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Accounting – An Introduction
Luca Pacioli (1447–1517):

Often referred to as the “Father of Accounting," Luca Pacioli was an Italian mathematician and
Franciscan friar who published a comprehensive guide to double-entry bookkeeping in 1494.

His work, "Summa de Arithmetica, Geometria, Proportioniet Proportionalità," included a

section on accounting titled "Particularis de Computis et Scripturis." Pacioli didn't invent
double-entry bookkeeping, but his work standardized and popularized it, laying the foundation
for modern accounting.

Introduction

A trader starts his business with an aim to earn profits. Hence, the trader brings some amount as
capital for purchasing of Land, Buildings, Plant and Machinery, Furniture and Raw-materials
etc., The trader do some activities in the business like buy, sell and manufacture of goods and
services and meet some payments like wages, salaries, rent and other expenses. Likewise
innumerable transactions take place in a day. It is impossible to keep all these in mind. Hence,
the word accounting is prominently required. At the end of the year the proprietor wants to
know whether his business is earning profit or loss and at the same time wanted to know the
financial status of the business.

Before going to know about the word “accounting” everybody should know, what is an
‘Account’.

Account

“An account is a summarized record of transactions relating to a person or a

thing”.

Definitions:

Accounting has been defined by some experts. Some of the definitions are listed below:

“Accounting is the process of identifying, classifying, recording,

summarizing and interpreting business transactions in terms of money”.

“Accounting system is a means of collecting, summarizing, analyzing and

reporting in monetary terms, the information about the business”
- R.N. Anthony

“Accounting is a means of measuring and reporting the results of Economic

Activities”
- Smith and Ashburne

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“The art of recording, classifying and summarizing in a significant manner
and terms of money transactions and events, which are in part at- least, of
a financial character and interpreting the results there of”.
- American Institute of Certified Public Accounts (AICPA)

“Accounting is the process of identifying, measuring and communicating

economic information to permit informed judgments and decisions by users of
the information”.
- American Accounting Association (AAA)

Accountancy

The word accountancy is differ from accounting. Accountancy is the science of

measurement of wealth. “It is the systematized knowledge of accounting”.

Importance / Significance of Accounting

1. Limitations of Human Memory

2. It helps to make inter period and inter firm Comparison
3. It is an Aid to the Management
4. It is needed for Legal Reasons
5. To ascertain Net Results
6. To ascertain Value of the Business

1. Limitations of Human Memory

Human memory has a limitation. It is not possible to remember all the business
transactions at a time. Therefore, there is need of accounting so that the information can be
recorded promptly in the books of accounts. Due to maintenance of books properly one can
know about the firm and get historical data also.

2. It helps to make Inter Period and Inter firm Comparison

So as to develop the business concern comparison with other similar business is one
parameter. Accounting helps to make inter period and inter firm comparison. If information
recorded properly can be used to compare the results of one year with those of the previous years
and with those of other enterprises.

3. It is an Aid to the Management

Accounting is an aid to the management. The information recorded properly can be used
for meaningful analysis so as to assist the management in decision making.

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4. It is needed for Legal Reasons

It is needed for legal reasons. Accounting information as recorded in a systematic

manner which can be produced as firm evidence in the court of law. It helps in taxations matters
and for finalizing other contract details, etc.,

5. To Ascertain Net Results

Each and every firm will prepare financial statements to know the performance of the
business firm. The proprietor of the firm is very anxious whether the established concerned
making profit or loss. The preparation of books of accounts helps to ascertain the net results of
the operations of the business during the year and also financial status.

6. To Ascertain the Value of the Business

If the books of accounts maintained by the business concern properly and giving good net
results which improves the value of the firm. So as to know the value of the firm accounting is
necessary.

Objectives of Accounting

The following are the main objectives of Accounting:

1. To Know the Profit or Loss

2. To Know the Financial Position
3. To Review the Business Policies
4. To Know the Information for Tax
5. To Minimize Cost
6. To Communicate Information to Various Interested Parties

1. To know the Profit or Loss:

After starting the business by the entrepreneur (owner), it is the duty of the entrepreneur
to know whether the business concern making profit or loss. So as to know the profit or loss, the
trader must prepare Trading and Profit and Loss Account which discloses Gross Profit and Net
Profit respectively. If the firm suffers due to the losses, the trader should have to develop some
strategies to improve the profit level.

2. To know the Financial Position:

At the end of each and every year the establisher of the business is very anxious to know
the financial position. By preparing balance sheet of the business concern one can know the
financial position. After preparing this statement, it is possible to know the resources such as
assets of the concern and also obligations such as liabilities etc.,

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3. To Review the Business Policies:

Based on the past records, the accountant will review the business policies which are
useful to the current situations. If there are any modifications required the management of the
business concern should have to update such policies.

4. To know the Information for Tax:

It is the responsibility of the every citizen of the country on their earnings to pay the tax.
How much of tax they should have to pay to the government is known through preparation of
books of accounts only. The books of accounts must be prepared as per the Income Tax Act,
1961. After, preparing the books, then, the concern should known how much of tax it should
have to pay and to fulfill the government obligations.

5. To Minimize Cost:

Each and every business person objective is to earn profit. There are three ways to
increase profit. They are i) by increasing selling price, ii) by decreasing the cost and iii) by
selling more quantity of goods. If the demand for the products is not well and good, it is
impossible to follow first and third options. There is only the way to decrease cost. By
preparing cost sheet, it is possible to know the cost of output and at the same time where the
possibilities to decrease the cost. To make all these ideas, accounting is pre-requisite.

6. To Communicate Information to Various Interested Parties:

According to the Companies Act, 1956 and 2013, it is the responsibility of the company to
communicate accounting information to various interested parties like investors, Government,
Creditors and Managers etc.,

LIMITATIONS OF ACCOUNTING

The majour limitations of accounting include the following:

1. Records only Financial Transactions

2. Price Level Changes not Considered
3. Historical in Nature
4. Subjective Choice
5. Contradictory Principles
6. Window Dressing

1. Records only Financial Transactions

Accounting records only financial transactions and events. It ignores qualitative

information, however, relevant these may be. If money involvement is there in the transaction, it
may be recorded, whether it is cash or credit transactions.

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2. Price Level Changes not Considered

Accounting information is expressed in terms of money, and it is assumed that the

monetary unit is stable overtime. It ignores the price level changes while preparing financial
statements. For example, fixed assets value is recorded, at cost less depreciation, because fixed
assets value may be changed over time. Similarly, revenue figures recorded without considering
price level changes which may not be useful for comparison over the year.

3. Historical in Nature

The information provided by accounting is historical in nature. The transactions and

events are recorded after it has taken place. Similarly, financial statements are prepared at the
end of accounting period only. So, the information provided is only a post-mortem analysis of
business transactions.

4. Subjective Choice

It is not free from bias and depends sometimes on a number of estimates, personal
judgements of the accountant. The accountant is faced with a number of alternative choices,
example choice in the method of depreciation, valuation of inventory, etc. It is based on
subjective choice which lacks objectivity. Thus, due to lack of objectivity, financial results and
position revealed of may not be true in certain cases.

5. Contradictory Principles

Accounting is based on certain principles which appear to be contradictory. For example,

according to the principle of conservatism, inventory is valued at cost or market price
whichever is lower. Accordingly, the inventory may be valued on cost basis in one year and at
market price in another year but it violates the principle of consistency.

6. Window Dressing

It is amenable to window dressing. The management may enter wrong figures to

artificially inflate or deflate the figure of profits, assets and liabilities and thus financial
statements may not reveal true and fair view of financial affairs of the business. Balance sheet
shows the financial position of the business on a particular date. Accountant may postpone
purchase of some items or convert long term liabilities into short term loans to present a good
picture on a particular date.

FUNCTIONS

An analysis of the definitions bring out the following functions of the accounting

1. Recording [Journal]
2. Classifying [Ledger]
3. Summarizing [Trial Balance and Final Accounts]

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4. Analysisng [Methodical Classification]
5. Interpreting [Meanigful Conclusion] and
6. Communicating [Passing Information]

1. Recording [Journal]

It is the basic function of accounting. It means recording the transactions as soon as

possible so that a complete record is available about the activities of the business. It is concerned
with ensuring that all the transactions of financial nature are recorded in orderly manner in the
proper books of accounts. Recording is done in the book ‘journal’ in chronological manner and
various other ‘Special Subsidiary Books”.

2. Classifying [Ledger]

It is concerned with classification of recorded transactions so as to group the similar

transactions at one place. It is done in the book termed as ‘Ledger’ in which different accounts
are opened and all financial transactions of similar nature are recorded at one place under
individual account heads. For example, all transactions related to debtor named as ‘Ram’ are put
under his account. Recording and classification are closely related to each other.

3. Summarizing [Trial Balance and Final Accounts]

It involves presenting the classified transactions in a manner useful to its users (both
internal and external). It involves the preparation of Trial Balance, Income Statement, Balance
Sheet, Statement of Changes in Financial Position, Cash Flow Statement etc.,

4. Analysisng [Methodical Classification]

The recorded financial information is analyzed to make useful interpretations. The term
‘analysis’ means methodical classification of the data given in financial statements. The figures
given in financial statements need to be put in a simplified manner. For example, all items
relating to ‘Current Assets” are arranged at one place while all items relating to
‘Current Liabilities’ are posted at another place. It provides the basis for interpretation.

5. Interpreting [Meaningful Conclusion]

It means explaining the meaning and significance of the data so simplified. The
accountants should interpret the statements in a manner useful to the users. Interpretation
requires analysis and analysis is useless without interpretation. It aims at drawing meaningful
conclusions from the information and uses it for decision-making in the future. It is the main
task of accountant in context as present scenario;. Routine work such as recording, classifying
and summarizing can be handled by electronic devices like computer etc.,

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6. Communicating [Passing Information]

Accounting information has tobe communicated in a proper form and manner to the
concerned persons. It is done by preparation and distribution of accounting reports for the users
of financial statements to make decisions. It involves preparation of Income Statement, Balance
Sheet, Funds Flow Statement, Cash Flow Statement, etc., in the form and manner required by
various users of accounting.

IMPORTANT PARTIES / USERS OF ACCOUNTING

The main importance of accounting is to furnish meaningful information to the needy

persons and also judge the performance and financial strength of the concern. Most probably the
following persons are needed the accounting information.

1. Entrepreneurs / Proprietors/ Owners

2. Creditors
3. Investors
4. Employees
5. Government
6. General Public
7. Researchers
8. Enterprise Managing People

1. Entrepreneurs / Proprietors/ Owners

An Entrepreneur supplies the factors of production and other infrastructural facilities. After
completing one accounting year the entrepreneur would become very anxious whether the
concern got profit or loss and also wish to know the financial position. Hence, the
entrepreneur needs accounting information so as to know all such things.

2. Creditors

Creditor is the person to whom the firm owed. The creditors are generally suppliers of raw
materials, loan givers (banks) and other lenders of money. They always concentrate on the
concern about its financial stability and also study the financial ability of the concern,
whether it has repayment capacity or not.

3. Investors

Before going to invest in a particular concern, the investors look not only the earning
capacity but also see its financial strength. They are very much interested about safety of
their capital (investment) and also improvement in its value.

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4. Employees

Employees also concentrate on the profitability of the concern. Because if the firm earns
more profits that the concern can pay fair salaries and other benefits, otherwise it may not.

5. Government

So as to impose the different taxes by the government, it required financial statements of the
concern.

6. General Public

Here, public means consumers, they also very much interested in accounting records because
how the firm controlling production and maintaining the standard of living.

7. Research

The research scholars are interested to collect the accounting records as secondary data
towards analyzing through various techniques in their research work. The secondary data is
very much useful to research to trace out the problems of the business to find the solutions
etc.,

8. Enterprise Managing People

The managers of a concern required information to make decisions. They also required
information towards comparison of sales, cost and profits with past years.

ACCOUNTING CYCLE

The process of accounting can be explained through a cycle which is known as Accounting
Cycle. This process takes place each and every year. The following is the Accounting cycle.

Transactions

Balance Sheet journal

Trading & P&L A/c

Ledger

Trail Balance

The accounting cycle starts with transactions next to preparation of Journal. After preparing the
Journal the forward step is posting the entries into respective accounts which is known as

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ledger. After preparing ledger the Trial Balance will be prepared which proves the
mathematical accuracy of the ledger balances. Finally, the accountant prepares Trading and
Profit and Loss Account and Balance Sheet. These statements may be prepared to know the net
results and financial status of the concerned at one date.

CAPITAL EXPENDITURE

If the benefit or advantage which accrues to a business from expenditure is spread over a
number of years, the expenditure is called capital expenditure. For example, if fund out flowed
to acquire the assets like Land, Buildings, Plant and Machinery, Furniture and Goodwill etc.
which were useful for series of years and also meant for earning profits. The expenditure
incurred on them was termed as capital Expenditure.

The following few basic rules may also be laid down for the recognition of Capital
Expenditure.

1) Acquisition of Assets: Expenditure which results in the acquisition of fixed assets (Long
Term Assets), whether tangible or intangible attached to the business and not meant for
resale is capital expenditure.

2) Extension and Improvement: Expenditure incurred on the existing fixed assets which results
in extension or expansion, longer life or increase in the revenue earning capacity is also
called Capital Expenditure. Purchase of additional plant or machinery, additions to building,
renovation expenditure, heavy expenditure on reconditioning second-hand assets etc are
examples of Capital Expenditure.

3) Expenditure Incidental to Acquisition: Besides the cost of acquisition, extension and

improvement expenditure incurred for making the asset ready for use is also treated as capital
expenditure. For Example commission and brokerage in connection with the acquisition of
an asset, carriage and cartage paid for transporting the asset to the factory premises, wages
and specialist’s fees for machinery erection or installation etc.

4) Expenditure for acquiring the right to carry on business: Amount paid for goodwill buys
the right to use the name of a business which has had a fairly long life and good reputation.

5) Other items: In addition to above, mention may be made of the following items of
expenditure also:

i) Legal Expenses in connection with defending suits for protecting the right, title or
interest to in the fixed Assets.

ii) Research and Development expenditure resulting in the acquisition of a patent.

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REVENUE EXPENDITURE

Expenditure incurred in running the business is termed as revenue expenditure.

Examples of revenue expenditure are: rent, salaries, office Expenses, cost of manufacturing and
selling the product, repairs, depreciation etc.,

Determination of Revenue Expenditure

The following guide lines may be mentioned as a guide to its determination:

a) Expenditure for running the Business:

Expenditure for day-to-day running of business the expenses which are incurred to run the
business daily is called revenue expenditure. Example, rent, printing & stations, Wages,
Salaries, power & fuel etc.,

b) Material Use:

Cost of materials purchased for using manufacturing process and of goods meant for resale is
also revenue expenditure.

c) Expenditure for keeping of Fixed Assets

The expenses which are incurred for running or maintain fixed assets in good condition are
called Revenue Expenditure. Example, repairs to building and Plant & Machinery.

d) Depreciation

Decreasing the value/quantity of an asset is called depreciation. Such decreasing value or the
expired cost of fixed assets is a revenue expenditure, treated as revenue loss.

e) Interest on loan

Interest paid on borrowed Capital, loan, interest on Capital etc., is also revenue expenditure.

f) Legal Charges

Legal expenses incurred in the course of running the business such as expenses for collecting
money from debtors or defending a suit for damages are termed as Revenue Expenditure.

Deferred Revenue Expenditure refers to expenses that are incurred by a business but are not
charged entirely to the income statement in the year they are incurred. Instead, these expenses
are spread over multiple years. This is because the benefit derived from these expenses is
expected to accrue over several years.
Examples: Advertising, Preliminary expenses and research and development cost.

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Book Keeping
Meaning

Book-keeping includes recording of journal, posting in ledgers and balancing of

accounts. All the records before the preparation of trail balance is the whole subject matter of
book-keeping. Thus, book- keeping may be defined as the science
and art of recording transactions in money or money’s worth so accurately and
systematically, in a certain set of books, regularly that the true state of businessman’s affairs
can be correctly ascertained. Here, it is important to note that only those transactions
related to business are recorded which can be expressed in terms of money.

Definitions

“Book keeping involves the chronological recording of financial

transactions in a set of books in a systematic manner”

“Book- keeping is the art of recording business transactions in a

systematic manner”.

A.H.Rosenkamph.

“Book- keeping is the science and art of correctly recording in

books of account all those business transactions that result in the transfer
of money or money’s worth”.
R.N.Carter

Objectives of Book- keeping

i. Book- keeping provides a permanent record of each transaction.

ii. Soundness of a firm can be assessed from the records of Assets and Liabilities on a
particular date.

iii. Entries related to incomes and expenditures of a concern facilitate to know the
profit and loss for a given period.

iv. It enables to prepare a list of customers and suppliers to ascertain the amount tobe
received or paid.

v. It is a method gives opportunities to review the business policies in the light of the
past records.

vi. Amendment of business laws, provision of licenses, assessment of taxes etc., are
based on records.

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DISTINCTION BETWEEN BOOK- KEEPING AND ACCOUNTING

The difference between book- keeping and accounting can be summarized in a tabular
from as under:

Basis of Book-keeping Accounting

difference
Transactions Recording of transactions in To examine these
books of original entry. recorded transactions in
order to find out their
accuracy.
Posting To make posting in ledger To examine this
posting in order to
ascertain its accuracy.
Total and Balance To make total of the amount To prepare trial balance
in journal and accounts of with the help of
ledger. To ascertain balance balances of ledger
in all the accounts. accounts.
Income Statement and Preparation of trading, Profit Preparation of trading,
Balance Sheet & loss account and balance profits and loss account
sheet is not book keeping and balance sheet is
included in it.
Rect ificat io n o f These are not included in These are included in
Er rors book-keeping accounting.
Special skill and It does not require any It requires special skill
knowledge special skill and knowledge as and knowledge.
in advanced countries this
work is done by machines.
Liability A book- keeper is not liable An accountant is liable
for accountancy work. for the work of book-
keeper.

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Accounting Terminology

1. Assets

It refers to tangible or intangible objects which carry future benefits. Assets are expected
to yield future economic benefits and arises from past events. Assets are of two types:

i. Current Assets: Current Assets are those assets which are converted in cash during an
accounting year or for their consumption in the production of goods or rendering of services
in the course of business. It is also known as circulating capital. Examples, cash in hand,
cash at bank, stock of finished goods or Work-in-Progress, Debtors, Bills Receivable, Stock
of Raw Materials etc.,

ii. Fixed Assets: Fixed assets are those assets which are useful for series of years, and useful
for the purpose of production of goods or services. Fixed Assets may be classified as
follows:

a. Tangible Assets: It refers to those assets which can be seen and touched. For
example, land and Buildings, furniture and fixtures, machinery etc.,

b. Intangible Fixed Assets: It refers to those assets which cannot be seen or

touched. It can only be felt. For example, Goodwill, Patents, Trademarks,
Copyrights etc.,

2. Entity: An entity is an economic unit which performs economic activities. (For Example,
Reliance Industries, Hindustan Lever Ltd., etc.,)

1. Event: An event is the happening of consequence to an entity (for example, the wear and
tear of machinery etc.,)

2. Transaction: A transaction is an exchange of goods or services for cash or on credit. It

involves transfer of money or money’s worth. (for example, the sale of goods on credit or
for cash).

3. Liabilities: It refers to the financial obligations of an enterprise other than owner’s equity.
It may be classified as follows:

a) Current Liabilities: Current liabilities are those liabilities which are payable during
an accounting year. For example Trade creditors, Bank Overdraft, Bills Payable etc.,

b) Long-term Liabilities: It refers to those liabilities which become due generally after a
period of 12 months). For example, Debenture, Long-term Loans etc.,

c) Capital: Capital is the amount invested in an enterprise by the Proprietor (in case of
proprietorship) or partners (in case of partnership) or shareholders (in case of limited

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company). It is the excess of Assets over Liabilities. It is also known as owner’s
equity or Net Worth.

“Capital is that part of wealth which is devoted to obtaining further wealth”.

4. Drawings: The term ‘drawings’ refer to the total amount of cash or goods or any other
assets withdrawn by the owners of the business out of business for the personal use. It
decreases owner’s equity.

5. Goods: Goods are the assets which are held for resale in the business. There is difference
between the goods and assets. For example, furniture owned by the furniture dealer is a
good but it is a fixed asset for the business of manufacturing electronic goods.

6. Expenditure: Expenditure are the costs incurred in acquiring an asset or service in the
form of depletion of assets or incurrence of a liability.

7. Income: Income is the increase in economic benefits during an accounting period in the
form of a. inflow of assets, or b. decrease of liabilities, which results in increase in equity
other than relating to contribution from owners’ enterprise.

8. Expenses: Expense is the decrease in economic benefits during an accounting period in the
form of a. depletion of assets, or b. Increase in liabilities, that result in decrease in owners’
equity other than those relating to drawings by the owners’ of the enterprise.

9. Gains: Gains are increase in equity from incidental transactions or evens. For example,
bad debts recovered, profit on sale of Fixed Assets or Investments etc.,

10. Losses: Losses result in decrease in equity from incidental transactions or events. For
example, loss on the sale of fixed assets or Investments, Bad Debts etc.,

11. Revenue: Revenue refers to the amount charged for the goods or services rendered by an
enterprise or for permitting others to use the resources of the enterprise. For example, sales,
royalty earned, commission earned, dividend received etc.,

12. Trade Debtors: the person who woes money to the firm he is known as debtor. Generally,
debtors may arrive through credit sales.

13. Trade Creditors: Trade creditor is the person to whom the business owes money for goods
purchased or services received on credit basis.

14. Stock: Stock refers to the tangible property held for sale in the ordinary course of business
or for consumption in the production of goods or services for sale. It includes stock of Raw-
materials, Work in Progress and Finished Goods.

15. Receivables: The term receivables means both the Trade Debtors and Bills Receivable.

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16. Payables: the term Payables include both the Trade Creditors and Bills Payable.

17. Invoice: It is a document related to the business where in details of the goods sold are
entered. It is issued by the seller to the buyer.

18. Networth: it is calculated by deducting all outside liabilities both current and non-current
from the total assets of the organization.

Networth = Total Assets – Outside Liabilities – Miscellaneous

expenses to the extent not written off – losses if any
Networth = Capital + Retained Earnings – Losses, if any – Miscellaneous expenses to the
extent of not written off.

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ACCOUNTING PRINCIPLES

To make the same meaning to all people and accountants through the world some
guidelines have prepared to record the transactions. These guidelines (rules) are termed as
‘Generally Accepted Accounting Principles’ (GAAP). Accounting principles can be classified
into two. They are:

I. ACCOUNTING CONCEPTS
II. ACCOUNTING CONVENTIONS

ACCOUNTING PRINCIPLES

I. ACCOUNTING CONCEPTS II. ACCOUNTING CONVENTIONS

1. Business Entity Concept 1. Convention of Consistency

2. Money Measurement Concept 2. Convention of Disclosure
3. Going Concern Concept 3. Convention of Conservatism
4. Cost Concept 4. Convention of Materiality
5. Dual Aspect Concept
6. Accounting Period Concept
7. Matching Concept
8. Realization Concept
9. Accrual Concept
10. Objective Evidence Concept

1. Business Entity Concept

This concept differentiates the firm and the owner i.e. firm is separate and owner is separate.
This means that all financial transactions of the business should be recorded separately from
the personal financial transactions of the owner(s).

Whatever the cash and assets brought by the owner credit to the Capital A/C but not owner’s
account (treating such items are obligation on part of the owner). When cash or goods are
drawn by the proprietor debits the Drawings A/C but not owner account.

2. Going Concern Concept

It is assumed that the business will exist for a long time. All the transactions recorded in the
books of accounts based on this concept. In the preparation of final accounts outstanding
expenses and prepaid expenses are taking into account, because the firm will be continued
years together.

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3. Money Measurement Concept

In the books of accounts each and every transaction will be measured with the money. The
use of building is measured through money by adding the name ‘Rent’. The services of
office staff is measured through money by calling name ‘Salaries’. But this concept is very
useful in Inflation Accounting.

4. Cost Concept

According to the cost concept, all the assets are recorded in books of accounts at their
original value of acquisition, i.e. at the cost of acquisition. But the book value of the assets
as recorded does not show the true worth of the asset.

For example: If the business has purchased machinery for Rs.25000 and the machinery has
working life of 5 years, then after 4 years the value of machinery will not be Rs.25,000, but
it will be less than the original value due to depreciation. The balance sheet shows the value
of assets with original value of purchase, year after year will only be misleading.

Therefore, the value of an asset is simply not recorded at its acquisition cost but it will be the
original cost of acquisition less of depreciation till date. Therefore, if an asset was purchased
at Rs.30,000 and every year the business firm charges depreciation on it at Rs.5,000 then at
the end of two years the value of the asset will be Rs.20,000 (i.e., Rs.30000 - Rs.10000,
where Rs.10000 is the depreciation for two years). Thus, according to cost concept, assets
are recorded at their original cost of acquisition less of depreciation till date.

5. Dual Aspect Concept: This concept is nothing but double entry principle. There are two
aspects in the transaction such as receiving aspect and giving aspect. Receiving aspect is
called Debit and Giving aspect is called Credit. For instance, a machinery purchased for
cash Rs.50,000. In this transaction receiving aspect is machinery and giving aspect is cash
i.e., debit for receiving benefit and credit for giving benefit. The following is the
accounting equation:

Assets = Liabilities + Capital

Assets = Outsider’s Equity + Owner’s Equity

6. Accounting Period Concept:

After establishing the business every entrepreneur is very anxious to known the net results of
their business concern. After completing one year the firm prepares final accounts.
Generally, accounting period is one year starting from 1st April to 31st March (If the firm is
following Financial Year) or from 1st January to 31st December (If the firm is following
Calendar Year).

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7. Matching Concept

The expenses which are incurred during an accounting year must match with the incomes in
the same year. When some incomes entered on Credit side of profit and loss account, the
expenses relating to should be entered on debit side of profit and loss account. Based on this
concept, the closing stock has to be taken into account. The costs and revenues whether
they are outstanding, received in advance and receivable are also taking into account.

8. Realization Concept

Revenue realization or recognition does not necessarily mean that revenue must be realized
in cash. Both cash and credit sales results in realization of revenue either immediately or at
later dates.

9. Accrual Concept

According to this concept, costs and revenues are recognized as they are incurred (whether
paid or not) or earned (whether they are received or not). For example, rent has been paid for
11months Rs.11000 and 1 month rent is due but not paid. But, the expense on rent for 12
months has been incurred. Therefore, in the books of accounts, expense on rent has to be
recorded for 12 months i.e., at Rs.12000 and the outstanding rent for 1 month Rs.1000 will
be shown on the liabilities side of the Balance Sheet.

10. Objective Evidence Concept

This concept refers all accounting transactions should be evidenced and supported by
documents such as receipts, vouchers and invoices etc., these documents are evidence for
making entries and verification of an auditor.

2. Accounting Conventions

1. Convention of Consistency

According to this convention the principles and methods could not change year by year, there is
consistency. When the firm wants to change it has to give clear note. For example, it would be
proper to value stock in trade according to one method one year and according to another method
next year. If change is necessary, the change must be stated clearly.

2. Convention of Disclosure

This convention reveals that the operations of the business should be communicated to users of
the accounting information such as proprietors, creditors, investors and others. It will be done
through the financial statements so as to make those statements all the more useful.
Hence, company’s Act, 1956 makes it compulsory to provide all the information in the
prescribed form.

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3. Convention of Conservatism

This convention strictly warns about the window dressing i.e., showing the position better than
what is actual. Based on this convention closing stock is valued at cost or market which ever is
lower. It avoids the secret reserves. It is provided adequate reserves and provisions. Hence,
Reserve for Bad and Doubtful Debts, Discount on Debtors etc., are providing.

4. Convention of Materiality

It refers to the relative importance of the information to be disclosed in the Financial Statements.
If any unimportant information is given for understanding purpose it will be shown under
footnote.

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ACCOUNTING STANDARDS

Accounting standards in India play a crucial role in ensuring transparency, consistency, and
comparability in financial reporting. These standards are guidelines or rules that govern how
financial statements should be prepared and presented, helping to create a standardized
framework for accounting practices across businesses and industries. Here are some key reasons
why accounting standards are important in India:

1. Ensuring Transparency and Accuracy:

 Consistency in Reporting: Accounting standards ensure that all companies follow the
same principles and practices when preparing financial statements. This consistency
helps in comparing the financial performance of different companies.
 Accuracy of Information: By adhering to standardized accounting principles, companies
are less likely to manipulate financial data, leading to more accurate and reliable financial
statements.

2. Enhancing Credibility and Trust:

 Investor Confidence: Investors rely on financial statements to make informed decisions.

Standardized accounting practices increase the credibility of these statements, thereby
enhancing investor confidence.
 Credibility with Creditors and Lenders: Creditors and financial institutions use
financial statements to assess a company’s creditworthiness. Adherence to accounting
standards provides assurance that the financial information is reliable, making it easier
for companies to secure financing.
3. Facilitating Comparability:

 Comparison Across Companies: Accounting standards allow for the comparison of

financial statements across different companies, regardless of their size or industry. This
comparability is essential for investors, regulators, and other stakeholders who need to
evaluate performance across different entities.
 Benchmarking: Companies can benchmark their performance against industry standards
or competitors, helping them identify strengths and weaknesses.

4. Legal and Regulatory Compliance:

 Compliance with the Companies Act, 2013: In India, companies are required to prepare
their financial statements in accordance with accounting standards notified under the
Companies Act, 2013. Compliance with these standards ensures that companies meet
their legal obligations.
 Taxation and Regulatory Reporting: Proper adherence to accounting standards is
necessary for accurate tax reporting and compliance with regulatory requirements,
reducing the risk of legal penalties and audits.

5. Facilitating Global Integration:

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 Convergence with IFRS: India has adopted Indian Accounting Standards (Ind AS),
which are largely converged with International Financial Reporting Standards (IFRS).
This alignment facilitates the integration of Indian companies into the global economy,
making it easier for them to attract foreign investment and expand internationally.
 Cross-Border Transactions: With the global convergence of accounting standards,
Indian companies can engage in cross-border transactions more efficiently, as their
financial statements are more easily understood by international stakeholders.

6. Protecting Stakeholders’ Interests:

 Protection of Minority Shareholders: Transparent and accurate financial reporting

helps protect the interests of minority shareholders by providing them with a clear view
of the company’s financial health.
 Public Trust: Standardized accounting practices contribute to the overall trust in the
financial system, which is essential for the smooth functioning of capital markets and the
economy.

7. Assisting in Decision-Making:

 Management Decisions: Accurate financial reporting based on accounting standards

provides management with reliable data to make informed business decisions, such as
budgeting, forecasting, and strategic planning.
 External Stakeholders: Investors, analysts, regulators, and other stakeholders rely on
financial statements to assess a company’s performance, make investment decisions, and
evaluate compliance with regulations.

8. Improving Financial Discipline:

 Internal Controls: Adherence to accounting standards promotes the implementation of

robust internal controls, which helps in detecting and preventing errors, fraud, and
financial mismanagement.
 Corporate Governance: By ensuring transparency and accountability, accounting
standards strengthen corporate governance practices, leading to more responsible
management of business resources.

Conclusion:

Accounting standards are vital for the integrity and efficiency of financial reporting in India.
They not only ensure that financial statements are transparent, consistent, and comparable but
also enhance the credibility of businesses, protect stakeholders, and support the overall stability
of the financial system. As India continues to integrate with the global economy, adherence to
these standards will become increasingly important for fostering investor confidence and
ensuring the smooth functioning of capital markets.
Here's a table summarizing the key Indian Accounting Standards (Ind AS) currently applicable in
India:

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STN
Ind AS Number Standard Name Description
Sets out overall requirements for the
Presentation of Financial presentation of financial statements,
Ind AS 1
Statements guidelines for their structure, and minimum
requirements for content.
Prescribes the accounting treatment for
inventories, including how to determine their
Ind AS 2 Inventories
cost and subsequent recognition as an
expense.
Requires the presentation of information
about historical changes in cash and cash
Ind AS 7 Statement of Cash Flows
equivalents through a statement of cash
flows.
Provides criteria for selecting and changing
Accounting Policies, Changes in accounting policies, and how to handle
Ind AS 8
Accounting Estimates and Errors changes in estimates and corrections of
errors.
Deals with when an entity should adjust its
Ind AS 10 Events after the Reporting Period financial statements for events after the
reporting period.
Prescribes the accounting treatment for
Ind AS 12 Income Taxes income taxes, including how to account for
current and deferred tax.
Specifies the accounting for the recognition,
Ind AS 16 Property, Plant and Equipment depreciation, and disposal of property, plant,
and equipment.
(Replaced by Ind AS 115) Previously dealt
Ind AS 18 Revenue with the principles for recognizing revenue
from sale of goods and rendering of services.
Prescribes the accounting and disclosure for
employee benefits, including short-term,
Ind AS 19 Employee Benefits
post-employment, and other long-term
benefits.
Prescribes how to include foreign currency
The Effects of Changes in Foreign
Ind AS 21 transactions and foreign operations in the
Exchange Rates
financial statements.
Specifies how to account for borrowing costs,
generally requiring capitalization of
Ind AS 23 Borrowing Costs
borrowing costs directly attributable to the
acquisition of qualifying assets.
Ind AS 24 Related Party Disclosures Requires disclosure of related party

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Ind AS Number Standard Name Description

relationships, transactions, and outstanding
balances, including commitments.
Prescribes the accounting and disclosure
requirements for investments in subsidiaries,
Ind AS 27 Separate Financial Statements
joint ventures, and associates when an entity
prepares separate financial statements.
Specifies the accounting for investments in
Investments in Associates and
Ind AS 28 associates and joint ventures, including the
Joint Ventures
use of the equity method.
Deals with the presentation of financial
Financial Instruments: instruments, distinguishing between liabilities
Ind AS 32
Presentation and equity, and when financial assets and
liabilities can be offset.
Provides guidance on the determination and
Ind AS 33 Earnings per Share
presentation of earnings per share (EPS).
Prescribes the procedures an entity applies to
Ind AS 36 Impairment of Assets ensure that its assets are carried at no more
than their recoverable amount.
Provisions, Contingent Liabilities Deals with accounting for provisions,
Ind AS 37
and Contingent Assets contingent liabilities, and contingent assets.
Prescribes the accounting treatment for
Ind AS 38 Intangible Assets intangible assets that are not dealt with
specifically in another Ind AS.
Specifies the accounting treatment for
investment property, including how to
Ind AS 40 Investment Property
measure the value of the property and the
disclosures required.
Prescribes the accounting treatment, financial
Ind AS 41 Agriculture statement presentation, and disclosures
related to agricultural activity.
First-time Adoption of Indian Provides guidance on the transition to Ind AS
Ind AS 101
Accounting Standards for the first-time adopters.
Specifies the financial reporting requirements
for share-based payment transactions,
Ind AS 102 Share-based Payment
including equity-settled, cash-settled, and
arrangements with options.
Deals with accounting for business
Ind AS 103 Business Combinations combinations, requiring the acquisition
method of accounting.
Ind AS 104 Insurance Contracts (Replaced by Ind AS 117) Previously

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Ind AS Number Standard Name Description

prescribed the accounting for insurance
contracts by any entity that issues such
contracts.
Prescribes the accounting for financial
Ind AS 109 Financial Instruments instruments, including recognition,
measurement, impairment, and hedging.
Provides guidance on preparing consolidated
Consolidated Financial
Ind AS 110 financial statements when an entity controls
Statements
one or more other entities.
Replaces Ind AS 18 and 11, providing a
Revenue from Contracts with
Ind AS 115 comprehensive framework for recognizing
Customers
revenue from contracts with customers.
Specifies the accounting for leases, requiring
Ind AS 116 Leases lessees to recognize assets and liabilities for
most leases.
Provides a comprehensive framework for the
Ind AS 117 Insurance Contracts accounting of insurance contracts, replacing
Ind AS 104.

These standards are mandatory for companies covered under the Companies (Indian Accounting
Standards) Rules, 2015, as amended, and they are periodically updated to align with global
standards and practices.

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BRANCHES OF ACCOUNTING

Based on the importance and need the accounting classified into five branches

1. Financial Accounting
2. Cost Accounting
3. Management Accounting
4. Inflation Accounting
5. Human Resource Accounting

1. Financial Accounting

The main aim to establish business concern is to earn more profits. Through financial
accounting it is possible to know profit/loss of the business concern and also know the
financial position of the firm. This accounting is also helpful to provide some more
information to the management to take decision.

2. Cost Accounting

The main importance of cost accounting is to give brief description about various costs in
manufacture of the product here, cost sheet is a document which represents various costs. It
helps in decreasing the cost of production and also fixing of selling price. Costing provides
full information to the management for decision making.

3. Management Accounting

The main aim of management accounting is furnishing the accounting relevant

information to the management. It means evaluating the different alternative solutions to
the financial problems of the firm. For instance, pricing designs, make or buy designs,
capital budgeting etc, thereby it’s very easy to take decision by the management.

4. Inflation Accounting

Day by day the rupee value has been changing. To overcome that problem and recording the
financial statements at their historical or original cost this accounting has been taken place.

5. Human Resource Accounting

Human beings are the most important to each and every organization. All human beings in an
organization are collectively known as human resources. In any firm there is no place in
financial statements especially to human beings except the words wages, salaries. Human
resource accounting concentrates on identifying and measuring data about human resources.

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CLASSIFICATION OF ACCOUNTS

Accounts are mainly classified in two categories:

I. Personal Accounts and

II. Impersonal Accounts

Again impersonal accounts are sub-divided into two. They are i. Real Accounts and ii.
Nominal Accounts. Totally accounts are Three viz., namely: 1. Personal Accounts 2. Real
Accounts and 3. Nominal Accounts.

Classification of Accounts

PERSONAL ACCOUNTS IMPERSONAL ACCOUNTS

Natural Artificial Representative

Real Accounts Nominal Accounts

Tangible Intangible Revenues Expenses

I. Personal Accounts

Personal Accounts deals with persons only. Persons [Personal Accounts] are of three
kinds namely Natural Person, Artificial person and Representative Persons. A Separate Account
is tobe maintained to each and every person which should not be repeated.

1. Natural Person: He is the person who is having head, hands, legs, thinking power, marital
status and so on.
Ex: Rama Account, Krishna Account, Ganesh Account etc.,
2. Artificial Person: The person who is specially created by Law.

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Ex: Banks, Companies, Educational Institutions and other Organizations. State Bank of India
A/c, Hindustan Liver Ltd., Mohan Babu University Account etc.,

3. Group or Representative Accounts: different persons with same nature when having the
account which is known as representative account. The persons who are involved in one account
and one head.

Ex: Salary, creditors, debtors etc., hence, Outstanding Salaries, Outstanding Expenses, Prepaid
Expenses, Income Received in Advance (un earned income), Accrued Income and so on are
representative accounts being certain group have involved in these head. Some more examples
are:

For example: Rent Outstanding, Insurance Prepaid, Interest due but not received, Commission
Received in Advance etc.,

Principle:

 Debit the Receiver

 Credit the Giver

II. Real Accounts: Real Accounts deals with Assets or Properties. Assets such as Cash, Land
and Buildings, Machinery, Furniture, Freehold Premises, Stock, Investments and Goodwill
etc., To each and every asset a separate account has tobe prepared and which should not be
repeated.

(i) Tangible Assets: Tangible assets are those assets which are possible to see and
touch.

Ex: Land and Buildings, Furniture, Machinery etc.,

(ii) Intangible Assets: Intangible Assets are those assets which are not possible to see
and touch. Ex: Goodwill, Patent Rights, Trade Marks etc.,

Principle
 Debit what Comes in
 Credit what Goes out
Transaction

Machinery Purchased for Cash Rs.50,000

In the above transaction there are two accounts namely Machinery A/c and Cash A/c
which deals with Real Account. Based on the principle, Machinery Account is debited being
machinery is coming into the business and Cash Account is credited being Cash is going out
from the business. The following is the Journal entry.

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Machinery A/c Dr 50,000
To Cash A/c 50,000

3. Nominal Accounts: Nominal Account deals with expenses, losses, incomes and gains. A
separate account has to be prepared to each and every expense, loss, income and gain which will
not be repeated.

Examples of expenses and losses

Salaries, Wages, Commission, Stationary, Rent, Interest, Depreciation, Travelling

Expenses, Postage, Telegram, Advertising, Carriage, Discount Allowed, Loss on Sale of Assets
Etc.,

Examples of incomes / Revenues and gains

Rent Received, Interest Received, Commission Received, Discount Received and Profit
on Sale of Assets etc.

Principle
 Debit all Expenses and Losses
 Credit all Incomes and Gains

Transactions
Salaries paid with cash Rs.5000

In the above transaction there are two accounts namely Salaries A/c and Cash A/c. Salaries A/c
is an expense deal by nominal A/c. Based on the principle Debit all Expenses and Losses,
Salaries Account is debited.

Cash A/c is an asset deal by Real Account. Based on the principle “Credit what goes out”,
cash A/c is credited.

Therefore, the following is the journal entry

Salaries A/c Dr 5,000
To Cash A/c 5,000

Rent Received Rs.2000

In the above transaction there are two accounts namely Rent A/C and Cash A/C. Here,
rent is income deal by Nominal Account. Based on the principle of Credit all Incomes and
Gains, rent account has been credited.

Cash A/C is an asset deal by Real Account. Based on the principle of Debit what comes
in, cash A/C is Debited. Therefore, the following is the journal entry.

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Cash A/C Dr 2,000
To Rent Received A/c 2,000

How to find out Cash and Credit Transactions

The following are the guidelines to identify whether the transaction is cash or credit.

1. When name of the person [Personal Account] is given and the word cash is not given, then it
is called credit transaction. Here, name of the person [Personal Account] has to be taken into
account.

Ex: Machinery purchased from Mohan Rao & Co. Rs.50000

2. When name of the person and the word cash both have given, then, it is called cash
transaction. Here, instead of taking name of the person cash A/c has to take into account.

Ex: Machinery purchased from Mohan Rao & Company with cash Rs. 50,000

3. When name of the person and the word cash both have not given, it is called cash transaction.

Ex: 1. Machinery Purchased Rs.50000

2. Sales Rs.20,000 and
3. Stationary Rs.2000 etc.,

IDENTIFICATION OF FORM OF GOODS / STOCK / INVENTORY

GOODS / STOCK / INVENTORY

Purchases Sales Purchase Returns / Sales Returns /

s Returns outwards Returns inwards
Goods Purchased from Avinash Rs.22,000
Purchases A/C Dr 22,000
To Avinash A/c 22,000

Goods Sold to Abhinav Rs.55,000

Adbhinav A/C 55,000
Dr 55,000
To Sales A/c

Goods returned to Avinash Rs.2,000

Avinash A/C Dr 2,000
To Purchase Returns / Returns Outwards A/c 2,000

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Goods returned by Abhinav Rs.5,000
Sales Returns / Returns Inwards A/C Dr 5,000
To Abhinav A/c 5,000

Capital / Drawings
Avinash commenced business with Cash Rs.100000
Cash A/C Dr 1,00,000
To Capital A/c 1,00,000

Mukesh started business with cash Rs.200000

Cash A/C Dr 2,00,000
To Capital A/c 2,00,000

Ambarish brought to the business cash Rs.300000

Cash A/C Dr 3,00,000
To Capital A/c 3,00,000

DRAWINGS

There are two kinds of drawings. They are cash and goods drawings.

Cash Drawings: If the proprietor withdrawn cash for his/her personal purpose which is
known as cash drawings. Ex: i. Cash withdrawn for personal use. ii. Cash used for
payment of son / daughter college / school fee.

Goods Drawings: When goods drawn for personal use which is known as goods
drawings.

In these two cases ‘drawings account’ is debited. Drawings Account is a personal

Account, debit the receiver is the principle. Cash and goods are the assets. Credit what goes
out is the principle. Cash Account and Goods Account [form of the goods] correspondingly
credited. Being both are goes out.

Cash / Goods Drawings

Proprietor drawn cash for his personal use Rs.5000

Drawings A/C Dr 5,000
To Cash A/c 5,000

Proprietor drawn cash from office for payment of daughter college fee Rs.10000
Drawings A/C Dr 1,00,000
To Cash A/c 1,00,000

Proprietor drawn goods for his personal use worth Rs.1000

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Drawings A/C Dr 1,00,000
To Purchases A/c 1,00,000

Bad Debts

Irrecoverable amount from the insolvent is called bad debts.

Mr. Karthik due to the firm 12000 and he became insolvent, 50 paise in a rupee has been
collected from his estate.

Cash A/C Dr 6,000

Bad Debts A/C Dr 6,000
To Karthik A/c 12000

Mr.Karthik has paid Rs.6000 which was treated as bad debts in earlier.
Cash A/C Dr 6,000
To Bad Debts Recovery A/C 6000

Compound Entry

In compound entry more than two accounts may be affected, such as:

i. Only one account should be affected either debit or credit [Single

compound entry]
ii. Several accounts should be affected either debit or credit. [Double
compound entry].
In any compound entry the a sum of debit must equal to sum of credit

Examples: (Single Compound Entry)

A business concern pays Wages Rs.3000, Salaries Rs.6000, Rent Rs.2000 and Electricity
Charges Rs.5000 on 31st December, 2018.
Date Particulars L.F. Debit Credit
2018 Wages A/C Dr. 3000
Dec. Salaries A/C Dr. 6000
st
31 Rent A/C Dr. 2000
Electricity Charges Account Dr. 5000
To Cash A/C 16000

Double Compound Entry

Opening Entry

In the beginning of the accounting period each and every enterprise shall have to enter the
transaction in the new books of account.

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With the help of opening entry the previous year closing balances of concerned accounts should
be recorded.

Principle

 Debit all Assets

 Credit all Liabilities

The difference between Assets and Liabilities shall be credited to “Capital Account”

On January, 2021 Mr.Saketh Started business with Cash Rs.200000, Machinery Rs.50000,
Furniture Rs.30000, Investments Rs.10000, Stock Rs.20000, Creditors Rs.10000.
Date Particulars L. Debit Credit
F.
2021 Cash Account Dr. 200000
Dec. Machinery Account Dr. 50000
st
31 Furniture Account Dr. 30000
Investments Account Dr. 10000
Stock Account Dr. 20000
To Creditors Account 10000
To Capital Account 300000

Trade Discount

Trade Discount is the reduction from the list price of goods or services on business
considerations [large quantity purchased, trade practices, previous acquaintances etc.,]. It is not
granted because of prompt payment.

Cash Discount

Cash discount is the reduction granted by the supplier from the invoice price in consideration of
payment within a stipulated period of time.

In some cases, cash discount is given by the creditor for making prompt payment.
Similarly, the discount is given to debtors for making the prompt payment. If it is allowed, it
represents business expenses and if it is availed, it represents business income. The following
example will explain this:

1. Received Rs.1800 from Akhil in full settlement of his account of Rs. 2000.
Cash A/C Dr 1,800
Discount Allowed A/C Dr 200
To Akhil A/c 2,000

2. Paid Rs.1950 to Suman in full settlement against the amount due to him Rs.2000.

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Suman A/C Dr 1,950
To Discount Received A/C 50
To Cash A/c 2,000

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JOURNAL

The word ‘Journal’ is derived from the French word ‘Jour’ which means a day. The day
to day transactions are recorded in Journal in a chronological order. It is the book of Original
Entry because all transactions are recorded in this book. In other words, it is also called book of
Prime Entry. The process of recording the transactions in the journal is called journalizing. The
following is the proforma of a journal.

Proforma of a Journal
Date Particulars L.F. Debit Credit
No.

1. Date Colum: In this column transaction date will be recorded. The procedure to enter the
date is; year, month, date respectively. Ex: 2015, January 1 st.

2. Particulars Column: Entries may be entered along with narration in this column. After
completing the narration then draw the line in between particulars column only.

3. L.F.Column: In this, Leger Folio No. (Page No.) Will be entered. If it is not available simply
put dash mark.

4. Debit Column: The debited entry amount will be entered in this column.

5. Credit Column: The credited entry amount will be entered in this column.

Prepare journal to the following transactions in the books of Sreenivas Charan.

2008 January

1st Mr. Sreenivas Charan commenced business with cash Rs.5,00,000

On Jan 4th Purchased Machinery for cash Rs 50,000
On Jan 10th Purchased Goods for cash Rs 20,000
15th Deposited cash in the bank Rs. 50,000

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Journal Entries in the books of Srinivas Charan
Date Particulars L.F. Debit Credit
No.
2008 Cash A/C Dr 5,00,000
Jan. To Capital A/C 5,00,000
1st (Being Capital brought by the owner)
4th Machinery A/C Dr 50,000
To Cash A/C 50,000
(Being Machinery purchased for cash)
10th Purchases A/C Dr 20,000
To Cash A/C 20,000
(Being goods purchased for cash)
15th Bank A/C Dr 50,000
To Cash A/C 50,000
(Being cash deposited in the bank)

2. On 1st January, 2013 Mr.Mukesh started business with cash Rs.100000

Jan. 4th Deposited Rs.20000 in the bank

Jan 8th Goods purchased from Avinash Rs.25000
Jan. 14th Goods sold to Abhiram Rs.50000
Jan. 25th A machinery purchased for Rs.20000
Jan.30th Furniture purchased from Rao and Co. Rs.15000
Jan 31st Salaries paid Rs.10000

From the above transactions prepare Journal of Mukesh

3. From the given below prepare journal

On 1st February, 2013 Mr.Kiran started Business with Cash Rs.200000

Feb 5th Deposited in the Bank Rs.40000
Feb. 12th Purchased goods from Agarwal worth Rs.15000
Feb. 18th Sold goods to Raghava worth Rs.80000
Feb. 22nd Purchased Machinery from Kanna and Co. Rs.60000
Feb. 28th Wages paid Rs.50000
Feb.28th Salaries paid Rs.15000
4. Journalise the following transactions in the books of Srikar.

On 1st January 2012 Srikar started business with cash Rs.100000, Plant and Machinery 50000,
Stock 20000 and furniture Rs.30000
3rd Deposited cash in the Bank Rs.20000
10th Purchases Rs.50000
15th Sales Rs. 30000
18th A machinery purchased from Yashvanth and Co. Rs.10000
24th Goods Purchased from Heera Lal worth Rs.20000

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29th goods sold to Aravind Valia woth Rs.40000
31st Salaries paid by Cheque Rs.5000

5. Prepare Journal of Avinash from the following Transactions

1st March, 2013 started business with Rs.500000

1st Purchased machinery Rs.40000
5th Purchased goods on credit from Sharma Rs.25000
8th Sold Goods Rs.35000
10th Purchased goods from Abinav for cash Rs.10000
12th Deposited into Bank Rs.25000
14th Purchased goods from Sudheer Rs.15000
16th Withdrew cash for personal use Rs.2000
18th Sold goods to Ram Rs.75000
20th Paid Rent Rs.2000
25th Received Commission Rs.5000
26th Sold goods to Surekha Rs.15000
27th Received cash from Ram 75000
28th Borrowed money from Venkat Rs.20000
29th Paid interest on loan Rs.1500
30th Outstanding salary Rs.1000
31st Goods withdrew for personal use Rs.2500

6. Prepare Journal to the following transactions in the books of Sripathy

April 1st 2013 commenced business with cash Rs.1000000

3rd Purchased Machinery for Rs.100000
5th Purchased Furniture for Rs.5000
7th Deposited in the bank Rs.50000
10th Goods purchased from Rama Rs.58000
11th Goods sold to Krishna Rs.100000
15th Cash paid to Ram Rs.58000
18th cash received from Krishna Rs.100000
20th Borrowed money from Lakshmi Rs.50000
22nd Wages outstanding Rs.5000
25th Interest paid on loan Rs.2000
26th Goods purchased from Lahari for cash Rs.28000
27th Goods sold to Hari for cash 35000
28th Cash draw for personal use from bank Rs.5000
29th Goods withdrawn Rs.2000 for personal use
30th Cash drawn from bank for payment of Son’s College Fee Rs.2000
30th Salaries paid by cash Rs.15000

7. Journalise the following transactions in the books of Sri Hari

2013 Jan. 1st commenced business with 50000

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2nd Goods purchased for cash 20000
3rd paid freight 2000
th
7 Goods sold Rajanikanth 13000
8th Paid for stationary 1000
th
9 Paid for rent 5000
10th Cash received from Mohan Das 15400
Allowed him discount 600
17th Paid premium 4000
19th Paid postage 100
20th Rakesh was declared insolvent, fifty paise in a rupee
was received from his estate, total debt being Rs.10000
th
29 Paid for salaries 8000

8. Journalise the following transactions in the books of Chintu

2013 Jan 2nd Started business with Rs.8000

3rd Bought furniture for Rs.1200
6th Bought stationary for Rs.50
7th Purchased goods for cash at Rs.2000
9th Sold goods for cash worth Rs.500
11th Sold to R Desai goods worth Rs.1000
14th Bought goods from Mundra Bros. at Rs.800
18th Paid Office clearing charges of Rs.15
20th Bought goods from Hari worth Rs.1000
22nd Sold to Sharma and Co. goods worth Rs.600
24th Received from R Desai Rs.500
25th Paid to Hari Rs.900
28th Bought typewriter for Rs.800
31st Paid rent of house Rs.75
31st Paid light charges of Rs.50
31st Paid salary amounting to Rs.50
31st Received commission of Rs.150

9. Journalise the following transations in the books of Yashaswini

2013 Jan 1st Yashaswini started business with cash 10000

2nd paid into bank 6000
rd
3 Bought goods from Mohan on credit 2000
4th Purchased Furniture 200
th
5 Purchased additions to Machinery 800
6th Purchased typewriter 800
6th Paid for postage 15
th
7 Sold goods for cash 400
9th Sold goods on credit to Keerthi and Co. 1000
15th Paid to Mohan 1950
Discount allowed by him 50

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25th Sold goods to Roy and Co. 560
26th Received cheque from Keerthi and co. in full settlement of amount due from her
975
31st Paid for electric charge 100
st
31 Paid rent by cheque 200

10. Journalise the following transactions in the books of Shankar & Co.
1998 Rs.
June 1 Started business with a capital of 60,000
June 2 Paid into bank 30,000
June
4 Purchased goods from Kamal on credit 10,000

June 6 Paid to Shiram 4,920

June 6 Discount allowed by him 80
June 8 Cash Sales 20,000
June 12 Sold to Hameed 5,000
June 1 Purchased goods from Bharat on credit 7,500
June 518 Paid Salaries 4,000
June 20 Received from Prem 2,480
June 20 Allowed him discount 20
June 25 Withdrew from bank for office use 5,000
June 28 Withdraw for personal use 1,000
June 30 Paid Hanif by cheque 3,000
11. Journalise the following transactions in the books of Sumit

2008 Jan. 1st Sumit started business with cash 10000

2nd Paid into bank 6000
3rd Bought goods from Mohan on credit 2000
4th Purchased furniture 200
Purchased adding machine 800
Purchased typewriter 600
6th paid for postage 15
8th Sold goods for cash 400
9th Sold goods on credit Madan & Co 1000
15th Paid to Mohan 1950
Discount allowed by them 50
th
25 Sold goods to Ray and Co 560
26th Received cheque from Madan and Co.
in full settlement of amount due from it 975
st
31 Paid for electric charge 10
Paid rent by cheque 200

12. Journalise the following in the books of Saketh

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2016 August, 1st Commenced Business with cash Rs.50000, Goods Rs.30000
and Furniture 20000
12th Purchased goods from Anurag Rs.20000 and paid cash Rs.10000
15th Goods returned to Anuran Rs.5000
18th Sold Goods to Deepak Rs.60000 and cash received Rs.40000
24th Deepak returned goods Rs.2500

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LEDGER

The main limitation of Journal is that particular person will not get readily information at
a time. For example, Mr.Krishna comes to the enterprise and wants to know about how much of
amount due to the firm or due by the firm on a particular date which is not possible to say
immediately by the firm accounts manager. Hence, the preparation of ledger A/C
(Krishna A/c) is needed, If Krishna A/C is available with the accountant he can easily say how
much due to him and due by him to the enterprise.

A ledger is a book which contains various accounts. It may be defined as the book of
Final Entry, All the transactions relating to a particular account are brought together and
recorded at one place.

“A ledger Account may be defined as ‘a summary statement of all

transactions relating to a person, asset, expense or income which have
taken place during a given period of time and shows their net effect”

The process of entering the transactions from Journal to ledger is called ‘posting’.

ACCOUNT

Each and every account is divided into two equal parts by vertical line (like ‘T’ shape).
The left hand side is called ‘Debit Side’ and right hand side is called ‘Credit Side’. The
following is the proforma of an Account.

ACCOUNT
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
No. No.

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Guide lines for preparation of an Account

The following are the few guide lines to prepare an account.

1. Draw a separate account to each and every Person / Asset / Expense / Income etc., but
it should not be repeated the same once again.
2. On left hand side top corner write Dr and on right-hand side top corner write Cr
3. ‘To’ is prefix on Debit side
4. ‘By’ is prefix on Credit side

Procedure to posting the entries: The following is the Journal entry how it may be posting into
the ledger let us see.

Machinery A/c Dr 10000

To Cash A/c 10000

In the above example Machinery A/c is debited. In ledger posting:

 Go to Machinery A/c debit side enter the date in date column and write credit entry as
“To Cash A/C” [the entry which is opposite to debit entry] in particulars column and
enter the amount in respective amount column.

In the above entry cash account is credited. In ledger posting:

 Go to Cash A/c credit side enter the date in date column and write debit entry as ‘By
Machinery A/c’ [which is opposite to credit entry] in particulars column and enter the
amount in respective amount column.

Balancing of an Account: - The following procedure generally followed to balance the account.

 Find out the sum of either columns i.e., debit side and credit side.
 Take into account of highest amount and the same has to show either side.
 Find out the difference the difference amount in lesser side.
 Enter the difference amount on lesser side and write in particulars column as ‘To
Balance C/d’ on debit side or ‘By Balance c/d’ on the credit side of an account.

Write date to the Balance C/d in date column [most probably the last date of the month for
example 31st March, 2015]

The same c/d balance is brought forward B/d to the next month by entering 1 st of the next month
i.e. 1st April 2015 as ‘To Balance B/d’.

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Machinery Account
Dr Cr
Date Particulars Amount Date Particulars Amount
2008 To Cash A/C 10000 2008 By Balance c/d 10000
Jan. Jan.
10th 31st
10000 10000
Feb To Balance b/d 10000
1st

Cash Account
Dr Cr
Date Particulars Amount Date Particulars Amount
2008 To Balance c/d 10000 2008 By Machinery A/C 10000
31st Jan
Jan 1st

10000 10000
Feb By Balance B/d 10000
1st

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LEDGER PROBLEMS

1. From the following transactions prepare Journal and Ledger in the books of Anand

Jan 1st 2013 Anand started business with Cash Rs.100000

4th Deposited in the bank Rs.5000
10th Machinery Purchased Rs.20000
14th Purchases Rs.10000
18th Sales Rs.40000
22nd Paid Rent Rs..500
31st Paid Wages 50000
31st Paid Salaries by cheque Rs.2000

2. From the following prepare ledger

Sept. 1st 2013 Raghava started business with cash Rs.200000 and
deposited in the bank Rs.50000
th
4 purchased Plant and Machinery and given a cheue Rs.20000
5th Furniture purchased Rs.5000
10th Stationery Purchased Rs.1000
15th Purchased goods for Rs.5000
20th Goods sold for Rs.10000
30th Rent and Salaries paid by cheque Rs.2000 and 5000 respectively.

2. Prepare Journal and Ledger to the following transactions

2013 April, 1st Gopal started business Rs.100000

1st Purchased goods from Bhagath 5000
3rd Sale of goods for cash Rs.1500
5th Purchased goods by cash 2000
6th Sale of goods to Charan 4000
7th Purchased goods from Tagoe for cash 3000
8th Sale of goods to Eswar for cash 2500
9th purchases 1500
10th sales 1000
12th purchase of Furniture 2000
14th purchase of stationary on credit from Sowmya 1000
17th Office rent paid 500
18th Commission received from Girish 200
19th Amount received from Charan’s Account 3000
25th Amount paid to Bhagath towards his account Rs.4000
29th Sale of old Machinery for Cash 3000
31st Paid salaries 6000

3. From the following transactions prepare Journal, ledger and trial balance in the books of
Mukesh

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2014 March 1st Started business with 100000
2nd Sold goods to Adi on credit 43000
6th Sold goods to Anand for cash 50000
8th Commission received 500
14th Goods returned by Adi 1000
16th Purchased goods from Mohan on credit 20000
19th Purchased goods from Madan for Cash 24000
20th Stationery purchased 750
21st Goods returned to Mohan 3000
22nd Paid cash to Mohan 17000
23rd Purchased goods for cash 6000
31st Salaries Paid 3000
31st Wages 2000
31st Electricity Expenses 1000

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TRIAL BALANCE

The totals of debit and credit must agree being ours is a double entry system. The
statement which shows all ledger balances of both debit and credit is called Trail Balance.
Generally, it will prepare at the end of the year to know the accounting accuracy. If trial balance
does not agree the accountant has to think that something mistake happened in the process of
journalizing or in posting.

The preparation of Trail Balance is the first step to prepare financial accounts. If Trial
Balance is not agreed, the balance temporally transfers to suspense A/c and starts the preparation
of final accounts process. After completion of preparation of final accounts, the accountant has
to trace out where mistakes have taken place.

Definitions

“A trial Balance is a list of all the balances standing on the ledger

accounts and cash book of concern at any given date”
- Spicer and Pegler

“A trial Balance is a statement of debit and credit balance extracted from

the ledger with a view to testing the arithmetical accuracy of the books”
- J.R.Batliboi

“Trail balance is a statement containing the balances of all ledger

accounts, as at any given date, arranged in the form of debit and credit
columns placed side by side and prepared with the object of checking
the arithmetical accuracy of ledger postings”.
M.S. Gosav

Methods of Trial Balance: popularly there are two methods in preparation of Trial Balance.
They are;

1. Total Method
2. Balance Method

1. Total Method: In this method the totals of debit and credit side balances of an account should
enter in Trial Balance but not closing balance of an account.

2. Balance Method: In this method only closing balances of an account should only taken into
an account.

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The following are the guide lines to prepare Trial Balance

Debit Side:

 All Assets, expenses, losses, opening stock, purchases, sales returns,

drawings, prepaid expenses and cash and bank balance have to show on debit
side of Trial Balance.

Credit Side:

 All Liabilities, incomes, gains, capital, Reserve for Bad and Doubtful Debts
or any Reserve, Purchase Returns. Outstanding expenses have to be shown on
credit side of Trial Balance.

OBJECTIVES OF PREPARING A TRAIL BALANCE

(i) It gives the balances of all the accounts of the ledger. The balance of any
account can be found from a glance from the trail balance without going
through the pages of the ledger.

(ii) It is a check on the accuracy of posting. If the trail balance agrees, it proves:

(a) That both the aspects of each transaction are recorded a n d

(b) That the books are arithmetically accurate.

(iii) It facilitates the preparation of profit and loss account and the balance sheet.

(iv) Important conclusions can be derived by comparing the balances of two or more
than two years with the help of trail balances of those years.

FEATURES OF TRAIL BALANCES

The following are the important features of a trail balance:

(i) A trail balance is prepared as on a specified date.

(ii) It contains a list of all ledger account including cash account.

(iii) It may be prepared with the balances or totals of Ledger accounts.

(iv) Total of the debit and credit amount columns of the trail balance must agree.

(v) It the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate.

(vi) Difference i n the debit and credit columns points out that some mistakes have

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been committed.

(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts.

LIMITATIONS OF TRAIL BALANCE

The following are the important limitations of trail balances:

i. The trail balance can be prepared only in those concerns where double entry system of
book- keeping is adopted. This system is too costly.

ii. A trail balance is not a conclusive proof of the arithmetical accuracy of the books of
account. It the trail balance agrees, it does not mean that now there are
absolutely no errors in books. On the other hand, some errors are not disclosed by the
trail balance.

iii. If the trail balance is wrong, the subsequent preparation of Trading, P&L
Account and Balance Sheet will not reflect the true picture of the concern

Trial balance disclosed some of the errors and does not disclosed some other errors. This is
given below.

A) Trial Balance disclosed by the Errors

i) Wrong totaling of subsidiary books

ii) Posting of an amount on the wrong side iii) Omission to post an amount into
ledger
iv) Double posting or omission of posting
v) Posting wrong amount
vi) Error in balancing

B) Trail Balance not disclosed by the Errors

i) Error of principle ii) Error of omission iii) Errors of Commission iv) Recording
wrong amount in the books of original entry v) Compensating errors.

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Problem 1

Prepare a Trial Balance from the following balances:

Account Debit (₹) Credit (₹)
Capital 30,000
Machinery 20,000
Cash 5,000
Purchases 15,000
Sales 25,000
Salaries 6,000
Rent 4,000
Solution:
Trial Balance as of [Date]
Account Debit (₹) Credit (₹)
Capital 30,000
Machinery 20,000
Cash 5,000
Purchases 15,000
Sales 25,000
Salaries 6,000
Rent 4,000
Total 50,000 50,000

Problem 2

Prepare a Trial Balance from the following balances:

Account Debit (₹) Credit (₹)

Capital 50,000
Furniture 20,000
Cash 10,000
Purchases 40,000
Sales 75,000
Rent 8,000
Wages 7,000
Solution:
Trial Balance as of [Date]

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Account Debit (₹) Credit (₹)

Capital 50,000
Furniture 20,000
Cash 10,000
Purchases 40,000
Sales 75,000
Rent 8,000
Wages 7,000
Total 85,000 85,000

Problem 3

The following balances are extracted from the books of a business:

Account Debit (₹) Credit (₹)
Capital 80,000
Cash in Hand 10,000
Debtors 20,000
Creditors 15,000
Sales 90,000
Purchases 65,000
Salaries 12,000
Rent 8,000
Furniture 10,000
Solution:
Trial Balance as of [Date]
Account Debit (₹) Credit (₹)
Capital 80,000
Cash in Hand 10,000
Debtors 20,000
Creditors 15,000
Sales 90,000
Purchases 65,000
Salaries 12,000
Rent 8,000
Furniture 10,000

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Account Debit (₹) Credit (₹)

Total 125,000 125,000

Problem 4

Prepare a Trial Balance from the following balances:

Account Debit (₹) Credit (₹)

Capital 100,000

Cash 5,000

Bank 20,000

Purchases 60,000

Sales 120,000

Salaries 30,000

Rent 10,000

Solution:

Trial Balance as of [Date]

Account Debit (₹) Credit (₹)

Capital 100,000

Cash 5,000

Bank 20,000

Purchases 60,000

Sales 120,000

Salaries 30,000

Rent 10,000

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Account Debit (₹) Credit (₹)

Total 125,000 125,000

Problem 5

Prepare a Trial Balance from the following balances:

Account Debit (₹) Credit (₹)

Capital 150,000

Stock 20,000

Purchases 70,000

Sales 140,000

Salaries 25,000

Rent 15,000

Creditors 10,000

Bank 20,000

Solution:

Trial Balance as of [Date]

Account Debit (₹) Credit (₹)

Capital 150,000

Stock 20,000

Purchases 70,000

Sales 140,000

Salaries 25,000

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Account Debit (₹) Credit (₹)

Rent 15,000

Creditors 10,000

Bank 20,000

Total 150,000 150,000

Key Points:

 The debit side and credit side totals of the Trial Balance must always match.
 Debits typically include assets and expenses.
 Credits typically include liabilities, equity, and revenue.
These simple problems provide a basic understanding of how a trial balance is prepared.

6. Prepare a trial balance:

Capital 1,00,000 Drawings 30,000 Goodwill 80,000 Premises 20,000 Bank overdraft 30,000
Purchases 60,000 Returns outward 10,000 Sales 60,000 Interest on fixed deposit 3,000, Returns
inward 10,000 Carriage Inward 5,000 Freight outward 10,000, Bad debt recovered 15,000
Interest on bank overdraft 3,000

7. Prepare Trial Balance from the following balances extracted from the books of S.Ganguly
as on 31.3.2020.
Wages: Rs.500; Delivery Van: 1,00,000; Return Inward: Rs.2,500 Capital A/c: Rs.1,50,000;
Salaries: Rs.25,000; Sales: Rs.45,000; Carriage Inward: Rs.1,700; Cash in hand: Rs.3,000;
Repairing charges: Rs.12,500; Trade payables: Rs. 6,000; Bank Loan: Rs.50,000; Machinery:
Rs.70,000; Purchases: Rs.30,000; Discount Allowed: Rs.600; Purchase Return A/c: 2,500;
Commission received A/c: 7,000; Sundry Debtors: Rs.9,000. Carriage outward: Rs.3,500; Bad
Debt Recovered A/c: Rs.1,300; Advertisement a/c: Rs.3,500.

8. Following are the balances extracted from Mr. Rohit Kohli, prepare a trial Balance as on
31.3.2020.

Capital: Rs.85,000; Purchases: Rs.1,04,000; Trade receivables: Rs.18,550; Building: Rs.62,000;

Sales: Rs.1,49,000; Stock on 1.4.2019: Rs.25,000; Rent: Rs.3,900; Carriage outward: Rs.650;
Cash at bank: Rs.1,560; Bad debt: Rs.780; Return outward: Rs.8.900; Drawings: Rs.7,950; Bills
Payable: Rs.8,300; Return inward: Rs.5,000; Prepaid salary: Rs.360; Furniture: Rs.15,600;
Cash: Rs.390; Wages: Rs.5,830; Carriage inward: Rs.260; Outstanding Rent: Rs.2,990;
Insurance: Rs.2,100; Audit fees: Rs.260.
9. Prepare a Trial Balance on 31.03.2020 from the following balances:

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Purchase 10,000; Investment 20,000; Bank overdraft 700; Goodwill 7,500; Return inward1,000;
Rent outstanding 4,000; Book Debts 3,000; Bad debt Recovered 2000; Sales15,000; Prepaid
Insurance 3,500; Rent from tenant800; Reserve Fund 3000; Carriage inward 500; Capital 25,000;
Loan Advanced 2,000.
10.Prepare a trial balance from the following and calculate the amount of opening stock A/c:
Machinery- Rs.9,000; Accounts payable: Rs.2,000; Capital Rs.20,000; Depreciation: Rs.900;
Trade Receivables: Rs.6,000; Sales: Rs. 14,000; Accrued Commission: Rs.1,000; Provision for
bad and doubtful debt Rs.300; Purchases- Rs.7,000; Bank deposit- Rs.2,500; Interest on bank
deposit: Rs.200; Rent received in advance: Rs.1,400.

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FINAL ACCOUNTS

At the end of each and every year the owner of the firm is very anxious whether started
firm earning profit or loss, if it is suffering due to loss what are the reasons and what steps that
the firm has to take to overcome from the losses. It is the duty of the proprietor to know the
financial position of the firm. To know all these the accountant could prepare final accounts
such as Trading and Profit and loss A/C and Balance Sheet.

Trading and Profit and Loss A/c

The accountant prepares two accounts under this head namely Trading A/c and Profit
Loss A/c. Trading account prepares towards to know the Gross Profit. If the concern is
manufacturing concern this account prepares to know the cost of goods sold. When credit side
total is more than debit side the difference is called Gross Profit. If debit side total is more than
credit side the difference is called Gross Loss. This gross Profit/Loss is brought forward to the
next account called Profit and Loss A/C.

Profit & Loss A/c

This account prepared by the accountant to know the net results of the firm popularly
known as net profit/net loss. All Indirect expenses and losses show on debit side and all Incomes
and gains show on credit. If credit side total is more than debit side total the difference is called
‘Net Profit’ if debit side total is more than credit side the difference is called ‘Net Loss’. This
net result net profit/net loss transfer to Capital Account. If it is net profit will be added to the
capital and Loss deducted from capital in the balance sheet on liabilities side.

Proforma of trading and P&L A/c has been presented here under

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Venkat’s
Trading and Profit and Loss of A/C as on 31st December, xxxx
Particulars Amount Particulars Amount

To opening stock xxx By sales xxx

(-) Returns xx xxx
To purchases xxx
(-)Returns xx By Closing Stock xxx
xxx
(-)Goods drawings xx xxx By Loss of Stock by Fire (Total Loss) xxx

To wages or productive wages xx

To Carriage/Cartage/ xx
Carriage on purchases/
Freight/carriage inwards
To Wages & salaries xx
To Import duty xx
To Excise Duty / Customs Duty xx
To Dock dues xxx
To Factory expenses xxx
To Motive power xxx
To Coal Gas & Water xxx
To Fuel & Power etc., xxx By Gross Loss
To Manufacturing Expenses xx (Transfer to profit & loss A/C) xxxx
To All Direct expenses xx
To Octroi xxx
To Royalties xxx
To Gross Profit c/d xxx -----
----- xxx
xxx

xx By Gross Profit b/d xxx

To Gross Loss B/d xx By Discount Received xx
To Salaries xx By Interest received xx
To Salaries & Wages xx By RBD (old-new) xx
To Rent, Rates & Taxes xx By Interest on drawings xx
To Printing & Stationery xx By Dividends received xx
To Un productive wages xx By Apprentice premium xx
To Insurance xx By Profit on sale of Assets xx
To General expenses xx
To Selling expenses xx
To Carriage outwards xx
To Distribution expenses xx
To Advertisements xx
To Bad debts xx
To Repairs xx
To Depreciation on Fixed Assets xx
To Reserve for Bad & Doubtful Debts (RBD) xx
(New-Old) xx By Net Loss (Transfer to capital A/c) xxx
To Interest on Capital xx
To Interest on Loans xx
To Discount Allowed xx
To Postage & Telegram xx
To Telephone xx
To Electricity Charges xx
To Travelling Expenses xx
To Commission xx
To Commission on Sales xx
To Package Charges xx
To Godown Expenses xx
To Free Samples xxx
To Trade Expenses xxx
To Loss on Sale of Assets xxx
To Discount Allowed xxx
To Discount on Debtors xxx
To Transfer to Reserve / General Reserve xxx
To Provisions xxx
To Net Profit xxx
-------- --------
{ Transfer to Capital A/c} xxxx xxxx
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BALANCE SHEET

After preparing Trading and Profit and Loss Account the next step is the preparation of
Balance Sheet. Balance sheet is a statement represents the financial position of a firm or the
owner of the concern on a particular date.

Definition

“A Balance sheet is an item wise list of Assets, Liabilities and

proprietorship of a business at certain date”
- Fruman

“Balance sheet is a ‘Classified summary’ of the ledger balances

remaining after closing all revenue items into the profit and loss
account.”
- Cropper

“Balance sheet is a screen picture of the financial position of a

going business concern at a certain moment”
- Francis

Balance sheet is divided into two parts. On left hand side liabilities and on right hand
side Assets. The totals of both Assets and Liabilities must be agreed. A proforma of a Balance
Sheet has been provided for understanding purpose.

CLASSIFICATION OF ASSETS AND LIABILITIES

A clear and correct understanding of the basic divisions of the assets and
liabilities and the meanings which they signify and the amounts which they represent is
very essential for a proper perspective of financial position of a business concern. Assets
and liabilities are classified under the following major headings.

Assets:

Assets are properties o f business. They are classified on the basis of their nature.
Different types of assets are as under:

(i) Fixed Assets: Fixed assets are the assets which are acquired and held permanently
and used in the business with the objective of making profits. Land and building, Plant and
machinery, Furniture and Fixtures are examples of fixed assets.

(ii) Current Assets: The assets of the business in the form of cash, debtors bank balances,
bill receivable and stock are called current assets as they can be realised within an
operating cycle of one year to discharge liabilities.

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(iii) Tangible Assets: Tangible assets have definite physical shape or identity and existence;
they can be seen, felt, and have volume such as land, cash, stock etc. Thus tangible assets
can be both fixed assets and current assets.

(iv) Intangible Assets: The assets which have no physical shape which cannot be seen
or felt but have value are called intangible assets. Goodwill, Patents, Trade Marks and
Licenses are examples of intangible assets. They are usually classified under fixed assets.

(v) Fictitious Assets: Fictitious asset s are not real assets. Past accumulated losses or
expenses which are capitalised for the time being, expenses for promotion of
organizations (preliminary expenses), discount on issue of shares, debit balance of profit
and loss account etc. are the examples of fictitious assets.

(vi) Wasting Assets: These assets are also called depleting assets. Assets such as mines,
Timber forests, quarries etc. which become exhausted in value by way of excavation of
the minerals, cutting of wood etc. are known as wasting assets. Such assets are usually
natural resources with physical limitations.

(vii) Contingent Assets: Contingent assets are assets, the existence, value possession of
which is based on happening or otherwise of specific events. For example, if a
business firm has filed a suit for a particular property now in possession of other persons,
the firm will get the property if the suit is decided in its favour. Till the suit is decided, it is
a contingent asset.

LIABILITIES

A liability is an amount which a business firm is ‘liable to pay’ legally. All the
amounts which are claims by outsiders on the assets of the business are known as liabilities.
They are credit balances in the ledger. Liabilities are classified into four categories as
given below.

(1) Owner's Capital: Capital is the amount contributed by the owners of the business. In
addition to initial capital introduced, proprietors may introduce additional capital and
withdraw some amounts from business over a period of time. Owner’s capital is also
called ‘net worth’ Net worth is the total fund of proprietors on a particulars
date. It consists of capital, profits and interest on capital subject to
eduction of drawings and interest on drawings.

In case of limited companies, capital refers to capital subscribed by

shareholders. Networth refers to paid up equity capital plus reserves and profits, minus
losses.

(2) Long term Liabilities: Liabilities repayable after specific duration of long period

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of time are called long term liabilities. They do not become due for payment in the
ordinary ‘operating cycle’ of business or within a short period of lime. Examples are long
term loans and debentures. Long term liabilities may be secured or unsecured, though usually
they are secured.

(3) Current liabilities: Liabilities which are repayable during the operating cycle of
business, usually within a year, are called short term liabilities or current liabilities.
They are paid out of current assets or by the creation of other current liabilities.
Examples of current liabilities are trade creditors, bills payable, outstanding expenses, bank
overdraft, taxes payable and dividends payable

(4) Contingent liabilities: Contingent liabilities will result into liabilities only if certain
events happen. Examples are:

Bills discounted and endorsed which may be dishonoured, unpaid calls on investments.

Classification of Assets and Liabilities

Assets: Assets have been classified into four Fixed Assets, Current Assets and Intangible and
Fictitious Assets

1. Fixed Assets: Fixed Assets are those assets which are useful for series of years.
Ex: Land and Buildings, plant & machinery, furniture etc,

2. Current Assets: Current Assets are those assets which are converted into cash during an
accounting year.
Ex: cash in hand, cash at bank, short term investments, bills receivables, sundry debtors, closing
stock , prepaid expenses etc.,

Intangible and Fictitious Assets: Intangible and fictitious assets are those assets which are not
visible. The examples of intangible and fictitious assets are Goodwill, Trade Marks, Copy
Rights etc., 2. Preliminary Expenses, Discount on Issue of Shares and Debentures etc.,

Liabilities

Liabilities are the obligations or debts payable by the enterprise in future in the form of money or
goods. Liabilities can be classified as: a) Fixed Liabilities / Long term Liabilities, b) Current
Liabilities and c) Contingent Liabilities.

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Performa of Balance Sheet
Mr.Venkat’s
Balance Sheet as at 31st December, 2015
LIABILITIES Amount ASSETS Amount
Bills Payable Xx Cash in Hand xx
Sundry Creditors Xx Cash at Bank xx
Loans Xx Investments xxx
Outstanding Expenses Xx Bills receivables xxx
An income received in Xx Sundry Debtors xxx
advance Less: Bad debts xx
Bank Over Draft (OD) Xx Xxx
Reserve Xx Less: RBD xx
General Reserve Xx Xxx
Less: Dis. on Debtors xx
xxx
Stock xx
Prepaid Expenses xx
Capital xxxx An Income receivable/Accrued xx
Less: Drawings xx income

xxxx
Less: Intr. On Drawings xx
xxxx Land and Buildings xxx
Add: Addl. Capital xx Plant & Machinery xxx
xxxx Less: Depreciation xx xxx
Add: Intr. On Capital xx Furniture xxx
Business Premises xxx
xxx Loose Tools xxx
+ Net Profit/Loss xx
Xxx Free hold Property xxx
Patents xxx
Copy Rights xxx
Trade Marks xxx
Goodwill xxx

xxxx xxxx

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PROBLEMS

1. From the following prepare Trading Account of Sricharan for the year ending 31st Dec 2008.
Opening Stock Rs. 5000
Purchases Rs.54000
Wages Rs.5000
Carriage inwards Rs.2000
Purchase returns Rs.4000
Sales Rs.154000
Sales returns Rs.4000
Closing stock Rs.10000
GP 98000

2. From the ledger balances extracted from the books of Saketh at the closing of trading year
ended 31st March 2008 prepare Trading Account.
Opening stock Rs.8000
Purchases Rs.20000
Sales Rs.80000
Returns inwards Rs.1500
Returns outwards Rs.400
Carriage inwards Rs.1200
Wages Rs.3300
Frieght & Dock charges Rs.2400
Stock on 31-03-2008 Rs.7000
GP 51000
3. From the following prepare Trading Account.

Opening Stock Rs.80000

Cash purchase Rs.100000
Credit purchases Rs.200000
Cash sales Rs.160000
Credit Sales Rs.250000
Purchase returns Rs.6000
Sales returns Rs.10000
Carriage & Freight Rs.12000
Duty & Clearing Charges Rs.4000
Wages Rs.8000
Closing stock Rs.60000
GP 62000

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4. From the following balances of Kishan Prepare trading account as on 31st march 2009.
Purchases Rs.16500
Wages Rs.500
Opening stock Rs.200
Returns outwards Rs.500
Manufacturing Expenses Rs.800
Carriage inwards Rs.150
Sales Rs.16400
Returns Inward Rs.400
Closing stock Rs.1150
GL 500
5. From the following prepare profit & loss account for the period ending 31st Dec 2008.

Gross profit Rs. 51000

Carriage outwards Rs. 2500
Salaries Rs.5500
Rent Rs.1100
Fire insurance Rs.900
Bad Debts Rs.2100
Discount (Debit) Rs.500
Apprentice (credit) Rs.1500
Printing & Stationary Rs.250
Rates & Taxes Rs.350
Travelling expenses Rs.200
Sundry trade expenses Rs.200

NP 38900
6. From the following Trial balance e of Mr.Gandhi prepare Profit and Loss account for the
year ended 31-3-2001.
Debit Credit
Rs. Rs.
Gross Profit 9,50,000
Commission received 5,000
Interest received 4,000
Sundry income 7,000
Depreciation 10,000
Salaries 15,000
Discount (Dr) 8,000
Discount (Cr)
12000
Bank charges 4,000
Audit fees 2,000
Stationery 400
NP: 938600

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7. From the following prepare Trading and profit & loss account for the period ending 31st Dec
2008.
Bad Debts Rs.125
Opening Stock Rs. 3460
Purchases Rs.5475,
Sales Rs.15450
Sales Returns Rs.200
Purchase returns Rs.125
Postage & Stationary Rs.875
Advertising Rs.450
Interest (Debit) Rs.118
Commission (Credit) Rs.1250
Taxes and Insurance Rs.1250
General expenses Rs.782
Salaries Rs.3300
Closing stock Rs.3250

GP:9690; NP 4040
9. From the following particulars taken from the books of Sri Hari, prepare Trading and Profit
& Loss Account for the period ending 31st Dec 2008.

Purchases Rs. 145000

Sales Rs.292000
Sales Returns Rs. 2600
Salaries Rs.8420
Motor car expenses Rs.6108
Rent, rate & tax Rs.3500
Fuel & power Rs.6430
Opening stock Rs.11400
Insurance premium Rs. 600
Wages Rs.23600
Purchase returns Rs.1000
General expenses Rs.2680
Carriage inwards Rs.2040
Carriage outward Rs.1630
Closing stock Rs.37000
Sundry expenses Rs.10650
GP 138930 NP 105342

9. From the following prepare Trading Profit & Loss account for the period ending 31st Dec
2007.
Stock Rs.200000
Purchase Rs. 255000
Wages Rs.100000
Carriage Rs. 5000
Purchase returns Rs.13250

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Export Duty Rs.9000
Sales Rs.575000
Coal & Coke Rs.25000
Sales Returns Rs. 10000
Printing & Stationary Rs.2250
Stock (31.12.07) Rs.300000
Salaries Rs.30000
Rent rate & tax Rs.12000
Depreciation Rs.3020
Repairs Rs.6000
Discount Allowed Rs.12505
Bad Debts Rs.9900
Advertising Rs.2500
Gas & Water Rs.1500
Factory lighting Rs.2500
General Expenses Rs.4000

GP 289250 NP 198075
10.From the following particulars prepare a balance sheet that on 31.03.2008 of Mr. Amar.
Capital Rs.50000
Business premises Rs. 55000
Furniture & Fixtures Rs.2500
Bills receivable Rs.3500
Bills payable Rs.2500
Sundry debtors Rs.20000
sundry creditors Rs.15800
Plant and machinery Rs.4500
Loan to Smith Rs.5000
Investments Rs.3000
Cash in hand Rs.200
Cash at bank Rs.3500
proprietor withdrawn Rs.3000
Net profit Rs.38900
Closing stock Rs.7000
B/S 104200
11. The given information related to Pradeep, prepare Balance sheet for the year ended 31.12.08.
Capital Rs.100000
Business premises Rs. 50000
land & building Rs.60000
furniture Rs.5000
Bills receivable Rs.7000
Bills payable Rs.5000
Sundry debtors Rs.40000
sundry creditors Rs.31600
plant & machinery Rs.9000
Investments Rs.16000

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Cash in hand Rs.400
Cash in bank Rs.7000
withdrawn Rs.6000
Net profit Rs.77800
Closing stock Rs.14000

B/S 208400

12. From the following trial balance prepare trading and profit & loss Account and Balance
Sheet of Srinivas Charan for the year ended 31.03.2009.
Cash in hand 3050
purchases 40650
wages 11000
opening stock 7800
Buildings 30000
land Rs. 5000
machinery 25000
Plants 8000
Salaries 17000
General expenses 3000
Insurance 600
Sundry debtors 8700
Bills Receivables 1200
Sales(credit) 99000
sundry creditors 6000
Capital 56000

161000 161000
Adjustments:
1. Closing Stock is valued at Rs.9800
GP 49350 NP 28750 B/S 90750

13. Prepare Final Accounts for the year ended 31.03.2009 of M.Ankesh

Cash in hand 6100

purchases 81300
Wages 22000
opening stock 15600
Buildings 60000
machinery 50000
Good will 16000
salaries 34000
General expenses 6000
land 10000
Insurance 1200
Sundry Debtors 17400

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Bills Receivables 2400
Sales(credit) 198000
sundry creditors 12000
Capital 112000
322000 322000
Adjustments: The closing Stock of the firm is valued at Rs.19600
GP 98700 NP 57500 B/S 181500

14. From the following Trail Balance prepare Final Accounts for the Year ending 31-12-
2008

Particulars Dr Cr
Sundry debtors 32000
Stock 22000
Cash in hand 35
Cash at bank 1000
Bills receivable 20000
Plant & machinery 17500
Creditors 10000
Trade expenses 1000
Sales 234500
Carriage inwards 1200
Wages 1700
carriage outwards 400
Rent 900
Bills Payable 7500
Purchases 218870
Discount 1100
Capital 79500
Business premises 34500
Reserve 20705
352205 352205
Adjustments:
1. Stock will be on 31-12-2008 Rs.25000
2. Outstanding Wages Rs.700
3. Prepaid Rent Rs.100
GP:15030; NP: 11730; B/S: 130135

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Treatment for Adjustments
1. Closing Stock

i. Given in trail balance only

Show on asset side directly

ii. Given in Adjustments

a) Show on credit side of trading Account.

b) Show on asset side of balance sheet.

TRADING ACCOUNT
Particulars Amount Particulars Amount
By closing stock 10000

BALANCE SHEET
Liabilities Amount Assets mount
Closing stock 10000

2. Outstanding expenses (or) Payable

i. Given in Trail Balance only

Directly show on liability side

ii. Given in adjustments

a) Add to concerned expenses
b) Show on Liabilities side of Balance Sheet.

PROFIT & LOSS ACCOUNT

Particulars Amount Amount Particulars Amount Amount
To salaries 10000
+ Outstanding
Salaries 2000 12000

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BALANCE SHEET
Liabilities Amount Amount Assets Amount Amount

Outstanding 2000
Salaries

3. Prepaid expenses (or) Unexpired (or) paid in advance

i. Given in Trail Balance

Show on asset side of Balance Sheet

ii. Given in Adjustments

a) Less from concerned item

b) Show on Asset side

PROFIT & LOSS ACCOUNT

Particulars Amount Amount Particulars Amount Amount
To Insurance 10800
(-) Prepaid 800 10000

BALANCE SHEET
Liabilities Amount Amount Assets Amount Amount
Unexpired
Insurance 800

4. Depreciation

i. Given in Trial Balance

Show directly on debit side of Profit & Loss Account

ii. Given in adjustments

a) Deduct from concerned asset.

b) Show on debit side of Profit & Loss Account.

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BALANCE SHEET
Liabilities Amount Amount Assets Amount Amount
Plant & 10000
Machinary
- Depreciation 1000 9000

PROFIT & LOSS ACCOUNT

Particulars Amount Amount Particulars Amount Amount

To Depreciate
On machinery 1000

5. Appreciation

i. Given in Trial Balance

Show on credit side of Profit & Loss Account.

ii. Given in Adjustments

a) Add to concerned asset.

b) Show on credit of profit & Loss Account.

BALANCE SHEET
Liabilities Amount Amount Assets Amount Amount

Premises 90000
+Appreciation of 10000 100000
premises

PROFIT & LOSS ACCOUNT

Particulars Amount Amount Particulars Amount Amount
By Appreciation
of premises 10000

6. Interest on Capital

i. Given in Trial Balance

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Show on the Debit side of the Profit & Loss Account

ii. Given in Adjustments

a) Add to capital on the liabilities side of the Balance Sheet.

b) Show on the Debit side of Profit & Account.

BALANCE SHEET
Liabilities Amount Assets Amount
Capital 100000
+ Intr. 5000 105000

P & L ACCOUNT
Particulars Amount Particulars Amount
To Intr. On capital 5000

7. Interest on Drawings

i. Given in trail Balance

Show on credit side of Profit & Loss Account

ii. Given in Adjustments

a) Less from Capital on liabilities side of Balance sheet.

b) Show on credit side of Profit & Loss Account

BALANCE SHEET
Liabilities Amount Assets Amount
Capital 100000
- Intr. 5000 95000

P & L ACCOUNT
Particulars Amount Particulars Amount
By Intr. on Drawings
5000

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8. Income Receivable

i. Given in Trail Balance

Show on the credit side of the Profit & Loss Account
ii. Given in Adjustments
a) Add to concern income in Profit & Loss Account
b) Show on the asset side.

P & L ACCOUNT
Particulars Amount Particulars Amount
By Rent Received
5000
+ Receivable 500 5500

BALANCE SHEET
Liabilities Amount Assets Amount
Rent Receivable 500

9. An Income received in Advance

i. Given in Trail Balance

Show on Liabilities side of Balance Sheet

ii. Given in Adjustments

a) Less from concerned income in Profit & Loss Account.

b) Show on Liability of balance sheet.

P & L ACCOUNT
Particulars Amount Particulars Amount
By Rent Received 5000
- Received in Advance 500 4500

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BALANCE SHEET
Liabilities Amount Assets Amount
Rent Received in
Advance 500

Adjustments with regarding debtors

Sundry Debtors XXX
(-) Bad Debts (Given in Adjustments) XX
XXX
(-) RBD (New) XX
XXX
(-) Discount on Debtors XX XXX

10. Bad debts

i. Given in Trail Balance

Show on debit side of Profit & Loss Account
ii. Given in Adjustments
a) Deduct from debtors as first item.
b) Show on debit side of Profit & Loss Account.

11. RBD (Reserve for Bad and Doubtful Debts)

Trail Balance RBD is an old RBD. Adjustment RBD is a new RBD.

i. Given in Trial Balance

Deduct from Sundry Debtors

ii. Given in Adjustments

a) Deduct from sundry Debtors.

b) Show on Profit & Loss Account Like

New – Old = Profit & Loss Account Debit side

Old – New = Profit & Loss Account Credit side

i. New RBD means which is given in Adjustments

ii. Old RBD means which is given in Trial Balance

12. Discount on Debtors

i. Given in Trail Balance
Show on the debit Side of the Profit & Loss Account
ii. Given in Adjustments

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a) Deduct from Sundry debtors after deducting Bad debts, RBD.
b) Show on the Debit side of the Profit & Loss Account.

13. Discount on Creditors

i. Given in Trail Balance

Show on Credit Side of Profit & Loss Account
ii. Given in Adjustments
a) Deduct from Sundry Creditors
b) Show on Credit Side of Profit and Loss Account

14. Construction of a room would cost Rs.10000 which was included

in wages. _ Capital Expenditure

i. Given in adjustment

a) Less from wages

b) Show on the assets side as writing Room/ Building or Add to the Room /
Building.

15. Prepare Trading and Profit & Loss Account for the calendar year 2022 and the Balance
Sheet in the books of Kishan as on that date from the following Trial Balance.
Particulars Dr Cr
Sales 125000
Purchases 78000
Sales returns 2700
Purchase returns 3600
Discount received 1250
Discount allowed 1850
Opening Stock 6675
Salaries 23000
Electricity & Gas 1500
Rent & Rates 1000
Sundry Expenses 2350
Premises 50000
Equipment 15000
Vehicle 10750
Debtors 11420
Bank Overdraft 425
Cash 60
Creditors 7750
Capital 55000
Drawings 5220
Long term loan 16500
209525 209525

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Adjustments:

a. Closing Stock Rs.15000 b. Outstanding Salaries 2000 c. Prepaid Rent 1000 d. Depreciation
on Equipment at 10% per annum.
GP 56225 NP 25275 B/S 101730
16. From the following prepare the Final Accounts of Ram for the Year 31-12-2008

Particulars Dr Cr
Capital A/c 28000
Drawings 3000
Debtors & creditors 19500 10401
Loan on Mortgage (Cr) 9500
Interest on Loan 300
Cash in Hand 2150
Opening Stock 6839
Motor Vehicle 10000
Cash at Bank 3455
Land & Buildings 12000
Bad debts 525
Purchases & Sales 66458 109643
Purchase & Sales Returns 7821 1346
carriage outwards 2404
carriage inwards 2929
Salaries 9097
Trade, Taxes & Insurance 2891
Advertising 3264
Discount (Cr) 540
General Expenses 3489
Bills Receivable & Payable 6882 2614
Rent Received 960
163004 163004
Adjustments
a. The value of Closing Stock Rs.6750 b. Salaries not yet paid Rs.500
c. Prepaid Taxes Rs.500 d. Advertising Expenditure Carry forward to the next year
Rs.200 e. Depreciate Motor Vehicles by 10%
GP 33692 NP 12422 B/S 60437
17. From the following trail Balance of M/s. Prasad & Co., prepare Final Accounts for the
year 31-12-2008.
Particulars Dr Cr
Machinery 4000
Cash at Bank 1000
Cash in hand 500
Wages 1000
Purchases 8000
Stock on 1-1-2008 6000

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Debtors 4400
Bills Receivables 2900
Rent 450
Commission 250
General Expenses 800
Salaries 500
Capital 9000
Sales 16000
Sundry Creditors 4500
Interest received 300
29800 29800

Adjustments

a. Provide Interest on Capital at 5% b. Depreciate Machinery at 10% c. Wages outstanding

amounting Rs.100 d. Rent Prepaid Rs.100 e. Stock on 31-12-2008 is Rs.8000
GP 8900 NP 6450 B/S 20500
18. From the following Trail Balance of Ankhesh prepare Final Accounts for the Calendar
year ending 2008.

Particulars Dr Cr
Drawings 1700
Plant & Machinery 12000
Horse & carts 2600
Debtors 3600
Purchases 2000
Capital 20000
Creditors 2600
Sales 4200
Bills Payable 2350
Wages 800
Cash at Bank 2600
Salaries 800
Repairs 190
Opening Stock 1600
Rent 450
Manufacturing Expenses 150
Bad debts 500
Carriage inwards 160
29150 29150
Adjustments:
a. Closing stock Rs.1600
b. Depreciate Plant & Machinery 10% and Horse & Carts 15%
c. Allow interest on Capital 5%
d. Rs.150 due for wages.
e. Paid Rs.50 Rent in advance.GP 940 NP 3540 B/S 20860

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