Cma Inter Marathon

COCEDUCATION.
COM CMA INTER-1 MARATHON CA/CMA Santosh kumar
FINANCIAL STATEMENT OF PROFIT MAKING ORGANISATIONS (COMMERCIAL ORGANISATIONS)

➢ The financial statements of a non-corporate commercial organisation broadly includes the Income Statement,
Balance Sheet, and Cash Flow Statement.
➢ The term ‘Income Statements’ is a generic term which refers to those components of financial states which are
associated with determination of operating result i.e. ascertainment or profit earned or loss suffered.
➢ The components of income statements of non-corporate commercial organisations are:
(a) Trading Account
(b) Profit & Loss Account
(c) Profit & Loss Appropriation Account
Format of trading account
Particulars Amount Particulars Amount

To Opening stock xxxx By sales xxx
To Purchases xxxx Less: sales return xxx xxxx
Less: return xxxx xxxx
To Direct expenses xxxx By closing stock xxxx
To Gross profit (Bal fig) By Gross loss ( bal fig)
Profit and loss account

To indirect expenses xxxx By Gross profit xxx
( expenses related to office, administration,
sales) By indirect income ( e.g sale of scrap, xxx
To abnormal losses ( fire/ theft/flood) xxxx commission, dividend, interest,
To Net profit ( bal fig) discount received etc)
Profit and loss appropriation account

To appropriation of By net profit xxxx
profit among partners
(e.g Interest on capital, By interest on drawings
salary to partners, share
in profit)
Note: 1. Transfer to general reserve is done through profit & loss account in case of sole proprietor and through
profit and loss appropriation account in case of partnership firm.
COCEDUCATION.COM CMA INTER-1 MARATHON CA/CMA Santosh kumar
Treatment of adjustments:
Revision question 1. Treatment of Closing stock –
(a) If given in adjustments – Credited to trading account and shown in assets side of balance sheet.
(b) If given in trial balance - It is shown in assets side of balance sheet.
Important adjustments given in adjustments:

Revision question 2. Prepaid expenses Rs 10,000:

Expenses paid xx
less: prepaid expenses 10,000
Balance sheet
Liability Amount Assets Amount

Prepaid expenses 10,000
Revision question 3.
Outstanding expenses: it is added in the related expenses in income statement and shown in liability
side of balance sheet.

Expenses paid xx
Add: outstanding expenses xx
Balance sheet

outstanding expenses xxx
Accrued income: it is added in the related income in income statement and shown in asset side of balance sheet.

Income received xx
Add: accrued income xx xx
Balance sheet

Accrued income xxx
Revision question 5. Advance income received: it is deducted from the related income in income statement
and shown in liability side of balance sheet.

Income received xx
less: advance income xx xx
Balance sheet

Advance income xxx
Revision question 6. Treatment of goods distributed as free sample/ charity/ advertisement

Trading account

Purchases xx
Less: distributed as free sample xx
Less: charity/ donation xx
Less: advertisement xx xx

Goods distributed as free sample Xx
Goods used for charity/ donation Xx
Goods used for advertisement xx
Revision question 7. Treatment of goods withdrawn by the proprietor

Trading account

Purchases xx
Less: drawings made xx xx
Balance sheet

Capital
Less: drawings xxx
Revision question 8. Treatment of normal loss of goods:-- No treatment
Revision question 9. Treatment of abnormal loss of goods:--
Trading account

Purchases xx
Less: abnormal loss xx xx

Abnormal loss of Goods xx
Revision question 10. Treatment of cash lost due to theft/ fire etc.

Abnormal loss of cash xx
Balance sheet

Cash xx
Less: loss by theft xx xx
Revision question 11. Treatment of outstanding expenses, prepaid expenses, advance income,
accrued income given in trial balance –
➢ They will be shown only in balance sheet of the firm.

➢ No adjustments are required in income statement.
Revision question 12. Treatment of abnormal loss of goods, goods distributed as free sample/ charity
etc given in trial balance –
➢ it will be shown only profit and loss account.

➢ No adjustment required in trading account.
Revision question 13. Treatment of cash lost by fire/theft given in trial balance –
-- it will be shown only profit and loss account. No adjustment required in cash balance shown in
balance sheet.
Revision question 14. Goods sent on approval basis:
Case 1. Approval received --- no treatment required
Case 2. Approval not received --
• Reduce sales from the amount of approval not received at selling price.
• Reduce debtors from the amount of approval not received at selling price.
• Stock with customer should be credited to trading account at its cost price.
• Stock with customer should be shown in balance sheet at its cost price.
Revision question 15. Treatment of provision for doubtful debts and provision for discount on debtors:
Prepare bad debts account, provision for bad debts account, extract of profit & loss account and balance sheet.
01-01-2023 Provision for bad debts 5,000

31-12-2023 Bad debts written off 3,000
Sundry debtors 1,25,000
31-12-2024 Bad debts written off 2,500

Sundry debtors 1,00,000
Provision for doubtful debts to be provided @ 5% for 2023 and 2.5% for 2024. Further bad debts Rs 10,000 in
the year 2024 after the close of accounts.
Solution: Method 1:
Bad debts account

31-12-23 To debtors account 3,000 31-12-23 By profit & loss account 3,000
3,000 3,000
31-12-24 To debtors account 2,500 31-12-24 By profit & loss account 12,500
To Debtors 10,000
2,500 2,500
Provision for doubtful debts

Date Particulars Amount Date Particulars Amount
1-1-23 By balance b/d 5,000
31-12-23 To balance c/d 6,250 31-12-23 By profit & loss a/c 1,250
(1,25,000 X 5%) ( bal fig)
6,250 6,250
31-21-24 To profit & loss a/c 4,000 1-1-24 By balance b/d 6,250
( bal fig)
31-21-24 To balance c/d 2,250
{1,00,000-10,000) X 2.5%}
6,250 6,250
Method 2.
Bad debts account

To debtors account 3,000 By Provision for doubtful debts 3,000
3,000 3,000
To debtors account 2,500 By Provision for doubtful debts 12,500
To debtors 10,000
2,500 2,500
Provision for doubtful debts

31-12-2023 To bad debts 3,000 1-1-2023 By balance b/d 5,000
(1,25,000 X 5%) ( bal fig)
9,250 9,250
31-12-24 To bad debts 12,500 1-1-2024 By balance b/d 6,250
(90,000 X 2.5%) ( bal fig)
14,750 14,750
Revision question 16. Treatment of manager’s commission:
Case 1. If it to be given @ 10% of net profit before charging such commission :-

𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒄𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏
𝟏𝟎𝟎
X 10
Case 2. If it to be given @ 10% on net profit after charging such commission :-

𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒄𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏
𝟏𝟏𝟎
X 10
➢ Calculated manager’s commission is debited to profit and loss account and should be shown as outstanding
commission in the liability side of the balance sheet.
Important Note:
➢ Commission of Manager of sales department/ administration dept should be shown in profit & loss account.
➢ But commission of works/factory department should be debited to trading account.
Revision question 17. Treatment of wrong valuation of opening stock.

Trial balance as on 31st March 2024
Particulars Debit Credit

Purchases 2,10,000
Stock 45,000
Capital 3,00,000
(a) It was the practice of the owner to value stock at 10% below cost.
(b) The closing stock on 1-04-2023 was Rs 49,500.
Solution: Trading account

𝟒𝟓,𝟎𝟎𝟎 50,000
To opening stock ( x 100)
𝟗𝟎
2,10,000 𝟒𝟗,𝟓𝟎𝟎 55,000

To purchases Closing stock ( x 100)
𝟗𝟎
Balance sheet
Capital and liabilities Amount Assets Amount

Capital 3,00,000 Stock 55,000
Less: over valuation of closing 5,000
stock of last year
TREATMENT OF SOME TYPICAL ADJUSTMENTS IN FINAL ACCOUNT:
Revision question 18. Goods purchased for Rs 6,000 on 29th March, 2023, but still lying in-transit, not at all recorded
in the books. Market value of such goods at the end of the year Rs 5,800. Show treatment for the year ended on 31-3-2024:
Solution:
✓ add in purchases by Rs 6,000

✓ increase creditors by Rs 6,000
✓ stock in transit should be credited in trading account by Rs 5,800
✓ stock in transit should be shown as asset in the balance sheet at Rs 5,800
Revision question 19. Goods worth Rs 19,000 were purchased on 24th March 2024 and sold on 29th March 2024
for 23,750.Sales were recorded correctly, but purchase invoice was missed out.
Answer: make entry for purchase and show its treatment in final account.
Purchases account Dr 19,000

To creditors account 19,000
Revision question 20: Purchase returns of Rs 1,500 were routed through sales return. Party’s A/c was correctly posted.

To purchases xxxx Sales xxxx
Less: purchase return xxx Less: sales return xxxx
Add: error rectified xx
Revision question 21. Purchase book was over-cast by Rs 1,000. Posting to suppliers’ A/c is correct.
Debit Credit
Purchases 4,99,000
Creditors 5,00,000
Suspense account 1,000
➢ Reduce purchases in trading account by Rs 1,000

➢ Reduce suspense account balances in balance sheet by Rs 1,000.
Revision question 22: Advertising will be useful for generating revenue for 5 years. Advertisement expenses
given in trial balance Rs 1,00,000.
Solution:

Advertisement 1,00,000
Revision question 23: Salaries include Rs 10,000 towards renovation of Proprietor’s residence.

Salary xxxx
Less: drawings 10,000
Balance sheet

Capital xxxx Stock 55,000
Less: renovation expenses 10,000
Revision question 24: Cash received from Debtors Rs 5,600 was omitted to be posted in the ledger.
Debit Credit
Cash 20,000
Debtors 14,400
Suspense account 5,600
Revision question 25: Sales included Rs 30,000 as goods sold for cash on behalf of Mr. Thakurlal, who allowed
15% commission onsuch sales for which effect is to be given.
Answer:
Correct entry Cash account Dr 30,000
To Thakural account 30,000
Thakural account Dr 4,500
To commission account 4,500
Wrong entry Cash account Dr 30,000
To sales account 30,000
Rectifying entry Sales account Dr 30,000
To commission account 4,500
To Thakural account 25,500
Trading account

By sales xxxx
Less: sales on behalf of thakural 30,000

By Commission 4,500
Balance sheet
Thakural 25,500
Revision question 26: Sales includes Rs 60,000 towards goods sold for cash on account of a joint venture with Mr.
Reddy who incurred RS 800 as forwarding expenses. The joint venture earned a profit of Rs 15,000 to which Mr. Reddy is
entitled to 60%.
Debit Credit
Sales 3,00,000
Cash 3,00,000
Answer:
1. Correct entry should be
Cash account Dr 60,000
To Reddy account 60,000
2. wrongly entry passed :
Cash account Dr 60,000
To sales account 60,000
3. Rectifying entry:
Sales account Dr 60,000
To Reddy account 60,000
4. Additional entry is required to pass:
Reddy account Dr 6,000
To profit on Joint venture (15,000 X 40%) 6,000
Treatment in final account:
➢ Decrease sales by Rs 60,000
➢ Show profit on joint venture Rs 6,000 in credit side of profit & loss account.
➢ Show Reddy as liability in balance sheet at Rs 54,000 ( 60,000 – 6,000)
Revision question 27: Trial balance as on 31st March 2024

Motor car 56,000
Purchases 6,80,000
i. The motor car account represents an old motor car which was replaced on 1.4.2023 by a new motor car
costing Rs 1,20,000 with an additional cash payment of Rs 40,000 laying debited to Purchase Account.
ii. Depreciation to be provided on motor car @ 20% (excluding sold item).

Answer:
Correct entry :
Motor car (new) account Dr 1,20,000
To Motor car ( old) 56,000
To Cash account 40,000
To profit on exchange 24,000
Wrong entry:
Purchase account Dr 40,000
To cash account 40,000
Trading account

Purchases 6,80,000
Less: motor car purchased 40,000 6,40,000

Depreciation on motor car 24,000 By profit on exchange of 24,000
motor car
Balance sheet

Motor car ( given) 56,000
Add: new motor car purchased 1,20,000
Less: old car exchanged (56,000)
Less: depreciation (24,000) 96,000
Revision question 28:

(a) An old furniture which stood at Rs 12,000 in the books on Jan 1, 2024 was disposed of at Rs 5,800 on June 30, 2024,
in part exchange of a new furniture costing Rs 10,400. A net invoice of Rs 4,600 was passed through the Purchase Day
Book.
(b) Depreciate Furniture @ 10% p.a
State the treatment in the financial statement for the year ended on 31st December 2024,
Answer:
Correct entry:
Furniture account(New) Dr 10,400
Depreciation account Dr 600
Loss on exchange account Dr 5,600
To Furniture ( old) account 12,000
To creditor for furniture 4,600
Wrong entry passed:
Purchase account Dr 4,600
To creditor account 4,600
Revision question 29: Sales include Rs 36,000 hire-purchase sales. Hire-purchase sales prices are determined
after adding 25% on Hire-Purchase price.
30% of the instalments have not fallen due yet. Profit or loss on hire-purchase sales isto be shown in the
Profit and Loss Account.
Solution: Rectifying entry:
1. Sales account Dr 36,000

To debtors account 36,000
2. H.P Debtors account Dr 25,200
Stock with customer a/c Dr 8,100
To purchase account 27,000
To profit on H.P 6,300

Trading account

To purchases xxx By sales xxxx
Less: cost of goods sold oh H.P 27,000 Less: H.P sales 36,000 36,000

Profit on H.P 6,300
Balance sheet

Debtors xxxx
Less: H.P sales 36,000
H.P Debtors
25,200
Stock with customer 8,100
H.P Trading account

Cost of goods sold on H.P 27,000 H.P Sales ( H.P Debtors) 25,200
(36,000 X 75%)
By Installment not due 8,100
Profit on H.P ( Bal fig) 6,300 ( Stock with customer)
33,300 33,300
Revision question 30: Bank Overdraft from PP Bank (Given in trial balance) Rs 60,000
Adjustment: PP Bank has allowed an overdraft limit against hypothecation of stocks keeping a margin of 20%.
The present balance is the maximum as permitted by the Bank.
𝟔𝟎,𝟎𝟎𝟎
Answer: value of closing stock at the end = x 100 = 75,000
𝟖𝟎
Revision question 31: Trial Balance as on 31.12.2024
Debit Credit
Debtors 1,04,000
Suspense A/c 8,000
GST 6,000
1. Debtors were shown after deduction of Provision for Doubtful Debt of Rs 2,000. It was decided that this
debt was considered to be bad and should be written off and a provision of Rs 1,000 should be made which was
considered doubtful.
2. Suspense account represents money advanced to sales manager who was sent to Mumbai in August,
2024 for sales promotion. On returning to Kolkata submitted a statement disclosing that Rs 2,000 was
incurred for travelling, Rs 1,200 for legal expenses and Rs 1,800 for miscellaneous expenses. The balance
lying with him is yet to be refunded.
Solution: Explanation of point no-2
Entry passed earlier Suspense account Dr 8,000

To Cash account 8,000
Adjustment entry Travelling expense Dr 2,000
Legal expense Dr 1,200
Misc expense Dr 1,800
Sales manager Dr 3,000
To suspense account 8,000
Trading account

To provision for bad debts 1,000 By provision for bad debts 2,000
To Travelling expense 2,000

To Legal expense 1,200
To Misc expense 1,800
To GST 6,000
Balance sheet

Debtors (1,04,000 + 2,000) 1,06,000
Less: provision for bad debts -1,000 1,05,000
Suspense account Nil Sales manager 3,000

Revision question 32 (Cash basis of accounting) . Mr. Oswal maintains his accounts on Mercantile basis. The
following Trial Balance has been prepared from his books as at 31st March, 2024 after making necessary
adjustments for outstanding and accrued items as well as depreciation:
Particulars Dr Cr
Plant and Machinery 2,12,500

Sundry Creditors 2,64,000
Sales 6,50,000
Purchases 4,20,000
Salaries 40,000
Prepaid Insurance 370
Advance Rent 2,000
Outstanding Salary 6,000
Advance Salary 2,500
Electricity Charges 2,650
Furniture and Fixtures 72,000
Opening Stock 50,000
Outstanding Electricity Charges 450
Insurance 1,200
Rent 10,000
Miscellaneous Expenses 14,000
Cash in hand 3,000
Investments 80,000
Drawings 24,000
Dividend from Investments 8,000
Accrued Dividend from Investments 1,500
Depreciation on Plant and Machinery 37,500
Depreciation on Furniture 8,000
Capital Account 2,11,970
Telephone Charges 6,000
Sundry Debtors 1,70,500
Stationery and Printing 1,200
Cash at Bank 65,000
Interest on Loan 8,000
Interest Due but not paid on loan 1,500
Loan Account 90,000
12,31,920 12,31,920
Additional Information:
(i) Salaries include Rs 10,000 towards renovation of Proprietor’s residence.
(ii) Closing Stock amounted to Rs 75,000.
Mr. Oswal, however, request you to prepare a Trading and Profit & Loss Account for the year ended 31 st
March, 2024 and a Balance Sheet as on that date following cash basis of accounting. (ICMAI Study material)
Solution: Trading A/c
Particular ₹ Particular ₹
To Opening Stock 50,000 By Sales 6,50,000
To Purchase 4,20,000
Closing Stock 75,000
To Gross Profit 2,55,000
(Balance figure)
7,25,000 7,25,000
Profit Loss A/c
Particular ₹ Particular ₹
To Salary 40,000 BY Gross Profit 2,55,000
Less: Outstanding salary 6,000 By Dividend (Form Investment) 6,500
Add: Advance Salary 2,500
36,500
Less: Renovation 10,000 26,500
To Insurance (1200 +370) 1,570
To Rent 12,000
To Electricity Charges 2,200
To Miscellaneous expenses 14,000
To Dep. On Plant & Machinery 37,500
To Dep. On Furniture 8,000
To Telephone charges 6,000
To stationery & Printing 1,200
To interest & Loan 6,500
(8000 – 1500)
To Net Profit 1,46,030
2,61,500 2,61,500
Balance Sheet
Liabilities ₹ Assets ₹
Sundry Creditors 2,64,000 Plant & Machines 2,12,500
Capital 2,11,970 Furniture 72,000
Renovation 10,000 Cash 3,000
Drawing 24,000 Investment 80,000
Net Profit +1,46,030 3,24,000 Debtors 1,70,500
Loan 90,000 Bank 65,000
Closing Stock 75,000
6,78,000 6,78,000
Working Notes (1)
Particulars ₹
Insurance for the year 1,200
Add: Prepaid Insurance 370
1570
Working Notes (2)
Particulars ₹
Rent For the year 10,000
(on Mercantile Basis)
+ Adv. Rent (end) 2,000
12,000
Working Notes (3)
Particulars ₹
Electricity Charges for the year 2,650
(on Accrual Basis)
Less: Outstanding electricity charge 450
Paid for the Year 2,200
Working Notes (4)
Dividend Form investment:
Particulars ₹
Total Dividend Form Investment 8,000
Less: Accrued Dividend 1,500
6,500
Revision question 33. MATCH THE FOLLOWINGS (IMPORTANT FOR MCQ):
1. Income Statement A. Partnership firm

2 Gross operating results B. Financial position
3. Balance Sheet C. vertical format
4. Top-down order D. determination of operating result
5. Profit & Loss Appropriation Account E. Trading Account
6. Abnormal losses F. Conservatism
7. Closing Stocks G. Profit & Loss Account
Answer:
1-D 2-E 3-B 4-C 5-A 6-G 7-F
Revision question 34. FILL IN THE BLANKS:
i. The financial statements of a non-corporate commercial organisation broadly includes the Income
Statement, Balance Sheet, and……………….
ii. According to convention of conservatism, stock is valued at cost or …………..whichever is lower.
iii. Balance Sheet is the financial statement that is prepared to show the financial position of the
organisation on …………….
iv. In the……………., the Liabilities appear on the left-hand side, while the Assets appear on the right-
hand side of the Balance Sheet.
v. ……….. refers to the order in which the various assets and liabilities are shown in the balance sheet.
vi. ……… is passed in the journal to record the closing balances of various assets and liabilities at the
end of previous year as the opening balances in the beginning of the new year.
Answer:
i. Cash flow statement iii. A specific date

ii. Net realizable value iv. Horizontal format
v. Marshalling vi. Opening entry
Revision question 35. MULTIPLE CHOICE QUESTIONS:

1. If the manager is entitled to a commission of 5% on profits before deduction this commission, he will get
a commission of ……………. on a profit of 84,000 before commission.
a. 4,200 b. 4,000 c. 4421 d. None
2. The balance of the petty cash is:

(a) An expense
(b) An income
(c) An asset
(d) A liability
3. The manufacturing account is prepared
(a) To ascertain the profit or loss on the goods produced

(b) To ascertain the cost of the manufactured goods
(c) To show the sale proceeds from the goods produced during the year
(d) Both, (b) and (C)
4. A company wishes to earn a 20% profit margin on selling price. Which of the following is the profit mark
up on cost, which will achieve the required profit margin?
(a)33%
(b) 25%
(c) 20%
(d) None of the above
5. Depreciation appearing in the Trial Balance should be:

(a) Debited to P & L A/c
(b) Debited to P & L A/c
(c) Reduced from related asset in balance sheet
(d) Both (a) and (c) above
6. Gross profit is equal to

(a) Sales – Cost of goods sold
(b) Sales – Closing stock + purchase
(c) Opening stock + Purchases – Closing stock
7. Which of the following is not a financial statement?

(a) Profit and loss account
(b) Balance sheet
(c) cash flow statement
(d) Trial balance
8. Based on which of the following concepts, share capital is shown on the liabilities side of a balance sheet?
(a) Business entity concept
(b) Money measurement concept
(c) Going concern concept
(d) Matching concept
9. Closing stock appearing in the trial balance is shown in –

(a) Trading A/c and Balance sheet (b) Profit and Loss a/c
(c) Balance Sheet only (d) Trading A/c only
10. Consider the following data and identify the amount which will be deducted from sundry debtors in
Balance sheet:
Bad debts (from trial balance)= 1,600,
Provision for doubtful debts (old) 1200
Current year’s provision (new) 800.
(a) 400 (b) 800 (c) 2,000 (d) 2,400
11. For goods distributed as free samples in the market, the journal entry will be .
(a) Drawing Dr. To Purchase A/c
(b) Sales A/c Dr. To Cash A/c

(c) Advertisement A/c Dr. To Purchase A/c
(d) No entry
12. General Manager gets 6% commission on net profit after charging such commission. Gross profit
Rs. 1,20,000 and other indirect expenses (other than manager's commission) are Rs. 14,000. Commission
amount will be:
(a) 6,360 (b) 6,000 (c) 6,766 (d) 7,200
13. Discount received Rs.2,000 Provision for discount on creditors(old) = Rs. 3200. It is desired to make a
provision of Rs.2200 on creditors. Find out the amount to be transferred to Profit & Loss A/c:
a) Rs. 1000 b) Rs. 7000 c) Rs. 2,000 d) Rs. 1600
14. Amount recovered from debtor, which was earlier written off as bad debt is debited to Cash A/c and
credited to ………. A/c:
(a) Bad Debts

(b) Bad debts recovered
(c) Debtors
(d) Sales
15. A prepayment of insurance premium will appear in the Balance Sheet and in the Insurance Account
respectively as:
(a) a liability and a debit side. (b) an asset and a debit side.
(c) an asset and a credit side. (d) None of the above
16. Under-statement of closing work in progress in the period will:
(a) Understate cost of goods manufactured in that period.

(b) Overstate current assets.
(c) Overstate gross profit from sales in that period.
(d) Understate net income in that period.
17. If sales are Rs. 2,000 and the rate of gross profit on cost of goods sold is 25%, then the cost of goods
sold will be
(a) Rs. 2,000. (b) Rs. 1,500. (c) Rs. 1,600. (d) None of the above.
18. Sales for the year ended 31st March, 2023 amounted to Rs. 10,00,000. Sales included goods sold to Mr.
A for Rs. 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer's risk.
Therefore, such goods should be treated as part of
(a) Sales. (b) Closing stock, (c) Goods in transit, (d) Sales return.
19. The capital of a sole trader would change as a result of:
(a) a creditor being paid his account by cheque.

(b) Fixed assets being purchased on credit.
(c) fixed assets being purchased on Cash.
(d) wages being paid in cash.
20. Rent paid on 1 October, 2023 for the year to 30 September, 2024 was Rs. 1,200 and rent paid on 1 October,
2024 for the year to 30 September, 2025 was Rs. 1,600. Rent payable, as shown in the profit and loss account for
the year ended 31 December 2024, would be:
(a) Rs. 1,200. (b) Rs. 1,600. (c) Rs. 1,300. (d) Rs. 1,500.
Answer:
1-a 2-c 3-b 4-b 5-a 6-a 7-d 8-a

9-c 10-b 11-c 12-b 13-a 14-b 15-c 16-d
17-c 18-a 19-d 20-c
COCEDUCATION.COM CMA INTER MARATHON CA/CMA Santosh kumar
FINANCIAL STATEMENT OF NON PROFIT MAKING ORGANISATIONS

Organisations:
(a) Profit making organisations : E.g TATA, Teliance, Wipro etc
(b) Non- profit making organisations : E.g Schools, ICMAI, ICAI, Govt colleges, Mandir etc.
Accounts prepared by NPO:
(i) Receipts and payment account
(ii) Income and expenditure account
(iii) Balance sheet
Format of receipts and payment account
Receipts Amount Payments Amount
To balance b/d Nil By Revenue payments (salary paid, 3,20,000
To revenue receipts ( subscription, rent 8,00,000 wages paid)
received, sale of scrap, interest received)
By capital payments (assets purchased) 4,00,000
To capital receipts (bank loan raised,
5,00,000
debentures issued)
By balance c/d 5,80,000
13,00,000 13,00,000
Note : it records all receipts and payment during the current year. It may be related to any period previous,
current or subsequent.
Income and expenditure account

Expenditure Amount Income Amount
To revenue payment( i.e expenses) 3,20,000 By revenue receipts (i.e income) 8,00,000
To surplus ( bal fig) 4,80,000
8,00,000 8,00,000
Balance sheet
Capital receipts (Capital, liabilities) 5,00,000 Capital payments ( assets) 4,00,000
Capital fund nil Cash 5,80,000

Add: surplus 4,80,000 4,80,000
9,80,000 9,80,000
COCEDUCATION.COM For enquiry: 9999631597, 7303445575, 8448322142,7011668629

2. Classification of items of revenue and capital nature:

Revenue nature Capital nature
(a) recurring nature (a) Non- recurring nature
(b) small amount (b) big amount
(c) receipts- general purpose (c) receipts – specific purpose
(d) payment – benefit in current year (d) payment – benefit in future
3. Treatment of some special items:

(i) Donations :- it is a gift in cash or kind from some person. It may be of two types:
(a) Specific Donation: Capitalised and shown in liability side of the balance sheet.
(b) General donation:-
Small amount Big amount

Credit side of income and expenditure a/c Liability side of the balance sheet
If not mentioned in question – assume it is of small amount.
(ii) Entrance fees/ admission fees :-
If one time payment received If received every year

Shown in liability side of the balance sheet Credit side of income and expenditure a/c
Note: If not mentioned in question – assume it revenue receipt.
(iii) Subscription:
If for specific purpose If it is for general purpose

Shown in liability side of the balance sheet Credit side of income and expenditure a/c
(iv) life membership fees – Treated as capital receipts -- Shown in liability side of the balance sheet.
Treatment:
Method 1 Method 2
Entire amount may be carried forward in a Entire amount will be carried forward in a special
special account in the liability side of the balance account in the liability side of the balance sheet.
sheet until the member dies.
After which the same will be transferred to the An amount calculated according to average life,
credit of capital fund. will be credited to income & expenditure account
annually.

(v) Legacy:-
➢ Received as per will after death of a person.
➢ Treated as Capital receipts.
➢ Added to the capital fund in the balance sheet.
(vi) Endowment fund donation:

➢ Capital receipts, shown in the liability side of the balance sheet.
➢ Income from investment of such donation is to be used for certain specific purpose.
➢ Such income is also added to the fund.
➢ All specific expenses incurred are deducted from such fund.
(vii) sale of old news paper and periodicals, scraps – revenue receipts.
(viii) sale of old fixed assets:
➢ Capital receipts.
➢ Profit or loss on sale is transferred to income and expenditure account.
(ix) Honorarium: paid to someone for receiving their services who are not the employee of the NPO.
Revision question 1. Prepare income and expenditure account and balance sheet from the given receipts and
payment account.
Receipts and payment account

To subscription 6,00,000 By rent 1,10,000
To sale of scrap 40,000 By salary 60,000
To commission 80,000 By advertisement 35,000
To donation 1,00,000 By match expenses 45,000
To donation for match fund 1,40,000 By building 2,00,000
To legacy 2,00,000 By furniture 3,00,000
To entrance fees 1,20,000 By honorarium 20,000
To life membership fees 80.000
To endowment fund 3,00,000
To bank loan 5,00,000 By balance c/d 14,10,000
21,80,000 21,80,000


To rent 1,10,000 By subscription 6,00,000
To salary 60,000 By sale of scrap 40,000
To advertisement 35,000 By commission 80,000
To honorarium 20,000 By donation 1,00,000
To surplus ( bal fig) 7,35,000 By entrance fees 1,20,000
9,60,000 9,60,000
Balance sheet at the end of the year

Donation for match fund 1,40,000 Building 2,00,000
Less: match expenses - 45,000 95,000 Furniture 3,00,000
Cash 14,10,000
Capital fund nil
Add: legacy 2,00,000
Add: surplus 7,35,000 9,35,000
Bank loan 5,00,000

Endowment fund 3,00,000
Life membership fees 80,000
19,10,000 19,10,000
Revision of adjustments related to specific fund:
Receipts and payment account ( extract)

Donation for match fund 2,00,000 Match expenses 2,30,000
Solution: Income and expenditure account

Match expenses ( 2,30,000 – 2,00,000) 30,000

Donation for match fund 2,00,000
Less: Match expenses 2,00,000 Nil

Receipts and payment account for the year ended on 31st march 2024

Donation for match fund 8,00,000 Match expenses 2,30,000
Interest on match fund investment 35,000 By 12% match fund investments 5,00,000
st
( 1 July 2023)
Solution:

Donation for match fund 8,00,000 12% M.F. Investment 5,00,000
Less: Match expenses - 2,00,000 Cash 1,35,000
Add: interest on M.F Invest + 45,000 6,45,000 Accrued interest on M.F 10,000
Investment
6,45,000 6.45,000
Revision question 4: Receipts and payment account for the year ended on 31st march 2024
To Donation for building 6,00,000 By Building 4,20,000
6,00,000 6,00,000


Donation for building 6,00,000 Building 4,20,000
Less: transfer to capital fund - 4,20,000 1,80,000 Cash 1,80,000
Capital fund nil

Add: transfer from building fund 4,20,000 4,20,000
6,00,000 6,00,000

Revision of adjustments related to subscription:

Receipts and payment account for the year ended on 31 st march 2024

To subscription 6,00,000
6,00,000 6,00,000
Adjustment:
(i) Outstanding subscription at the end of the year Rs 2,00,000.
Solution:
Add: surplus 8,00,000 8,00,000 Outstanding subscription 2,00,000
8,00,000 8,00,000

By subscription ( received + accrued at end) 8,00,000
To surplus 8,00,000
Revision question 6. Receipts and payment account for the year ended on 31 st march 2024

8,00,000 8,00,000
Adjustment:
(i) Outstanding subscription at the end of the year Rs 40,000.

(ii) Advance subscription received during the year Rs 25,000.
Solution:

Add: surplus 8,15,000 8,15,000 Outstanding subscription 40,000
Advance subscription 25,000

8,40,000 8,40,000

By subscription ( 8,00,000+ 40,000 – 25,000) 8,15,000
To surplus 8,15,000

Adjustments:
31-3-2023 31-3-2024
Outstanding subscription 40,000 70,000
Advance subscription 25,000 32,000
Solution: Balance sheet as on 31-3-2023
Advance subscription 25,000 Outstanding subscription 40,000
Balance sheet as on 31-3-2024
Advance subscription 32,000 Outstanding subscription 70,000


By subscription 8,23,000
Working notes: computation of Subscription for the current year
Subscription received during the year 8,00,000

Add: outstanding at the end of the year +70,000
Less: outstanding at the beginning of the year -40,000
Add: prepaid at the beginning of the year +25,000
Less: prepaid at the end of the year -32,000
8,23,000
Revision question 8. Receipts and payment account for the year ended on 31 st march 2024

To subscription:
22-23 25,000
23-24 6,40,000
24-25 20,000 6,85,000
Adjustments: i.
31-3-2023 31-3-2024
Outstanding subscription 40,000 70,000
Advance subscription for
23-24 26,000 ------
24-25 15,000 35,000
ii. Outstanding subscription for the year 22-23 Rs 6,000 is to be written off during the year.
Prepare extract of income and expenditure and balance sheet and prepare subscription account.

Solution: Balance sheet as on 31-3-2023
Advance subscription(26,000 + 15,000) 41,000 Outstanding subscription 40,000
Advance subscription (20,000 +15,000) 35,000 Outstanding subscription 70,000

Subscription written off 6,000 By subscription 7,27,000
Working notes: Computation of Subscription for the current year
Subscription received during the year for current year 6,40,000

Add: outstanding at the end of the year for the current year [70,000 – (40,000-25,000-6,000)] +61,000
Add: Advance at the beginning of the year for the current year +26,000
7,27,000
Subscription account

1-4-23 To outstanding subscription 40,000 1-4-23 By advance subscription 41,000
During the By bank account (R/P A/c) 6,85,000
31-3-24 To income & expenditure A/c 7,27,000 year
31-3-24 By subscription W/off 6,000
31-3-24 To advance subscription 35,000 31-3-24 By outstanding subscription 70,000
8,02,000 8,02,000

Revision of adjustments related to stationary:


By stationary 20,000
Adjustments:
31-3-23 31-3-24
Stock of stationary 6,000 9,000
Solution:

To stationary consumed 17,000
(20,000 + 6000-9,000)

Stock of stationary 6,000

Stock of stationary 9,000
Working notes: Stationary account

To balance b/d 6,000 By stationary consumed ( income & exp a/c) 17,000
To cash 20,000 By balance c/d 9,000
26,000 26,000


By creditors for stationary 80,000
By stationary (for cash) 20,000
Adjustments:
31-3-23 31-3-24
Creditors for stationary 20,000 26,000
Stock of stationary 15,000 21,000

To stationary consumed 1,00,000

Creditors for stationary 20,000 Stock of stationary 15,000

Creditors for stationary 26,000 Stock of stationary 21,000
Working notes: Stationary account

To balance b/d 15,000 By stationary consumed ( trf to income &
To cash 20,000 expenditure a/c) 1,00,000
To creditors for stationary 86,000 By balance c/d 21,000

1,21,000 1,21,000
Creditors for stationary account

By balance b/d 20,000
To bank account 80,000 By stationary purchased ( bal fig) 86,000
To balance c/d 26,000
1,06,000 1,06,000

Revision question 11. Assume in previous question, the following additional information are also given:
31-3-22 31-3-23
Advance for stationary 2,000 3,000
Revision of adjustments related to expenses:


By rent 60,000
Adjustments:
(i) outstanding rent at the end of the year Rs 12,000.
(ii) Advance rent at the end of the year Rs 17,000.
Calculate rent for the current year.

By Salary 80,000
Adjustments:
31-3-22 31-3-23
Outstanding salary 12,000 15,000
Prepaid salary 16,000 18,000
Calculate salary for the current year.

Revision of adjustments related to fixed assets:


By Sports and equipments 80,000
Adjustments:
31-3-23 31-3-24
Sports and equipments 50,000 1,10,000
Solution: Sports equipment account

To balance b/d 50,000 By depreciation ( bal fig) 20,000
To cash account 80,000 By balance c/d 1,10,000

1,30,000 1,30,000

To sale of sports equipment 60,000 By Sports and equipments 7,00,000
( Book value 70,000)
Adjustments:
31-3-23 31-3-24
Sports and equipments 2,00,000 6,20,000
Solution:
Sports equipment account

To balance b/d 2,00,000 By cash account 60,000
By loss on sale 10,000
To cash account 7,00,000 By depreciation (bal fig) 2,10,000

9,00,000 9,00,000



To balance b/d ( cash) 20,000 By rent 40,000
By telephone charges 15,000
To interest on investments @ 9% p.a for full 9,000 By furniture 30,000
year By bank lodged 70,000
To bank withdrawal 30,000
Adjustments:
(i) Rent amounting to Rs 40,000 P.A paid upto 30 th June 2024.
(ii) A quarter charge for telephone is outstanding. The amount accrued being Rs 3,000. The charge for
each quarter is same for both 22-23 and 23-24.
(iii) During 2022-23, a furniture was purchased for Rs 2,00,000 and against which Rs 1,70,000 had been paid.
(iv) opening balance of bank Rs 35,000.
Most important things for your exam:

(i) Read question very carefully:
(a) if receipts and payment account is given ---- prepare income and expenditure account.
(b) if income and expenditure account is given – prepare receipts and payment account.
(ii) Must revise concept of bar trading account/ refreshment account.

(iii) must revise concept of balance in bank given as per cash book or pass book.

Revision question 17. Important points for MCQ.

1. Charitable trusts, trade unions, Cultural clubs Non- profit organisations
2. after the demise of the person, the funds pass on to the institution Legacy
3. Endowments capital receipts
4. Receipts and Payments Account Real account
5. Income and Expenditure Account Nominal account

6. Accumulated Fund Capital fund
7. created out of special donation Special Fund
Revision question 18. MULTIPLE CHOICE QUESTIONS:

1. Endowment fund receipt is treated as –
(a) Capital Receipt

(b) Revenue Receipt
(c) Loss
(d) Expenses
2. Which one of the following is not prepared by non-profit organizations

(a) Profit and loss account
(b) Income & Expenditure account
(c) Receipts and payments account
(d) Balance sheet
3. Legacy are generally –
(a) Capitalized
(b) Treated Loss
(c) Revenue Expenses
(d) Deferred Revenue expenses
4. If Rs 1,500 was outstanding at the beginning of the year towards subscription and 10,000 is received
during the year, with 2,500 still outstanding at the end of the year. The amount to be taken to receipts and
payments account is:
(a) 11,000
(b) 8,500
(c) 10,000
5. Any revenue expenses for which a separate fund is available will be

(a) Debited to the separate fund

(b) Debited to income and expenditure account
(c) Capitalized and shown in the balance sheet
6. Sale of old materials must be shown on the credit side of
(a) Cash Book

(b) Income and expenditure account
(c) Balance Sheet
7. The information for the preparation of receipts and payments account is taken from
(a) Cash Book

(b) Income and expenditure account
(c) Cash Book and Balance Sheet
(d) None
8. The receipts and payments account for the year ended on 31st march 2023 shows the following details:
Subscription 21-22 Rs.500
22-23 Rs.10,500
23-24 Rs. 800
There are 1,200 members each paying an annual subscription of Rs 10.
The amount to be credited to income and expenditure account will be

(a) Rs. 11,800 (b) Rs. 11,300
(c) Rs. 12,000 (d) None of the above
9. Income and expenditure account shows subscriptions at Rs.10,000. Subscriptions accrued in the beginning of
the year and at the end of the year were Rs 1,000 and Rs. 1,500 respectively. The figure of subscriptions received
appearing in receipts and payments account will be
(a) Rs. 9,500
(b) Rs. 11,000
(c) Rs.10,000
10. Subscription received in advance is a/an
(a) Asset
(b) Liability
(c) Income
(d) Expenditure
11. Accrued subscription is a/an
(a) Asset
(b) Liability
(c) Income

(d) Expenditure
12. Income and Expenditure account is prepared under
(a) Accrual basis (b) Cash basis
(c) Either of the two (d) Neither of the two
13. Receipt and Payment Account is prepared under
(a) Accrual basis (b) Cash basis
(c) Either of the two (d) Neither of the two
14. Calculate match expenses to be shown in income and expenditure account:
Donation for match fund received during the year = Rs 40,000

Match expenses incurred during the year = Rs 45,000
Answer: 5,000.
15. Calculate Prize expenses to be shown in income and expenditure account:
Donation for prize fund received during the year = Rs 48,000.

Prize fund investment made during the year = Rs 15,000.
Prize awarded during the year = Rs 35,000

(a) 35,000 (b) 2,000 (c) 13,000 (d) nil
16. Calculate Prize expenses to be shown in income and expenditure account:
Opening balance of prize fund = Rs 25,000

Donation for prize fund received during the year = Rs 48,000.
Prize fund investment made during the year = Rs 35,000.
Interest received on prize fund investment = Rs
2,000 Prize awarded during the year = Rs 80,000
(a) 80,000 (b) 32,000 (c) 5,000 (d) 7,000
17. Donation for building received during the year = Rs 20,00,000

Expenditure incurred on construction of building = Rs 13,00,000
Building fund investment made during the year = Rs 5,00,000
Calculate amount to be shown in income and expenditure account --------------
Answer: nil
18. Donation for building received during the year = Rs 24,00,000

Expenditure incurred on construction of building = Rs 9,00,000

Building fund investment made during the year = Rs 12,00,000

Calculate amount to be added in capital fund.
(a) 9,00,000 (b) 12,00,000 (c) 24,00,000 (d) 21,00,000
Answer: 9,00,000
19. subscription received in cash during the year 2023-24 = Rs 8,00,000

Outstanding subscription at the end of the year = Rs 40,000
Outstanding subscription at the beginning of the year = Rs 24,000
Advance subscription at the end of the year = Rs 12,000
Advance subscription at the beginning of the year = Rs 15,000.

Outstanding Subscription of previous year unrecoverable and to be written off during current year = Rs 7,000.
Calculate subscription to be shown as income for the current year in income and expenditure account.
(a) 8,19,000 (b) 8,12,000 (c) 8,00,000 (d) 8,26,000
Answer: 8,26,000
20. If Rs 1,500 was outstanding at the beginning of the year towards subscription and 10,000 is received during
the year, with 2,500 still outstanding at the end of the year. The amount to be taken to receipts and payments
account is:
(a) 11,000 (b) 8,500 (c) 10,000 (d) None of the above
Answer: 10,000
21. Income and expenditure account shows subscriptions at Rs.10,000. Subscriptions accrued in the
beginning of the year and at the end of the year were Rs 1,000 and Rs. 1,500 respectively. The figure of
subscriptions received appearing in receipts and payments account will be
(a) Rs. 9,500 (b) Rs. 11,000 (c) Rs.10,000 (d) None of the above
Answer : 9,500
22. Income and expenditure account shows subscriptions at Rs. 40,000.
Subscriptions accrued in the beginning of the year and at the end of the year were Rs 1,000 and Rs. 1,500 respectively.
Advance subscriptions in the beginning of the year and at the end of the year were Rs 2,500 and Rs. 3,400 respectively.
The figure of subscriptions received appearing in receipts and payments account will be ………..
Answer : 40,400 ( 40,000+1,000-1,500-2,500+3,400)
23. Receipts & payment account for the year ended 31st December 2023
To Subscriptions:
For 2022 12,500
2023 75,000
2024 14,000 1,02,500
(a) Subscription outstanding on December 31,2022 13,000
(b) Subscription outstanding for the year ended on December 31,2023 12,500
(c) Subscription Received in Advance on December 31,2022 15,000
(i) You are required to calculate the income from subscriptions for the year ending December 31,2023.
(ii) Total outstanding subscription as on 31st December 2023.
Answer: (i) 1,02,500 ( 75,000+12,500+ 15,000) (ii) 13,000 (12,500 + 500)
24. Receipts & payment account for the year ended 31st December 2023 ( extract)

To Subscriptions:
For 2022 12,000
2023 47,500
2024 2,000 61,500
(i) There are 500 members each paying an annual subscription of Rs 100. Rs 1,800 are still in arrear for the year 2022.
(ii) 15 members had paid advance subscription during 2022 for the year 2023.
Calculate :
(a) amount of subscription to be shown in income and expenditure account for the year 2023.
(b) outstanding subscription to be shown in balance sheet prepared as on 31-12-2023.
(c) outstanding subscription to be shown in balance sheet prepared as on 31-12-2022.
Answer: (a) 50,000 (500x100)
(b) 2,800 ( 50,000-47,500-1500 + 1800)
(c) 13,800 ( 12,000 + 1800)
25. Calculate the amount of Stationery purchased during the year 2023 from the following data:
Stock of stationery on January 1,2023 24,000

Creditors for stationery on January 1,2023 16,000
Amount paid for stationery during the year 2023 86,000
Stock of stationary on December 31,2023 42,000
Creditors for stationery on December 31,2023 10,000
Answer: 80,000 ( 86,000 + 10,000 – 16,000)
26. Calculate amount of stationary purchased and amount paid for Stationery during the year 2023 from the
following data:

Stationery consumed during the year 2023 60,000

Stock of stationary on December 31,2023 45,000
Answer: stationary purchased = 85,000 (60,000 + 45,000 – 20,000),
Amount paid for stationary = 87,000 (85,000 -10,000 +12,000)
27. Calculate the amount of Stationery Consumed during the year 2023 from the following data:

Advance paid for stationery carried forward from 22020 160
Amount paid for stationery during the year 2023 8,640
Stock of stationary on December 31,2023 400
Advance paid for stationery on December 31,2023 240
(a) 10,000 (b) 8,640 (c) 10,640 (d) None of the above
Answer: 10,000
28. Receipts & payment account for the year ended 31-3-2023 ( extract)
Receipts Amount Payments amount

By rent 3,000
By telephone charges 15,000
Adjustment:
1. At 31-3-2023, the rent was prepaid to the following 31st January. The yearly charge being Rs 3,000.
2. A quarter charge for telephone is outstanding, the amount accrued being Rs 3,000.
Calculate:
(i) Rent to be shown in income and expenditure account. (Answer : 3,000)

(ii) Prepaid rent at the end of the year 2020-21. [Answer: 2,500 (3,000 X 10/12)]
(iii) Calculate telephone charges to be shown in income and expenditure account.
[Answer: 12,000 (3,000X 4)]
(iv) Outstanding telephone charges at the end of 31-3-2020. [Answer: 6,000]


COCEDUCATION.COM REVISION SERIES CA/CMA Santosh kumar
INCOMPLETE RECORDS ( SINGLE ENTRY SYSTEM)

Features of single entry system:
i. It is considered as a no system at all.
ii. The books which are maintained according to single entry system can be kept only by a sole trader or by a
partnership firm.
iii. In single entry system, it is very often to keep one cash book which mixes up business as well as private
instruments.
iv. single entry system is precisely defined as a system where only personal accounts are kept.
v. single entry system lacks uniformity as it is mere adjustments of double entry system according to convince of
the person.
vi. Under single entry system , it is difficult to prepare trading account, profit and loss account and balance sheet
due to absence of nominal and real accounts in the ledger.
Benefits of single entry system:

(a) Quick and easy to maintain.
(b) Does not required a qualified accountant.
(c) Useful for business run by individual where volume of business activity is not large.
(d) Economical
Limitations of single entry system:

(a) Trial balance can not be prepared and arithmetical accuracy can not be guaranteed.
(b) Profit and loss can be found out only by estimates.
(c) Not possible to prepare Balance Sheet in the absence of real accounts.
(d) Difficult to detect fraud or errors.
(e) Valuation of assets and liabilities is not possible.

Methods of accounting under single entry system:

Statements of affairs method Conversion method
Information required to calculate profit/loss
under this method:
Opening capital Trading account, Profit and loss account and
Closing capital balance sheet are prepared.
Additional capital
Drawings
Closing capital = 1,50,000
Opening capital = 60,000
Drawings during the year:
On account of profit -30,000
On account of capital = 15,000
Additional capital = 25,000
Answer: Statement showing computation of profit or loss during the year:
Capital at the end 1,50,000

Add: Drawings during the year (30,000+15,000) 45,000
Less: Additional capital 25,000
Adjusted capital at the end 1,70,000
Opening capital 60,000
Profit during the year 1,10,000
Opening capital = 96,000
Closing capital = 1,31,400
During the year, owner brought in Rs 7,500 cash in the business. He withdrew goods of Rs 2,100 and cash of
Rs 7,200 for his personal use.
Interest on opening capital is to be given @ 5% and interest on drawings is to be charged @10%.
Calculate net profit or loss for the year.

Solution: Statement showing computation of profit or loss during the year:

Add: Drawings during the year (2,100+7,200) 9,300
Add: Interest on drawings 930
Less: Additional capital (7,500)
Less: interest on opening capital (96,000 x 5%) (4,800)
Opening capital -96,000
Profit during the year 33,330
Revision question 3. On 1st April 2023, Neha started a beauty parlour. She acquired a shop for Rs 12,00,000 and paid
Rs 2,00,000 for interior fittings. She put Rs 4,00,000 in business bank. She carried on business till 31 st March 2024, when
she wanted to know what the parlour has earned over the period. She had approached you to find out the business
result with following information as on 31-3-2024.
In addition to shop and fitting, she had following possession:
Stock = Rs 6,00,000
Motor car (purchased on 30-09-23) = Rs 5,50,000
Cash at bank = Rs 2,50,000
Based on his limited knowledge, she had told you to charge depreciation @ 2% p.a. on shop, 5% p.a. on fittings
and 20% p.a. on motor car.
On 31-3-24, Rs 1,40,000 was payable to creditors and Rs 1,00,000 to a friend for money borrowed @ 12% P.a. on 1st
July 2023 for the business. She had withdrawn 2,000 P.M. from the business. Manager was entitled to a commission
of 10% of the net profit before such commission. Calculate net profit during the year.
Solution:
SOA as on 1-4-2023
Capital + liability Amount Assets Amount

Capital ( bal fig) 18,00,000 Shop 12,00,000
Fittings 2,00,000
Bank 4,00,000
18,00,000 18,00,000

SOA as on 31-3-2024

Creditors 1,40,000 Shop (12,00,000- 24,000) 11,76,000
Loan from friend 1,00,000 Fittings (2,00,000- 10,000) 1,90,000
O/s interest (1,00,000 x 12%x 9/12) 9,000 Bank 2,50,000
Capital ( bal fig) 24,62,000 Motor car 4,95,000
Stock in trade 6,00,000
27,11,000 27,11,000
Statement showing computation of profit before manager’s commission during the year:

Add: Drawings during the year (2,000 x 12) 24,000
Less: Additional capital Nil
Opening capital 18,00,000
Profit before commission 6,86,000
𝟏𝟎 (68,600)
Less: commission (6,86,000 X )
𝟏𝟎𝟎
Net Profit after commission 6,17,400
Revision question 4. Assume in previous question we have to calculate Gross profit during the year
and it is required to prepare profit and loss account and balance sheet.
SOA as on 31-3-24 (without considering items shown in profit and loss account)

Creditors 1,40,000 Shop 12,00,000
Loan from friend 1,00,000 Fittings 2,00,000
Capital ( bal fig) 25,60,000 Bank 2,50,000
Motor car 5,50,000
Stock in trade 6,00,000
28,00,000 28,00,000

Statement showing computation of Gross profit for the year:

Add: Drawings during the year (2,000 x 12) 24,000
Less: Additional capital Nil
Opening capital 18,00,000
Gross Profit 7,84,000

To depreciation: By Gross profit 7,84,000
Shops 24,000
Fittings 10,000
Motor car 55,000 89,000
To interest on loan 9,000

To manager’s commission 68,600
(6,86,000 X 10%)
To net profit 6,17,400
7,84,000 7,84,000

Creditors 1,40,000 Shop (12,00,000- 24,000) 11,76,000
Loan from friend 1,00,000 Fittings (2,00,000- 10,000) 1,90,000
O/s interest (1,00,000 x 12%x 9/12) 9,000 Bank 2,50,000
O/S Manager’s commission 68,600 Motor car 4,95,000
Capital 23,93,400 Stock in trade 6,00,000
27,11,000 27,11,000

Revision of Conversion method:

Step 1: Prepare format of trading account, profit and loss account, closing balance sheet and also
opening balance sheet ( If opening capital not given in question)
Step 2: put all given information in the respective format prepared above.
Step 3: Check out missing information and prepare necessary accounts to find out missing information.
Some important tips:

Firstly we should prepare format:
Trading account
To opening stock By sales
To purchases
To direct expenses By closing stock
To gross profit
Note: If information about direct expenses are not given in question, we assume that direct expenses are nil in the
given question.

To indirect expenses By gross profit
To net profit By other income
Note: If information about other incomes are not given in question, we assume that other incomes are nil in the
given question.
(1) Total purchases are missing:
Total purchases
Cash purchases Credit purchases
Cash account Creditors account
Bills payable account
Note: if information about cash purchase are not given in question, we always assume that total purchase
is equal to credit purchase.

(2) Total sales are missing:
Total sales
Cash sales Credit sales
Cash account or bank account Debtors account
Bills Receivable account
Note: if information about cash sales are not given in question, we always assume that total sales is equal
to credit sales.
1-1-2024 31-12-2024
Debtors 5,000 4,000
Creditors 4,000 6,000
Bills receivable received during the year = Rs 10,000
Bills payable issued during the year = Rs 8,000
Cash received from customers = Rs 30,000
Cash returned to debtors = Rs 500
Cash paid to suppliers = Rs 20,700
Discount allowed by suppliers = Rs 270
Discount allowed to debtors = Rs 150
Bad debts written off = Rs 1,200
Bad debts recovered = Rs 300
Bills receivable endorsed to creditors = Rs 4,000
Bills receivable dishonoured by customers = Rs 1,000
Endorsed bills receivable dishonoured = Rs 500
Bills receivable discounted = Rs 2,000
Discounted bills receivable dishonoured = Rs 700
Sales return = Rs 600
Purchase return = Rs 200
Calculate credit sales and credit purchase.

Solution: Debtors account

To balance b/d 5,000 By B/R 10,000
To cash account 500 By cash 30,000
To B/R 1,000 By discount 150
To creditors 500 By bad debts 1,200
To bank 700 By sales return 600
To credit sales (bal fig) 38,250 By balance c/d 4,000
45,950 45,950
Creditors account

To B/P 8,000 By balance b/d 4,000
To cash 20,700 By debtors 500
To discount 270
To B/R 4,000 By credit purchase ( bal. fig) 34,670
To purchase return 200
39,170 39,170
Revision question 6: Shri Kapoor has a trading for which the following procedure is followed :
(1) All collections are deposited with the bank each day.
(2) All payments except petty expenses are made by cheque.
(3) To meet petty expenses a cheque for Rs. 1,500 is withdrawn from the bank on the 1 st day of each month.
The following figures are available from Shri Kapoor’s record:
Items 1-1-2024 31-12-2024
Cash in hand 150 300
Bank balance 30,000 21,000
Debtors 1,00,000 1,25,000
Creditors 90,000 1,00,000
Stock 15,000 25,000
Payment made to creditor during the year Rs 1,20,000.

Personal drawings out of bank Rs. 6,000.
Shri Kapoor sells goods at a profit of 25% on sales.
Prepare Profit and Loss Account for the year ended 31st December 2024 and Balance Sheet as on that date from
the above information.

To opening stock 15,000 By sales (credit)
To purchases (Credit)
To direct expenses Nil By closing stock 25,000
To gross profit

To petty expenses 17,850 By gross profit
{ 150 + (1,500 X 12) – 300} By Other income Nil
To net profit
Balance sheet as on 1st January 2024

Creditors 90,000 Cash 150
Bank account 30,000
Debtors 1,00,000
Stock 15,000
Balance sheet as on 31st December 2024

Creditors 1,00,000 Cash 300
Capital (opening) Bank account 21,000
Less: Drawings 6,000 Debtors 1,25,000
Add: profit Stock 25,000
Target to solve the answer:
1. Sales (credit sales) are missing.

2. Purchases ( credit purchases) are missing.
3. Opening capital is missing.

Now we will start working notes to find out missing information:
1. Creditors account
To bank account 1,20,000 By balance b/d 90,000
To balance c/d 1,00,000 By purchases ( bal fig) 1,30,000
2,20,000 2,20,000
2. Cost of goods sold = opening stock + purchases – closing stock
= 15,000 + 1,30,000 – 25,000
= 1,20,000
𝟏 𝟏
Gross profit ratio = 𝟒 on sales = 𝟑
on cost
𝟏
Gross profit = 1,20,000 X = Rs 40,000
𝟑

Revision question 7: Mr. A. runs a business of readymade garments. He closes the books of accounts on
31st March, 2023. The Balance Sheet as on 31st March, 2023 was as follows:
Liabilities Rs. Assets Rs.
A's capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4, 86,000 4, 86,000
You are furnished with the following information:
1. His sales, for the year ended 31st March, 2024 were 20% higher than the sales of previous year, out of
which 20% sales was cash sales. Total sales during the year 2022-23 were Rs. 5,00,000.
2. Payments for all the purchases made by cheques only.
3 Goods were sold for cash and credit both. Credit customers pay by cheques only.
4. Depreciation on furniture is to be charged 10% p.a.
5. Mr. A sent to the bank the collection of the month at the last date of the each month after paying
salary of Rs. 2,000 to the clerk, office expenses Rs. 1,200 and personal expenses Rs. 500.
Analysis of bank pass book for the year ending 31st March, 2024 disclosed the following:
Payment to creditors 3,00,000

st
Payment of rent up to 31 March, 2024 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2024:
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March, 2024 the cashier absconded with the available cash in the cash book. You are required
to prepare Trading and Profit and Loss A/c for the ended 31st March,2024 and Balance Sheet as on that date. All the
workings should form part of the answer.


Particulars Rs. Particulars Rs.
To Opening stock 2,80,000 By Sales:
To Purchases Credit:
To Gross Profit Cash:
By Closing stock 1,60,000
7,60,000 7,60,000
To Salary (2,000 X 12) 24,000 By Gross Profit 1,16,000
To Rent 16,000
To Office expenses (1,200 X 12) 14,400
To Loss of Cash
To Depreciation of furniture 4,000
To Net Profit
1,16,000 1,16,000
Balance Sheet as on 31st March, 2024
Liabilities Rs. Assets Rs.
A's Capital 4,04,000 Furniture 40,000
Add: Net Profit Less: Depreciation (4,000) 36,000
Less: Drawings (6,000) Stock 1,60,000
Creditors 1,46,000 Debtors 1,20,000
Cash at bank
Cash in hand
5,78,000 5,78,000
Working Notes:
(1) Calculation Of Purchases:

Creditors Account

To bank account 3,00,000 By balance b/d 82,000
To balance c/d 1,46,000 By purchases (bal. fig) 3,64,000
4,46,000 4,46,000

(2) Calculation of total sales

Rs.
Sales for the year 2022-23 5, 00,000
Add: 20% increase 1, 00,000
Total sales for the year 2023-24 6, 00,000
(3) Calculation of credit sales

Total sales 6,00,000
Less: Cash sales (20% of total sales) (1,20,000)
Credit sales 4,80,000
(4) Calculation of cash collected from debtors:

Debtors Account
To Balance b/d 1,00,000 By Bank A/c (Bal. fig) 4,60,000
To Sales A/c 4,80,000 By Balance c/d 1,20,000
5,80,000 5,80,000
(5) Calculation of closing balance of cash at bank:
Bank account
To Balance b/d 38,000 By Creditors A/c 3,00,000
To Debtors A/c 4,60,000 By Rent A/c 16,000
To cash A/c 80,000 By Balance c/d (bal fig) 2,62,000
5,78,000 5,78,000
(6) Calculation of the amount of cash defalcated by the cashier:

Cash account

To balance b/d 28,000 By salary 24,000
To cash sales 1,20,000 By office expenses 14,400
By drawings 6,000
By bank account 80,000
By cashier (cash lost) 23,600
By balance c/d Nil
1,48,000 1,48,000

Revision question 8. FILL IN THE BLANKS:

i. …… ………… system is usually followed by the small businesses.
ii. Under ……………… , the operating result of an entity is determined by comparing the net worth capital of
the entity at two different points of time.
iii. ……….. is prepared for determining the Capital or Net Worth at two different points of time.
iv. Distribution of profits is a/ an ……………………….item.
v. The Sales Rs 180 Lakh, Purchases Rs 129 Lakh and Opening Stock Rs 33 Lakh. If the rate of Gross Profit is 50%
on cost, then the value of closing stock will be………………..
vi . Profit & Loss Account is drafted to determine the ……………….of a concern.
vii. is an account which is prepared by a merchandising concern which purchases goods and sells
the same during a particular period.
answer:
i- Single Entry iv. appropriation vii. trading account x-xi-xii

single entry system
ii. Balance Sheet Approach/ v. 42 lakhs viii. single entry system
Net Worth Approach/
Comparison Approach
iii. Statement of Affairs’ vi. net profit ix. single entry system
Revision question 9: State whether following statements are true or false:

i. Single Entry System is an unscientific approach of recording transactions.
ii. under single entry system, usually, only the cash and personal accounts are recorded.
iii. In the case of double entry system, there is a ledger which contains personal, real and nominal accounts.
But in single entry system, the ledger contains cash account and some personal accounts only.
iv. it is possible to prepare a trial balance in single entry system.
v. Balance Sheet Approach is also known as Comparison Approach/ net worth approach.
vi. Statement of Affairs has no statutory format.
vii. Final Accounts is prepared from the balances of ledger accounts.
answer:
i- true ii- true 3-true 4-false 5-true 6-true 7-true

Revision question 10: MULTIPLE CHOICE QUESTIONS:

(1). The closing capital of Mr A on 31.3.2024 was Rs 1,50,000. On 1.4.2023 his capital was Rs 60,000.
during the year he had drawn Rs 40,000 for domestic expense. He introduced Rs 25,000 as additional
capital in February 2024. find out his profit for the year.
(a) 90,000 (b) 1,05,000 (c) (1,05,000) (d) none of the above
(2). Debtors as on 1st January = Rs 1,20,000
Bad debts written off = Rs 4,000
Bad debts recovered = 3,000
Debtors as on 31st December = 85,000
Bills receivable received during the year = 20,000
Cash received from debtors = Rs 90,000
Sales returns = Rs 15,000
Discount allowed to customers = 5,000
Calculate net credit sales during the year.
(a) 99,000 (b) 84,000 (c) 87,000 (d) 1,02,000
Hint: Debtors account

To balance b/d 1,20,000 By bad debts 4,000
By B/R 20,000
To credit sales( bal.fig) 99,000 By cash 90,000
By sales return 15,000
By discount 5,000
By balance c/d 85,000
2,19,000 2,19,000
Net credit sales = 99,000 – 15,000 = 84,000
(3). Creditors at the beginning = Rs 60,000
Creditors at the end = Rs 20,000
Cash paid to creditors = Rs 85,000
Purchase return = 8,000
Discount received = Rs 4,000
Cash purchase = 50,000
Calculate gross purchase during the year.
(a) 57,000 (b) 49,000 (c) 1,07,000 (d) 99,000

(4). sales during the last year = Rs 5,40,000
increase in sales during the current year = 20%
cash sales = Rs 1,50,000
debtors at the end (credit period) = 3 months
calculate debtors at the end.
(a) 1,35,000 (b) 1,24,500 (c) 1,62,000 (d) none of above
Hint:
Sales for the current year = (5,40,000 + 20% of 5,40,000)
= 6,48,000
Credit sales = 6,48,000- 1,50,000
= 4,98,000
𝟑
Debtors at the end = 4,98,000 X = 1,24,500
𝟏𝟐
(5). Total sales during the year = Rs 5,00,000
Profit margin on cost = 25%
Opening stock = 40,000
Closing stock = 60,000
Cash purchases = 1,00,000
Calculate credit purchase.
(a) 4,20,000 (b) 3,20,000 (c) 3,95,000 (d) 2,95,000
𝟏 𝟏
Hint: profit margin = on cost = on sales
𝟒 𝟓
𝟏
Cost of goods sold = 5,00,000 –( x 5,00,000)
𝟓
= 4,00,000
COGS = opening stock + purchases – closing stock
4,00,000 = 40,000 + purchases – 60,000
Purchases = 4,20,000
Credit purchase = 4,20,000- 1,00,000
= 3,20,000

(6). Credit sales = Rs 3,60,000
Cash sales = 20% of total sales
Gross profit margin = 25%
Net profit margin = 8%
Calculate cost of goods sold.
( a) 4,14,000 (b) 3,24,000 (c) 3,37,500 (d) None of the above
Hint:
𝟏
Cash sales = x 3,60,000
𝟒
= 90,000
Total sales = (3,60,000 + 90,000)
= 4,50,000
COGS = 4,50,000 – (25% X 4,50,000)
= 3,37,500
(7). Cash sales = Rs 6,00,000
Credit sales = 20% of total sales
Gross profit margin = 33.33 % on cost
Net profit margin = 8%
Calculate indirect expenses.
(a) 1,20,000 (b) 1,90,000 (c) 1,27,500 (d) None of above
Solution:
(a) Let total sales = 100
Credit sales = 20
Cash sales = 80
𝟔,𝟎𝟎,𝟎𝟎𝟎
(b) Credit sales = x 20 = 1,50,000
𝟖𝟎
Total sales = 1,50,000 + 6,00,000
= 7,50,000
𝟏
(c) Gross profit margin = on cost
𝟑
𝟏
= on sales
𝟒
𝟏
Gross profit = x 7,50,000
𝟒
= 1,87,500
(d) Net profit = 8% X 7,50,000
= 60,000
(e) Indirect expenses = 1,87,500 – 60,000 = 1,27,500

(8). Outstanding salary at the beginning = 25,000
prepaid salary at the beginning = 15,000
outstanding salary at the end = 12,000
prepaid salary at the end = 18,000
salary paid during the year = 3,00,000
calculate salary as expense for the current year.
(a) 2,84,000 (b) 3,16,000 (c) 3,00,000 (d) 2,94,000
Hint: Salary account

To prepaid salary (opening) 15,000 By outstanding salary(opening) 25,000
To cash account 3,00,000 By profit & loss account (bal fig) 2,84,000
To outstanding salary (closing) 12,000 By prepaid salary (end) 18,000

3,27,000 3,27,000
(9) Outstanding Rent at the beginning = 60,000
prepaid Rent at the beginning = 5,000
outstanding Rent at the end = 32,000
prepaid Rent at the end = 28,000
Rent for the year = 5,00,000
calculate rent paid during the current year.
(a) 4,49,000 (b) 5,28,000 (c) 5,51,000 (d) none of above
Hint: Rent account

To prepaid rent (opening) 5,000 By outstanding rent(opening) 60,000
To cash account (bal fig) 5,51,000 By profit & loss account (rent for the year) 5,00,000
To outstanding rent (closing) 32,000 By prepaid rent (end) 28,000

5,88,000 5,88,000
(10) Outstanding wages for one month at the beginning of the year = Rs 20,000.
Increase in wages during the year = 25%
Wages paid during the year = 2,82,000
Prepaid wages at the end of the year = 12,000
Calculate outstanding wages at the end.
(a) 50,000 (b) 18,000 (c) 32,000 (d) None of above

Hint: wages per month during current year = 20,000 + (25% of 20,000)
= 25,000
Wages for the whole year = 25,000 X 12 = 3,00,000
Wages paid during the year 2,82,000

Less: O/S at the beginning - 20,000
Less: prepaid at the end - 12,000
Wages paid for the year 2,50,000
Wages for the year 3,00,000
Outstanding at the end of the year 50,000
(11) A buys goods for resale only from one manufacturer in Japan, who allowed a rebate of 3% of the goods
purchased by him in excess of Rs 5,00,000 in a calendar year. The rebate due for the year ended 31 st December
2023 was Rs 12,480. Calculate amount of purchases made during the year for the purpose of accounting.
(a) 4,16,000 (b) 9,16,000 (c) 9,03,520 (d) None of the above
Hints:
𝟏𝟐𝟒𝟖𝟎
Purchases = [( X 100) + 5,00,000 ] – 12,480
𝟑
= 9,03,520
(12) Debtors at the beginning = 50,000
Credit period = 1 month
Debtors have shown an increase of 20% as compared to last year.
Cash sales constituted 20% of total sales.
Sales return = 12,000
Calculate gross sales.
(a) 9,00,000 (b) 9,12,000 (c) 7,32,000 (d) None
Hints: Debtors per month based on current year sales = (50,000 + 10,000) = 60,000
Credit sales = 60,000 X 12 = 7,20,000
Let total sales = 100
Less: cash sales = 20
Credit sales = 80
𝟕,𝟐𝟎,𝟎𝟎𝟎
Total sales(Net) = x 100
𝟖𝟎
= 9,00,000
Gross sales = 900,000 + 12,000
= 9,12,000

(13) Total sales (gross) = 7,50,000
Sales return = 50,000
Goods are sold at cost plus 25%.
Opening stock = 50,000
Opening stock is 20,000 more than the value of closing stock.
Calculate amount of purchases.
(a) 5,40,000 (b) 5,80,000 (c) 5,50,000 (d) None
Hints: Net sales = 7,00,000

𝟏
COGS = 7,00,000 – ( X 7,00,000)
𝟓
= 5,60,000
Closing stock = 30,000
COGS = 50,000+ Purchases – 30,000
Purchases = 5,40,000
(14). Following information is given:
Opening Stock 2,13,000

Purchase 16,55,000
Gross Sales 21,32,000
Carriage Inwards 32,500
Carriage Outwards 38,600
Return Inwards 38,000
The rate of gross profit is 25% on cost then value of closing stock will be ––––––––––
(a) Rs 2,57,800
(b) Rs,94,900
(c) Rs 2,25,300
(d) Rs 3,30,000
Hints: Net sales = 21,32,000 – 38,000
= 20,94,000
𝟏
COGS = 20,94,000 – ( X 20,94,000)
𝟓
= 16,75,200
16,75,200 = 2,13,000 + 16,55,000 + 32,500 – Closing stock
= 2,25,300

(15). If average inventory is Rs 1,25,000 and closing inventory is Rs 10,000 less than opening inventory then the
value of closing inventory will be:
(a) 1,35,000
(b) 1,15,000
(c) 1,30,000
(d) 1,20,000
Hints:
Let opening inventory = x
Closing inventory = X-10,000

𝑿+(𝑿−𝟏𝟎,𝟎𝟎𝟎)
Average inventory =
𝟐
1,25,000 X 2 = 2x-10,000
X (Opening stock) = 1,30,000
Closing stock = 1,30,000 – 10,000
= 1,20,000
(16) If opening capital is Rs 70,000 and closing capital is Rs 90,000. Rent paid during the year Rs 12,000.
Machine purchase during the year Rs 50,000. what is the amount of profit or loss?
(a) 20,000 Profit

(b) 20,000 Loss
(c) 58,000 profit
(d) 8,000 Profit
Hints: profit = 90,000 – 70,000
= 20,000
(17) Credit sales = 6,00,000
Cash sales = 40% of total sales
Calculate total sales.
(18) cash purchase = 3,20,000
Credit purchase = 20% of total purchase
Purchase return = 25,000
Calculate gross purchase.

(19) Cost of goods sold = 6,00,000
Gross profit = 20% on sales
Cash sales = 30% of credit sales
Calculate credit sales.
Hints:
𝟏 𝟏
Gross profit = on sales = on cost
𝟓 𝟒
𝟏
G.P = 6,00,000 x
𝟒
= 1,50,000
Total Sales = 7,50,000
Let Credit sales = 100
Cash sales = 30
Total sales = 130

𝟕,𝟓𝟎,𝟎𝟎𝟎
Credit sales = X 100
𝟏𝟑𝟎
= 5,76,923
Answer:
1- b 2-b 3-c 4-b 5-b 6-c 7-c 8-a 9-c

10-a 11-c 12-b 13-a 14-c 15-d 16-a

COCEDUCATION.COM ACCOUNTING FUNDAMENTALS CA/CMA Santosh kumar
ACCOUNTING FUNDAMENTALS THEORY

➢ According to Collins Dictionary, the term ‘framework’ refers to ‘a structure that forms a support or frame
for something’.
➢ In accounting, ‘framework’ provides a common set of rules and guidelines that is used to measure,
recognize, present, and disclose the information appearing in an entity’s financial statements.
Four Framework of Accounting:

The framework of accounting has four pillars – Conceptual, Legal, Institutional and Legal. These are
discussed below.
(a) Conceptual framework:-

The Conceptual Framework is a body of interrelated objectives and fundamentals. The objectives identify the
goals and purposes of financial reporting and the fundamentals are the underlying concepts that help achieve
those objectives.
Those concepts provide guidance in selecting transactions, events and circumstances to be accounted for,
how they should be recognized and measured, and how they should be summarized and reported.
(b) Legal framework:-

Businesses are often controlled by various statutes under which they are formed. For example, Indian
Partnership Act, 1932 , Limited Liability Partnership Act, 2008, the Companies Act, 2013. All these statutes
not only govern the administrative set up of these organisations, but also provide important guidelines
regarding use of resources,financing and also on the maintenance of books of accounts and treatment of
specified transactions.
(c) Institutional Framework:

Institutional framework refers to the guidelines issued in form of certain pronouncements by institutions
entrusted to oversee the development of the respective field. In India, the ICAI has been entrusted to develop
standards in the field of accounting.
In addition, the Cost Accounting Standards Board (CASB) of the Institute of Cost Accountants of India has
been entrusted to develop Cost accounting standards. CASB, so far, has developed 24 Cost Accounting
Standards to facilitate cost accounting and reporting.
(d) Regulatory framework:-

The activities of organisations often come under the regulatory ambit of various regulators. In India, there
are different regulatory authorities, such as RBI, SEBI, IRDAI etc. The regulations imposed by these
authorities may also have important bearing on accounting of a concerned entity.

ACCOUNTING CONCEPTS, PRINCIPLES AND CONVENTIONS
INTRODUCTION:-- A widely accepted set of rules, conventions, standards and procedures for reporting
financial information, as established by the Financial Accounting Standards Board(FASB) are called Generally
Accepted Accounting Principles (GAAP).
They are common set of accounting principles, standards and procedures that companies/entities use to compile
their financial statements.
ACCOUNTING CONCEPTS, ACCOUNTING PRINCIPLES, ACCOUNTING CONVENTIONS:
Accounting Principles are the basic rules which act as a primary standard for recording business
transactions and maintaining books of accounts. They provide standards for scientific accounting
practices and procedures. They guide as to how the transactions are to be recorded and reported. They
assure uniformity and understandability.
The accounting principles can be split into –
[A] Accounting Concepts and
[B] Accounting Conventions.
[A] Accounting Concepts: Accounting Concepts refer to the assumptions and conditions that define the
parameters and constraints within which the accounting operates. They lay down the foundation for accounting
principles. The common accounting concepts are:
(a) Entity Concept

(b) Going Concern Concept
(c) Periodicity Concept
(d) Money Measurement Concept
(e) Accrual Concept
(f) Dual aspect Concept
(g) Matching Concept
(h) Realisation Concept
(i) Cost Concept
Accounting concepts in details:

(a) Entity Concept:- As per this concept, an organisation is treated as distinct and separate from the owner.
Therefore business transactions are recorded in the books of accounts from business point of view and
not from the owner. Therefore amount invested by owner into the business is also treated as liability
(internal) for business.

(b) Going Concern Concept :- According to this concept, it is assumed that enterprise will continue its
operation for indefinite period of time. It is assumed that an enterprise neither has intention nor the need to
liquidate or wind up and curtail its scale of operation. It is because of this concept a distinction is made
between assets and expense, fixed and current assets / liabilities.
(c) Periodicity Concept/Accounting period concept:-- According to this concept, the life of an enterprise is
broken into smaller periods so that its performance can be measured at regular interval. Generally one year
period is taken up for performance measurement and appraisal of financial position. At the end of accounting
period, we prepare financial statements.
(d) Money Measurement Concept : -- According to this concept, only those transactions which can be
expressed in money should be recorded in the books of accounts . Transactions and events, that cannot be
expressed in money are not recorded in books of accounts, even if they are very useful or affect the result of
business.
(e) Accrual Concept:- Accrual means recognition of revenue and expenses as they are earned or incurred
and not when cash or money is received or paid. Revenue means gross inflow of cash, receivables and other
consideration arises in the ordinary course of business activities from sale of goods, rendering services and
using other enterprises resources yielding interest, royalties and dividends. Expenses are cost relating to
revenue earned for a particular period.
(f) Dual aspect concept/ Duality concept: The dual aspect concept assumes that every transaction
recorded in the books of accounts is based on two aspects (called ‘Debit’ and ‘Credit’). This concept provides the
basis for recording business transactions in the books of accounts. This implies that the transaction that is recorded
affects two (or more) accounts on their respective opposite sides. Hence, the transaction should be recorded in at
least two accounts.
(g) Matching concept : For ascertaining profit and loss for a particular period, expenses should be
matched with revenue of that period. In financial statement, it is necessary to match revenue of the period
with the expenses of that period to determine correct profit or loss.
(h) Revenue realisation concept:- The concept of realisation says that amount should be recognized only to the
tune of which it is certainly realizable. Thus, mere getting an order from the customer won’t make it eligible to be
recognized as revenue.
(i) Historical cost concept : According to this concept, value of asset is determined at its historical cost or
acquisition cost or price paid for acquisition of asset.

(B) ACCOUNTING CONVENTIONS:

Accounting Conventions are customs, methods, procedures or guidelines associated with the practical application
of accounting principles. These are widely accepted, and are the common practices which are used as a guideline
when recording transactions. Followings are accounting conventions:
(a) Convention of Conservatism/ Prudence: The convention of conservatism essentially assumes an

uncertain future and as such, advocates providing for all possible losses, but never for possible future gains.
As such, application of this convention would always result in understatement of incomes, profits and thus,
resources.
(b) Convention of Consistency: This convention suggests the uniformity and consistency. Consistency of
accounting rules is vital to profit and loss calculations as well as comparisons of company performance.
Frequent changes in the treatment of accounts would result in inconsistency and hence, make the accounting
information less reliable. It would result in making accounting information truthful, accurate and complete.
(c) Convention of Materiality: The convention of materiality advocates the recording and reflection of all
material facts in the accounting records.
An item should be regarded as material if there is reason to believe that knowledge of it would influence
the decision of an informed investor. Whether an amount is material or not, will depend on its amount,
nature, size of business and level of person taking decision. It is an exception of full disclosure principal.
(d) Convention of Full disclosure: This convention advocates the full disclosure of all material information,
whether favourable or otherwise, in the accounting statements of a business enterprise. This convention requires
that all accounting statements must be prepared honestly. The convention of disclosure holds greater importance
in the case of businesses where the ownership is separate from the management.

Capital and revenue transactions:

There are 2 types of transaction:
i. Capital transaction:- transactions having long term effect are known as capital transaction.
ii. Revenue transaction:- transactions having short term effect are known as revenue transactions.
It is necessary to make a distinction between Revenue and Capital transaction to determine the correct
income of the business. To calculate net profit of the business, only revenue income and expenditure will
be taken into consideration.
(i) Capital and Revenue Expenditures:
(a) Capital Expenditure:- Capital Expenditure refers to that expenditure, benefit from which can be
enjoyed by an entity over a number of accounting periods. This type of expenditure happens to be non-recurring
in nature. A capital expenditure takes place when an asset or service is acquired or improvement of a fixed asset
is affected. These assets resulting from such expenditure are not intended for resale in the ordinary course of
business.
Example: Purchase of machinery; Construction of building; Development of website; Heavy repairs of a non-
current asset etc.
Accounting Treatment: An expenditure of capital nature is not written off completely (i.e. charged) against
income in the accounting period in which it is acquired. Rather, it is capitalised (i.e. recorded) as an asset and
gets reflected in the balance sheet. However, over time the amount of capital expenditure sliced for being
recognized as revenue expenditure and charged against the profit. For example, the acquisition of a machinery
isa capital expenditure, but charging regular depreciation on this machinery is a revenue expenditure.
(b) Revenue Expenditure:- Revenue Expenditure refers to that expenditure, benefit from which can be
enjoyed by an entity in the current accounting period. This type of expenditure happens to be recurring in
nature. Revenue expenditures are incurred to carry on the regular course of operations by an organisation.
Example: Purchase of goods for sale; payment of recurring expenses (like salaries, wages, rent, depreciation,
conveyance charges, monthly internet charges etc.); Repairs and maintenance of non-current assets etc.
Accounting Treatment: An expenditure of revenue nature charged as an expense against profit of the
accounting period in which it is incurred or recognised.

The following are the points of distinction between Capital Expenditure and Revenue
Expenditure:
Capital expenditure Revenue expenditure
1. The economic benefits from capital 1. The economic benefits from revenue
expenditureare enjoyed for more than one expenditureare enjoyed for only one accounting
accounting period. period.
2. It is non-recurring in nature. 2. It is recurring in nature.
3. Normally, it involves heavy cash outlay. 3. Normally, it involves lower cash outlay.
4. It is reflected in the Balance Sheet. 4. It is debited to Income Statement.
5. It may be incurred before or after the 5. It is always incurred after the commencement
commencement of operations of an entity. ofoperations of an entity.
6. It tends to increase the earning capacity or, 6. It helps in carrying on the activities in the
reduce the operating expenses of an entity. currentaccounting period.
7. A portion of capital expenditure may get 7. Entire amount of such expenditure is matched
matched against the revenue to determine the against the revenue to determine the operating
operating result. result.
Certain Rules for Identification of Capital Expenditure:

An expenditure can be recognised as capital if it is incurred for the following purposes:
(i) An expenditure incurred for the purpose of acquiring long term assets for use in the organisation to carry on its
operations (and not meant for resale) will be treated as a capital expenditure.
(ii) When an expenditure is incurred to improve the present condition of an asset.
(iii) An expenditure incurred for improving the earning capacity of an organisation will be considered to be of
capital nature. For example, expenditure incurred for shifting the factory for easy supply of raw materials will be
a capital expenditure.
(c) Deferred Revenue Expenditure:

Deferred Revenue Expenditure is the expenditure for which payment has been made or a liability has been incurred
but which is carried forward on the presumption that will provide benefit over a subsequent periods. Deferred
revenue expenditures are a combination of capital and revenue expenses whose usefulness does not expire in the
year of their occurrence, but generally expires in the near future.
Example: Heavy advertisement expenditure incurred prior to launching a new product; Development
expenses of a product etc

Accounting treatment:- After the issuance of AS-26, the expenditures which were recognised as deferred
revenue expenditure has to be treated as simple revenue expense. The accounting standard has specifically
mentioned that any expenditure incurred for research, training, advertising and promotional activities
should be recognised as an expense of the accounting period in which it has been incurred.
Capital and Revenue Receipts:

A receipt of money may be of a capital or revenue nature depending upon the source of the receipt. A clear distinction
should be made between capital receipts and revenue receipts to ensure proper determination of operating results.
(a) Capital Receipts:- Capital Receipts refer to the receipts which are obtained by an entity from operations
other than the regular operations of the entity. Capital receipts do not have any effect on the operating result
(i.e. profits earned or losses incurred) during the course of a year.
Example: Additional capital introduced by proprietor; receipts from issue of fresh shares, by a company;
proceeds from sale of long-term assets etc.
Accounting Treatment: Such receipt is credited to the respective account of capital nature, and gets reflected
in the Balance Sheet.
(b) Revenue Receipts:- Revenue Receipts refer to the receipts which are obtained by an entity from its regular
course of operations. Receipts of money in the revenue nature increase the profits or decrease the losses of a
business and must be set against the revenue expenses in order to ascertain the profit for the period.
Example: Collection from customers for goods sold on credit; Fees received for services rendered in the ordinary
course of business; Recovery from customers earlier written-off as bad etc.
Accounting Treatment: These are recognised as income and should be credited to the Income Statement.
The following are the points of difference between capital receipts and revenue receipts:
Capital receipts Revenue receipts
1. These receipts are obtained by an entity from 1.These receipts are obtained by an entity from
operations other than from the regular operations. regular day-to-day operations.
2.It is irregular and hence, non-recurring in nature. 2. It is recurring in nature.
3. It is not recognised as an income. 3. It is recognised as an income.
4. It gets reflected in the Balance Sheet. 4. It is credited to Income Statement.
5. It does not affect the operating result of an entity. 5. It affects the operating result of an entity.
6. It may result in creation of liability. 6. It does not create any liability.

Capital and Revenue Profits:

While ascertaining the operating result of an entity in relation to an accounting period, proper distinction is to
be made between capital profits and revenue profits.
(a) Capital Profit:- Capital Profit refers to a profit which arises out of the non-operating activities of an
entity. It is non-recurring in nature. Generally, capital profits arise out of the sale of assets other than
inventory, or in connection with the raising of capital or at the time of purchasing an existing business.
Examples: Profit prior to incorporation; Premium received on issue of shares; Profit made on re-issue of forfeited
shares; Redemption of Debenture at a discount; Profit made on sale or revaluation of a non-current tangible
asset etc.
Accounting Treatment: Capital profits are generally capitalised i.e. transferred to a Capital Reserve Account.
(b) Revenue Profit:- Revenue Profit refers to a profit which arises out of the regular operating activities of
an entity. It is recurring in nature.
Example: Profit arising out of the sale of the merchandise that the business deals in; Profit made by
rendering regular services to clients; Surplus earned by a non-profit organisation etc.
Accounting Treatment: Revenue profits, which get determined in the Income Statement, are distributed to the
owners of the business or transferred to any Reserve Account.
Capital and Revenue Losses:

While ascertaining losses, revenue losses are differentiated from capital losses.
(a) Capital Loss:- Capital Loss refers to a loss which does not arise to an entity in the regular course of
its operations.
Example: Capital losses may result from the sale of assets other than inventory for less than written
down value; assets lost by flood, fire etc.; issue of debentures at a discount or on the settlement of
liabilities for a consideration more than its book value (debenture issued at par but redeemed at a
premium).
Accounting Treatment: It is either charged against the revenue or reflectedin the asset-side of Balance Sheet
(as fictitious assets).
(b) Revenue Loss:- Revenue Loss arise to an entity from the normal course of business.
Example: Discount allowed to customers for prompt payment; loss due to bad debts etc.
Accounting Treatment: Such loss is to be recorded in the debit-side of Income Statement.

ACCOUNTING CYCLE AND ANALYSIS OF TRANSACTIONS

Meaning: The Accounting Cycle is a sequence of activities performed by an accountant to document and
report an organisation’s financial transactions during an accounting period. This cycle follows financial
transactions from when they occur to how they affect financial documents. The entire process starting with
identification of transactions, their recording and processing all transactions of an organisation, to its
representation on the financial statements, and also to closing the accounts is referred to as Accounting Cycle.
Stages of Accounting Cycle: accounting cycle consists of the following sequential steps:
1. Identifying transactions: The first step in the accounting cycle is to analyze events to determine if they are
“transactions”.
2. Recording transactions in Books of Original Entry: The second step in the accounting cycle is to record the
identified transactions in the relevant Books of Original Entry.
3. Posting to the ledger: The next step is to record a summary of the activities in relevant account in the ledger
(referred to as Posting).
4. Drafting of Unadjusted Trial Balance: At the end of an accounting period, data from the ledger accounts
may be taken to draft a trial balance. It is prepared for identifying any errors that may have occurred during
the initial stages of the accounting cycle.
5. Passing of adjustment entries: Identification of necessary adjustments and passing of adjusting entries make
up the fifth step in the cycle.
6. Drafting of Adjusted Trial Balance: Once all adjusting entries are completed, then an Adjusted Trial
Balance can be prepared.
7. Closing of books: In this stage of the accounting cycle, the ledger accounts are closed and balanced (also
referred to as “zeroed out”) at the end of every accounting period.
8. Drafting the Financial Statements: In the last stage of the accounting cycle, the Income Statement is prepared
with the closing balances of the nominal accounts, while the balances of real and personal accounts gets reflected
in the Balance Sheet.

Events & Transactions:

(1) Events: Everything that is happening in every moment of human life is an event. Simply stated, any
happening is an event. As such, events can be financial (like, purchasing a book, paying cab fare, receiving
a cheque etc.) and non-financial (like, visiting a book store, going for morning walk etc.). An event may
involve any number of parties, and may be complete and may be incomplete.
(2) Transactions: An accounting transaction is an event which has a monetary impact on the financial
position of the organisation. In order to be considered as a transaction, an event has to satisfy the following
conditions:
1. It must be measurable in terms of money.
2. It must involve atleast two parties.
3. It involves a monetary exchange for a goods or service.
4. It must cause a change in the financial position of the entity.
Charts of Accounts:
➢ A Chart of Accounts (COA) is a listing of all accounts in the general ledger, each account accompanied by a
reference number. It is a financial organizational tool that provides a complete listing of every accountin
the general ledger of a company, broken down into subcategories. Specifically, it is an index of all the financial
accounts in the general ledger of an organisation.
➢ Chart of Accounts is the driving force behind an organisation’s book-keeping and accounting systems, and is
considered to be the foundation of financial reporting.
➢ The basic purpose of such charting is to organize the accounts and group similar ones together.
➢ Example of Account numbering in chart of accounts
1000 to 1999: Asset accounts

2000 to 2999: Liability accounts
3000 to 3999: Equity accounts
4000 to 4999: Revenue accounts
5000 to 5999: Cost of goods sold accounts
6000 to 6999: Expense account
7000 to 7999: Other revenue (for example rent received, bad debt recovery etc.)
8000 to 8999:Other expenses (for example depreciation income taxes etc.)

Accounting Equation: The accounting equation is a representation of how the three important
components of accounting namely Assets,Liabilities and Equity are associated with each other. In the most
simplistic form, the accounting equation is presented as: Assets = Liabilities + Equity.
Double Entry System:

Double Entry System of Bookkeeping is an accounting system which recognizes the fact that every
transaction has two aspects and both aspects of the transaction are recorded in the books of accounts.
Double entry system records the transactions by understanding them as a Debit item or Credit item.
Rules of Debit and Credit under Double Entry System: The rules of debit and credit can be explained by
applying two methods:
1. Golden Rules; and
2. Accounting Equation (Modern approach)

JOURNAL AND LEDGER

Journal: Journal is the book of original entry in which financial transactions are firstly recorded after their
occurrence in chronological order. It is in this book of accounts where the transactions are recorded in the first place.
The word ‘Journal means’ a daily record. Journal is derived from French word ‘Jour’ which means a day.
This book of account is also referred to as the Book of Prime Entry or Books of First Entry.
The process of recording the transactions in a journal is called ‘Journalizing’.
The entry made in this book is called a ‘Journal Entry’. Every entry in the journal is followed by a short summary
which describes the particular transaction. This short summary is referred to as ‘Narration’. Every entry in the
bookof original entry must be followed by such a narration.
Types of Journal: The books of original entry are broadly classified into two categories:
1. Special Journal:
2. General Journal
1. Special Journal:
A Special Journal is a book of primary entry in which transactions of a specific type viz. credit purchases,
credit sales, return inwards etc. are first recorded before being posted in the respective ledger account. These
are also referred to as Subsidiary Books.. The different special journals that are usually maintained by an
organisation for primary recording of its transactions are:
(a) Cash Journal or Cash Book

(b) Purchase journal/Purchase Book
(c) Sales Journal
(d) Purchase Return Journal
(e) Sales Return Journal
(f) Bills Receivable Journal
(g) Bills Payable Journal
2. General Journal/ Journal proper: This is a book of original entry in which those transactions are
recorded for which no specific day book is maintained are recorded.
Types of Entries Recorded in Journal Proper:

(1) Opening entries: These entries are passed for bringing the balances of certain accounts in the books of the
current accounting period. The different accounts whose balances are brought forwards are the assets, liabilities
and equity accounts appearing the Balance Sheet of the preceding accounting period.
(2) Transfer entries: In accounting, it is sometimes necessary to transfer an amount or balance of one account to
some other account. The journal entries through which the amount of an account are transferred to another
accountare referred to as Transfer entries. Such entries are used when a wrong booking has been made in respect
of any account or to allocate an expense/ revenue from one account to another.
(3) Closing entries: All the expenses and gains or income related nominal accounts must be closed at the end of

the year. The entries which are passed at the end of an accounting period for closing the nominal accounts by
transferring them to the profit determining accounts like Trading Account, Profit & Loss Account, Consignment
Account, Joint Venture Account, Income & Expenditure Account etc.
(4) Adjustment entries: These entries are passed at the time of finalization of accounts for honouring the different
generally accepted accounting principles i.e. accounting concepts and accounting conventions.
(5) Rectification entries: These entries are passed for correcting the different errors that get committed while
recording, posting, casting, balancing etc. in the books of accounts.
Rules of Debit and Credit Based on the Types of Account (Golden Rules Approach):
Nominal Account Debit Expenses and Losses

Credit Incomes and Gains
Real Account Debit What comes in
Credit What goes out
Personal Account Debit The receiver
Credit The giver
Rules of Debit and credit Based on the Accounting Equation (Accounting Equation Approach):
Assets/expenses/drawings Debit Increase

Credit Decrease
Liabilities/capital/revenue Debit Decrease
Credit Increase
Ledger:
The book of account in which transactions are recorded in respective account, after they have been entered in the
journal is called the Ledger. It is the book of account in which the transactions are recorded in a classified and
permanent manner. It is the final destination of all the accounts, and hence, it is also called the Book of Final
Entry.The process of recording the entry in the ledger is technically known as Posting. It contains various ‘ledger
accounts’. The transactions are recorded in each of the relevant ledger accounts in a chronological order.
Sub-divisions of Ledger: On the basis of the nature of accounts maintained, ledger can be classified into
Personal Ledger and General Ledger.
1. Personal Ledger: The ledger which contains the personal accounts of the debtors and creditors is called
Personal Ledger. It can be further sub-divided into:
(a) Debtors’/Customers’/Sales ledger: It contains the personal accounts of all the customers/trade debtors.
(b) Creditors’/Suppliers’/Purchase/Bought ledger: It contains the personal accounts of all the suppliers/
trade creditors.

2. Impersonal Ledger or General Ledger: The ledger which contains the accounts other than those contained in the
‘Personal Ledger’ is called Impersonal/General Ledger. The types of accounts maintained in this ledger are Real,
Nominal and Personal (except Trade Debtors and Trade Creditors).
CASH BOOK, BANK BOOK AND BANK RECONCILIATION STATEMENT:

Cash book:- The book of account that records all cash receipts and cash payments of an organisation is
referred to as cash book. The receipts are entered on the debit side, while the payments are recorded in the
credit side of the cash book.
Types of Cash Book:
1. Regular Cash Book: Regular cash book can be classified into the following three categories :
(a) Single Column Cash Book: In this cash book, only one amount column is maintained on each side to record
transactions involving liquid cash.
(b) Double Column Cash Book: Two amount columns are maintained by organisation on each side of the cash book
i.e cash and bank column.
(c) Triple Column Cash Book: A Cash book with three amount columns on each side (namely Cash, Bank and
Discount columns) is called the Triple Column Cash Book.
2. Petty Cash Book: The cashier in charge of the petty cash book is known as the Petty Cashier. He maintains petty
cash by any of the following two system:
(a) Ordinary System :- The amount of petty cash is provided to the petty cashier either on Ordinary System
or on Imprest System. Under the Ordinary System, a pre-decided amount of cash is given in lump sum by the
chief cashier to the petty cashier. When the entire amount of petty cash gets spent, the petty cashier submits the
details of petty expenditures to the chief cashier for review, and reimbursement.
(b) Imprest system:- Under the Imprest System, the total amount of petty expenses for a particular period is
estimated beforehand.This amount is referred to as Imprest Cash or Imprest Float. The imprest cash is advanced
by the principal cashier to the petty cashier out of which the later meets all the petty expenses incurred during the
period. At the end of the fixed period, petty cashier prepares a Statement of Petty Cash reflecting the petty expenses
incurred and submits the same to the chief cashier. The chief cashier after examination of the petty transactions
remit an amount equal to the total petty expenses incurred to the petty cashier.
BANK BOOK:- Deviating from the traditional method of keeping an additional column for bank transactions
in a double and triple column cash book, today organisations keep a separate subsidiary book similar to cash
book to record all receipts and payments made through the bank. This is known as Bank Book or Bank
Journal.

Usually, big companies maintain this book where the volume of bank transactions is very high. Small businesses
may still continue to record their bank transactions along with the cash book in an additional column.
Similar to a Single Column Cash Book, a Bank Book consists of two sides, receipts side and payment side.
Receipts are debited and payments are credited in the bank book.
TRIAL BALANCE: The Trial Balance is a statement drawn up using the ledger balances to test of the
arithmetical accuracy of the ledger account. The primary purpose of drafting a Trial Balance is to ensure that
there are no arithmetical errors.
Features:
(a) A trial balance is just a statement, and not an account.
(b) It forms no part of the double entry system.
(c) It does not appear in the actual books of accounts. It is usually prepared as a separate document.
(d) It is prepared as on a particular date, and not for a period.
(e) A trial balance may be prepared at any time, say, on monthly, quarterly, half-yearly or on annual basis.
(f) If the books are arithmetically accurate, the total of the debit balances must agree with the total of the
credit balances.
Preparation of Trial Balance: There are two recognised methods of preparing Trial Balance. They are
(1) Total Method, and (2) Balance Method.
(1) Total Method: In this method, for each ledger account the total of debit side and total of credit side are
collected and placed on the debit and credit columns of the Trial Balance. Trial Balance can be drafted
underthis method even though the ledger accounts have not been balanced.
(2) Balance Method: Under this method, Trial Balance is prepared only after each ledger account has been
balanced. So, for each ledger account only one amount is posted in the Trial Balance.

Let’s practice study material questions:
1. MATCH THE FOLLOWINGS:
1. Used by organisations in drafting their financial statements. GAAP
2. Customs, methods, procedures or guidelines associated with the Accounting Conventions

practical application of accounting principles.
3. Assumptions and conditions that define the parameters and Accounting concepts
constraints within which the accounting operates.
4. The basic rules which act as a primary standard for recording Accounting principles
business transactions
5. Providing for all possible losses, but never for possible future gains Conservatism/ prudence
6. Recording and reflection of all material facts. Convention of materiality
7. Recognition of both cash and credit transactions Accrual concept
2. FILL IN THE BLANKS(important for MCQ):

1. The framework of accounting has four pillars – Conceptual, Legal, Institutional and……...
2. The common set of rules, conventions, standards, and procedures in preparation and presentation of financial
statement is referred to as -----------------------
3. As per ……….concept, an organisation is treated as distinct and separate from the persons who own or manage it.
4. …………….Concept enables the accountant to carry forward the values of assets and liabilities from one
accounting period to the other.
5. ………..concepts assumes that the infinite life of an organisation can be split into smaller periods of equal
duration.
6. ………..Concept assumes that any event which can be expressed in terms of money is always recorded in the
books of accounts.
7. The ………..concept assumes that every transaction recorded in the books of accounts is based on two aspects,
technically called ‘Debit’ and ‘Credit’.
8. ………..concept states that the revenues and expenses must be recorded at the same time at which they are
incurred.
9. ………. Concept talks about how much of the revenue should be recognized in the books of accounts. It says,
amount should be recognized only to the tune of which it is certainly realizable.
10. The …………concept states all the business assets should be written down in the book of accounts at the costs
incurred for their acquisition.
11. Convention of …………advocates the continuous observation and application of the rules and practices of
accounting.

12. ……….refers to that expenditure, benefit from which can be enjoyed by an entity over a number of
accounting periods.
13. ………..refer to the receipts which are obtained by an entity from operations other than the regular
operations of the entity.
Answer:
1.Legal 2- Generally Accepted 3- entity 4-Going Concern

Accounting Principles (GAAP).
5- Accounting period 6- Money Measurement 7- dual aspect 8- Matching
9- Realisation Concept 10- cost 11- Consistency 12- Capital Expenditure
13- Capital Receipts
3.FILL IN THE BLANKS:
1. …… refers to a profit which arises out of the non-operating activities of an entity. It is non-recurring in nature.
2. Profit prior to incorporation; Premium received on issue of shares; Profit made on re-issue of forfeited shares;
Redemption of Debenture at a discount; Profit made on sale or revaluation of a non-current tangible asset etc.
are examples of………….
3. ………….refers to a profit which arises out of the regular operating activities of an entity. It is recurring
in nature.
4. ……….refers to a loss which does not arise to an entity in the regular course of its operations.
5. The ………….is a sequence of activities performed by an accountant to document and report an organisation’s
financial transactions during an accounting period.
6. Everything that is happening in every moment of human life is a/an……...
7. ………is a listing of all accounts in the general ledger, each account accompanied by a reference number.
8. ……..represent the valuable resources controlled by the company.
9. …………represent its obligations of an organisation to its external stakeholders.
10. ……..represents owners net claim on the assets.
11. Expanded Accounting Equation is:
Assets + Expenses + Drawings = Liabilities + Capital + …………..
12. Firstly transactions are recorded in the … … … … …
13. The transactions are classified in a suitable manner and recorded in another book of account known as…...
14. The arithmetical accuracy of the books of account may checked by means of drafting a……….
15. The process of recording the transactions in a journal is called ‘…………’
16. Every entry in the journal is followed by a short summary which describes the particular transaction. This
short summary is referred to as ‘……….
17. Cash Book is a book of account which is a book of primary entry as-well-as a book of final entry. So, it is
referred to as……………..
18. The method of preparing Trial Balance under which the Trial Balance can be prepared only after each
ledger account has been balanced is called the --------method.

19. The amount charged by an entity against the profits to provide for the possible collection loss from
customers is known as………………..
20. The ……….discount is never entered in the books of accounts.
21. The Bank A/c is a ………..Account.
22. While posting an opening entry in the ledger, in case of an Account having debit balance, in ‘Particulars’
column the words ‘………….are written on debit side.
Answer:
1-Capital 2-Capital Profit 3-Revenue Profit 4- Capital Loss 5- Accounting Cycle

Profit
6- event 7-A Chart of Accounts 8- Assets 9- Liabilities 10- equity
(COA)
11- Revenue 12- Books of Original 13- Ledger 14- Trial Balance 15- Journalizing
Entry.
16- Narration 17- journalized ledger 18- balance 19- provision for 20- trade
doubtful debts
21- personal 22- to balance b/d’
4. MULTIPLE CHOICE QUESTIONS:

1. Capital losses may result from
(a) the sale of assets other than inventory for less than written down value;
(b) Diminution/ elimination of assets other than as the result of use or sale i.e. loss by flood, fire etc.
(c) in connection with raising debt capital by a company (issue of debentures at a discount) or on the
settlement of liabilities for a consideration more than its book value (debenture issued at par but redeemed
at a premium).
(d) all of the above
2. When in a journal entry only two accounts are affected – one account is debited and another account is
credited, it is called a:
(a) Simple journal entry
(b) Compound journal entry
(c) Transfer entries
(d) Adjustment entries
3. In case of a …………….. at least two debits and at least one credit or at least one debit and two or more
credit items are involved.
(a) Simple journal entry
(b) Compound journal entry
(c) Transfer entries
(d) Adjustment entries
4. These entries are passed for bringing the balances of certain accounts in the books of the current accounting

period.
(a) Compound journal entry
(b) Transfer entries
(c) Adjustment entries
(d) opening entry
5. A …………….. is a book of primary entry in which transactions of a specific type viz. credit purchases,
credit sales, return inwards etc. are first recorded before being posted in the respective ledger account. These
are also referred to as Subsidiary Books.
(a) special journal.
(b) general Journal
(c) important Journal
(d) None
6. This is a book of original entry in which those transactions are recorded for which no specific day book
is maintained are recorded:
(a) special journal.
(b) general Journal
(c) important Journal
(d) None
7. The journal entries through which the amount of an account are transferred to another account are referred
to as Transfer entries. Such entries are used when a wrong booking has been made in respect of any account
or to allocate an expense/ revenue from one account to another.
(d) closing entries
8. The entries which are passed at the end of an accounting period for closing the nominal accounts by
transferring them to the profit determining accounts like Trading Account, Profit & Loss Account,
Consignment Account, Joint Venture Account, Income & Expenditure Account etc.
(d) closing entries
9. These entries are passed at the time of finalization of accounts for honouring the different generally
accepted accounting principles i.e. accounting concepts and accounting conventions.

(d) closing entries
10. Features of trial balance include:
(a) A trial balance is just a statement, and not an account.
(b) It forms no part of the double entry system.
(c) It does not appear in the actual books of accounts. It is usually prepared as a separate document.
(d) all of the above
11. Traditional approach of making journal entry in case of nominal accounts:
(a) debit all expenses and losses: Credit all incomes and gain
(b) debit what comes in; credit what goes out.
(c) debit the receiver; credit the giver.
(d) debit all incomes and gain: Credit all expenses and losses.
12. Traditional approach of making journal entry in case of real accounts:
(a) debit all expenses and losses: Credit all incomes and gain
(b) debit what comes in; credit what goes out.
(c) debit the receiver; credit the giver.
(d) debit all incomes and gain: Credit all expenses and losses.
13. ……concept assumes that the infinite life of an organisation can be split into smaller periods of equal duration.
(a) Accounting Period

(b) Entity
(c) Going concern
14. The accounts related to expenses or losses and incomes or gains are called .
(a) Personal Account

(b) Representative Personal Account
(c) Nominal Account
(d) Real Account
15. The accounting equation is presented as:
(a) Assets = Liabilities + Equity

(b) Assets = Liabilities + [Capital + (Revenue – Expenses) – Drawings]
(c) Assets + Expenses + Drawings = Liabilities + Capital + Revenue
(d) All of the above
16. The book of account which records only those cash transactions which are not of heavy
amount, but thetype of transactions is frequently entered into by an entity is .
(a) Triple Column Cash Book
(b) Petty Cash Book
(c) Ledger

17. A resource owned by the business with purpose of using it for generating future profit, is known as -----
(a) Capital
(b) Asset
(c) Liability
(d) Surplus
18. Which of the following transaction is of capital nature?
(a) Commission on purchases

(b) Cost of repairs
(c) Rent of factory
(d) Wages paid for installation of machinery
19. At the end of the accounting year the capital expenditures are shown in the:
(a) assets side of the Balance Sheet.

(b) liabilities side of the Balance Sheet.
(c) debit side of the Profit and Loss A/c.
(d) credit side of the Profit and Loss A/c.
20. Which of the following book is both a journal and a ledger?
(a) Cash Book

(b) Sales Day Book
(c) Bills Receivable Book
(d) Journal Proper
Answer:
1-d 2-a 3-b 4-d 5-a 6-b 7-b 8-d 9-c 10-d
11-a 12-b 13-a 14-c 15-d 16-b 17-b 18-d 19-a 20-a
Question 5. Mr. Dravid. has provided following details related to his financials. Find out the missing figures:
Particulars (`in’000)
Profits carved during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000
Answer: A-42,000 ; B- 50,000; C- 15,000.

Question.6 Pass Journal entry in the book of Pramod (Opening) From the following Transaction:- Cash
₹2,00,000;Bank ₹3,00,000; Debtors ₹5,00,000; Machine ₹8,00,000; Creditors ₹2,40,000; Bank Loan ₹1,60,000
Solution:- Cash ₹2,00,000

Bank ₹3,00,000
Debtors ₹5,00,000
Machine ₹8,00,000
To Creditors ₹2,40,000
To Bank Loan ₹1,60,000
To Capital Account ₹14,00,000 (b/f)

COCEDUCATION.COM CMA INTER 1 CA/CMA Santosh kumar
BRANCH ACCOUNTING
Branches
Dependent branch Independent branch Foreign Branch
Small branches Large branches Large branches
Their accounts are They maintain their accounts They maintain their accounts
maintained by H.O independently independently and AS- 11 is applied
Methods of accounting in case of dependent Branch:

(a) Debtor system or synthetic method
(b) Stock and debtor system or Analytical method
(c) Final account method:-
(i) Cost Basis
(ii) Wholesale Basis
(a) Debtor system of accounting:

Branch account (nominal account)

Opening balances of assets: Opening balance of liability:
Cash Creditors
Debtors Outstanding expenses
Stock
Furniture
Building
To Goods sent to branch By Bank account (remittances):

Cash sales
To bank account + collection from debtors
( expenses paid by H.O)
Closing balances of assets:

Closing balance of liability: Cash
Creditors Debtors
Outstanding expenses Stock
Furniture
To profit at branch ( bal figure) Building
COCEDUCATION.COM For enquiry: 9999631597, 7303445575, 8448322142, 7011668629

Proof of above format:

To opening stock 20,000 By sales:
To purchases 5,00,000 Cash sales 6,00,000
To expenses:
Paid by H.O 30,000
Paid by Branch 10,000
Non-cash expenses:
Depreciation 50,000 By closing stock 1,20,000
Bad debts 8,000
Goods lost by theft 2,000
To profit at branch
Important note 1: expenses paid by branch are not shown in branch account because they are adjusted from
branch cash account or remittances.
Important note 2: non- cash expenses are not shown in branch account because they are adjusted from
related assets account. For example: bad debts, discount allowed, loss by fire/ theft.
Important note 3: credit sales are not shown in branch account.
Practice question 1: Prepare branch Account under debtor system with following information:
Balances as on 1st April 2024:
Cash 40,000
Debtors 30,000
Stock 35,000
Furniture 1,00,000
Building 2,00,000
Goods sent to branch during the year 3,80,000
Expenses paid by branch 28,000
Expenses paid by head office 22,000
Bad debts 8,000
Discount allowed 2,000
Cash sales 2,20,000
Collection from debtors 6,30,000
Balances as on 31st March 2025:
Stock 25,000
Charge depreciation @ 10% on furniture.

Solution: Branch account

Opening balances of assets:
Cash 40,000
Debtors 30,000
Stock 35,000
Furniture 1,00,000 By Bank account (remittances):
Building 2,00,000 Cash sales 2,20,000
+ collection from debtors 6,30,000 8,50,000
To Goods sent to branch 3,80,000
To bank account Closing balances of assets:

( expenses paid by H.O) 22,000 Cash (40,000-28,000) 12,000
Debtors
Stock 25,000
Furniture (1,00,000- 10,000) 90,000
To profit at branch ( bal figure) Building 2,00,000
Working notes: Debtors account

To balance b/d 30,000 By cash account 6,30,000
To credit sales 8,00,000 By bad debts 8,000
By discount 2,000
By balance c/d ( bal figure) 1,90,000
8,30,000 8,30,000

Practice question 2: Solve the above question by final account method:

Cash 40,000
Debtors 30,000
Stock 35,000
Furniture 1,00,000
Building 2,00,000
Expenses paid by head office 22,000
Bad debts 8,000
Cash sales 2,20,000
Stock 25,000
Charge depreciation @ 10% on furniture.
Solution :
Branch trading account

To Goods sent to branch (purchases) 3,80,000 Cash sales 2,20,000
Credit sales 8,00,000 10,20,000
To gross profit 6,30,000 By closing stock 25,000

10,45,000 10,45,000
Branch profit and loss account

To expenses paid by H.O 22,000 By gross profit 6,30,000
To expenses paid by Branch 28,000
To bad debts 8,000
To discount 2,000
To depreciation 10,000
To net profit ( bal fig) 5,60,000
6,10,000 6,10,000

Practice question 3: The COC Pvt. Ltd. invoices goods to their various branches at cost and the branches sell on
credit as well as for cash. From the following details relating to the Bombay branch, prepare the necessary accounts
in the Head Office books:
Debtors, 1st January, 2024 26,200

Debtors, 31st December, 2024 31,100
Cash Balance, 1st January, 2024 300
Stock, 1st January, 2024 15,000
Stock, 31st December, 2024 13,900
Goods received from Head Office 50,800
Cash received from Head Office 1,500
Goods returned to Head Office 700
Cash sales 33,500
Credit Sales 60,000
Allowances to Customers 320
Returns from Customers 580
Discount allowed to Customers 2,400
Bad Debts 600
Remittance to Head Office 74,900
Rent and Rates 1,800
Wages and Salaries 6,000
General Trade Charges 1,300
Normal loss of goods due to wastage 1,200
Abnormal loss of goods due to pilferage 3,000
Solution: Branch account (under debtor system)

Opening balances of assets:
Debtors 26,200
Cash 300 By Bank account (remittances):
Stock 15,000 Cash sales
+ collection from debtors 74,900
To Goods sent to branch 50,800
Less: return 700 50,100 Closing balances of assets:
Debtors 31,100
To bank account Cash
( expenses paid by H.O) 1,500 Stock 13,900
To profit at branch ( bal figure)

Working notes: Branch cash account

To balance b/d 300 By HO Bank ( remittances) 74,900
To HO Bank 1,500 By rent and rates 1,800
To cash sales 33,500 By wages and salaries 6,000
To debtors 51,200 By general trade charges 1,300
By balance c/d ( bal fig) 2,500
Branch debtors account

To balance b/d 26,200 By cash account ( bal fig) 51,200
To credit sales 60,000 By allowances 320
By sales return 580
By discount 2,400
By bad debts 600
86,200 86,200
Practice question 4: Solve the above question by final account method:

Debtors, 1st January, 2024 26,200
Debtors, 31st December, 2024 31,100
Cash Balance, 1st January, 2024 300
Stock, 1st January, 2024 15,000
Stock, 31st December, 2024 13,900
Goods received from Head Office 50,800
Cash received from Head Office 1,500
Goods returned to Head Office 700
Cash sales 33,500
Credit Sales 60,000
Allowances to Customers 320
Returns from Customers 580
Discount allowed to Customers 2,400
Bad Debts 600
Remittance to Head Office 74,900
Rent and Rates 1,800
Wages and Salaries 6,000
General Trade Charges 1,300
Normal loss of goods due to wastage 1,200
Abnormal loss of goods due to pilferage 3,000

Branch trading account

To Goods sent to branch 50,800 Cash sales 33,500
Less : return 700 50,100 Credit sales 60,000
To wages and salary 6,000 Less: return 580 92,920
By abnormal loss trf to P and L account 3,000
To gross profit 38,720 By closing stock 13,900

To allowances 320 By gross profit 38,720
To discount 2,400
To bad debts 600
To rent, rates 1,800
To general trade charges 1,300
To abnormal loss 3,000
To net profit ( bal fig) 29,300
Practice question 5: prepare branch account from following informations:

Debtors 30,000
Stock 35,000
Creditors 25,000
Prepaid rent ( for 1 month) 2,000
Outstanding salary (for 2 months) 5,000
Expenses paid by head office:
Rent for 9 months Rs 18,000
Salary for 13 months Rs 32,500 50,500
Goods purchased by branch from local supplier 70,000
Payment made to suppliers ( creditors) by the head office 62,000
Discount received from supplier 5,000

Cash sales 2,20,000

Debtors 2,00,000
Stock ?
Value of Closing stock could not be ascertained but it is known that branch usually sells goods on cash basis at 20%
profit on sales and 25% profit on cost in case of credit sales.
Solution: Branch account

Opening balances of assets: Opening balance of liabilities:
Debtors 30,000 Creditors 25,000
Stock 35,000 Outstanding salary 5,000
Prepaid rent 2,000
To Goods sent to branch 9,80,000

By Bank account (remittances):
To H.O bank account: Cash sales 2,20,000
Rent 18,000 + collection from debtors 6,30,000
Salary 32,500 Less: expenses paid by Branch - 28,000 8,22,000
Creditors 62,000 1,12,500
Closing balances of assets:
Closing balance of liabilities: Debtors 2,00,000
Creditors Stock
Outstanding salary (1 month) 2,500 Prepaid rent Nil
Outstanding rent (2 months) 4,000
To profit at branch ( bal figure)
Working notes: Creditors account

To H.O Bank account 62,000 By balance b/d 25,000
To discount received 5,000 By credit purchases 70,000
95,000 95,000

Branch stock account

To balance b/d 35,000 By cost of goods sold:
To purchases 70,000 Cash basis 2,20,000 X
𝟖𝟎
= 1,76,000
𝟏𝟎𝟎
To goods sent to branch 9,80,000 𝟏𝟎𝟎 8,16,000
Credit basis 8,00,000 X = 6,40,000
𝟏𝟐𝟓
By balance c/d
2,69,000
Practice question 6: (concept of invoice price)
Case 1: if load is given on cost price
Case 2: if load is given on invoice price
Assumption: if not mentioned, whether given information is cost price or invoice price.

Let’s revise concept of stock and debtor system:
This method can be followed only if goods have been sent at loaded price (invoice price).
Following accounts are prepared under this method:
(1) Branch stock account: it is always prepared at loaded price ( IP)
Format of branch stock account ( At IP)

To balance b/d xx By Branch cash ( cash sales) xx
To goods sent to branch xx By branch debtors( credit sales) xx
To debtors (sales return) xx By goods sent to branch (return to HO) xx
By balance c/d xx
(2) Branch Debtors account: This account is prepared only if goods have been sold on credit basis.
Format of branch Debtors account

To balance b/d xx By Branch cash (collection) xx
To Branch stock (credit sales) xx By discount account xx
By Branch stock (sales return) xx
By balance c/d xx
(3) Branch Expenses account:
Format of branch expenses account

To H.O Bank ( paid by H.O) xx
To Branch Cah account ( Paid by Branch) xx
To Branch debtors ( bad debts, discount) xx By Branch Profit and loss account xx
( bal fig)

(4) Branch adjustment account : this account is prepared to calculate gross profit/ gross loss at branch. This account
is prepared with the help of branch Stock account. In this account, we reverse profit margin of each and every item
appearing in Branch stock account ( except sales and sales return). The balancing figure will be called Gross profit (
debit side) or Gross loss ( credit side).
Format of branch Adjustment account

To goods sent to branch xx By Stock reserve account xx
(Load in return to HO) (load in opening stock)
By Goods sent to Branch xx
To stock reserve xx (load in goods sent)
(load in closing stock)
To Gross profit ( bal fig)
(5) Branch profit and loss account: This account is prepared to calculate net profit/net loss during the year. In this
account, we debit all expenses related to branch (paid by H.O, paid by Branch or non-cash expenses). Balancing
figure will be called net profit (debit side) or net loss (credit side) of the branch.
Format of branch profit and loss account

To branch expenses account By Gross profit
To net profit ( bal fig)

Revision question 7: H.O. sends goods to its branch at cost + 25%. From the following information prepare necessary
accounts under stock and debtor system.
Balances at branch on 1st April 2024:
Furniture 50,000
Stock at invoice price 40,000
Debtors 60,000
Goods sent to Branch at invoice price 2,00,000
Cash sales 60,000
Cash collected from debtors 1,35,000
Bad debts 2,000
Expenses paid by Branch 4,000
Expenses paid by HO 3,000
Goods lost by fire/ theft 10,000
Charge deprecation @ 10% on furniture
Solution: Branch stock account ( At IP)

To balance b/d 40,000 By Branch cash (cash sales) 60,000
To goods sent to branch 2,00,000 By branch debtors (credit sales) 1,20,000
By branch adjustment (load of loss by fire) 2,000
By Branch profit and loss (cost of loss by fire) 8,000
2,40,000 2,40,000
Format of branch Debtors account

To balance b/d 60,000 By Branch cash (collection) 1,35,000
To Branch stock (credit sales) 1,20,000 By discount account 8,000
By Bad debts account 2,000
1,80,000 1,80,000

Branch Adjustment account

To Branch Stock account 2,000 By Stock reserve account 8,000
(Load in abnormal loss) 𝟏
(40,000 X )
𝟓
40,000
By Goods sent to Branch
To stock reserve 10,000 𝟏
(2,00,000 X ) )
𝟏 𝟓
(50,000 X ))
𝟓
36,000
To Gross profit ( bal fig)
48,000 48,000

To branch Stock account 8,000 By Gross profit 36,000
(cost of abnormal loss)
To depreciation 5,000
To discount 8,000
To bad debts 2,000
To H.O. Bank account 4,000
To Branch cash account 3,000

36,000 36,000
Important Note:-
Treatment of abnormal loss: Cost of abnormal loss is debited to Branch profit and loss account and load of
abnormal loss is debited to branch adjustment account.
Treatment of Normal loss: IP (Cost+ Load) of normal loss is debited to branch adjustment account.
Treatment of Surplus: If all relevant information given in question and balancing figure comes to debit of
Branch Stock account, it should be treated as surplus. Load of such surplus should be credited to Branch
Adjustment account and cost of such surplus should be credited to Branch Profit and loss account.

Revision question 8: (Local Purchases by Branch) Aakash established a retail business in Delhi several years
ago and has since opened branch shops at Mumbai, Calcutta and Chennai. All the purchasing and administration
is done at the Head Office. Branches are also allowed to purchase locally in special circumstances. Branches sell
both for cash and credit terms, but all invoices for credit sales are sent from Delhi and payments from credit
customers received there. The branches are expected to achieve a profit of 50% on cost price. The following
information relates to the Mumbai branch for the first six months of 2024:
Opening stock of goods at branch (Cost to H.O.) 28,000

Opening Debtors 9,000
Goods received by Branch at selling price 1,80,000
Credit Sales 60,000
Cash sales 1,18,000
Transfer from other branches to Mumbai
Branch at selling price 12,000
Transfer to other Branches from Mumbai at selling price 21,000
Goods returned to H.O. at selling price 6,000
Cash from Debtors received at H.O. 53,000
Bad debts written off 2,000
Goods returned by credit customers to Branch 2,400
Goods returned by credit customers to H.O. 1,200
Goods purchased by Bombay Branch
from local suppliers (cost) 15,000
Expenses at the Branch 7,500
Closing stock at Branch:
From H.O. at selling price 45,000
From local purchases 3,000
Additional information:
(i) Goods amounting to Rs.6,000 at cost to H.O. were in transit.

(ii) Branch had on 1 January, 2024 furniture and other equipment at a book value of Rs. 7,500. Depreciation
at 10% p.a. is to be provided on this item.
(iii) Goods purchased locally were sold at 25% profit on sales price.
Prepare necessary accounts under stock and debtor system.

Solution: Branch stock account ( At IP)

To balance b/d 42,000 By Branch cash (cash sales) 1,18,000
To goods sent to branch 1,89,000 By branch debtors (credit sales) 60,000
To goods sent to branch 12,000 By goods sent to branch (inter transfer) 21,000
(inter transfer) By goods sent to branch (return to HO) 6,000
To Branch Debtors account 2,400 By goods sent to branch (return to HO) 1,200
To Branch Debtors account 1,200
By branch adjustment (load of shortage) 800
To Branch cash 15,000 By Branch profit and loss (cost of shortage) 1,600
To Branch Adjustment 5,000 By balance c/d :
Goods in transit 9,000
Stock in godown:
From HO 45,000
Local purchase (selling price) 4,000
Branch Debtors account

To balance b/d 9,000 By HO Bank (collection) 53,000
To Branch stock (credit sales) 60,000 By Bad debts account 2,000
By branch stock (return to branch) 2,400
By branch stock (return to HO) 1,200

69,000
Note: Journal entry for Goods returned by customers direct to Head Office at list price:
Part A: Goods returned by customers to the branch:

Branch Stock account Dr 1,200
To Branch debtor account 1,200
Part B: Goods returned by branch to HO:
Goods sent to branch account Dr 1,200
To Branch stock account 1,200

Branch Adjustment account

To goods sent to Branch 7,000 By Stock reserve account 14,000
𝟓𝟎 𝟓𝟎
(21,000 X ) (42,000 X )
𝟏𝟓𝟎 𝟏𝟓𝟎
63,000
To goods sent to Branch By Goods sent to Branch
𝟓𝟎 2,000 𝟓𝟎
(6,000 X ) (1,82,000 X )
𝟏𝟓𝟎 𝟏𝟓𝟎
To goods sent to Branch By Goods sent to Branch

400 4,000
𝟓𝟎 𝟓𝟎
(1200 X ) (12,000 X ))
𝟏𝟓𝟎 𝟏𝟓𝟎
By branch stock 5,000

To Branch Stock account 800
(Load of shortage)
To stock reserve:
𝟓𝟎
HO (54,000 X ) 18,000
𝟏𝟓𝟎
19,000
Local 1,000
To Gross profit ( bal fig) 56,800
86,000 86,000

To depreciation (6 months) 375 By Gross profit 56,800
To bad debts 2,000
To H.O. Bank account 7,500
To Branch stock (cost of shortage) 1,600
56,800 56,800

Revision question 9: Kali Baba of Karol Bagh, Delhi invoices goods to its Mumbai Branchat 20% less than the list price
which is cost plus 100 percent with instructions that cash sales were to be made at invoice price and credit sales at list
price. From the following particulars available from Mumbai Branch, prepare Branch Stock A/c for the year ending on
31st December 2024 under stock and debtor system.
Stock on 1st January 2011 at invoice Price 18,000

Goods received from H.O. at Invoice Price 1,80,000
Cash Sales 82,000
Credit Sales 1,20,000
Goods in transit on 31st Dec 2011 10,000
Stock at the end at Invoice Price 16,000
Goods returned by customers direct to Head Office at list price 1,500
Solution:
Cost 100
List price for credit sales 200
Invoice price for cash sales 160
Branch stock account

To balance b/d 18,000 By Branch cash (cash sales) 82,000
To goods sent to Branch 1,90,000 By Branch Debtors (credit sales) 1,20,000
To Branch Adjustment account 24,000
𝟒𝟎
(1,20,000 X ) By Goods sent to Branch 1,200
𝟐𝟎𝟎
To Branch debtors (sales return) 1,500 (return to HO) 300
By Branch Adjustment account
(excess of sales return over IP)
𝟒𝟎
(1,500 X )
𝟐𝟎𝟎
4,000
By Shortage ( Bal fig)
By balance c/d:
Goods in transit 10,000
In godown 16,000
2,33,500 2,33,500

Note: Journal entry for Goods returned by customers direct to Head Office at list price:
Part A: Goods returned by customers to the branch:
Branch Stock account Dr (1500 X

𝟏𝟔𝟎
) 1,200
𝟐𝟎𝟎
𝟒𝟎 300
Branch Adjustment account Dr (1500 X )
𝟐𝟎𝟎
To Branch debtor account

1,500
Part B: Goods returned by branch to HO:

Goods sent to branch account Dr 1,200
To Branch stock account 1,200
Final account method (Wholesale basis)
Revision question 10: A Head Office sends goods to its branch at 20% less than list price i.e. catalogue price. Goods
are sold to customers at cost plus 100%. From the following particulars, ascertain the profit made at the head office
and the branch onthe wholesale basis for the year ended 31st December, 2024:
Particular HEAD OFFICE (Rs.) BRANCH

Opening Stock at its cost 1,69,500 40,000
Purchases 5,10,000
Goods sent to Branch (at Invoice Price) 4,80,000
Sales (at list price) 3,40,800 5,97,500
Office Expenses 21,000 4,500
Assume that the head office sells goods to customers at list price.
Solution:
Cost 100
Selling price to customers 200
Invoice price (wholesale price) 160

Trading and Profit and Loss A/c
Particular Head office Branch Particular Head office Branch
To Opening stock 1,69,500 40,000 By Sales 3,40,800 5,97,500

To Purchases 5,10,000 ----- By Goods sent to branch 4,80,000
To Goods received
from head office 4,80,000
To Gross profit c/d 3,50,400 1,19,500 By Closing stock 2,09,100 42,000
10,29,900 6,39,500 10,29,900 6,39,500
To Office expenses 21,000 4,500 By Gross profit b/d 3,50,400 1,19,500
To Branch Stock Reserve 15,750
To Net Profit 3,13,650 1,15,000
3,50,400 1,19,500 3,50,400 1,19,500
Working notes:
Calculation of closing stock of head office: Rs.

Opening Stock of head office (cost price) 1,69,500
Goods purchased by head office (cost price) 5,10,000
6,79,500
Less: Cost of goods sold:
𝟏𝟎𝟎
Customers: (3,40,800 x ) = 1,70,400
𝟐𝟎𝟎
𝟏𝟎𝟎 4,70,400
Branch: (4,80,000 x ) = 3,00,000
𝟏𝟔𝟎
Closing stock of branch: 2,09,100
Calculation of closing stock at Branch ( at IP)

Opening stock at branch (at IP) 40,000
Goods received from head office [At invoice value] 4,80,000
5,20,000
Less: IP of goods sold (5,97,500 x

𝟏𝟔𝟎
) 4,78,000
𝟐𝟎𝟎
Closing stock at Branch (at IP) 42,000
𝟔𝟎
Calculation of unrealized profit in branch stock: (42,000 x ) = 15,750
𝟏𝟔𝟎

Revision question 11: Ganga Ltd. having head office at Mumbai has a branch at Nagpur. The head office does wholesale
trade only at cost plus 80%. The goods are sent to branch at the wholesale price viz., cost plus 80%. The branch at Nagpur
is wholly engaged in retail trade and the goods are sold at cost to H.O. plus 100%. Following details are furnished for the
year ended 31st March, 2024:
Particular Head Office Branch

Opening stock (as on 1.4.2008) 2,25,000 —
Purchases 25,50,000 —
Goods sent to branch (Cost to H.O. plus 80%) 9,54,000 —
Sales 27,81,000 9,50,000
Office expenses 90,000 8,500
Selling expenses 72,000 6,300
Staff salary 65,000 12,000
You are required to prepare Trading and Profit and Loss Account of the head office and branch for the year ended
31st March, 2024.
Solution:
Cost 100
Invoice price (wholesale price) 180
Selling price to customers 200
Trading and Profit and Loss A/c
Particular Head office Branch Particular Head office Branch
To Opening stock 2,25,000 — By Sales 27,81,000 9,50,000

To Purchases 25,50,000 — By Goods sent to branch 9,54,000 —
To Goods received — 9,54,000
from head office
To Gross profit c/d 16,60,000 95,000 By Closing stock 7,00,000 99,000
44,35,000 10,49,000 44,35,000 10,49,000
To Office expenses 90,000 8,500 By Gross profit b/d 16,60,000 95,000
To Selling expenses 72,000 6,300
To Staff salaries 65,000 12,000
To Branch Stock Reserve 44,000 -
To Net Profit 13,89,000 68,200
16,60,000 95,000 16,60,000 95,000

Working notes:
Calculation of closing stock of head office: Rs.

Opening Stock of head office (cost price) 2,25,000
Goods purchased by head office (cost price) 25,50,000
27,75,000
Less: Cost of goods sold:
𝟏𝟎𝟎
Customers: (27,81,000 x ) = 15,45,000
𝟏𝟖𝟎
𝟏𝟎𝟎
Branch: (9,54,000 x ) = 5,30,000
𝟏𝟖𝟎
20,75,000
Closing stock of branch: 7,00,000
Calculation of closing stock at Branch ( at IP)

Opening stock at branch (at IP) NIL
Goods received from head office [At invoice value] 9,54,000
9,54,000
Less: IP of goods sold (9,50,000 x

𝟏𝟖𝟎
) 8,55,000
𝟐𝟎𝟎
Closing stock at Branch (at IP) 99,000
𝟖𝟎
Calculation of unrealized profit in branch stock: (99,000 x ) = 44,000
𝟏𝟖𝟎

Let’s revise -- Independent Branch:
1. Here Branches operate on very large scale. They maintain their account independently considering them
separate from their head office.
2. Journal entries for transactions during the year:
Head office Branch
1. Goods costing Rs 2,00,000 sent Branch account Dr Goods received from HO Dr
by HO to its Branch To goods sent to Branch To Head office account
2. Cash Rs 10,000 sent by Branch Cash account Dr Head office account Dr
to the HO To Branch account To cash account
3. Expenses Rs 5,000 paid by HO Branch account Dr Expenses account Dr
on behalf of the branch To Cash account To Head office account
Asset (Machine) purchased by HO for the Branch
Case 1:
4A. If ownership is transferred to Branch account Dr Machine account Dr
Branch To Bank/Vendor account To Head office account
4B. Depreciation @ 10% charged No entry Depreciation account Dr
on the above asset To Machinery account
Case 2:
5A. If ownership is retained by Machine account Dr
the HO To Bank/Vendor account
5B. Depreciation @ 10% charged onBranch

the account Dr Depreciation account Dr
above asset To Machinery account To Head office account

3. Adjustment entries at the end of year:
Head office Branch
1. Goods costing Rs 2,00,000 sent by HO to its Branch out of which goods costing Rs 5,000 still in transit at the
end of the year
Goods In transit Dr
To Head office account
2. Cash Rs 10,000 sent by Branch to the HO but not yet received by the HO
Cash In Transit account Dr
To Branch account
3. Out of Expenses(Rent) paid by the HO, Rs 4,000 to be borne by the Branch
Branch account Dr 4,000 Rent account Dr 4,0 00
To Rent account 4,000 To Head office account 4,000
Revision question 12: The head office of a business and its branch keep their own books and each prepares its own
profit and loss Account. The following are the balances appearing in the two sets of book as on 31 st December 2024
after ascertainment of profit and after making all adjustments except those referred to below:
Particular Head office Branch

Dr Cr Dr Cr
Capital 1,00,000
Fixed assets 36,000 16,000
Stock 34,200 10,740
Debtors and creditors 7,820 3,960 4,840 1,920
Cash 10,740 1,420
Profit and loss account 14,660 3,060
Branch office account 29,860
Head office account 28,020
1,18,620 1,18,620 33,000 33,000

Set out the balance sheet of the business as on 31 st December,2024 and the journal entries necessary [in both
sets of books] to record the adjustments dealing with the following:
(a) On 31st December,2024 the branch had sent a cheque of for Rs.1,000 to the head office, not received by head-
office nor credited to Branch Account till 3rd January, 2025.
(b) Goods valued at Rs.840 had been forwarded by the head office to the branch and invoiced on 30th December
2024, but were not received by the branch nor dealt with in branch’s books till 11th January ,2025.
Solution: Journal entries in the book of Head office:
Cheque in Transit account Dr 1,000
To Branch account 1,000
Branch account (In the book of HO)

To balance b/d 29,860 By cheque in transit 1,000
29,860 29,860
Journal entries in the book of Branch:
Goods in Transit account Dr 840
To Head office account 840
HO account (In the book of Branch)

By balance b/d 28,020
By Goods in transit 840
To balance b/d 28,860
28,860 28,860

Consolidated Balance sheet as on 31st December 2024

Capital: Fixed assets:
HO- 1,00,000 HO- 36,000
Branch- nil 1,00,000 Branch – 16,000 52,000
Stock:
Creditors: HO- 34,200
HO- 3,960 Branch- 10,740 44,940
Branch- 1,920 5,880
Debtors:
Profit & loss account: HO- 7,820
HO- 14,660 Branch- 4,840 12,660
Branch- 3,060 17,720
Cash:
HO- 10,740
Branch 1,420 12,160
Cheque in transit (HO) 1,000

Cash in transit (Branch) 840
1,23,600 1,23,600
Revision question 13: Give Journal Entries to rectify or adjust the following in the books of both the Head Office and
the Branch:
(i) Goods costing Rs. 8,000 purchased by Branch, but payment made by Head office. The Head Office had debited
the amount to its own purchases account.
In the book of Head office
Correct entry Branch account Dr 8,000
To bank account 8,000
Wrong entry Purchases account Dr 8,000
Rectifying entry Branch account Dr 8,000
To purchases account 8,000

(ii) Branch paid Rs. 15,000 as salary to a visiting Head Office official. The Branch had debited the amount to
Salaries account.
In the book of Branch
Correct entry Head office account Dr 15,000
Wrong entry Salaries account Dr 15,000
Rectifying entry Head office account Dr 15,000
To salaries account 15,000
(iii) Depreciation Rs.25,000 in respect of Branch assets whose accounts are kept in Head Office books.
In the book of HO In the book of Branch

Branch account Dr 25,000 Depreciation account Dr 25,000
To asset account 25,000 To Head office account 25,000
(iv) Expenses Rs. 35,000 to be charged to the Branch for work done on its behalf by the Head Office.

Branch account Dr 35,000 Expenses account Dr 35,000
To Expenses account 35,000 To Head office account 35,000
(v) Goods sent by the Head Office to its Branch Rs.20,000, not yet received by the Branch.

Goods in transit Dr 20,000
To Head office account 20,000
Practice question 14: A Delhi firm has two branches - one at Bombay and another at Calcutta. The branches keep
complete set of books. On 31st March, 2024, Bombay and Calcutta Branches Accounts in Delhi books showed a
debit balance of Rs.95,000 and Rs.40,000 respectively before taking the following information into account:
(1) Goods valued at Rs.8,000 were transferred from Bombay to Calcutta under instruction from Head Office.
Calcutta Branch account Dr 8,000
To Bombay Branch account 8,000

(2) Bombay Branch collected Rs. 3500 from a local customer at the Head office.
Bombay Branch account Dr 3,500
To HO Debtors account 3,500
(3) Calcutta Branch paid Rs.5000 for certain goods purchased by Head office in Calcutta.
Purchases account Dr 5000
To Calcutta Branch account 5000
(4) Rs. 12,500 remitted by Bombay Branch to Delhi on 29th March 2024, received in Delhi on 3rd April 2024.
Cash in transit account Dr 12,500
To Bombay Branch account 5000
(5) Calcutta Branch received on behalf of the Head office Rs. 3200 as dividend from a company located at
Calcutta.
To dividend income 3,200
(6) For the year 23-24 Bombay Branch showed a net loss of Rs.9,000 and Calcutta branch showed a net
profit of Rs. 15,850.
Profit and loss account Dr 9,000
To Bombay Branch account 9,000
To profit and loss account 15,850
Revision question 15: Sri Sundaram commenced business on 1st 1 April, 2023 with head office at Madras and a
branch at Nagpur. Purchases were made exclusively by the head office where the goods were processed before sale.
There was no loss or wastage in processing. Only the processed goods received from head office were handled by the
branch and these were charged thereto at processed cost plus 10%. All sales, whether by head office or by the branch,
were at a uniform gross profit of 25% on cost. Following is the Trial Balance of Sri Sundaram as on 31st March, 2024:

Head office
Particular
Dr. Cr.
Capital 62,000
Drawings 11,000
Purchases 3,93,900
Cost of Processing 10,100
Sales 2,56,000
Goods sent to Branch 1,84,800
Administrative Expenses 27,800
Selling Expenses 10,000
Debtors 61,920
Creditors 1,20,280
Branch Current Account 77,960
Bank Balance 30,400
6,23,080 6,23,080
Branch
Particular Debit Credit
Sales 1,64,000
Goods received from Head Office 1,76,000
Administrative Expenses 3,000
Selling Expenses 1,240
Debtors 22,720
Creditors 2,160
H.O. Current Account 52,300
Bank Balance 15,500

2,18,460 2,18,460
The following further information are also available:
(i) Goods sent by H.O to the branch in March, 24 at Rs.8,800 were not received by the branch until April,24.
(ii) A remittance of Rs. 16,860 from the branch to head office was not received until April, 2024.
(iii) Stock taking at the branch disclosed a shortage of goods of Rs. 4,000 (at selling value).
(iv) Cost of unprocessed goods at head office on 31st March, 2024 was Rs. 20,000.

Prepare trading and Profit & Loss Account in Columnar form and Balance sheet of the business as a whole as on 31st
March, 2024.
Particulars HO Branch Particulars HO Branch

To opening stock Nil Nil By sales 2,56,000 1,64,000
To purchases 3,93,900 By Goods sent to Branch 1,84,800
To cost of processing 10,100 By shortage transferred to P/L A/c 3,520
To Goods received from HO 1,84,800
By closing stock:
Goods in transit ------ 8,800
Unprocessed goods 20,000 ----
To gross profit (bal fig) 68,000 19,680 Processed goods 11,200 28,160
4,72,000 2,04,480 4,72,000 2,04,480
To administrative expenses 27,800 3,000 By Gross profit 68,000 19,680
To selling expenses 10,000 1,240
To shortage of goods 3,520
To stock provision (
𝟑𝟔,𝟗𝟔𝟎
x10) 3,360
𝟏𝟏𝟎
To net profit ( bal fig)

11,920
26,840
68,000 19,680 68,000 19,680
Working notes:
Cost 100
IP 110
Selling price 125
𝟒,𝟎𝟎𝟎
1. Invoice price of shortage of goods = x 110 = 3,520
𝟏𝟐𝟓
2. Computation of value of stock of processed goods at the end at Head Office ( cost price):
Cost of goods available for sale at HO:

Opening stock Nil
Purchases 3,93,900
Cost of processing 10,100
Less: closing stock of unprocessed goods -20,000
3,84,000
Less: cost of goods sold by HO to:
Branch: (
𝟏,𝟖𝟒,𝟖𝟎𝟎
x 100) = -1,68,000
𝟏𝟏𝟎
𝟐,𝟓𝟔,𝟎𝟎𝟎 -2,04,800
Customer: x 100 =
𝟏𝟐𝟓

value of stock of processed goods at the end at HO 11,200

( cost price):
3. Computation of value of stock of processed goods at the end at Branch ( Invoice price):
IP of goods available for sale at Branch:

Opening stock Nil
Goods received from HO 1,84,800 1,84,800
1,84,800
Less: IP of goods sold during the year:
Customer:
𝟏,𝟔𝟒,𝟎𝟎𝟎
x 100 -1,44,320
𝟏𝟐𝟓
-3,520
Less: IP of shortage of goods
value of closing stock at branch (invoice price): 36,960
less: Goods in transit 8,800
Closing stock in godown at Branch 28,160
Revision question 16: Show adjustment journal entry in the books of Head Office at the end of April, 2023 for
incorporation of inter-branch transactions assuming that only Head Office maintains different branch accounts in its
books.
A) Delhi Branch:
1. Received goods from Mumbai - Rs. 35,000 and Rs. 15,000 from Kolkata.
2. Sent goods to Chennai - Rs. 25,000, Kolkata - Rs. 20,000.
3. Bill Receivable received - Rs. 20,000 from Chennai.
4. Acceptances sent to - Mumbai - Rs. 25,000, Kolkata - Rs. 10,000.
B) Mumbai Branch (apart from the above):
1. Received goods from Kolkata - Rs. 15,000, Delhi – RS. 20,000.
2. Cash sent to Delhi - Rs. 15,000, Kolkata - Rs. 7,000.

C) Chennai Branch (apart from the above):
1. Received goods from Kolkata — Rs. 30,000.
2. sent acceptances and Cash sent to Kolkata - Rs. 20,000 and Rs. 10,000, respectively.
D) Kolkata Branch (apart from the above):

1. Sent goods to Chennai - Rs. 35,000.
2. Paid cash to Chennai - Rs. 15,000, Acceptances sent to Chennai - Rs. 15,000.
All working should form part of the answer

Answer:
No. Delhi branch Mumbai branch Chennai branch Calcutta branch

Debit Credit Debit Credit Debit Credit Debit Credit
A1 35,000 35,000
15,000 15,000
A2 25,000 25,000 20,000
20,000
A3. 20,000 20,000
A4. 25,000 25,000 10,000
10,000
B1. 15,000 15,000
20,000 20,000
B2. 15,000 15,000
7,000 7,000
C1. 30,000 30,000
C2. 20,000 20,000
10,000 10,000
D1. 35,000 35,000
D2. 15,000 15,000
15,000 15,000
Total 85,000 1,00,000 60,000 57,000 1,20,000 50,000 67,000 1,25,000
Net 15,000 (credit) 3,000(debit) 70,000 (debit) 58,000 (credit)
Journal Entry In the books of H. O.

30th Mumbai Branch Account Dr. 3,000
April Chennai Branch Account Dr. 70,000
2023 To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by H. O. in respect of inter branch
transaction for the month of April, 2023)

Let’s revise ---- FOREIGN BRANCH
Debit Credit
Machinery Historical rate
Furniture Historical rate
Debtors Closing rate
Cash Closing rate
Bills receivable Closing rate
Bank loan Closing rate
Mortgage loan Closing rate
Creditors Closing rate
Bills payable Closing rate
Bank overdraft Closing rate
Opening stock Opening rate
Purchases Average rate
Rent/salary/wages Average rate
Sales Average rate
Commission received Average
rate/actual rate
Goods received from HO Actual
HO Actual
Foreign exchange loss/gain
Adjustments:
1. closing stock at the end --- closing rate
Treatment of some important items:
(a) Depreciation/ provision for depreciation – Historical rate

(b) Repairs on fixed asset – average rate

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COCEDUCATION.

COM CMA INTER-1 MARATHON CA/CMA Santosh kumar

FINANCIAL STATEMENT OF PROFIT MAKING ORGANISATIONS (COMMERCIAL ORGANISATIONS)

(a) Trading Account

(b) Profit & Loss Account

(c) Profit & Loss Appropriation Account

Format of trading account

Particulars Amount Particulars Amount

Profit and loss account

Particulars Amount Particulars Amount

Profit and loss appropriation account

Particulars Amount Particulars Amount

(b) If given in trial balance - It is shown in assets side of balance sheet.

Important adjustments given in adjustments:

Particulars Amount Particulars Amount

Liability Amount Assets Amount

Profit and loss account

Particulars Amount Particulars Amount

Liability Amount Assets Amount

Particulars Amount Particulars Amount

Liability Amount Assets Amount

Profit and loss account

Particulars Amount Particulars Amount

Liability Amount Assets Amount

Revision question 6. Treatment of goods distributed as free sample/ charity/ advertisement

Particulars Amount Particulars Amount

Profit and loss account

Particulars Amount Particulars Amount

Revision question 7. Treatment of goods withdrawn by the proprietor

Particulars Amount Particulars Amount

Liability Amount Assets Amount

Revision question 8. Treatment of normal loss of goods:-- No treatment

Revision question 9. Treatment of abnormal loss of goods:--

Particulars Amount Particulars Amount

Profit and loss account

Particulars Amount Particulars Amount

Profit and loss account

Particulars Amount Particulars Amount

Liability Amount Assets Amount

➢ They will be shown only in balance sheet of the firm.

➢ it will be shown only profit and loss account.

Revision question 14. Goods sent on approval basis:

Case 1. Approval received --- no treatment required

Case 2. Approval not received --

01-01-2023 Provision for bad debts 5,000

31-12-2024 Bad debts written off 2,500

Bad debts account

Provision for doubtful debts

Bad debts account

Provision for doubtful debts

Revision question 16. Treatment of manager’s commission:

Case 1. If it to be given @ 10% of net profit before charging such commission :-

Case 2. If it to be given @ 10% on net profit after charging such commission :-

Revision question 17. Treatment of wrong valuation of opening stock.

Particulars Debit Credit

Solution: Trading account

Particulars Amount Particulars Amount

2,10,000 𝟒𝟗,𝟓𝟎𝟎 55,000

Profit and loss account

Particulars Amount Particulars Amount