Introduction to Accounting

Meaning of Accounting
Whenever a businessman starts business, he wants to know about the actual profit or loss made from
business. So, he adopts proper system. From here the need of accounting starts.
Accounting is defined as the process of identifying, measuring, recording and communicating the
required information relating to the economic events of an organization to the interested users of
such information.

Basic Terms in Accounting:

Entity
Entity has a definite individual existence. Business entity is an identifiable business enterprise such
as Super Bazaar, Baburam Jewelers and so on.

Capital
It is the amount invested by proprietor/partners to start the business.

Drawings
Withdrawal of money and/or goods by the owner from the business for personal use is known as
drawings. Drawings reduce the investment of the owners.

Transaction
Transaction is an event involving some value between two or more entities. It can be a purchase of
goods, receipt of money, payment to a creditor, incurring expenses and so on. It can be either a cash
transaction or credit transaction.

Assets
Assets are economic resources of an enterprise that can be expressed in monetary terms. They are
items of value used by the business in its operations. For example, Super Bazaar owns a fleet of
trucks which is uses of deliver goods. The trucks provide economic benefit to the enterprise. So they
are shown on the asset side of the balance sheet.

Assets can be broadly classified into

Fixed Assets
Current Assets

Fixed Assets are assets held on a long term basis such as land, buildings, machinery, plant, furniture
and fixtures.

Current Assets are cash in hand, cash at bank, debtors, bills receivable, accrued income, prepaid
expenses, stock, outstanding incomes, advances etc.

Discount
When we purchase or sale something then it is normal condition to receive or allow some discount.
Discount may be of two types:
a- Trade Discount
Trade discount is a discount allowed from the list price of a commodity. Trade discount is deducted
from the list price.

c- Cash Discount

Copyright and all other rights reserved with Planet-c computer learnings 1
Cash discount is a discount allowed as an inducement/incentive to the customers to make prompt
payments. Cash discount is not deducted from the sales revenue but is recognized separately.

Voucher
The documentary evidence in support of a transaction is known as voucher. For a example, when you
buy goods for cash, you get a cash memo. When you buy goods on credit, you get an invoice. When
you make a payment, you make a receipt, and so on.

Goods
Goods refer to the products which a business unit produces and sells, or buys and sells. The items
that are purchased for use in business are not called goods. For example, for a furniture dealer the
purchase of chairs and tables is termed as goods, while for others it is furniture and is treated as an
asset. Similarly, for a stationery merchant, stationery is goods. But for others, stationery is an item of
expense (not purchases)

Stock
Stock (inventory) is a measure of something on hand – goods, spares and other items in a business. It
is called ‘Stock in hand. In a trading concern, the amount of goods that lie unsold at the end of an
accounting period is called closing stock (ending inventory). In a manufacturing company, closing
stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date.
Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the
accounting period.

Debtors
Debtors are persons and/ or other entities who owe enterprise money, having bought goods and
services on credit. The total amount against such persons and/ or entities on the closing date is shown
in the balance sheet as Sundry debtors on the asset side.

Creditors
Creditors are persons and/ or other entities who have to be paid by an enterprise for providing goods
and services on credit. The total amount in favor of such persons and/ or entities on the closing date
is shown in the balance sheet as Sundry creditors on the liabilities side.

Liabilities
It is the outsider’s money owed by business.

Vouchers
A voucher is a document containing the details of a financial transaction. Examples sales invoice,
purchase invoice, pays slip, rent receipt and so on.

Copyright and all other rights reserved with Planet-c computer learnings 2
Recording of Transactions

A transaction is an event or happening that changes an organization’s financial position and/ or its
earnings. For example, when you sell goods for cash, your cash balance increases and your stock
reduces.

Such transaction involves the aspect of Give and Take. Receipt of cash involves the take aspect and
delivery of stock is give aspect. Thus, business transactions are exchanges of economic consideration
between parties and have two-fold effects that are recorded in at least two accounts.

Business transactions can be classified as follows:

 Receipt – Cash or Bank
 Payments – Cash or Bank
 Purchases
 Sales

Source Document or Voucher

Business transactions are usually evidenced by an appropriate document such as Cash memo,
Invoice, Sales bill, Pay-in slip, Cheque, Salary slip and so on. A document which provides evidence
of the transactions is called the source document or voucher.

Classification of Accounts
On the basis of transactions A/c’s can be classified into three types.
Personal Account
Real Account
Nominal Account

Personal Account
In this account we can keep all the transactions related with personal name. For example loan taken
from any company, any person. Here, company name and person name belongs to personal A/c.

Real Account
In this account we can keep all the transactions related with sale & purchase of fixed assets and
current assets.

Nominal Account
In this account we can keep all the transactions related with income & expenditure.

Rules for different A/c’s

Debit Credit
Personal A/c Receiver Giver
Real A/c What Comes In What goes out
Nominal A/c Exp. & Losses Income & gains

Copyright and all other rights reserved with Planet-c computer learnings 3
Principle of double entry system

Everything has two aspects one is receiving aspect and the other is giving aspect. It is a nature of law
that when we gain something then it is necessary to lose something.
In accounting language receiving aspect is ‘Debit’ and the giving aspect is ‘Credit’.
For instance: - when we purchase machinery then the receiving aspect is machinery and the giving
aspect is cash. So in A/c’s language we can say that machinery A/c is Dr and cash A/c is Cr.
In double entry system it is necessary to find out debit and credit in a transaction and the
amount of debit and credit must be equal.

Journal
A journal is a book in which business transactions are entered in chronological order. A record of a
single business transaction is called a journal entry. Every journal entry is supported by a voucher
evidencing the related transaction.

Format of journal

Date Particulars L.F Debit Credit

The DATE column is meant to record the date on which a particular transaction takes place.

In the particular column the account title to be debited is written in the first line beginning from the
left corner and the word Dr. is written at the end of the column. The account title to be credited is
written in the second line, leaving a margin on the left with a prefix To. Below the accounts title, a
brief explanation of the transaction is given which is called Narration. After the narration a line is
drawn in the Particular column which indicates the end of recording the specific journal entry.

In the Ledger Folio (L.F.) column, the page number of the ledger book on which relevant account
appears is recorded.

The Debit column is meant to record the amount against the account to be debited.

The Credit column is meant to record the amount against the account to be credited.

The journal entry is the basic record of a business transaction. It may be simple or compound. When
two accounts are involved to record a transaction, it is called a simple journal entry.

Copyright and all other rights reserved with Planet-c computer learnings 4
Transactions related with personal account
1. Loan taken Rs.5000 from Naved.
2. Payment made to Anil Rs.4000
3. Cash received Rs.3500 from Abc & co.

Transactions related with real account

1. . Purchase a machine with cash Rs. 12000
2. Purchase a computer for Rs. 18000 credit from Compaq.
3. Sold old furniture Rs.3000

Transaction related with nominal account

1. Commission paid Rs. 1000
2. Payment of salaries in cash Rs.3500
3. Interest received in cash Rs.500
4. Purchase goods with cash Rs.5500
5. Sold goods with cash Rs.6000
6. Cash received from Mohan Rs.3000
7. Telephone bill paid by cheque Rs.1200

Exercise 1.

Date Transactions
01.4.2009 Business started with cash Rs. 5,00,000
02.4.2009 Goods purchased from Mohan Rs. 40000
05.4.2009 Stationery purchased for cash Rs. 2000
06.4.2009 Opened a bank account with UTI Bank by depositing cash of Rs. 50,000
08.4.2009 Goods sold to Parul for Rs. 25,000
10.4.2009 Received a cheque of Rs. 25,000 from Parul
11.4.2009 Sold Goods to Shrikant Rs. 12,000
15.4.2009 Shrikant pays Rs. 12,000 Cash
16.4.2009 Goods purchased for Rs. 16,000 on credit from Neelu
18.4.2009 Insurance paid by cheque Rs. 8,000
19.4.2009 Paid Rs. 4,000 towards rent by cash
20.4.2009 Goods costing Rs. 2,500given as charity
23.4.2009 Purchased office furniture for Rs 10,500 in cash
24.4.2009 Cash withdrawn for household purpose Rs 2,000
25.4.2009 Interest received in cash Rs 1,000.
27.4.2009 Cash sales Rs 5,000
28.4.2009 Commission paid Rs 1,000 by cheque.
29.4.2009 Telephone bill paid by cheque Rs 2,500
Copyright and all other rights reserved with Planet-c computer learnings 5
30.4.2009 Payment of salary in cash Rs 13000.

Exercise 2
Record the following transactions in a journal.
Date Particulars
01.5.2009 Business started with cash of Rs. 8,00,000
02.5.2009 Deposited Rs. 5,00,000 in UTI Bank account
04.5.2009 Purchased plants and machinery worth Rs. 2,50,000 from ABC & Co. by making
immediate payment of Rs, 50,000 in cash
06.5.2009 Purchased goods worth Rs. 30,000 for cash and Rs. 55,000 on credit from Ram Traders
10.5.2009 Issued a cheque for Rs. 2,00,000 to ABC & Co. towards the purchase of planets and
machinery
12.5.2009 Goods sold for cash Rs. 80,000 (cost of goods Rs. 50,000)
15.5.2009 Proprietor withdrew Rs. 20,000 cash for personal use
20.5.2009 Paid Rs. 3,000 by cheque towards insurance
25.5.2009 Paid salary of Rs. 7,500
26.5.2009 Purchase furniture worth Rs. 20,000 in cash
30.5.2009 Took a loan of Rs. 20,000 from bank

Ledger

After the preparation of journal it is necessary to prepare ledger. In journal we can store all the types
of transactions but the classification of transaction is also necessary this can be done in a book called
ledger. When we prepare ledger then all the transaction according to accounts can be classified.

The format of ledger is as follows.

Title of the Account
Date Particulars J.F Amount Date Particulars J.F Amount
Rs. Rs.

The columns contain the following information:

Title of the account: The name of the item is written at the top as the title of the account. The title of
the account ends with the suffix, ‘Account’.

Dr. / Cr.: Dr. is the Debit side of the account, i.e., the left side and Cr. Is the Credit this column.

Date: Year, month and date of transactions are posted in chronological order in this column.
Copyright and all other rights reserved with Planet-c computer learnings 6
Particulars: Name of the item with reference to the original book of entry is written on debit/credit
side of the account.

Journal Folio (J.F.): It records the page number of the original book of the entry on which the
relevant transaction is recorded. This column is filled in at the time of posting.

Amount: It records the amount in numerical figures, corresponding to what has been entered in the
amount column of the original book of entry.

Exercise 3.
M/s Shubhodaya Enterprises furnished the following transaction

Date Transactions
01.6.2009 Started a business with cash of Rs. 4,00,000
03.6.2009 Opened an account in HDFC Bank by depositing Rs. 1,00,000
05.6.2009 Goods purchased from Ranjah Traders for Rs. Traders for Rs. 50,000
10.5.2009 Purchased furniture for Rs. 20,000 by paying cash
15.6.2009 Solds goods on cash Rs. 25,000
20.6.2009 Paid Insurance of Rs. 2,000 by cash
22.6.2009 Paid Rs. 3,000 towards rent in cash
25.6.2009 Paid Rs. 5,000 as salary to the manager in cash
26.6.2009 Sold goods worth Rs. 8,000 to Raghu
27.6.2009 Purchased stationery worth Rs. 200 in cash.

Journalise the transactions and then post them to ledgers.

Exercise 4.
Journalise the following transactions of M/s Premier Fashion House and post the entries to the
ledger.

Date Transactions
04.7.2009 Commenced business with cash Rs. 5,00,000
06.7.2004 Opened a bank account with Vijay Bank by depositing Rs. 75,000
10.7.2009 Purchased goods worth Rs. 40,000 on credit from Garuda Fashion House
13.7.2009 Purchased machinery for Rs. 35,000 and paid by cheque
17.7.2009 Paid Rs. 10,000 by cheque towards rent
19.7.2009 Sold goods worth Rs. 30,000 on credit to M/s Mohan Bros
21.7.2009 Sold goods for Rs. 20,000 cash
25.7.2009 Paid Rs. 40,000 to Garuda fashion House by cash
28.7.2009 Received a cheque for Rs. 30,000 from M/s Mohan Bros
31.5.2009 Paid salary of Rs. 10,000 by cash
Exercise 5.
Journalise the following transaction of M/s Time Zone Enterprise and post them to ledger accounts.
Date Transactions
01.8.2009 Started a business with cash
03.8.2009 Opened a bank account with HDFC Bank by depositing cash 1,20,000
05.8.2009 Purchase goods for cash 24,000
09.8.2009 Paid cartage 1,000
13.8.2009 Sold goods on credit to Lara Creations 35,000
15.8.2009 Received cash from Lara Creations 15,000
Copyright and all other rights reserved with Planet-c computer learnings 7
16.8.2009 Goods returned by Lara Creations 3,000
19.8.2009 Paid trade expenses 1,400
21.8.2009 Purchased goods on credit from Tarun 42,000
22.8.2009 Cheque received from Lara Creations as final settlement 16,500 and discount
allowed Rs. 500
23.8.2009 Goods returned to Tarun 2,000
25.8.2009 Amount paid for stationery 2,400
27.8.2009 Issued cheque to Tarun 20,000
28.8.2009 Rent paid by cheque 6,000
30.8.2009 Cash withdrawn for personal use 5,000
31.8.2009 Cash Sales 10,000
31.8.2009 Goods sold to M/s Rupkala Traders 10,000

Exercise 6.
Journalise the following transactions and post it to the ledger.

Date Transactions
01.4.2009 Commenced business with cash Rs. 1,75,000, furniture worth Rs. 15,000 and
goods worth Rs. 10,000
03.4.2009 Purchased goods for Rs. 25,000 from Harsha
05.4.2009 Sold goods for cash Rs. 14,000
09.4.2009 Purchased machinery for cash Rs. 7,000
12.4.2009 Cash paid to Harsha Rs. 10,000
15.4.2009 Paid Rs. 300 towards sundry expenses
16.4.2009 Sold goods for cash Rs. 10,000
17.4.2009 Deposited cash Rs. 8,000 in bank
19.4.2009 Withdrew Rs. 4,000 for personal use
20.4.2009 Paid cash Rs. 15,000 to Harsha in full settlement of his account
22.4.2009 Sold goods for Rs. 10,000 to Neelesh on credit
23.4.2009 Paid Cartage of Rs. 600
25.4.2009 Paid rent in cash Rs. 2,000
27.4.2009 Received cash from Neelesh Rs. 9,800 and allowed a discount of Rs. 200
30.4.2009 Paid Rs. 4,500 towards the salary for the month of April

Exercise 7.
Journalise the following transactions in the books of M/s Anand Mohan and post the same to
the ledger.

Date Transactions
01.6.2009 Anand Mohan started business with cash Rs. 1,75,000
03.6.2009 Opened a current account in Syndicate Bank by depositing Rs. 75,000
04.6.2009 Purchased goods for Rs. 25000 and credit from pruthvi
06.6.2009 Purchased goods for cash Rs. 10,000
07.6.2009 Sold goods to Narayan for Rs. 11,000
08.6.2009 Paid cash Rs. 25,000 to Pruthvi
10.6.2009 Received cash Rs. 10,900 from Narayan and allowed him a discount of Rs. 100
11.6.2009 Paid Rs. 2,000 towards the wages
13.6.2009 Purchased furniture worth Rs. 5,000 for office use
14.6.2009 Withdrew cash Rs. 2,000 from bank for personal use
17.6.2009 Paid Rs. 3,500 towards rent by cheque
19.6.2009 Withdrew goods worth Rs. 1,000 for house hold purpose
20.6.2009 Withdrew cash Rs. 6,500 from bank for office use
Copyright and all other rights reserved with Planet-c computer learnings 8
21.6.2009 Received commission Rs. 750
23.6.2009 Paid Rs. 150 towards the bank charges
24.6.2009 Paid Rs. 2,500 towards insurance premium by cheque
28.6.2009 Paid Rs. 5,000 as salary
30.6.2009 Sold goods for cash Rs. 9,000
Exercise 8
Journalise the following transactions in the books of M/s Arun Traders and post the same to
the ledger.
Date Transactions
Jul. 01 Commenced business with cash Rs. 1,50,000
Jul. 03 Opened a bank account with SBI by depositing Rs. 60,000
Jul. 05 Purchased furniture worth Rs. 15,000
Jul. 06 Bought goods for cash Rs. 20,000 from Roopa Traders
Jul. 09 Purchased goods for Rs. 35,000 from Harish
Jul. 11 Sold goods for cash Rs. 40,000
Jul. 12 Sold goods on credit to Ram Gupta Rs. 12,000
Jul. 13 Paid Rs. 2,000 towards rent
Jul. 17 Paid trader expenses Rs. 450
Jul. 20 Received cash Rs. 12,000 from Ram Gupta
Jul. 21 Goods worth Rs. 1,000 returned to Harish
Jul. 23 Paid cash Rs. 34,000 to Harish
Jul. 25 Paid Rs. 250 towards postage expenses
Jul. 30 Paid Rs. 5,000 as salary

Exercise 9
Journalise the following transactions in the books of M/s Life Ken medicals and post the same
to the ledger.

Date Transactions
Sep. 01 Madan (proprietor) started a business with cash Rs. 1,20,000
Sep. 03 Deposited Rs. 75,000 in bank
Sep. 04 Bought goods for Rs. 30,000 on credit from Sanjay
Sep. 05 Purchased goods worth Rs. 20,000 by cash.
Sep. 08 Returned goods worth Rs. 3,000 by cash
Sep. 11 Sold goods for cash Rs. 18,000
Sep. 12 Issued cheque for Rs. 27,000 to Sanjay as settlement of account
Sep. 15 Sold goods for Rs. 25,000 to Anup
Sep. 16 Withdrew Rs. 4,000 from bank for personal use
Sep. 17 Anup returned goods worth Rs. 2,000
Sep. 21 Received cheque for Rs. 23,000 from Anup
Sep. 24 Gave goods worth Rs. 500 as charity
Sep. 27 Paid Rs. 4,500 towards rent
Sep. 28 Paid Rs. 8,000 as salary
Sep. 30 Purchased machinery for Rs. 5,000 by cash.

Copyright and all other rights reserved with Planet-c computer learnings 9
Exercise 10
Journalise the following transactions in the books of Sanjana Electricals and post the same to the
ledger.
Date Transactions
Mar. 01 Ajay started a business with the following assets and liabilities.
Cash in hand Rs. 8,000
Cash at bank Rs. 60,000
Stock of goods Rs. 30,000
Due to Rajan Rs. 5,000
Due from Vivekl Rs. 8,000
Mar. 02 Sold goods for Rs. 25,000 to Mahesh
Mar. 03 Sold goods for cash Rs. 7,500
Mar. 05 Sold goods for Rs. 6,000 to Sheena
Mar. 07 Purchased goods for Rs. 40,000 from Rupa
Mar. 08 Mahesh returned goods worth Rs. 1,200
Mar. 10 Received cash Rs. 23,800 from Mahesh
Mar. 13 Issued a cheque for Rs. 5,000 to Rajan
Mar. 14 Received cash Rs. 6,000 from Sheena
Mar. 16 Received cheque for Rs. 8,000 from Vivek
Mar. 18 Made a payment of Rs. 28,000 to Rupa
Mar. 19 Paid cartage of Rs. 500
Mar. 21 Paid Rs. 6,000 as salary
Mar. 22 Sold goods for cash Rs. 5,000
Mar. 25 Issued a cheque for Rs. 12,000 to Rupa
Mar. 28 Ajay took goods worth Rs. 2,000 for personal use
Mar. 31 Paid Rs. 750 towards general expenses.

Copyright and all other rights reserved with Planet-c computer learnings 10
 Recording of Transactions -II
Introduction
Business transactions are first recorded in the journal and then posted to ledger accounts. Small
businesses usually record all their transactions in a single journal.
In large organizations, the journal is sub-divided into special journals, also known as day books or
subsidiary books..

Following are the types of subsidiary books.

 Cash Book
 Purchase Book
 Purchase Return ( Return Outwards) Book
 Sales Book
 Sales Return ( Return Inwards ) Book
 Journal Proper.

Cash Book
The cash book is an accounting book which records cash receipts and disbursements. It is opened
with a cash or bank balance at the beginning of the period. The entries are balanced on a monthly
basis. Cash book, also known as book of original entry, is maintained by all organizations, big or
small, profit or non-profit. It serves the purpose of both journal as well as the ledger (Cash) account.
When a cash book is maintained, transactions of cash are not recorded in the journal and no separate
account of cash or bank is required in the ledger.

Single Column Cash Book

The Single column cash book records all cash transactions (Receipts and Payments) of a business in
chronological order. It has only one amount column on each debit and credit side.

Format of Single Column Cash Book

Dr. Cr.
Date Particulars R. L. Amount Date Particulars V. L Amount
No F Rs. No . Rs.
F

A single column cash book consists of two side.

Debit side: The left side or the receipt side (used for recording cash receipts).

Credit side: The right side or the payment side (used for recording cash payments).

Each side is further divided into five columns. These columns contain the following information.

Date column: Records the date on which cash is received or paid.

Copyright and all other rights reserved with Planet-c computer learnings 11
Particulars column: Records the name of the person from whom cash is received or to whom cash
is paid.

Receipt Number (R. No.) column: Records the serial number of the receipt which is issued at the
time of receipt of cash.

Voucher Number (V. No. ) column: Records the serial number of the voucher which is received at
the time of payment of cash.

Ledger Folio (L. F.) column: Records the page number of the ledger to which a particular item
from the cash book is posted.

Amount column: Records the amount of cash received or paid.

Exercise 1
Record the following transactions in single column cash book.

Date Transactions
01.10.2009 Business has an opening cash balance of Rs. 40,000
02.10.2009 Received cash Rs. 20,000 from Gaganjeet
05.10.2009 Paid Rs. 3,000 towards insurance premium
10.10.2009 Purchased furniture for cash Rs. 5,000
12.10.2009 Sold goods for cash Rs. 10,000
15.10.2009 Purchased goods for cash Rs. 4,500 from Tom
18.10.2009 Purchased stationery for cash Rs. 200
20.10.2005 Paid cash Rs. 3,200 to Ram Mohan in full settlement of his account
25.10.2005 Paid Rs. 4,750 towards the rent
28.10.2009 Paid Rs. 6,000 as salary
30.10.2009 Deposited cash Rs. 10,000 in bank.

Posting from Single Column Cash Book

The left side of a Cash Book shows the receipts of Cash, while the right side shows payments made
in cash. The accounts appearing under debit are credited as cash has been received. Thus, in the
above exercise, the entry Cash received from Gaganjeet appears on the debit side of the cash book.
Therefore, Gaganjeet’s account is credited by writing cash in the particular column on the credit side.
Similarly, all account names appearing on the credit side of the cash book are debited as cash/cheque
has been received.

Exercise 2
Post the related ledger accounts from the above exercise.

Double Column Cash Book

A double column cash book contains two columns of amounts on each side of the cash book. In
many organizations, as far as possible, all receipts and payments are effected through a bank.

Exercise 3
Record the following transactions in a double column cash book and post them to the ledger.

Date Transactions
01.12.2008 Business has cash balance of Rs. 25,000 and bank balance of Rs. 50,000
02.12.2008 Purchased goods for Rs. 5,000 and paid by cheque.
05.12.2008 Sold goods for cash Rs. 6,000
Copyright and all other rights reserved with Planet-c computer learnings 12
08.12.2008 Purchased machinery worth Rs. 15,000 by cheque
10.12.2008 Received Cheque for Rs. 10,000 towards the sales made and deposited it in bank.
15.12.2009 Goods purchased from Sarala on cash for Rs. 8,000
18.12.2008 Purchased stationery for Rs. 750 and paid by cheque
20.12.2008 Issued cheque for Rs. 2,000 to Uday Shankar in full settlement of his account.
22.12.2008 Withdrew cash Rs. 4,500 from Bank for office use.
23.12.2008 Paid Rs. 3,000 towards rent by cheque
25.12.2008 Paid Rs. 10,000 as Salary in cash.
28.12.2008 Withdrew Rs. 1,000 from bank for personal use.

Petty Cash Book

Miscellaneous expenses such as conveyance, cartage, postage, telegrams and so on are common to
every organisation. These are generally repetitive in nature and it would burden the cashier to record
all these payments in the main cash book. Further, the cash book would become very bulky. Hence
large organizations usually appoint a petty cashier and maintain a separate cash book to record such
transactions. Such a cash book is called Petty Cash book.

The Petty cashier follows the Imprest system. Under this system, a definite sum, say Rs. 1,500 is
given to the petty cashier at the beginning of a certain period. This amount is called impress amount.
The Petty cashier makes all small payments out of this imprest amount. When he has spent a
substantial portion of the imprest amount, say Rs. 1380, he gets a reimbursement from the head
cashier. Thus, he again has the full imprest amount. The reimbursement may be made on a weekly,
fortnightly or monthly basis, depending on the frequency of small payments.

Consider the following example.

Karthik, the petty cashier of Sapna Traders, received Rs. 1700 on June 01, 2005 from the head
cashier. Petty expenses for the month of June are listed as follows.

Date Particulars Amount Rs.

1.6.2009 Auto Fare 60.00
3.6.2009 Courier expenses 100.00
5.6.2009 Purchased postal stamps 75.00
10.6.2009 Stationery purchased (Erasers/Sharpeners/pencils/pads) 200.00
11.6.2009 Paid speed post charges 30.00
12.6.2009 Taxi fare (Rs. 65+40) 105.00
13.6.2009 Refreshments 180.00
14.6.2009 Auto fare 40.00
15.6.2009 Registered post expenses 15.00
16.6.2009 Paid telegram expenses. 45.00
18.6.2009 Paid cartage 20.00
19.6.2009 Purchased computer stationery 300.00
19.6.2009 Bus Fare 20.00
20.6.2009 Office sanitation including disinfectant 50.00
21.6.2009 Refreshments 35.00
25.6.2005 Courier charges 40.00
25.6.2009 Unloading charges 80.00
28.6.2009 Bus fare 45.00

Record the transactions in the petty cash book. Journalise the transactions and post them to
the ledger.

Copyright and all other rights reserved with Planet-c computer learnings 13
 Books of Sapna Traders
Petty Cash Book
Amt. Recd. Date Particulars V.NO. Total Analysis of Payments
Payments
Rs 2005 Rs. Telephone & Postage Conveyance Stationery Miscellaneous
June Telegram
1700 1 Auto fare 60 60
3 Courier Expenses 100 100
5 Postal Expenses 75 75
10 Stationery 200 200
11 Speed 30 30
12 Taxi Fare 105 105
13 Refreshments 180 180
13 Auto Fare 40 40
14 Regd. Post Expenses 15 15
15 Telegram Expenses 45 `45
16 Cartage 20 20
18 Computer Stationery 300 300
19 Bus Fare 20 20
19 STD Call Charge 110 110
20 Office Sanitation 50 50
21 Refreshments 35 35
25 Courier Charges 40 40
25 Unloading Charges 80 80
28 Bus fare 45 45
1550 155 260 270 500 365
30 Balance c/d 150
1700 1700
July
150 01 Balance b/d
1550 01 Cash received

Copyright and all other rights reserved with Planet-c computer learnings 14
 Journal
Date Particulars L.F Debit Credit
2009
June 01 Petty cash A/c Dr. 1,700
To Cash A/c 1,700
(Cash Paid to petty cashier)

June 30 Telephone & Telegram A/c Dr. 155

Postage A/c Dr. 260
Conveyance A/c Dr. 270
Stationery A/c Dr. 500
Miscellaneous Expenses A/c Dr. 365
To Petty Cash A/c 1550
( Petty expenses posted to petty cash account)
Petty
July 01 Petty cash A/c Dr. 1550
To cash A/c 1550
(Cash Paid to petty cashier)

Exercise 4

Ganesh Enterprises provide the following information. Prepare a single column cash book.

Date Particulars
1.1.2009 Cash in hand 50,000
2.1.2009 Cash deposited into bank 12,000
4.1.2009 Cash received from preethi in settlement of her account 5,000
6.1.2009 Payment made to Mudit in settlement of his account 7,500
10.1.2009 Sold goods for Cash 6,000
12.1.2009 Insurance paid for the first quarter 2,500
14.1.2009 Purchased furniture for office use 3,600
16.1.2009 Purchased stationery 150
18.1.2009 Paid cartage 175
20.1.2009 Payment made to Kripa 2,500
And discount received 50
21.1.2009 Cash received from Sapna Traders 10,800
And discount allowed 200
22.1.2009 Cash withdrawn for personal use 2,500
22.1.2009 Paid electricity bill 650
23.1.2009 Purchased goods for Cash 7,000
24.1.2009 Paid telephone charges 600
25.1.2009 Paid rent by cash 3,000
26.1.2009 Paid monthly wages and salary 8,000
28.1.2009 Purchased goods from Amar by cash 4,000
30.1.2009 Paid postal charges 150
31.1.2009 Sold goods for cash 15,000

Copyright and all other rights reserved with Planet-c computer learnings 15
Exercise 5

Record the following transactions in a double column cash book.

Date Particualars
1.3.2009 Opening cash balance Rs. 16,000 and bank balance Rs. 45,000
2.3.2009 Paid Rs. 3,400 towards insurance premium by cheque
3.3.2009 Sold goods for cash Rs. 8,000
5.3.2009 Purchased goods for Rs. 20,000 from Abdullah and paid by cheque
6.3.2009 Received cheque for Rs. 7,900 from Pooja in settlement of her account
6.3.2009 Sold goods to Raj Traders for Rs. 6,500 and received a cheque for the same
9.3.2009 Deposited the cheque received from Raj Traders in bank
10.3.2009 Withdrew cash Rs. 2,000 from bank for office use.
11.3.2009 Purchased goods worth Rs. 8,500 by cash
16.3.2009 Paid Rs. 100 towards courier charges.
18.3.2009 Paid Rs. 5,00 towards electricity bill by cheque
21.3.2005 Received cheque for Rs.5,000 from sunshine Enterprises towards the sales and deposited the
same in bank.
22.3.2009 Paid Rs. 5,000 towards the rent by cash
25.3.2009 Purchased stationery for Rs. 200 by cash
28.3.2009 Bank dishonoured and returned the cheque of Sunshine Enterprises deposited on 21.3.2009
30.3.2009 Deposited Rs. 4,000 into bank

Exercise 6

Record the following transactions in a double column cash book for the month of June, 2004

Date Particulars
June 01 Cash in hand Rs. 6,000
Bank overdraft Rs. 4,200
June 02 Paid Rs. 500 as wages in cash
June 04 Sold goods for cash Rs. 8,000
June 06 Purchased goods for Rs. 3,000 and issued a cheque
June 07 Purchased furniture worth Rs. 1,500 for cash
June 10 Paid Rs. 1,000 cash to Rohan
June 11 Sold goods for cash Rs. 750
June 13 Deposited cash Rs. 1,200 in bank
June 14 Bank charged Rs. 1,300 interest on overdraft
June 18 Paid Rs. 650 towards telephone bill by cheque
June 20 Sold goods and received cheque for Rs. 3,000 ( deposited on the same day)
June 22 Paid Rs. 800 as salary in cash
June 25 Withdrew cash Rs. 600 for personal use
June 28 Paid Rs. 800 as salary in cash
June 30 Bank collected Rs. 1,800 as dividend on Shares.

Copyright and all other rights reserved with Planet-c computer learnings 16
Purchase (Journal) Book:
A Purchase (Journal) book is used to record all credit purchases of goods. Other purchases such as the
purchases of office equipment, furniture and building are recorded in the journal proper if purchased on
credit, or in the cash book if purchased for cash. Invoices or bills received from suppliers of goods are the
source documents to record entries in the book.

Format of Purchases (Journal) Book

Date Particulars Inward Invoice Ledger Folio Amount

(Name of the Supplier) No.

The above columns contain the following information.

Date Column: Records the date on which the invoice is received.

Particulars column: Records the name of the supplier of goods.

Inward Invoice Number column: Records the invoice number. It is intended to facilitate reference to the
invoice concerned.

Ledger Folio column: Records the page number of the ledger where the account of the supplier and
purchases are opened.

Amount Column: Records the net amount of the invoice. (Net amount means the amount of the invoice
after deducting trade discount.)

The following example shows how transactions are entered in a purchase book. Global Electricals is in the
business of trading furniture and electronic items. They furnish the following details of purchases made in
April 2006.

Date Details
1.4.2009 Purchased 10 TV sets @ Rs. 6,000 per piece and 10 tape recorders @ Rs. 2,500 per piece
from Arun Suppliers (Invoice No. A – 5621). Trade discount allowed @ 5%
5.4.2009 Purchased 10 iron boxes @ Rs. 800 per piece and 20 stabilisers @ Rs. 800 per piece from
International Electricals ( Invoice No. 4722)
11.4.2009 Purchased 10 colour TV sets @ Rs. 10,000 per piece from Praghna Electricals (Invoice No.
6983). Trade discount allowed @ 12.5%.
19.4.2009 Purchased 25 tape recorders @ Rs. 1,750 per piece and 5 air conditioners @ Rs. 20,000 per
piece from Neelima Electricals ( Invoice No. 5671). Trade discount allowed @ 10%
28.4.2009 Purchased 50 video cassettes @Rs. 250 per piece from Arun Suppliers ( Invoice No. 6344).

Copyright and all other rights reserved with Planet-c computer learnings 17
Purchases Return (Journal) Book

Goods purchased are sometimes returned to the supplier for reasons such as poor quality, defects and so
on. Entries regarding the purchases return of goods are recorded in the Purchases Return Book.

For every return, the trader prepares a debit note (in duplicate) to inform the supplier that his account has
been debited to the extent of the goods returned or for the allowance claimed. The original is then sent to
the supplier to enable him to make the necessary entries in his book. The source document to record
entries in the purchases Return Journal is generally a debit note. A debit note contains the name of the
party( to whom the goods have been returned), details of the goods returned and the reason for returning
the goods. Each debit note has a serial number and date.

Format of Debit Note

Garuda Traders
Jayanagar, New Delhi
Debit Note
No. 008 Bangalore
12.3.2009

Anupam Traders,
J C Road,
New Delhi
We have debited your account for goods returned to you as follows.
Two colour TV sets @ Rs. 10,000 per piece.

20,000

Rupees Twenty Thousand Only 20,000

Format of Purchases Return (Journal) book.

Date Particulars Debit Note No. L.F. Amount

Date column: Records the date on which goods are returned or an allowance is claimed from the
supplier/seller.

Particulars column: Contains the name of the supplier/ seller to whom the goods are returned or from
whom allowance is claimed.

Debit Note Number column: Records the serial number of the debit note.

Ledger Folio: Records the page number of the ledger where the account of the supplier concerned and
the purchases returns are opened.

Amount column: Records the value of the goods returned to the supplier.

Copyright and all other rights reserved with Planet-c computer learnings 18
 Sales (Journal) Book
The Sales Journal is a book maintained to record all credit sales of merchandise. The format of the sales
journal is similar to that of the purchase journal. Sales Invoices or bills, issued by the firm to its customers,
are the source documents to record entries in the sales journal.

Format of Sales Journal

Date Particulars Outward L.F. Amount

(Name of Customer) Invoice No.

The above columns contain the following information.

Date column: Records the date on which the invoice is sent.

Particulars column: Records the names of the customers or buyers of goods.

Outward Invoice Number column: Contains the serial number of outward Invoices.

Ledger Folio (L.F.) Records the page numbers of the ledger where the accounts of customers and sales
are opened.

Amount column: Contains the net amount of sale ( i.e., the sale price minus the trade discount).

The following illustration shows how credit sales are recorded in the sales book.
Kamath Traders sold the following items on credit.

Date Particulars
15.5.2008 Two air conditioners @ Rs. 20,000 per piece to Anand & Co. and allowed a discount of
10% ( Invoice No. 5567)
20.5.2008 Twenty stabilizers @ Rs. 980 per piece to Naveen, Mumbai ( Invoice No. 5588)
28.5.2008 25 video cassettes @ Rs. 350 per piece to Akash Traders ( Invoice No. 5605).

SalesReturn (Journal) Book

Sales Return (Journal) book is used to keep a record of the goods returned by customers. The trader
prepares a statement, known as credit note, when goods are taken back from the customer or an allowance
is granted to a customer. A credit note informs the customer that his account has been credited for the
goods returned or for the allowance granted.

Copyright and all other rights reserved with Planet-c computer learnings 19
 Format of Credit Note

United Traders
Gandhi Nagar, New Delhi
Credit Note
No. 012 New Delhi
12.3.2009

Shrinidhi Traders,
Preet Vihar
New Delhi
We have credited your account for goods returned to you as follows.
Five colour TV sets @ Rs. 12,000 per piece.

60,000

Rupees Sixty Thousand Only 60,000

For United Traders

(Sd/-)
Shradha
Partner

Format of Sales Return Book

Date Particulars Credit Note L.F. Amount

No.

The above columns contain the following information.

Date column: Records the date on which the goods are taken back from the customer or the allowance is
granted to the customer.

Particulars column: Contains the names of the customers from whom the goods are taken back.

Credit Note Number column: Records the serial number of the credit notes.

Ledger Folio column: Records the page number of the ledger on which the relevant customer’s account
and the sales returns account are opened.

Amount column: Records the value of the goods returned.

Record the following transactions in the Sales Return book.

On 27.1.2008, Naveen Traders returned 10 stabilisers @ Rs. 980 per piece and one air conditioner @
18,000 per piece.

Copyright and all other rights reserved with Planet-c computer learnings 20
Journal Proper
The Journal Proper is a book maintained to record transactions that cannot be recorded in any of the
special journals. It is also known as Modern Journal or Journal Regular.

A Journal Proper generally records the following entries.

 Opening entries
 Rectifying entries
 Transfer entries
 Adjustment entries
 Closing entries
 Entries regarding dishonour of cheques
 Credit purcshases and sale of things other than goods.
 Entries of goods withdrawn by the owner for personal use
 Loss of goods by fire, theft and so on.
 Transactions with respect to consignment and joint ventures

Trial Balance and Rectification of Errors

Meaning of Trial Balance

The trial balance is a statement showing the balances or total of debits and credits of all the accounts in the
ledger, with a view to verify the arithmetical accuracy of posting to the ledger accounts. It is an important
statement in the accounting process as it shows the final position of all accounts and helps in preparing the
final statements.

Objectives of Trial Balance

The purpose of preparing a trial balance is to ascertain whether all debits and credits have been properly
recorded in the ledger and accounts correctly balanced. As a summary of the ledger, the trial balance is a
list of accounts and their balances. When the totals of all debit and credit balances in the trial balance are
equal, it is assumed that the posting and balancing of accounts are arithmetically correct.

Helps to Locate Errors

When a trial balance does not tally (i.e., the totals of the debit and credit columns are not equal), it implies
that there has been an error.
The error may have occurred at any of the following stages of the accounting process.
 Totaling of subsidiary books
 Posting of journal entries to the ledger
 Calculating account balances
 Carrying account balances to the trial balance
 Totaling the trial balance columns.
Rules of trial Balance
1. All expenses show “Debit” balance.
2. All incomes show “Credit” balance
3. All assets show “Debit” balance
4. All liabilities show “Credit” balance
5. Capital show “credit” balance.
Copyright and all other rights reserved with Planet-c computer learnings 21
Sample Trial Balance

Trial Balance of…………………..as on…………………………………….

Account Title L.F. Debit Credit

Rs. Rs.
Capital - XXX
Land and building XXX -
Planet and machinery XXX -
Equipment XXX -
Furniture and fixtures XXX -
Cash in hand XXX -
Debtors XXX -
Bills receivable XXX -
Opening stock of raw materials XXX -
Work in progress XXX -
Stock of finished goods XXX -
Prepaid Insurance XXX -
Purchases XXX -
Carriage inwards XXX -
Carriage outwards XXX -
Sales - XXX
Sales return XXX -
Purchases return - XXX
Interest paid XXX -
Commission/ Discount received - XXX
Salaries XXX -
Long term loan - XXX
Bills payable - XXX
Creditors - XXX
Outstanding salaries - XXX
Outstanding interest earned XXX -
Advances from customers - XXX
Drawings XXX -
Reserve fund - XXX
Provision for doubtful debts - XXX
Total XXX XXX

Illustration 1

From the following ledger balances extracted from the books of Mr. Raghu, prepare the trial balance as on
31.12.2008
Copyright and all other rights reserved with Planet-c computer learnings 22
 Particulars Amount Particulars Amount
Debtors 12,000 Purchases return 4000
Creditors 10,000 Sales return 500
Capital 15,000 Building 10,000
Drawings 5,200 Rent paid 500
Cash balance 300 Furniture 5,000
Bank balance 2,100 Sales 30,000
Purchases 20,000 Interest received 200

Solution

Trial balance as on 31.12.2008

Sl. No. Name of the Accounts L.F. Debit Credit
1. Debtors 12,000
2. Creditors 10,000
3. Capital 15,000
4. Drawings 5,200
5. Cash balance 300
6. Bank balance 2,100
7. Purchases 20,000
8. Sales 30,000
9. Buildings 10,000
10. Rent paid 500
11. Purchases return 400
12. Sales return 500
13. Interest received 200
14. Furniture 5,000
Total 55,600 55,600

Exercise 1.

Journalise the following transactions in the books of Mr. Sanjay. Post them to the ledger, balance
the accounts and draft the trial balance as on 30.06.2003.

Date Particulars Amount (Rs.)

June 01 Sanjay commenced business with
Cash 50,000
Furniture 50,000
Buildings 3,00,000

June 03 Sold goods to Prashant 50,000

June 08 Bought goods from Mahesh 1,00,000
June 14 Received cash from Prashant in settlement of his account 50,000
June 20 Returned goods to Mahesh 5,000
June 24 Paid Mahesh on account 20,000
June 26 Bought goods from Suma for cash 10,000
June 27 Sold goods for cash 1,00,000
June 30 Paid Salaries 20,000
June 30 Paid rent 10,000

Ans: 6, 30,000
Copyright and all other rights reserved with Planet-c computer learnings 23
 Final Accounts
Meaning of Final Accounts
Final accounts are the statement prepared at the end of a year, which presents the final results of the
operations of a business, in financial terms. They include
 Income statements or trading and profit and loss account: It is prepared to ascertain the results
of a business operation, i.e. the net profit or net loss of the business for an accounting year.
 Position statement or balance sheet: It includes the financial position, i.e. the assets, liabilities
and owner’s capital of a business as at the end of an accounting year.

Trading and profit and Loss Account

Profit and loss account is an accounting statement that shows an organisation’s trading position over a
given period of time, usually the financial year. A profit and loss account has two sections namely trading
account and profit and loss account.

At the option of the organization (Trading or Manufacturing), these two accounts may be put together in
one account or shown separately. However, the usual practice is that a single account is prepared with two
sections, viz. trading account and profit and loss account.

Trading Account
A trading account merely indicates the result of buying and selling of goods, i.e. the gross profit or gross
loss on trading, without considering administration, selling and financial expenses incurred in running the
business.

Format of Trading Account is given below

Trading account for the period Ending………………

Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock XXX By Sales XXX
To Purchases XXX Less: Sales Returns XX
Less: Purchases Returns XX XXX Less: Sales Tax XX XXX

To Cartage XXX By Closing Stock XXX

To Carriage Inwards XXX By Gross Loss ( Gross loss
To Freight XXX transferred to profit and loss
To Import Duty XXX account) XXX
To Excise Duty XXX
To Octroi XXX
To Dock Dues XXX
To Wages XXX
To Power XXX
To Electricity and Water XXX
To Packaging XXX
To Gross Profit (Gross
Profit transferred to profit
and loss account) XXX

XXXX XXXX

Copyright and all other rights reserved with Planet-c computer learnings 24
Explanation of the items in the above format

Opening Stock: It is the first item on the debit side of the trading account. In case of manufacturing
business, opening stock includes the stock of raw materials, partly finished goods and finished goods at the
beginning of the trading period. In case of trading business, it includes only the stock of finished goods at
the beginning of the trading period.

Purchases and Purchases Returns: Purchases refer to finished goods purchased for resale or raw
materials purchased for manufacture. It includes both cash and credit purchases. Net purchases are entered
in the outer column by deducting the purchase returns from the total purchases.

Cartage, Carriage Inward and Freight: The details of transportation charges incurred for the movement
of goods are entered in these fields. They may be inwards or outwards. Carriage, Carriage inwards and
freight incurred on the goods purchased are entered on the debit side of the trading account. When these
expenses are incurred on goods sold, they are entered in the profit and loss account. When it is not stated
whether cartage, carriage and freight are inward or outward, the common practice is to treat them as
inwards.

Import Duty, Excise Duty, and Octroi: The import duty, export duty and octroi paid on the goods
purchased are shown on the debit side of the trading account. Such duties paid on goods sold are entered in
the profit and loss account. If there is no specification as to whether these duties are paid on purchase or
on sales, it is considered to have been paid on purchases.

Dock Dues: Dock dues incurred on purchases are entered on the debit side of the trading account and
those incurred on sales are entered in the profit and loss account. If it is not stated whether they are paid on
purchases or sales, it can be regarded as the dues paid on the purchases.

Wages: Wages incurred while manufacturing goods or making purchased goods ready for sale are
considered direct expenses and entered on the debit side of the trading account. Indirect and non-
manufacturing wages are entered in the profit and loss account. The wages, of which the nature (direct or
indirect) is not mentioned, are treated as direct wages. Certain organizations combine wages and salaries.
They treat them as direct expenses and enter the details on the debit side of the trading account.

Power, Fuel, Gas, Water, Heating, Lighting and so on: Fuel, power, gas and oil used for running the
machines are direct expenses. Water used in the factory is also treated as a direct expenses. They are
entered on the debit side of the trading account.
Heating and lighting may be for a factory or an office. Factory heating and lighting are direct expenses and
appear on the debit side of the trading account. Office heating and lighting appear on the debit side of the
profit and loss account. When it is not stated whether the heating and lighting are for factory or office they
are treated as direct expenses.

Packaging Materials and Charges: Packaging materials and charges incurred to make goods ready for
sale are direct expenses and entered on the debit side of the trading account. Whereas such expenses
incurred on the finished goods for their safe dispatch to the customer are treated as indirect expenses. They
appear on the debit side of profit and loss account.

Other factory Expenses: Other factory expenses such as factory rent, factory insurance are direct
expenses. They appear on the debit side of the trading account.

Sales and Sales Returns: Sales is the first item on the credit side of the trading account. Sales include
both cash and credit sales. Net sales are entered in the outer column by deducting the Sales Returns from
the Total Sales.

Copyright and all other rights reserved with Planet-c computer learnings 25
Sales Tax: Sales Tax refers to the tax paid by a businessman to the government on the sales made by him.
It can be deducted from sales on the credit side of the trading account. Alternatively, it can also be treated
as a selling expenses and entered on the debit side of the profit and loss account.

Closing Stock: Closing stock represents the stock of finished goods in case of a trading business. Whereas
in case of a manufacturing business, it represents the stock of raw materials, partly finished goods and
finished goods at the end of the trading period. Closing stock generally does not appear in the trial balance
but it has to be calculated and brought into the books of accounts.

Exercise 1.

Prepare the trading account for the year ended 31, March 2008 from the following particulars.

Particulars Rs.
Opening Stock 12,000
Purchases 60,000
Carriage 600
Sales 1,10,00
Sales returns 5,000
Sales tax 2,000
Factory lighting 1,000
Fuel and oil 750
Freight inwards 1,050
Octroi 1,200
Import duty 1,800
Marine insurance 2,400
Dock dues 500
Wages 6,000
Water and electricity 650
Factory rent 7,500
Packing materials 1,500
Purchase returns 3,000
Cartage 120
Customs duty 3,000
Factory insurance 2,500
Closing stock on 31, March, 2008 10,500

Ans: 13,930
Exercise 2.
Prepare the trading account for the year ended 31.12.2008 from the following particulars.
Particulars Rs.
Opening Stock 30,000
Purchases 85,000
Sales 1,20,000
Octroi 2,500
Cartage 600
Purchase returns 7,800
Sales returns 12,000
Import duty 6,000
Copyright and all other rights reserved with Planet-c computer learnings 26
Carriage inwards 3,500
Dock dues 1,500
Excise duty 2,000
Clearing charges 1,200
Factory rent 8,000
Factory insurance 2,400
Marine insurance 1,750
Customs duty 1,500
Water and electricity 780
Gas and Oil 1,300
Factory lighting 760
Closing stock 12,800
Ans: Gross Loss 20,190
Profit and Loss Account
Profit and loss account is an accounting statement that shows the organisation’s trading position. It helps
in ascertaining the net profit or net loss of a business for a given trading period, usually a financial year. It
is the profit earned or loss incurred after charging all business expenses including all depreciation and
provisions.

Format of Profit and Loss Account is given below

Profit and Loss account for the period Ending………………

Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Gross Loss By Gross Profit
(Transferred from trading (Transferred from trading
account) XXX account) XXX
To Salaries XXX By rent received XXX
To Rent, Rates and Taxes XXX By Commission received XXX
To Office Lighting and By Discount earned XXX
Heating By Bad Debts Recovered XXX
To Insurance XXX By Interest on Drawings XXX
To Printing and stationery XXX By Net Loss(Transferred to
To Postage and Telegrams XXX capital account) XXX
To Interest Paid XXX
To Discount Allowed XXX
To Bad Debts XXX
To Repairs XXX
To Depreciation XXX
To Commission Paid XXX
To Carriage Outwards XXX
To Travelling Expenses XXX
To Interest on Capital XXX
To Net Profit (Transferred
to capital account) XXX

XXX XXX

Explanation of a few important items in the above format.

Office and Manintenance Expenses

Copyright and all other rights reserved with Planet-c computer learnings 27
Salaries: This refers to the salaries paid to office staff.

Rent and Taxes: Rent and taxes refers to municipal taxes and the rent paid for the office building.

Insurance: This refers to the premium paid for insuring buildings, machinery, stock and so on against
risks.

Office Lighting and Heating : This refers to lighting and expenses incurred in providing lighting and
heating for the office.

Printing and Stationery : This indicates the printing and stationery expenses incurred in the office.

Repair and Renewals :This refers to repair chares incurred for repair the properties of the business .

Depreciation : Depreciation refers to the wear and tear ,i.e. the reduction in the value of an asset ,resulting
out its use.

Selling and Distribution Expenses

Carriage Outwards or Freight outwards :It refers to the transportation expenses incurred in carrying the
goods to the market for sale.

Bad Debts :Bad debts refers to the debts that are considered to be irrevocable.

Commission Paid: This is the commission paid to the salesmen and distributors for their services.

Financial Expenses
Discount On Sale or Discount Allowed: This indicates the cash discount allowed to the debtors for
prompt payment made by them.

Interest Paid: This refers to the interest paid on loans.

Interest on Capital : Interest allowed to the proprietor on his capital is entered under interest on capital.

Incomes

Non-trading incomes: It refers to all incomes other than trading incomes, such as rent received,
commission received, interest received and so on.

Interest on Drawings: It refers to the interest charged on the amount withdrawn by the proprietor from
the business for his personal use. It is an income of the business and appears on the credit side of profit
and loss account.

Note: Personal expenses such as life insurance premium, income tax, and so on, incurred by the business
owner should not be included in the profit and loss account. Such expenses are treated as drawings, which
has to be deducted from the capital.

Exercise 1.
From the given particulars, prepare the profit and loss account for the year ended 31.12.2008

Particulars Rs.
Gross Profit 1,50,000
Salaries 25,000
Commission received 1,800
Copyright and all other rights reserved with Planet-c computer learnings 28
Rent Paid 10,000
Office lighting 2,500
Advertisement 5,600
Printing and stationery 3,000
Repairs and renewals 4,200
General Expenses 500
Interest on Capital 1,800
Interest on Loan 900
Discount allowed 2,000
Insurance premium 1,800
Interest on bank deposits 1,200
Interest on drawings 250
Bad debts 2,200
Carriage outwards 1,200
Traveling outwards 1,850
Rent received from sub-tenant 1,500
Bad debts recovered 700
Sundry expenses 550
Discount received 600
Commission received 1,200

Ans: Net Profit 94,150

Exercise 2.
From the given particulars, prepare the profit and loss account for the year ended 31.12.2007

Partifuclars Rs.
Gross Profit 25,000
Salaries 13,500
Rent Paid 5,600
Advertisement Expenses 2,100
Commission Received 1,950
General Expenses 750
Bad Debts 1,100
Printing and Stationery 2,150
Repairs and Renewals 900
Discount allowed 600
Discount received 850
Carriage 300
Lighting and Heating 1,250
Trade Expenses 560
Insurance 2,000
Interest on Investment 3,000
Depreciation 1,450
Commission Paid 800

Ans: Net Loss 52,260

Exercise 3.
Prepare the trading and profit and loss account for the year ended 31.3.2007 using the particulars
given below.
Copyright and all other rights reserved with Planet-c computer learnings 29
 Particulars Rs.
Opening Stock 45,000
Purchases 90,000
Sales 2,05,000
Purchase returns 4,500
Sales returns 6,500
Water and Electricity 2,300
Gas and Fuel 3,800
Dock Dues 1,500
Factory Rent 7,500
Octroi 1,300
Carriage inwards 2,400
Wages 8,000
Sales Tax 12,000
Import duty 1,700
Excise Duty 1,000
Marine Insurance 2,500
Salaries 17,000
Office rent 8,600
Advertisement 2,000
Commission received 1,400
Printing and stationery 1,250
Repairs and renewals 1,100
Discount allowed 450
General Expenses 900
Trade expenses 1,550
Insurance premium 2,300
Commission Paid 2,050
Bad Debts 1,500
Bad Debts recovered 750
Rent from sub tenant 2,200
Discount received 660
Depreciation 850
Office lighting 1,200
Carriage Outwards 1,650
Closing Stock 54,000

Ans: Gross Profit 78,000, Net Profit 40,610

Copyright and all other rights reserved with Planet-c computer learnings 30
 Balance Sheet
Balance sheet is a quantitative summary of a business organisation’s financial condition at a specific point
of time presenting a complete picture of company’s assets, liabilities and net worth. In other words, it is a
statement of the total assets and liabilities (including capital) of an organization as on a particular date –
usually the last date of an accounting period.
The first part of a balance sheet shows all the productive assets a company owns, and the second part
shows all the financial methods (Such a liabilities and share holders equity). It is also called the statement
of condition.

Objective of Balance Sheet

A balance sheet is prepared with a view to ascertain the financial position or soundness of a business as on
a given date. The assets and liabilities of the organization reflects its financial position or soundness. A
business can be called sound when its assets are more than its liabilities. On the other hand, if the
liabilities are more than its assets, it is considered unsound.

Types of Assets and Liabilities Included in Balance Sheet

Current assets, circulating, floating or fluctuating assets: Refers to cash or other temporarily assets
which can be converted into cash in a short period. Examples are cash in hand, cash at bank, bills
receivable and other liquid items.

Liquid assets: Liquid assets are the current assets which are either in the form of cash or can be converted
into cash immediately without incurring high losses. Examples are cash in hand, cash at bank and sundry
debtors.

Investments: Refers to the amount invested by the business or government bonds, on shares and
debentures of companies for the purpose of earning interest and dividends. Investments may be for a short-
term of long-term. Short-term investments are grouped with current assets and long-term investments are
shown as a separate item.

Fixed assets: These are the assets held by a business organization for its use, and not for sale. These are
relatively permanent in nature. Examples are buildings, furniture and machinery.

Wasting assets: Wasting assets are the fixed assets lost through use or exhausted. Examples are mines and
quarries.

Copyright and all other rights reserved with Planet-c computer learnings 31
Intangible assets: are the fixed assets which do not have a physical existence. i.e. it cannot be seen or
touched, but the possession of which yields benefit to the business or the possessor. Examples are
copyright, patent and goodwill.

Fictitious assets: Fictitious assets are the debit balances, i.e., expenses and losses, carried forward from
one accounting period to another. These are fictitious and not represented by any tangible or concrete
property. Examples are heavy advertisement expenses not written off and preliminary expenses

Copyright and all other rights reserved with Planet-c computer learnings 32
The format of the balance sheet is given below.

Balance Sheet as on………………………

Liabilities Rs. Rs. Assets Rs. Rs.
1. Capital XXXXX 1. Fixed Assets
Less: Drawings XXX Goodwill XXXXX
Less: Net Loss XXX Patents
XXXXX
Add: Net Profit XXX Copyrights
Add: Interest on XX XXXXX Land and Building XXXXX
Capital Plant and XXXXX
2. Long-term Liabilities Machinery XXXXX
Long-term Loans XXXXX Motor Vehicles XXXXX
Long-term Deposits XXXXX Furniture and XXXXX
3. Current Liabilities Fixtures
XXXXX
Income Received in Loose Tools
Advance XXXXX 2. Long-term XXXXX
Liabilities for Expenses XXXXX Investments XXXXX
Sundry Creditors XXXXX 3. Current Assets
Bills Payable XXXXX Short-term
Bank Overdraft XXXXX investments XXXXX
Short-term Loans XXXXX Outstanding
XXXXX
Outstanding expenses XXXX Incomes
Prepaid Expenses XXXXX
Closing Stock XXXXX
Sundry Debtors XXXXX
Bills Receivable XXXXX
Cash at Bank XXXXX
Cash in Hand
XXXXX

XXXXXX XXXXXX

Example 1.
Prepare a balance sheet as on 31, December 2007 using the particulars given below.

Particulars Rs.
Capital 60,000
Drawings 3,000
Long term Loan 40,000
Sundry Creditors 16,000
Sundry debtors 30,000
Investments 20,000
Bills Receivable 5,000
Outstanding Rent 1,500
Plant and Machinery 18,000
Land and Building 25,000
Goodwill 10,000
Patents 5,000
Bills Payable 13,000
Cash in Hand 5,600
Cash at Bank 10,400
Net Profit 12,000
Copyright and all other rights reserved with Planet-c computer learnings 33
Closing Stock 15,500
Bank Overdraft 5,000
Ans: 1,44,500

Example 2.
Prepare a balance sheet as on 31, December 2008 using the ledger balances given below.

Particulars Rs.
Capital 1,20,000
Drawings 6,000
Interest on Capital 7,200
Net Loss 14,200
Building 32,000
Plant and Machinery 16,500
Patents and Trademarks 6,500
Goodwill 7,000
Sundry Creditors 14,000
Sundry Debtors 24,000
Bills Receivable 18,000
Cash in Hand 8,700
Cash at Bank 15,300
Long-term Loan 20,000
Deposits (Cr.) 15,000
Bank Overdraft 8,000
Closing Stock 21,000
Outstanding Salary 6,500
Long Term Investments 10,000
Prepaid Insurance 750
Commission Insurance 250
Commission Accrued 10,500
Deposits (Dr.)

Ans: 1,70,000

Example 3.
Using the following ledger balances, prepare trading and profit and loss account and balance sheet
for the period that ended on 31.3.2006

Particulars Rs. Particulars Rs.

Stock as on 1.4.2005 Bad debts 1,300
Raw materials 12,000 Bad debts recovered 1,000
Semi finished goods 5,000 Interest received 2,000
Finished goods 20,000 Depreciation 2,600
Purchases 1,10,000 Capital 3,00,000
Purchases returns 5,000 Long term Loan 1,00,000
Sales 2,10,000 Deposits (Cr.) 50,000
Sales Returns 8,000 Sundry Creditors 36,000
Sales Tax 12,000 Sundry Debtors 80,000
Factory Rent 5,400 Long term Investments 81,950
Factory Lighting 1,200 Bills receivable 35,000
Octroi 2,200 Bills payable 17,000
Copyright and all other rights reserved with Planet-c computer learnings 34
Excise Duty 1,350 Bank overdraft 16,000
Carriage inwards 1,550 Building 1,40,000
Marine Insurance 2,500 Machinery 70,000
Wages 5,500 Patents 6,500
Freight 600 Goodwill 4,800
Salaries 20,000 Cash in Hand 12,500
Printing and Stationery 2,300 Cash at Bank 50,500
Telephone Charges 800 Bank deposits 25,000
Carriage Outwards 750 Closing stock
Office lighting 1,100 Raw materials 12,000
Rent 8,000 Semi finished goods 6,000
Commission received 500 Finished goods 17,000
Commission Paid 300 Drawings 7,500
Discount received 700

Adjustments
Adjustments in final accounts is the process of recording all those items which have not been included in
the trial balance
The items that typically require adjustments at the time of preparation of final accounts are

Closing Stock: is the stock of goods that remain unsold at the end of the trading period.

Outstanding expenses or unpaid expenses: These are the expenses that have been incurred during a
particular trading period, but not paid by the end of that period.

Prepaid expenses or expenses paid in advance: The expenses paid during the current period, but related
to next trading period fall in this category.

Outstanding incomes: Outstanding incomes are incomes earned during a specified period, but not
actually received during that period.

Incomes received in advance or pre-received incomes: These incomes received during a trading period,
even though they have not been earned.

Bad debts: Some debts due to the organization are irrecoverable for reasons such as the insolvency of the
debtors, willful non-payment by the debtor and so on. Debts which are concluded as irrecoverable are
known as bad debts.

Provision for doubtful debts: The recovery of some debts is doubtful. Since these are only expected
losses, a provision or reserve known as Provision for doubtful debts is created.

Provision for discount on debtors: Cash discount may be allowed to the debtors who pay their dues
promptly. A Provision or reserve is created in order to meet such losses/ expenses.

Provision for discount on creditors: Business sometimes receive cash discount from the creditors. Such
income which is earned but yet to be received is recorded in the current year’s account. A reserve for
discount on creditors is created to record such expected discounts.

Depreciation: Depreciation is the permanent continuing and gradual diminution, shrinkage or fall in the
book value of a fixed asset due to various reasons such as wear and tear, passage of time, obsolescence
and so on.
Copyright and all other rights reserved with Planet-c computer learnings 35
Appreciation: is the increase in the value of asset.

Interest on capital: Capital invested by the proprietor in the business is the nature of a loan taken by the
business from him. So it is desirable to allow a reasonable rate of interest on the proprietor’s capital before
ascertaining the real net profit or net loss of the business.

Interest on drawings: It is the interest charged on the amount withdrawn by the proprietor for his
personal use. Interest on drawings is charged on the ground that the drawings of the proprietor amounts to
loans granted by the business to the proprietor.

The following table will help you understand the treatment of various adjustments in final account.

Adjustment Treatment in Trading Treatment in Balance sheet

Account
Closing Stock Entered on the credit side of the Shown on the assets side of the balance
trading account. sheet

.
Outstanding Expenses Added to the respective expenses Shown as outstanding liabilities on the
on the debit side of the trading liability side of the balance sheet
account or profit and loss account
Prepaid Expenses Deducted from the respective Shown as prepaid expenses on the assets
expenses on the debit side of the side of the balance sheet.
trading account or profit and loss
account
Outstanding Incomes Added to the respective incomes Shown as the outstanding income on the
on the credit side of the profit and assets side of the balance sheet.
loss account.
Incomes Received in Deducted from the respective Shown as the income received in advance
Advance incomes on the credit side of the on the liability side of the balance sheet
profit and loss account
Bad Debts Entered on the debit side of the Deducted from sundry debtors on the
profit and loss account assets side of the balance sheet.
Provision for Bad Entered on the debit side of the Deducted from the sundry debtors on the
Debts profit and loss account. assets side of the balance sheet.
Provision for Discount Entered on the debit side of the Deducted from sundry debtors on the
on Debtors profit and loss account. assets side of the balance sheet.
Provision for Discount Entered on the credit side of the To be deducted from sundry creditors on
on Creditors profit and loss account the liability side of the balance sheet.
Depreciation Entered on the debit side of the Deducted from the concerned asset on the
Profit and Loss account assets side of the balance sheet.
Appreciation of Assets Entered on the credit side of the Added to the concerned assets on the
Profit and Loss account assets side of the balance sheet.
Interest on capital Entered on the debit side of the Added to capital on the liabilities side of
profit and loss account the balance sheet.
Interest on Drawings Entered on the credit side of the Deducted from capital on the liability side
Profit and Loss account of the balance sheet.

Copyright and all other rights reserved with Planet-c computer learnings 36
Exercise 1.
Prepare a trading and profit and loss account for the year that ended on 31.12.2003 using the
particulars given below.

Particulars Rs.
Opening Stock 10,500
Cash Purchases 35,000
Credit Purchases 15,000
Cash Sales 40,000
Credit Sales 55,000
Sales Return 2,000
Sales Tax 1,200
Salaries 15,000
Rent and Rates 3,500
Insurance 2,000
Trade Expenses 750
Advertisement Expenses 600
Commission Received 800
Commission Paid 650
Interest on Bank balance 400
Wages 1,500
Freight 800
Octroi 500
Excise Duty 900

Adjustments
1. Closing stock Rs. 12,000
2. Unpaid rent Rs. 500
3. prepaid insurance Rs 300
4. Write off bad debts Rs. 450
5. Depreciation on building Rs. 1,500
6. Interest on capital Rs. 600
7. Interest on loan Rs. 250
Outstanding wages Rs. 500.

Copyright and all other rights reserved with Planet-c computer learnings 37
Exercise 2.
Prepare a trading and profit and loss account for the year that ended on 31.3.2001 using the
particulars given below.

Name of Ledger Accounts Debit (Rs.) Credit (Rs.)

Opening Stock 45,000
Purchases 2,00,000
Sales 4,50,000
Sales Returns 5,000
Purchases Returns 3,000
Wages 15,000
Freight 1,250
Factory Rent 5,700
Water and Electricity 6,000
Salaries 18,000
Rent 5,000
Office Lighting 750
Advertisement 500
Commission Received 700
Commission Paid 300
Discount (Dr.) 250
Discount (Cr.) 300
Insurance 1,750
Bad Debts 700
Building 1,50,000
Machinery 25,000
Furniture 40,000
Investments 1,55,000
Long term loans 35,000
Long term deposits (Cr.) 25,000
Capital 3,00,000
Sundry Creditors 23,000
Sundry Debtors 80,000
Bills Receivable 7,800
Bills Payable 4,000
Cash in Hand 20,000
Cash at Bank 58,000
Total 8,41,000 8,41,000

Adjustments
1. Closing stock as on 31.3.2001 Rs. 30,000
2. Charges of depreciation @ 2% on furniture and 5% on machinery
3. Outstanding salary Rs. 2,000
4. Prepaid insurance Rs. 350
5. Discount allowed on debtors @ 1%
6. Discount allowed by creditors @ 2%
7. Interest @ 2% allowed on capital
8. Appreciate building by 10%
Copyright and all other rights reserved with Planet-c computer learnings 38