peat Uo GraeIReUrIAL YoL-sdis Hey/1215)12-22/8, ol. 1-3-2016-2 Ha ELEMENTS OF ACCOUNTS (Part 2) Standard 11 @ PLEDGE India is my country. All Indians are my brothers end sisters. I love my country and I am proud of its rich and varied heritage. I shall always strive to be worthy of it I shall respect my parents, teachers and all my elders and treat everyone with courtesy. I pledge my devotion to my country and its people. My happiness lies in their well-being and prosperity. Price : % 76.00 (dat Gujarat State Board of School Textbooks ‘Vidyayan’, Sector 10-A, Gandhinagar-382010© Gujarat State Board of School Textbooks, Gandhinagar Copyright of this book is reserved by Gujarat State Board of School Textbooks. No reproduction of this book in whole or in part, in any form is permitted without written permission of the Director, Gujarat State Board of School Textbooks. Subject Adviser Shri R. H. Vyas PREFACE Authors Dr H. C. Sardar (Convener) ‘The Gujarat Secondary and Higher DN. V. Suchak Secondary Board has prepared new syllabi Shri Pankajbhai C. Raval in accordance with the syllabi at the national Dr Dipak R. Raste level. These syllabi are approved by the DrR. K. Patel ‘ Dr Jayesh A. Thakkar Government of Gujarat. Shri Sureshchandra J. Sahu The Gujarat State Board of School Shri Raghubhai T. Socha Textbooks takes pleasure in presenting ‘Transistors this textbook to the students. It is prepared Dr H. C. Sardar Dr N. V. Suchak according to the new syllabus of Elements Shri PankajbhaiC. Raval Dr Dipak R. Raste of Accounts (Part 2) for Standard 11. Dr R. K. Patel This textbook is written and reviewed Reviewers by cxpert teachers and professors. This Prof B. D. Mewada Shri Bankim N. Pancholi | textbook is published after incorporating Prof H. N. Patel SmtK.S.Vasumathy | the necessary changes suggested by the Shri Prakash S. Patel Smt Shreya N. Parikh, js reviewers. Shri Ravi P. Pillai Dr Neel A. Shastri ‘The Board has taken ample care to Language Reviewers Dr Bharti G. Dave Dr Margi Hathi make this textbook interesting, usefull and free of errors. However, suggestions are Co-ordinator welcome to improve the quality of this book Dr Chirag N. Shah is from persons taking interest in education, (Subject Co-ordinator : Commerce) Preparation and Planning Shri Haren Shah | P. Bharathi aas) (Dy. Director : Academic) Director Executive President Lay-outand Planning Date : 25-11-2019 Gandhinagar Shri Haresh S. Limbachiya (Dy. Director : Production) First Edition : 2016, Reprint : 2017, 2018, 2019, 2020 Published by : P. Bharathi, Director, on behalf of Gujarat State Board of School Textbooks, ‘Vidyayan’, Sector 10-A, Gandhinagar Printed byFUNDAME DUTIES It shall be the duty of every citizen of India : (a) to abide by the Constitution and respect its ideals and institutions, the National Flag and the National Anthem; (b) to cherish and follow the noble ideals which inspired our national struggle for freedom; (c) _ to uphold and protect the sovereignty, unity and integrity of India; (4) to defend the country and render national service when called upon to do so; (c) to promote harmony and the spirit of common brotherhood amongst all the people of India transcending religious, linguistic and regional or sectional diversities: to renounce practices derogatory to the dignity of women: (1) to value and preserve the rich heritage or our composite culture: (g) to protect and improve the natural environment including forests, lakes, rivers and wild life, and to have compassion for living creatures; (h) to develop the scientific temper, humanism and the spirit of inquiry and reform; (i) to safeguard public property and to abjure violence; (j) to strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavour and achievement; (k) who is a parent or guardian to provide opportunities for education to his child or, as the case may be, ward between the age of six and fourteen years.CONTENTS Rectification of Errors Depreciation Accounts Provisions and Reserves Bills of Exchange Financial Statements of Business Organisations Conventions, Assumption, Concepts and Principles of Accounting Accounting Standards : Concept and Objectives Introduction of Deshi Nama System Accounts of Non-trading Concerns Accounts from Incomplete Records Computers and Accounting Answers, Project-Work 26 68 15 106 219 223 255 295 312 320 324Rectification of Errors Errors that affect the T Effects of Rectification on Profit-Loss 1. Introduction 4 Balance 2. Types of Accounting Errors 5 3. Errors do not affect the Trial Balance — Exercise 1. Introduetion The information regarding arithmatical errors in preparing a journal, posting in ledger and extracting balances of accounts can be obtained by preparing a trial balance. If debit side and credit side of trial balance tallies, it is believed that there is no arithmatical error in recording the transactions and posting and extracting balances of accounts. But if the trial balance does not tally, there must be some errors in writing books of accounts and the errors are detected and rectified. In fact trial balance is not a final yard stick of accounting errors. Even if the trial balance tallies, itis quite possible that errors may have been committed while preparing accounts. Thus the errors affecting trial balance and errors not affecting trial balance must be detected and rectified. The accounts will reveal the true picture of business only when these errors are rectified. This process is inevitable. The process of detecting errors in accounts and rectifying them is called as Rectification of Errors. Following are the objectives of rectification of errors. (1) When the error is detected in accounts before preparing a trial balance, it is to be rectified. (2) When the error is detected after preparing a trial balance of respective accounting year, it is to be rectified (3) To determine true profit or loss from correct accounting records by rectifying the errors. (4) To show true financial position by preparing a balance sheet at the end of an accounting period based on correct accounting information by rectifying the errors As per the accounting rules, be rectified by deleting the same. To rectify the error, an accounting effect is given related to the respective error. Rectification of error has a virtual importance in accounting system. 2. ‘Types of Accounting Errors Accounting errors are classified into two parts, based on whether they affect the trial balance or not. (1) Errors which do not affect the trial balance (2) Errors which affect the trial balance Types of Accounting Errors if there is an error in amounts recorded in accounts, it can not Errors which do not affect the trial balance Errors which affect the trial balance (1) Errors of omission (1) Errors regarding posting (2) Errors of principle (2) Errors regarding balance of an account (3) Errors of recording to a wrong account (3) Errors in totalling the subsidiary books (4) Errors committed at the time of recor (4) Errors committed at the time of the in primary books (5) Compensatory errors preparing the trial balance. Rectification of Errors3. Error do not Affect the Trial Balance A trial balance is prepared to know whether the accounts are arithmetically correct or not. But it can not be said that the accounts are perfectly correct only because the trial balance tallies. At times some accounting errors exist even if the trial balance tallies. Such errors are known as errors not affecting the trial balance. Such errors can not be detected easily. They can be known by comparing the records of receipts from customers and payments from Traders, by vouchers of purchase and sales of assets, by correspondence with bank, by preparing bank reconciliation statement and by exchange of copies of accounts or at the 1¢ of auditing of accounts. To rectify these errors, whether detected before or after preparing a trial balance or before or after preparing final accounts, a rectification entry must be passed in the journal proper. ‘Now understand the errors which do not affect the trial balance and how to rectify these errors. (1) Error of Omission : When a transaction is totally omitted to be recorded in the journal or the subsidiary book or the ledger, such an error is known as an error of omission. The trial balance will tally even though error of omission is committed because posting is omitted on both credit and debit side. Errors of omission take place at two stages : (i) A transaction is totally omitted to be recorded in the journal or the subsidiary book or the ledger. ¢.g. Cash sales of € 2000 is left unrecorded. By writing correct journal entry for this transaction the above error will be rectified. Date Particulars LF. | Debit (z) | Credit (2) Cash Alc. 2000 To Sales A/e 2000 [Being the entry of = 2000 cash sales is left unrecorded. | ‘A transaction is totally recorded in the journal or the subsidiary book or the ledger but posting of both accounts are omitted. eg. Fumiture purchased on credit from Raj Furniture Mart of % 5000 is recorded in journal proper, but it is forgotten to be posted in the accounts of furniture and Raj Furniture Mart in ledger. To rectify this error there is no need to record journal entry in journal proper but the error will be rectified by debiting furniture account and crediting Raj Furniture Account in ledger. (2) Error of Principle : When an error arises because of non-compliance of accounting principles it is known as an error of principle. These types of errors do not affect the trial balance. Because the amount of the ‘transaction is same but instead of one account any other account is debited or credited. eg. (i) % 20,000 worth Machinery purchased is debited to purchase account. (i) % 600 commission received from Rahim is credited to Rahim's A/c Following process is done for the rectification of errors in the above transaction. 2 Elements of Accounts : Part IT: Std. 11‘Transaction Correct Entry Error Committed Entry for Rectification (1) | Machinery | Machinery A/c Dr. Purchase A/e Dr. Machinery A/c Dr. = 20,000 purchased = 20,000 % 20,000 | To Purchase A/c 20,000 % 20,000 | To Cash Ale % 20,000] To Cash Ave % 20,000] (Being the rectification entry for purchase of machinery wrongly debited to purchase Ale) @ [Commission | Cash Ave Dr = 600 | Cash Ale Dr & 600 |Rahim's Ale Dr. © 600 received To Commission A/c | To Rahim's Ale € 600] To Commission Ale = 600 600 from = 600 (Being the rectification entry Rahim. for commission received from Rahim wrongly credited to Rahim's A/c) Explanation : In recording both the transactions there is no error in cash account, but in the first transaction purchase account is debited instead of Machine account. To rectify this error the correct account ie. Machine account will be debited while purchase account is wrongly debited which will be credited to rectify the error. In the other transaction, Rahim’s account is credited instead of commi rectification entry, correct account i.e. commission account will be debited. (3) Error of Debiting or Crediting Wrong Account : In such type of error, instead of debiting or crediting correct account, the other account is debited ‘or credited. Thus by debiting or crediting a wrong account with correct amount on the correet side the trial halance remains unaffected e.g. & 1000 received from Eva is credited to Riya's Ale by mistake. This error will be rectified by the following entry n account, therefore in unt will be credited and wrongly credited Rahim’s Transaction Correct Entry Error Committed | Entry for Rectification (1) |Received | Cash Ave Dr.@ 1000 | Cash A/e Dr.% 1000 | Riya's A/e Dr. & 1000 % 1000 from | To Eva's A/c % 1000] To Riya's A’e % 1000) To Eva's Ave 1000 Eva. (Being the rectification entry| {for & 1000 received from Eva ‘wrongly credited to Riye's A/c) Explanation : Wrongly credited % 1000 to Riya's account will be debited and correct account i.e. Eva's account will be credited in rectification entry. (4) Error of Commission : While writing the books of accounts, if the transaction in primary books are recorded either more or less than the correct amount or it is recorded in wrong subsidiary book, such an error is known as an error of commission. (A) Transaction recorded in correct book by more or less amount : eg. (i) Goods of % 500 sold to Shahid is recorded by mistake as & 50. (ii) Bank charges of € 70 is recorded by mistake as € 700 in cash book. Rectification of ErrorsThese errors will be rectified by the following process ‘Transaction Correct Entry Error Committed | Entry for Rectification (1) | Goods of | Shahid's A/e Dr. & 500 | Shahid’s A/c Dr. € SO | Shahid’s Afe Dr. @ 450 % 500 sold To Sales A/e 7 500] To Sales Ale 750 | To Sales A/e & 450 to Shahid. (Being the rectification entry for the goods purchased from Shahid by less amount.) (2) | Bank charges} Bank charges A/c Dr. | Bank charges A/c Dr. | Bank Alc Dr. € 630 770 270 % 700) To Bank charges A/c % 630] To Bank A/c % 70] To Bank A/c & 700 | (Being the rectification entry for recorded excess amount.) Explanation (1) Shabid’s account and sales account are recorded less by % 450, therefore % 450 is debited to Shahid’s account and credited to Sales account in rectification entry. (2) Bank charges are recorded more by % 630 therefore its reverse entry will be made in rectification entry and bank account will be debited by € 630 and bank charges account will be credited by € 630. (B) Transaction recorded in wrong subsidiary book : e.g, (1) Goods of € 800 sold to Payal is recorded by mistake in purchase book. Instead of recording the transaction in sales book it is recorded in purchase book. For rectification of this type of error, following process will be followed. ‘Transaction Correct Entry Error Committed Entry for Rectification (1) | Sold goods Payal's A/e Dr. % 800 | Purchase A/c Dr. % 800] Payal’s A/c Dr. & 1600 = 800 to To Sales Ave 800] To Payal's Alc % 800 | To Sales A/c = 800 Payal To Purchase Ale @ 800 (Being the rectification entry of goods sold to Payal wrongly recorded in purchase book.) Explanation : To make correct entry of the transaction, Payal's account will be debited and sales account will be credited while wrong entry of credit purchase will be reversed, therefore Payal's account will be debited and purchase account will be credited by © 800. Thus Payal’s account will be debited by double amount of & 1600. (C) Transaction recorded in wrong subsidiary book with wrong amount : eg. (1) Goods of € 400 return from Pradeep is wrongly recorded in purchase book as € 4000. For the rectification of this error, following process will be followed : 4 Elements of Accounts : Part IT: Std. 11‘Transaction Correct Entry Error Committed Entry for Rectification (1) | Goods of | Sales return A/e Dr. 400 returned = 400 by Pradeep | To Pradeep’s A/c € 400 Purchase A/e Dr. = 4000 To Pradeep's A/c & 4000) Sales return Ale Dr. € 400 Pradeep's Ale Dr. % 3600 To Purchase Ale & 4000 (Being the rectification entry of| return goods from Pradeep] % 400 wrongly recorded in| purchase book with wrong] amount % 4000.) Explanation ; In rectification entry, correct entry will be made i.e. sales return account will be debited by % 400 and Pradeep's account will be credited by % 3600, because Pradeep's account is wrongly credited by % 4000 while wrongly debited purchase account will be credited by 4000. (5) Compensatory Errors : In the books of accounts, when more than one errors are committed but when their effects are recorded on both debit and credit sides, the trial balance tallies. Such errors are known as compensatory errors. e.g. © 100 is debited instead of € 1000 to Ram's A/c and & 1000 is debited instead of € 100 to Shyam's Ave. Date Particulars LE Debit () Credit (2) Ram's Ale To Shyam's Ale [Being Ram's account was debited by less amount of & 900 and Shyam's account was excess debited for % 900, for which rectification entry is made.] Dr 900 Explanation : Ram's account is debited less by % 900 therefore his account will be debited by % 900 in rectification entry while Shyam’s account is debited more by € 900 which will be credited in rectification entry. Mlustration 1: Pass necessary entries in the books of Shri Rakesh to rectify the following errors 1 ea ah ke % 1500 withdrawn from bank for personal use is left to be recorded, Installation charges paid & 400 on purchase of machinery is debited to sundry expenses account. % 500 paid to Kajal is debited to Raja's account by mistake. Our bill receivable of 1550 accepted by Komal is recorded in the books by ¥ 500. Goods of & 700 sold to Switoo is recorded in purchase book by mistake. Goods of © 1250 purchased from Rekha is recorded in sales book by © 250. 200 credited by bank as interest in passbook recorded on payment side of cashbook. % 300 paid for salary is debited to salary account by % 400, whereas furniture sold for & 400 is credited to furniture account by & 500, 3 Rectification of ErrorsAns. ¢ Rectification Entries in the Book of Shri Rakesh Date Particulars Li Debit (%) | Credit (®) 1 Drawings A/c Dr 1500 To Bank A/e 1500 [Being rectification entry for % 1500 withdrawn from bank for personal use is left to be recorded.) 2 Machinery A/e Dr 400 ‘To Sundry expenses A/e 400 [Being error rectified for charges for machinery 2 400 is debited to sundry expenses account.] 3 Kajal's Ale Dr 500 To Rajal’s Ale 500 [Being % 500 paid to Kajal debited to Rajal’s account by mistake, now rectified. ] 4 Bills receivable Ale Dr 1050 To Komal's Ale 1050 [Being rectification entry for bills receivable of % 1050 recorded by less amount.] 5 Switoo's Ale Dr 1400 To Sales A/e 700 To Purchase A/e 700 [Being goods sold to Switoo of € 700 recorded by mistake in purchase book now rectified] 6 Purchase A/e Dr 1250 Sales A/e Dr 250 To Rekha's Ale 1500 [Being rectification entry for goods purchased from Rekha of € 1250 recorded in sales book by € 250 by mistake.] 7 Bank A/c Dr 400 To Bank interest A/c 400 [Being rectification entry for interest credited by bank % 400 recorded on payment side of cashbook by mistake. ] 8 Furniture Ale Dr 100 To Salary Alc 100 [Being compeusation error now rectified.] Total 6850 6850 Elements of Accounts : Part I Std. 11Mlustration 2 : Pass necessary rectification entries to rectify the following journal entries written by ‘Vandana. Journal Entries of Vandana Date Particulars LF. | Debit (@) | Credit (®) 1 Rohan's A/c Dr 6000 To Cash AVe 6000 [Being the salary = 6000 of current month paid to a clerk Rohan. ]} 2 Purchase Ale Dr 8000 To Chetan's Ale 8000 [Being the goods of & 8000 sold to Chetan on credit.] 3 Purchase A/c Dr 17.280 To Cash Ale 17,280 [Being the goods worth 20,000 purchased at 10 % trade discount and 4 % cash discount.] 4 Brokerage A/e Dr 10,000 To Cash Ale 10,000 [Being the brokerage = 10,000 paid for the purchase of building for business. 5 Cash Ale Dr 3500 ‘To Mayank’s Ale 3500 [Reing the amount © 3500 written off as had debts in last year, received in current year from Mayank.] 6 Bhavesh's A/c Dr 14,000 To Cash Ale 14,000 [Being the amount & 14,000 paid to Bhavesh for cash purchase. 7 Income Tax Ale Dr 18,400 ‘To Bank A/c 18,400 [Being the amount % 18,400 of Income Tax. paid by cheque.] 8 Rita's Ale Dr 1200 To Purchase return A/e 1200 [Being the goods of € 12,000 returned by Rita recorded in purchase return book.] 9 Scooter A/e Dr 20,000 To Cash Ale 19,000 To Discount Ale 1000 [Being the amount of € 20,000 paid after deducting $ % discount for the scooter purchased for personal use.] Total 98,380 98,380 Rectification of ErrorsAns. + Rectification Entries of Shri Vandana Date Particulars LF. | Debit (%) | Credit (2) 1 Salary A/e Dr 6000 To Rohan's Ale 6000 [Being the rectification of salary = 6000 paid to Rohan wrongly debited to his account.] 2 Chetan's Ale Dr 16,000 To Purchase A/c 8000 To Sales Ale 8000 [Being the rectification of credit sales © 8000 to ‘Chetan wrongly recorded in purchase book. | 3 Purchase A/c Dr 720 To Discount Ale m0 [Being the rectification for cash discount 2 720 received, omitted to be recorded at the time of cash purchases. ] 4 Building A/c Dr 10,000 To Brokerage A/c v.00 tion of brokerage © 10,000 [Being the rect paid for purchae of building debited wrongly to brokerage A/c] 5 Mayank's A/c Dr 3500 To Bad debt recovered A/c 3500 [Being the rectification of bad debts ¥ 3500 written off in last year received, credited wrongly to personal Alc] 6 Purchase A/c Dr 14,000 ‘To Bhavesh's A/e 14,000 [Being the rectification of % 14,000 cash purchase, wrongly recorded in Bhavesh's A/c.] 7 Drawings A/e Dr 18,400 To Income tax Ale 18,400 [Being the rectification of Income tax (personal expense) & 18,400 paid, wrongly recorded. ] Total o/f 68,620 68,620 Elements of Accounts : Part IT: Std. 11Date Particulars LE. | Debit (@) | Creait (@) Total b/t 68,620 68,620 8 Sales return A/e Dr 12000 Purchase return A/c Dr 1200 To Rita Ale 13,200 [Being the rectification of goods of ¥ 12,000 returned by Rita recorded in purchase return book by € 1200.] 9 Drawings A/c Dr 19,000 Discount Ale Dr 1000 To Scooter Ale 20,000 [Being rectification of the scooter purchased at % 20,000 for personal use. Wrongly debited to scooter A/c] Total 1,01,820 | 1,01,820 4. Error that affect the Trail Balance Sometimes the total of debit side and credit side of a trial balance are not equal. i. does not tally. In such circumstances error or errors might have been committed somewhere in posting, in balancing the accounts, in writing the balance of an account on the wrong side of a trial balance or in the preparation of the trial balance. Let us understand the types of errors affecting the trial balance and how they can be rectified, if they are detected before or after the preparation of the final accounts. (1) Error detected before the preparation of the final account : Errors affecting the trial balance are one sided errors. So if these types of errors are detected before the preparation of the final account, the effect of rectification of errors will be given to that related account only, So that journal entry of rectification of error is not necessary. These types of errors are as under : (i) Errors of posting : trial balance (A) Omission of posting in any account : This is also a type of omission, e.g. Goods of % 7000 sold to Mitesh is correctly recorded in the sales book but the posting in Mitesh’s account is omitted. Credit sales of goods of % 7000 to Mitesh is left to be debited to Mitesh’s account, So this error will be rectified by posting the amount on debit side of Mitesh’s account as under Mitesh's Account Dr Cr Date Particulars J. | Amount | Date Particulars J. | Amount r| @) FE] @) To the amount of 7000 posting omitted for goods sold. (Sales book page no....) Rectification of Errors(B) Posting twice in an account : e.g., Payment of rent % 3000 is recorded correctly in cash book, but by mistake it is debited twice in Rent account. Rent Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount F| @ F.| (%) By rectification of 3000 payment of rent posted twice in rent Ale Explanation : In rent account posting of € 3000 is done twice by mistake, so it will be rectified by giving credit effect in rent account. (C) Posting of a wrong amount in an account : e.g. Purchase of machinery of € 50,000 is recorded in machinery account as © 5000. Machinery Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount KR (8) rR (2) To rectification of 45,000 less amount posted in machinery account. Explanation + Purchase of machinery of @ 50,000 is debited as % 5000. So remaining amount % 45,000 is debited to machinery account. (D) Posting in an account on the wrong side : e.g. Paid commission © 300 is credited to commission account. Commission Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount F| @) Fl] @) To rectification of 600 commission paid € 300 wrongly credited to commission account. Explanation + Paid commission of © 300 is wrongly credited instead of debiting to commision account. So here two mistakes take place. (1) It is not debited to commission account of & 300. (2) It is wrongly credited to commission account of & 300. This error will be rectified by debiting double amount % 600 to commission account. (E) Posting wrong amount on the wrong side of an account : eg. Paid rent of € 10,000 is correctly recorded in cashbook but by mistake it is recorded on credit side of rent account by 1000. 10 Elements of Accounts : Part IT: Std. 11Rent Account Dr Cr Date Particulars J. | Amount | Date J. | Amount F| @ FE | @) Being rectification of 11,000 rent paid % 10,000 is by mistake credited to rent account as & 1000. (® 10,000 + & 1000) Explanation : Paid rent of Z 10,000 is by mistake credited to rent account as % 1000, So here ‘two mistakes are done. (1) & 10,000 is not debited to rent account. (2) By mistake € 1000 is credited to rent account. is error will be rectified by debiting © 10,000 of rent paid and also by debiting € 1000 which is wrongly credited to rent account, So total © 11,000 is debited to rent account. (ii) Errors regarding balance of an account : (A) Error in finding out the balance of an account : If the balance of any account is found cither more or less the trial balance does not tally. If the calculated balance is less on debit side, then put the deficit amount on the debit side and if the calculated balance is less on credit side then put the defict amount on the credit side to rectify the error eg. The debit balance of purchase account is worked out as 5000 instead of € 15,000. Here, write % 10,000 which is debited less, the error will be rectified by making the following entry : Purchase Account Dr Cr Date Particulars J. | Amount | Date Particulars J, | Amount Fr] @) RB] () To rectification of 10,000 less balance worked out Sameway if the balance of purchase account is written % 25,000 instead of % 15,000 then error will be rectified by writing that excess amount on tie opposite side of purchase account by € 10,000. Purchase Account Dr cr s Date Particulars J. | Amount | Date Particulars ‘Amount KR (®) rR (2) ication of 10,000 excess balance of By re purchase account Rectification of Errors(B) Error in writing the balance of an account : eg. Opening balance of % 1,00,000 of machinery account is written as & 10,000. Here, opening balance of machinery account means debit balance is written less by % 90,000. So more amount is written to the debit side to rectify the errors which is shown as under : Machinery Account Dr Cr Date Particulars J. | Amount | Date Particulars J. | Amount r| ©@ FF] @) To rectification of 90,000 the opening balance written less. (C) Balance of an account is omitted to be recorded : e.g. Opening balance of € 50,000 of machinery account remains unrecorded. Machinery Account Dr Cr Date Particulars J. | Amount | Date Particulars J. | Amount F (2) F (2) To rectification of 50,000 unrecording opening balance (D) Balance of an account is written on the wrong side : A balance of % 800 of Bharat (a debtor's) account, is written on the credit side. Error in Bharat (a debtor's) account will be rectified by writing double the amount that is % 800 + Z 800 = % 1600 on debit side. Bharat's Account Dr ce Date Particulars J. | Amount] Date Particulars J. | Amount F| @) RE] @) ‘To rectification of the 1600 amount written on the wrong side. (E) Balance of an account is written on the wrong side with a wrong amount e.g. Balance of Bharat (a debtor's) account, % 800 is written on the credit side as % 80. 8 Bharat's Account Dr Cr Date Particulars J. | Amount ] Date Particulars J. | Amount rR] @) R| @ To rectification of the 880 balance written on wrong, side by wrong amount. po _—_____—_. Elements of Accounts : Part IT: Std. 11Errors in totalling the subsidiary books The trial balance does not tally if an ertor is committed while totalling subsidiary books like purchase book, sales book, goods return book, cash book etc. This error will be rectified by writing necessary note in that respective account. A journal entry is not necessary to rectify this type of error, eg. (I) Total of purchase book is under cast by % 700. This error will be rectified by writing in purchase account % 700 on debit side and in the column of particulars "being the total under cast (2) Total of sales book is undercast by % 800. This error will be rectified by writing in sales account % 800 on credit side and in the column of particulars ‘being the total under cast’, (3) Total of purchase book is over cast by & 400. This error will be rectified by writing in purchase account % 400 on credit side (opposite side) and in the column of particulars ‘being the total over cast (4) In cashbook on debit side of bank column total is over cast by % 500. This error will be rectified by writing in bank account % 500 on credit side (payment side) of cashbook and in the column of particulars ‘being total over cast’ balance : (iv) Errors committed while preparing While preparing a trial balance there remains a possibility of errors like, error in totalling of the trial balance, balance of an account is omitted to be recorded, recorded twice, recorded with wrong amount, recorded on the wrong side, or recorded on wrong side with the wrong amount. To rectify these types of errors no journal entry is required. After rectifying the errors, a new trial balance is prepared and it will get tallied. Mlustration 3 : Rectify the following errors committed while writing the books of Margi (1) Total of goods return book is under cast by % 800. (2) 480 received from Prerna a customer, is posted in her account as = 840. (3) Balance of & 5000 of Kaushik’s account, a debtor, is left unrecorded in the trial balance. (4) = 900 paid to Manan a supplier, is recorded correctly in the cashbook but by mistake it is credited to his account, (5) Salary paid % 1000 is debited twice to salary account, (6) % 2500 the balance of drawings account is shown in the credit column of the trial balance. (7) Wages paid © 3000 are recorded corrsetly in the cashbook but are not posted to wages account. (8) Debit balance of rent account % 850 is written as credit balance of % 540 in the trial balance. (9) = 240 paid for general expenses, posted to that account as © 140. (10) Opening balance of the cash account © 1500 is brought forward as © 1050. 13 Rectification of ErrorsAns. 5 Rectification Entries in the Journal proper of Margi (1) The error will be rectified by writing in goods return book (purchase return) = 800 fon credit side and in the column of particulars. ‘Being total of goods return book is under cast” (2) The error will be rectified by writing in Premna's A/c % 360 on debit side and in the column of particulars ‘being excess amount credited by mistake’. (3) The error will be rectified by writing € 5000 a balance of Kaushik's account in the debit column of the trial balance. (4) The error will be rectified by writing in Manan, a supplier's account, % 1800 on debit side and in the column of particulars ‘being the amount written on wrong side’ (5) The error will be rectified by writing in salary account % 1000 on credit side and in the column of particulars ‘being the amount debited twice by mistake’ (6) The error will be rectified be writing 2500 as the balance of drawings account in the debit column of the trial balance and revised trial balance is prepared there after, (7) The error will be rectified by writing in wages account % 3000 on debit side and in the column of particulars ‘being posting omitted’. (8) The error will be rectified by writing Z 1390 a balance of rent account in the debit balances of the trial balance or by preparing a new trial balance wherein correct debit balance of % 850 of rent account will be shown, (0) The error will be rectified by writing in general expenses account % 100 on debit side and in the column of particulars ‘being the posting done by less amount (10) The error will be rectified by writing in cashbook © 450 on debit side and in the column of particulars ‘being the balance brought forward by less amount. (2) Errors detected after preparation of the final accounts and use of suspense account If the accounts are written correctly without any error, the trial balance tallies and thereafter final accounts are prepared. But when trial balance does not tally, because of some errors, many times it is required to detect such errors and consequently final acconts can not be prepared in time. In such circumstances the difference of the trial balance is transferred to suspense account and final accounts are prepared. Afterwards the suspense account is closed, when errors are rectified with or without the help of suspense account as per requirement. Suspense account will be closed automatically when all the errors are rectified Suspense Account : When the (rial balance does not tally bul there is an urgency for preparing final accounts, temporarily the difference in the trial balance is transferred to one account in order to get it tallied and that account is known as a suspense account. If the difference arises on the debit side of a trial balance, it is treated as a debit balance of suspense account and in final accounts it will be shown on the assets side of the balance sheet. If the difference arises on the credit side of a trial balance, it is treated as a credit balance of suspense account and in final accounts it will be shown on the Capital-Liabilities side of the balance sheet. 14 Elements of Accounts : Part IT: Std. 11Balance sheet is tallied by transferring the difference of trial balance to suspense account. In the begining or during the next year, the errors because of which the trial balance was not tallied, rectification entries will be passed with the help of suspense account. e.g. The total of purchase book is under cast by % 1000. This etror will be rectified by an entry in journal proper which is as under Purchase A/e Dr. & 1000 To Suspense Ale € 1000 Sameway if the total of sales book is overcast by % 1000, then this error will be rectified by debiting sales account and crediting suspense account. Thus, when the error is committed only on one side, the correct accont is debited or credited correctly and the other account. i.e. suspense acccunt is debited or credited. When all the errors are rectified, suspense account is closed automatically. Other than rectification of errors, suspense account is also useful for various other purposes. Such as when in any transaction the account which is to be debited or credited is not decided, for the time being that amount is debited or credited to suspense account. Later on when the correct head of account is decided, after giving the effect - to that account, the suspense account is closed. Mlustration 4 : Shri Harjit has tallied his trial balance by debiting a difference of % 1000 to suspense account and thereafter he has prepared final accounts. After preparation of final accounts the following errors are detected. (1) Goods of % 3500 retumed by Beena is posted on debit side of her account. (2) Total of purchase return book is overcast by % 800. (3) Harjit has paid © 600 for his personal medical bill and the amount is debited to miscellaneous expense account. (4) & 1200 received from Neela for rent is posted to the credit of her account as well as to rent account. (5) Goods of & 5000 sold to Surendra is recorded in purchase book. (6) 6000 paid to Esha for repayment of loan is not posted to her account. From the above information pass rei ication entries and prepare suspense account Ans. : Rectification Entries of Shri Harjit, Date Particulars LF. | Debit () | Credit (%) 1] Suspense Ave Dr 7000 To Beena's Ale 7000 [Being the rectification of goods of & 3500 returned by Beena posted on debit side of her account. 2 | Purchase return A/c Dr 800 To Suspense A/c 800 [Being the rectification of overcast total € 800 of purchase return book.] 3 | Drawings Ale Dr 600 ‘To Miscellanous expense A/c 600 [Being the rectification of personal medical bill of F 600 debited to miscellaneous expenses A/c.) 15, Rectification of ErrorsDate Particulars LE} Debit (%) | Credit (%) 4 Neela's Ale Dr 1200 ‘To Suspense A/e 1200 [Being the rectification of rent € 1200 received from Neela credited to her A/c and also rent A/c.]) 5 Surendra's Ale Dr 10,000 To Purchase Ale 5000 To Sales A/e 5000 [Being the rectification of goods € 5000 sold to Surendra recorded in purchase book. ] 6 Loan of Esha's A/e Dr 6000 ‘To Suspense A/e ‘6000 [Being the rectification of loan repaid to Esha % 6000 left unposted to her account.) Total 25,600 25,600 Suspense Account Dr cr Date Parti J. | Amount [ Date J. | Amount Fr (z) rE (2) To Balance bid 1000 By Purchase return A/e 800 1 | To Beena's Ale 7000} 4 | By Necla's Ale 1200 6 | By Loan of Esha's A/e 6000 8000 Notes (1) From the above illustration, it will be clear that after detecting all the errors, and giving their effects in suspense account, at the end, suspense account is closed and will not have any balance to be carried forward. (2) For the rectification of entry number 3 and 5 above. No effect is to be given to suspense 5. Effects of Rectifie: account because rectification entry can be passed by debiting and crediting the accounts already affected. yn on Profit-Loss If errors are rectified before preparing final accounts, correct profit or loss of the business is revealed by final accounts as no error is left in accounts. Therefore at that time there is no question of effect of error on profit or loss of the business. But when trial balance is prepared by not rectifying the accounts and recording suspense account in I balance in order to get it tallied, profit and loss account may not reveal true profit or loss. Particularly when the error of revenue and expense is transferred to suspense account, the profit and loss account will not reveal true profit or loss. e.g. Purhcase 16 Elements of Accounts : Part IT: Std. 11book is undercast by % 500 and this difference is taken to suspense account, the rectification entry will be made as under when the error is detected. Purchase Ae Dr % 500 To Suspense A/c % 500 Thus the profit will decrease by % 500 as purchase increases. The same way if sales book is undercast by % 1000, the error is rectified by debiting suspense account and crediting sales account by & 1000. The profit will increase by % 1000 as sales is increased when the effect of error on profit is given. If expense is recorded less than actual profit will decrease and if the income is recorded less than the actual profit will rease. ‘Now let us understand the effect of errors rectified after preparing final accounts on profit by illustration no. 5. Illustration 5 : As on 31-12-2014 trial balance of Shri Ramanlal does not tally and therefore he has written a difference of % 576 on the credit side of suspense account and gets his trial balance tallied. Later on, after preparing final accounts the following errors are detected in the next year. (1) € 2596 received from Ashok is posted as € 180 on the debit side of his account. (2) 1424 paid for repairing expenses were posted on the debit side of machinery account as 624, (3) Discount of € 100 given by Piyush is credited to his account as well as discount received account. (4) € 1828 paid to Narendra is debited to Mahendra's account as © 1028. (5) Total of purhease book is undercast by ® 400. (6) Purchase of furniture of € 1468 debited to purchase account. To rectify the above errors, pass necessary rectification entries and prepare suspense account. At the end of the year 2014, if profit and loss A/e discloses a profit of % 31,440. Find out correct profit after rectification of errors. Ans. ¢ Rectification Entries of Shri Ramanlal Date Particulars LF. | Debit (€) | Credit (®) 1 Suspense A/c Dr 2776 To Ashok's Ale 2776 [Being the rectification of % 2596 received from Ashok posted on the debit side of his account by % 180.] 2 Repairing expense A/c Dr 1424 ‘To Machinery A/e 4 To Suspense Ale 800 [Being the rectification of repairing expenses of % 1424 were debited to machinery as % 624.) 3 Piyush’s Ale Dr 200 To Suspense Ale 200 [Being the rectification of discount 100 given by Piyush credited to his account. ] 17 Rectification of ErrorsDate Particulars LF. | Debit (z) | Creait (=) 4 Narendra's A/c Dr 1828 ‘To Mahendra's Ale 1028 To Suspense A/e 800 [Being the rectification of @ 1828 paid to Narendra debited to Mahendra's A/c by & 1028.] 3 Purchase A/e Dr 400 To Suspense Ale 400 [Being the rectification of purchase book total % 400 undercast. | 6 Furniture Ale Dr 1468 To Purchase A/e 1468 [Being the rectification of purchase of furniture % 1468 debited to purchase A/c.) Total 8096 8096 Suspense Account Dr cr Date Particulars L. | Amount | Date Particulars L. | Amount R| () F| @) 1 | Ashok’s A/c 2776 By Balance b/d 516 (difference) 2 | By Repairing exp. Ale 800 3 | By Piyush’s Ave 200 4 | By Narendra's Ave 800 s | By Purchase A/e 400 2776 2776 Because of rectification of these errors the effect on profiteloss can be found out as under Effect of Rectification of Error on Profit-Loss Note Particulars Increase in | Decrease in No. Profit (2) Profit (2) (1) _ | Profit-Loss remains unaffected. - - (2) | Profit decreases because repairing exp. A/c is debited - 1424 (3) | Profit-Loss remains unaffected. - - (4) | Profit-Loss remains unaffected. - - (5) _ | Profit decreases because purchase A/c is debited - 400 (6) | Profit increases because purchase A/c is credited 1468 - 1468 1824 18, Elements of Accounts : Part IT: Std. 11Profit of the year 2014 before rectification of error Increase in profit due to rectification of error Decrease in profit due to rectification of error Rectified correct profit of the year 2014 AAA AA 31,440 1468 32,908 1824 31,084 Mustration 6 : Trial balance of Pallavi as on 31-3-2015 does not tally. The difference is transferred to suspense account in order to get it tallied which is as under Trial Balance of Pallavi as on 31 Name of the Account LE. | Debit (%) | Credit (2) Capital Ale - 45,000 Drawings Ale 5000 - Purchase A/e 24,000 - Sales A/e - 36,000 Salary A/e 15,400 - Building A/e 11200 - Anita's Ale 2400 - Jalpa's A/e - 4200 Cash Ale 2100 - Bank A/e 18,300 - Reshma's A/e 5000 - Sundry expenses A/c 1600 - Insurance premium Ale 1200 - Carriage outward A/c 800 - Suspense A/c - 1800 Total (2) 87,000 87,000 The following errors are detected after the final accounts are prepared : % 1300 received from Anita is posted on the debit side of her account. Total of sales book is overcast by © 600, Personal expense of % 700 is debited to sundry expenses A/c. Goods of % 700 purchased from Anita are recorded correctly in purchase book but while posting, the same was debited to Anitas A/c. Salary paid to Jalpa is debited to her personal A/c 1400. Opening balance of € 1600 of Meena, a debtor's A/c, is omitted to be carried down. 19 Rectification of ErrorsGive necessary rectification entries to rectify the above errors. Prepare suspense account and the rectified trial balance. Ans. : Journal Proper of Pallavi Date Particulars LF. | Debit (z) | Credit (2) 1 Suspense A/c Dr 2600 To Anita's A/c 2600 [Being the rectification of amount % 1300 received from Anita debited to her eccount.) 2 Sales Ale Dr 600 To Suspense A/c 600 [Being the rectification of total of sales book overcast by % 600.] 3 Drawings A/e Dr 700 ‘To Sundry expenses Ale 700 [Being the rectification of personal expense. % 700 debited to sundry expense A/c.] 4 Suspense A/e Dr 1400 To Anita's A/e 1400 [Being the rectification of goods of € 1400 purchased from Anita debited to her account. ] 5 Salary A/e Dr 1400 To Jalpa's Ale 1400 [Being the rectification of salary paid € 1400 debited to personal account of Jalpa.] 6 Meena's Ale Dr 1600 ‘To Suspense A/e 1600 [Being the rectification of opening balance % 1600 omitted to be recorded in the account of Meena, a debtor. | Total 8300 8300 Suspense Account Dr cr Date Particulars L. | Amount | Date Particulars L. | Amount r| ®& F| @) 1 | To Anita's Ave 2600] 1 | By Balance b/d 1800 4 | To Anita's Ale 1400] 2 | By Sales Ave 600 6 | By Meenas A/c 1600 4000 4000 20 Elements of Accounts : Part IT: Std. 11Rectified Trial Balance of Pallavi as on 31-3-2015 ‘Name of the Account L.F. | Debit (*) | Credit (%) Capital Ave - 45,000 * Drawings A/e 5700 - Purchase A/e 24,000 - * Sales A/e - 35,400 * Salary A/c 16,800 - Building A/e 11,200 - * Anita's Ale - 1600 * Jalpa's Ale - 5600 Cash Ave 2100 - Bank A/c 18,300 - Reshma's A/e 5000 - * Sundry expense A/c 900 - Insurance premium A/e 1200 - Carriage outward Ale 800 - * Meena’s A/e 1600 - Total 87,600 87,600 Note : (1) Amount of accounts having * astrik mark is changed after rectification of error. (2) New account of Meena is added. (3) Debit balance of Anita's A/c is now converted into a credit balance. (4) After rectification of all errors, when the effect is given in suspense account it is closed 1. and therefore in new rectified trial balance its balance is not shown. Select the right answer from the given alternatives : (1) (2) (3) (4) When a transaction is left unrecorded in primary books, the error is known as (a) (c) Errors of compensatory Errors of principle () (a) Errors of omission Not carry forward to suspense A/c An error arises because of non-compliance of accounting principles is known as .. (a) Errors of compensatory (c) Errors of principle ‘An error arises because of debiting or crediting a wrong account with correct amount on the correct side is known as (a) Errors of compensatory (c) Errors of principle When trial balance does not tally, it is tallied temporarily with the help of (a) (c) Trading Ale Suspense A/c au (b) (@) (b) (a) (b) (a) Errors of omission Not carry forward to suspense A/c Errors of omission Errors of recording to a wrong account account. Profit and Loss A/e Balance Sheet Rectification of Errors(s) By opening suspense account, which of the following accounts brings effect on ‘Profit and Loss account’ ? (a) Error in peronsal Alc (b) Error in assets A/e (c) Error in both personal A/c and assets A/e (4) Error in goods A‘e and nominal Ale 2. Answer the following questions in one sentence : State the types of accounting errors. State the errors not affecting trial balance. State the errors affecting trial balance. When is the suspense A/c used ? When does the accounting errors affect the profit ? When does the accounting errors do net effect the profit ? 3. Answer the following questions : () (2) (@) (4) What is errors of omission ? How to rectify these errors ? Explain What is errors of principle ? How to rectify these errors ? Explain with illustration. What is compensatory errors ? How to rectify these errors ? Explain with illustration. Write note on suspense accounts, illustration, 4. Prepare rectification entries to rectify the following errors detected while preparing final accounts of Shri Balram as on 31-32015. (1) Purchase af goods % $000 is left to he recorded (0) Installation charges paid & 2000 on pnchase of machinery is dehited to sundry expense account (3) € 2400 paid to Devanshi is recorded to Karan’s account by mistake. '4) Goods of % 5000 sold to Nayana is recorded in purchase book by mistake. (5) Our bill receivable of € 1900 accepted by Rekha is recorded in bills receivable book by € 1000. (6) % 150 credited by bank as interest in passbook recorded on payment side of cashbook. (7) Goods of ® 1200 sold to Amita is recorded in purchase book by & 200. 5. Pass necessary rectification entries to rectify the following journal entries written by Ishwarlal : Date Particulars L.F. | Debit (*) | Credit (%) 1 Kishan's A/e Dr 7000 To Cash Ale 7000 [Being the salary of current month = 7000 paid to Kishan. | 2 Purchase A/c Dr 9500 To Clinton's A/c 9500 [Being the goods of € 9500 sold to Clinton on credit. 2 Elements of Accounts : Part I: Std. 11Date Particulars LF. | Debit (@) | Credit (@) 3 Purchase A/e Dr 17,100 To Cash Ale 17,100 [Being the goods worth % 20,000 purchased at 10 % trade discount and 5 % cash discount. ] 4 Brokerage Ale Dr 16,000 To Cash Ale 16,000 [Being the brokerage @ 16,000 paid for the purchase of machinery for business] 5 Cash Ale Dr 4500 To Karina's A/e 4500 [Being the amount % 4500 written off as bad debts in last year, received in current year from Karina.] 6 Chaitali's Ale Dr 6900 To Cash Ale 6900 [Being the amount % 6900 paid to Chaitali for cash purchase. 1 Income Tax A/e Dr 5000 ‘To Bank A/c 5000 [Being the amount % 5000 of income tax paid by cheque.] 8 Cash Ale Dr 1200 To Bank Ale 1200 [Being change of = 1200 taken from bank. | 9 Pushpa's A/c Dr 1800 To Purchase return A/c 1800 [Being the goods of € 1800 retuned by Pushpa recorded in purchase return book.] 10 Furniture Ale Dr 20,000 To Cash Ale 18,000 To Discount A/c 2000 [Being the amount % 20,000 paid after deducting 10 % discount for the purchase of furniture for personal use. | Total 89,000 89,000 23 Rectification of Errors6. At the time of preparing final accounts of Vivek as on 31-3-15, the following errors are found out. Pass necessary rectification entries to rectify the same : (1) % 5000 paid for purchase of a computer is debited to purchase account at the time of posting from cashbook. (2) % 4800 paid for rent to Vedant, a owner of shop, by mistake is debited to his personal account. (3) Goods of € 9000 are completely burnt by fire and insurance co. has accepted a claim at 40 % for the same, which is unrecorded by mistake. (4) © 1200 paid for brokerage is posted twice in brokerage A/c. (5) 1,00,000 incurred for extension of building, by mistake, is debited to repairing expense account. (6) & 560 paid for general expense is posted to that account as @ 650. (7) © 720 received towards interest is posted to interest account on debit side. (8) A machinery of € 20,400 is sold for € 22,000. It is recorded in sales book by & 22,000, (9) Total of bills payable book is undercast by % 300. (10) In March 2015 discount received and discount paid are © 3400 and & 3600 respectively. But by mistake they are recorded on their opposite sides. 7. Trial balance of Shri Marmik as on 31-3-15 does not tally and therefore a difference of % 1440 is credited to suspense account, The following errors are detected afier final accounts are prepared. (1) = 6490 received from Paresh is posted as % 450 on the debit side of his account. (2) % 3560 paid for repairing expenses were posted on the debit side of machinery account as & 1560. (3) Discount of % 250 given by Palak is credited to his account as well as discount received account. (4) € 4570 paid to Surechbhai is debited to Maheshbhai's account az & 2570. (5) Total of purchase hook is undereast by % 1000. (6) Purchase of furniture of % 3670 debited to purchase account. To rectify the above errors, pass necessary rectification entries and prepare suspense account, At the end of the year 2015, if profit and loss account discloses a profit of Z 78,600. Find out the correct profit after the rectification of errors. 8. Trial balance of Shri Dinesh as on 31-3-15 does not tally. The difference is transferred to suspense account in order to get it tal as under : Debit Balance Amount (7) Credit Balance Amount (2) Drawings A/e 1,00,000 | Capital Ave 900,000 Purchase A/e 480,000 | Sales Ave 720,000 Salary Ale 3,08,000 | Jignesh’s A/c 84,000 Building A/c 224,000 | Suspense Ave 36,000 Dev's Ale 48,000 Manan's A/e 1,00,000 Cash Ave 42,000 Bank A/e 3,66,000 Sundry expense A/c 32,000 Insurance premium A/c 24,000 Carriage outward A/c 16,000 17,40,000 17,40,000 24 Elements of Accounts : Part I: Std. 11‘The following errors are detected after the final acc: ints are prepared : (1) % 26,000 received from Dev is posted on the debit side of her account. (2) Total of sales book is overcast by = 12,000. (3) _ Personal expense of % 14,000 is debited to sundry expenses account. (4) Goods of & 14,000 purchased from Dev are recorded correctly in purchase book but while posting the same were debited to Dev's account. (5) Salary paid to Jignesh & 28,000 is debited to his personal account. (6) Opening balance of = 32,000 of Manisha, debtor's account, is omitted to be carried down. Give necessary rectification entries to rectify the above errors. Prepare suspense account and the rectified trial balance, 9. Write rectification entries for the errors found in the books of Priyansh : (1) Goods purchased of € 3000 from Chiranshi is recorded correctly in purchase book. But posting is omitted in her account. (2) Goods sold to Tajagna < 5000 is comectly recorded in sales book, but her account is posted twice. (3) € 500 received from Vaidehi is posted to her account by € 50. (4) = 2500 received from Ayush is correctly recorded in cash book, but % 500 has been debited to his account. (5) Opening bnalance of a debtor, Keval, © 5100 is carried forward on credit side. (6) © 2500 paid to a creditor, Zeel, is debited to her account by € 500 while posting from cash book. (7) Opening balance of machine % 54,000 is recorded as & 45,000. (8) Credit balance of bank loan % 7500 is omitted to be recorded in trial balance. (9) Balance of rent paid € 860 is recorded as credit balance by % 680 in trial balance. (10) Total of sales return book undercast by € 500. + SU Rectification of ErrorsDepreciation Accounts 1, Introduction 7. Depreciable Assets 2, Meaning and Definition of Depreciation 8. Different Methods of Depreciation 3. Characteristics of Depreciation 9. Difference : Straight Line Method and Reducing 4. Necessity (objectives) of Provision Balance Method for Depreciation 10. Methods of Recording Depreciation 5, Factors Affecting Depreciation 11, Typical Illustrations 6. Factors to be Considered to Determine — — Exercise Amount and Rate of Depreciation 1, Introduction Different kind of fixed tangible assets like machines, furniture, building, vehicles, computer, ete. are used in trade-business. Each asset has its own useful life. The useful life is based on, the time period for which it can be used. Due to the use of asset, its efficiency decreases. Due to the natural or physical factors, due to passing of time or due to innovation, the value of asset keeps on decreasing. Sometimes, inspite of having good physi n of assets, the use of old assets becomes expensive due to the emergence of new and more efficient assets. Due to these reasons, the life of asset becomes finite (limited). Because of the any of the above stated reasons, when the efficiency of asset constantly decreases and cousequently the useful value of alse contansily and permanently decreases, it is kuowa as depreciation, | conditi 2, Meaning and Definition of Depreciation (1) Carter : “Depreciation is the gradual permanent decrease in the value of an asset due to any reason.” (2) Spicer and Pegler : “Depreciation may be defined as a measure of the exhaustion of the effective life of an asset, due to any cause, during # given pe From the above definitions, it can be understood that, the permanent reduction in value of asset is depreciation. At the end of cretain years, asset becomes useless for determined specific use and object. Depreciation is time related expense. It is debited to Profit and Loss account as non cash revenue expense. It indicates reduction in useful value of an asset; thus it is debited to Profit and Loss account. 3. Characteristics of Depreciation (1) Fixed Assets : Depreciation is to be calculated on fixed tangible assets, thus these assets are known as depreciable assets. Beside this, intangible assets like patent, copy right, trademark are also gradually written off during their estimated life. Depreciation is not calculated on current and liquid asset of the business e.g. cash, stock, debtor ete. (2) Useful Value : Depreciation indicates continous and permanent reduction in the useful value of assets, (3) Time : Depreciation is time related expense. 26 Elements of Accounts : Part II: Std. 11(4) Revenue Expense : As a non cash revenue expense, depreciation is debited to Profit and Loss account. (5) Written off Amount like salary and rent. + Inspite of being a revenue expenditure, depreciation is not paid in cash (6) Use of Assets : Depreciation is based on consumption along with time. (7) At the End of Accounting Year : Generally, amount of depreciation is deducted from the value of assets at the end of an accounting year. (8) Provision : Depreciation is one kind of provision. 4, Necessity (Objectives) of Provision for Depreciation Depreciation is a different kind of expense then other routine expenses of trade and business. It is not cash expense like rent, salary, wages ete which are paid in respective accouting year. It is provided in respective accounting year and incorporated in the accounts. The following arguments specify the necessity or objectives of depreciation. (1) To be treated as business expense : Depreciation accounting year and which is not paid in cash. (2) To know true and fair profit : It is essential to consider depreciation to know the true and fair profit-loss of the business. Thus it is debited to profit and loss account. (3) To know true and fair financial position of business : Balance sheet discloses economic position of the business, where depreciable assets are shown after deducting depreciation. Due to the disclosure of assets after depreciation, balance sheet reflects true position. On the basis of that, true and fair position of entire business can be ascertained (4) To determine correct cost of production : To determine the cost of goods produced in factory or services, expense affecting production or production related expenses should be considered Thus, like other expenses depreciation on depreciable assets used in business is essential to be considered to determine the cost a revenue expense of the respective (5) To determine correct selling price of product or service : To arrive at a selling price of 4 product or service, total cost is determined, where depreciation is included. (6) To maintain capital : The significant share of total capital is employed in fixed assets. These assets become useless at the end of their useful life. To acquire new assets, replacing these assets, capital is needed. To maintain this kind of capital in business, depreciation provision is being made on assets of business. (7) To comply with legal provision + A computation depreciation and its recording in accounts are done according to legal provision. 5. Factors Affecting Depreci Depreciation is a reduction in the useful value of asset. Causes of reduction in useful value of asset are as follows (1) Use of asset : The efficiency of any asset reduces due to its use. The useful life and useful value also reduces due to the reduction in efficiency of asset. During the year, value reduction of asset, shows amount of depreciation. (2) Time factor : The life of some assets come to end automatically on completion of certain period of time. The life of some assets of business is predetermined like lease hold property. 27 Depreciation Accountseg. Lease hold machines for five years. The useful life of such assets gradually reduces with time and at the end of a fixed period its value is considered zero. After deduction of the estimated scrap value, the remaining cost price is written off as depreciation during the useful life of asset. In this case, it can be said that cost price after deduction of scrap value indicates total depreciation of respective asset. Many times assets remain unused, still their value is decreasing. This decrease is also known as depreciation, (3) Gradual reduction in quantity : The value of some assets is determined by the quantity of the respective assets, like mines, gas and oil wells. The value of such assets is based on their size of quantity. The use (acquisition) of such assets, reduce their value. This reduction known as depreciation. In such kind of assets, the depreciation is computed in the proportion of the reduction in quantity. The amount paid, is written off proportionally as a depreciation. (4) Permanent reduction in market value : As and when there is permanent reduction in market value of asset, the amount of reduction is known as depreciation. (5) Accident : Some times accidents create loss during the use of assets, So this reduces the utility and estimated life of the asset and consequently the value of asset reduces. This reduction is known as depreciation, (6) New innovation and research : At times the introduction of new technology or innovation reduces the value of the assets in use. Such reduction is known as depreciation in value. (7) Natural factor : Due to the natural factors like flood, earthquake, rain, climate etc the estimated life of asset decreases or asset becomes useless and consequently the value of asset reduces. This is known as depreciation. 6. Factors to be Considered to Determine Amount and Rate of Depreciation The depreciation of asset is an estimation based on various factors. Higher the degree of real and accurate estimate, higher the degree of realistic depreciation determination. Thus to determine the amount of depreciation, the computation of depreciation and the rate of depreciation the following important points are required to be considered. (1) Cost price of assets : The computation of depreciation is always done on cost price. Thus the determination of cost price is very significant. During the determination of cost price of asset the transportation cost and installation cost are added to the purchase price of asset. If old asset is purchased, expenses incurred to bring the asset in usable form, are added to the purchase price of fan asset. This can be represented in the form of formula as follows. Cost price = Purchase price + Transportation cost + Installation cost If old asset (second hand asset) is purchased : Cost price = Purchase price + Expenses incurred to bring the asset in usable forms. (repairing expenses) e.g. A company of Ahmedabad has purchased a machine from Surat for € 50,000. The transportation cost to bring this machine from Surat was 7 4000. % 2000 paid to install this machine in factory. The cost price of machine will be, % 50,000 + % 4000 + ¥ 2000 = & 56,000. (2) Estimated life of asset : The time period for which an asset can be used efficiently, is known as estimated life of asset. During the determination of estimated life of an asset, technical aspects and possibility of innovation etc. are considered. 28 Elements of Accounts : Part II: Std. 11(3) Estimated serap value of asset : The amount which is realizable at the end of the estimated life of an asset is known as scrap value of asset. The depreciable amount of an asset is determined afier the deduction of the scrap value from the cost price of a asset. The annual amount of depreciation is determined by dividing this depreciable amount with the estimated life of a asset. (4) Use of asset : The efficiency of any asset depends on its use. Higher the use of asset, higher ‘the amount of depreciation is chargeable. It means that the life of a asset is dependent on the use rather than its life. In a factory, when machines are used in more than one shifts, proportionately high amount of depreciation is chargeable. Thus the use of an asset is considered as a very important factor, to determine the amount of depreciation. (5) Repairing and maintenance expense : The estimated life and efficiency of asset increases, if sufficient amount at appropriate time is spent on repairing and maintenance of asset. Thus, annual depreciation would decrease. Hence, this aspect is also necessary to determine the rate of depreciation. Simultaneously, it is also observed that, a balance should be maintained between amount of depreciation and repairing (6) Interest on capital employed for asset : When fixed assets are acquired by loan, and production is not commenced after the acquisition of asset, interest of this period is added to the price of asset. The depreciation is calculated on such total amount. (7) New innovation and research : Continuous new innovations and researches are taking place in present times. Consequently, after some time asset become obsolete. Therefore, the remaining time period of asset is also considered to determine the depreciation. (8) Other factors : Besides, above mentioned factors, the objective of the use of asset, possibility of market price reduction, possibility of accident, natural calamities and other factors are also essential to be considered for depreciation. 7. Depreciable Assets There is reduction in value of some assets due to their limited life, they are called as depreciable assets. While on some assets depreciation is not charged, because their value does not reduce due to use for a passage of time. e.g. Land. In normal circumstances, the following explanation can be given for depreciable assets (1) An asset which is purchased for the purpose of use; it means, not acquired for the purpose of sale, such asset is considered as depreciable asset. (2) An asset which is used for more than one accounting period, such asset is considered as depreciable asset. It means asset which is useful for one accounting year only, it is not considered as a long term depreciable asset, because the total cost of asset is written off as depreciation. (3) An asset which has limited life, is considered to be a depreciable asset. But asset which has unlimited life or whose estimation of life is not possbile, this kind of asset is not considered as depreciable asset. e.g. Land. With observation of above mentioned charateristics the list of depreciable assets is as follows : (i) Building (ii) Plants and machines (iii) Furniture and fixtures (iv) Loose tools (v) Lease hold properties (vi) Vehicles (vii) Patent, copyright, trade mark (viii) Mines, Gas wells, Oil wells etc. 29 Depreciation Accounts8. Different Methods of Depreciation (1) Fixed Instalment or Straight Line Method (2) Reducing Balance Method or Written down Value Method (3) Annuity Method (4) Depreciation Fund or Sinking Fund Method (5) Insurance Policy Method (6) Revaluation Method (7) Compound Interest Method (8) Depletion Method (9) Mileage Method (10) Machine Hour Rate Method Note : As per syllabus, practical problems only on fixed instalment method and reducing balance method are expected. (1) Fixed Instalment or Straight Line Method This is very simple and widely used (popular) method, Under this method the annual amount of depreciation remains identical. The graph of depreciation of each year remains in horizontal line. Thus, this method is known as fixed instalment method or straight line method. (A) Procedure to detert ¢ the amount of depreciation = (i) Under this method to determine the amount of depreciation, total depreciable amount is determined by deducting estimated scrap value fiom the cost price of an asset. By dividing this depreciable amount with the total years of estimated life of an asset, the arrived amount is called as the annual amount of depreciation. ‘The annual amount of depreciation can be obtained with the help of the following formula : c-s Formula : D = > Where, D = Annual depreciation © = Cost Price S = Scrap Value N = Number of Years of Useful Life (ii) Some times to determine the amount of depreci ‘method. In this circumstances, the multiplication of cost price with the rate of depreciation, gives annual amount of depreciation. For this, the following formula can be used. CR 700 , depreciation rate is provided under this Formula : Where, D = Annual depreciation © = Cost Price R = Rate of Depreciation 30 Elements of Accounts : Part II: Std. 11From the formula given below, the rate of depreciation can be obtained as follows : (B) (e) (v) (e) R=2 x 100 Benefits : (i) It is very simple method to compute depreciation on asset. (i) This method is very easy to understand (iii) Since, the amount of depreciation remains identical every year, no frequent computation of depreciation is required. Disadvantages (limita (i) Under this method, the amount of depreciation remains identical every year. Thus ‘no appropriate balance is maintained between depreciation and maintenance expense. In the initial years of a new asset, the repairing expense comes minimum and in subsequent years it increases. (i) Under this method, interest on capital is ignored. For which assets, it is appropriate ? ‘This method is appropriate for those assets, whose, useful estimated life can be determined very easily. e.g. Leaschold properties, copyright, patent, trade mark ete. Accounting treatment of depreciation : (i) For the first year. Date Particulars LF. | Debit (%) | Credit (2) When asset is purchased : Asset Ale Dr Cost price To bank A/c Purchase_price To bank/cash Ale (Being asset is purchased and expenses are paid) ‘Recording of depreciation at the end of the accounting year : Depreciation A/c Dr To asset A/c (Being the amount of depreciation is charged.) Entry for closing down depreciation account and transfer to profit and loss account Profit and loss A/c Dr ‘To depreciation A/e (Being depreciation account is closed and transferred to profit and loss account.) (ii) Second year onwards, at the end of each accounting year, until the asset is sold / the completion of life. 3 Depreciation AccountsDate Particulars LF. | Debit (%) | Credit (2) 1 Recording of depreciation : Depreciation A/c Dr To asset A/c (Being the amount of depreciation is charged.) 2 Entry for closing down depreciation account and transfer to profit and loss account : Profit and Loss A/c Dr ssa To depreciation A/e (Being depreciation account is closed and transferred to profit and loss account.) ‘The annual amount of depreciation is disclosed in annual accounts on debit side of profit and loss account and in balance sheet on asset side it is deducted from the cost price of an asset at the end of each accounting year. Illustration 1 : Sheela Ltd. has purchased a machine for % 48,000 on 1-04-2012. Installation expense of this machine was € 2000. An estimated life of this machine is 10 years and serap value of machine is expected to be % 10,000, Determine annual depreciation and annual depreciation rate under straight line method of depreciation. Accounting year of the company is ending on 31st March. Prepare, journal entries, machine account and depreciation accounts for first three years. Disclose accounting effect of it in final accounts of first year. (1) Annual depreciation : D = ss D_ = Amount of annual depreciation © = Cost price = Purchase price + Installation expense = 48,000 + 2000 = t 50,000 S. = Scrap value = & 10,000 N_ = Total life in years = 10 years = 50,000 10,000 _ 40,000 _ p-aemm = Rew = & 4000 Annual amount of depreciation = 4000 (2) Rate of depreciation : D R= Gx 100 4000, th X 100 % R Annual rate of depreciation 8% 20 —_______—_. Elements of Accounts : Part II: Std. 11Journal Entries in the Books of Sheela Limited Date Particulars LF. | Debit () | Credit (2) 14-12 Machine A/c Dr 50,000 To bank A/c 48,000 To cash Ale 2000 (Being machine of © 48,000 purchased and payment is made by cheque and installation expense & 2000 paid in cash.) 313-13 | Depreciation A/c Dr 4000 To machine Af 4000 (Being depreciation of € 4000 is recorded.) 31-3413 | Profit and Loss Ale Dr 4000 To depreciation A/c 4000 (Being depreciation of € 4000 transferred to profit and loss account.) 31-314 | Depreciation A/c Dr 4000 To machine A/c 4000 (Being depreciation of € 4000 is recorded.) 31314 | Profit and Loss Ale Dr 4000 To depreciation A/c 4000 (Being depreciation of € 4000 transferred to and loss account.) 313-15 | Depreciation A/c Dr 4000 To machine A/e 4000 (Being depreciation of & 4000 is recorded.) 31-3415 | Profit and Loss Ale Dr 4000 To depreciation A/c 4000 (Being depreciation % 4000 transfered to profit and loss account.) Total 74,000 74,000 33 Depreciation AccountsLedger of Sheela Limited Machine Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount BE] (z) Fr] (2) 14-12 | To Bank Alc 48,000 |31-3413 | By Depreciation A/c 4000 * | To Cash Ale 2000 {31-313 | By balance c/d 46,000 50,000 50,000 14-13 | To balance b/d 46,000 By Depreciation A/c +4000) By balance e/d 42,000 46,000 46,000 14-14 | To balance b/d 42,000 By Depreciation A/c 4000 By balance e/d 38,000 42,000 42,000 Depreciation Account Dr Cr Date Particulars, J. | Amount | Date Particulars J. | Amount F.| () Fr] () 313-13 | To machine Ale 4000 |31-3-13 | By profit and loss A/e 4000 4000 4000 31-314 | To machine Ale 4000 |31-3-14 | By profit and toss A/e 4000 4000 4000 31-3-15 | To machine Ale 4000 |31-3-15 | By profit and loss A/e 4000 4000 4000 Accounting Effect in Annual Accounts Profit and Loss Account for the Year Ending 31-3-13 Dr cr Particulars ‘Amount Particulars ‘Amount @) (@) To machine depreciation A/e 4000 Balance Sheet as at 31-3-13 Amt. (®) Assets-Debts Amt. (&) Machine 50,000 — Depreciation 4000 | 46,000 34 Elements of Accounts : Part II: Std. 11Note : In the above mentioned illustration the cost of machine is € 50,000. If depreciation it to be calculated at 8 % per annum instead of the estimated scrap value and useful life, the depreciation will be calculated as under. Accounting treatments, (accounting effects) in annual accounts would remain ‘the same. Annual amount of depreciation : 50,000_8 D= —n p= (2) Reducing Balance Method = (A) Method to deter calculated on opening balance of asset at the predetermined rate. Opening balance means closing balance of the previous year after the deduction of depreciation. Thus due to the substraction of depreciation from the value of asset, the opening balance of asset would reduce to that extent. Consequently, every year amount of depreciation gradually reduces. Thus, this method is known as reducing balance method. \e depreciation amount Under this method every depreciation is Ilustration 2 : Surbhi & Co. purchased a machine at a cost of 57,000. Installation cost to it was % 3000. Compute depreciation at 5 % under reducing balance method for first three years. Cost price = 57,000 + 3000 = % 60,000 Computation of Depreciation Particulars Amount (8) Cost price of machine 60,000 — Depreciation at the end of first year (5 % on 60,000) 3000 Closing balance at the end of first year 57,000 (Opening balance of second year) = Depreciation at the end of second year (5 % on 57,000) 2850 Closing balance at the end of second year 54,150 (Opening balance of third year) - Depreciation at the end of third year (5 % on 54,150) 2708 Closing balance at the end of third year 51442 (Opening balance of fourth year) Explanation : (i) Every year depreciation is calculated at 5 %. (i) Every year depreciation is calculated on the opening balance of respective year. Due to the depreciation, opening balance of each year reduces. In this case this amount is © 57,000, % 54,150 and & 51,442. (ii) The amount of depreciation also gradually reduces. It is % 3000, % 2850 and % 2708 respectively. Therefore, this method is known as reducing balance method. (B) Advantages : (Under this method balance between depreciation amount and repairing expense is ‘maintained. Because in the intial years, the amount of depreciation would remain high and it 35 Depreciation Accountsreduces in subsequent years. While in intial years repairing amount remains insignificant and with passing of time the repairing expenses increases. In this manner, the balance between the amount of depreciation and the repairing expense is maintained Gi) This is simple method to compute depreciation (C) Disadvantages : (This method is not as simple as the straight line method. (i) Under this method, interest on capital employed for asset is not considered. (D) For which assets it is appropriate : This method is appropriate for those assets which are of long term use and which have balance amount after their use. e.g. furniture, fixtures, plant and machines, building etc. (E) Accounting treatments of depreciation : Under this method accounting treatments are given like straight line method. Every year only the amount of depreciation reduces gradually. Mlustration 3 : Harpal Limited has purchased a machine for € 1,50,000 on I~4-12. Installation expense to it was € 10,000. If every year 15 % depreciation is chargeable, under reducing balance method, pass journal entries and prepare machine account, depreciation account for first three years. Disclose accounting effect of it in final accounts of first two years. ‘Ams. : Journal Entries in the Books of Harpal Date Particulars LF. | Debit (%) | Credit (%) 14-12 | Machine A/e Dr 160,000 ‘To hank A/e 1,50,000 To cash Ale 10,000 (Being machine purchased for & 1,50,000 and paid installation € 10,000 in cash.) 313-13 | Depreciation A/c Dr 24,000 To machine A/c 24,000 (Being depreciation of € 24,000 is recorded.) 31.313 | Profit and Loss Ale Dr 24,000 To depreciation A/o 24,000 (Being depreciation of & 20,400 is transferred to Profit and Loss account.) 31-314 | Depreciation A/c Dr 20,400 To machine Ale 20,400 (Being depreciation of € 20,400 is recorded.) 31-314 | Profit and Loss Ale Dr 20,400 ‘To depreciation A/c 20,400 (Being depreciation of % 20,400 is transferred to Profit and Loss account.) 36 Elements of Accounts : Part II: Std. 11Date Particulars LF. | Debit () | Creait (%) 313.15 | Depreciation A/c Dr 17340 To machine A/e 17340 (Being depreciation of & 17,340 is recorded.) 313.15 | Profit and Loss Ale Dr 17340 To depreciation A/e 17340 (Being depreciation of © 17,340 is transferred to Profit and Loss account.) Total 2,83,480 | 2,83,480 Ledger of Harpal Limited Machine Account Dr Cr Date Particulars J. | Amount | Date Particulars J. | Amount FE} () rk] (@) 14-12 | To bank A/e 1,50,000 By depreciation A/c 24,000 » | To cash Ale 10,000 By balance e/d 136,000 1,60,000 1,60,000 14-13 | To balance b/d 1,36,000 By depreciation A/c 20,400 By balance e/d 115,600 136,000 1,36,000 14-14 | To balance b/d 1,15,600 By depreciation A/c 17,340 By balance e/d 98,260 1,15,600 113,600 Depreciation Account Dr Ce Date Particulars J. | Amount | Date Particulars J. | Amount RK (z) rR (z) 31-3413 | To machine Ale 24,000 } 31-3-13 | By Profit and Loss A/e 24,000 24,000 [24,000 | 313-14] To machine Ale 20,400 | 31-3-14 | By Profit and Loss A/e 20,400 20,400 20,400 31-3415] To machine Ale 17,340 [31-3-15 | By Profit and Loss Ale 17,340 17,340 17,340 37 Depreciation AccountsAccounting Effect in Annual Accounts Profit and Loss Accounts for the year ending 31-3-13 Dr Cr Particulars ‘Amount Particulars ‘Amount @ (®) To machine depreciation A/e 24,000 Balance Sheet as at 31-3-13 Capital-Liabilities Amt. (2) Assets-Debts Amt. (2) Machine 1,60,000 = Depreciation 24,000 | 1,36,000 Profit and Loss Account for the year ending 31-3-14 Dr Cr Particulars ‘Amount Particulars ‘Amount ® @) To machine depreciation A/e 20,400 Balance Sheet as at 31-3-14 Amt. (2)| Assets-Debts Amt. (2) Machine 1,36,000 — Depreciation 20,400 | 1,15,600 9. Difference : Straight Line Method and Reducing Balance Method No.| Aspect of Straight Line Method Reducing Balance Method Difference (1) | Computation of | Under this method depreciation is] Under this method depreciating depreciation calculated by deducting scrap value | amount is calculated on the basis amount from cost price and dividing arrival | of predetermined rate of amount by number of years of depreciation. estimated life of asset (2) | Amount of Under this method every year Under this method every year depreciation amount of depreciation remains amount of depreciation reduces. identical. (3) | Value of asset at | Under this method value of asset | Under this method value of asset the end of estimate] becomes zero at the end of its does not become zero at the end life estimated life. of its estimated life. 38 Elements of Accounts : Part II: Std. 11No.] Aspect of, Straight Line Method Reducing Balance Method Difference (4) | Amount of Under this method no balance is | Under this method appropriate depreciation and | maintained between depreciation and | balance is maintained between repair expense. | maintenance expense. Because amount of depreciation and during every year depreciation maintenance. Because, during remains identical and during initial _| years depreciation remains high and years maintenance remains low. maintenance remains low. While While during later years the amount | during later years depreciation of maintenance increases but amount | amount reduces and maintenance of depreciation remains identical. _| expense increases. (5) | On which price | On cost price of asset depreciation | On depreciated price depreciation depreciation is | is calculated. is calculated. It means depreciation calculated ? is calculated on opening balance of respective years. ‘On different valid grounds the method of depreciation is changed by business enterprises Specifically, conversion is done of straight line method into reducing balance method or of reducing balance method into straight line method. But, one aspect is to be kept in mind that, irrespective of the use of depreciation method, the amount of total depreciation at the end of estimated life remains identical. Under straight line method every year amount of depreciation is identical. Under reducing balance method every year amount of depreciation reduces. To maintain the identical amount of total depreciation and to prevent the violation of this rate, the rate of depreciation of reducing balance method is always higher than the depreciation rate under straight line method. To determine the rate of depreciation the following formula is used under reducing balance method Scrap value of aset — 'VCost price of asser * 100 n = life in years Rate of depreciation Let us understand this aspect with following illustration = e.g. An enterprise has purchased a machine for % 1,25,000. The estimated scrap value of this machine is % 25,000. The estimated life of machine is 4 years. From the above information calculate rate of depreciation and total amount of depreciation uder (i) Straight line method (ji) Reducing balance method. (i) Straight line method : Cost price of machine — Scrap value Estimated life 1,25,000 = 25,000 Annual depreciation in amount 25,000 Annual depreciation ‘Cost price of machine 25,000 Rate of annual depreciation = X 100 = ey X 100 = 20% |) Reducing balance method : [Scrap value of Annual rate of depreciation = 1 — x 100 Cost price of asset 100 = Approximatly 33.13 % 39 Depreciation AccountsStraight Line Method Reducing Balance Method Cost price of machine 125,000, Cost price of machine 125,000, = 20 % depreciation 25,000 | - 33.13 % depreciation 41413 1,00,000 83,587 = 20 % depreciation 25,000 | - 33.13 % depreciation (on 27,692 75,000 reduced balance) 35,895 = 20 % depreciation 25,000 | — 33.13 % depreciation (on 18,518 50,000 reduced balance) 37377 = 20 % depreciation 25,000 | — 33.13 % depreciation (on 12377 reduced balance) Scrap value 25,000 Scrap value 25,000 Total depreciation 25,000 + ++ Total depreciation 41,413 + 25,000 + 25,000 + 25,000 = | 1,00,000 27,692 + 18,518 + 12,377 = | 1,00,000 Note : (1) Under reducing balance method when depreciation rate is to be calculated by applying the above mentioned formula, the use of Log methed is essential. It is not expected from students (2) Only, theoretical explanation is given. 10. Methods of Recording Depreciation From the view point of accounting, there are two methods for recording depreciation, which are as follows : (1) Method of providing depreciation on the respective assets (2) Method of provision for depreciation (1) Method of Providing Depreciation on the Respective Asset = Under this method, by applying predetermined method of depreciation, the amount of depreciation is debited to depreciation account and credited to the respective asset, consequently, the book value of asset reduces to the extent of amount of depreciation. stration 4 : Akshara Limited has purchased a machine for % 70,000 on 01-4-2013. 10 % depreciation is to be charged as per straight line method on this machine, Pass journal entries for first two years of depreciation in the books of company and disclose effect in annual accounts. : Here, amount of depreciation will be © 7000. Since straight line method of depreciation is applied, the amount of depreciation would remain identical and its accounting treatments will be as follows : Journal Entries in the Books of Akshara Limited Date Particulars LF. | Debit (%) | Credit (2) 313-14 | Depreciation A/c Dr 7000 To machine A/e 7000 (Being depreciation of % 7000 is recorded.) 313-14 Profit and Loss A/c Dr 7000 To depreciation A/c 7000 (Being depreciation of & 7000 is transfered to Profit and Loss account.) 40 Elements of Accounts : Part II: Std. 11Date Particulars Le. | Debit (z) | Credit (2) 313-15 | Depreciation A/c Dr 7000 To machine A/c 7000 (Being depreciation of = 7000 is recorded.) 313-15 | Profit and Loss A/c Dr 7000 To depreciation A/e 7000 (Being depreciation of & 7000 is transferred to Profit and Loss account.) Total 28,000 28,000 Note : At the end of every accounting year the amount of depreciated will be transfered to Profit and L ss account. Accounting Effect in Annual Ac ‘counts Profit and Loss Account for the year ending 31-3-14 Dr cr Particulars ‘Amount Particulars ‘Amount ®& ®&) To machine dereciation Ale 7000 Profit and Loss Account for the year ending 31-3-15 Dr cr Particulars Amount Particulars Amount @® ® ‘To machine depreciation A/c 7000 Balance Sheet as at 31-3-14 Capital-Liabilities Amt. (2) Assets Amt. (2) Machine 70,000 = Depreciation 7000 | 63,000 Balance Sheet as at 31-3-15 Capital-Liabilities Amt. (2)) Assets Amt. (2) Machine 63,000 = Depreciation 7000 | 56,000 41 Depreciation AccountsAs disclosed above, at the end of every accounting year depreciation treatments will be given in annual accounts. The book value of asset, after deduction of depreciation of respective year will be shown in the balance sheet. (2) Method of Provision for Depreciation Under this method, first of all, the amount of depreciation is decided on the basis of predetermined method of depreciation. Subsequently depreciation amount is debited to depreciation account and credited to depreciation provision account. In this manner, amount written off every year, will be accumulated in depreciation account; consequently the amount of depreciation would increase every year. This accumulated amount shows, total amount of depreciation of the respective period. From the cost price of asset, the total depreciation provision amount is deducted and disclosed on the asset side of balance sheet at the end of every accounting year. While the amount debited to depreciation is transferred to profit and loss acecount. Depreciation provision account is disclosed in the books of account. Since the amount of depreciation of year gets accumulated in depreciation provision account, it is known as accumulated depreciation account also. Illustration 5 : On 1-4-2013 book value of an asset is ® 70,000. Provide 10% depreciation under straight line method through creation of depreciation provision account. Pass journal entries show its effects in annual accounts and prepare depreci ion provision account for first two years. Journal Entries Date Particulars LF. | Debit (%) | Credit (%) 313-14 | Depreciation A/c Dr 7000 To depreciation provision A/c 7000 (Being depreciation of € 7000 is provided.) 313-14 | Profit and Loss A/e Dr 7000 ‘To depreciation A/c 7000 (Being depreciation of € 7000 transferred to profit and loss account.) 313-15 | Depreciation A/c Dr 7000 ‘To depreciation provision A/c 7000 (Being depreciation of 7000 is provided.) 313-15 | Profit and Loss A/e Dr 7000 To depreciation Ave 7000 (Being depreciation of € 7000 transferred to profit and loss account.) Total 28,000 28,000 42 Elements of Accounts : Part II: Std. 11Depreciation Provision Account (Accumulated Depreciation Account) Dr Cr Date Particulars J. | Amount | Date Particulars J. | Amount FE} (@) rk! @) 31-3-14 | To balance e/d 7000 }31-3-14 | By depreciation A/c 000 7000 7000 31-3-15 | To balance ¢/d 14,000 | 14-14 | By balance b/d 7000 31-315 | By depreciation A/c 7000 14,000 14,000 Machine Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount rE] @ F/ (®) 14-13 | To bank A/c 70,000 | 31-3-14 | By balance c/d 70,000 70,000 70,000 Im-14 | To balance b/d 70,000 By balance c/d 70,000 70,000 70,000 Accounting Effect in Annual Accounts Profit and Loss Account for the year ending 31-3-14 Dr cr Particulars Amount Particulars Amount (®) () To machine depreciation A/c 7000 Profit and Loss Account for the year ending 31-3-15 Dr cr Particulars Amount Particulars Amount (2) (2) To machine depreciation A/c 7000 Balance Sheet as at 31-3-14 Capital-Lial Amt. (2) Assets Amt. (2) Machine 70,000 = Accumulated 000 | 63,000 depreciation 43 Depreciation AccountsBalance Sheet as at 31-3-15 Capital-Liabilities Amt. (2) Assets Amt. (2) Machine 70,000 — Accumulated 14,000 | 56,000 depreciation Important Note (1) As stated above, no effect of depreciation is given in machine account. From the cost price of machine, accumulated depreciation is deducted and shown in balance sheet for annual accounts purpose. (2) Alternatively, under this method asset is shown at cost price on assets side of balance sheet and depreciation provision accounts is shown on liabilities side. 11. Typical Mlustrations Illustration 6 : There is balance in machine account of & 65,000 in the books of Kashvi Enterprise fon 1-4-2015. This machine was purchased five year back. On this machine depreciation was computed as per straight line method, and total written off depreciation is € 55,000. Total depreci Total years of use ion. Ans. :(1) Amount of annual depreciation as per straight line method QP = 11,000 Annual amount of depreciation = < 11,000 (2) Cost price of machine = Opening balance of machine + Amount of depreciation till date = 65,000 + 55,000 120,000 Cost price of machine = & 1,20,000 Illustration 7 Shrey Limited has purchased a machine on I~ 14 for & 1,20,000. Its installation expense is % 30,000. If depreciation is charged at 15 % under straight line instalment method, disclose the effect in annual accounts of first year Ans. : R= Annual rate of depreciation = 15 % C = Cost price of machine = Purchase price + Installation expense 1,20,000 + 30,000 1,50,000 -k o Annual depreciation amount 70 150,000 = 15 To) 22,500 44 Elements of Accounts : Part IIAccounting Effect in Annual Account Profit and Loss Account for the year ending 31-3-2015 Dr Cr Particulars ‘Amount Particulars ‘Amount @ @ ‘To machine depreciation A/c 22,500 Balance Sheet as at 31-3-15 Amt. (3) Assets Amt. (®) Machine 1,50,000 = Depreciation 1,27,500 Mlustration 8 + There was an opening balance of machine account on I-4-15 in the book of Shruti Limited % 1,05,000. This machine was purchased four years back. Under straight line method, 10 % depreciation is charged on this machine, From this information ascertain the amount of annual depreciation Necessary computation and explanation : Under straight line method, the amount of depreciation is determined on the basis of cost price of machine. First of all, cost price of machine will be ascertained. Assume cost price ot machine 1s, = 100 (-) Depreciation at 10 % for four years (10 x 4) z 40 “+ Book value of machine at the end of fourth year 60 ‘As given, book value of machine at the end of fourth year is 1,05,000. If book value of at the end of fourth year © 60 = cost price € 100 “+ If book value of at the end of fourth year & 1,05,000 = (?) 1,05,000 = 100 _ =o = 1,75,000 J+ Cost price of machine = & 1,75,000 crR Annual amount of depreciation = <= Where, C = 1,75,000, R = 10% : _ocR . p=ok 175,000 = 10 “nw Annual amount of depreciation = & 17,500 Ans. Cost price & 1,75,000 Annual amount of depreciation % 17,500. 45 Depreciation AccountsIlustration 9 : Yug & Co. had purchased one machine for € 1,10,000 on I~4=12. Installation cost of this ‘machine was % 6000 and carriage expense was % 4000. Company provides 8 % depreciation under straight line method, On 31-3-15 this machine was sold at a loss of 20 % of book value. Prepare journal entries and machine account for three years, Ans. : Necessary Calculation : Annual depreciation : Cost price of machine = Purchase price + Installation cost + Other expenses = © 1,10,000 + © 6000 + = 4000 = %1,20,000 Annual depreciation = Cost price of machine x Depreciation rate = 9600 Selling price of mac! Cost price of machine on 1-4-12 (-) Depreciation of three years (€ 9600 x 3) “+ Book value of machine on 31-3-15 91,200 (—) Sales of 20 % loss (% 91,200 x 20 %) 18,240 “. Selling price of machine 72,960 Journal Entries in the Book of Yug Limited Date Particulars LF. | Debit (%) | Credit (%) 14-12, | Machine Ale Dr 120,000 To bank Ae 1,10,000 To cash Ale 10,000 (Being machine purchased for € 1,10,000 and paid 10,000 for its installation and other expenses.) 313-13 | Depreciation A/c Dr 9600 To machine A/c 9600 (Being depreciation of % 9600 is charged.) 313.13 | Profit and Loss Ale Dr 9600 To depreciation Afe 9600 (Being depreciation of % 9600 is transferred to profit and loss account.) 313-14 | Depreciation Ale Dr 9600 ‘To machine A/c 9600 (Being depreciation of & 9600 is charged.) 46 Elements of Accounts : Part II: Std. 11Date Particulars LF. | Debit (¢) | Creait (2) 313-14 | Profit and Loss A/e Dr 9600 To depreciation Ale 9600 (Being depreciation of € 9600 is transferred to profit and loss account.) 313-15 | Depreciation A/c Dr 9600 To machine Ale 9600 (Being depreciation of & 9600 is charged.) 313-15 | Profit and Loss A/e Dr 9600 To depreciation A/e 9600 (Being depreciation of % 9600 is transferred to profit and loss account.) 313-15 | Bank A/c Dr 72,960 To machine Ale 72,960 (Being machine of book value of € 91,200 sold at loss of 20 %) 31-315 | Profit and Loss A/e Dr 18,240 ‘To machine Ale 18,240 (Being loss on sale of machine & 18,240 is transferred to profit and loss account.) Total 2,68,800 | 2,68,800 Ledger of Yug & Company Machine Account Dr cr Date Particulars J. | Amount | Date Particulars J. | Amount E| @ F | () I-12 | To bank A/e 1,10,000 By depreciation A/c 9600 1412 | To cash Ale 10,000 By balance c/d 1,10,400 1,20,000 1,20,000 14-13 | To balance b/d 110,400 By depreciation A/c 9600 By balance c/d 1,00,800 1,10,400 1,10,400 1414 | To balance b/d 1,00,800 By depreciation A/c 9600 By bank Ave 72,960 By Profit and Loss A/e 18,240 (Loss on sale of machine) 1,00,800 1,00,800 47 Depreciation AccountsIllustration 10 : Shushma Limited has purchased one machine for € 52,000 on 14-12. Installation expense of machine was € 3000, On 1-10-13 second machine purchased for % 19,000, its installation cost was % 1000. Company charges depreciation at 10 % under straight line method of depreciation On 31-3-15, first machine was sold at profit of 20 % on book value. Ans. : Necessary calculation : Selling price of first machine (which is sold) : Cost price of machine = % 52,000 + % 3000 = % 55,000 Annual depreciation amount (at 10 %) = = = s500 Selling price of machi z Cost price of machine on 1-4-12 55,000 (—) Depreciation at 10 % for three years (¥ 5500 x 3) 16,500 “+ Book value of machine on 31-315 38,500 (+) 20 % profit on ¥ 38,500 7700 . price of machine 46,200 Depreciation on second machine : Cost price on 1-10-13 & 20,000. Depreciation at 10 % for six months from 1-10-13 to 31-3-14 & 1000. Depreciation for 1-4-14 to 31-3-15 for entire year % 2000. Journal Entries in the Book of Shushma Limited Date Particulars LF. | Debit (*) | Credit (¢) 14-12 | Machine A/c Dr 55,000 lo bank Ale 52,000 To cash Ale 3000 (Being machine purheased for % 52,000 and paid its installation expense € 3000.) 31-313 | Depreciation A/e Dr 3500 To machine A/c 5500 (Being depreciation of % 5500 is recorded.) 313.13 | Profit and Loss Ale Dr 5500 To depreciation A/c 5500 (Being depreciation of % 5500 is transferred to profit and loss account.) 1-10-13 | Machine A/e Dr 20,000 To bank A/c 19,000 To cash Ale 1000 (Being machine purchased for = 19,000 and paid its installation expense & 1000.) 313-14 Dr 6500 6500 (Being depreciation of % 5500 on first machine and Z 1000 on second machine is recorded.) 48 Elements of Accounts : Part II: Std. 11