NOTES (UNIT-2)

1. DEPRECIATION
1.1 Meaning:
Depreciation is the reduction in book value of fixed assets due to wear and tear or
reflex of time or due to obsolescence or accident.
According to Spicer and Pegler, depreciation may be defined as a measure of
exhaustion of the effective life of an asset from any cost during a given period.
Depreciation is an expense for an entity and is transferred to the debit of the profit
and loss account:
(i) to determine the correct profit and loss for the year and
(ii) to show the true and fair view of the financial position by showing fixed
deserts at their fair value.
1.2 Characteristics of Depreciation
The characteristics of depreciation are
1. Depreciation is a process of allocating depreciation, cost (cost minus scrap value)
of tangible essay to expense over its estimated useful life in a systematic manner.
2. ⁠ It reduces the book value of the fixed asset.
3. ⁠ Depreciation is provided every year because the book value is reduced either
because of its use or with the passage of time.
4. ⁠ It occurs gradually unless there is a quick physical deterioration or obsolescence
due to technological developments.
5. ⁠ It is not a process of valuation of assets, but the accounting of expense each year.
6. ⁠ Depreciation is a non-cash expense. There is no outflow of cash when
depreciation is charged.
7. ⁠ Depreciation is an indirect expense, therefore, it is transferred to the debit of the
profit and loss account.
1.3 Depreciation and OtherSimilar Terms
There are some terms like ‘depletion’ and ‘amortization’, which are also used in
connection with depreciation. This has been due to the similar treatment given to
them in accounting on the basis of similarity of their outcome, as they represent the
expiry of the usefulness of different assets.
 Depletion: The term depletion is used in the context of extraction of natural
resources like mines, quarries, etc. that reduces the availability of the
quantity of the material or asset. For example, if a business enterprise is into
a mining business and purchases a coal mine for Rs. 10,00,000. Then the
 value of coal mine declines with the extraction of coal out of the mine. This
decline in the value of mine is termed as depletion. The main difference
between depletion and depreciation is that the former is concerned with the
exhaustion of economic resources, but the latter relates to the usage of an
asset. In spite of this, the result is erosion in the volume of natural resources
and the expiry of the service potential. Therefore, depletion and depreciation
are given similar accounting treatment.
 Amortization: Amortization refers to writing off the cost of intangible assets
like patents, copyrights, trademarks, franchises, and goodwill which have
utility for a specified period of time. The procedure for amortization or
periodic write-off of a portion of the cost of intangible assets is the same as
that for the depreciation of fixed assets. For example, if a business firm buys
a patent for Rs.10,00,000 and estimates that its useful life will be 10 years
then the business firm must write off Rs.10,00,000 over 10 years. The
amount so written- off is technically referred to as amortization
1.4 Causes of Depreciation
 Wear and Tear due to Use or Passage of Time: Wear and tear means
deterioration, and the consequent diminution in an assets value, arising from
its use in business operations for earning revenue. It reduces the asset’s
technical capacities to serve the purpose for, which it has been meant.
Another aspect of wear and tear is the physical deterioration. An asset
deteriorates simply with the passage of time, even though they are not being
put to any use. This happens especially when the assets are exposed to the
rigours of nature like weather, winds, rains, etc.
 Expiration of Legal Rights: Certain categories of assets lose their value
after the agreement governing their use in business comes to an end after the
expiry of pre-determined period. Examples of such assets are patents,
copyrights, leases, etc. whose utility to business is extinguished immediately
upon the removal of legal backing to them.
 Obsolescence: Obsolescence is another factor leading to the depreciation of
fixed assets. In ordinary language, obsolescence means the fact of being
“out-of-date”. Obsolescence implies an existing asset becoming out-of-date
on account of the availability of a better type of asset. It arises from such
factors as:
• Technological changes;
• Improvements in production methods;
 • Changes in market demand for the product or service output of the asset; •
Legal or other description.
 Abnormal Factors: Decline in the usefulness of the asset may be caused by
abnormal factors such as accidents due to fire, earthquake, floods, etc.
Accidental loss is permanent but not continuing or gradual. For example, a
car that has been repaired after an accident will not fetch the same price in
the market even if it has not been used.
1.5 Need for Depreciation
The need for providing depreciation in accounting records arises from conceptual,
legal, and practical business considerations. These considerations provide
depreciation a particular significance as a business expense.
 Matching of Costs and Revenue: The rationale of the acquisition of fixed
assets in business operations is that these are used in the earning of revenue.
Every asset is bound to undergo some wear and tear, and hence lose value,
once it is put to use in business. Therefore, depreciation is as much the cost
as any other expense incurred in the normal course of business like salary,
carriage, postage and stationary, etc. It is a charge against the revenue of the
corresponding period and must be deducted before arriving at net profit
according to ‘Generally Accepted Accounting Principles’.
 Consideration of Tax: Depreciation is a deductible cost for tax purposes.
However, tax rules for the calculation of depreciation amount need not
necessarily be similar to current business practices.
 True and Fair Financial Position: If depreciation on assets is not provided
for, then the assets will be over-valued and the balance sheet will not depict
the correct financial position of the business. Also, this is not permitted
either by established accounting practices or by specific provisions of law.
 Compliance with Law:Apart from tax regulations, there are certain specific
legislations that indirectly compel some business organizations like corporate
enterprises to provide depreciation on fixed assets.
1.6 Factors Affecting Depreciation
The determination of depreciation depends on three parameters, viz. cost, estimated
useful life, and probable salvage value: -
 Cost of asset: Depreciation of an asset is directly proportional to the cost of
the asset and the cost of a fixed asset is calculated by adding the cost of
acquisition, installation, etc. Hence, the cost isan important factor in
affecting depreciation.
  Estimated useful life: Every fixed asset has a useful life till whichit can be
used for a business. After that, it will not be of any use tothe business.
Hence, the useful life of an asset is also a factor indetermining depreciation.
 Estimated scrap value: Every asset has a scrap value or salvagevalue. It is
also known as net residual value or as the sale value ofthe asset arrived at the
end of its useful life. If the net residualvalue is higher, it will help in
reducing the amount of depreciationand vice versa. Thus, net residual value
is also one of the factorsaffecting the amount of depreciation.

1.7 Methods of Calculating Depreciation

The depreciation amount to be charged during an accounting year depends upon the
depreciable amount and the method of allocation. For this, two methods are
mandated by law and enforced by professional accounting practice in India. These
methods are straight-linemethod and written-down value method. Besides these two
main methods, there are other methods such as – the annuity method, depreciation
fund method, insurance policy method, sum of years digit method, double declining
method, etc. which may be used for determining the amount of depreciation. The
selection of an appropriate method depends upon the following:
• Type of the asset
• Nature of the use of such asset
• Circumstances prevailing in the business

1.7.1 STRAIGHT-LINE METHOD

In this method, depreciation is charged at a fixed percentage of the
asset’s original cost. The amount of depreciation remains equal from year
to year, and this method is also referred to as the ‘Equal installment
method’. It is also called the fixed installment method because the
amount of depreciation remains constant from year to year over the
useful life of the asset. According to this method, a fixed and equal
amount is charged as depreciation in every accounting period during the
lifetime of an asset.
The depreciation amount to be provided under this method is computed
by using the following formula:
Depreciation Per Annum = (Cost of Asset – Salvage Cost) *
Depreciation Rate
or
Depreciation Per Annum = (Cost of Asset – Salvage Cost) / Useful
Life
The rate of depreciation under the straight-line method is the percentage
of the total cost of the asset to be charged as deprecation during the
useful lifetime of the asset. The rate of depreciation is calculated as
follows:
Rate of depreciation = Annual Depreciation/(Cost of asset-Salvage
cost)*100
1.7.1.1 Advantages of Straight-Line Method
Straight Line method has certain advantages which are stated
below:-
• It is very simple and easy to understand and apply. Simplicity
makes it a popular method in practice;
• Asset can be depreciated up to the net scrap value or zero value.
Therefore, this method makes it possible to distribute full
depreciable cost over useful life of the asset;
• Every year, same amount is charged as depreciation in profit
and loss account. This makes comparison of profits for different
years easy;
• This method is suitable for those assets whose useful life can be
estimated accurately and where the use of the asset is consistent
from year to year such as leasehold buildings.
1.7.1.2 Limitations of Straight-Line Method
Although straight line method is simple and easy to apply it
suffers from certain limitations which are given below.
• This method is based on the faulty assumption of same amount
of the utility of an asset in different accounting years;
• With the passage of time, work efficiency of the asset decreases
and repair and maintenance expense increases. Hence, under this
method, the total amount charged against profit on account of
depreciation and repair taken together, will not be uniform
throughout the life of the asset, rather it will keep on increasing
from year to year.
1.7.2 WRITTEN DOWN VALUE METHOD
Under this method, depreciation is charged on the book value of the
asset. Since book value keeps on reducing by the annual charge of
depreciation, it is also known as the ‘reducing balance method’.
The formula is as follows:
Written Down Value Method = (Cost of Asset – Salvage Value of
Asset) * Rate of Depreciation in %

1.7.2.1 Advantages of Written Down Value Method

Written down value method has the following advantages:
• This method is based on a more realistic assumption that the
benefits from assets go on diminishing (reducing) with the
passage of time. Hence, it calls for proper allocation of cost
because higher depreciation is charged in earlier years when the
asset’s utility is higher as compared to later years when it
becomes less effective.
• It results inan almost equal burden of depreciation and repair
expenses taken together every year on the profit and loss account;
• The Income Tax Act accepts this method for tax purposes;
• As a large portion of the cost is written off in earlier years, loss
due to obsolescence gets reduced;
• This method is suitable for fixed assets that last for long and
which require increased repair and maintenance expenses with the
passage of time. It can also be used where the obsolescence rate is
high.
1.7.2.2 Limitations of Written Down Value Method
Although this method is based upon a more realistic assumption it
suffers from the following limitations.
• As depreciation is calculated at a fixed percentage of written
down value, the depreciable cost of the asset cannot be fully
written off. The value of the asset can never be zero;
• It is difficult to ascertain a suitable rate of depreciation.
1.8 DIFFERENCE BETWEEN STRAIGHT-LINE METHOD AND WRITTEN
DOWN VALUE METHOD

Basis of Straight Line Method Written Down Value

Comparison Method

How it is Original asset cost is taken as Reducing balance is the basis

calculated the basis for calculating of calculating depreciation.
Depreciation Reducing balance is also
known as book value

How depreciation A fixed amount is deducted Depreciation is deducted

is charged every year till the useful life of based on the written down
the asset value of an asset every year
till the effective life of an
asset.

Value of Asset It reaches zero at the effective It never becomes zero and
life of the asset and is written hence not completely written
off off.

Asset Suitability Assets such as buildings and Assets requiring more repair,
lands which require less repair like machinery, plant, and
and have less chance of cars are more suitable
becoming obsolete are suitable
for this method

Impact of Increases every year Remains constant every year

Depreciation and
repairs on P & L
account
 1.9 JOURNAL ENTRIES
 For purchase of an asset
Asset A/c Dr.
To Bank/vendor A/c
(With the cost of an asset including installation expenses, freight etc.)

 Following entries are recorded at the end of each year

Depreciation A/c Dr.
To Asset A/c

(With an amount of depreciation)

Profit and loss A/c Dr.
To Depreciation A/c
(With an amount of depreciation)
 Sale of an asset
Cash/Bank A/c Dr.
Profit and loss A/c Dr. (In case of loss)
To Asset A/c
To Profit and loss A/c (In case of Profit)

(Being an Asset sold)

QUESTIONS
Q1. A Ltd. purchased a machine on 1st July, 2019 at a cost of Rs. 14, 00,000 and
spent Rs.1, 00,000 on its installation. The firm writes off depreciation at10%p.a.of
the original cost every year. The books are closed on 31st March every year. You are
required to show the MachineryAccount and DepreciationAccount for the year
2019and 2020.
Solution1:
 In the books of Ltd. Machinery Account

Date Particulars Amount(Rs.) Date Particulars Amount(Rs.)

2019- 2019-20
20
July1 To Bank A/c 14,00,000 March. By Depreciation 1,12,500
31 A/c
July1 To Bank A/c- 1,00,000 (10%on
(Installation Expenses) Rs.15,00,000 for
9 months)
Mar.31 By Balance c/d 13,87,500

15,00,000 15,00,000

2020- 2020-21
21
April.1 To Balance b/d 13,87,500 Mar.31 By Depreciation 1,50,000
A/c
(10% on
Rs.15,00,000)
Mar.31 By Balance c/d 12,37,500

13,87,500 13,87,500

Depreciation Account A/c

Date Particulars Amoun Date Particulars Amoun
t (Rs.) t (Rs.)
2019-20 1,12,500 2019-20 By Profit & Loss A/c 1,12,500
March. 31 To Machinery A/c March.
31
1,12,500 1,12,500
2020-21
March. 31 2020-21
To Machinery A/c March. By Profit & Loss A/c
1,50,000 31 1,50,000

1,50,000 1,50,000
=======
Q2. A Ltd. depreciates its equipment at 10%p.a.on straight line method. On1/4/2019 the
balance in Equipment account was Rs.8,50,000 (OriginalCostRs.12,00,000).On1/7/2019
new equipment was purchased for Rs. 25,000. On 31/12/2019 an old equipment having
WDV of Rs. 40,000 on 1/4/2019 (Original cost Rs. 60,000) was sold for Rs. 30,000. Show
the Equipment Account for the year ended 31.03.2020.

Solution2.

In the Books of A Ltd.

Equipment A/c
Date Particulars Amount Date Particulars Amount
(Rs.) (Rs.)
2019 2019
April1 To Balance b/d 8,50,000 Dec.31 By Depreciation A/c 4500
[WN-1]

July1 To Bank A/c 25,000 Dec.31 By Bank A/c [sale of 30,000

[Purchase of equipment] equipment]
2020
March
31 By Loss on sale of 5,500
equipment A/c
31 By Depreciation A/c 1,15,875
[WN-2]
By Balance c/d 7,19,125

8,75,000 8,75,000

Workings Notes:

1. Sale of Equipment on 31.12.2019

Amount(Rs.) 40,000
WDV on1.4.19 4,500
Less:Depreciation@10%p.afor9months[60,000×10%×9/12]
35,500
WDV on31.12.19 30,000
Sale proceeds
5,500
Loss on sale

2. AnnualDepreciationfor2019-20 Rs.
On equipment exists on 1.4.19; (12,00,000-60,000)×10% =1,14,000
On equipment purchased on1.7.2019: (25,000×10%×9/12) =1,875

TOTAL =115875
Q3. A Ltd. purchased on 1st April, 2019 a machinery for Rs. 2,91,000 and incurred Rs. 9000
for installation. On 1st October another machinery for Rs. 1,00,000 was purchased. On 1st
October 2020 the machinery purchased on 01/04/2019 having become useless was sold for
Rs. 1,93,000 and on that day a new machinery was purchased for Rs. 2,00,000.
Depreciation was provided on 31st March each year @ 10 percent p.a on written Down
Value. You are required to prepare machinery account.
Solution3.

In the Books of A Ltd.

Machinery A/c
Date Particulars Amount Date Particulars Amount
(Rs.) (Rs.)

2019 2020
Apri March 31 By Depreciation A/c 35000
l To Bank 2,91,000 [depreciation on asset sold ]
1 A/c To 9,000 By Balance c/d
1 Bank A/c 31 3,65,000
[Installation 1,00,000 4,00,00
Oct.1 Charge] To Bank 4,00,000 0
A/c 2020 By Depreciation A/C (sold
2020 3,65,000 Oct.1 on Machinery)
April1 13,500
To Balance b/d 2,00,000 By Bank A/c
Oct.1 1
To Bank By Profit & Loss A/c 1,93,000
A/c [New 1
Machine 2021 ByDepreciation A/c 63,500
Purchased] March 31 By balance c/d
March 31 19,500
27550
0

5,65,000 5,65,000
====== =====
WorkingNote1:
Book Value of Machine

Particulars Machine-1 Machine2 Machine-3

(Rs.) (Rs.) (Rs.)
Cost 3,00,000 1,00,000 2,00,000
Depreciationfor2019-20 (30,000) (5000)
Written Down Value 2,70,000 95,0000
Depreciationfor2020-21 (13,500)
(13500) (9,500)
(9500) (10,000)
Written Down Value 2,56,500 85,500 1,90,000
Sale Proceeds (1,93,000)
Loss on Sale 63,500

2. BANK RECONCILIATION STATEMENT

2.1 Meaning: Bank Reconciliation Statement is a statement prepared on a particular
date reconciling the bank balance in the Cash Book with the balance as per Bank
Statement or Pass Book showing the reasons or causes of difference between the
two balances.
2.2 Reasons or Causes of Difference
Reasons can be as follows:
(i) Cheques issued but not presented for payment;
(ii) Cheques deposited but not credited;
(iii) Interest allowed by the bank not recorded in Cash Book;
(iv) Interest and expenses charged by the bank not recorded in Cash Book;
(v) Interest and dividend collected by the bank not recorded in Cash Book;
(vi) Direct payments by the bank not recorded in Cash Book;
(vii) Direct payments into the bank by a customer not recorded in Cash Book;
(viii) Dishonour of bills discounted with the bank not recorded in Cash Book,
(ix) Cheques collected by the bank on behalf of a customer not recorded in Cash
Book; and
(x) Errors committed.
2.3 Errors Made by Bank or Firm While Recording the Transaction
Sometimes there may be an error while recording a transaction that can result in a
difference in balances. Such errors can be made both by banks or firms, hence they
are of two types:
  Errors committed by the firm:
(i) Wrong amount debited or credited in the cash book.
(ii) Omission of any transaction.
(iii) Error in totalling or balancing the bank column of the Cashbook.
 Errors committed by the bank:
(i) Wrong amount debited or credited in the passbook.
(ii) Omission of any transaction.
(iii) Error in totalling or balancing the bank column of the Passbook.

2.4 Benefits of Preparing Bank Reconciliation Statement

 Helps in tracking errors.

 Helps terminate the risks of fraud.
 Helps in tracking transaction status periodically.
 Helps in achieving accurate balance.

2.5 Preparation of Bank Reconciliation Statement

 A BRS is prepared by taking either the balance of the Passbook or the Cash
Book as a starting point.
 The bank records all the deposits on the credit and withdrawals on the debit
side of the Passbook.
 Tally the debit side of the cash book and the credit side of the pass book and
vice-versa and note the point of differences.
2.5.1 Format for preparing Bank Reconciliation Statement
Amount
Particulars
(in Rs.)

Balance as per Cash Book

Items Credit in the Pass
Book but not recorded in
the Cash Book.
Items are credited in the ……….
Add:
Cash Book but not ……….
recorded in the Pass ……….
Book.
……….
Less:
Items debited in the Cash ……….
Book but not recorded in
the Pass Book.
Item debit in Pass Book
but not recorded in Cash
Book.
Balance as per the
……….
passbook
2.5.2 Important Note
 Debit Balance as per Cash Book or Credit Balance as per Pass
Book means favourable balance.
 Credit Balance as per Cash Book or Debit Balance as per Pass
Book means unfavourable balance.

2.5.3 Bank Reconciliation Statement- At a glance

Particulars Cash Book— Pass Book—
Starting Balance Starting Balance
Favourable Unfavourable Favourable Unfavourable
Balance (Dr. Balance/Over Balance Balance/Over
Balance) draft (Cr. (Cr. draft (Dr.
Balance) Balance) Balance)
Cheques issued but + – – +
not yet presented for
payment
Cheques deposited – + + –
into the Bank but not
yet collected
. Interest allowed by + – – +
the Bank but not
entered in the Cash
Book
Bank charges not – + + –
entered in the Cash
Book
Direct deposit into + – – +
the bank by a
customer
Direct payments from – + + –
the bank not entered
in the Cash Book.
Direct collections + – – +
made by the bank not
entered in the Cash
Book.
Cheque issued and – + + –
payment received by
 the creditor but not
entered in the Cash
Book
Cheque paid into the + – – +
bank but omitted to
be entered in the
Cash Book.
Dishonour of a – + + –
cheque and bill
discounted with the
bank
Cheque entered in the – + + –
Cash Book but not
sent to the Bank

2.6 Difference between Bank Reconciliation Statement and Bank Statement

Basis Bank Reconciliation Bank Statement

Statement
1. Who prepares It is prepared by the It is prepared by the bank.
account holder.

2. Objective It is prepared to reconcile It is prepared to inform the

the difference between customer, i.e., account
Cash Book Balance and holder about all
Pass Book Balance. transactions which have
taken place in his account
during the period covered
by the statement.

3. When it is prepared It is prepared on a It is prepared for a

particular date particular period.

4. Necessity It is not compulsory. It is compulsory for the

bank to prepare it.
 5. Final Result It may show the bank It shows the balance of
balance as per Cash Book Customer’s Account as per
or Pass Book at the end of bank ledger at the end of
the period. the period.

2.7 Questions
Q1. From the following particulars, prepare a bank reconciliation statement as of
March 31, 2017.
(i) Balance as per cash book ₹ 3,200
(ii) Cheque issued but not presented for payment ₹ 1,800
(iii) Cheque deposited but not collected up to March 31, 2017 ₹ 2,000
(iv) Bank charges debited by bank ₹ 150

Solution1.

Bank Reconciliation Statement, as on March 31, 2017

S. No. Particulars Amount Amount

₹ ₹

Balance as per the Cash Book 3,200

Add Cheque issued but not presented for payment 1,800
Less Cheque deposited but not cleared (2,000)
Less Bank charges (150)
Balance as per the Pass Book 2,850

Q2. Prepare Bank Reconciliation Statement from the following particulars:

(i) On 31st March, 2023, Cash Book showed a credit bank balance (i.e. bank
overdraft) of Rs.20,000
(ii) Out of the total cheques amounting to Rs.1,00,000 drawn, cheques
aggregating Rs.30,000 were encashed in March, cheques aggregating
Rs.40,000 were encashed in April and the rest have not yet been presented.
(iii) Out of the total cheques amounting to Rs.50,000 deposited, cheques
aggregating Rs.15,000 were credited in March, cheques aggregating
Rs.20,000 were credited in April, and the rest have not yet been collected.
(iv) Bank has debited Rs.5,000 on account of interest on overdraft and Rs.1,000
as bank charges.
(v) Bank has credited Rs.7,000 to the account being dividend on shares.
(vi) Cheque of Rs.10,000 (discounted with the bank in January) dishonoured on
31st March (but not yet recorded in the Cash Book).

Solution2.
BANK RECONCILIATION STATEMENT as on 31st March, 2023

Particulars Amount Amount

Details (Rs.) Rs.

Overdraft Balance as per Cash Book(Cr.) 20,000

Less: Cheques issued but not yet presented for payment (70000)
70,000
Dividend collected and credited by Bank (7000) (77,000)
(57,000)
Add:Cheques deposited but not yet collected 35,000

Interest debited by Bank not recorded in Cash Book 5,000

Bank charges debited by Bank not recorded in Cash Book 1,000
Cheque discounted dishonoured by Bank not recorded in Cash 10,000 51,000
Book
Balance as per Pass Book(Cr.) (6,000)

Q3. Prepare bank reconciliation statement as on December 31, 2017. On this day
the passbook of Mr. Himanshu showed a balance of ₹ 7,000.
(a) Cheques of ₹ 1,000 directly deposited by a customer.
(b) The bank has credited Mr. Himanshu for ₹ 700 as interest.
(c) Cheques for ₹ 3,000 were issued during the month of December but of these
cheques for ₹ 1,000 were not presented during the month of December.

Solution3.

Bank Reconciliation Statement of Mr. Himanshu as on December 31, 2017

S. Particulars Amount Amount
No.
₹ ₹

Balance as per the Pass Book 7,000

Less Cheques directly deposited by a customer (1,000)
Less Bank allowed interest (700)
Less Cheques issued but not presented for payment in (1,000)
December
Balance as per the Cash Book 4,300
Q4. Prepare bank reconciliation statement of Shri Bhandari as on December 31,
2017

(i) The Payment of a cheque for ₹ 550 was recorded twice in the passbook.
(ii) Withdrawal column of the passbook under cast by ₹ 200
(iii) Cheque of ₹ 200 has been debited in the bank column of the Cash Book but
it was not sent to bank at all.
(iv) A Cheque of ₹ 300 debited to Bank column of the cash book was not sent to
the bank.
(v) ₹ 500 in respect of dishonoured cheque were entered in the passbook but not
in the cash book. Overdraft as per passbook is ₹ 20,000.

Solution4.

Bank Reconciliation Statement of Shri Bhandari as on December 31, 2017

S. Particulars Amount Amount

No.
₹ ₹
Overdraft as per the Pass Book (20,000)

Add Payment of cheque twice debited in the Pass Book 550

Less Withdrawal column of the Pass Book under cast (200)

Add Cheque debited in the Cash Book 200

but not deposited in the bank
Add Cheque added in the Cash Book but not deposited 300
in the bank
Add Cheque dishonoured 500 1350

Overdraft as per the Cash Book (18,650)

3. COMPUTERIZED ACCOUNTING SOFTWARE
 Meaning: Computerized accounting system refers to the system of maintaining
accounts using computers. It involves the processing of accounting transactions
through the use of hardware and software in order to keep and produce accounting
records and reports.
 Features of computerized accounting:
i. Simple and integrated: It is designed to automate and integrate all the business
operations such as purchase, sales, finance, inventory and manufacturing. The CAS
may be integrated with enhanced Management Information System (MIS), multi-
lingual and data organisation capabilities to simplify all the business processes of the
organisation easily and cost-effectively.
ii. Speed: It can perform functions at much higher speed than doing the same
manually.
iii. Accuracy : Computers perform functions with high degree of accuracy. If hardware,
software and input by people are proper, the computerised accounting system can
assure of accurate outcome.
iv. Reliability: Computers are used to process large volumes of data and hence, data
provided by it are reliable.
v. Versatility: Computer and accounting software have the ability to perform diverse
tasks. For example, by simply recording accounting entries through accounting
software, one can get trial balance, trading account, profit and loss account, balance
sheet and diverse reports.
vi. Transparency: With computerised accounting, the organisation will have greater
transparency of day-today business operations and access to the vital information.
vii. Scalability computerized accounting enables processing of any volume of data in
tune with the change in the size of the business.
viii. On-line facility computerized accounting offers online facility to store and process
transaction and data so as to retrieve information to generate and view financial
reports in any part of the world.
ix. Security In computerized accounting, only the authorised users are permitted to
have access to accounting data. Under manual accounting system, it is very difficult
to secure such information as it is open to inspection by any person dealing with the
books of accounts.

 Components of Computerised Accounting System

 Components of Computerised Accounting can be classified into six categories, namely, i)
Hardware ii) Software iii) People iv) Procedure v) Data and vi) Connectivity.
i) Hardware: The physical components of a computer constitute its hardware.
Hardware consists of input devices and output devices that make a complete
computer system. Examples of input devices are keyboard, optical scanner, mouse,
joystick, touch screen and slylus which are used to feed data into the computer.
Output devices such as monitor and printer are media to get the output from the
computer.
ii) Software: A set of programs that form an interface between the hardware and the
user of a computer system are referred to as software. The following are the various
types of software:
a) System software: A set of programs to control the internal operations such as
reading data from input devices, giving results to output devices and ensuring
proper functioning of components is called system software. The system
software includes the following:
(1) Operating system: A set of tools and programs to manage the overall
working of a computer using a defined set of hardware components is called an
operating system. It is the interface between the user and the computer system.
Example: DOS, Windows, UBUNTU, imac, etc.
(2) Programming software: Special software to accept data and interpret them
in the form of machine/assembly language understandable by a computer.
Example: C, PASCAL, COBOL, etc.
(3) Utility software: These are designed specifically for managing the
computer device and its resources. Example: File manager, Anti-virus software,
etc.
b) Application software: Programs designed to perform a specific function for a
user. An application software can be classified as follows:
(i) General purpose software: This type of application can be used for a
variety of tasks and not limited to one particular function. Example: MS-
Office.
(ii) Specific purpose software: This software is created to execute one
specific task and they are customised to the needs of user. Example:
Accounting software, payroll software, etc.
(iii) People The most important element of a computer system is its users.
They are also called live-ware of the computer system. The following
types of people interact with a computer system. a) System analysts:
 People who design the operation and processing of the system. b) System
programmers: People who write codes and programs to implement the
working of the system. c) System operators: People who operate the
system and use it for different purposes.
(iv) Procedure Procedure is a step by step series of instructions to perform a
specific function and achieve desired output. In a computer system there
are three types of procedures. a) Hardware oriented procedure: It defines
the working of a hardware component. b) Software oriented procedure: It
is a set of detailed instructions for using the software. c) Internal
procedure: It maintains the overall working of each part of a computer
system by directing the flow of information
(v) Data The facts and figures that are fed into a computer for further
processing are called data. Data are raw input until the computer system
interprets them using machine language, stores them in memory,
classifies them for processing and produces results in conformance with
the instructions given to it. Processed and useful data are called
information which is used for decision making.
(vi) Connectivity When two or more computers are connected to each other,
they can share information and resources such as sharing of files
(data/music, etc), sharing of printer, sharing of facilities like the internet.
This sharing is possible using wires, cables, satellite, infra-red, bluetooth,
microwave transmission, etc.
 Advantages of Computerised Accounting
1. Better Quality Work: The accounts prepared with the use of computerized accounting
system are usually uniform, neat, accurate, and more legible than a manual job.
2. Lower Operating Costs: Computer is a reliable and time-saving device. The volume of
job handled with the help of computerized system results in economy and lower operating
costs. The overall operating cost of this system is low in comparison to the traditional
system.
3. Improves Efficiency: This system is more efficient in comparison to the traditional
system. The computer makes sure speed and accuracy in preparing the records and accounts
and thus, increases the efficiency of employees.
4. Facilitates Better Control: From the management point of view, there is greater control
possible and more information may be available with the use of the computer in accounting.
It ensures efficient performance in accounting records.
 5. Greater Accuracy: Computerized accounting make sure accuracy in accounting records
and statements. It prevents clerical errors and omissions in records.
6. Relieve Monotony: Computerized accounting reduces the monotony of doing repetitive
accounting jobs which are tiresome and time-consuming.
7. Facilitates Standardization: Computerised accounting provides standardization of
accounting routines and procedures. Therefore, it ensures standardization in the accounting
records.
8. Minimizes Mathematical Errors: While doing mathematical work with computers,
errors are virtually eliminated unless the data is entered improperly in the system.
9. Legibility : The data displayed on computer monitor is legible. This is because the
characters (alphabets, numerals, etc.) are type written using standard fonts. This helps in
avoiding errors caused by untidy written figures in a manual accounting system.
10.Efficiency : The computer based accounting systems ensure better use of resources and
time. This brings about efficiency in generating decisions, useful informations and reports.
11. Quality Reports : The inbuilt checks and untouchable features of data handling
facilitate hygienic and true accounting reports that are highly objective and can be relied
upon.
12. Speed : Accounting data is processed faster by using a computerized accounting system
than it is achieved through manual efforts. This is because computers require far less time
than human beings in performing a task.
 Disadvantages of Computerized Accounting:
1. Reduction of Manpower: The introduction of computers in accounting work reduces the
number of employees in an organization. Thus, it leads to greater amount of unemployment.
2. High Cost: A small firm cannot install a computer accounting system because of its high
installation and maintenance cost. To be more economical there should be large volume of
work. If the system is not used to its full capacity, then it would be highly uneconomical.
3. Require Special Skills: Computer system calls for highly specialized operators. The
availability of such skilled personnel is very scarce and very costly.
4. Other Problems: Frequent repair and power failure may affect the accounting work very
much. Computers are prone to viruses. Often time’s people will assume the computer is
doing things correctly and problems will go unchecked for long period of time.
5. Cost of Training: The sophisticated computerised accounting packages generally require
specialised staff personnel. As a result, a huge training costs are incurred to understand the
use of hardware and software on a continuous basis because newer types of hardware and
software areacquired to ensure efficient and effective use of computerised accounting
systems.
 6. Staff Opposition : Whenever the accounting system is computerised, there is a
significant degree of resistance from the existing accounting staff, partly because of the fear
that they shall be made redundant and largely because of the perception that they shall be
less important to the organisation.
7. Disruption : The accounting processes suffer a significant loss of worktime when an
organisation switches over to the computerised accounting system. This is due to changes in
the working environment that requires accounting staff to adapt to new systems and
procedures
8. System Failure : The danger of the system crashing due to hardware failures and the
subsequent loss of work is a serious limitation of computerized accounting system.
However, providing for back-up arrangements can obviate this limitation. Software damage
and failure may occur due to attacks by viruses. This is of particular relevance to accounting
systems that extensively use Internet facility for their online operations. No full-proof
solutions are available as of now to tackle the menace of attacks on software by viruses.
 Difference Between Manual Accounting and Computerized Accounting

Basis for Manual Accounting Computerized Accounting

Comparison
Meaning Manual Accounting is a system of Computerized Accounting is an
accounting that uses physical accounting system that uses an accounting
registers and account books, for software, for recording financial
keeping financial records. transactions electronically
Recording Recording is possible through book Data content is recorded in customized
of original entry database
Calculation All the calculation is performed Only data input is required, the
manually calculations are performed by computer
system
Speed Slow Comparatively faster
Adjusting It is made for rectification of errors It cannot be made for rectification of
entries errors
Backup Not possible Entries of transactions can be saved and
backed up
Trial Balance Prepared when necessary Instant trial balance is provided on daily
basis
Financial It is prepared at the end of the period, It is provided at the click of button.
Statement or quarter
 Grouping
In any organisation, the main unit of classification is the major head which is further
divided into minor heads. Each minor head may have number of sub-heads. After
classification of accounts into various groups namely, major, minor and sub-heads and
allotting codes to each account these are programmed into the computer system.
 VOUCHERS
Meaning: ‘Voucher’ is the original documentary evidence in support of any payment or
receipt of money by the business. It would be with the help of the voucher that the
accuracy of entry can be checked. Voucher alone can tell us about the nature and sources
of the transaction, its value and authority.
Types of Accounting Vouchers
 Sales voucher in Tally: It is one of the most used accounting vouchers in Tally.
Users can create this voucher in two different formats; as an invoice, or as a
voucher. The invoice format enables users to print a copy of invoices for
customers.
 Purchase Voucher in Tally: Like sales vouchers, purchase voucher belongs to the
accounting category and is available in both invoice and voucher formats. Editing
and modifying receipt entries in Tally are easy, as its voucher format helps
accountants to do so quickly.
 Payment Voucher in Tally: The payment voucher is another accounting voucher in
Tally that helps create and print cheques against the order. Once the payment
voucher gets passed, the corresponding cheque can be printed by clicking on
‘banking’ and then on ‘cheque printing’.
 Receipt Voucher in Tally: When accountants make a receipt voucher in Tally, all
the invoices which have pending payments pop up as a reminder. As soon as the
client makes the payment through any mode, the receipt can be updated with the
payment method details.
 Contra Voucher in Tally: Contra vouchers are used to withdraw or deposit money
in banks with the help of instruments such as cheques/ATM/DD or e-transfer to
another account through NEFT/IMPS. With the help of contra vouchers in Tally,
accountants can also generate deposit slips for recordkeeping.
  Journal Voucher in Tally: Unlike other vouchers, a journal voucher in Tally can
come under the roof of both accounting and inventory vouchers. There are
multiple uses of a journal voucher in Tally depending on the type of business it is
being used for.
 Credit Note Voucher in Tally: Credit note voucher in Tally has to be enabled
manually. It is usually enabled by pressing F11 and they manually configuring its
features. Credit note can also be passed by checking the original invoice. When a
client is selected, Tally shows the transaction invoice history that have been
raised.
 Debit Note Voucher in Tally: Debit note voucher is one of the most-used types of
voucher in Tally ERP 9, that is used for managing purchase returns. With the help
of this, accountants can generate a debit note for invoicing as well as a voucher.
 How do you create, Edit and delete of voucher?
1). Creation of a Company:-
Go to Gateway of Tally > Company Info. > Create Company
Or from the buttons bar select by using mouse Company Info.
Or Alt +F3 to bring up the Company Info Menu
To Select a Company:-
Go to the Gateway of Tally > Alt + F3 > Company Info. > Select Company OR Press F1.
To Alter Company Details :-
Go to the Gateway of Tally > Alt + F3 > Company Info. >Alter
To Shut a Company :-
Go to the Gateway of Tally > Alt + F3 > Company Info. > Shut Company
Or
Alt +F1
2). F11: Features:-
Features are divided in to Four Major Categories –
 Accounting Features
 Inventory Features
 Statutory & Taxation
 Tally. NET Features
Gateway of Tally > Press F11 OR
To Select F11:Features from button bar
Accounting Features :-
Go to Gateway of Tally > F11: Features > Accounting Features or click on F1: Accounts

Inventory Features:-
Go to Gateway of Tally > F11: Features > Inventory Features or click on F2 : Inventory

Statutory & Taxation:-

Go to Gateway of Tally > F11: Features > Statutory & Taxation or click on F3 : Statutory

Tally.NET Features:-
Go to Gateway of Tally > F11: Features > Tally.NET Features or click on F4 : Tally.NET
3). F12: Configurations:-
In Tally.ERP 9, the F12: Configurations are provided for Accounting, Inventory &
printing options and are user-definable as per your requirements.
The F12: Configuration options vary depending upon the menu display. i.e., if you press
F12: configure from Voucher entry screen, the respective F12: Configurations screen is
displayed.
Go to Gateway of Tally > press F12: Configure
4). In Master Creation:-
Group and Ledger Creation
Group Creation:–
Go to the Gateway of Tally > Accounts Info. > Groups > Create
Group Alter :-
Go to the Gateway of Tally > Accounts Info. > Groups > Alter
Group Display:-
Go to the Gateway of Tally > Accounts Info. > Groups > Display
You can create Multiple Group:-
Go to the Gateway of Tally > Accounts Info. > Groups > CReate
To Alter Multiple Group:-
Go to the Gateway of Tally > Accounts Info. > Groups > AlTer
To Display Multiple Group:-
Go to the Gateway of Tally > Accounts Info. > Groups > DIsplay
How to create Ledgers:-
Ledger Creation:–
Go to the Gateway of Tally > Accounts Info. > Ledger> Create
Ledger Alter :-
Go to the Gateway of Tally > Accounts Info. > Ledger > Alter
Ledger Display:-
Go to the Gateway of Tally > Accounts Info. > Ledger > Display
You can create Multiple Ledgers:-
Go to the Gateway of Tally > Accounts Info. > Ledger> CReate
To Alter Multiple Ledger:-
Go to the Gateway of Tally > Accounts Info. > Ledger > AlTer
To Display Multiple Ledger:-
Go to the Gateway of Tally > Accounts Info. > Ledger > DIsplay
5). Creating Inventory Masters in Tally .ERP 9:-
Go to Gateway of Tally – Inventory Info.
Creation of Stock Group :-
Gateway of Tally > Inventory Info. > Stock Groups > Create
Alter of Stock Group:-
Gateway of Tally > Inventory Info. > Stock Groups > Alter
Creating Units of Measure:-
Gateway of Tally > Inventory Info. > Units of Measure > Create
Creating Stock Item:-
Gateway of Tally > Inventory Info. > Stock Items > Create
Creating Stock Categories:-
First change F11 Features -(F2 inventory features)-Maintain Stock Categories-set –Yes to
get additional option Stock categories under InventryInfo.
Gateway of Tally > Inventory Info. > Stock Categories > Create or
Creating Godowns:-
First change F11 Features -(F2 inventory features)-Maintain Multiple Godowns-set –Yes
to get additional option Godown under Inventry Info.
Gateway of Tally > Inventory Info. > Godown > Create or
6). Voucher Entry in Tally ERP 9 :-
Accounting Vouchers:-
Tally .ERP9 is Pre-Programmed variety of accounting Vouchers, each designed to
perform a different Job. The Standard Accounting Vouchers are –
Contra Voucher (F4):- Contra Voucher is use specific for Cash Deposit at Bank & Cash
Withdrawal
Gateway of Tally > Accounting Vouchers> F4:Contra
Payment Voucher (F5):- All payment entry in Payment Voucher
Receipt Voucher (F6):- All Receipt entry maid in Receipt Voucher
Journal Voucher(F7) :- All Journal Voucher used for other than cash/bank and Purchase
of Goods & Sales of Goods
Sales Voucher /Invoice (F8) :- The Sales Voucher used all cash bank Sales
Credit Note Voucher (Ctrl+F8):- All Sales Return transactions here entered.
Purchase Voucher (F9):- Cash or Credit Purchase entry made here.
Debit Note Voucher (Ctrl+F9) : All Purchase Return transactions here entered.
Reversing Journals (F10):-Reversing Journals are special Journals that are
automatically reversed after a specified date. Gateway of Tally +F11 >F1: Accounting
Feature –Use Reversing Journal & Optional Vouchers –Yes.
Memo voucher (CTRL+ F10):- Memorandum Vouchers is a non-accounting voucher
and the entries made using the memo voucher will not affect your accounts. In other
words, Tally does not post these entries to ledgers but stores them in a separate
Memorandum Register.
7). Trade Discounts:-
If we want a separate column for discount in Invoices :-
To activate Separate Discount Column in Invoice-
Gate Way of Tally-Press F11-Features-F2 for Inventory Features-
Activate -Separate Discount Column in Invoice Set as –Yes
Use Different Actual & Billed Quantity

When there is difference between Quantities purchase/sold and delivered,we have to

specify quantities, at the time of invoicing.
Example. We have delivered 4 T-Sharts out of which 1 T-Shirt free.then we will issue a
bill for 3-T-Shirts.
Gate Way of Tally-Press F11-Features-F2 for Inventory Features-
Active – Use Separate actual and billed quantity Columns as –Yes
Zero Valued Entries in Voucher:-
It is useful Free Samples -in Purchase or Sales vouchers time

Gate Way of Tally-Press F11-Features-F2 for Inventory Features-

Activate – Enable Zero-Valued transactions- Set –Yes
8). Cost Centres:-
Example of Cost Centre are –

Department of an organization- Finance, Manufacturing, Marketing, HR, Admin Etc

Product/Service of a Company-Product X, Product Y, Product Z
Individual such as Salesman -1, Salesman 2
Go to Gateway of Tally > Press F11 Features- F1 for Accounting Features-
Activate-Maintain Cost Centre-To Yes > Maintain more than one cost category to Yes
and Accept the features
Creation of Cost category:-

Gateway of Tally—Accounts Info-Cost Category-Create

Creation of Cost Centre :-

Gateway of Tally—Accounts Info-Cost Centre-Create

9). Invoice No Number Creation:-

Gateway of Tally-Accounts Info-Voucher Types- Alter- Sales-
Method of Voucher Numbering- Select -Automatic-
Use Advance Configuration-Set-Yes-Voucher Type Alteration Screen Display-
Ask –Starting no, Width of Numerical Part- From date-Prefix & Suffix Details
Example : TRP/00001/2020-21
10). Report Shortcuts Relating to Tally.ERP9.
All short cuts from Gateway of Tally-

Purchase Register Required – D+A+P

Sale Register ” – D+A+S
Cash/Bank Book ” – D+A+C
Journal Register – D+A+J
Any Ledger Required – D+A+L
Receivable Outstanding – D+S+O+R
Payable Outstanding – D+S+O+P
Outstanding Ledgers – D+S+O+L
Cost centre Breakup Reports – D+S+C+O
Inventory Reports:-

Physical Stock Register – D+I+P

Stock Movement Analysis – D+I+M
Cash Flow – D+C+C
Funds Flow – D+C+F
Exception Reports:-

Negative Stock – D+X+N

Negative Ledgers D+X+L
Statutory Reports :-

GST Reports- D+O+G

TDS Reports – D+O+T