Study Material Accountancy Class 11th 2023-24

केन्द्रीय शवद्यािय संगठन
KENDRIYA VIDYALAYA SANGATHAN
शिक्षा एवं प्रशिक्षण का आं चशिक संस्थान, चंडीगढ़

ZONAL INSTITUTE OF EDUCATION AND TRAINING, CHANDIGARH
अध्ययन सामग्री / STUDY MATERIAL

िैशक्षक सत्र / SESSION – 2023-24
कक्षा / CLASS – ग्यारहवी ं/ XI
शवषय / SUBJECT – िेखांकन / ACCOUNTANCY
शवषय कोड / SUBJECT CODE - 055
तैयारकताा - रशव कुमार, सह-प्रशिक्षक (वाशणज्य)

PREPARED BY: RAVI KUMAR, TRAINING ASSOCIATE (COMMERCE)
शिक्षा एवं प्रशिक्षण का आं चशिक संस्थान, चंडीगढ़

ZONAL INSTITUTE OF EDUCATION AND TRAINING, CHANDIGARH
से क्टर 33-सी, चंडीगढ़ / SECTOR-33 C, CHANDIGARH
वेबसाइट / WEBSITE : zietchandigarh.kvs.gov.in

ई-मेल/ E-MAIL :[email protected] दू रभाष / Phone : 7102-2921841; 2921994
INDEX
S. NO. PARTICULARS PAGE NO.
1. SYLLABUS 02-07
PART A: FINANCIAL ACCOUNTING - I -
2. CH - 01. INTRODUCTION TO ACCOUNTING 08 - 16
3. CH - 02. THEORY BASE OF ACCOUNTING 17 - 24
4. CH - 03. RECORDING OF TRANSACTIONS - I 25 - 48
5. CH - 04. RECORDING OF TRANSACTIONS - II 49 - 60
6. CH - 05. BANK RECONCILIATION STATEMENT 61 - 67
7. CH - 06. TRIAL BALANCE AND RECTIFICATION OF ERRORS 67 - 79
8. CH - 07. DEPRECIATION, PROVISIONS AND RESERVES 80 - 100
PART B: FINANCIAL ACCOUNTING – II -----
9. CH - 08. FINANCIAL STATEMENTS - I 101 - 116
10. CH - 09. ADJUSTMENTS IN PREPARATION OF FINANCIAL 117 - 133

STATEMENTS
ACCOUNTANCY (Code No. 055)
RATIONALE
The course in accountancy is introduced at plus two stage of senior second of school education, as the
formal commerce education is provided after ten years of schooling. With the fast changing
economic scenario, accounting as a source of financial information has carved out a place for itself at
the senior secondary stage. Its syllabus content provide students a firm foundation in basic
accounting concepts and methodology and also acquaint them with the changes taking place in the
preparation and presentation of financial statements in accordance to the applicable accounting
standards and the Companies Act 2013.
The course in accounting put emphasis on developing basic understanding about accounting as an
information system. The emphasis in Class XI is placed on basic concepts and process of accounting
leading to the preparation of accounts for a sole proprietorship firm. The students are also
familiarized with basic calculations of Goods and Services Tax (GST) in recording the business
transactions. The accounting treatment of GST is confined to the syllabus of class XI.
The increased role of ICT in all walks of life cannot be overemphasized and is becoming an integral
part of business operations. The learners of accounting are introduced to Computerized Accounting
System at class XI and XII. Computerized Accounting System is a compulsory component which is
to be studied by all students of commerce in class XI; whereas in class XII it is offered as an
optional subject to Company Accounts and Analysis of Financial Statements. This course is
developed to impart skills for designing need based accounting database for maintaining book of
accounts.
The complete course of Accountancy at the senior secondary stage introduces the learners to the world
of business and emphasize on strengthening the fundamentals of the subject.
OBJECTIVES:
1. To familiarize students with new and emerging areas in the preparation & presentation of
financial statements.
2. To acquaint students with basic accounting concepts and accounting standards.
3. To develop the skills of designing need based accounting database.
4. To appreciate the role of ICT in business operations.
5. To develop an understanding about recording of business transactions and preparation of
financial statements.
6. To enable students with accounting for Not-for-Profit organizations, accounting for Partnership
firms and Company accounts.
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ACCOUNTANCY (Code No.055)
Course Structure Class - XI (2023 - 24)
Theory: 80 Marks 3 Hours

Project: 20 Marks
Units Periods Marks

Part A: Financial Accounting - I
Unit-1: Theoretical Framework 25 12
Unit-2: Accounting Process 115 44
Part B: Financial Accounting - II
Unit-3: Financial Statements of Sole Proprietorship 60 24
Part C: Project Work 20 20
PART A: FINANCIAL ACCOUNTING - I

Unit-1: Theoretical Frame Work
Units/Topics Learning Outcomes
Introduction to Accounting After going through this Unit, the students will be able to:
 Accounting- concept, meaning, as a source of  describe the meaning, significance, objectives, advantages
information, objectives, advantages & and limitations of accounting in the modem economic
limitations, types of accounting information; environment with varied types of business & non-business
users of accounting information and their needs. economic entities.
Qualitative Characteristics of Accounting  identify / recognise the individual(s) & entities that use
Information. Role of Accounting in Business. accounting information for serving their needs of decision
 Basic Accounting Terms- Entity, Business making.
Transaction, Capital, Drawings. Liabilities  explain the various terms used in accounting & differentiate
(Non Current & Current). Assets (Non Current, between different related terms like current & non-current,
Current); Expenditure (Capital & Revenue), capital and revenue.
Expense, Revenue, Income, Profit, Gain, Loss,  give examples of terms like business transaction, liabilities,
Purchase, Sales, Goods,Stock, Debtor, Creditor, assets, expenditure & purchases.
Voucher, Discount (Trade discount & Cash  explain that sales/ purchases include both cash & credit
Discount) sales/purchases relating tothe accounting year.
Theory Base of Accounting  differentiate among income, profits and gains.
 Fundamental accounting assumptions:
 state the meaning of fundamental accounting
GAAP: Concept
assumptions and their relevance in accounting.
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 Basic Accounting Concept : Business Entity,  describe the meaning of accounting assumptions and the
Money Measurement, Going Concern, situation in which an assumption is applied during the
Accounting Period, Cost Concept, Dual Aspect, accounting process.
Revenue Recognition, Matching, Full  explain the meaning, applicability, objectives, advantages
Disclosure, Consistency, Conservatism, and limitations of accounting standards.
 Materiality and Objectivity  appreciate that various accounting standards developed
 System of Accounting. Basis of Accounting: nationally and globally are in practice for bringing parity
cash basis and accrual basis in the accounting treatment of different items.
 Accounting Standards: Applicability of  acknowledge the fact that recording of accounting
Accounting Standards (AS) and Indian transactions follows double entrysystem.
Accounting Standards (Ind AS)  explain the bases of recording accounting transaction & to
 Goods and Services Tax (GST): Characteristics appreciate that accrual basis is a better basis for depicting
and Advantages. the correct financial position of an enterprise.
 Explain the meaning, advantages & characteristic of GST.
Unit-2: Accounting Process

Recording of Business Transactions After going through this Unit, the students will beable to:
 Voucher and Transactions: Source documents &  explain the concept of accounting equation & appreciate
Vouchers, Preparation of Vouchers, Accounting that every transaction affectseither both the sides of the
Equation Approach:Meaning and Analysis, Rules equation or a positive effect on one item and a negative
of Debit & Credit. effect on another item on the same side of accounting
equation.
 Recording of Transactions: Books of Original  explain the effect of a transaction (increase ordecrease)
Entry- Journal on the assets, liabilities, capital, revenue & expenses.
 Special Purpose books:  appreciate that on the basis of source documents,
 Cash Book: Simple, cash book with bank accounting vouchers are prepared for recording
column and petty cashbook transaction in the books of accounts.
 Purchases book  develop the understanding of recording oftransactions in
 Sales book journal and the skill of calculating GST.
 Purchases return book
 explain the purpose of maintaining a Cash Book &
 Sales return book
develop the skill of preparing the format of different
 Journal proper
types of cash books and the method of recording cash
Note: Including trade discount, freight and cartage transactions in Cash book.
expenses for simple GST calculation.
 describe the method of recording transactions other than
 Ledger: Format, Posting from journal and cash transactions as per their nature in different
subsidiary books, Balancing of accounts subsidiary books .
Bank Reconciliation Statement:  appreciate that at times bank balance as indicated by
 Need and preparation, Bank Reconciliation cash book is different from thebank balance as shown
Statement by the pass book / bank statement and to reconcile both
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Depreciation, Provisions and Reserves the balances, bank reconciliation statement is
 Depreciation: Meaning, Features, Need,Causes, factors prepared.
 Other similar terms: Depletion & Amortisation  develop understanding of preparing bank
 Methods of Depreciation: reconciliation statement.
i. Straight Line Method (SLM)  appreciate that for ascertaining the position of
ii. Written Down Value Method (WDV)Note: individual accounts, transactions are posted
Excluding change of method from subsidiary books and journal proper into
 Difference between SLM and WDV; Advantages of the concerned accounts in the ledger and
SLM and WDV develop the skill of ledger posting.
 Method of recoding depreciation  explain the necessity of providing depreciation
i. Charging to asset account and develop the skill of using different
ii. Creating provision for depreciation/ methods for computing depreciation.
accumulated depreciation account  understand the accounting treatment of
 Treatment of disposal of asset providing depreciation directly to the
 Provisions, Reserves, Difference Between Provisions concerned asset account or by creating
and Reserves. provision for depreciation account.
 Types of Reserves:  appreciate the method of asset disposal
i. Revenue reserve through the concerned asset account or by
ii. Capital reserve preparing asset disposal account.
iii. General reserve  appreciate the need for creating reserves and
iv. Specific reserve also making provisions for events which may
v. Secret Reserve belong to the current year but may happen in
Difference between capital and revenue reserve next year.
 appreciate the difference between reserveand
Trial balance and Rectification of Errors
reserve fund.
 Trial balance: objectives, meaning andpreparation
 state the need and objectives of preparingtrial
(Scope: Trial balance with balance method only)
balance and develop the skill of preparing trial
 Errors: classification-errors of omission, balance.
commission, principles, and compensating;their  appreciate that errors may be committed during
effect on Trial Balance. the process of accounting.
 Detection and rectification of errors;  understand the meaning of different types of
(i) Errors which do not affect trial balance errors and their effect on trial balance.
(ii) Errors which affect trial balance  develop the skill of identification and location
 preparation of suspense account. of errors and their rectification and preparation
of suspense account.
Part B: Financial Accounting – II

Unit 3: Financial Statements of Sole Proprietorship
Financial Statements After going through this Unit, the students will be
Meaning, objectives and importance; Revenue and Capital able to:
Receipts; Revenue and Capital Expenditure;  state the meaning of financial statements the
Deferred Revenue expenditure. Opening journal entry. purpose of preparing financial statements.
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Trading and Profit and Loss Account: Gross Profit,  state the meaning of gross profit, operating profit
Operating profit and Net profit. Preparation. and net profit and develop the skill of preparing
Balance Sheet: need, grouping and marshalling of assets & trading and profit and loss account.
liabilities. Preparation. Adjustments in preparation of  explain the need for preparing balance sheet.
financial statements with respect to closing stock,  understand the technique of grouping and
outstanding expenses, prepaid expenses, accrued income, marshalling of assets and liabilities.
income received in advance, depreciation, bad debts,  appreciate that there may be certain items other
provision for doubtful debts, provision for discount on than those shown in trial balance whichmay need
debtors, Abnormal loss, Goods taken for personal use/staff adjustments while preparing financial statements.
welfare, interest on capital and managers commission.  develop the understanding and skill to do
Preparation of Trading and Profit and Loss account and adjustments for items and their presentation in
Balance Sheet of a sole proprietorship with adjustments. financial statements like depreciation, closing
Incomplete Records stock, provisions, abnormal loss etc.
Features, reasons and limitations.  develop the skill of preparation of trading and
Ascertainment of Profit/Loss by Statement of Affairs profit and loss account and balance sheet.
method. (excluding conversion method)
Part C: Project Work (Any One)

1. Collection of source documents, preparation of vouchers, recording of transactions with the help of vouchers.
2. Preparation of Bank Reconciliation Statement with the given cash book and the pass book with twenty to
twenty-five transactions.
3. Comprehensive project of any sole proprietorship business. This may state with journal entries and their
ledgering, preparation of Trial balance. Trading Account, Profit and Loss Account; and Balance Sheet.
Expenses, incomes and profit (loss), assets and liabilities are to be depicted using pie chart / bar diagram. This
may include simple GST related transactions.
PROJECT WORK
It is suggested to undertake this project after completing the unit on preparation of financial statements. The
student(s) will be allowed to select any business of their choice or develop the transaction of imaginary
business. The project is to run through the chapters and make the project an interesting process. The amounts
should emerge as more realistic and closer to reality.
Specific Guidelines for Teachers

Give a list of options to the students to select a business form. You can add to the given list:
1. A beauty parlour 10. Men's wear 19. A coffee shop
2. Men's saloon 11. Ladies wear 20. A music shop
3. A tailoring shop 12. Kiddies wear 21. A juice shop
4. A canteen 13. A Saree shop 22. A school canteen
5. A cake shop 14. Artificial jewellery shop 23. An ice cream parlour
6. A confectionery shop 15. A small restaurant 24. A sandwich shop
7. A chocolate shop 16. A sweet shop 25. A flower shop
8. A dry cleaner 17. A grocery shop
9. A stationery shop 18. A shoe shop
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After selection, advise the student(s) to visit a shop in the locality (this will help them to settle on a realistic
amounts different items. The student(s) would be able to see the things as they need to invest in furniture,
decor, lights, machines, computers etc.
A suggested list of different item is given below.
1. Rent 19. Wages and Salary
2. Advance rent [approximately three months] 20. Newspaper and magazines
3. Electricity deposit 21. Petty expenses
4. Electricity bill 22. Tea expenses
5. Electricity fitting 23. Packaging expenses
6. Water bill 24. Transport
7. Water connection security deposit 25. Delivery cycle or a vehicle purchased
8. Water fittings 26. Registration
9. Telephone bill 27. Insurance
10. Telephone security deposit 28. Auditors fee
11. Telephone instrument 29. Repairs & Maintenance
12. Furniture 30. Depreciations
13. Computers 31. Air conditioners
14. Internet connection 32. Fans and lights
15. Stationery 33. Interior decorations
16. Advertisements 34. Refrigerators
17. Glow sign 35. Purchase and sales
18. Rates and Taxes
At this stage, performas of bulk of originality and ledger may be provided to the students and they may be
asked to complete the same.
In the next step the students are expected to prepare the trial balance and the financial statements.
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Suggested Question Paper Design
Accountancy (Code No. 055) Class XI
(2023-24)
Theory: 80 Marks 3 hrs.

Project: 20 Marks
S.No. Typology of Questions Marks Percentage
1. Remembering and Understanding:

Exhibit memory of previously learned material by recalling facts,
terms, basic concepts, and answers. 44 55%
Demonstrate understanding of facts and ideas by organizing,
comparing, translating, interpreting, giving descriptions, and stating
main ideas.
2. Applying: Solve problems to new situations by applying acquired

19 23.75%
knowledge, facts, techniques and rules in a different way.
3. Analysing, Evaluating and Creating:

Examine and break information into parts by identifying motives or
causes. Make inferences and find evidence to support generalizations.
Present and defend opinions by making judgments about information, 17 21.25%
validity of ideas, or quality of work based on a set of criteria.
Compile information together in a different way by combining
elements in a new pattern or proposing alternative solutions.
TOTAL 80 100%
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CH - 01. INTRODUCTION TO ACCOUNTING
(MIND MAP)
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LEARNING OBJECTIVES:
The students will be able to:
 Describe the meaning, significance, objectives, advantages and limitations of accounting in the
modem economic environment with varied types of business and non-business economic entities.
 Identify / recognise the individual(s) and entities that use accounting information for serving their
needs of decision making.
 Explain the various terms used in accounting.
 Differentiate between different related terms like current and non-current, capital and revenue.
 Give examples of terms like business transaction, liabilities, assets, expenditure and purchases.
 Explain that sales/ purchases include both cash and credit sales/ purchases relating to the
accounting year.
 Differentiate among income, profits and gains.
 State the meaning of fundamental accounting assumptions and their relevance in accounting.
 Describe the meaning of accounting assumptions and the situation in which an assumption is
applied during the accounting process.
 Explain the meaning, applicability, objectives, advantages and limitations of accounting standards.
 Double entry system
 Explain the meaning, advantages and characteristic of GST.
Meaning Of Accounting:
The American Institute of Certified Public Accountants (AICPA) had defined accounting as the art
of recording, classifying, and summarising in a significant manner and in terms of money,
transactions and events which are, in part at least, of financial character, and interpreting the results
thereof‘.
In order to appreciate the exact nature of accounting, we must understand the following relevant
aspects of the definition:
• Economic Events.
• Identification, Measurement, Recording and Communication.
• Organisation.
 Economic Events:
Business organisations involves economic events. An economic event is known as a happening of
consequence to a business organisation which consists of transactions and which are measurable in
monetary terms. For example, purchase of machinery.
If an event involves transactions between an outsider and an organisation, these are known as
external events. The following are the examples of such transactions:
• Sale of merchandise to the customers.
• Rendering services to the customers by ABC Limited.
• Purchase of materials from suppliers.
• Payment of monthly rent to the landlord.
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An internal event is an economic event that occurs entirely between the internal wings of an
enterprise, e.g., supply of raw material or components by the stores department to the manufacturing
department, payment of wages to the employees, etc.
 Identification, Measurement, Recording and Communication

(a) Identification: It means determining what transactions to record, i.e., to identity events which are
to be recorded. It involves observing activities and selecting those events that are of considered
financial character and relate to the organisation.
(b) Measurement: It means quantification (including estimates) of business transactions into
financial terms by using monetary unit, viz. rupees and paise as a measuring unit.
(c) Recording: Once the economic events are identified and measured in financial terms, these are
recorded in books of account in monetary terms and in a chronological order.
(d) Communication: The economic events are identified, measured and recorded in order that the
pertinent information is generated and communicated in a certain form to management and other
internal and external users.
 Organisation
Organisation refers to a business enterprise, whether for profit or not-for-profit motive. Depending
upon the size of activities and level of business operation, it can be a Sole-proprietary concern,
Partnership firm, Cooperative society, Company, Local authority, Municipal Corporation or any
other association of persons.
 Interested Users of Information
Accounting is a means by which necessary financial information about business enterprise is
communicated and is also called the language of business. Many users need financial information in
order to make important decisions. These users can be divided into two broad categories: internal
users and external users. Internal users include: Chief Executive, Financial Officer, Vice President,
Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, etc. External users
include: present and potential Investors (shareholders), Creditors (Banks and other Financial
Institutions, Debenture-holders and other Lenders), Tax Authorities, Regulatory Agencies
(Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India,
Labour Unions, Trade Associations, Stock Exchange and Customers, etc.
Why do the Users Want Accounting Information?
• The owners/shareholders use them to see if they are getting a satisfactory return on their
investment, and to assess the financial health of their company/business.
• The directors/managers use them for making both internal and external comparisons in their
attempts to evaluate the performance. They may compare the financial analysis of their
company with the industry figures in order to ascertain the company‘s strengths and
weaknesses. Management is also concerned with ensuring that the money invested in the
company/organisation is generating an adequate return and that the company/organisation is
able to pay its debts and remain solvent.
• The creditors (lenders) want to know if they are likely to get paid and look particularly at
liquidity, which is the ability of the company/organisation to pay its debts as they become due.
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• The prospective investors use them to assess whether or not to invest their money in the
company/organisation.
• The government and regulatory agencies such as Registrar of companies, Custom departments
IRDA, RBI, etc. require information for the payment of various taxes such as Value Added Tax
(VAT), Income Tax (IT), Customs and Excise duties for protecting the interests of investors,
creditors (lenders), and also to satisfy the legal obligations imposed by The Companies Act 2013
and SEBI from time-to-time.
Accounting as a Source of Information:
Accounting is a definite process of interlinked activities that begins with the identification of
transactions and ends with the preparation of financial statements. Every step in the process of
accounting generates information. To be useful, the accounting information should ensure to:
 Provide information for making economic decisions;
 Serve the users who rely on financial statements as their principal source of information;
 Provide information useful for predicting and evaluating the amount, timing & uncertainty of
potential cash-flows;
 Provide information for judging management‘s ability to utilise resources effectively in
meeting goals
 Provide factual and interpretative information by disclosing underlying assumptions on
matters subject to interpretation, evaluation, prediction, or estimation; and
 Provide information on activities affecting the society.
Branches of Accounting:
The economic development and technological advancements have resulted in an increase in the
scale of operations and the advent of the company form of business organisation. This has made the
management function more and more complex and increased the importance of accounting
information. This gave rise to special branches of accounting.
These are:
 Financial accounting:
The purpose of this branch of accounting is to keep a record of all financial transactions so that:
(a) The profit earned or loss sustained by the business during an accounting period can be worked out,
(b) The financial position of the business as at the end of the accounting period can beascertained, &
(c) The financial information required by the management and other interested parties can be provided.
 Cost Accounting:
The purpose of cost accounting is to analyse the expenditure so as to ascertain the cost of various
products manufactured by the firm and fix the prices. It also helps in controlling the costs and
providing necessary costing information to management for decision-making.
 Management Accounting:
The purpose of management accounting is to assist the management in taking rational policy
decisions and to evaluate the impact of its decisions and actions.
 Tax accounting:
(GST and income tax). The purpose of this accounting is to calculate the tax liabilities of business.
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Book-Keeping Base of Accounting:-
Book keeping is an art of recording the transactions in the books of accounts. Only those
transactions which bear a monetary value are recorded. It is the first step of accounting.
Difference between Book-Keeping and Accounting
Basis of distinction Book-keeping Accounting
1. Scope It is concerned only with recording of It also includes classifying,
monetary transactions. summarizing, analysing and also
communicating the results to users.
2. Stage It‘s a primary stage. It‘s a secondary stage.
3. Objective To maintain systematic records of To calculate the net profit or net
business. loss in the business.
4. Nature Routine and clerical. Analytical.
5. Staff involved It is done by junior level staff. It is done by senior level staff.
Qualitative Characteristics of Accounting Information:

Qualitative characteristics are the attributes of accounting information which tend to enhance its
understandability and usefulness. In order to assess whether accounting information is decision useful,
it must possess the characteristics of reliability, relevance, understandability and comparability.
Qualitative Characteristics of Accounting:
(i) Reliability: Accounting information should be reliable, verifiable and based on facts.
(ii) Relevance: Only Relevant information should be disclosed. Information which is irrelevant and
useless should be not be the part of financial statements.
(iii) Understandability: Accounting information should be presented in a very simple way so that it is
easy to understand by its users.
(iv) Comparability: Financial Statements should contain the figures of current year as well as figures
of previous year so that the current performance of the business can be compared with the
performance of previous year.
Objectives of Accounting:
(i) The main objective of the accounting is to keep systematic record of business transactions. That is
why, all financial transactions are first recorded in journal & then posted into ledger.
(ii) Accounting is helpful in preventing and detecting the errors and frauds.
(iii) Accounting plays important role in calculating the profit or loss during a particular period by
preparing Trading account and Profit and Loss Account.
(iv) Accounting is helpful in ascertaining the financial position of the business.
(v) Accounting provides useful information to its users.
Advantages of Accounting
1. Financial Information about Business
2. Assistance to Management
3. Replaces Memory
4. Facilitates Comparative Study
5. Facilitates Settlement of Tax Liabilities
6. Facilitates Loans
7. Evidence in Court
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Limitations of Accounting
1. Accounting is not Fully Exact
2. Accounting does not Indicate the Realizable Value
3. Accounting Ignores the Qualitative Elements
4. Accounting Ignores the Effect of Price Level Change
5. Accounting may Lead to Window Dressing
 Role of Accounting:
For centuries, the role of accounting has been changing with the changes in economic development
and increasing societal demands. It describes and analyses a mass of data of an enterprise through
measurement, classification and summarisation, and reduces those date into reports and statements,
which show the financial condition and results of operations of that enterprise. Hence, it is regarded
as a language of business.
Basic Accounting Terms:

1. Entity: An economic unit, which may be business entity (enterprise) or non-business entity.
2. Business Transaction: A Business transaction is an economic activity of business that changes
its financial position.
3. Account: It is a record of all business transactions relating to a particular person or item. It is
a T-Shaped Performa.
4. Capital: It refers to the amount invested by the owner in a business. The amount invested
could be in the form of cash, goods, etc.
5. Drawing: Any cash or goods withdrawn by the owner for personal use made out of business funds
are known as drawings.
6. Liabilities: Liabilities refer to financial obligations of business. It denotes the amount which a
business owes to others.eg.- Creditors, loan, etc. It is of 2 types;
(a) Non- current liabilities: It refers to those which fall due for payment in a relatively longer
period. For eg- long term loans.
(b) Current liabilities: It refers to those which are to be paid in the near future. For eg-Creditors,
Outstanding expenses.
Liabilities
Non-Current Current
Liabilities Liabilities
Long Term Deferred Tax Other Long Long Terms Short Term Trade Other Current
Provisions
Short Term
Borrowings Liabilities Term Borrowings Payables Liabilities
(Net) Liabilities Provisions
7. Receipts: Amount received from sale of goods and/ or services or both.

8. Expenditure: It involves spending cash or incurring a liability for the purpose of acquiring
assets, goods or services. It is of 3 types.
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Expenditure
Revenue Expenditure Capital Expenditure Deferred Revenue Expenditure
(a) Revenue Expenditure: It refers to any expenditure, the full benefit of which is received during
one accounting period. eg- salaries, rent etc.
(b) Capital Expenditure: It refers to expenditure, the benefit of which is received during more than
one year. Example - Machinery.
(c) Deferred Revenue Expenditure: It refers to expenditure which are revenue in nature but
benefit of which is likely to be derived over no of years. Example - Advertisement.
9. Expenses: It is the amount used in order to produce and sell goods and services.
Expenses
Prepaid Expenses Outstanding Expenses
(a) Prepaid Expenses: Expenses paid in the current year but relating to next financial year or years.
(b) Outstanding Expenses: Expenses incurred but not paid.
10. Assets: - These are properties or economic resources of enterprises which can be expressed in
monetary terms it can be divided in two parts.
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11. Revenue: Gross inflow of cash (Received or Receivable), receivables or other consideration in
the normal course of business.
12. Income: It is the difference between revenue and expense.
13. Profit: It is the excess of total revenue over total expense of a business.
Profit = Revenue - Expenses.
14. Gain: It is a monetary benefit resulting from events or transactions which are incidental to business
like profit on sale of fixed assets.
15. Loss: The excess of expenses over related revenue is known as loss.
Loss = Expenses - Revenue.
16. Purchases: It refers to the amount of goods bought by business for resale or use in production.
It can be of cash or credit.
17. Purchase return: When purchased goods are returned to suppliers, it is referred to as
purchase return.
18. Sales: It means transfer of goods or services for money in the normal course of business.
19. Sales return: When customers return the goods sold to them it is known as sales returns.
20. Revenue from Operation: Amount received or receivable from the sale of goods and/ or
services or both.
21. Goods: Goods purchased for resale or for manufacturing product.
22. Stock/ Inventory: It includes goods unsold on a particular date.
23. Trade Receivables: Amount receivable against sale of goods and/or services or both.
(a) Debtors: A person or entity to whom goods are sold and / or services are rendered on credit.
(b) Bills Receivable: Acceptance (Bills of Exchange) received from a debtor.
24. Trade Payables: Amount payable against purchase of goods and /or services or both.
(a) Creditors: It refers to those persons whose business buys goods on credit & payment has not
been done yet.
(b) Bills Payable: Acceptance (Bill of Exchange) given to a creditor.
25. Cost: Expenses on purchasing and/or manufacturing goods.
26. Voucher: A voucher is a written document which is created in support of a particular
transaction. It may be in the form of a cash memo, invoice or receipt. Voucher is a necessary
component of auditing.
27. Discount: It is the rebate given by the seller to the buyer.
Discount
Cash Discount Trade Discount Rebate
15
(a) Trade Discount: This is a type of discount allowed by the sellers to their customers at a
fixed percentage on the list price of goods and also it is not entered in the books of accounts.
(b) Cash Discount: When discount is allowed to customers for making prompt payment. It is
always recorded in books of accounts.
(c) Rebate: Reduction allowed in the sale value due to (saying) poor quality, excess supply, etc.
28. Bad Debts: It refers to the amount that debtor has not paid even after repeated reminders &has no
intention of paying in the future.
29. Balance Sheet: A statement of balances of assets and liabilities.
30. Book Value: Value of assets as existing in the books of accounts.
31. Books of Accounts: Books in which transactions are recorded or transferred (posted).
32. Credit: Traditionally, right side of an account is credit side.
33. Debit: Traditionally, left side of an account is debit side.
34. Depreciation: Decrease in book value of an asset due to its use or efflux of time or
obsolescence.
35. Entry: Recording business transaction in the books of account.
36. Insolvent: A person or entity unable to pay his/its debts.
37. Solvent: A person or entity who is in a position to pay his/its debts.
38. Proprietor: A person who owns the business.
39. Financial Statements or Final Accounts: Statements prepared at the end of the accounting
period to determine financial performance and financial position.
PRACTICE QUESTIONS:
1. Define accounting.
2. State the end product of financial accounting.
3. Enumerate main objectives of accounting.
4. Who are internal users of accounting information?
5. State the nature of accounting information required by long-term lenders.
6. Who are the external users of information?
7. Enumerate information needs of management.
8. Give any three examples of revenues.
9. Distinguish between debtors and creditors; profit and gain
10. ‗Accounting information should be comparable‘. Do you agree with this statement?
Give two reasons.
---------------------------------------------END OF CHAPTER--------------------------------------
16
CH - 02. THEORY BASE OF ACCOUNTING
(MIND MAP)
17
After studying this chapter, you will be able to:
• identify the need for theory base of accounting;
• explain the nature of Generally Accepted Accounting Principles (GAAP);
• state the meaning and purpose of the basic accounting concepts;
• list the accounting standards issued by Institute of Chartered Accountants of India;
• describe the systems of accounting; and
• describe the basis of accounting.
Generally Accepted Accounting Principles:

Generally Accepted Accounting principles refer to the rules or guidelines adopted for
recording and reporting of business transactions in order to bring uniformity in the
preparation and presentation of financial statements. These principles are also referred to as
concepts and conventions. From the practicality view point, the various terms such as
principles, postulates, conventions modifying principles, assumptions, etc. have been used
interchangeably and are referred to as basic accounting concepts, in the present book.
Basic Accounting Concepts:
The basic accounting concepts are referred to as the fundamental ideas or basic assumptions
underlying the theory and practice of financial accounting and are broad working rules for all
accounting activities and developed by the accounting profession. The important concepts have been
listed as below:
• Business entity; • Money measurement;

• Going concern; • Accounting period;
• Cost • Dual aspect (or Duality);
• Revenue recognition (Realisation); • Matching;
• Full disclosure; • Consistency;
• Conservatism (Prudence); • Materiality;
• Objectivity.
1. Business Entity Concept: This concept assumes that business has distinct and separate
entity from its owners. Thus, for the purpose of accounting, business and its owners are
to be treated as two separate entities.
2. Money Measurement Concept: The concept of money measurement states that only
those transactions and happenings in an organisation, which can be expressed in terms
of money are to be recorded in the book of accounts. Also, the records of the
transactions are to be kept not in the physical units but in the monetary units.
3. Going Concern Concept: The concept of going concern assumes that a business firm
would continue to carry out its operations indefinitely (for a fairly long period of time) and
would not be liquidated in the near future.
18
4. Accounting Period Concept: Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared to know whether it has earned
profits or incurred losses during that period and what exactly is the position of its assets and
liabilities, at the end of that period.
5. Cost Concept: The cost concept requires that all assets are recorded in the book
of accounts at their cost price, which includes cost of acquisition, transportation,
installation and making the asset ready for the use.
6. Dual Aspect Concept: This concept states that every transaction has a dual or two-fold
effect on various accounts and should therefore be recorded at two places. The duality
principle is commonly expressed in terms of fundamental accounting equation, which
is:
Assets = Liabilities + Capital
7. Revenue Recognition (Realisation) Concept: Revenue is the gross in-flow of cash arising
from the sale of goods and services by an enterprise and use by others of the enterprise
resources yielding interest royalties and dividends. The concept of revenue recognition
requires that the revenue for a business transaction should be considered realised when a
legal right to receive it arises.
8. Matching Concept: The concept of matching emphasises that expenses incurred in an
accounting period should be matched with revenues during that period. It follows from
this that the revenue and expenses incurred to earn these revenue must belong to the
same accounting period.
9. Full Disclosure Concept: This concept requires that all material and relevant facts
concerning financial performance of an enterprise must be fully and completely
disclosed in the financial statements and their accompanying footnotes.
10. Consistency Concept: This concepts states that accounting policies and practices
followed by enterprises should be uniform and consistent one the period of time so that
results are compassable. Comparability results when the same accounting principles are
consistently being applied by different enterprises for the period under comparison, or
the same firm for a number of periods.
11. Conservatism Concept: This concept requires that business transactions should be
recorded in such a manner that profits are not overstated. All anticipated losses should be
accounted for but all unrealised gains should be ignored.
12. Materiality Concept: This concept states that accounting should focus on material
facts. If the item is likely to influence the decision of a reasonably prudent investor or
creditor, it should be regarded as material, and shown in the financial statements.
13. Objectivity Concept: The concept of objectivity requires that accounting transaction should be
recorded in an objective manner, free from the bias of accountants and others. This can be possible
when each of the transaction is supported by verifiable documents or vouchers.
19
Systems of Accounting:
The systems of recording transactions in the book of accounts are generally classified into two types,
viz. Double entry system and Single entry system. Double entry system is based on the principle of
―Dual Aspect‖ which states that every transaction has two effects, viz. receiving of a benefit and
giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at
different places in the ledger.
Double entry system is a complete system as both the aspects of a transaction are recorded in the
book of accounts. The system is accurate and more reliable as the possibilities of frauds and mis-
appropriations are minimised.
Single entry system is not a complete system of maintaining records of financial transactions. It does
not record two-fold effect of each and every transaction.
Basis of Accounting:
From the point of view the timing of recognition of revenue and costs, there can be two broad
approaches to accounting. These are:
Basis of Accounting
Cash basis Accrual basis
(i) Cash basis; and (ii) Accrual basis.

1. Cash basis: Under this entry in the books of accounts are made when cash received or paid and
not when the receipt or payment becomes due. For example, if salary ₹ 10,000 of February 2023 paid
in March 2023 it would be recorded in the books of accounts only in March, 2023.
2. Accrual basis: Under this however, revenues and costs are recognized in the period in which they
occur rather when they are paid. It means it record the effect of transaction is taken into book when
they areearned rather than in the period in which cash is actually received or paid by the enterprise. It
is more appropriate basis for calculation of profits as expenses are matched against revenue earned in
the relation thereto.
For example, raw materials consumed are matched against the cost of goods sold for the accounting
period.
Difference between Accrual Basis of Accounting and Cash Basis of Accounting
Basis Accrual Basis of Accounting Cash Basis of Accounting

1. Nature of Both cash and credit transactions are Cash transactions are
Transactions recorded. recorded.
2.Prepaid/ Outstanding Prepaid & Outstanding expenses are Prepaid & outstanding
Expenses; accounted in the Profit & loss A/c. expenses are not adjusted.
Accrued Income / Accrued income & income received in Similarly, accrued income &
Income received in advance are also accounted and shown in income received in advance
20
Advance the Balance Sheet. are not adjusted.
3. Profit or Loss Correct profit or loss is ascertained Correct profit or loss is not
because it records both cash & credit ascertained because it records
transactions. only cash transactions.
4. Technical The Accrual Basis of Accounting require It does not require much of
Knowledge technical knowledge as many adjustment technical knowledge as is
like prepaid, outstanding, capital & required for Accrual Basis of
revenue are required to be made. Accounting.
5. Legal Position Accrual basis of Accounting is recognised Cash basis of Accounting is
by the Companies Act, 2013. not recognised by the
companies Act, 2013.
6. Acceptability Accrual basis of Accounting is more Cash basis of accounting is
acceptable in business as it reveals correct not acceptable in business as
income and expenses besides assets and it does not reveal the required
liabilities. information.
ACCOUNTING STANDARDS:
Accounting standards may be defined as written statements issued from time to time by institutions
of accounting professionals e.g. ICAI, specifying uniform rules or practices for preparing &
presenting financial statements. Some of accounting standards are as follows:
(i) AS-1: Disclosure of Accounting Policies
(ii) AS-2: Valuation of Inventories
(iii) AS-3: Cash Flow Statement.
Need or Utility or Advantages of Accounting Standards:
(i) Accounting standards bring uniformity in preparation and presentation of financial statements.
(ii) They ensure the consistency and comparability of different financial statements.
(iii) They significantly reduce the chances of manipulations and frauds.
(iv) To improve the reliability and credibility of financial statements.
Benefits of Accounting Standards:
1. Accounting standard helps in eliminating variations in accounting treatment to prepare financial
statements.
2. Accounting standard may call for disclosures of certain information which may not be required by
law, but such information might be useful for general public, investors and creditors.
3. Accounting standard facilitate comparability between financial statements of inter and intra
companies.
Limitations of Accounting Standards:
1. Accounting standard makes choice between different alternate accounting treatments difficult to
apply.
2. It is rigidly followed and fails to extend flexibility in applying accounting standards.
3. Accounting standard cannot override the statue. The standards are required to be farmed within the
ambit of prevailing status.
21
Goods and Services Tax (One Country One Tax):
GST is a destination-based tax on consumption of goods and services. It is proposed to be levied at all
stages right from manufacture up to final consumption with credit of taxes paid at previous stages
available as set off.
GST has a dual aspect with the Centre and States simultaneously levying on a common tax base. There
are three main components of GST which are CGST, SGST and IGST.
CGST means Central Goods and Services Tax. Taxes collected under CGST will constitute the revenues
of the Central Government.
SGST means State Good and Services Tax. A collection of SGST is the revenue of the State
Government.
For example, Ramesh a dealer in Punjab sell goods to Seema in Punjab worth ₹ 10,000. If the GST rate
is 18%, i.e., 9% CGST and 9% SGST, ₹ 900 will go to Central Government and ₹ 900 will go to
Punjab Government.
IGST means Integrated Goods and Services Tax. Revenue collected under IGST is divided between
Central and State Government as per the rates specified by the Government. IGST is charged on
transfer of goods and services from one state to another. Import of goods and services are also
covered under IGST.
Characteristics of Goods and Services Tax:

1. GST is a common law and procedure throughout the country under single administration.
2. GST is a destination-based tax and levied at a single point at the time of consumption of goods &
services by the end consumer.
3. GST is a comprehensive levy and collection on both goods & services at the same rate with benefit of
input tax credit or subtraction of value.
4. Minimum number of rates of tax does not exceed two.
5. There is no scope for levy of cess, resale tax, additional tax, turnover tax etc.
6. There is no multiple levy of tax on goods and services, such as sales tax, entry tax, Octroi,
entertainment tax or luxury tax etc.
22
Advantages:
1. Introduction of GST has resulted in the abolition of multiple types of taxes in goods and services.
2. GST widens the tax base & increased revenue to Centre and State thereby reducing administrative
cost for the Government.
3. GST has reduced compliance cost and increases voluntary compliance.
4. GST has affected rates of tax to the maximum of two floor rates.
5. GST has removed the cascading effect on taxation.
6. GST will result in enhancing manufacturing & distribution system affecting the cost of production of
goods and services and consequently the demand & production of goods and services will increase.
7. It will eventually promote economic efficiency & sustainable long-term economic growth as GST
is neutral to business processes, business models, organisational structure & geographical location.
8. GST would help to extend competitive edge in international market for goods & services produced
in the country leading to increased exports.
PRACTICE QUESTIONS:
1. Why is it necessary for accountants to assume that business entity will remain a going concern?
2. When should revenue be recognised? Are there exceptions to the general rule?
3. What is the basic accounting equation?
4. The realisation concept determines when goods sent on credit to customers are to be included in
the sales figure for the purpose of computing the profit or loss for the accounting period. Which
of the following tends to be used in practice to determine when to include a transaction in the
sales figure for the period. When the goods have been:
(a) Dispatched (b) Invoiced (c) Delivered (d) Paid for.
5. Give reasons for your answer. Complete the following worksheet:
(i) If a firm believes that some of its debtors may ‗default‘, it should act on this by making sure that
all possible losses are recorded in the books. This is an example of the _________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the
__________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the
_________ concept.
(iv) The ________concept states that if straight line method of depreciation is used in one year, then it
should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock
may be increased. Normal accounting procedure is to ignore this because of the ________.
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the
_________.
(vii) The management of a firm is remarkably incompetent, but the firms accountants cannot take this
into account while preparing book of accounts because of __________ concept.
23
6. Explain Cost concept.
7. What is mean by accounting standard? What is the main objective of accounting standard?
8. Explain the following concepts.
(a) Business entity concept (b) Going concern concept (c) Revenue recognition concept
9. Explain the utility of Accounting Standards.
10. Which principle assumes that a business enterprise will not be liquidated in near future?
Ans. Going concern concept.
11. ―Closing stock is valued lower than the market price‖ which concept of accounting is applied
here?
Ans. Conservatism (Prudence) concept.
12. ―An asset may define as a bundle of services‖ – explain with an example.
13. Under which accounting principle, quality of manpower is not recommended in the books of
accounts?
Ans. Money measurement concept.
---------------------------------------------END OF CHAPTER--------------------------------------
24
CH - 03. RECORDING OF TRANSACTIONS - I
(MIND MAP)
25
• describe the nature of transaction and source documents;
• explain the preparation of accounting vouchers;
• apply accounting equation to explain the effect of transactions;
• record transactions using rules of debit and credit;
• explain the concept of book of original entry and recording of transactions in journal;
• explain the concept of ledger and posting of journal entries to the ledger accounts.
Business Transactions and Source Document:

Business transactions are exchanges of economic consideration between parties and have two-fold
effects that are recorded in at least two accounts.
Business transactions are usually evidenced by an appropriate document such as Cash memo,
Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the
transactions is called the Source Document or a Voucher.
Preparation of Accounting Vouchers:
Accounting vouchers may be classified as cash vouchers, debit vouchers, credit vouchers, journal
vouchers, etc. There is no set format of accounting vouchers.
A transaction with one debit and one credit is a simple transaction and the accounting vouchers
prepared for such transaction is known as Transaction Voucher.
Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called
compound voucher.
Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher;
Compound Voucher
Debit Voucher Credit Voucher
Transactions with multiple debits and multiple credits are called complex transactions and the
accounting voucher prepared for such transaction is known as Complex Voucher/ Journal Voucher.
The design of the accounting vouchers depends upon the nature, requirement and convenience of the
business. There is no set format of an accounting voucher. To distinguish various vouchers, different
colour papers and different fonts of printing are used. Some of the specimens of the accounting
vouchers are given in the earlier pages.
An accounting voucher must contain the following essential elements:
• It is written on a good quality paper;
• Name of the firm must be printed on the top;
• Date of transaction is filled up against the date and not the date of recording of transaction is to be
mentioned;
• The number of the voucher is to be in a serial order;
• Name of the account to be debited or credited is mentioned;
26
• Debit and credit amount is to be written in figures against the amount;
• Description of the transaction is to be given account wise;
• The person who prepares the voucher must mention his name along with signature; and
• The name and signature of the authorised person are mentioned on the voucher.
Meaning of Accounting Equation

Accounting equation signifies that the assets of a business are always equal to the total of its liabilities
and capital. The equation reads as follows:
A=C+L
Where,
A= Assets
L= Liabilities
C= Capital
The above equation can also be presented in the following forms as its derivatives to enable the
determination of missing figures of Capital(C) or Liabilities (L).
A–L=C
A–C=L
Since, the accounting equation depicts the fundamental relationship among the components of the
balance sheet, it is also called the Balance Sheet Equation. As the name suggests, the balance sheet is
a statement of assets, liabilities and capital
Illustration 1. Find the capital of the business if total assets are ₹ 1, 50,000 & liabilities are ₹ 70,000.
Solution: Assets = Liabilities + Capital
So, Capital = Assets – Liabilities
Capital = ₹ 1, 50,000 – ₹ 70,000 = ₹ 80,000
Illustration 2. Aryan Ltd. commenced business on 1st April, 2016 with a capital of ₹ 50,000. On 31st
March 2017, its assets were worth ₹ 95,000 and liabilities of ₹ 30,000. Find the capital at the end of
the year and profit earned during the year.
Solution: Assets = Liabilities + Capital
So, Capital = Assets – Liabilities = ₹ 95,000 – ₹ 30,000 = ₹ 65,000
Profit = Closing Capital – Opening Capital = ₹ 65,000 – ₹ 50,000 = ₹ 15,000
Illustration 3.
Prepare the Accounting Equation on the basis of the following: (₹)

1. Ramesh commenced business with cash. 1,50,000
2. Furniture purchased for cash. 20,000
3. Purchased goods from Manish on credit. 25,000
4. Sold goods (costing ₹ 10,000) to Mohini for cash. 14,000
5. Additional capital introduced. 20,000
6. Commission received in advance. 2,000
7. Paid to creditor (Manish) in full settlement. 22,500
8. Sold goods (costing ₹ 15,000) for ₹ 18,000 out of which ₹ 5,000 received in cash.
9. Depreciation on furniture provided @ 10%.
27
Solution:
No Transactions Assets = Liabilities + Capital

Cash + Furniture + Stock + Debtors = Creditors + Comm. + Capital
Rec. inAdvance
₹ ₹ ₹ ₹ ₹ ₹ ₹
1 Ramesh Commencedbusiness with cash 1,50,000 + 0 + 0 + 0 = 0 + 0 + 1,50,000
2. Furniture purchasedfor cash –20,000 + 20,000 + 0 + 0 = 0 + 0 + 0
New Equation 1,30,000 + 20,000 + 0 + 0 = 0 + 0 + 1,50,000
3. Purchased goodsfrom Manish 0 + 0 + 25,000 + 0 = 25,000 + 0 + 0
New Equation 1,30,000 + 20,000 + 25,000 + 0 = 25,000 + 0 + 1,50,000
4. Cash Sales (Profit ₹ 14,000 – ₹ 10,000) 14,000 + 0 – 10,000 + 0 = 0 + 0 + 4,000
New Equation 1,44,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,54,000
5. Additional capitalintroduced 20,000 + 0 + 0 + 0 = 0+ 0 + 20,000
New Equation 1,64,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,74,000
6 Commission receivedin advance 2,000 + 0 + 0 + 0 = 0+ 2,000 + 0
New Equation 1,66,000 + 20,000 + 15,000 + 0 = 25,000 + 2,000 + 1,74,000
7 Paid to creditor Manish ₹22,500 in –22,500 + 0 + 0 + 0 = – 25,000 + 0 + 2,500
full settlement
New Equation 1,43,500 + 20,000 + 15,000 + 0 = 0 + 2,000 + 1,76,500
8 Sold goods (costing ₹15,000) for 5,000 + 0 – 15,000 +13,000 = 0 + 0 + 3,000
₹18,000 out of which ₹ 5,000 received
in cash 1,48,500 + 20,000 + 0 +13,000 = 0 + 2,000 + 1,79,500
9 New Equation 0 – 2,000 + 0 + 0 = 0 + 0 – 2,000
Dep. on furniture @ 10% on ₹ 20,000
1,48,500 + 18,000 + 0 +13,000 = 0 + 2,000 + 1,77,500
New Equation
Illustration 4. Show effect of following transaction on the accounting equation:

(a) Manoj started business with Cash ₹ 2, 30,000; Goods ₹ 1, 00,000 and Building ₹ 2, 00,000.
(b) He purchased goods for cash ₹ 50,000.
(c) He sold goods (costing ₹ 20,000) ₹ 35,000.
(d) He purchased goods from Rahul ₹ 55,000.
(e) He sold goods to Varun (Costing ₹ 52,000) ₹ 60,000.
(f) He paid cash to Rahul in full settlement ₹ 53,000.
(g) Salary paid by him ₹ 20,000.

(h) Received cash from Varun in full settlement ₹ 59,000.
(i) Rent outstanding ₹ 3,000.
(j) Prepaid Insurance ₹ 2,000.
(k) Commission received by him ₹ 13, 000.
(l) Amount withdrawn by him for personal use ₹ 20,000.
(m) Depreciation charge on building ₹ 10,000.
(n) Fresh capital invested ₹ 50,000.
(o) Purchased goods from Rakhi ₹ 10,000.
28
Solution:
S.N TRANSACTION ASSETS = LIABILITIES + CAPITAL
CASH STOCK BUILDING DEBTORS PREPAID CREDITORS O/S CAPITAL

INSUR. RENT
a Started business 2,30,000 1,00,000 2,00,000 5,30,000
2,30,000 1,00,000 2,00,000 5,30,000
b Purchased goods for cash (50,000) 50,000
1,80,000 1,50,000 2,00,000 5,30,000
c Sold goods for cash 35,000 (20,000) 15,000
2,15,000 1,30,000 2,00,000 5,45,000
d Purchased goods from Rahul 55,000 55,000
e Sold goods toVarun 2,15,000 1,85,000 2,00,000 5,45,000

(52,000) 60,000 8,000
2,15,000 1,33,000 2,00,000 60,000 55,000 5,53,000

(55,000)
f Paid cash to Rahul (53,000) 2,000
1,62,000 1,33,000 2,00,000 60,000 5,55,000
g Paid salary (20,000) (20,000)
142,000 1,33,000 2,00,000 60,000 5,35,000
h Received cash from Varun 59,000 (60,000) (1,000)
2,01,000 1,33,000 2,00,000 5,34,000
i O/S Rent 3,000 (3,000)
2,01,000 1,33,000 2,00,000 2,000 3,000 5,31,000
j Prepaid Insurance (2,000)
1,99,000 1,33,000 2,00,000 2,000 3,000 5,31,000
k Commission received 13,000 13,000
2,12,000 1,33,000 2,00,000 2,000 3,000 5,44,000
l Drawings (20,000) (20,000)
1,92,000 1,33,000 2,00,000 2,000 3,000 5,24,000
m Depreciation on building (10,000) (10,000)
1,92,000 1,33,000 1,90,000 2,000 3,000 5,14,000
n Fresh capital 50,000 50,000
2,42,000 1,33,000 1,90,000 2,000 3,000 5,64,000
o Purchased goods from 10,000 10,000
Rakhi
2,42,000 1,43,000 1,90,000 --- 2,000 10,000 3,000 5,64,000
5,77,000 5,77,000
Illustration 5. How are the following items dealt in Accounting Equation?

(i) Interest due but not received ₹ 5,000.
(ii) Rent received in advance ₹ 10,000.
(iii) Insurance premium paid in advance ₹ 15,000.
(iv) Salaries due but not paid ₹ 20,000.
Solution:
(i) Interest due but not received shall be added to assets on one side & to the capital on other side.
(ii) It will increase cash on the assets side and increase the liabilities.
(iii) It will decrease one asset (cash) and increase another asset (Prepaid insurance).
(iv) Salary being an expense will be deducted from the capital & being unpaid will be added to
liabilities.
29
Illustration 6. Give an example for each of the following types of transactions:
1. Increase in one asset, decrease in another asset.
2. Increase in asset, increase in liability.
3. Increase in asset, increase in owner‘s capital.
4. Decrease in asset, decrease in liability.
5. Decrease in asset, decrease in owner‘s capital.
6. Decrease in liabilities, increase in owner‘s capital.
7. Increase in one liability, decrease in another liability.
8. Increase in liabilities, decrease in owner‘s capital.
Solution:
1. Purchase of furniture for cash—Increase in furniture and decrease in cash.
2. Purchase of furniture on credit—Increase in furniture and increase in liability.
3. Capital introduced by proprietor—Increase in cash and increase in capital.
4. Payment to creditors—Decrease in cash and decrease in creditors.
5. Cash withdrawn by proprietor—Decrease in cash and decrease in capital.
6. Conversion of partner‘s loan into capital—Increase in capital and decrease in loan.
7. Bills Payable accepted—Increase in bills payable and decrease in creditors.
8. Outstanding expenses provided—Increase in creditors for outstanding expenses and decrease in
capital.
Using Debit and Credit:

As already stated every transaction involves give and take aspect. In double entry accounting, every
transaction affects and is recorded in at least two accounts. When recording each transaction, the total
amount debited must equal to the total amount credited. In accounting, the terms — debit and credit
indicate whether the transactions are to be recorded on the left hand side or right hand side of the
account. In its simplest form, an account looks like the letter T. Because of its shape, this simple form
called a T-account. Notice that the T format has a left side and a right side for recording increases and
decreases in the item. This helps in ascertaining the ultimate position of each item at the end of an
accounting period.
 Rules of Debit and Credit:

Classification of Accounts:
Accounts can be classified in two ways:
(a) Traditional Classification: and (b) Modern Classification.
(a) Traditional Classification:
Traditional Classification
Personal Accounts Impersonal Accounts
1. Personal Accounts: Accounts which relate to persons, i.e., individuals, firms, companies, debtors
or creditors, etc. are Personal Accounts. Ex. of Personal A/c are the account of Mohan & Co., a
customer (Debtor).
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Personal Accounts
Natural Personal A/c Artificial Personal A/c Representative Personal A/c
Personal Accounts can be classified into three categories:

(i) Natural Personal A/c’s:- The term‘ Natural Person‘ means persons who are creations of God.
Therefore, these will include accounts in individual name. Like Sita‘s A/c, Mohan‘s A/c, etc.
(ii) Artificial Personal A/c’s:- These accounts include accounts of corporate bodies or institutions
which are recognised as person in business dealings. Like then account of a limited company, the
account of a club etc.
(iii) Representative Personal A/c’s:- These are accounts which represent a certain person or a
group of persons. Like if rent is due to the landlord, an Outstanding Rent Account will be opened in
the books.
 Rule of Debit and Credit - Debit the receiver, Credit the giver.
2. Impersonal Accounts: Account which are not personal such as Machinery A/c, Furniture A/c,
Cash A/c etc. are termed as Impersonal Account. These can be further subdivided into two accounts;
(a) Real A/c’s: Real accounts are the accounts which relate to tangible or intangible assets of the
firm (excluding debtors.
Tangible assets like – Building, Land, Plant and Machinery and Investment, Cash in hand or stock.
Intangible assets like- Patents, Trademark and Goodwill.
 Rule of Debit and Credit - Debit what comes in, Credit what goes out.
(ii) Nominal (Revenue or Expense) Accounts:- Accounts which relate to expenses , losses, gains,
revenue, etc. are termed as Nominal Accounts. These are Rent A/c, Salary A/c, Sales A/c,
Commission Received A/c etc.
 Rule of Debit and Credit - Debit all expenses and losses, Credit all incomes & gains.
B. Modern Classification:-
Under this classification, all the accounts are classified into the following five categories.
1. Asset Accounts. 2. Liability Accounts. 3. Capital Accounts.

4. Revenue Accounts. 5. Expense Accounts.
1. Asset Accounts: Asset accounts are those accounts which relate to the economic resources
of an enterprise such as Plant & Machinery, Land & Building etc.
● Rule of Debit and Credit - Debit31the increases, Credit the decreases.

2. Liability Accounts: - Liability accounts are accounts of lenders, creditors for goods,
outstanding expenses, etc.
● Rule of Debit and Credit - Debit the decreases, Credit the increases.
3. Capital Accounts: - These are the accounts of proprietors/partners who have invested
amount in the business. It includes both Capital and Drawings Account.
4. Revenue Accounts: - These are accounts of incomes and gains. Examples are - Sales,
Discount received, Interest received, bad debts recovered etc.
5. Expense Accounts: - These are the accounts of expenses or losses incurred in carrying the
business. Examples are: Purchases, Wages, Salaries Discount allowed etc.
● Rule of Debit and Credit - Debit the increases, Credit the decreases.
 The rules applicable to the different kinds of accounts have been summarised in the following
chart:
Illustration 7: On which side will increase in following accounts be recorded? Also,

mention the nature of accounts are debited and credited?
1. Cash 2. Creditors 3. Bank loan

4. Stock 5. Rent received 6. Salary paid 7. Salary payable
8. Rajan (owner) 9. Suman (debtor) 10. Sharan (Customer)
11. Purchase 12. Sales 13. Interest Payable
14. Accrued Commission 15. Drawings 16. Discount received
17. Depreciation
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Solution:
S/No. Name of the Account Nature of the A/c Side in which Increase will be recorded
1. Cash Asset Debit
2. Creditors Liability Credit
3. Bank loan Liability Credit
4. Stock Asset Debit
5. Rent Received Income/ Revenue Credit
6. Salary Paid Expenses/ losses Debit
7. Salary Payable Liability Credit
8. Rajan (Owner) Capital Credit
9. Suman (Debtor) Asset Debit
10. Sharan (Customer) Asset Debit
11. Purchase Expenses/ losses Debit
12. Sales Income/ Revenue Credit
13. Interest Payable Liability Credit
14. Accrued Commission Asset Debit
15. Drawings Capital Credit
16. Discount received Income/ Revenue Credit
17. Depreciation Expenses/ losses Debit
Books of Original Entry:

The book in which the transaction is recorded for the first time is called journal or book of original
entry. The source document, as discussed earlier, is required to record the transaction in the journal.
This practice provides a complete record of each transaction in one place and links the debits and
credits for each transaction. After the debits and credits for each transaction are entered in the journal,
they are transferred to the individual accounts. The process of recording transactions in journal is called
journalising. Once the Journalising process is completed, the journal entry provides a complete and
useful description of the event‘s effect on the organisation. The process of transferring journal entry to
individual accounts is called Posting.
This sequence causes the journal to be called the Book of Original Entry and the ledger account as the
Principal Book of entry. In this context, it should be noted that on account of the number and
commonality of most transactions, the journal is subdivided into a number of books of original entry as
follows:
(a) Journal Proper

(b) Cash book
(c) Other day books:
(i) Purchases (journal) book (ii) Sales (journal) book
(iii) Purchase Returns (journal) book (iv) Sale Returns (journal) book
(v) Bills Receivable (journal) book
JOURNAL (vi) Bills Payable (journal) book
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Journal:-
The first book in which the transactions of a business unit are recorded is called Journal. Here, business
transactions are recorded in chronological order i.e. in the order in which they occur. Each record in a
journal is called an entry. As the journal is the first book in which entries are recorded, it is also known
as a book of original entry.
Format of Journal
Date Particulars L.F. Dr. (₹) Cr. (₹)
Ledger Folio (L.F.): Ledger Folio is the page No. of Ledger on which the Debit A/c & Credit A/c are
to be posted.
Types of Entries:
1. Simple Entry: It is that entry in which only two accounts are affected i.e. one account is debited
and another account is credited with an equal amount.
2. Compound Entry: It is that entry in which more than two accounts are involved. Compound
Entries can further be classified into single compound entry and double compound entry.
3. In Single Compound Entry several accounts are to be debited and only one account is to be
credited or only one account is to be debited and several accounts are to be credited.
4. Opening Entry: The entry passed to record the closing balances of the previous year is called
opening entry. While passing an opening entry, all assets accounts are debited and all liabilities
accounts are credited.
Transaction related to Goods:

1. Goods purchased for cash: 2. Goods purchased from Ram on Credit:
Purchase A/c Dr. Purchase A/c Dr.
To Cash A/c To Ram
(Being goods purchased for cash) (Being goods purchased from Ram on
credit)
3. Goods sold for cash: 4. Goods sold on credit to Mohan:
Cash A/c Dr. Mohan Dr.
To Sales A/c To Sales A/c
(Being goods sold for cash) (Being goods sold to Mohan on credit)
5. Withdrawal of goods by owner for personal use: 6. Goods distributed as free samples:
Drawings A/c Dr. Advertisement A/c Dr.
To Purchase A/c To Purchase A/c
(Being goods withdrew by owner for personal use) (Being goods distributed as free samples)
7. Goods given as charity: Goods lost by fire/ flood/ theft etc.:
Charity A/c Dr. Loss by fire/ theft A/c Dr.
8.
To Purchases A/c To Purchase A/c
(Being goods given as charity) (Being goods lost by fire/flood/theft)
Note: Purchases A/c is credited in the above mentioned entries at S. No. 5 to 8 because the goods are
going out of our business on cost and it is not a sale hence, deducted from the purchases A/c.
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Transaction related to Bank:-
1. Cash deposited into the bank:
Bank A/c Dr.
To Cash A/c
(Being cash deposited to bank)
2. Cash withdrawn for office use:
Cash A/c Dr.
To Bank A/c
(Being cash withdrew from bank for office use)
3. When cheque is received from customer and deposited into bank same day:
Bank A/c Dr.
To Customer‘s personal A/c
(Being cheques deposited into bank)
4. Cash withdrawn for personal use by owner:
Cash A/c Dr.
To Bank A/c
(Being cash withdrew for personal use)
5. When cheque is received from customer and not deposited into bank same day:
Cheque-in-hand A/c Dr.
To Customer‘s personal A/c
(Being cheque received from customer)
6. When above cheque (Point 5) is deposited later into bank:
Bank A/c Dr.
To Cheque-in-hand A/c
(Being cheques deposited into bank received from …………….. On ………)
7. When payment is made through cheque:
Personal A/c Dr.
To Bank A/c
(being payment made to …….. by cheque)
8. When expense is paid through cheque:
Expense A/c Dr.
To Bank A/c
(Being expense paid by cheque)
9. When interest is allowed by the bank:
Bank A/c Dr.
To Interest A/c
(Being interest allowed by bank)
10. When Bank charges for the services provided:
Bank Charges A/c Dr.
To Bank A/c
(Being Bank charges deducted)
Note: - Bank A/c will be debited if the amount is deposited/ credited by bank & Bank A/c will be
credited if the amount is withdrawn/ debited by bank.
Note: - Cash will also be debited if business receives it & Credited if business paid it.
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Transaction related to Expense or Income:-
1. Expense paid by bank/ Cash by the Business: 2. Expense is outstanding during a Current F.Y:
Expense A/c Dr. Expense A/c Dr.
To Cash / Bank A/c To Outstanding Exp. A/c
(Being expense paid by cash/Bank) (Being expense is due but not paid)
3. Expense paid in advance: 4. Income received in Cash/Bank:
Prepaid Expense A/c Dr. Cash/Bank A/c Dr.
To Cash/Bank A/c To Income A/c
(Being expense paid in advance by cash/ Bank) (Being Income received in cash / bank)
5. Income due but not received: 6. Income received in cash/Bank in advance:
Accrued / Outstanding Income A/c Dr. Cash/Bank A/c Dr.
To Income A/c To Prepaid Income A/c
(Being Income due but not received) (Being income received in advance)
Transactions related to Assets/ Liabilities:-

1. When Assets is purchased in Cash/Bank: 2. Depreciation charged on assets:
Assets A/c Dr. Depreciation A/c Dr.
To Cash / Bank A/c To Assets A/c
(Being Assets purchased in cash/Bank) (Being Depreciation charged on assets @…. %)
3. Assets Sold by the business: 4. Liability arise when business raise funds:
Cash/ Bank A/c Dr. Cash/Bank A/c Dr.
To Assets A/c To Liability A/c
(Being Assets sold in cash/Bank) (Being fund raised)
5. Payment of Liability:
Liability A/c Dr.
To Cash/Bank A/c
(Being Liability paid in Cash/Bank)
Some other Journal Entries:-

1. Bad Debts (when Debtors fail to pay due): 2. Bad Debts Recovered:
Bad Debts Dr. Cash / Bank A/c Dr.
To Debtors A/c To Bad Debts Recovered A/c
(Being amount Bad Debts ) (Being bad debts recovered )
3. Debtors Become insolvent: 4. Interest on Capital:
Cash/ Bank A/c Dr. (Amt. Received) Interest on Capital A/c Dr.
Bad Debts Dr. (Amt. not rec.) To Capital A/c
To Debtors A/c (The due amt.) (Being Interest on capital credited by
(Being Debtors become insolvent could pay only business in capital A/c)
…….. paise in a Rupees)
5. Interest on drawing:
Capital A/c Dr.
To Interest on Drawing A/c
(Being interest on Drawing charged by business
from capital A/c)
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Important: Besides opening Journal entries, any transaction which is not covered under any of the
Subsidiary Book is recorded in Journal proper.
Discount: There are two types of discount that are explained below:
(a) Trade discount: - Trade discount is allowed by wholesalers and manufacturers to the retailers
at a fixed percentage. Trade discount is not to be shown in the books.
(b) Cash discount: - Cash discount is allowed to the customers for making an early payment.
Ex: If a retailer sells goods of list price ₹ 10,000 at 10% trade discount & 2% cash discount
Ans: List price ₹ 10,000
Less: Trade discount @ 10% (1,000)
₹ 9,000
Less: Cash discount @ 2%. (₹ 9000 × 2 ÷ 100) (180)
₹ 8,820
Illustration 8. Soraj Mart furnishes the following information:

Transactions during the month of April, 2023 are as under:
Date Details
01.4.2023 Business started with cash ₹ 1, 50,000.
01.4.2023 Goods purchased form Manisha ₹ 36,000.
01.4.2023 Stationery purchased for cash ₹ 2,200.
02.4.2023 Open a bank account with SBI for ₹ 35,000.
02.4.2023 Goods sold to Priya for ₹ 16,000.
03.4.2023 Received a cheque of ₹ 16,000 from Priya.
05.4.2023 Sold goods to Nidhi ₹ 14,000.
08.4.2023 Nidhi pays ₹ 14,000 cash.
10.4.2023 Purchased goods for ₹ 20,000 on credit from Ritu.
14.4.2023 Insurance paid by cheque ₹ 6,000.
18.4.2023 Paid rent ₹ 2,000.
20.4.2023 Goods costing ₹ 1,500 given as charity.
24.4.2023 Purchased office furniture for ₹ 11,200.
29.4.2023 Cash withdrawn for household purposes ₹ 5,000.
30.4.2023 Interest received cash ₹ 1,200.
30.4.2023 Cash sales ₹ 2,300.
30.4.2023 Commission paid ₹ 3,000 by cheque.
30.4.2023 Telephone bill paid by cheque ₹ 2,000.
30.4.2023 Payment of salaries in cash ₹ 12,000.
Journalise the transactions.
Solution: Books of Saroj Mart (Journal)

Date Particulars L.F. Debit (₹) Credit (₹)
2023
Apr.01 Cash A/c Dr. 1,50,000
To Capital A/c 1,50,000
(Being Business started with cash)
Apr.01 Purchases A/c Dr. 36,000
To Manisha A/c 36,000
(Being Goods purchase on credit)
37
Apr.01 Stationery A/c Dr. 2,200
To Cash A/c 2,200
(Being Purchase of stationery for cash)
Bank A/c Dr. 35,000
Apr. 02 To Cash A/c 35,000
(Being Opened a bank account with SBI)
Apr. 02 Priya A/c Dr. 16,000
To Sales A/c 16,000
(Being Goods sold to Priya On Credit)
Apr. 03 Bank A/c Dr. 16,000
To Priya A/c 16,000
(Being Cheque Received from Priya)
Apr. 05 Nidhi A/c Dr. 14,000
To Sales A/c 14,000
(Being Sale of goods to Nidhi on credit)
Apr. 08 Cash A/c Dr. 14,000
To Nidhi A/c 14,000
(Being Cash received from Nidhi)
Apr. 10 Purchases A/c Dr. 20,000
To Ritu A/c 20,000
(Being Purchase of goods on credit)
Apr. 14 Insurance Premium A/c Dr. 6,000
To Bank A/c 6,000
(Being Payment of Insurance premium by cheque)
Apr. 18 Rent A/c Dr. 2,000

To Cash A/c 2,000
(Being Rent paid)
Apr. 20 Charity A/c Dr. 1,500
To Purchases A/c 1,500
(Being Goods given as charity)
Apr. 24 Furniture A/c Dr. 11,200
To Cash A/c 11,200
(Being Purchase of office furniture)
Apr. 29 Drawings A/c Dr. 5,000
To Cash A/c 5,000
(Being With drawl of cash from the business for personal
use of the proprietor)
To Interest received A/c 1,200
(Being Interest received)
To Sales A/c 2,300
(Being Sale of goods for cash)
Apr. 30 Commission A/c Dr. 3,000

3,000
To Bank A/c
(Being Commission paid by cheque)
Apr. 30 Telephone expenses A/c D r. 2,000
To Cash A/c 2,000
(Being Payment of telephone bill)
Apr. 30 Salaries A/c Dr. 12,000
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To Cash A/c 12,000
(Being Payment of salary to the office persons)
Illustration 9: Prove that the accounting equation is satisfied in all the following
transactions of Chhaya house by preparing the analysis table. Also record the
transactions in Journal.
(i) Business commenced with a capital of ₹ 6, 00,000.
(ii) Deposited ₹ 4, 50,000 in a bank account.
(iii) Purchased Plant & Machinery for ₹ 2, 30,000 by paying ₹ 30,000 cash
immediately.
(iv) Purchased goods worth ₹ 40,000 for cash and ₹ 45,000 on account.
(v) Paid a cheque of ₹ 2, 00,000 to the supplier for Plant and Machinery.
(vi) ₹ 70,000 cash sales (of goods costing ₹ 50,000).
(vii) Withdrawn by the proprietor ₹ 35,000 cash for personal use.
(viii) Insurance paid by cheque of ₹ 2,500.
(ix) Salary of ₹ 5,500 outstanding.
(x) Furniture of ₹ 30,000 purchased in cash.
Solution: Journal
(i) Cash A/c Dr. 6,00,000
(Business started with cash)
(ii) Bank A/c Dr. 4,50,000
To Cash A/c 4,50,000
(Cash deposited into the bank)
(iii) Plant and Machinery A/c Dr. 2,30,000
To Cash A/c 30,000
To Creditors A/c 2,00,000
(Purchase of plant and machinery by paying ₹ 30,000
cash and balance on a later date)
(iv) Purchases A/c Dr. 85,000
To Cash A/c 40,000
To Creditors A/c 45,000
(Bought goods for cash as well as on credit)
(v) Creditor‘s A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Payment made to the supplier of plant and machinery)
(vi) Cash A/c 70,000
To Sales A/c 70,000
(Sold goods on profit)
(vii) Drawings A/c 35,000
To Cash A/c 35,000
(Withdrew cash for personal use)
(viii) Insurance A/c 2,500
To Bank A/c 2,500
39
(Paid insurance by cheque)
Salary A/c 5,500

(ix)
5,500
To Outstanding salary A/c
(Salary outstanding)
(x) Furniture A/c 30,000
30,000
To Cash A / c
(Furniture purchased for cash)
Statement showing the effect of various transaction on accounting equation

(Figures in rupees)
No Cash Bank Stock Furniture Plant and Total = Non-trade Trade Capital Total
. Machinery Creditors Creditors
1 6,00,000 6,00,000 = 6,00,000 6,00,000

6,00,000 - - - - 6,00,000 = - - 6,00,000 6,00,000
2 (4,50,000) 4,50,000
1,50,000 4,50,000 - - - 6,00,000 = - - 6,00,000 6,00,000
3 (30,000) - - - 2,30,000 2,00,000 2,00,000 - - 2,00,000
1,20,000 4,50,000 - - 2,30,000 8,00,000 = 2,00,000 - 600,000 8,00,000
4 (40,000) - 85,000 - - 45,000 - 45,000 - 45,000
80,000 4,50,000 85,000 - 2,30,000 8,45,000 = 2,00,000 45,000 600,000 8,45,000
5 - (2,00,000) - - - (2,00,000) (2,00,000) - - (2,00,000)
80,000 2,50,000 85,000 - 2,30,000 6,45,000 = - 45,000 6,00,000 20,000
6 70,000 - (50,000) - - 20,000 - - 20,000 20,000
1,50,000 2,50,000 35,000 - 2,30,000 6,65,000 = - 45,000 6,20,000 6,65,000
7 (35,000) - - (35,000) (35,000) (35,000)
1,15,000 2,50,000 35,000 - 2,30,000 6,30,000 = - 45,000 5,85,000 6,30,000
8 (2,500) (2,500) (2,500) (2,500)
1,15,000 2,47,500 35,000 - 2,30,000 6,27,500 = - 45,000 5,82,500 6,27,500
9 5,500 - (5,500)
1,15,000 2,47,500 35,000 - 2,30,000 6,27,500 = 5,500 45,000 5,77,000 6,27,500
10 (30,000) - - 30,000 - - - - -
85,000 2,47,500 35,000 30,000 2,30,000 6,27,500 = 5,500 45,000 5,77,000 6,27,500
Accounting Entries under Goods and Services Tax
Illustration 10:
Record necessary Journal entries assuming CGST @ 5% and SGST @ 5% and all transactions
are occurred within Delhi.
(i) Shobit bought goods ₹ 1, 00,000 on credit
(ii) He sold them for ₹ 1, 35,000 in the same state on credit
(iii) He paid for Railway transport ₹ 8,000
(iv) He bought computer printer for ₹ 10,000
(v) Paid postal charges ₹ 2,000
Solution: Journal
(i) Purchases A/c Dr. 1,00,000
Input CGST A/c Dr. 5,000
Input SGST A/c Dr. 5,000
To Creditors A/c 1,10,000
(Being Goods bought on credit)
(ii) Debtors A/c Dr. 1,48,500
40
To Sales A/c 1,35,000
To Output CGST A/c 6,750
To Output SGST A/c 6,750
(Being Goods sold on credit)
(iii) Transport Charges A/c Dr. 8,000
Input CGST A/c Dr. 400
Input SGST A/c Dr. 400
To Bank A/c 8,800
(Being transport charges paid)
(iv) Computer printer A/c Dr. 10,000
To Bank A/c 11,000
(Being Computer-Printer bought)
(v) Postal charges A/c Dr. 2,000
To Bank A/c 2,200
(Being Paid for Portage)
(vi) Output CGST A/c Dr. 6,7503
Output SGST A/c Dr. 6,7504
To Input CGST A/c 6,0001
To Input SGST A/c 6,0002
To Electronic Cash Ledger A/c 1,500
(Being GST set off and balance paid)
Working Notes:-
Total Input CGST= ₹ 5,000 + ₹ 400 + ₹ 500 + ₹ 100 = ₹ 6,000 1
Total Input SGST = ₹ 5,000 + ₹ 400 + ₹ 500 + ₹ 100 = ₹ 6,000 2
Total Output CGST = ₹ 6,750 3
Total Output SGST = ₹ 6,750 4
Net CGST Payable = ₹ 6,750 - ₹ 6,000 =₹ 750
Net SGST Payable = ₹ 6,750 - ₹ 6,000 = ₹ 750
The Ledger:
The ledger is the principal book of accounting system. It contains different accounts where
transactions relating to that account are recorded. A ledger is the collection of all the accounts, debited
or credited, in the journal proper and various special. A ledger may be in the form of bound register, or
cards, or separate sheets may be maintained in a loose leaf binder. In the ledger, each account is
opened preferably on separate page or card.
Utility
A ledger is very useful & is of utmost importance in the organisation. The net result of all transactions
in respect of a particular account on a given date can be ascertained only from the ledger. For ex., the
management on a particular date wants to know the amount due from a certain customer or the amount
the firm has to pay to a particular supplier, such information can be found only in the ledger. Such
information is very difficult to ascertain from the journal because the transactions are recorded in the
chronological order and defies classification.
41
Format of the account is shown in figure
Dr. Name of the Account Cr.
Date Particulars J.F. Amt. (₹) Date Particulars J.F. Amt. (₹)
Distinction between Journal and Ledger:

The Journal & the Ledger are the most important books of the double entry mechanism of
accounting and are indispensable for an accounting system.
Following points of comparison are worth noting:
1. The Journal is the book of first entry (original entry); the ledger is the book of second entry.
2. The Journal is the book for chronological record; the ledger is the book for analytical record.
3. The Journal, as a book of source entry, gets greater importance as legal evidence than the ledger.
4. Transaction is the basis of classification of data within the Journal; Account is the basis of
classification of data within the ledger.
5. Process of recording in the Journal is called Journalising; the process of recording in the ledger is
known as Posting
Illustration 11:
Date Details Amt. (₹)
2022
Dec. 01 Business started with cash 1,20,000
Dec. 02 Opened a bank account with ICICI 4,00,00
Dec. 04 Goods purchased for cash 12,000
Dec. 10 Paid cartage 500
Dec. 12 Goods sold on credit to M/s Lara India 25,000
Dec. 14 Cash received from M/s Lara India 10,000
Dec. 16 Goods returned from Lara India 3,000
Dec. 18 Paid trade expenses 700
Dec. 19 Goods purchased on credit from Taranum 32,000
Dec. 20 Cheque received from M/s Lara India for final settlement 11,500
and deposited same day into bank
Dec. 22 Goods returned to Taranum 1,500
Dec. 24 Paid for stationery 1,200
Dec. 26 Cheque given to Taranum on account 20,000
Dec. 28 Paid rent by cheque 4,000
Dec. 29 Drew cash for personal use 10,000
Dec. 30 Cash sales 12,000
Dec. 31 Goods sold to M/s Rupak Traders 11,000
Solution: Books of Time Zone

Journal
2022
Dec. 01 Cash A/c Dr. 1,20,000
( Business started with cash)
42
02 Bank A/c Dr. 40,000
To Cash A/c 40,000
(Opened a current account with ICICI bank)
04 Purchases A/c Dr. 12,000

To Cash A/c 12,000
(Goods purchased for cash)
10 Cartage A/c Dr. 500
To Cash A/c 500
(Cartage paid)
12 Lara India A/c Dr. 25,000
To Sales A/c 25,000
(Goods sold on credit)
14 Cash A/c Dr. 10,000
To Lara India A/c 10,000
(Cash received from Lara India)
16 Sales Return A/c Dr. 3,000
(Goods returned from Lara India)
18 Trade Expenses A/c Dr. 700
To Cash A/c 700
(Trade expenses paid)
19 Purchases A/c Dr. 32,000
To Taranum‘s A/c 32,000
(Goods purchased on credit)
20 Bank A/c Dr. 11,500
Discount A/c Dr. 500
(Cheque received for final settlement)
22 Taranum‘s A/c Dr. 1,500
To Purchase Return‘s A/c 1,500
(Goods returned to Taranum)
24 Stationery A/c Dr. 1,200
To Cash A/c 1,200
(Cash paid for stationery)
26 Taranum‘s A/c Dr. 20,000
To Bank A/c 20,000
(Cheque given to Taranum)
28 Rent A/c Dr. 4,000
To Bank A/c 4,000
(Rent paid by cheque)
29 Drawings A/c Dr. 10,000
To Cash A/c 10,000
(Cash withdrawn for personal use)
30 Cash A/c Dr. 12,000
To Sales A/c 12,000
(Goods sold for cash)
31 Rupak Trader A/c Dr. 11,000
To Sales A/c 11,000
(Goods sold on credit)
Total 3,14,900 3,14, 900
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Posting in the Ledger books:
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45
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USEFUL LINK
https://diksha.gov.in/play/collection/do_31310347535505817611436?contentType=TextBook
PRACTICE QUESTIONS:
1. Prepare accounting equation for the following transactions:
(i) Introduced ₹ 8, 00,000 as cash and ₹ 50,000 by stock.
(ii) Purchased plant for ₹ 3, 00,000 by paying ₹ 15,000 in cash and balance at a later date.
(iii) Deposited ₹ 6, 00,000 into the bank.
(iv) Purchased office furniture for ₹ 1, 00,000 & paid by cheque.
(v) Purchased goods worth ₹ 80,000 for cash and for ₹ 35,000 in credit.
(vi) Goods amounting to ₹ 45,000 was sold for ₹ 60,000 on cash basis.
(vii) Goods costing ₹ 80,000 were sold for ₹ 1, 25,000 on credit.
(viii) Cheque issued to the supplier of goods worth ₹ 35,000.
(xi) Cheque received from customer amounting to ₹ 75,000.
(x) Withdrawn by owner for personal use ₹ 25,000.
2. Prepare accounting equation for the following transactions:
(i) Started business with cash ₹ 2, 00,000 & stock ₹ 1, 50,000.
(ii) Purchased goods for cash ₹ 15,000 & on credit ₹ 20,000.
(iii) Sold goods for cash ₹ 20,000 & on credit ₹ 10,000.
(iv) Purchased goods of the value of ₹ 12,000 for ₹ 15,000.
(v) Sold goods for ₹ 20,000 (Cost price ₹ 17,500).
3. Find the total assets of the firm if the capital is ₹ 60,000 & liabilities ₹ 39,000.
4. A started business on 1st April, 2017 with a capital of ₹ 1, 10,000 & took loan from bank
₹ 40,000. At the end of the year on 31st March, 2018, his assets were for ₹ 2, 50,000;
creditors for ₹ 70,000. Bank loan has not been paid so far; however interest on loan has been paid.
Find the closing capital and profit earned during the year.
5. Find the opening capital of the firm from the following information given at the end of the year:
Total assets ₹ 1, 30,000; External liabilities ₹ 40,000; Additional capital ₹ 20,000;
Drawings ₹ 15,000 & Profit ₹ 25,000.
6. Pass Journal Entries for the following:
(a) Goods worth ₹ 35,000 and cash ₹ 17,000 were stolen by an employee.
(b) Charge Depreciation @ 10% p.a. for two months on machine costing ₹ 1, 40,000.
(c) Paid to landlord by cheque ₹ 90,000 for Rent. One-third of the building is occupied by the
proprietor for residential use.
(d) Sold goods to Raj costing ₹ 80,000 at a profit of 25% & allowed him10% trade discount and
paid for cartage ₹ 1,000 to be charged from him.
47
7. Enter the following transactions in the Journal of Manohar Lal & Sons.:-
2023 (₹)
Feb 1 Manohar Lal & Sons started business with cash 60,000
2 Purchased furniture for cash 10,000
4 Purchased goods for cash 25,000
5 Bought goods from Kamlesh 15,000
10 Paid cash to Kamlesh 15,000
16 Purchased goods from Sohan 6,000
18 Purchased goods from Sohan for cash 8,000
22 Paid rent for the office 1,000
8. Enter the following transactions in the Journal of M/s Tripathi Bros.:-

2023 (₹)
Jan. 1 Sold goods for cash 36,000
8 Sold goods to Hari 30,000
14 Received cash from Hari 18,000
26 Received Commission 750
27 Paid Salary to Gopal 1,200
28 Received cash from Hari 12,000
29 Withdrew cash from office for personal use 4,000
30 Wages paid 7,200
31 Bought Machinery for Cash 8,000
9. Pass Journal entries in the books of Gauri Shankar & Co. and also prepare Ledger Account from
the following:
2022 (₹)
April 01 Commenced business with cash 50,000
02 Purchased goods from Shubh 20,000
04 Sold goods to Shyamnath……………………………………………….. 15,000
06 Shyamnath returned defective goods 1,000
10 Received cash from Shyamnath and 13,800
Discount allowed 200
12 Mani sold goods to us……………………………………………………. 10,000
14 Paid to Mani in full settlement of his account after deducting 5% discount.
15 Paid Rent 10,000
16 Paid Rent of Gauri Shankar's residence………………………………… 5,000
18 Purchased goods for cash from Govinda for ₹ 6,000 at 20% trade discount.
20 Purchased goods from Govinda for ₹ 10,000 at 20% trade discount.
24 Paid to Govinda ₹ 7,850 in full settlement of his account.
25 Paid to Shubh ₹ 4,750; discount received ₹ 250.
30 Paid Wages ₹ 400; Salaries ₹ 4,000; Advertisement expenses ₹ 800 and
Trade expenses ₹ 1,000.
------------------------------------------END OF CHAPTER--------------------------------------
48
CH - 04. RECORDING OF TRANSACTIONS - II
• state the need for special purpose books;
• record the transactions in cash book and post them in the ledger;
• prepare the petty cashbook;
• record the transactions in the special purpose books;
• post the entries in the special purpose book and to the ledger;
• balance the ledger accounts.
A small business may be able to record all its transactions in one book only, i.e., the journal. But as
the business expands and the number of transactions becomes large, it may become cumbersome to
journalise each transaction. For quick, efficient and accurate recording of business transactions,
Journal is sub-divided into special journals.
These special journals are also called daybooks or subsidiary books. Transactions that cannot be
recorded in any special journal are recorded in journal called the Journal Proper. Special journals
prove economical and make division of labour possible in accounting work. In this chapter we will
discuss the following special purpose books:
• Cash Book • Purchases Book
• Purchases Return (Return Outwards) Book • Sales Book
• Sales Return (Return Inwards) Book • Journal Proper
Cash Book:
Cash book is a book in which all transactions relating to cash receipts and cash payments are recorded.
It starts with the cash or bank balances at the beginning of the period. Generally, it is made on monthly
basis. This is a very popular book and is maintained by all organisations, big or small, profit or not-for
profit.
Single Column Cash Book:
The single column cash book records all cash transactions of the business in a chronological order, i.e.,
it is a complete record of cash receipts and cash payments. When all receipts and payments are made in
cash by a business organisation only, the cash book contains only one amount column on each (debit
and credit) side.
Format of Simple Cash book
Dr. Simple Cash book Cr.
Date Receipts L.F (₹) Date Payments L.F (₹)
To…….. By…
Illustration 1: Enter the following transaction in a single column cash book:-

2023 March 01. Commenced business with cash ₹ 10,000.
02. Bought goods for cash ₹ 2,500.
05. Sold goods for cash ₹ 2,000.
49
10. Goods purchased from Ravi on credit ₹ 5,000.
13. Paid to Ravi ₹ 3,500.
15. Cash sale ₹ 4,000.
18. Purchased furniture for cash ₹ 3,000.
20. Paid wages ₹ 190.
24. Paid rent ₹ 200.
26. Received commission ₹ 300.
28. Withdrew for personal use ₹ 500.
31. Paid salary ₹ 450.
Ans: Dr. Simple Cash Book Cr.
Date Particulars L.F (₹) Date Particulars L.F (₹)
2023, Mar 1 To Capital A/c 2023, Mar 2 By Purchases 2,500
5 To Sales A/c 10,000 13 By Ravi A/c 3,500
15 To Sales A/c 2,000 18 By Furniture A/c 3,000
26 To Commission A/c 4,000 18 By Wages A/c 190
300 20 By Rent A/c 200
24 By Drawings A/c 500
28 By Salary A/c 450
31 By Balance c/d 5,960
16,300 16,300
2017,April 1 By Balance b/d 5,960
Cash Book with Cash and Bank Column:

In this case the Cash Book is ruled with two amount columns on either side of the cash book namely,
―Cash and Bank‖. Cash columns in such a case will record actual cash received in the debit side and
payments in the credit side. Cheques received should be entered on the debit side of the bank column
when it deposited in the bank. The payments by cheques should be entered on the credit side in bank
column and also when cash is withdrawn from the bank.
Performa of Double Column Cash Book
Dr. Double Column Cash Book Cr.
Date Particulars L.F Cash(₹) Bank(₹) Date Particulars L.F Cash(₹) Bank(₹)
To…….. By…
Important Entries:-
1. Contra Entries: These entries affect cash and bank columns both at the same time. To indicate
contra entry ―C‖ is mentioned in the L.F. column of the cash Book. Following two cases result in
Contra entries.
(a) Depositing cash into Bank ₹ 1,000. It will increase bank balance, so bank column is debited and
flash balance will decrease, so cash column is credited.
Dr. Cash Book (with Cash & Bank Column) Cr.
Date Particulars L.F. Cash (₹) Bank(₹) Date Particulars L.F. Cash (₹) Bank(₹)
2023,Apr 01 To Cash A/c C 1,000 2023 By Bank A/c C 1,000
(b) Withdrawn from Bank for office use ₹ 1,000. It will increase cash balance, so cash column is
debited and bank balance will decrease, so bank column is credited.
50
Dr. Cash Book (with Cash & Bank Column) Cr.
Date Particulars L.F. Cash (₹) Bank (₹) Date Particulars L.F. Cash (₹) Bank (₹)
2023,Apr 01 To Bank A/c C 1,000 2023 By Cash A/c C 1,000
(2) Entries relating to cheques:

(i) When any payment is made by cheque: It will reduce the bank balance and thus bank column
will be credited.
(ii) When any payment is received in the form of cheque and no information about its deposit into
bank is given. In this case it is assumed that the cheque is deposited into bank on the same day,
when it is received & so bank A/c will be debited.
(iii) When any payment is received in the form of cheque and it is deposited into bank on same day
than bank A/c will be debited. When payment is receive in the form of cheque on one day & it
is deposited into Bank on other day i.e. when two dates, one for the receipt of cheque and the
other for deposit. In this case no entry it to be recorded at the time of receiving the cheque.
Entry is to made when cheque deposited in the bank, as bank column is debited
Illustration 2:
Sep 1, 2022 Bank balance. 21,000
Sep 01 Cash balance. 7,500
Sep 04 Purchased goods by cheque. 6,000
Sep 08 Sale of goods for cash. 3,000
Sep 13 Purchase of machinery by cheque. 2,750
Sep 16 Sold goods and received cheques (deposited same day.) 2,250
Sep 17 Purchase goods from Mira in cash. 8,700
Sep 20 Purchase stationery by cheque. 550
Sep 24 Cheque given to Rohit. 750
Sep 27 Cash withdrawn from the bank. 5,000
Sep 31 Rent paid by cheque. 1,250
Sep 31 Paid salary. 1,750
Ans: Dr. Double column cash book Cr.

Date Particulars LF Cash (₹) Bank (₹) Date Particulars L.F Cash (₹) Bank (₹)
2022,01Sep To balance b/d 7,500 21,000 04 Sept By Purchases ----- 6,000
08 Sept To Sales A/c 3,000 ----- 13 Sept By Machinery A/c ----- 2,750
16 Sept To Sales A/c ----- 2,250 17 Sept By Purchases A/c 8,700 -----
27 Sept To Bank A/c 5,000 ----- 20 Sept By Stationery A/c ----- 550
24 Sept By Rohit ----- 750
27 Sept By Cash A/c ----- 5,000
31 Sept By Rent A/c ----- 1,250
31 Sept By Salary A/c 1,750 -----
31 Sept By Balance c/d 5,050 6,950
15,500 23,250 15,500 23,250
Oct 1 To balance b/d 5,050 6,950
51
Illustration 3: Prepare double column cash book of M/s Adreno Technology Pvt. Ltd.
for the month of December 2022 from the following transactions:
2022, Dec. 01 Cash in hand 3,065
Cash at bank 6,780
Dec. 02 Cash paid to petty cashier 1,000
Dec. 03 Received cheque from Priya 3,000
Dec. 05 Deposited into bank 1,200
Dec. 06 Priya‘s cheque deposited into bank 3,000
Dec. 08 Purchased furniture by cheque 6,500
Dec. 10 Paid trade expenses 400
Dec. 12 Cash Sales 9,000
Dec. 13 Bank charges 300
Dec. 15 Dividend collected by bank 1,200
Dec. 16 Paid electric bill by cheque 600
Dec. 17 Cash purchases 2,000
Dec. 19 Paid for advertising 1,000
Dec. 21 Goods sold and received a cheque (deposited same day) 6,000
Dec. 22 Paid legal charges 500
Dec. 23 Drew from bank for personal use 2,000
Dec. 24 Paid establishment expenses 340
Dec. 25 Paid for printing of bill book 850
Dec. 26 Paid insurance premium by cheque 2,150
Dec. 28 Paid salary by cheque 4,000
Dec. 29 Rent paid 3,000
Dec. 30 Commission received by cheque (deposited same day) 2,500
Dec. 31 Paid for charity by cheque 800
Solution:
Dr. Cash Book with Cash & Bank Column Cr.
Date Receipts L.F. Cash(₹) Bank(₹) Date Payments L.F Cash(₹) Bank(₹)
2022,1.Dec To Balance b/d 3,065 6,780 2022,Dec2 By Petty Cashier 1,000

03 To Priya 3,000 05 By Bank A/c C 1,200
04 To Sales A/c 2,000 06 By Bank A/c C 3,000
05 To Cash A/c C 1,200 08 By Furniture A/c 6,500
06 To Cash A/c C 3,000 10 By Trade exp. A/c 400
12 To Sales A/c 9,000 13 By Bank char. A/c 300
15 To Dividend A/c 1,200 16 By Electric charges 600
21 To Sales A/c 6,000 17 By Purchases A/c 2,000
27 To Sales A/c 7,200 19 By Advertisement 1,000
30 To Commission 2,500 22 By Legal charges 500
23 By Drawings A/c 2,000
24 By Establi. exp. A/c 340
25 By Printing A/c 850
52
26 By Insurance Prem. 2,150
28 By Salary A/c 4,000
29 By Rent A/c 3,000
31 By Charity A/c 800
31 By Balance c/d 10,975 4,330
24,265 20,680 24,265 20,680

1 Jan, 2023 To Balance b/d 10,975 4,330
Petty Cash Book:

Business has to incur small expenses which are repetitive in nature. To save the time and efforts of
head cashier, business appoints a petty cashier. He is entrusted with the duty of paying these expenses.
Imprest System of Petty Cash Book:-

Under this system, Head cashier gives a fixed amount to petty cashier for a definite period. At the
end of given period, Head cashier reimburses the amount actually spent by the petty cashier
resulting the same amount with petty cashier which he had in the beginning of the period.
This can be illustrated as under.

Head Cashier →→ Petty Cashier
Advantage of Petty Cash Book:

(a) Saving of time and efforts of Head cashier
(b) Control on Petty expenses
(c) Less chances of fraud.
Illustration 4:
Mr. Mohit, the petty cashier of M/s Samaira Traders received ₹ 2,000 on May 01, 2023
from the Head Cashier. For the month, details of petty expenses are listed here under.
53
2023, May 02 Auto fare 55
03 Courier services 40
04 Postal stamps 105
05 Erasers/Sharpeners/Pencils/Pads 225
06 Speed post charges 98
08 Taxi fare (₹ 105 + ₹ 90) 195
08 Refreshments 85
10 Auto fare 60
12 Registered postal charges 42
13 Telegram 34
14 Cartage 25
16 Computer stationery 165
19 Bus fare 24
19 STD call charges 87
20 Office sanitation including disinfectant (₹ 36 + ₹ 24) 60
22 Refreshment 45
23 Photo stating charges 47
28 Courier services 40
29 Unloading charges 40
30 Bus fare 15
Solution: The Petty Cash Book for the month will be prepared as follows:
Amt. Date Particulars Voucher Amt. Analysis of Payments
Received No. paid
2023 Postage Telephone Conveyance Stationery Misc.
May & Telegram
2,000 01 To Cash received
02 By Auto fare 55 55
03 By Courier services 40 40
04 By Postal stamps 105 105
05 By Erasers/Sharpeners 225 225
/Pencils
06 By Speed post charges 98 98
08 By Taxi fare (105 + 90) 195 195
08 By Refreshments 85 85
10 By Auto fare 60 60
12 By Registered postal 42 42
charges
13 By Telegram 34 34
14 By Cartage 25 25
16 By Computer stationery 165 165
19 By Bus fare 24 24
19 By STD call charges 87 87
20 By Office sanitation 60 60
including disinfectant
(36+24)
22 By Refreshment 45 45
23 By Photo stating charges 47 47
28 By Courier services 40 40
29 By Unloading charges 40 40
30 By Bus fare 15 15
1,487 325 121 349 390 302
31 By Balance c/d 513
2,000 2,000
Jun.
513 01 To Balance b/d
1,487 01 To Cash received
54
Books of Original Entry/ Special Purpose Books
As the business grows and number of transactions increase, it becomes necessary for the necessary for
the business to divide the recording work.
Advantages of Maintaining Subsidiary Books:-
(a) Division of work
(b) Leads to Specialization
(c) Easy to maintain Ledger
(d) Check on frauds
(e) Easy to fix responsibility
(f) Quick availability of required information.
Special Purpose Subsidiary Books:-
Purchases Book:-
In this book, only those transactions are recorded which are related to credit purchases of goods in
which the business deals in. Recording is made on the basis of Bills/ Invoices issued by the Suppliers.
Transactions not recorded in purchases Book:
 Purchases of goods for cash.
 Purchases of Assets meant for long term, not for resale.
Format of Purchases (journal) Book

Purchase (Journal) Book
Date Invoice No. Name of Supplier (Account to be Credited) L.F Amt (₹)
Sales Books/ Sales Journal:

In this book, transactions for credit sales of goods are recorded. The source documents for this book is
duplicate copy of invoice/bills issued to the customers.
Transactions not recorded in Sales Book
 Sales of goods for cash
 Sales of Assets.
Format of Sales (journal) Book

Sales (Journal) Book
Date Invoice No. Name of Customer (Account to be Debited) L.F Amt (₹)
Purchases Returns/ Returns Outward Book:

This book includes only those transactions which are related to returns of goods bought on credit. The
goods may be returned due to various reasons such as goods bought being defective, supply of inferior
quality goods etc. Entries in this book are made on the basis of Debit Note. A Debit note contains the
name of the supplier to whom good are returned, details of goods returned.
Format of Purchases Return (journal) Book
Purchase Return (Journal) Book
Date Debit No. Name of Supplier (Account to be Debited) L.F Amt (₹)
55
Sales Returns Book:
This book includes all the returns by customers of credit sales of goods. The Credit Note is used for
recording entries in this book. The credit note contains the details of customers and goods returned.
Format of Sales Return (journal) Book
Sales Return (Journal) Book
Date Credit No. Name of Customer (Account to be credited) L.F Amt (₹)
Journal Proper:
A book maintained to record transactions, which do not find place in special journals, is known as
Journal Proper or Journal Residual.
Following transactions are recorded in this journal:
1. Opening Entry: In order to open new set of books in the beginning of new accounting year and
record there in opening balances of assets, liabilities & capital, the opening entry is made in the journal.
2. Adjustment Entries: In order to update ledger account on accrual basis, such entries are made at the
end of the accounting period. Such as Rent outstanding, Prepaid insurance, Depreciation and
Commission received in advance.
3. Rectification entries: To rectify errors in recording transactions in the books of original entry and
their posting to ledger accounts this journal is used.
4. Transfer entries: Drawing account is transferred to capital account at the end of the accounting year.
Expenses accounts and revenue accounts which are not balanced at the time of balancing are opened to
record specific transactions. Accounts relating to operation of business such as Sales,
Purchases, Opening Stock, Income, Gains and Expenses, etc., and drawing are closed at the end of the
year and their Total/balances are transferred to Trading and Profit and Loss account by recording the
journal entries. These are also called closing entries.
5. Other entries: In addition to the above mentioned entries in the point‘s number 1 to 4, recording of
the following transaction is done in the journal proper:
(i) At the time of a dishonour of a cheque the entry for cancellation for discount received or discount
allowed earlier.
(ii) Purchase/sale of items on credit other than goods.
(iii) Goods withdrawn by the owner for personal use.
(iv) Goods distributed as samples for sales promotion.
(v) Endorsement and dishonour of bills of exchange.
(vi) Transaction in respect of consignment and joint venture, etc.
(vii) Loss of goods by fire/ theft/ spoilage.
Illustration 5: Enter the following transactions in the Purchase Book, Sales Book, Purchase Returns
Book and Sales Returns Book of Abhishek and Co. for the month of January, 2022.
01. Jan. Purchased goods from Raj Traders ₹ 16,400 at 10% trade discount.
03. Jan. Preeti enterprises invoiced goods to us ₹ 17,250.
06. Jan. Sold goods to Vinita Stores Rs 19,000 at 5% trade discount.
09. Jan. Mitesh Associates invoiced goods to us ₹ 17,000 at 2½ trade discount.
12. Jan. Returned goods to Raj traders ₹ 1,650 (Net).
15. Jan. Vinita Traders returned goods to us as they were damaged in transit ₹ 4,000(Gross).
56
18. Jan. Returned goods to Preeti ₹ 2,550
23. Jan. Placed an order with Novel Stores for goods worth ₹ 29,000.
25. Jan. Novel Stores supplied goods worth ₹ 19,000 only
26. Jan. Returned goods to Novel Stores as they were not as per specification ₹ 2,550.
28. Jan. Sold goods to Deepika ₹ 24,000 at 8% trade discount.
30. Jan. Deepika returned goods of ₹ 4,000 (Gross).
Answer: In the Books of Abhishek and Co.

Purchases Book
Date Particulars L.F. Details (₹) Amount(₹)
2022
1 Jan Raj Traders 16,400
Less: Trade Discount @ 10% (1,640) 14,760
3 Jan Preeti Enterprises 17,250
9 Jan Mitesh Associates 17,000
Less: Trade Discount @ 2.5% (425) 16,575
25 Jan Novel Stores 19,000
31 Jan Purchases A/c Dr. 67,585
Sales Book
Date Particulars L.F. Details (₹) Amount (₹)
2022
6 Jan Vinita Stores 19,000
Less: Trade Discount @ 5% (950) 18,050
28 Jan Deepika 24,000
Less: Trade Discount @ 8% (1,920) 22,080
31 Jan Sales A/c Cr. 40,130
Purchase Return Book

Date Particulars L.F. Details (₹) Amt. (₹)
2022
12 Jan Raj Traders 1650
18 Jan Preeti Enterprises 2550
26 Jan Novel Stores 2550
31 Jan Purchases Returns A/c. Cr. 6750
Sales Return Book
Date Particulars Credit Note No. L.F. Details (₹) Amt. (₹)
Jan 2022
15 Jan Vinita Traders 4,000
30 Jan Deepika 4,000

31 Jan Sales Returns A/c Dr. 7,480
57
PRACTICE QUESTIONS:
1. Record the following transaction in simple cash book for November 2023:
2023, Amt. (₹)
Jan. 01. Cash in hand 12,500
Jan. 04. Cash paid to Hari 600
Jan. 07. Purchased goods 800
Jan. 12. Cash received from Amit 1,960
Jan. 16. Sold goods for cash 800
Jan. 20. Paid to Manish 590
Jan. 25. Paid cartage 100
Jan. 31. Paid salary 1,000
2. Prepare Double column Cash Book with Cash and Bank Columns from following information.
2023 Amt. (₹)
Feb 04 Cash in Hand 30,000
Bank Overdraft 1,40,000
Feb 06 Paid wages 8,000
Feb 07 Cash Sales 2,80,000
Feb 10 Cash deposited in Bank 1,60,000
Feb 15 Goods purchased against Cheque 80,000
Feb 20 Paid Rent 20,000
Feb 25 Drew from bank for personal use 16,000
Feb 27 Salary paid 40,000
3. Prepare double column cash book from the following transactions for the year August 2022:
2022, Amt. (₹)
Aug. 01. Cash in hand 17,500
Cash at bank 5,000
Aug. 03. Purchased goods for cash 3,000
Aug. 05. Received cheque from Jasmeet 10,000
Aug. 08. Sold goods for cash 7,000
Aug. 10. Jasmeet‘s cheque deposited into bank
Aug. 12. Purchased goods and paid by cheque 20,000
Aug. 15. Paid establishment expenses through bank 1,000
Aug. 18. Cash sales 7,000
Aug. 20. Deposited into bank 10,000
Aug. 24. Paid trade expenses 500
Aug. 27. Received commission by cheque 6,000
Aug. 29. Paid Rent 2,000
Aug. 30. Withdrew cash for personal use 1,200
Aug. 31. Salary paid 6,000
4. M/s Ruchi trader started their cash book with the following balances on June 2023:
Cash in hand ₹1,354 and balance in bank current account ₹ 7,560. He had the following
transaction in the month of June 2023: Amt. (₹)
03 June, Cash sales 2,300
05 June, Purchased goods, paid by cheque 6,000
08 June, Cash sales 10,000
12 June, Paid trade expenses 700
15 June, Sales goods, received cheque (deposited same day) 20,000
58
18 June, Purchased motor car paid by cheque 15,000
20 June, Cheque received from Manisha (deposited same day) 10,000
22 June, Cash Sales 7,000
25 June, Manisha‘s cheque returned dishonoured
28 June, Paid Rent 2,000
29 June, Paid telephone expenses by cheque 500
30 June, Cash withdrawn for personal use 2,000
Prepare bank column cash book.
5. Prepare Petty cash book from the following transactions. The Imprest amount is ₹ 2,000.
2023 Amt. (₹)
Jan. 01. Paid cartage 50
Jan. 02. STD charges 40
Jan. 02. Bus fare 20
Jan. 03. Postage 30
Refreshment for employees 80
Jan. 06. Courier charges 30
Jan. 08. Refreshment of customer 50
Jan. 10. Cartage 35
Jan. 15. Taxi fare to manager 70
Jan. 18. Stationery 65
Jan. 20. Bus fare 10
Jan. 22. Fax charges 30
Jan. 25. Telegrams charges 35
Jan. 27. Postage stamps 200
Jan. 29. Repair on furniture 105
Jan. 30. Laundry expenses 115
Jan. 31. Miscellaneous expenses 100
6. Enter the following transactions in the Purchase Journal (Book) of M/s Rai Traders of July 2022:
01 July 2022. Bought from Rahul Traders as per invoice no.20041
40 Registers @ ₹ 60 each
80 Gel Pens @ ₹ 15 each
50 Note books @ ₹ 20 each
Trade discount 10%.
15 July 2022. Bought from Global Stationers as per invoice no.1132
40 Ink Pads @ ₹ 8 each
50 Files @ ₹ 10 each
20 Colour Books @ ₹ 20 each
Trade Discount 5%
23 July 2022. Purchased from Lamba Furniture as per invoice no. 3201
2 Chairs @ ₹ 600 per chair
1 Table @ ₹ 1,000 per table
25 July 2022. Bought from Mumbai Traders as per invoice no.1111
10 Paper Rim @ ₹ 100 per rim
400 Drawing Sheets @ ₹ 3 each
20 Packets waters colour @ ₹ 40 per packet
7. Enter the following transactions in Sales (journal) book of M/s. Bansal Electronics of Sep. 2022:
01. Sep. Sold to Amit Traders as per bill no. 4321
20 Pocket Radio @ ₹ 70 per Radio
59
2 T.V. set, B&W.(6‖) @ ₹ 800 per T.V.
10. Sep. Sold to Arun Electronics as per bill no. 4351
5 T.V. sets (20‖) B&W @ ₹ 3,000 per T.V.
2 T.V. sets (21‖) Colour @ ₹ 4,800 per T.V.
22. Sep. Sold to Handa Electronics as per bill no. 4399
10 Tape recorders @ ₹ 600 each
5 Walkman @ ₹ 300 each.
28. Sep. Sold to Harish Trader as per bill no. 4430
10 Mixer Juicer Grinder @ ₹ 800 each.
8. Prepare a Purchases Return (journal) book from the following transactions for April 2023.
2023 Amt. (₹)
April 05. Returned goods to M/s Kartik Traders 1,200
April 10. Goods returned to Sahil Pvt. Ltd. 2,500
April 17. Goods returned to M/s Kohinoor Traders. for list price ₹ 2,000
Less: 10% trade discount.
April 28. Return outwards to M/s Handa Traders 550
9. Prepare Return Inward Journal (Book) from the following transactions of M/s Bansal Electronics
for July 2022:
2022 Amt. (₹)
July 04. M/s Gupta Traders returned the goods 1,500
July 10. Goods returned from M/s Harish Traders 800
July 18. M/s Rahul Traders returned the goods not as per specifications 1,200
July 28. Goods returned from Sushil Traders 1,000
10. Record the following transactions in Purchase Book, Sales Book, Purchase Returns Book & Sales
Returns Book of Tushar General Stores for the month of May 2022.
May 01 - Jaya invoiced goods of ₹ 15,000 at 9% trade discount as per their Invoice no. 231.
May 13 - Purchased computer from IBM Computers worth ₹ 55,000 as per their Invoice no. 863.
May 23 - Invoiced goods to Priya for ₹ 20,000 at 4 % trade discount as per Invoice no. 341.
May 25 - Sold goods to Sneha for ₹ 14,500 at 10% trade discount as per Invoice no. 342.
May 27 - Sold goods to Anita for ₹ 26,650 as per Invoice no. 343 and purchased goods from her
for ₹ 12,250 as per their Invoice no. 545.
May 29 - Satya supplied goods to us of ₹ 2,450 Invoice no. 630.
May 30 - Returned goods worth ₹ 460 to Satya and issued Debit Note No. 95
11. Enter the following transactions in the books of Ajay in Purchase Book, Sales Book, Purchase
Returns Book and Sales Returns Book for the month of July 2022.
July 01 - Purchased goods from Neelkamal Stores ₹ 33,000 at 5% trade discount. Half the amount
was paid immediately
July 05 - Sonali invoiced goods of ₹ 14,000 to us at 4% trade discount as per our order dated 27th
June 2022.
July 14 - Sold goods of ₹ 30,000 on credit to Ramlal and Sons at 7% trade discount
July 19 - Purchased goods from Surabhi Stores ₹ 15,000 & sold the same to Prachi at a profit of
25% on cost
July 24 - Purchased goods of ₹ 6,600 from Seema Stores and paid for carriage ₹ 340.
July 26 - Purchased furniture for office use ₹ 23,000 from Bharat Furniture on credit.
---------------------------------------END OF CHAPTER----------------------------------
60
CH - 05. BANK RECONCILIATION STATEMENT
(MIND MAP)
61
• state the meaning and need for the preparation of bank reconciliation statement;
• identify causes of difference between bank balance as per cash book and pass book;
• prepare the bank reconciliation statement;
• ascertain the correct bank balance as.
Bank Reconciliation Statement is a record book of the transactions of a bank account. This statement
helps the account holders to check and keep track of their funds and update the transaction record that
they have made. Bank Reconciliation statement is also known as bank passbook. The balance
mentioned in the bank Passbook of the statement must tally with the balance mentioned in the Cash
book. In the statement, all the deposit will be shown in the credit column and withdrawals will be
shown in the debit column. However, if the withdrawal exceeds deposit it will show a debit balance
(overdraft).
Importance:
While making a comparison between the company‘s cash book and bank balance, the balance does
not tally. Therefore, it is important to determine the cause for the difference and display them in the
bank reconciliation statement and then tally the two balances. The bank reconciliation statement
helps in explaining the differences in the amount between thecompany‘s cash book and bank balance.
The cash book and the bank pass book differences are caused by:
The difference in timing can be caused by many factors which are:
1. Bank-issued cheque but not yet deposited for payment
2. Paid cheque in the bank but yet not cleared
3. Bank made direct debit from the customer‘s side
4. Cheque/ amount deposited directly to the bank account
5. Dividends and Interest collected by the bank
6. Bank made direct payment from the customer‘s side
7. Cheques deposited/bills discounted dishonoured
In a few occasions, the error in two balances can be made from the bank side or in the company‘s cash
book. Few errors are as follows:
1. Errors made while registering the transaction by the company
2. Errors made while registering the transaction by the bank
Types of Bank Reconciliation Statement:
The Bank Reconciliation Statement can be prepared in 2 ways:
1. Documenting of bank reconciliation statement without adjusting the cash book balance.
2. Filing of bank reconciliation statement after adjusting the cash book balance.
Steps to Prepare Bank Reconciliation Statement:
 First, the date on which the statement is recorded is mentioned.
 After which the balance displayed in the cash book is mentioned in the statement.
Sometimes, the balance mentioned in the passbook can also be mentioned.
 The deposited cheques which are not collected are deducted.
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 Then the cheques issued but the deposited for payment, but amount directly deposited in
the bank account are recorded.
 All the transactions like overdraft interest, amount debited by the bank but not recorded in
the cashbook, cheques and bills dishonoured are deducted.
 All the credits and profit collected by the company and directly deposited in the bank is added.
 Adjustments of errors are made
 Now the balance between the cash book and statement should be equal or the same.
Illustration 1.
Prepare Bank Reconciliation Statement from the following particulars on 31st July 2022
(a) Balance as per Pass Book ₹ 500.
(b) Three cheque for ₹ 60, ₹ 39.37, and ₹ 15.25 issued in July 2022 were presented her payment to
the bank in August 2022.
(c) Two cheques of ₹ 50 and ₹ 65 sent to the bank for collection where not entered in the pass
book by July 31st, 2022.
(d) The Bank charged ₹ 46 for its commission and allowed interest ₹ 10 which were not entered in
the bank account.
Solution: Bank Reconciliation Statement
Particulars Plus (₹) Minus (₹)
Balance as per Pass Book 500.00
Less: Cheque issued but not yet presented (₹ 60 + ₹ 39.37 + ₹ 15.25) 114.62
Add: Cheque sent to the bank but not yet collected (₹ 50 + ₹ 65) 115.00
Add: Bank charges 46.00
Less: Interest allowed by Bank 10.00
Balance as per cash Book 536.38
661.00 661.00
Illustration 2.
Prepare Bank Reconciliation Statement from the following particulars on 31st December 2021. Cash
book showed a balance of ₹ 15,000 on 31st December 2021. On comparing the same with the
balance of Pass Book it was revealed that:
(a) A cheque of ₹ 2,000 issued in the month of Dec. 2021 has not been presented for payment to the
bank.
(b) The customer deposited cheque worth ₹ 3,000 but they have not been collected by the bank.
(c) The bank had allowed ₹ 200 as interest.
(d) Bank had charged ₹ 20 as commission for his service.
Balance as per Cash Book 15,000
Add: Cheque issued but not yet issued for payment 2,000
Interest allowed by the bank 200
Less: Cheque deposited but not yet collected by the bank 3,000
Bank Charges 20
Balance as per pass Book 14,180
17200 17200
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Illustration 3.
On 31st Dec. 2022 the Cash Book on Jain works showed an overdraft of ₹ 5,600 from the
following particulars make out a bank reconciliation statement.
(a) Cheque drawn but not cashed before 31st Dec. 2022 amounted to ₹ 3,946.
(b) Cheque paid into bank but not collected and credited before 31st December amount to ₹ 4,891.
(c) A bill received for ₹ 520 previously discounted with the bank had been dishonoured & debited in
the pass book.
(d) Bank charges debited in the pass book amounted to ₹ 55.
(e) Debit is made in the pass book for ₹ 120 on account of interest on overdraft.
(f) The bank has collected interest on investment and credited ₹ 760 in the pass book.
Overdraft as per Cash Book 5,600
Add: Cheque issued but not yet presented for payment 3,946
Less: Cheque paid into bank but not yet credited 4,891
Less: Dishonoured bills debited by the bank 520
Less: Interest on overdraft debited in the pass book 120
Less: Bank Charges 55
Add: Interest on investment collected and credited by bank 760
Overdraft as per pass book 6,480
11,186 11,186
Illustration 4.
The Bank pass book of Mr. X showed an overdraft of ₹ 33,575 on 31st March, 2022. On going through
the pass book the accountant found the following.
(a) A cheque of ₹ 1,080 credited in the pass book on March 28 is dishonoured and debited in the pass
book on April 1, 2022. There was no entry in the cash book about the dishonour of the cheque until
15th April.
(b) Bank had credited his account with ₹ 2,800 for interest collected by them on his behalf but the
same had not been entered in his pass book.
(c) Out of ₹ 20,500 paid in by Mr. X in cash and by the cheque on 31st March, cheque amount to ₹
7,500 were collected on 7th April.
(d) Out of the cheque amount to ₹ 7,800 drawn by him on 27th March, a cheque for ₹ 2,500 was
encashed on 3rd April.
Prepare a Bank Reconciliation Statement on 31st March, 2022.
Overdraft as per pass book 33,575
Less: Interest collected and credited by the bank 2,800
Add: Cheque paid into the bank but not yet collected 7,500
Less: cheque issued but not yet encashed 2,500
Overdraft as per cash book 31,375
38,875 38,875
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OBJECTIVE QUESTIONS:
1. Why is the bank reconciliation statement important?
Answer : The bank reconciliation statement is important to determine the cause for the difference
made on the part of the bank or customers side.
2. Which balance is caused an overdraft of cash book and passbook?
Answer: Cash book Cr. and Pass book Dr. balances.
3. Mention two items drafted in a plus column while starting with a debit balance of cash book.
Answer: The two items drafted in a plus column while starting with a debit balance of cash
book are.
 Bank issued cheque but not yet presented for payment
 Interest allowed by the bank but not recorded in the cash book
4. Mention two items drafted in a minus column while starting with a debit balance of cash book.
Answer: The two items drafted in a minus column while starting with a debit balance of cash
book are.
 Cheque deposited but not cleared
 Bank made direct payment from the customer‘s side
5. Mention two items drafted in a minus column while starting with an overdraft balance of cash
book.
Answer: The two items drafted in a minus column while starting with an overdraft balance of
cashbook are.
 Cheque deposited but not cleared.
 Bank made direct payment from the customer‘s side.
6. Mention two items drafted in a plus column while starting with an overdraft balance of cash book.
Answer: The two items drafted in a plus column while starting with an overdraft balance of cash
book are.
 Bank-issued cheque but not yet presented for payment.
 Interest allowed by the bank but not recorded in the cash book.
7. A bank reconciliation statement is prepared to.
(a) Reconcile Bank balance as per cash book and bank balance as per pass book.
(b) Reconcile Cash balance as per cash book and bank balance as per pass book.
(c) Both (a) & (b).
(d) None of the above.
Answer: (a)
8. A Pass Book is a copy of
(a) A customer‘s account in the bank‘s book
(b) Cash book relating to bank column
(c) Cash book relating to cash column
(d) Firm‘s receipts and payments
Answer: (a)
9. A bank reconciliation statement is prepared with the balance of
(a) Cash Book
(b) Pass Book
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(c) Either Cash Book or Pass Book
(d) Neither Cash Book nor Pass Book
Answer: ( c)
10. A bank reconciliation statement is prepared by
(a) Bank
(b) Customers of the Bank
(c) Creditors
(d) Auditors
Answer: (b)
PRACTICE QUESTIONS:
1. From the following particulars prepare Bank reconciliation statement of Arun Ltd. as on 31st March,
2023:
(a) Balance as per Pass Book was ₹ 14,000.
(b) Bank collected a cheque of ₹ 500 on behalf of Arun Ltd. but forgot to record it in the Pass Book.
(c) Bank deposits a cash deposit of ₹ 2,589 as ₹ 2,598.
(d) The payment of a cheque of ₹ 700 was recorded twice in the Pass Book.
(e) Dividend collected by bank ₹ 450.
(f) Bank charges ₹ 250 debited by the bank.
2. On examining the Bank Statement of Green Ltd., it is found that the balance shown on 31st March,
2023, differs from the bank balance of ₹ 23,650 shown by the Cash Book on that date. From a detailed
comparison of the entries it is found that:
(i) ₹ 2,860 is entered in the Cash Book as paid into the bank on 31st March, 2023 but not credited by
the bank until the following day.
(ii) Bank charges of ₹ 70 on 31st March, 2023 are not entered in the Cash Book.
(iii) A bill for ₹ 5,500 discounted with the bank is entered in the Cash Book without recording the
discount charges of ₹ 270.
(iv) Cheques totaling ₹ 16,720 were issued by the company and duly recorded in the Cash Book before
31st March, 2023 but had not been presented at the Bank for payment until after that date.
(v) On 25th March, 2019, a debtor paid ₹ 1,000 into the Company's Bank in settlement of his account
but no entry was made in the Cash Book of the company in respect of this.
(vi) No entry has been made in the Cash Book to record the dishonors on 15th March, 2023, of a cheque
for ₹ 550 received from Ram Babu.
Prepare a Bank Reconciliation Statement as on 31st March, 2023
3. Prepare a Bank Reconciliation Statement as on 31st March, 2023 from the following:
(i) On 31st March, 2023, Cash Book of a firm showed bank balance of ₹ 36,000 (Cr.).
(ii) Cheques had been issued for ₹ 30,000, out of which cheques of ₹ 24,000 were presented for
payment.
(iii) Cheques of ₹ 8,400 were deposited in the bank on 28th March, 2023 but had not been credited by
the bank. Also, a cheque of ₹ 3,000 entered in the Cash Book on 30th March, 2023 was banked on
3rd April.
66
(iv) A cheque from Suresh for ₹ 2,400 was deposited in the bank on 26th March, 2023 was dishonoured,
advice was received on 2nd April.
(v) Pass Book showed bank charges of ₹ 120 debited by the bank.
(vi) One of the Debtors deposited ₹ 3,000 in the bank account of the firm on 26 th March, 2023, but the
intimation in this respect was received from the bank on 2nd April.
4. Prepare Bank Reconciliation Statement from the following particulars on 31st July, 2022:
(i) Balance as per the Pass Book ₹ 50,000.
(ii) Three cheques for ₹ 6,000, ₹ 3,937 and ₹ 1,525 issued in last week of July, 2022 were presented for
payment to the bank in August, 2022.
(iii) Two cheques of ₹ 500 and ₹ 650 sent to the bank for collection were not entered in the Pass Book by
31st July, 2022.
(iv) The bank charged ₹ 460 for its commission and allowed interest of ₹ 100 which were not mentioned
in the Bank Column of the Cash Book.
5. On 31st Dec, 2022 the Cash book of Mittal Bros. Showed an overdraft of ₹ 6,920. From the
following particulars prepare a Bank Reconciliation Statement and ascertain the balance as per
passbook.
(i) Debited by bank for ₹ 200 on account of Interest on overdraft and ₹ 50 on account of charges for
collecting bills.
(ii) Cheques drawn but not encashed before 31st Dec, 2022 for ₹ 4,000.
(iii) The bank has collected interest and has credited ₹ 600 in Pass book.
(iv) A bill receivable for ₹ 700 previously discounted with the bank had been dishonoured & debited in
the passbook.
(v) Cheques paid into bank but not collected and credited before 31st Dec, 2022 amounted ₹ 6,000.
6. The passbook of Mr. Randhir Singh showed an overdraft of ₹ 40,950 on 31st March, 2023. Prepare
bank reconciliation statement on 31st March, 2017.
(i) Out of cheques amounting to ₹ 8,000 drawn by Mr. Randhir Singh on 27th March a cheque for ₹
3,000 was encashed on April 2023.
(ii) Credited by bank with ₹ 3,800 for interest collected by them, but the amount is not entered in the
Cash book.
(iii) ₹ 10,900 paid in by Mr. Randhir Singh in cash and by cheques on 31st March, cheques amounting
to ₹ 3,800 were collected on 7th April.
(iv) A Cheque of ₹ 780 credited in the passbook on 28th March being dishonoured is debited again in
the passbook on 1st April, 2023. There was no entry in the cash book about the dishonour of the
cheque until 15th April.
-------------------------------------- END OF CHAPTER ----------------------------------
67
CH - 06. TRIAL BALANCE AND RECTIFICATION OF ERRORS
(MIND MAP)
68
• state the meaning of trial balance;
• enumerate the objectives of preparing trial balance;
• prepare trial balance;
• explain the types of errors;
• state various process of locating errors;
• identify the errors which affect the agreement of trial balance and those which do not affect the
agreement of trial balance;
• rectify the errors without preparing suspense account; and
• rectify the errors with suspense account.
Meaning of Trial Balance:

A trial balance is a statement showing the balances, or total of debits and credits, of all the accounts in
the ledger with a view to verify the arithmetical accuracy of posting into the ledger accounts. Trial
balance is an important statement in the accounting process as it shows the final position of all
accounts and helps in preparing the final statements.
Format of a trial balance
Trial Balance of ......as on March 31, 2023
Account Title. L.F Debit Bal. (₹) Credit Bal. (₹)
Total
It is normally prepared at the end of an accounting year. However, an organisation may prepare a trial
balance at the end of any chosen period, which may be monthly, quarterly, half yearly or annually
depending upon its requirements.
In order to prepare a trial balance following steps are taken:
• Ascertain the balances of each account in the ledger.
• List each account and place its balance in the debit or credit column, as the case may be.
(If an account has a zero balance, it may be included in the trial balance with zero in the column
for its normal balance).
• Compute the total of debit balances column.
• Compute the total of the credit balances column.
• Verify that the sum of the debit balances equal the sum of credit balances. If they do not tally, it
indicate that there are some errors. So one must check the correctness of the balances of all
accounts. It may be noted that all assets expenses and receivables account shall have debit
balances whereas all liabilities, revenues and payables accounts shall have credit balances.
Objectives of Preparing the Trial Balance:
The trial balance is prepared to fulfil the following objectives:
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements. (Profit & Loss account and Balance Sheet).
69
Illustrative Trial Balance:
Account Title L.F. Debit Bal. (₹) Credit Bal. (₹)
• Capital 
• Land and Buildings 
• Plant and Machinery 
• Equipment 
• Furniture and Fixtures

• Cash in Hand
• Cash at Bank 
• Debtors 
• Bills Receivable 
• Stock of Raw Materials 
• Stock of Finished Goods 
• Purchases 
• Carriage Inwards

• Carriage Outwards

• Sales 
• Sales Return 
• Purchases Return 

• Interest Paid
• Commission/Discount Received  
• Salaries
• Long Term Loan  
• Bills Payable 
• Creditors 
• Advances from Customers 
• Drawings

Total xxxx xxxx
Preparation of Trial Balance

Theoretically spreading, a trial balance can be prepared in the following three ways:
(i) Totals Method
(ii) Balances Method
(iii) Totals-cum-balances Method
1. Totals method:
Under this method, total of each side in the ledger (debit and credit) is ascertained separately &
shown in the trial balance in the respective columns. However, this method is not widely used in
practice, as it does not help in assuming accuracy of balances of various accounts and preparation of
the financial statements.
2. Balances Method:
This is the most widely used method in practice. Under this method trial balance is prepared by
showing the balances of all ledger accounts and then totalling up the debit and credit columns of the
trial balance to assure their correctness.
70
3. Totals-cum-balances Method:
This method is a combination of totals method and balances method. Under this method four
columns for amount are prepared. Two columns for writing the debit and credit totals of various
accounts and two columns for writing the debit and credit balances of these accounts. However, this
method is also not used in practice because it is time consuming and hardly serves any additional or
special purpose.
Significance of Agreement of Trial Balance:
It is important for an accountant that the trial balance should tally. Normally a tallied trial balance
means that both the debit and the credit entries have been made correctly for each transaction.
However, as stated earlier, the agreement of trial balance is not an absolute proof of accuracy of
accounting records. A tallied trial balance only proves, to a certain extent, that the posting to the
ledger is arithmetically correct. But it does not guarantee that the entry itself is correct. There can be
errors, which affect the equality of debits and credits, and there can be errors, which do not affect the
equality of debits & credits.
Some common errors include the following:
• Error in totalling of the debit and credit balances in the trial balance.
• Error in totalling of subsidiary books.
• Error in posting of the total of subsidiary books.
• Error in showing account balances in wrong column of the trial balance, or in the wrong amount.
• Omission in showing an account balance in the trial balance.
• Error in the calculation of a ledger account balance.
• Error while posting a journal entry: a journal entry may not have been posted properly to the
ledger, i.e., posting made either with wrong amount or on the wrong side of the account or in the
wrong A/c.
• Error in recording a transaction in the journal: making a reverse entry, i.e., account to be debited is
credited and amount to be credited is debited, or an entry with wrong amount.
• Error in recording a transaction in subsidiary book with wrong name or wrong amount.
Classification of Errors:
Keeping in view the nature of errors, all the errors can be classified into the following four
categories:
• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating Errors
Errors of Commission:
These are the errors which are committed due to wrong posting of transactions, wrong totalling or
wrong balancing of the accounts, wrong casting of the subsidiary books, or wrong recording of
amount in the books of original entry, etc.
For example:
Raj Traders paid ₹ 25,000 to Preetpal Traders (a supplier of goods). This transaction was correctly
recorded in the cashbook. But while posting to the ledger, Preetpal‘s account was debited with ₹ 2,500
only. This constitutes an error of commission. Such an error by definition is of clerical nature and
most of the errors of commission affect in the trial balance.
71
Errors of Omission:
The errors of omission may be committed at the time of recording the transaction in the books of
original entry or while posting to the ledger. These can be of two types:
(i) Error of complete omission.
(ii) Error of partial omission.
When a transaction is completely omitted from recording in the books of original record, it is an error
of complete omission. For example, credit sales to Mohan ₹ 10,000, not entered in the sales book.
When the recording of transaction is partly omitted from the books, it is an error of partial
omission.
If in the above example, credit sales had been duly recorded in the sales book but the posting from
sales book to Mohan‘s account has not been made, it would be an error of partial omission.
Errors of Principle:
Accounting entries are recorded as per the generally accepted accounting principles. If any of these
principles are violated or ignored, errors resulting from such violation are known as errors of
principle. An error of principle may occur due to incorrect classification of expenditure or receipt
between capital and revenue. This is very important because it will have an impact on financial
statements. It may lead to under/over stating of income or assets or liabilities, etc.
For example, amount spent on additions to the buildings should be treated as capital expenditure &
must be debited to the asset account. Instead, if this amount is debited to maintenance and repairs
account, it has been treated as a revenue expense. This is an error of principle. Similarly, if a credit
purchase of machinery is recorded in purchases book instead of journal proper or rent paid to the
landlord is recorded in the cash book as payment to landlord, these errors of principle. These errors
do not affect the trial balance.
Compensating Errors:
When two or more errors are committed in such a way that the net effect of these errors on the debits
and credits of accounts is nil, such errors are called Compensating errors. Such errors do not affect
the tallying of the trial balance.
For example, if purchases book has been overcast by ₹ 10,000 resulting in excess debit of ₹ 10,000 in
purchases account and sales returns book is undercast by ₹ 10,000 resulting in short debit to sales
returns account is a case of two errors compensating each other‘s effect. One plus is set off by the
other minus, the net effect of these two errors is nil and so they do not affect the agreement of trial
balance.
Rectification of Errors:
Errors are of two types:
a. Errors that do not affect the Trial Balance
b. Errors that affect the Trial Balance.
Errors that do not affect the Trial Balance:
These are those errors that are being committed in two or more accounts so that it doesn‘t affect
the balances in Trial Balance. To rectify this rectifying journal entry is passed.
There are following types of errors that do not affect the Trial Balance:
(i) Error of Omission: When the transaction is omitted to be recorded in the books of account. For
Example, Goods sold to Mohan were omitted to be recorded in the Sales Book.
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(ii) Compensating errors: When the net effects of two or more errors result in nil it is referred to
as compensating errors. For example, if the purchase account has an excess debit of ₹ 5,000
and the Sales Return Account is undercast by the same amount.
(iii) Errors of Principle: If any accounting principle is violated while recording the transaction
such errors do not affect the Trial balance. For example, an addition to machinery was
wrongly debited to Repairs and Maintenance Account considering as revenue expenditure
instead of capital expenditure.
i. Incorrect account in the original book: Instead of Babu‘s account, Shyam‘s account is
maintained.
ii. Posting to the wrong account: Instead of posting in the purchase account, the transaction is
posted in the sales account.
Errors that affects the Trial Balance:

These are those errors that are being committed in one account and they can berectified by opening
The Suspense Account.
There are following errors that affect the Trial Balance:
(i) Error of Omission (ii) Error of Commission (iii) Wrong Posting
Suspense Account:
When Trial Balance Does not agree, then first of all we try to locate the errors. Sometimes, in spite
of the best efforts, all the errors are not located and the Trial Balance does not tally. Then in order to
avoid delay in the preparation of final accounts, a new account is opened which is known as
―Suspense Account‖ Difference in Trial Balance is posted to this Account.
1. If there is Excess Debit in the Trial Baal → Difference is posted to the Credit side of Suspense A/c
2. If there is Excess Credit in the Trial Balance → Difference is posted to the Debit side of Suspense A/c
Example: Trial Balance

S.No Trial Dr. Total (₹) Balance (Cr. Total) (₹) Difference (₹) Posted to Suspense A/c
1. 2,25,000 2,16,500 8,500 (Excess Debit) Credit Side of Suspense A/c
2. 2,16,500 2,25,000 8,500 (Excess Debit) Debit Side of Suspense A/c
Closing of Suspense A/c

 The errors which led to the difference still remains to have to be located.
 These errors will be rectified through Suspense A/c (One sided errors) which will be explained in
the topic Rectification of Errors.
 When all the errors are rectified, this Account closes down automatically. If the difference in Trial
Balance persist, it is shown in the Balance Sheet.
1. Debit Balance of Suspense Account is shown in the Asset Side of the Balance Sheet.
2. Credit Balance of Suspense Account is shown in the Liability Side of the Balance Sheet.
73
Illustration 1: Pass Journal Entries to rectify the following errors:-
(a) Total of Return Inward Book ₹ 3,300 posted to Purchase A/c.
Sales Return A/c Dr. 3,300
To Purchases A/c 3,300
(b) Old furniture Sold for ₹ 5,000 was posted to Sales A/c as ₹ 2,000
Sales A/c Dr. 2,000
Suspense A/c Dr. 3,000
To Furniture A/c 5,000
(c) An item of ₹ 1,605 entered in the Sales Return Book had been posted to debit of the customer
who returned the goods.
Suspense A/c Dr. 1,605
To Customer 1,605
(d) Credit Purchases from Manorama & Co. ₹ 8,000 were recorded in Sales Book as ₹ 4,000 and
posted there from to the credit of Manorama & Co. as ₹ 3,000
Purchases A/c Dr. 8,000
Sales A/c Dr 4,000
To Manorama & Co. A/c 5,000
To Suspense A/c 7,000
(e) Goods bought from a merchant for ₹ 660 had been posted to the credit of account as ₹ 6,600
Merchant A/c Dr. 5,940
Illustration 2: Trial Balance of ABC Ltd. doesn‘t meet; it showed an excess credit ₹ 20,000. They
put the difference to a suspense account. The errors that they located were:
(i) Sales return book overcast by ₹ 2,000.
(ii) Purchases book was undercast by ₹ 1200.
(iii) In the sales book total of page no. 4 was carried forward to page 5 as ₹ 2,000 instead of ₹ 2,400
and total of page 8 was carried forward to page 9 as ₹ 11,200 instead of ₹ 10,000.
(iv) Goods returned to Ram ₹ 2,000 were recorded through sales book.
(v) Credit purchases from M & Co. ₹ 16,000 were recorded through sales books.
(vi) Credit purchases from S & Co. ₹ 10,000 were recorded through sales books. However, S & Co.
were correctly credited.
(vii) Salary paid ₹ 4,000 was debited to employee‘s personal account.
Ans: Rectification entries:
(i) Sales return book overcast by ₹ 2,000.
Suspense A/c ......................................Dr. 2,000
To Sales Return A/c 2,000
(Being Sales returns book overcast by ₹ 2,000 now corrected).
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(ii) Purchases book was undercast by ₹ 1,200.
Purchase A/c ..................................... Dr. 1,200
(Being Purchase book undercast by ₹ 1,200 now corrected)
(iii) In the sales book total of page no. 4 was carried forward to page 5 as ₹ 2,000 instead of ₹ 2,400
& total of page 8 was carried forward to page 9 as ₹ 11,200 instead of ₹ 10,000.
Sales A/c .................................... Dr. 800
To Suspense A/c 800
(Being Error in carry forward of sales book now corrected)
(iv) Goods returned to Ram ₹ 2,000 were recorded through sales book.
Sales A/c .................................... Dr. 2,000
To Returns Outwards A/c 2,000
(Being Return Outwards wronglyrecorded through sales book now rectified)
(v) Credit purchases from M & Co. ₹ 16,000 were recorded through salesbooks.
Purchase A/c ..................................... Dr. 16,000
Sales A/c ……………….. Dr. 16,000
To M & Co.‘s A/c 32,000
(Being Credit purchases wrongly recorded through sales book, now rectified)
(vi) Credit purchases from S & Co. ₹ 10,000 were recorded through sales books. However S & Co.
were correctly credited.
Purchase A/c ..................................... Dr. 10,000
Sales A/c ……………….. Dr. 10,000
20,000
To Suspense A/c
(Being Credit purchases wrongly recorded through sales book, however
suppliers account correctly credited now rectified)
(vii) Salary paid ₹ 4,000 was debited to employee‘s personal account.

Salary A/c .................................... Dr. 4,000
To Employees Personal A/c 4,000
(Being Salary paid wrongly debited to employee‘s personal account, now corrected)
Dr. Suspense A/c Cr.

Date Particulars J.F Amt (₹) Date Particulars J.F Amt. (₹)
To Difference as per Trial balance 20,000 By Purchases A/c 1,200
To Sales Returns A/c 2,000 By Sales A/c 800
By Purchases A/c 10,000
By Sales A/c 10,000
22,000 22,000
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PRACTICE QUESTIONS:
1. Prepare a Trial Balance from the following balances as at 31st March 2023:
(₹) (₹)
Purchases 82,000 Interest on Investment 2,400
Sales 1,60,000 Return Inwards 7,500
Stock on 01-04-2022 28,800 Return Outwards 5,600
Wages 16,160 Carriage Inwards 1,640
Salaries 6,400 Carriage Outwards 3,200
Repair Charges 1,500 Furniture 12,000
Commission Received 1,800 Motor Car 80,000
Sundry Debtors 24,200 Cash in Hand 4,700
Sundry Creditors 7,300 Bank Overdraft 35,400
Capital 90,000 Investment 30,000
Drawings 4,400
2. A newly appointed clerk prepared the following Trial Balance from the balances of ledger.
It seems to be correct, but it is not correct. Prepare a corrected Trial Balance:
Particular L.F Dr. (₹) Cr. (₹)
Purchases 60,000
Sales 45,000
Reserve Fund 5,000
Opening Stock 5,000
Closing Stock 10,000
Outstanding expenses 5,000
Machinery 40,000
Capital 50,000
Suspense A/c 20,000
Total 1,20,000 1,20,000
3. Rectify the following errors:

Credit purchases from Raghu ₹ 20,000
(a) Were not recorded.
(b) Were recorded as ₹ 10,000.
(c) Were recorded as ₹ 25,000.
(d) Were not posted to his account.
(e) Were posted to Raghav‘s account.
(f) Were posted to the debit of Raghu‘s account.
(g) Were posted to the debit of Raghav.
(h) Were recorded through sales book.
4. Trial balance of Anurag did not agree. It showed an excess credit ₹ 10,000. Anurag put the
difference to suspense account. He located the following errors:
(a) Sales return book over cast by ₹ 1, 000.
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(b) Purchases book was undercast by ₹ 6,000.
(c) Goods returned to Ram ₹ 1,000 were recorded through sales book.
(d) Credit purchases from M & Co. ₹ 8,000 were recorded through sales book.
(e) Salary paid ₹ 2,000 was debited to employee‘s personal account.
5. Tick the correct
I) Agreement of trial balance is affected by:
(a) One sided errors only.
(b) Two sided errors only.
(c) Both (a) and (b).
(d) None of the above.
II) Which of the following is not an error of principle:
(a) Purchase of furniture debited to Purchases account.
(b) Repairs on the overhauling of second hand machinery purchased debited to Repair account.
(c) Cash received from Manoj posted to Saroj.
(d) Sale of old car credited to Sales account.
III) Which of the following is not an error of commission:
(a) Over casting of Sales book.
(b) Credit sales to Ramesh ₹ 5,000 credited to his account.
(c) Wrong balancing of machinery account.
(d) Cash sales not recorded in cash book.
IV) If suspense account does not balance off even after rectification of errors it implies that:
(a) There are some one sided errors only in the books yet to be located.
(b) There are no more errors yet to be located.
(c) There are some two sided errors only yet to be located.
(d) There may be both one sided errors and two sided errors yet to be located.
6. Give two examples of errors of principle?
7. Give two examples of errors of commission?
8. What is a suspense account? Is it necessary that is suspense account will? Balance off after
rectification of the errors detected by the accountant? If Not, then what happens to the balance
still remaining in suspense account?
(i) Credit sales to Mohan ₹ 7,000 were not recorded.
(ii) Credit purchases from Rohan ₹ 9,000 were not recorded.
(iii) Goods returned from Mahesh ₹ 1,000 were not recorded.
(iv) Goods returned to Rakesh ₹ 4,000 were not recorded.
(i) Salary paid ₹ 5,000 was debited to employee‘s personal account.
(ii) Rent Paid ₹ 4,000 was posted to landlord‘s personal account.
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(iii)Cash received from Kohli ₹ 2,000 was posted to Kapur‘s account.
(iv) Cash paid to Babu ₹ 1,500 was posted to Sabu‘s account.
11. Rectify the following errors & ascertain the amount of difference in trial balance by preparing
Suspense A/c:
(i) Credit sales to Mohan ₹ 7,000 were posted as ₹ 9,000.
(ii) Credit purchases from Rohan ₹ 9,000 were posted as ₹ 6,000.
(iii) Goods returned to Rakesh ₹ 4,000 were posted as ₹ 5,000.
(iv) Goods returned from Mahesh ₹ 1,000 were posted as ₹ 3,000.
(v) Cash sales ₹ 2,000 were posted as ₹ 200.
12. Rectify the following errors assuming that suspension account was opened. Ascertain the
difference in trial balance.
(i) Furniture purchased for ₹ 10,000 wrongly debited to purchase account as ₹ 4,000
(ii) Repairs on machinery ₹ 1,400 debited to Machinery account as ₹ 2,400
(iii) Repairs on overhauling of second hand machinery purchased ₹ 2,000 was debited to Repairs
account as ₹ 200.
(iv) Sale of old machinery at book value ₹ 3,000 was credited to sales account as ₹ 5,000
13. Trial balance of Anuj did not agree. It showed an excess credit of ₹ 6,000. He put the
difference to suspense account. He discovered the following error:
(i) Cash received from Ravish ₹ 8,000 posted to his account as ₹ 6,000.
(ii) Returns inwards book overcast by ₹ 1,000.
(iii) Total of sales book ₹ 10,000 was not posted to Sales account.
(iv) Credit purchases from Nanak ₹ 7,000 were recorded in sales Book. However Nanak‘s
account was correctly credited
(v) Machinery purchased for ₹ 10,000 was posted to purchases account as ₹ 5,000. Rectify the
errors and prepare Suspense account
14. Pass Journal Entries to rectify the following errors:-
(a) An amount of ₹ 1,000 is withdrawn by the proprietor for his personal use has been debited to
the Trade Expenses Account.
(b) A purchase of goods from Ram amounting to ₹ 1,500 has been wrongly passed through Sales
Book.
(c) Bill for ₹ 820 received from Raju for repairs to Machinery was entered in the Purchase book as
₹ 720.
15. Rectify the following errors by passing the rectifying entries using Suspense A/c.
(a) Credit Sale of ₹ 2,000 to Rohan was posted to Raman‘s A/c.
(b) Sales Return book is under cast by ₹ 1,000
(c) Paid ₹ 20,000 as wages for construction of building debited to wages A/c ₹ 20,000
(d) ₹ 1,000 paid in cash for a typewriter was charged to office expense account.
16. Pass necessary Journal Entries in the book of X to rectify the following errors:
(a) Bought Machinery for ₹ 2,500 for the proprietor was debited to General Expenses A/c‘s ₹ 500.
(b) Goods returned by Mohan ₹ 960 have been debited to his account ₹ 1,680.
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(c) Bought goods from Krishan ₹ 2,000 was passed through the sales book, however, the account of
Ramesh was credited correctly.
17. Which types of error has been made in these sentences? Identify the errors & explain about them.
(a) Purchased goods from Raj on credit but were recorded in the purchases book.
(b) Sale of ₹ 10,000 recorded as ₹ 1,000 and Purchase of ₹ 10,000 recorded as ₹ 1,000.
(c) Sales of some parts of old car was credited to Sales A/c.
---------------------------------------------- END OF CHAPTER ----------------------------------------------
79
CH - 07. DEPRECIATION, PROVISIONS AND RESERVES
(MIND MAP)
80
LEARNING OUTCOME:
 Students will understand the need for providing depreciation.
 Learn about the various methods that will help in calculating depreciation.
 Learn the accounting treatment of providing depreciation directly to asset Account or by
preparing provision for depreciation Account.
 Appreciate the methods of asset disposal.
 The need for creating reserves and provisions.
Meaning of depreciation:
Fixed assets are subject to decline in value and this decline is technically referred to as
depreciation. In other words, depreciation may be described as a permanent, continuing and
gradual shrinkage in the book value of fixed assets.
Features of Depreciation:
1. It is decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage or obsolescence.
3. It is a continuing process.
4. It is an expired cost and hence must be deducted before calculating taxable profits.
5. It is a non-cash expense. It does not involve any cash outflow.
Depletion: The term depletion is used in the context of extraction of natural resources like
mines, quarries, etc. that reduces the availability of the quantity of the material or asset.
Amortisation: Amortisation refers to writing-off the cost of intangible assets like patents,
copyright, trademarks, franchises, goodwill which have utility for a specified period of time.
Causes of Depreciation:
1. Wear and Tear due to Use or Passage of Time
2. Expiration of Legal Rights
3. Obsolescence
4. Abnormal factors such as accidents due to fire, earthquake, floods, etc.
Need for Depreciation:
1. Matching of Costs and Revenue.
2. Consideration of Tax.
3. True and Fair Financial Position.
4. Compliance with Law.
Factors Affecting the Amount of Depreciation:
The determination of depreciation depends on three parameters, viz. cost, estimated useful life &
Probable salvage value.
(a) Cost of Asset.
(b) Estimated Net Residual Value.
(c) Depreciable Cost.
(d) Estimated Useful Life.
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Methods of Calculating Depreciation Amount:
1. Straight Line Method- It is also called fixed instalment method because the amount of
depreciation remains constant from year to year over the useful life of the asset. According to this
method, a fixed and an equal amount is charged as depreciation in every accounting period during the
life time of an asset.
Depreciation = Cost of asset - Estimated net residential value

Estimated useful life of the asset
Rate of Depreciation = Annual Depreciation Amount x 100

Acquisition cost
Advantages of Straight-Line Method:

Straight Line method has certain advantages which are stated below:
1. It is very simple, easy to understand and apply. Simplicity makes it a popular method inpractice;
2. Asset can be depreciated up to the net scrap value or zero value.
3. Every year, same amount is charged as depreciation in profit and loss account. This makes
comparison of profits for different years easy.
4. This method is suitable for those assets whose useful life can be estimated accurately andwhere the
use of the asset is consistent from year to year.
Limitations of Straight Line Method:
Although straight line method is simple and easy to apply it suffers from certain limitations which
are given below:
(a) This method is based on the faulty assumption of same amount of the utility of an asset in
different accounting years;
(b) With the passage of time, work efficiency of the asset decreases & repair and maintenance
expense increases. Hence, under this method, the total amount charged against profit on account of
depreciation and repair taken together, will not be uniform throughout the life of the asset, rather
it will keep on increasing from year to year.
2. Written Down Value Method:
Under this method, depreciation is charged on the book value of the asset. Since book value keeps on
reducing by the annual charge of depreciation, it is also known as ‗Reducing Balance Method‘.
For example, the original cost of the asset is ₹ 2, 00,000 and depreciation is charged @ 10% p.a. at
written down value, then the amount of depreciation will be computed as follows:
(i) Depreciation (I year) = ₹ 20,00,000 x 10/ 100 = ₹ 20,000
(ii) Written down value = ₹ 2,00,000 – ₹ 20,000 = ₹ 1,80,000 (at the end of the I year)
(iii) Depreciation (II year) = ₹ 1, 80, 000 × 10/ 100 = ₹ 18,000
(iv) Written down value = ₹1, 80,000 – ₹ 18,000 = ₹ 1,62,000 (at the end of the II year)
(v) Depreciation (III year) = ₹ 1, 62, 000 × 10/ 100 = ₹ 16,200
(vi) Written down value = ₹ 1, 62,000 – ₹ 16,200 = ₹ 1,45,800.
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Advantages of Written Down Value Method:
Written down value method has the following advantages:
(a) This method is based on a more realistic assumption that the benefits from asset go on
diminishing (reducing) with the passage of time.
(b) It results into almost equal burden of depreciation and repair expenses taken together every year
on profit and loss account.
(c) Income Tax Act accepts this method for tax purposes.
(d) As a large portion of cost is written-off in earlier years, loss due to obsolescence gets reduced.
(e) This method is suitable for fixed assets which last for long and which require increased repair &
maintenance expenses with passage of time.
Limitations of Written Down Value Method:
Although this method is based upon a more realistic assumption it suffers from the following
limitations:
(a) As depreciation is calculated at fixed percentage of written down value, depreciable cost of the
asset cannot be fully written-off. The value of the asset can never be zero;
(b) It is difficult to ascertain a suitable rate of depreciation.
Difference between the Straight line method and Written down value method.
Basis Straight line method Written down value method
1. Amount of Equal depreciation charged every Depreciation goes on decreasing year
Depreciation year. after year.
2. Basis of calculation Depreciation is charged on the Depreciation is charged on the
of depreciation. original cost of the asset. reducing balance of the asset.
3. Zero levels. The book value of the asset can be The book value of the asset cannever
reduced to zero. be reduced to zero.
4. Approval of Income This method is not approved by This method is approved by income
tax authorities. income tax authorities. tax authorities.
Methods of Recording Depreciation:

In the books of account, there are two types of arrangements for recording depreciation on
fixed assets:
• Charging depreciation to asset account or
• Creating Provision for depreciation/Accumulated depreciation account.
Charging Depreciation to Asset account:
 Straight Line Method:-

Depreciation is charged at a fixed percentage on the original cost of the asset. The amount of
depreciation remains equal from year to year and as such the method is also known as the ‗Equal
instalment method'.
(Accounting treatment)
Following entries are passed in this method:-
1. Entry for Purchase of Asset:-
Asset A/c
To Bank A/c
83
2. Entry for providing Depreciation at the end of each year:-
Depreciation A/c
To Asset A/c
3. Entry for the amount realized on the Sale of Asset:-
Bank A/c
To Asset A/c
4. Entry in case of Loss on Sale of Asset:-
Profit /loss A/c
To Asset A/c
5. Entry in case of Profit on the Sale of Asset:-
Asset A/c
To Profit and Loss A/c
Let’s practice with a question:-
Illustration 1.
On 1st April 2019, Rama Glass Ltd. purchased a machine for ₹ 90,000 and spent ₹ 6,000 on its
carriage and ₹ 4,000 on its erection. On the date of purchase, it was estimated that the effective life of
the machine will be 10 years and after 10 years its scrap value will be ₹ 20,000.
Prepare Machine A/c and depreciation A/c for 4 years after providing depreciation on the fixed
installment method. Accounts are closed on 31st March every year.
Ans: Dr. Machine A/c Cr.
Date Particulars Amt. (₹) Date Particulars Amt. (₹)
2019 Apr. 1 To Bank A/c 90,000 2020 Mar. 31 By Depreciation A/c 8,000
Apr. 1 To Bank A/c (Expenses) 6,000 (8% on ₹ 1,00,000)
Apr. 1 To Bank A/c (Expenses) 4,000 Mar. 31 By balance c/d 92,000
1,00,000 1,00,000
To balance b/d 92,000 8,000
2020 Apr. 1 2021 Mar. 31 By Depreciation A/c
(8% on ₹ 1,00,000)
Mar. 31 By balance c/d 84,000
92,000 92,000
To balance b/d 84,000 2022 Mar. 31 By Depreciation A/c 8,000
2021Apr. 1
(8% on ₹ 1,00,000)
84,000 84,000
2022 Apr. 1 To balance b/d 76,000 2023 Mar. 31 By Depreciation A/c 8,000
(8%on ₹ 1,00,000)
76,000 76,000
2023,Apr. 1 To balance b/d 68,000
Dr. Depreciation A/c Cr.

2019Apr.1 To Bank A/c 8,000 2020, Mar. 31 By depreciation A/c 1,000
Apr. 1 To Bank A/c (Expenses) 2,000 (10% on ₹ 10,000)
10,000 10,000
84
2020,Apr. 1 To balance b/d 9,000 2021, Mar. 31 By Depreciation A/c 900
(10% on ₹ 9,000)
9,000 9,000
2021, Apr. 1 To balance b/d 8,100 2022, Mar. 31 By Depreciation A/c 810
(10% on ₹ 8,100)
8,100 8,100
2022, Apr. 1 To balance b/d 7,290 2023, Mar. 31 By Depreciation A/c 729
(10% on ₹ 7,290)
7,290 7,290
2023, Apr. 1 To balance b/d 6,561
Working note:-
As the rate of depreciation is not given in the question, the amount of the annual depreciation will be
arrived at as under:
Annual Depreciation = Cost of the asset x Estimated net residual value = 1, 00,000 - 20,000 = ₹ 8,000
No. of years of expected life 10
Rate of depreciation = Amount of Depreciation x 100 = 8,000 x 100 = 8% p.a.

Total Cost of Asset 1, 00,000
 Written Down Value Method:

Under this method, the value of assets goes on diminishing year after year; the amount of
depreciation charged every year also goes on declining.
For example, if a machine is purchased for ₹ 20,000 and depreciation is to be charged at 10% p.a.
according to written down value method the depreciation will be charged as:
 Ist year
10% of ₹ 20,000 = ₹ 2,000
 2nd year
₹ 20,000- ₹ 2,000 = ₹ 18,000
10% of ₹ 18,000 = ₹ 1,800
 3rd year
₹ 18,000 - ₹ 1,800 = ₹ 16,200
10% of ₹ 16,200 = ₹ 1,620
And so on…
Illustration 2.
Tesla traders purchased a machine on April 1, 2019, at a cost of ₹ 8,000 and spent ₹ 2,000 on its
installation. The firm writes off depreciation @10% p.a. by a written down value method. The scrap
value of the plant at the end of its economic life of 4 years is expected to be ₹ 6,561.
Show the machine account for 4 years in the books of Tesla traders. The books are closed on 31st
March, every year.
85
Ans: Dr. Machine A/c Cr.
1/4/19 To Bank A/c 8,000 31/3/20 By Depreciation A/c 1,000
To Bank A/c (Expenses) 2,000 (10% on ₹ 10,000)
31/3/20 By Balance c/d 9,000
10,000 10,000
1/4/20 To Balance b/d 9,000 31/3/21 By Depreciation A/c 900
(10% on ₹ 9,000)
31/3/21 By Balance c/d 8,100
9,000 9,000
(10% on ₹ 8,100)
31/3/22 By Balance c/d 7,290
8,100 8,100
(10% on ₹ 7,290)
31/3/23 By Balance c/d 6,561
7,290 7,290
1/4/23 To Balance b/d 6,561
Illustration 3.
M/s Samarth Enterprises acquired a printing machine for ₹ 40,000 on July 01, 2019 and spent ₹ 5,000
on its transport and installation. Another machine for ₹ 35,000 was purchased on January 01, 2021.
Depreciation is charged at the rate of 20% on written down value. Prepare Printing Machine account.
Solution: Books of Samarth Enterprises
Dr. Printing Machine Account Cr.
Date Particulars J.F. Amt. (₹) Date Particulars J.F Amt. (₹)
2019, Jul. 01 To Bank A/c 40,000 Mar. 31 By Depreciation A/c 6,7501

To Bank A/c 5,000 2020 By Balance c/d 38,250
45,000 45,000
2020, Apr.01 To Balance b/d 38,250 Mar. 31 By Depreciation A/c 9,4002
2021, Jan.01 To Bank A/c 35,000 2021 Balance c/d 63,850
73,250 73,250
2021, Apr. 01 To Balance b/d 63,850 Mar.31 By Depreciation A/c 12,7703
2022 By Balance c/d 51,080
63,850 63,850
2022, Apr. 01 To Balance b/d 51,080
Working Notes:
(₹)
Original cost Machine purchased on July 01, 2019 45,000
(–) Depreciation till Mar. 31, 2020 (for 9 months @ 20%) (6,750)1
38,250
+ Cost of new machine purchased on Jan. 01, 2021 35,000
73,250
(–) Depreciation for the year 2020-2021
(20% of ₹ 38,250 + 20% of ₹ 35,000 for 3 month) (9,400)2
WDV on Mar. 31, 2021 63,850
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(–) Depreciation for the year 2021- 22 (20% of ₹ 63,850) (12,770)3
WDV on Mar. 31, 2022 51,080
Methods of recording depreciation:-
 First Method: - By charging to an asset account.
 Second Method: - By creating provision for depreciation accounts.
Illustration 4.
Bhulal Ltd. Purchased on April 1, 2019, a Second-hand Plant for ₹ 4, 00,000 and immediately spent ₹
80,000 for its overhauling and ₹ 20,000 for its instalment. On 1st Oct, 2022 the Plant became obsolete
and was sold for ₹ 2, 00,000. Depreciation is provided at 10% p.a. on the original cost method.
Accounts are closed each year on 31st March.
Show necessary ledger accounts assuming that:-
1. Provision for depreciation account is not maintained, and
2. Provision for depreciation account is maintained.
Ans: 1. When provision for depreciation account is not maintained:-
Dr. Plant A/c Cr.
2019April1 To Bank A/c 4,00,000 2020Mar.31 By DepreciationA/c 50,000
April1 To Bank A/c (expense ) 1,00,000 Mar.31 By Balance c/d 4,50,000
5,00,000 5,00,000
2020 April1 To Balance b/d 4,50,000 2021Mar.31 By Depreciation A/c 50,000
Mar.31 By Balance c/d 4,00,000
4,50,000 4,50,000
2021 April1 To Balance b/d 4,00,000 2022Mar.31 By Depreciation A/c 50,000
Mar.31 By Balance c/d 3,50,000
4,00,000 4,00,000
2022 April 1 To Balance b/d 3,50,000 2022Oct.1 By Bank A/c 2,00,000
Oct.1 By Depreciation A/c (6 m) 25,000
Oct.1
By Statement of P/L (B.F.) 1,25,000
3,50,000 3,50,000
2. Provision for depreciation account is maintained.

Dr. Plant A/c Cr.
1/04/19 To Bank A/c 4,00,000 31/3/20 By Balance c/d 5,00,000
1/04/19 To Bank A/c(Expenses) 1,00,000
5,00,000 5,00,000
31/3/21 By Balance c/d
1/04/20 To Balance b/d 5,00,000 5,00,000
1/04/21 To Balance b/d 5,00,000 31/3/22 By Balance c/d 5,00,000
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1/04/22 To Balance b/d 5,00,000 1/10/22 By Bank A/c 2,00,000
By Provision for dep. 1,75,000
By Statement of P/L 1,25,000
5,00,000 5,00,000
Dr. Provision for Depreciation A/c Cr.

31/3/2020 To Balance c/d 50,000 31/3/2020 By Depreciation A/c 50,000
31/3/2021 To Balance c/d 1,00,000 01/4/2020 By Balance b/d 50,000
31/3/2021 By Depreciation A/c 50,000
1,00,000 1,00,000
31/3/2022 To Balance c/d 1,50,000 01/4/2021 By Balance b/d 1,00,000
1,50,000 1,50,000
1/10/2022 To Plant A/c 1,75,000 01/4/2022 By Balance b/d 1,50,000
(Transfer to Plant A/c) 1/10/2022 By Depreciation A/c 25,000
1,75,000 1,75,000
Disposal of Asset
Disposal of asset can take place either (a) at the end of its useful life or (b) during its useful life (due
to obsolescence or any other abnormal factor). If it is sold at the end of its useful life, the amount
realised on account of the sale of asset as scrap should be credited to the asset account and the balance
is transferred to profit and loss account. In this regard the following journal entries are recorded.
1. For sale of asset as scrap:
Bank A/c Dr.
To Asset A/c
2. For transfer of balance in asset account:
(a) In case of profit
Asset A/c Dr.
(b) In case of loss:
Profit and Loss A/c Dr.
To Asset A/c
In case, however, the provision for depreciation account has been in use for recording the depreciation,
then before passing the above entries transfer the balance of the provision for depreciation account to
the asset account by recording the following journal entry:
Provision for depreciation A/c Dr.
To Asset A/c
Illustration 5: Surya Ltd. purchased a vehicle for ₹ 4, 00,000. After 4 years its salvage value is
estimated at ₹ 40,000. To find out the amount of depreciation to be charged every year based on
straight line basis, and show as to how the vehicle account would appear for four years assuming it is
sold for ₹ 50,000 at the end when
(a) depreciation is charged to asset account; and
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(b) provision for depreciation account is maintained.
Consider the following entries in the book of account of Surya Ltd.
(a) When depreciation is charged to assets account
Solution: Books of Surya Ltd.
Dr. Vehicle A/c Cr.
Date Particulars L.F Amt. (₹) Date Particulars L.F Amt. (₹)
I year To Bank A/c 4,00,000 End of By Depreciation A/c 90,000
the year By Balance c/d 3,10,000
4,00,000 4,00,000
II year To Balance b/d 3,10,000 End of By Depreciation A/c 90,000
3,10,000 3,10,000
III year To Balance b/d 2,20,000 End of By Depreciation A/c 90,000
2,20,000 2,20,000
IV year To Balance b/d 1,30,000 End of the By Depreciation A/c 90,000
To P& L (Profit 10,000 year 50,000
By Bank A/c
on sale of vehicle)
1,40,000 1,40,000
(b) When Provision of Depreciation A/c is maintained

Books of Surya Ltd.
Dr. Vehicle A/c Cr.
I year To Bank A/c 4,00,000 End of the year By Balance c/d 4,00,000
4,00,000 4,00,000
II year To Balance b/d 4,00,000 End of the year By Balance c/d 4,00,000
4,00,000 4,00,000
III year To Balance b/d 4,00,000 End of the year By Balance c/d 4,00,000
4,00,000 4,00,000
3,60,000
IV year To Balance b/d 4,00,000 End of the year By Provision for Dep.
By Bank 50,000
To P&L (Profit on 10,000
Sale of Vehicle)
4,10,000 4,10,000

I year To Balance b/d 90,000 End of the year By Depreciation A/c 90,000
90,000 90,000
1,80,000 End of the year By Balance b/d 90,000
II year To Balance b/d
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By Depreciation A/c 90,000
1,80,000 1,80,000
End of the year By Balance c/d
III year To Balance b/d 2,70,000 1,80,000
By Depreciation A/c
90,000
2,70,000 2,70,000
IV year To Machinery 3,60,000 2,70,000
End of the year By Balance c/d
By Provision for Dep. A/c 90,000
3,60,000 3,60,000
Use of Asset Disposal Account:

Asset disposal account is designed to provide a complete and clear view of all the transactions
involved in the sale of an asset under one account head. The concerned variables are the original cost
of the asset, depreciation accumulated on the asset upto date, sale price of the asset, value of the parts
of the asset retained for use, if any and the resultant profit or loss on disposal. The balance of this
amount is transferred to the profit and loss account. This method is generally used when a part of the
asset is sold and provision for depreciation account exists.
Under this method, a new account titled Asset Disposal Account is opened. The original cost of the
asset being sold is debited to the asset disposal account and accumulated depreciation amount
appearing in provision for depreciation account relating to that asset till the date of disposal is
credited to the asset disposal account. The net amount realised from the sale of the asset is also
credited to this account. The balance of asset disposal account shows profit or loss which is
transferred to profit and loss account.
The advantage of this method is that it gives a full picture of all the transactions related to asset
disposal at one place.
The journal entries required for the preparation of asset disposal account is as follows:
1. Asset Disposal A/c Dr. (with the original cost of asset, being sold)
To Asset A/c
2. Provision for Depreciation A/c Dr. (with the accumulated balance in provision for depreciation A/c)
To Asset Disposal A/c
3. Bank A/c Dr. (with the net sales proceeds)

Asset Disposal Account may ultimately show a debit or credit balance. The debit balance on the
account indicate loss on disposal and would be dealt with as follows:
Profit and Loss A/c Dr. (with the amount of loss on sale)
The credit balance of the account, profit on disposal & would be closed by the following journal
entry:
Asset Disposal A/c Dr. (with the amount of profit on sale)
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Illustration 6: Kartik Enterprises has the following balances in its books as on 31st March, 2022
Machinery (gross value): ₹ 6, 00,000
Provision for depreciation: ₹ 2, 50,000
A machine purchased for ₹ 1, 00,000 on 01st Nov, 2018, having accumulated depreciation amounting
to ₹ 60,000 was sold on 01st April, 2022 for ₹ 35,000. The Asset Disposal account will be prepared in
the following manner:
Books of Kartik Enterprises
Dr. Machinery Disposal A/c Cr.
2022 To MachineryA/c 1,00,000 2022,Apr1 By Provision for Dep. A/c 60,000
Apr. 01 By Bank A/c 35,000
By P&L (Loss on sale) 5,0001
1,00,000 1,00,000
Dr. Machinery A/c Cr.

2022 To Balance b/d 6,00,000 2022 Apr. 01 By Machine Disposal 1,00,000
April 01 2023 Mar. 31 By Balance c/d 5,00,000
6,00,000 6,00,000
Working Notes:
(1) Computation of loss on sale of machinery Amt. (₹)
Original cost of the asset being sold 1,00,000
Less: accumulated depreciation (60,000)
40,000
(2) Sales value realised (35,000)
Loss on sale (i.e. ₹ 40,000 – ₹ 35,000) 5,0001
Illustration 7:
On 01st Jan, 2020 Kohli Transport Co. purchased five trucks for ₹ 20,000 each. Depreciation has been
provided at the rate of 10% p.a. using straight line method and accumulated in provision for
depreciation account. On 01st Jan, 2021, one truck was sold for ₹ 15,000. On 1st July, 2022, another
truck (purchased for ₹ 20,000 on Jan, 01, 2019) was sold for ₹ 18,000. A new truck costing ₹ 30,000
was purchased on 01st Oct., 2021.
You are required to prepare Trucks A/c, Provision for depreciation A/c & Truck disposal A/c for the
years ended on Dec. 2020, 2021 and 2022 assuming that the firm closes its accounts in Dec. every year.
Solution: Book of Kohli Transport Co.
Dr. Trucks A/c Cr.
1/1/20 To Bank A/c (Truck Purc.) 1,00,000 31/12/20 By Balance c/d 1,00,000
1,00,000 1,00,000
1/1/21 To Balance b/d 1,00,000 1/1/21 By Truck disposal A/c 20,000
31/12/21 By Balance c/d 80,000
1,00,000 1,00,000
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1/1/22 To Balance b/d 80,000 1/7/22 By Truck disposal A/c 20,000
1/1/22 To Bank A/c(Purchase of 30,000 31/12/22 By Balance c/d 90,000
new truck)
1,10,000 1,10,000
Dr. Truck Disposal A/c Cr.

1/1/21 To Machinery A/c 20,000 1/1/21 By Provision for Dep. A/c 2,000
By Bank A / c (Sale) 15,000
By P&LA/c(Loss on sale) 3,0004
20,000 20,000
1/7/22 To Machinery A/c 20,000 1/7/22 By Provision for Dep. A/c 5,000
To P&L A/c (Profit on sale)5 3,000 (₹ 2,000+ ₹ 2,000+ ₹ 1,000)
By Bank A / c (Sale) 18,000
23,000 23,000

10,000 10,000
01/1/21 To Truck Disposal A/c 2,000 1/1/21 By Balance b/d 10,000
31/12/21 ToBalance c/d 16,000 31/12/21 By Depreciation A/c 8,0002
18,000 18,000
1/1/22 To Truck Disposal A/c 5,000 1/1/22 By Balance b/d 16,000
31/12/22 ToBalance c/d 18,750 31/12/22 By Depreciation A/c 7,7503
(₹ 6000+ ₹ 1000+ ₹ 750)
23,750 23,750
Working Notes:
1. Calculation of amount of depreciation Amt. (₹)
Year - 2020
10% on ₹ 1,00,000 for one year 10,0001
Year - 2021
10% on ₹ 80,000 for one year 80002
Year – 2022
10% on ₹ 60,000 for 1 year 6,000
10% on ₹ 20,000 for six months 1,000
10% on ₹ 30,000 for three months 750
7,7503
2. Loss on sale of first truck
Original cost on January 01, 2020 20,000
Less: Depreciation at 10% (2,000)
Book value on January 1, 2021 18,000
Sales price realised on 01.01.2021 (15,000)4
Loss on sale of first machine 3,000
3. Profit on sale of second truck Amt. (₹)

Original Cost of second truck 20,000
(Less) depreciation charged
2020 2,000
2021 2,000
92
2022 (upto June, 2021) 1,000 5,000
Book value of second truck 15,000
Sale price of second truck 18,000
Profit on sale 3,000
Illustration 8:
On 01st Jan, 2019 Chawla & Sons purchased a second hand plant costing ₹ 2, 00,000 & spent ₹ 10,000
on its overhauling. It also spent ₹ 5,000 on transportation & installation of the plant. It was decided to
provide for depreciation @ 20% on written down value. The plant was destroyed by fire on 31st July,
2022 & an insurance claim of ₹ 50,000 was admitted by the insurance company.
Prepare plant account, accumulated depreciation A/c & Plant disposal A/c assuming that the company
closes its books on 31st Dec, every year.
Solution: Books of Chawla & Sons.
Dr. Plant A/c Cr.
1/1/19 To Bank A/c 2,15,000 31/12/19 By Balance c/d 2,15,000
2,15,000 2,15,000
1/1/20 To Balance b/d 2,15,000
2,15,000 31/12/20 By Balance c/d
2,15,000 2,15,000
1/1/21 To Balance b/d 2,15,000 31/12/21 By Balance c/d 2,15,000
2,15,000 2,15,000
1/1/22 To Balance b/d 2,15,000 31/12/22 By Plant Disposal A/c 2,15,000
2,15,000 2,15,000
Dr. Accumulated Depreciation A/c Cr.

43,000 43,000
31/12/20 To Balance c/d 77,400 1/1/20 By Balance b/d 43,000
77,400 77,400
31/12/21 To Balance c/d 1,04,920 1/1/21 By Balance b/d 77,400
1,04,920 1,04,920
31/7/22 To Plant Disposal A/c 1,17,763 1/1/22 By Balance b/d 1,04,920
1,17,763 1,17,763
Dr. Plant Disposal A/c Cr.

31/7/22 To Plant A/c 2,15,000 31/7/22 By Accumulated Dep. A/c 1,17,763
By Insurance Co. 50,000
By P&L A/c (Loss on sale) 47,2375
2,15,000 2,15,000
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Working Notes:
1. Calculation of Depreciation Amt. (₹)
Original cost on 01/01/2019 2, 15,000
(₹ 2, 00,000 + ₹ 10,000 + ₹ 5,000)
Depreciation for the year 2019 (@ 20% of ₹ 2, 15,000) (43,000)
1, 72,000
Depreciation for the year 2020(@ 20% of ₹ 1,72,000) (34,4002)
1,37,600
Depreciation for the year 2021 (@ 20% of ₹ 1,37,600) 27,5203
1,10,080
Depreciation till 31.07.22 (@ 20% of ₹ 1,10,080) (12,8434)

97,237
Insurance claim (50,000)
Loss on disposal 47,2375
SECTION – II
Provisions and Reserve
Provision: - Provision can be described as an amount kept aside to cover a known expense/liability
in the future. This is the fund that is to be put aside by a company/organisation to cover the
anticipated losses in the future.
Examples of provisions are:
• Provision for depreciation; • Provision for bad and doubtful debts;
• Provision for taxation; • Provision for discount on debtors; and
• Provision for repairs and renewals.
It must be noted that the amount of provision for expense and loss is a charge against the revenue of
the current period. Creation of provision ensures proper matching of revenue and expenses and hence
the calculation of true profits. Provisions are created by debiting the profit and loss account.
In the balance sheet, the amount of provision may be shown either:
• By way of deduction from the concerned asset on the assets side.
For example, provision for doubtful debts is shown as deduction from the amount of sundry debtors
and provision for depreciation as a deduction from the concerned fixed assets;
• On the liabilities side of the balance sheet along with current liabilities. For example provision for
taxes and provision for repairs and renewals.
Accounting Treatment for Provisions
The accounting treatment of all types of provisions is almost similar. Therefore, the accounting
treatment is explained here taking up the case of provision for doubtful debts. As already stated that
when business transaction takes place on credit basis, debtors account is created and its balance is
shown on the asset-side of the balance sheet.
These debtors may be of three types:
• Good Debtors are those from where collection of debt is certain.
94
• Bad Debts are those debtors from where collection of money is not possible and the amount of
credit given is a certain loss.
• Doubtful Debts are those debtors who may pay but business firm is not sure about the collection of
full amount from them.
For creating a provision for doubtful debts the following journal entry is recorded:
Profit and Loss A/c Dr. (with the amount of provision)
To Provision for doubtful debts A/c
This is explained with the help of the following example
Observe an extract of the trial balance from the books of Somnath Traders on March 31, 2023 is given
below:
Date Account title L.F. Dr. (₹) Cr. (₹)
Sundry Debtors 68,000
Additional Information:
• Bad debts proved bad but not recorded amounted to ₹ 8,000
• Provision is to be maintained at 10% of debtors.
In order to create the provision for doubtful debts, the following journal entries will be recorded:
Journal
Date Account title L.F. Dr. (₹) Cr. (₹)
31/3/2023 Bad debts A/c Dr. 8,000
To Sundry debtors A/c 8,000
(Bad debts written off)
31/3/2023 Profit & Loss A/c Dr. 8,000
To Bad debts A/c 8,000
(Bad debts debited to Profit and loss account)
31/3/2023 Profit and Loss A/c Dr. 6,000
To Provision for doubtful debts A/c 6,000
(For creating provision for doubtful debts)
Working Notes:
Provision for doubtful debts @10% of Sundry debtor‘s i.e.
₹ 68,000 – ₹ 8,000 = ₹ 60,000
₹ 6,000 x 10 = ₹ 6,000
100
Reserves:
A part of the profit may be set aside and retained in the business to provide for certain future needs
like growth and expansion or to meet future contingencies such as workmen compensation. Unlike
provisions, reserves are the appropriations of profit to strengthen the financial position of the
business. Reserve is not a charge against profit as it is not meant to cover any known liability or
expected loss in future. However, retention of profits in the form of reserves reduces the amount of
profits available for distribution among the owners of the business. It is shown under the head
Reserves and Surpluses on the liabilities side of the balance sheet after capital.
95
Examples of reserves are:
• General reserve; • Workmen compensation fund;
• Investment fluctuation fund; • Capital reserve;
• Dividend equalisation reserve; • Reserve for redemption of debenture.
Difference between Provision and Reserve

Basis Provision Reserve
1. Meaning Provisions are created to meet a Reserves are created to meet an unknown
known liability. liability in future.
2. Object The objective of creating provisions is The objective of creatingreserves is to
to provide for depreciation and other strengthenthe financial position of the
specific liabilities. business.
3. Mode of They are created even ifthere is They are created out of adequate profit
creation insufficient profit. only.
4. Investment Provision cannot be invested outside Reserves can be invested outside the
outside the business.
thebusiness. business.
Types of Reserves:
A reserve is created by retention of profit of the business can be for either a general or a specific
purpose.
1. General reserve: When the purpose for which reserve is created is not specified, it is called
General Reserve. It is also termed as free reserve because the management can freely utilise it for any
purpose. General reserve strengthens the financial position of the business.
2. Specific reserve: Specific reserve is the reserve, which is created for some specific purpose and
can be utilised only for that purpose. Examples of specific reserves are given below:
(i) Dividend equalisation reserve: This reserve is created to stabilise or maintain dividend rate. In
the year of high profit, amount is transferred to Dividend Equalisation reserve. In the year of low
profit, this reserve amount is used to maintain the rate of dividend.
(ii) Workmen compensation fund: It is created to provide for claims of the workers due to accident,
etc.
(iii) Investment fluctuation fund: It is created to make for decline in the value of investment due to
market fluctuations.
(iv) Debenture redemption reserve: It is created to provide funds for redemption of debentures.
Reserves are also classified as revenue and capital reserves according to the nature of the profit out of
which they are created.
(a) Revenue reserves: Revenue reserves are created from revenue profits which arise out of the
normal operating activities of the business and are otherwise freely available for distribution as
dividend. Examples of revenue reserves are:
• General reserve; • Workmen compensation fund;
• Investment fluctuation fund; • Dividend equalisation reserve;
• Debenture redemption reserve;
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(b) Capital reserves: Capital reserves are created out of capital profits which do not arise from the
normal operating activities. Such reserves are not available for distribution as dividend. These
reserves can be used for writing off capital losses or issue of bonus shares in case of a company.
Examples of capital profits, which are treated as capital reserves, whether transferred as such or not,
are:
• Premium on issue of shares or debenture. • Profit on sale of fixed assets.
• Profit on redemption of debentures. • Profit on revaluation of fixed asset & liabilities.
• Profits prior to incorporation. • Profit on reissue of forfeited shares
Difference between Revenue Reserve & Capital Reserve

Basis Revenue Reserve Capital Reserve
1. Source It is created out of revenue profits It is created primarily out of capital profit
which arise out of normal operating which do not arise out of the normal
of creation
activities of the business and are operating activities of the business and not
otherwise available for dividend available for dividend distribution. But
distribution. revenue profits may also be used for this
purpose.
2. Purpose It is created to strengthen the financial It is created for compliance of legal

position, to meet unforeseen requirements or accounting practices.
contingencies or for some specific
purposes.
3. Usage A specific revenue reserve can be It can be utilised for specific purposes as
utilised only for the earmarked provided in the law in force e.g., to write
purpose while a general reserve can be off capital losses or issue of bonus shares.
utilised for any purpose including
distribution of dividend.
Importance of Reserves:
A business firm may consider it proper to set up some mechanism to protect itself from the
consequences of unknown expenses and losses, it may be required to bear in future. It may also
regard it as more appropriate in certain cases to reduce the amount that can be drawn by the
proprietors as profit in order to conserve business resource to meet certain significant demands in
future. An example of such a demand is the much needed expansion in the scale of business
operations. This is presented as the justification for reserves in business activities and in accounting.
The amount so set aside may be meant for the purpose of:
• Meeting a future contingency
• Strengthening the general financial position of the business;
• Redeeming a long-term liability like debentures, etc.
Secret Reserve:
Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the
disclosed profits and also the tax liability. The secret reserve can be merged with the profits during
the lean periods to show improved profits. Management may resort to creation of secret reserve by
charging higher depreciation than required. It is termed as ‗Secret Reserve‘, as it is not known to
outside stakeholders. Secret reserve can also be created by way of:
• Undervaluation of inventories/stock
• Charging capital expenditure to profit and loss account
97
• Making excessive provision for doubtful debts
• Showing contingent liabilities as actual liabilities
Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence
and preventing competition from other firms.
Link of NCERT e textbook:

https://diksha.gov.in/play/collection/do_31310347535505817611436?contentId=do_31298 6201089146880110
Link of explanation videos:

https://diksha.gov.in/play/collection/do_31310347535505817611436?contentId=do_31310414982116147212320
Link of practice questions:

PRACTICE QUESTIONS:
1. What is ‗Depreciation‘?
2. State briefly the need for providing depreciation.
3. What are the causes of depreciation?
4. Explain basic factors affecting the amount of depreciation.
5. Distinguish between Straight line & Written down value method of calculating depreciation.
6. On 1st July, 2010, Asha Ltd. Purchased a Machine for ₹ 1, 08,000 and spent ₹ 12,000 on its
installation. At the time of purchase it was estimated that the effective commercial life of the machine
will be 12 years & after 12 years its salvage value will be ₹ 12,000.
Prepare Machine A/c & Depreciation A/c in the books of Asha Ltd. For first three years, if
depreciation is written off according to straight line method. The accounts are closed on 31st Dec,
every year.
(Ans: Balance of Machine account as on 1.01.2013 ₹ 97,500).
7. Barela Ltd. Purchased a second hand machine for ₹ 56,000 on 1st July, 2019 & spent ₹ 24,000 on its
repair and installation and ₹ 5,000 for its carriage. On 1st Sept, 2020, it purchased another machine for
₹ 2, 50,000 and spent ₹ 10,000 on its installation.
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(a) Depreciation is provided on machinery @10% p.a on original cost method annually on 31st Dec.
Prepare Machinery A/c and Depreciation A/c from the year 2019 to 2022.
(b) Prepare Machinery A/c and Depreciation A/c from the year 2019 to 2022, if depreciation is
provided on machinery @10% p.a. on written down value method annually on 31st Dec.
(Ans: [a] Balance of Machine account as on 1.01.23 ₹ 2, 54,583.
[b] Balance of Machine account as on 1.01.23 ₹ 2, 62,448.
8. M/s Aroma Fabrics purchased a Textile Machine on 1st April, 2018 for ₹ 1, 00,000. On 1st July,
2019 another machine costing ₹ 2, 50,000 was purchased. The machine purchased on 1st April, 2018
was sold for ₹ 25,000 on 1st Oct, 2022. The company charges depreciation @15% p.a. on straight
line method.
Prepare Machinery A/c and Machinery Disposal A/c for the year ended 31st March, 2023.
(Ans. Loss on sale of Machine A/c ₹ 7,500.)
9. The following balances appear in the books of Shiney Ltd, on 1st Jan, 2022
Machinery A/c on ₹ 15, 00,000
Provision for Depreciation A/c ₹ 5, 50,000
On 1st April, 2022 a machinery which was purchased on 1st Jan, 2019 for ₹ 2, 00,000 was sold for ₹
75,000. A new machine was purchased on 1st July, 2022 for ₹ 6, 00,000. Depreciation is provided on
machinery at 20% p.a. on Straight line method and books are closed on 31st Dec every year.
Prepare the Machinery A/c & Provision for depreciation A/c for the year ending 31st Dec, 2022.
(Ans. Profit on sale of Machine ₹ 5,000.
Balance of Machine A/c t as on 31.12.19 ₹ 19, 00,000.
Balance of Provision for depreciation A/c as on 31.12.19 ₹ 4, 90,000).
10. Agra Transport Company purchased 5 trucks at the cost of ₹ 2, 00,000 each on 1st April, 2020.
The company writes off depreciation @ 20% p.a. on original cost and closes its books on 31st Dec,
every year. On 1st Oct, 2022, one of the trucks is involved in an accident and is completely
destroyed. Insurance company has agreed to pay ₹ 70,000 in full settlement of the claim.
On the same date the company purchased a second hand truck for ₹ 1, 00,000 and spent ₹ 20,000 on
its overhauling.
Prepare Truck A/c and Provision for depreciation A/c for the three years ended on 31st Dec, 2022.
Also give Truck A/c if Truck Disposal A/c is prepared.
(Ans: Loss of settlement of Truck Insurance ₹ 30,000.
Balance of Provision for depreciation A/c as on 31.12.22 ₹ 4, 46,000.
Balance of Trucks A/c as on 31.12.22 ₹ 9, 20,000).
11. On 1st Oct, 2020 Janmeja Transport Company purchased 2 Trucks for ₹ 10, 00,000 each. On 1st
July, 2022, One Truck was involved in an accident and was completely destroyed & ₹ 6, 00,000 were
received from the insurance company in full settlement.
On 31st Dec, 2022 another truck was involved in an accident & destroyed partially, which was not
insured. It was sold off for ₹ 1, 50,000. On Jan 31, 2023 Company purchased a fresh truck for
₹ 12, 00,000. Depreciation is to be provided at 10% p.a. on the written down value every year.
The books are closed every year on 31st March.
Give the Truck A/c from 2020 to 2023.
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(Ans: Loss on Ist Truck Insurance claim ₹ 3, 26,250.
Loss on IInd Truck ₹ 7, 05,000.
Balance of Truck A/c as on 31.03.23 ₹ 11, 80,000).
12. Shri Brij Manufacturing Company purchased 10 machines for ₹ 75,000 each on 1st July, 2019.
On 1st Oct, 2021, one of the machines got destroyed by fire & an insurance claim of ₹ 45,000 was
admitted by the company. On the same date another machine is purchased by the company for
₹ 1, 25,000. The company writes off 15% p.a. depreciation on written down value basis. The
company maintains the calendar year as its financial year.
Prepare the Machinery A/c from 2019 to 2022.
(Ans: Loss on settle of Insurance claim ₹ 7,735.
Balance of Machine A / c as on 31.12.22 ₹ 4, 85,709).
13. An extract of Trial balance from the books of Tayal and Sons Enterprises on 31st March, 2023 is
given below:
Name of the Account Debit Amt. (₹) Credit Amt. (₹)
Sundry debtors. 50,000
Bad debts 6,000
Provision for doubtful debts 4,000
Additional Information:
• Bad Debts proved bad but not recorded amounted to ₹ 2,000.
• Provision is to be maintained at 8% of Debtors.
Give necessary accounting entries for writing off the bad debts & creating the provision for
doubtful debts account. Also show the necessary accounts.
(Ans: New provision for Bad debts ₹3,840, profit and loss account [Dr.] ₹ 7,840.)
-------------------------------------- END OF CHAPTER ----------------------------------
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CH - 08. FINANCIAL STATEMENTS - I
(MIND MAP)
101
• state the nature of the financial statements;
• identify the various stakeholders and their information requirements;
• distinguish between the capital and revenue expenditure and receipts;
• explain the concept of trading and profit and loss account and its preparation;
• State the nature of gross profit, net profit and operating profit;
• describe the concept of balance sheet and its preparation;
• explain grouping and marshalling of assets and liabilities;
• prepare profit and loss account and balance sheet of a sole proprietary firm; and
• make an opening entry.
Financial Statements:
Financial statement are those statement that show the profitability (Income statement) and the
financial position (Balance Sheet) of the business at the end of accounting period.
In the word of John N. Myer “The financial statement provide a summary of the accounts of a
business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date
and the income statement showing the result of operation during a certain period”.
Financial statements include the following statements:

1. Income statement (Trading and Profit and Loss Account) – Prepared to ascertain gross
profit/loss and net profit/loss during an accounting period.
2. Statement of Financial Position (Balance Sheet) – Prepared to ascertain position (assets,
liabilities and capital) of an enterprise at a particular point of time.
3. Schedules and notes forming part of Balance sheet and Income statement – To give details of
various items shown in both the statements.
These two Financial Statements (Income Statement and Statement of Financial Position) are termed
as ‗Final Accounts‘.
Objective of Preparing Financial Statements:
1. To present a true and fair view of the financial performance (Profit/Loss) of the business.
2. To present a true and fair view of the financial position (Assets/Liabilities) of the business.
Distinction between Capital and Revenue:
A very important distinction in accounting is between capital and revenue items. The distinction has
important implications for making of the trading and profit and loss account and balance sheet. The
revenue items form part of the trading and profit and loss account, the capital items help in the
preparation of a balance sheet.
(a) Expenditure:
Whenever there is a payment made for other than settling the existing liabilities it is called
expenditure. On the basis of the nature of this payment expenditure are classified as:
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1. Capital Expenditure: These are those non-recurring expenditure benefits of which are
extended to more than one accounting year. For example, Expenditure incurred to purchase
machinery, the benefits of machinery would definitely extend to more than one accounting
year hence this is a capital expenditure. Capital expenditures are shown on the assets side of the
Balance Sheet.
2. Revenue Expenditure: These are those recurring expenditures that are incurred for smooth
conduct of the business benefits of which are extended to only one accounting year. Example,
Salary paid to the employees, advertising expenditures, etc. These are shown on the debit side
of Trading and Profit and Loss Account.
(b) Receipts:
Receipts are the cash inflows that may or may not result in obligation to pay in future. On the
basis of this nature, receipts can be classified as:
1. Capital receipts: These are that receipt that implies a future obligation to return the money in
future. These are those receipts that are irregular and not received in the normal course of
business. Example: Sale of machinery, Long- term loan taken, Capital brought in by the
owner, etc. These are shown in the balance sheet, either increase in liabilities (Loan taken) or
decrease in assets (Sale of Machinery).
2. Revenue Receipts: These are receipts that do not imply a future obligation to return the
money in future. These are regular receipts that are necessary for operational activities of the
business. Example, Rent received, Interest or commission received, etc. These are shown in
the credit side of the Trading andProfit and Loss Account.
(c) Deferred Revenue Expenditure:
The expenditure which is revenue in nature, but the heavy amount spent and benefit likely to be
derived over a number of years called deferred revenue expenditure e.g. heavy expenses on
advertising on launching of a new product and hence it is capitalized like any fixed asset.
Capital Nature Items:
Capital Expenditure: Those expenditures which are incurred in acquiring and increasing
the valueof fixed assets. Example:
1. Purchase of fixed assets or bringing into existence of fixed assets
2. Expenditure incurred on erection of a fixed asset
3. Payment of goodwill
4. Decrease in long term debts.
5. Capital Receipts: Any receipt from the sale of fixed assets is known as capital receipt.
Revenue Nature items:
Revenue Receipts: Receipts in the business of recurring nature are called as Revenue receipts
ex:rent received, discount received, commission received.
Revenue Expenditures: Recurring nature of expenditure done in the business which are done in
order to earn profit are known as revenue expenditure ex.:
1. Purchase of goods during the year
2. Money spent in acquiring or manufacturing goods like freight, carriage, wages etc.Any expenses
for meeting day to day business like wages, salaries, postage etc.
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Distinction between Capital Expenditure and Revenue Expenditure
Basis Capital Expenditure Revenue Expenditure
1. Purpose Money spent for purchasing a Money spent for the conduct of
fixed asset for business. the business.
2. Benefit For several years For one accounting period only.
duration
3. Presentation Shown in the Balance sheet. Shown either in Trading A/c or
in Profit and Loss A/c.
4. Nature of Real account Nominal account
Account
Types of Expenses:
Direct Expenses: Those expenses which are incurred on purchasing of goods and for converting
the raw materials into the finished goods e.g. Manufacturing wages, Expenses on purchases
(including all duties and taxes paid on purchases), Carriage/Freight/Cartage inwards, Production
expenses (such as power and fuel, water etc.), factory expenses (e.g. lighting, rent and rates),
Royalty based on Production etc.
Note: All direct expenses are debited to Trading account.
Indirect Expenses: Those expenses which are not directly related to production or purchase of
the goods are called indirect expenses. It includes those expenses which are related to office and
administration, selling and distribution of goods and financial expenses etc.
These expenses are shown on the debit side of the Profit and Loss A/c.
Calculation of Gross Profit
Gross Profit = Net Sales – Cost of Goods Sold
Net Sales= Total Sales – Sales Return.
Cost of goods sold = Opening Stock + Net Purchases + Direct Expenses (Wages, Expenses on
Purchases, Carriage inward etc.) – Closing Stock.
Net Purchases = Total Purchases – Purchases Return
Calculation of Operating Profit:

Operating profit = Net sales – Operating cost.
OR = Gross Profit – (Office and Administrative Expenses + Selling and distribution exp.)
Operating Cost = Cost of Goods Sold + Office and Administrative Expenses + Selling and
distribution exp.
Net Profit = Operating Profit + Non-operating Income – Non-operating expenses.
Operating expenses: The expenses which are related to the main or normal activities of the
business e.g. office and Administrative expenses, selling and distribution expenses. Operating profit
is also called EBIT (Earnings before interest and taxes).
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Income Statement:
It is divided into two parts:
1. Trading Account which shows the gross profit or gross loss.
2. Profit and Loss Account which shows the net profit or net loss.
1. Trading and Profit and Loss Account:
It is the income statement that depicts the profit earned or the loss incurred at the end of the current
accounting year. The net of revenue and expenditure is profit or loss.
Items come under Trading Account:
Items on the debit side:
1. Opening Stock: It is the stock of goods that are in hand at the beginning of the year and is
being carried forward from the previous year.
2. Net Purchases: Goods which are purchased during the year both cash and credit purchases less
goods returned to the suppliers known as Purchase Returns gives Net Purchases.
3. Wages: These are direct wages paid to the factory workers as remuneration.
4. Carriage Inwards/ Freight inwards: These are the transportation costs that are incurred for
bringing items to the place of purchase.
5. Fuel/Water/Power/Gas: These are those expenses that are incurred while production of
goods.
6. Packaging Materials and packing charges: These form part of direct expenses for packing and
packaging expenses of goods to be sold.
Items on the Credit Side:
1. Net Sales: It refers to the total sales made during the year both cash and credit sales less the Sales
returns i.e., the goods returned by the customers.
2. Other Incomes: Incomes in the form of Interest received, Commission received, rent received
comes under the credit side of the Profit and Loss Account.
3. Closing Stock: It is the stock of goods that are in hand at the end of the year and is being carried
forward to the upcoming year
Format of Trading Account
Name of Business Firm
Trading Account
Particulars Amt.(₹) Particulars Amt.(₹)
To Opening Stock By Sales
To Purchases Less: Returns Inward/ Sales Returns
Less: Purchase Return/Return outwards By Scrap sales
To All Direct Expenses By Closing Stock
To Wages
By Gross Loss transferred to Profit
To Wages & Salaries
& Loss A/c) (Bal. figure)
To Carriage of Carriage Inwards or
Carriage on purchases
To Direct Expenses
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To Gas, Fuel and power
To Freight, Octroi and cartage
To Manufacturing Expenses or
Productive expenses
To Custom or import duty
To Dock and clearing charge
To Excise duty
To Factory rent and lighting
To Other direct charges
To Royalty
To Gross Profit transferred to Profit &
Loss A/c)(Bal. figure)
Items come under Profit and Loss Account:-

1. Salaries: These are the remuneration paid to administrative, office or godown staff for their
services in the business.
2. Rent Paid: It is the expense of Rent for office, administration building, municipal taxes paid
for running the business.
3. Interest Paid: It is the interest component paid on liabilities, i.e., Interest on loans/debentures,
etc.
4. Commission Paid: It is the commission paid to sales agents that are an expense and are debited
to Profit and Loss Account.
5. Repairs: These include the revenue expenditure made on maintenance and repairs of fixed
assets.
6. Miscellaneous Expenses: Some petty or sundry expenses that are so small that cannot come
under one head are clubbed together and are written as miscellaneous expenses.
7. Depreciation: It refers to decrease in the value of asset on account of wear and tear and
passage of time. It is treated as expense and debited to profit and loss account and in the
balance sheet deducted from asset value.
8. Provision for bad debts: It's not possible for the business to know the actual amount of bad
debts; hence we make a reasonable estimate for the loss and provide the loss. It is known as
provision for bad debts.
Formal of Profit & Loss Account Profit & Loss A/c for the Year Ended……
Particulars Amt. (₹) Particulars Amt. (₹)
To Gross Loss By Gross Profit
(Transferred from Trading A/c) (Transferred from Trading A/c)
To Office & Admin. Expenses By Rent Received
To Salaries By Rent (Cr.)
To Rent Rates Taxes By Discount Received
To Printing and Stationery By Discount (Cr.)
To Salaries & Wages By Rebates
To Postages and Telephones By Commission Received
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To Office Lighting By Interest Received
To Insurance Premium By Dividend Received
To Legal Expenses By Bad Debts Recovered
To Establishment Expenses By Apprentice fees or premium
To Audit Fees By Gain on Sale of Fixed Asset
To Trade Expenses By Miscellaneous Receipts
To Travelling Expenses By Net Loss (If Dr. side > Cr. side)
To General Expenses (Transferred to capital Account) By
To Selling & Distribution Exp. Gross Profit
To Carriage and Freight Outwards (Transferred from Trading A/c)
To Commission By Rent Received
To Brokerage By Rent (Cr.)
To Advertisement By Discount Received
To Publicity By Discount (Cr.)
To Bad Debts By Rebates
To Export Duty By Commission Received
To Packing Expenses By Interest Received
To Salaries of Salesman By Dividend Received
To Delivery Van Expenses By Bad Debts Recovered
To Financial Exp. By Apprentice fees or premium
To Interest paid on loans By Gain on Sale of Fixed Asset
To Interest (Dr.) By Miscellaneous Receipts
To Discounts (Dr.) By Net Loss (If Dr. side > Cr. side)
To Rebate Allowed (Transferred to capital Account)
To Bank Charges
To Miscellaneous Exp.
To Repairs
To Depreciation on Fixed Assets
To Conveyance Expenses
To Entertainment Expenses
To Donations & Charity
To Loss on Sale of Fixed Assets
To Stable Expenses
To Loss by Fire
To Loss by theft
To Unproductive Expenses
To Net Profit Transferred to Capital

Account
(If Cr. side > Dr, side)
 The words ‗To‘ and ‗By‘ are generally not used these days.
 The name of Business Firm is stated on the top of trading & P & L A/c.
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Balance Sheet:
Meaning of Balance Sheet
Balance sheet is a summarised statement of assets and liabilities, prepared generally at the end of
financial year to show the financial position of the business. All liabilities are put on the left hand side
of balance sheet where all assets are shown on its right hand side.
Items come under Balance Sheet:
1. Current Assets: These are those assets that can be liquefied in cash easily i.e., they can be
converted to cash within one year. For ex- Debtor, Bills receivables,Cash, Bank etc.
2. Current Liabilities: These are those liabilities that are paid within a period of one year. Such as
Creditors, Bills payable, outstanding expenses etc.
3. Fixed Assets: These are those long-term assets that are not easily liquefied into cash and are kept
in business for a longer period of time like, plant and Machinery.
4. Intangible Assets: These are those assets that are not tangible in nature i.e., they cannot be seen or
touched like goodwill, trademark, etc.
5. Investments: These are the investments made in the securities of government or other
businesses. They are generally represented at Cost price.
6. Long-term liabilities: These are those liabilities that are payable after one yearsuch as long-term
bank loan, long-term debentures.
7. Capitals: It is the amount brought in by the owner. It is the difference of liabilities due to
outsiders from assets.
8. Drawings: These are the amounts withdrawn by the proprietor or the owner for personal use that
reduce the amount of capital.
9. Closing Stock: It is the stock of goods that are in hand at the end of the year and is being carried
forward to the upcoming year.
Grouping and Marshalling of Assets and Liabilities:

Grouping: The term ‗Grouping‘ means putting together items of a similar nature under a common
heading.
For example, under the heading ‗trade Creditors‘ the balances of the ledger accounts of all the
suppliers from whom goods have been purchased on credit, will be shown.
Marshalling: It refers to the order in which the various assets and liabilities are shown in the
Balance Sheet. The assets and liabilities can be shown either in the order of liquidity or in the order
of permanence.
Order of Liquidity:
1. The assets are arranged in the order of their liquidity i.e., the most liquid asset (e.g., cash-in-hand),
is shown first. The least liquid asset (e.g., goodwill) is shown last.
2. The liabilities are arranged in the order of timing i.e., the liabilities which are to be paid
immediately {e.g., Creditors) are shown first and which are to be paid later are shown at last (long-
term loans).
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A general format of a Balance Sheet in order of liquidity is shown below:
Balance Sheet of ……….As at………….
Liabilities Amt. (₹) Assets Amt. (₹)
Current Liabilities: Current Assets:
Bank Overdraft Cash-in hand
Bills Payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding Expenses Short Term Investment
Income received-in-advance Sundry Debtors
Long-term Liabilities: Prepaid Expenses
Long term loan Accrued Income
Reserve and Surplus Closing Stock
Capital: Investment: (Long term)
Add : Interest on Capital Fixed Assets:
Add : Net Profit Furniture and Fixtures
Less : Drawings Plant & Machinery
Less : Interest on Drawings Building
Less : Income Tax Land
Less : Life Insurance Premium Goodwill
Less : Net Loss
Order of Permanence: This order is exactly reverse of the liquidity order

1. The assets are arranged in the order of their permanence i.e., the least liquid asset (e.g., goodwill)
is shown first and the most liquid asset (e.g., Cash-in-hand) is shown last.
2. The least urgent payment to be made (e.g., short-term creditors) is shown last.
3. A company is required to prepare the balance sheet in the order of permanence.
A general format of a Balance Sheet in the order of performance is shown below:
Balance Sheet of …………As at………….
Capital: Fixed Assets:
Opening Balance XXX Good will
Add: Net Profit XXX Land
(Less: Net Loss) Building
Less: Drawings XXX Plant & Machinery
Long-term Liabilities: Furniture & Fixtures
Long term loan Investment: (long term)
Current liabilities: Current Assets:
Income received-in-advance Closing stock
Outstanding Expenses Accrued income
Sundry Creditors Prepaid expenses
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Cash at Bank
Cash in Hand
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Cost of Goods Sold:
Cost of goods sold is computed in two ways:
(i) Cost of goods sold or cost of sales = Sales – Gross profit
(ii) Cost of goods sold = Opening stock + Purchases + Direct expenses – Closing stock
Illustration 1:
Find the cost of goods sold and closing stock from the following information:
Sales ₹ 4,30,000; Return inward ₹ 5,000; Gross profit ₹ 1,00,000; Opening stock ₹ 35,000;
Purchases ₹ 2,85,000; Wages ₹ 27,000; Other direct expenses ₹ 16,000.
Solution:
(a) Net Sales = Sales – Sales return
= ₹ 4, 30,000 – ₹ 5,000 = ₹ 4, 25,000
(b) Cost of goods sold = Sales – Gross profit
= ₹ 4, 25,000 – ₹ 1, 00,000 = ₹ 3, 25,000
(c) Cost of goods sold = Opening stock + Purchase + Direct expenses – Closing stock
₹ 3, 25,000 = ₹ 35,000 + ₹ 2, 85,000 + (₹ 27,000 + ₹ 16,000) – Closing stock
Closing stock = ₹ 3, 63,000 – ₹ 3, 25,000 = ₹ 38,000
Illustration 2:
Prepare a Trading A/c of M/s Prime Products from the following particulars pertaining to the year
2022-23.
(₹)
Opening stock 50,000
Purchases 1, 10,000
Return inwards 5,000
Sales 3, 00,000
Return outwards 7,000
Factory rent 30,000
Wages 40,000
Solution: Books of Prime Products

Dr. Trading Account for the year ended March 31, 2023 Cr.
Expenses/ Losses Amt. (₹) Revenues/ Gains Amt. (₹)
To Opening stock 50,000 By Sales 3,00,000 2,95,000

To Purchases 1,10,000 Less: Return Inwards (5,000)
Less: Return outwards (7,000) 1,03,000
To Factory rent 30,000
To Wages 40,000
To Gross profit 72,000
2,95,000 2,95,000
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Illustration 3:
Prepare a trading account of M/s Anjali from the following information related to March 31, 2023.
(₹)
Opening stock 60,000
Purchases 3, 00,000
Sales 7, 50,000
Purchases return 18,000
Sales return 30,000
Carriage on purchases 12,000
Carriage on sales 15,000
Factory rent 18,000
Office rent 18,000
Dock and Clearing charges 48,000
Freight and Octroi 6,500
Coal, Gas and Water 10,000
Solution: Books of Anjali
Dr. Trading Account for the year ended March 2023 Cr.
To Opening stock 60,000 By Sales 7,50,000 7,20,000

To Purchases 3,00,000 Less : Sales return (30,000)
Less : Purchases return (18,000) 2,82,000
To Carriage on purchases 12,000
To Factory rent 18,000
To Dock and Clearing charges 48,000
To Freight and Octroi 6,500
To Coal, Gas and Water 10,000
To Gross Profit 2,83,500
7,20,000 7,20,000
Illustration 4:
From the following balances obtained from the few accounts of Mr. Bhagat. Prepare the Trading and
Profit and Loss Account.
Amt. (₹) Amt. (₹)
Stock on Apr. 01, 2016 8,000 Bad debts 1,200
Purchases for the year 22,000 Rent 1,200
Sales for the year 42,000 Discount allowed 600
Purchase expenses 2,500 Commission paid 1,100
Salaries and wages 3,500 Sales expenses 600
Advertisement 1,000 Repairs 600
Closing stock on March 31, 2023 is ₹ 4,500
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Solution: Books of Mr. Bhagat
Dr. Trading Account for the year ended March 2023 Cr.
To Opening stock 8,000 By Sales 42,000
To Purchases 22,000 By Closing stock 4,500
To Purchase expenses 2,500
To Gross profit c/d 14,000
46,500 46,500
To Salaries and Wages 3,500 By Gross profit b/d 14,000
To Rent 1,200
To Advertisement 1,000
To Commission 1,100
To Discount allowed 600
To Bad debts 1,200
To Sales expenses 600
To Repairs 600
To Net profit 4,200
(transferred to capital account)
14,000 14,000
Illustration 5:
Following balance is extracted from the books of a trader ascertain Gross Profit, Operating Profit &
Net Profit for the year ended March 31, 2023.
Particulars Amount (₹)
Sales 75,250
Purchases 32,250
Opening stock 7,600
Sales return 1,250
Purchases return 250
Rent 300
Stationery and printing 250
Salaries 3,000
Misc. Expenses 200
Travelling expenses 500
Advertisement 1,800
Commission paid 150
Office expenses 1,600
Wages 2,600
Profit on sale of investment 500
Depreciation 800
Dividend on investment 2,500
Loss on sale of old furniture 300
Closing stock (March 31, 2023) valued at ₹ 8,000
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Sol: Dr. Trading and Profit & Loss Account for the year ended 31st March, 2023 Cr.
To Opening stock 7,600 By Sales 75,250
To Purchases 32,250 Less : Sales return (1,250) 74,000
Less: Purchases return (250) 32,000 By Closing stock 8,000
To Wages 2,600
To Gross profit c/d 39,800
82,000 82,000
To Rent 300 By Gross profit b/d 39,800
To Stationery and printing 250
To Salaries 3,000
To Misc. expenses 200
To Travelling expenses 500
To Advertisement expenses 1,800
To Commission paid 150
To Office expenses 1,600
To Depreciation 800
To Operating profit c/d 31,200
39,800 39,800
To Loss on sale of old furniture 300 By Operating profit b/d 31,200

To Net Profit (transferred to 33,900 By Profit on sale of investment 500
capital A/c) By Dividend on investment 2,500
34,200 34,200
Illustration 6: From the following information prepare Trading and Profit and Loss Account and
Balance Sheet for the year ended 31st March, 2023.
Account Amt. (₹) Account Amt. (₹)
Capital 7,20,000 Salaries 1,20,000
Machinery 1,40,000 General Expenses 40,000
Sales 16,40,000 Rent 1,00,000
Purchases 8,00,000 Purchases Return 10,000
Sales Return 20,000 Debtors 6,00,000
Opening Stock 2,00,000 Cash 80,000
Drawings 80,000 Carriage Outwards 40,000
Wages 2,00,000 Advertising 40,000
Carriage Inwards 10,000 Creditors 1,00,000
Closing Stock was valued at ₹ 4, 00,000.
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Ans: Trading and Profit and Loss Account for the year ended 31st March, 2023
Dr. Cr.
To Opening Stock 2,00,000 By Closing Stock 4,00,000
To Purchases 8,00,000 By Sales 16,40,000
Less: Purchase Returns (10,000) 7,90,000 Less: Sales Return 20,000 16,20,000
To Wages 2,00,000
To Carriage Inwards 10,000
To Gross Profit c/d 8,20,000
20,20,000 20,20,000
To Salaries 1,20,000 By Gross Profit b/d 8,20,000
To General Expenses 40,000
To Rent 1,00,000
To Carriage outwards 40,000
To Advertising 40,000
To Net Profit (trf. to capital A/c) 4,80,000
8,20,000 8,20,000
Balance Sheet as at 31st March, 2023

Capital 7,20,000 Fixed Assets:
Less: Drawings (80,000) Machinery 1,40,000
Add: Net Profit 4,80,000 11,20,000 Current Assets:
Current Liabilities: Debtors 6,00,000
Creditors 1,00,000 Cash 80,000
Closing Stock 4,00,000
12,20,000 12,20,000
PRACTICE QUESTIONS:
1. The Manager is entitled to commission of 5% on profits before deducting the Commission. The
profit is ₹ 2,100, therefore, the commission will be:
(a) ₹ 100 (b) ₹ 105 (c) ₹ 110.53 (d) ₹ 210
2. Find Cost of Goods Sold and Closing Stock from the following information:
Sales ₹ 4, 30,000; Return Inward ₹ 5,000; Gross Profit ₹ 1, 00,000; Opening Stock ₹ 35,000;
Purchases ₹ 2, 85,000; Wages ₹ 27,000; Other Direct Expenses ₹ 16,000;
Sundry Creditors ₹ 30,000.
3. (a) Calculate Gross profit on the basis of the following information:
Wages ₹ 50,000; Purchases ₹ 6, 80,000; Return Outwards ₹ 30,000;
Carriage Outwards ₹ 15,000; Carriage Inwards ₹ 20,000; 3/4th of the goods are sold for ₹ 60,000.
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(b) Calculate Closing Stock from the following details:
Opening Stock ₹ 4, 80,000; Purchase ₹ 13, 60,000; Sales ₹ 19, 50,000; GP is 30% on Cost.
4. On 31st March, 2023 the following trial Balances was extracted from the books of Mohan:
Particulars Dr. Amt. (₹) Cr. Amt. (₹)
Capital. . . . . . . . . . . . . . . . . . . . . . . ----- 30,000
Drawings 5,000 -----
Debtors & Creditors 20,000 10,000
Loan ----- 9,500
Interest on Loan . . . . . . . . . . . . . . . 300 -----
Cash 2,000 -----
Provision for Bad Debts ----- 700
Stock (1st April, 2022) 6,800 -----
Motor Vehicles. . . . . . . . . . . . . . . 10,000 -----
Bank 3,500 -----
Land & Building 12,000 -----
Bad Debts 500 -----
Purchases & Sales. . . . . . . . . . . . . 66,000 1,10,000
Returns 8,000 1,500
Carriage Outwards 2,500 -----
Carriage Inwards 3,000 -----
Salaries. . . . . . . . . . . . . . . . . . . . 9,000 -----
Rent and Insurance 3,000 -----
Advertising 3,500 -----
Discount ----- 500
General Expenses. . . . . . . . . . . . . 3,400 -----
Bills Receivable & Bills Payable 6,000 2,000
Rent Received ----- 300
Stock on 31st March, 2023 was valued at ₹ 7, 000.

Prepare the Trading Account and Profit and Loss Account for the year ended 31st March, 2023 &
the Balance Sheet as on that date.
5. Prepare Trading, Profit and Loss Account and Balance Sheet from the following particulars as at
31st March, 2023:-
Debit (₹) Credit (₹)
Scooty 12,000 -----
Stock on 1st April, 2022 24,000 -----
Bad-Debts 900 -----
General Expenses 3,600 -----
Bank Loan ----- 15,000
Commission ----- 2,700
Scooty Expenses 7,800 -----
Cash in Hand 6,000 -----
Capital ----- 75,000
Furniture 7,920 -----
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Purchases and Sales 1,01,400 1,68,120
Carriage inward 2,100 -----
Bad-Debts Provision ----- 2,100
Interest on Bank Loan 900 -----
Insurance and taxes 6,000 -----
Debtors and Creditors 9,000 24,000
Salaries 13,200 -----
Building 90,000 -----
Return inward and Outward 6,900 4,800
2,91,720 2,91,720
Closing Stock on 31st March, 2023 was valued at ₹ 13,020.
-------------------------------------- END OF CHAPTER ----------------------------------
116
CH - 09: ADJUSTMENTS IN PREPARATION OF FINANCIAL STATEMENTS
(MIND MAP)
117
• describe the need for adjustments while preparing the financial statements;
• explain the accounting treatment of adjustments for outstanding and prepaid expenses, accrued &
advance receipts of incomes;
• discuss the adjustments to be made regarding depreciation, bad debts, provision for doubtful debts,
provision for discount on debtors;
• explain the concepts and adjustment of manager‘s commission and interest on capital;
• prepare profit and loss account and balance sheet with adjustments
Adjustment in preparation of financial statements of Sole-proprietor:

Meaning of Adjustment entries: Those entries which need to be passed at the end of the accounting
year to show the accurate profit or loss and fair financial position of the business.
Need of Adjustment:
There are number of transactions that may not find the place in the Trial Balance due to any reason
such as Closing Stock (because it is valued at the end of the year), Manager‘s Commission based on
Net profits (because its calculation requires preparation of Income Statement first). These transactions
can only be taken into account by passing Adjustment entries so that their impact on the profitability
and financial position can be shown.
1. Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the end
of the accounting period.
2. Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses.
As they relate to the earning of revenue during the current accounting year, it is logical that they
should be duly charged against the revenue for computation of the correct amount of profit or loss.
3. Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some
expenses have not yet been fully received; a portion of its benefit would be received in the next
accounting year. This portion of expenses is carried forward to the next year and is termed as prepaid
expenses.
4. Accrued Income: It may sometime happen that certain items of income such as a interest on loan,
commission, rent, etc. are earned during the current accounting year but have not been actually
received by the end of the same year. Such incomes are known as accrued income.
5. Income Received in Advance: Sometimes, a certain income is received but the whole amount of
it does not belong to the current period. The portion of the income which belongs to the next
accounting period is termed as income received in advance or an Unearned Income.
6. Depreciation: It is the decline in the value of assets on account of wear and tear and passage of
time. It is treated as a business expense and is debited to profit and loss account. This, in effect,
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amounts to writing-off a portion of the cost of an asset which has been used in the business for the
purpose of earning profits.
Closing Stock Closing Stock A/c Dr. (i) Credit side of Trading A/c.
To Trading A/c (ii) Show on the assets side of Balance
sheet.
Outstanding/Unpaid Expenses A/c Dr. Dr. (i) Add to the concerned item on the
Expenses To Outstanding Expenses A/c Debit side of Trading/Profit & Loss
A/c.
(ii) Shown on the liabilities side of
Balance sheet.
Prepaid Prepaid Expenses A/c Dr. (i) Deduct from the concerned
expenses/Unexpired To Expenses A/c expenses on the debit side of Profit &
expenses Loss A/c
(ii) Show on the assets side of Balance
sheet.
Accrued income/ Accrued Income A/c Dr. (i) Add to the concerned income on
Income due but not To Income A/c Credit side of Profit and Loss A/c
received (ii) Show on the assets side of Balance
sheet.
Unearned Income A/c Dr. (i) Deduct from the concerned income
income/Income To Unearned Income A/c on the credit side of Profit & Loss A/c
received in Advance (ii) Show on the liabilities side of
Balance Sheet.
Depreciation Depreciation A/c Dr. (i) Show on the debit side of Profit
To Asset A/c Loss A/c
(ii) Deduct from the concerned asset in
the Balance Sheet.
7. Bad Debts: The debtors from whom amounts cannot be recovered are treated in the books of
accounts as bad and are termed as bad debts.
8. Further Bad Debts: These Bad debts is a loss that occurred after reparation of Trial Balance.
Further bad debts be added in the bad debts already appearing in the Profit and Loss A/c and Debtors
would be reduced with the same amount.
9. Provision for Bad Debts: In the balance sheet, debtors appear on the assets side of the Balance
Sheet, which is their estimated realisable value during next year. It is quite possible that the whole of
the amount may not be realized in future. However it is not possible to accurately know the amount of
such bad debts.
Hence, a reasonable estimate of such loss is provided in the book. Such provision is called provision
for bad debts. Provision for doubtful debts is shown as a deduction from the debtors on the asset side
of the balance sheet.
Note: The provision for doubtful debts brought forward from the previous year is called the opening
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provision or old provision. When such a provision already exists, the loss due to bad debts during the
current year are adjusted against the same and while making provision for doubtful debts required at
the end of the current year is called new provision. The balance of old provision as given in trial
balance should also be taken into account.
10. Provision for discount on Debtors: Discount is allowed to customers to encourage them to make
prompt payment. The discount likely to be allowed to customers in an accounting year can be
estimated & provided for by creating a provision for Discount on debtors. Provision for discount on
debtors is made on good debtors which are arrived at by deducting further bad debts and provision for
bad debts out of Debtors shown in the Balance sheet.
To write off bad Bad Debts A/c Dr. (i) Debit side of P&L A/c.
debts To Debtors (ii) Deduct from debtors on the as-
sets side of Balance Sheet.
Provision for bad Prov. for Doubtful Debts A/c Dr. (i) Debit side of P & L A/c.
and doubtful debts To Debtors A/c (ii) Deduct from debtors on the
assets side of Balance Sheet.
Provision for P & L A/c Dr. (i) Debit side of P & L A/c.
discount on debtors To Prov. for Discount on Debtors A/c (ii) Deduct from debtors on the
assets side of Balance Sheet.
11. Manager’s Commission:

The manager of the business is sometimes given the commission on the net profit of the company. The
percentage of the commission is applied on the profit either before charging such commission or after
charging such commission. In the absence of any such information, it is assumed that commission is
allowed as a percentage of the net profit before charging such commission.
1. Commission on Net profits before charging such commission
Commission = Net profit before Commission × Percentage of Commission
100
2. Commission on Net profits after charging such commission
Commission = Net profit before Commission × Percentage of Commission
100 + Percentage of Commission
Interest on Capital Interest on Capital A/c Dr. (i) Debit side of P & L A/c.
To Capital A/c (ii) Add to capital on the liabilities
side of Balance Sheet.
Interest on drawings Capital/Drawings A/c Dr. (i) Credit side of P & L A/c.
To Interest on Drawings A/c (ii) Deduct from capital on the
liabilities side of Balance Sheet.
Interest payable on Interest on Loan A/c Dr. (i) Debit side of P & L A/c.
loan (borrowed) To Loan A/c (ii) Add to loan on the liabilities
side of Balance Sheet.
Commission payable P& L A/c Dr. (i) Debit side of P & L A/c.
to manager To Comm. Payable to Manage A/c (ii) Show on the liabilities side of
Balance Sheet.
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12. Adjustment in Respect of Goods:
Abnormal Loss: Sometimes losses occur due to some abnormal circumstances such as accident, fire,
flood, earthquakes etc. Such losses are called Abnormal losses. These may be divided into two
categories:-
(A) Loss of Goods (B) Loss of fixed assets.
Good taken for personal use (Drawings in goods): When the goods are withdrawn by proprietor for
personal use the cost of such goods deduct from purchases and the amount should be deduct from
capital in Balance Sheet.
Goods distributed as free samples: Sometime goods are distributed as free sample by the
businessman for the purpose of advertisement. The cost of free sample deduct from purchase and
shown in Debit side of profit and loss account.
Abnormal loss of goods by fire, theft, accident, etc.

Adjustment Treatment in Trading & P & L A/c Treatment in Balance Sheet
1) Loss of Goods (By 1) Loss of … A/c Dr. (i) Gross Loss: Deduct from Purchases
accident, Fire, Theft) To Trading A/c or show on the credit side of Trading
(or) A/c.
To Purchases A/c
If goods were note 2) P & L A/c Dr. (ii) Net Loss: Debit side of P & L A/c.
insured To Loss by …… A/c
If goods were insured 2) Insurance company A/c Dr. (iii) Insurance claim: Assets side of
and full claim accepted To Loss by … A/c Balance Sheet.
by insurance company
If full claim not 2) Insurance Company A/c Dr.
accepted by Insurance Profit & Loss A/c Dr.
Company To Loss By …. A/c
2) Goods taken by the Drawings A/c Dr. (i) Deduct the amount of goods from the
proprietor for his To Purchases A/c purchases in Trading A/c.
personal use (ii) Deduct the amount from the capital
on the liabilities side of Balance Sheet.
3) Goods distributed as Advertising A/c Dr. (i) Deduct the amount of goods from the
free samples To Purchases A/c purchases in Trading A/c.
(ii) Show on the debit side of P & L
A/c.
4) Goods given as Charity A/c Dr. (i) Deduct the amount from the
charity To Purchases A/c purchases on the debit side of Trading
A/c.
(ii) Show on the debit side of P & LA/c.
Key Points:
1. If closing stock is shown in Trial Balance then it will be shown in balance sheet only. It is
assumed that purchases amount already gets adjusted in trial balance.
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2. Salary and wages will be shown in profit and loss A/c debit side (assuming that salary is
prominent) while wages and salary will be shown in trading A/c debit side, (wages are prominent).
3. Freight, carriage, cartage will be shown in Dr. side of trading A/c. if inward word attached with
these then it also debited to trading A/c, if outward word attached with these item then it will be
debited to profit and loss account.
4. Any expenses related to factory are debited to trading account like factory lighting, factory rent if
factory word is not given then lighting and rent will be debited to profit and loss account.
5. Trade expenses always debited to profit and loss A/c not as name indicate trading A/c.
6. Packaging material: Cost of packaging material used in product are direct expenses as it refers to
small containers which form part sold, it will debited to trading A/c.
7. Packing: The packing refers to the big containers that are used for transporting the goods &
regarded as indirect expenses and debited to profit and loss account.
8. Adjusted purchases mean the amount of purchases is adjusted by way of adding opening stock &
reduced by the amount of closing stock, e.g., purchases ₹ 1,00,000; opening stock ₹ 12,000,
closing stock ₹ 8,000. Calculate adjusted purchases.
Adjusted Purchases = Purchases + Opening stock – Closing stock
= ₹ 1, 00,000 + ₹ 12,000 – ₹ 8,000 = ₹ 1, 04,000.
When adjusted purchases is given in trail balance, then there is no need of debiting opening stock
& crediting closing stock in trading A/c.
In this case closing stock will be shown in balance sheet only.
9. Wasting Assets: - Assets which are exhausted during the working are called wasting assets. For
exp. Mines, oil wells etc.
10. Contingent liabilities: - Liabilities the happening of which is uncertain are called contingent
liabilities. For exp. – case of bonus pending in the court, bill discounted not yet matured. It is stated
as footnote below the balance sheet.
Remember:-While preparing Final Accounts the items which are given inside the Trial Balance are
written only once either in Income Statement or in the Balance Sheet. (Assuming that they have been
already adjusted in the respective account). On the other hand, the items which are given outside the
Trial Balance (known as adjustment) are to be written twice because the double entry in respect of all
adjustments is to be completed in the final accounts itself.
Illustration 1:
From the following information prepare Trading and Profit and Loss Account and Balance Sheet for
the year ended 31st March, 2023.
Account Amt. (₹) Account Amt. (₹)
Capital 7,20,000 Salaries 1,20,000
Machinery 1,40,000 General Expenses 40,000
Sales 16,40,000 Rent 1,00,000
Purchases 8,00,000 Purchases Return 10,000
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Sales Return 20,000 Debtors 6,00,000
Opening Stock 2,00,000 Cash 80,000
Drawings 80,000 Carriage Outwards 40,000
Wages 2,00,000 Advertising 40,000
Carriage Inwards 10,000 Creditors 1,00,000
Adjustments:
(a) Closing Stock was valued at ₹ 4, 00,000.
(b) Outstanding salaries amounting to be ₹ 20,000
(c) Rent includes prepaid rent of ₹ 30,000.
(d) Bad debts amount to ₹ 50,000.
Ans: Trading and Profit and Loss Account for the year ended 31st March, 2023
To Opening Stock 2,00,000 By Sales 16,40,000
To Purchases 8,00,000 Less: Sales Return (20,000) 16,20,000
Less: Purchase Returns (10,000) 7,90,000 By Closing Stock 4,00,000
To Wages 2,00,000
To Carriage Inwards 10,000
To Gross Profit c/d 8,20,000
20,20,000 20,20,000
To Salaries 1,20,000 By Gross Profit b/d 8,20,000
Add: Outstanding Salary (20,000) 1,40,000
To General Expenses 40,000
To Rent 1,00,000
Less: Prepaid Rent (30,000) 70,000
To Carriage outwards 40,000
To Advertising 40,000
To Bad Debts 50,000
To Net Profit (trf to Capital A/c) 4,40,000
8,20,000 8,20,000
Balance Sheet as at 31st March, 2023
Capital 7,20,000 Fixed Assets:
Less: Drawings (80,000) Machinery 1,40,000
Add: Net Profit 4,40,000 10,80,000
Current Assets:
Current Liabilities: Debtors (6,00,000-50,000) 5,50,000
Creditor 1,00,000 Cash 80,000
Outstanding Salary 20,000 Closing Stock 4,00,000
Prepaid rent 30,000
12,00,000 12,00,000
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PRACTICE QUESTIONS:
1. Extract of Trial Balance as on 31st March, 2023:
Amt. (₹) Amt. (₹)
Debtors (including Mohan for dishonoured bill of ₹ 1,000) 60,000 ------
Bad Debts 3,000 ------
Adjustments:
(i) Half of Mohan‘s bill is irrecoverable.
(ii) Create a provision of 5% on Debtors.
2. Show the effect on Profit & Loss Account and Balance sheet for the following:
(a) Extract of Trail Balance as on 31st March, 2023:
Amt. (₹) Amt. (₹)
Debtors 80,000 ------
Bad Debts 2,000 ------
Provision for Doubtful debts ------ 5,000
Discount received ------ 2,500
Adjustments:
(i) Write off further Bad Debts ₹ 500.
(ii) Provision for Doubtful debts is to be maintained at 3% on Debtors.
(iii) Discount on Debtors is 2%.
3. From the following figures prepare Trading and Profit and Loss Account for the year ended 31st
March, 2023 and a Balance Sheet as on that date:
Amt. (₹)
Opening Stock 36,600
Purchases 1,86,000
Sales 3,05,000
Sales return 5,000
Wages 22,000
Carriage 4,200
Bad debts 700
Bad debts provision 2,100
Sundry debtors 40,400
Sundry creditors 25,700
Furniture 8,000
Plant and machinery 50,000
Salaries 11,000
Advertisement 4,400
Goodwill 6,000
Freight 6,300
Commission (Cr.) 1,000
Capital 86,800
Drawing 15,000
Investments 14,000
Cash 8,000
Rent and Insurance 3,000
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Adjustments:
(a) Stock on 31st march 2020 was ₹ 31,500
(b) Salary and wages for March 2023 were unpaid.
(c) Rent outstanding amounted to ₹ 600 and insurance unexpired amounted to ₹ 400.
(d) Commission amounting to ₹ 200 has been received in advance.
(e) Write off ₹ 400 as bad debts, create provision for doubtful debts at 5% on Sundry debtors &
provide 2% provision for discount on debtors and creditors.
(f) Depreciate furniture and plant and machinery by 10%.
(GP ₹ 3, 31,500; NP ₹ 48,554; B/S ₹ 1, 49,340)
4. Following is the Trial Balance of Rama & Co. for the year ending 31st December 2022.
PrepareTrading and Profit and Loss Account and Balance Sheet:
Name of Account Dr. Balance (₹) Cr. Balance (₹)
Drawing and Capital 4,000 23,000
Furniture 8,000 ----
Apprentice Premium ---- 1,000
Machinery 20,000 ----
Bad debts 350 ----
Provision for bad debts ---- 500
Sundry debtors and Creditors 8,200 5,000
Stock on January 1, 2022 7,400 ----
Purchases and sales 75,000 1,05,000
Bank overdraft ---- 2,600
Sales return and purchase returns 500 400
Advertisement 2,400 ----
Interest 200 ----
Commission ---- 400
Cash in hand 1,650 ----
Taxes and Insurance 3,200 ----
Carriage and Freight 1,500 ----
Salaries 5,500 ----
Adjustments:
The following adjustments are to be made:
(i) Stock in hand on 31st December 2022 was value ₹ 8,250.
(ii) Salary is paid at ₹ 500 for month.
(iii) Tax outstanding ₹ 300 and insurance is prepaid ₹ 400.
(iv) Write off furniture bad debts ₹ 200 and create provision for bad debts on debtors at 5%.
(v) Apprentice Premium ₹ 300 is related to 2023.
(vi) Commission Accrued ₹ 100.
(G.P. ₹ 29,250; NP ₹ 18,300 and B/S ₹ 46,000)
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5. The following is the Trial Balance of Sh. Anil Kumar on 31st March 2023. You are required to
prepare the final Accounts after giving effects to the adjustments.
Debit Balance Amt. (₹) Credit Balance Amt. (₹)
Sundry Debtors 1,45,000 Sundry Creditors 63,000
Drawings 52,450 Capital A/c 7,10,000
Insurance 6,000 Return Outward 5,000
General Expenses 30,000 Sales 9,87,800
Salaries 1,50,000
Patents 75,000
Machinery 2,00,000
Freehold Land 1,00,000
Building 3,00,000
Stock (1st April, 2022) 57,600
Cash at Bank 26,300
Carriage on Purchases 20,400
Carriage on Sales 32,000
Fuel & Power 47,300
Wages 1,04,800
Return Inwards 6,800
Purchases 4,06,750
Cash in Hand 5,400
17,65,800 17,65,800
Adjustments:
(a) Stock on 31st March 2023 was valued at ₹ 68,000.
(b) A Provision for Bad & Doubtful Debts is to be made to the extent of 5% on Sundry Debtors.
(c) Depreciate Machinery by 10%; Patents by 20% & Building by 5%.
(d) Wages include a sum of ₹ 20,000 spent on construction of a cycle shed.
(e) Salaries for the month of February and March 2023 were not paid.
(f) Insurance includes a premium of ₹ 1,700 on a policy expiring on 30th Sep. 2023.
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ACCOUNTS FROM INCOMPLETE RECORDS
(MIND MAP)
127
• state the meaning and features of incomplete records;
• calculate profit or loss using the statement of affairs method;
• distinguish between balance sheet and statement of affairs;
• prepare trading and profit and loss account and balance sheet from incomplete records; and
• detect the missing figures/ information by preparing relevant accounts.
Accounting records, which are not strictly kept according to double entry system, are known as
incomplete records. Many authors describe it as single entry system.
However, single entry system is a misnomer because there is no such system of maintaining
accounting records. Normally, under this system records of cash and personal accounts of debtors &
creditors are properly maintained, while the information relating to assets, liabilities, expenses and
revenues is partially recorded. Hence, these are usually referred as incomplete records.
Features of Incomplete Records:
Incomplete records may be due to partial recording of transactions as is the case with small
shopkeepers such as grocers and vendors. In case of large sized organisations, the accounting records
may be rendered to the state of incompleteness due to natural calamity, theft or fire.
The features of incomplete records are as under:
(a) It is an unsystematic method of recording transactions.
(b) Generally, records for cash transactions and personal accounts are properly maintained and there
is no information regarding revenue and/ or gains, expenses and/or losses, assets and liabilities.
(c) Personal transactions of owners may also be recorded in the cash book.
(d) Different organisations maintain records according to their convenience and needs, and their
accounts are not comparable due to lack of uniformity.
(e) To ascertain profit or loss or for obtaining any other information, necessary figures can be
collected only from the original vouchers such as sales invoice or purchase invoice, etc. Thus,
dependence on original vouchers is inevitable.
(f) The profit or loss for the year cannot be ascertained under this system with high degree of
accuracy as only an estimate of the profit earned or loss incurred can be made. The balance sheet
also may not reflect the complete and true position of assets and liabilities.
Reasons of Incompleteness and its Limitations:
It is observed, that many businessmen keep incomplete records because of the following reasons:
(a) This system can be adopted by people who do not have the proper knowledge of accounting
principles;
(b) It is an inexpensive mode of maintaining records. Cost involved is low as specialised accountants
are not appointed by the organisations;
(c) Time consumed in maintaining records is less as only a few books are maintained;
(d) It is a convenient mode of maintaining records as the owner may record only important
transactions according to the need of the business.
However, the mechanism of incomplete records suffers from a number of limitations. This is due
to the basic nature of this mechanism. Broadly speaking, unless a systematic approach to
maintenance of records is followed, reliable financial statements cannot be prepared.
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The limitations of incomplete records are as follows:
(a) As double entry system is not followed, a trial balance cannot be prepared and accuracy of
accounts cannot be ensured.
(b) Correct ascertainment and evaluation of financial result of business operations cannot be made.
(c) Analysis of profitability, liquidity and solvency of the business cannot be done. This may cause
a problem in raising funds from outsiders and planning future business activities.
(d) The owners face great difficulty in filing an insurance claim with an insurance company in case
of loss of inventory by fire or theft.
(e) It becomes difficult to convince the income tax authorities about the reliability of the computed
income.
Ascertainment of Profit or Loss:
Every business firm wishes to ascertain the results of its operations to assess its efficiency and success
and failures. This gives rise to the need for preparing the financial statements to disclose:
(a) the profit made or loss sustained by the firm during a given period; and
(b) the amount of assets and liabilities as at the closing date of the accounting period. Therefore, the
problem faced in this situation is how to use the available information in the incomplete records
to ascertain the profit or loss for the particular accounting year and to determine the financial
position of a entity as at the end of the year.
This can be done in two ways:
1. Preparing the Statement of Affairs as at the beginning and as at the end of the accounting period,
called statement of affairs or net worth method.
2. Preparing Trading and Profit and Loss Account and the Balance Sheet by putting the accounting
records in proper order, called conversion method.
Preparing Statement of Affairs Under this method, statements of assets and liabilities as at the
beginning and at the end of the relevant accounting period are prepared to ascertain the amount of
change in the capital during the period. Such a statement is known as statement of affairs, shows
assets on one side and the liabilities on the other just as in case of a balance sheet. The difference
between the totals of the two sides (balancing figure) is the capital.
Though statement of affairs resembles balance sheet, it is not called a balance sheet because the data
is not wholly based on ledger balances. The amount of items like fixed assets, outstanding expenses,
bank balances, etc. are ascertained from the relevant documents and physical count.
Format of statement of affairs
Statement of Affairs as at –
Bills payable ………. Land and Building ……….
Creditors ………. Machinery ……….
Outstanding expenses ………. Stock ……….
Capital (balancing figure)* ………. Furniture ……….
Debtors ……….
Cash and Bank ……….
Prepaid expenses ……….
Capital (balancing figure)* ……….
xxxx xxxx
Note: * where the total of liabilities side is more than total of assets side, capital would be shown in assets
129
side and it represents debit balance of capital
Once the amount of capital, both at the beginning and at the end is computed with the help of
statement of affairs, a statement of profit and loss is prepared to ascertain the exact amount of profit or
loss made during the year. The difference between the opening and closing capital represents its
increase or decrease which is to be adjusted for withdrawals made by the owner or any fresh capital
introduced by him during the accounting period in order to arrive at the amount of profit or loss made
during the period.
Statement of Profit or Loss for the year ended........
Particulars Amt. (₹)
Capital as at the end of year (computed from statement of affairs as at the end of year) .........
Add: Drawings during the year .........
Less: Additional capital introduced during the year (.......)
Adjusted capital at the end of year .........
Less: Capital as at the beginning of year (computed from statement of affairs as at the (.......)
beginning of year)
Profit or Loss made during the year .........
The same computation can be done in the form of an equation as follows:

Profit or Loss = Capital at end – Capital at beginning + Drawings during the year – Capital introduced
during the year.
For example, consider the following information extracted from the records of Ms. Shambu:
Capital at the beginning of year, i.e. April 01, 2022 ₹ 60,000
Capital at the end of year, i.e. on March 31, 2023 ₹ 1, 00,000
Capital brought in by the proprietor during the year ₹ 25,000
Withdrawals made by the proprietor during the year ₹ 15,000. The profit for the year will be
calculated as follows: The profit earned or loss incurred during a given period will be computed as
follows:
Statement of Profit or Loss for the year ended........
Capital as on March 31, 2023 1,00,000
Add: Drawings during the year 15,000
1,15,000
Less: Additional capital introduced during the year (25,000)
Adjusted capital at the end, i.e. March 31, 2023 90,000
Less: Capital in the beginning, i.e. April 01, 2022 (60,000)
Profit made during the year 30,000
Mrs. Sugandha runs a small printing firm. She was maintaining only some records, which she thought,
were sufficient to run the business.
On April 01, 2022, available information from her records indicated that she had the following assets
& liabilities: Printing Press ₹ 5,00,000; Buildings ₹ 2,00,000; Stock ₹ 50,000; Cash at bank ₹ 65,600;
Cash in hand ₹ 7,980; Dues from Customers ₹ 20,350; Dues to creditors ₹ 75,340 and Outstanding
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wages ₹ 5,000. She withdrew ₹ 8,000 every month for meeting her personal expenses. She had also
introduced ₹ 15,000 during the year as additional capital.
On 31st March, 2023 her position was as follows: Press ₹ 5, 25,000; Buildings ₹ 2, 00,000;
Stock ₹ 55,000; Cash at bank ₹ 40,380; Cash in hand ₹ 15,340; Dues from Customer‘s ₹ 17,210;
Dues to Creditors ₹ 65,680.
Calculate the profit made by Mrs. Sugandha during the year using statement of affairs method.
Solution: Books of Mrs. Sugandha

Statement of Affairs as on April 1, 2013 and as on March 31, 2023
Liabilities 01 Apr. 31Mar. Assets 01 Apr. 31Mar.
2022 (₹) 2023 (₹) 2022 (₹) 2023 (₹)
Creditors 75,340 65,680 Printing press 5,00,000 5,25,000
Wages outstanding 5,000 ----- Building 2,00,000 2,00,000
Capital 7,63,590 7,87,250 Debtors 20,350 17,210
(bal. figure) Stock 50,000 55,000
Cash in hand 65,600 40,380
Cash at bank 7,980 15,340
8,43,930 8,52,930 8,43,930 8,52,930
Statement of Profit or Loss for the year ended as on March 31, 2023
Capital as on March 31, 2023 7,87,250
Add: Drawings during the year 96,000
8,83,250
Less: Additional capital introduced during the year (15,000)
Adjusted capital at the end of the year (31.3.2023) 8,68,250
Less: Capital as on April 01, 2022 (7,63,590)
Profit made during the year 1,04,660
Difference between Statement of Affairs and Balance Sheet:

Both statement of affairs and balance sheet show the assets and liabilities of a business entity on a
particular date. However, there are some fundamental differences between the two.
These differences have been shown in a tabular form as under:
Basis of
Statement of affairs Balance sheet
difference
1. Reliability It is less reliable as it is prepared from It is more reliable as it is prepared from
incomplete records. double entry records.
2. Objective The objective of preparing statement of The objective of preparing balance sheet
affairs is to estimate the balance in is to show the true financial position of
capital account on a particular date. an entity on a particular date.
3. Omission Omission of assets or liabilities cannot Omissions of assets or liabilities can be
be discovered easily. discovered easily and can be traced from
accounting records.
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PRACTICE QUESTIONS:
1. Manu started his business on 1st Jan, 2013 with a capital of ₹ 4, 50,000. On 31st Dec, 2022 his
position was as under:
Cash ₹ 99,000; Bills receivable ₹ 75,000; Plant ₹ 48,000; Land and Building ₹ 1, 80,000;
Furniture ₹ 50,000. He owned ₹ 45,000 from his friend Sunil on that date. He withdrew ₹ 8,000 per
month for his household purposes.
Ascertain his profit or loss for this year ended 31st Dec, 2022.
[Ans: Profit: ₹ 53,000]
2. From the information given below ascertain the profit for the year:
Capital at the beginning of the year ₹ 70,000; Additional capital introduced during the year ₹17,500;
Stock ₹ 59,500; Sundry debtors ₹ 25,900; Business premises ₹ 8,600; Machinery ₹ 2,100;
Sundry creditor‘s ₹ 33,400; Drawings made during the year ₹ 26,400
[Ans: Profit: ₹ 1,600]
3. Mr. Manoj maintains his books of accounts from incomplete records. His books provide the
information: Jan. 01, 2022 Dec. 31, 2022
Amt. (₹) Amt. (₹)
Cash 1,200 1,600
Bills receivable — 2,400
Debtors 16,800 27,200
Stock 22,400 24,400
Investment — 8,000
Furniture 7,500 8,000
Creditors 14,000 15,200
He withdrew ₹ 300 per month for personal expenses. He sold his investment of ₹ 16,000 at 2%
premium and introduced that amount into business.
[Ans: Profit: ₹ 9,780]
4. Mr. White does not keep his books properly. Following information is available from his books.
01/04/2022 Amt. (₹) 31/03/2023 Amt. (₹)
Sundry Creditors 45,000 93,000

Loan from wife 66,000 57,000
Sundry Debtors 22,500 ---------
Land & Building 89,600 90,000
Cash in Hand 7,500 8,700
Bank Overdraft 25,000 ---------
Stock 24,000 15,500
Computer 10,000 9,500
During the year Mr. White sold his private car for ₹ 50,000 at 5% Premium and invested this amount
into the business. He withdrew from the business ₹ 1,500 per month upto 30th June 2022 & thereafter
₹ 4,500 per month drawings. Depreciation on Furniture is 25% and 10 % annually.
132
5. Mr. Ashwani does not keep his books properly. Following information is available from his books.
Jan. 01, 2022 Dec. 31, 2022
Amt. (₹) Amt. (₹)
Sundry creditors 45,000 93,000
Loan from wife 66,000 57,000
Sundry debtors 22,500 -------
Land and Building 89,600 90,000
Cash in hand 7,500 8,700
Bank overdraft 25,000 -------
Stock 34,000 25,000
During the year Mr. Ashwani sold his private car for ₹ 50,000 and invested this amount into
the business. He withdrew from the business ₹ 1,500 per month upto July 31, 2022 and thereafter ₹
4,500 per month as drawings.
You are required to prepare the statement of profit or loss and statement of affair as on 31st Dec,
2022.
[Ans: Loss: ₹ 57,900]
--------------------------------------------- END OF CHAPTER ---------------------------------------------
133
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केन्द्रीय शवद्यािय संगठन

KENDRIYA VIDYALAYA SANGATHAN

शिक्षा एवं प्रशिक्षण का आं चशिक संस्थान, चंडीगढ़

अध्ययन सामग्री / STUDY MATERIAL

तैयारकताा - रशव कुमार, सह-प्रशिक्षक (वाशणज्य)

शिक्षा एवं प्रशिक्षण का आं चशिक संस्थान, चंडीगढ़

से क्टर 33-सी, चंडीगढ़ / SECTOR-33 C, CHANDIGARH

वेबसाइट / WEBSITE : zietchandigarh.kvs.gov.in

S. NO. PARTICULARS PAGE NO.

PART A: FINANCIAL ACCOUNTING - I -

2. CH - 01. INTRODUCTION TO ACCOUNTING 08 - 16

3. CH - 02. THEORY BASE OF ACCOUNTING 17 - 24

4. CH - 03. RECORDING OF TRANSACTIONS - I 25 - 48

5. CH - 04. RECORDING OF TRANSACTIONS - II 49 - 60

6. CH - 05. BANK RECONCILIATION STATEMENT 61 - 67

7. CH - 06. TRIAL BALANCE AND RECTIFICATION OF ERRORS 67 - 79

8. CH - 07. DEPRECIATION, PROVISIONS AND RESERVES 80 - 100

PART B: FINANCIAL ACCOUNTING – II -----

9. CH - 08. FINANCIAL STATEMENTS - I 101 - 116

10. CH - 09. ADJUSTMENTS IN PREPARATION OF FINANCIAL 117 - 133

Theory: 80 Marks 3 Hours

Units Periods Marks

Unit-1: Theoretical Framework 25 12

Unit-2: Accounting Process 115 44

Part B: Financial Accounting - II

Unit-3: Financial Statements of Sole Proprietorship 60 24

Part C: Project Work 20 20

PART A: FINANCIAL ACCOUNTING - I

Unit-2: Accounting Process

Part B: Financial Accounting – II

Part C: Project Work (Any One)

Specific Guidelines for Teachers

Theory: 80 Marks 3 hrs.

S.No. Typology of Questions Marks Percentage

1. Remembering and Understanding:

2. Applying: Solve problems to new situations by applying acquired

3. Analysing, Evaluating and Creating:

 Identification, Measurement, Recording and Communication

Qualitative Characteristics of Accounting Information:

Basic Accounting Terms:

7. Receipts: Amount received from sale of goods and/ or services or both.

Revenue Expenditure Capital Expenditure Deferred Revenue Expenditure

Prepaid Expenses Outstanding Expenses

Profit = Revenue - Expenses.

Loss = Expenses - Revenue.

Cash Discount Trade Discount Rebate

Generally Accepted Accounting Principles:

• Business entity; • Money measurement;

Cash basis Accrual basis

(i) Cash basis; and (ii) Accrual basis.

Difference between Accrual Basis of Accounting and Cash Basis of Accounting

Basis Accrual Basis of Accounting Cash Basis of Accounting

Characteristics of Goods and Services Tax:

Business Transactions and Source Document:

Debit Voucher Credit Voucher

Meaning of Accounting Equation

Prepare the Accounting Equation on the basis of the following: (₹)

No Transactions Assets = Liabilities + Capital

Illustration 4. Show effect of following transaction on the accounting equation:

(g) Salary paid by him ₹ 20,000.