Unit – I

Basics of Accounting
Introductory Terms
First of all, you should understand the meaning of some terms which will be frequently used.

1. Business: It is an activity which involves exchange of goods/services with the intention of

earning income and profit.
2. Business Transactions: It refers to any transaction, dealing or event which involves transfer of
money or money’s worth between two parties.
3. Expenditure: It means spending of money or incurring an obligation to pay at a later date.
Expenditure may be of capital nature (that is, leading to acquisition of an asset) or of revenue
nature (that is where the benefit from it will soon be exhausted).
4. Expense: It means an expenditure whose benefit is enjoyed and finished immediately or almost
immediately.
5. Cash Transaction: When payment for business activity is made immediately,it is called cash
transaction.
6. Non-Cash Transaction: A non-cash transaction is a business transaction where there is no
payment or receipt of cash either immediately or at a future date. Example: Depreciation, Bad
Debts etc.
7. Proprietor: The owner of business is called proprietor. He invests capital in the business with the
intention of earning profit.
8. Capital: It is the amount invested by the proprietor in the business. It is always equal to assets
minus liabilities. It is also called owners’ equity.
9. Drawings: it is the value of cash or goods withdrawn from the business by the owner for his
personal use.
10. Debtors: A debtor is a person who owes money to the business.
11. Creditors: A creditor is a person to whom the business owes money.
12. Assets: Assets refer to any properties or things owned by a business concern including the
amounts due to it from others. Examples: Buildings, Machinery, Stock, Cash and Bank balances,
Investments etc.
13. Liabilities: The term ‘Liabilities’ refer to debts or amounts due from a business to others either
for money borrowed or for goods or assets purchased on credit or services received without
making immediate payment. These include bank loan or overdraft, trade creditors, outstanding
expenses etc.
14. Debt: The amount due from a debtor is called Debt.
15. Brought Down (b/d): This term is written in the ledger to show the opening balance in any
account. It suggests that the account has been brought down from the previous period.
16. Carried Down(c/d): This is written in the ledger account at the time of closing the account.

DEFINITIONS OF ACCOUNTING

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“Accounting is the science of recording and classifying business transactions and events, primarily of
financial in character, and the art of making significant summaries, analysis and interpretations of those
transactions and events, and communicating the results to persons who must make decisions or form
judgements.”

Smith and Ashburn

“Accounting is the art of recording, classifying and summarising in significant manner and in 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 Accountants

Objectives of Accounting

The following are the main objectives of accounting:

i. Keeping Systematic Records: Accounting is done to keep a systematic record of financial

transactions.
ii. Protecting and Controlling Business Properties: Accounting helps in seeing to it that there is no
unauthorised use or disposal of any assets or property belonging to the firm, because proper
records are maintained. Accounting will furnish information about money due from various
persons and money due to various parties. The firm can see that all amounts due to it are
recovered in due time and that no amount is paid unnecessarily
iii. Ascertaining the operational profit or loss: Accounting is used to show the results of the
activities in a given period, usually a year, i.e. to show how much profit has been earned or how
much loss has been incurred. This is done by keeping a proper record of revenues and expenses
of a particular period.
iv. Ascertaining the financial position of the business: balance sheet is prepared to ascertain the
financial position of the firm at the end of a particular period. It shows the value of the firms
possessions and the amount the firm is owing to others.
v. Facilitating rational; decision making: Accounting has taken upon itself the task of collection,
analysis and reporting of information at the required point of time to the required levels of
authority in order to facilitate rational decision making.

USERS OF ACCOUNTING INFORMATION:

i. Proprietors: The primary aim of accounting is to provide necessary information to the

owners related to his business.
ii. Managers: In large business organisations and in corporations, there is separation of
ownership and management functions. The management of such business are more
concerned with accounting information because it is they who are answerable to the
owners.
iii. Prospective investors: The person who is contemplating an investment in a business will like
to know about its profitability and financial position. They derive these information from the
accounting reports of the concern.

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 iv. Creditors, Bankers and other lending institutions: Trade creditors, bankers and other
lending institutions would like to be satisfied that they will be paid on time .The financial
statements help them in judging such positions .banks and other lending agencies rely
heavily upon accounting statements for determining the acceptability of a loan application.
v. Government: The government is interested in the financial statements of a business
enterprise on an account of taxation, labour and corporate laws.
vi. Employees: Employees are interested in financial statements on accounts because their
wages increase and payment of bonus depend on the size of the profit earned.
vii. Regulatory agencies: various government departments and agencies such as company law
board, registrar of companies, tax authorities etc.use accounting reports not only as the
basis for tax assessment but also in evaluating how well various business organizations are
operating under regulatory legislation.
viii. Researchers: Accounting data are also used by the research scholars in their research in
accounting theory as well as business affairs and practices.

SYSTEMS OF ACCOUNTING:

Basically there are two systems of accounting

i. Cash System of Accounting: In this system of accounting entries are made only when cash is
received or paid. No entry is made when a payment or receipt is merely due. It may not
treat any revenue to have been earned or even sales to have taken place unless cash is
actually paid by the customers. Government system of accounting is mostly on the cash
system. Professional people also record their income on cash basis, but while recording
expenses they take into account the outstanding expenses also.
ii. Accrual System of Accounting: This is also known as mercantile system of accounting. It is a
system in which accounting entries are made on the basis of amounts having become due
for payment or receipt. Accrual basis of accounting, attempts to record the financial effects
of the transactions, events, and circumstances of an enterprise in the period in which they
occur rather than recording them in period(S) in which cash is received or paid by the
enterprise. It recognises that the buying,producing, selling and other economic events that
affect enterprise‘s performance often do not coincide with the cash receipts and payments
of the period. The purpose of accrual basis accounting is to relate the revenue in terms of
cost so that reported net income measures an enterprise’s performance during a period
instead of merely listing its cash receipts and payments. Apart from income measurements,
accrual basis of accounting recognise assets, liabilities or components of revenues and
expenses for amounts received or paid in cash in the future.

ACCOUNTING PRINCIPLES, CONCEPTS AND CONVENTIONS

Accounting principles have been defined as “the body of doctrines commonly associated with the
theory and procedure of accounting, serving as an explanation of current practices and as a guide for
the selection of conventions or procedures where alternatives exist”.

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 These principles can be classified into two categories

i. Accounting concepts
ii. Accounting conventions

Accounting Concepts:

i. Business Entity Concept: Accountants assume that an enterprise is separate from its owners. It
is treated to have a distinct accounting entity which controls the resources of the concern and is
accountable there for. Accounts are kept for a business entity as distinguished from the persons
associated with it. They will record transactions between the owner and the firm; for instance,
when capital is provided by the owner, the accounting record will show that the firm as having
received so much money and as owing it to the proprietor. This concept is based on the sense
that proprietors entrust resources to the management; the management is expected to use
these resources to the best advantage of the firm and to account for the resources placed at its
disposal. The concept of separate entity is applicable to all forms of business organisations.
ii. Money Measurement Concept: Only those transactions and events as can be interpreted in
terms of money are recorded. Events or transactions which cannot be expressed in money do
not find place in the books of account though they may be very useful for the business.
iii. Cost Concept: Transactions are entered in the books of account at the amount actually
involved. The personal views of people are not considered as the basis for making the record.
iv. Going Concern Concept: According to this concept it is assumed that the business will continue
for a fairly long time to come. Transactions are, therefore, recorded in such a manner that the
benefits likely to accrue in future from money spent now or the further consequences of events
occurring now are taken into consideration. It is on this basis that a clear distinction must be
made between assets and expenses. It is because of this concept that fixed assets are recorded
at their original cost and are depreciated in a systematic manner without reference to their
current realisable value. However, if it is certain that the business will last only for a limited
period; the accounting record will keep the expected life in view, probably treating all
expenditure, capital and revenue alike.
v. Dual Aspect Concept: Every transaction entered into by a firm or institution will have two
aspects; if any event occurs, it is bound to have double effect.
vi. Realisation Concept: According to this concept revenue is recognised when a sale is made.
Consequently unless money has been realised, i.e. either cash has been received or a legal
obligation to pay has been assumed by the customer no sale can be said to have taken place and
no profit can be said to have arisen. It prevents business firms from inflation their profits by
recording sales and incomes that are likely to accrue i.e. expected incomes or gains are not
recorded.
vii. Accrual Concept: If a transaction has been entered into or an event has occurred its
consequences must follow, i.e. the amount of assets and liabilities will be affected by the
various transactions and events even if settlement in cash will be only at a later time. To ignore
any transaction or vent would mean station assets or liabilities and capital wrongly. Hence all
transactions and events should be recorded. This concept is called accrual concept. The system
of accounting that is based on it is called the mercantile system.

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ACCOUNTING CONVENTIONS
The term ‘accounting conventions’ refer to the customs or traditions which are used as a guide in
the preparation of accounting reports and statements. The following are the important accounting
conventions in use.
i. Consistency: According to this convention the accounting practice should remain unchanged
from one period to another. It requires that working rules once chosen should not be changed
arbitrarily and without notice of the effects of change to those who use the accounts.
ii. Disclosure: Apart from statutory requirements good accounting practice also demands that
significant information should be disclosed in financial statements. Such discloses can also be
made through footnotes. Purpose of this convention is to communicate all material and relevant
facts concerning financial position and results of operations to the users.
iii. Conservatism: Financial statements are usually drawn up on a conservative basis. Anticipated
profits are ignored but anticipated losses are taken into account while drawing the statements.
Valuing inventory at cost or market price whichever is less and creating provision for doubtful
debts are the good examples of the application of this convention.
iv. Materiality: According to this convention, the accountant should attach importance to material
details and ignore insignificant details in the financial statements. This is because otherwise
accounting will be unnecessarily overburdened with minute details.

Book-keeping and Accounting

Book-keeping and accounting are often used interchangeably but they are different from each other.
Book-keeping is mainly concerned with recording of financial data relating to the business operations in
a significant and orderly manner. It 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’sworth. It is mechanical and
repetitive. This work is usually entrusted to junior employees f accounts section of a business house.

Accounting is a broader and more analytical subject. It includes the design of accounting systems
which the book-keepers use, preparation of financial statements, audits, cost studies, income-tax work
and analysis and interpretation of accounting information for internal and external end-users as an aid
to taking business decisions. This work requires more skill, experience and imagination. The larger the
firm, the greater is the responsibility of the accountant. It can be said that accounting begins where
book-keeping ends. Book-keeping provides the basis for accounting.

Double Entry System

There are two systems of keeping records i.e. (i) single entry system and (ii) double entry system.

The single entry system appears to be time saving and economical but it is unscientific as under this
system some transactions are not recorded at all whereas some other transactions are recorded only
partially. On the other hand, the double entry system is based on scientific principles and is, therefore,
used by most of the business houses. The system recognises the fact that every transaction has two
aspects and records bothaspects of each and every transaction. Under this system in every transaction
an account is debited and some other account is credited. The crux of accountancy lies in finding out

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which of the two accounts are affected by a particular transaction and out of these two accounts which
account is to be debited and which account is to be credited.

Merits of Double Entry System

i. It keeps a complete record of business transactions. Both personal accounts and impersonal
accounts are kept. The entire information regarding the value of assets and profits earned
during the year can be easily obtained.
ii. It provides a check on the arithmetical accuracy of the both of accounts, since every debit has
corresponding credit to it and vice-versa.
iii. The detailed profit and loss account can be prepared to show profits earned or loss suffered
during any given period.
iv. The system makes possible the comparison of purchases as well as sales, expenditure, income
etc. of a current year with those of the previous years, thus enabling a businessman to control
his business activities.
v. The balance sheet can be prepared at any specified point of time or any date showing the actual
amount of assets, liabilities and capital.
vi. The system being a scientific one, it prevents commission of fraud and if a fraud is committed it
can be easily detected.
vii. The accurate details with regard to any account can be easily obtained.

Accounts

An account is an individual record of a person, firm, or thing, an item of income or an expense.

According to Kohler’s Dictionary for Accountants, an account has been defined as a formal record of a
particular type of transaction expressed in money.

Classification of Accounts

Accounts are broadly classified into two classes: (i) Personal Accounts and (ii) Impersonal Accounts.
The latter are further sub-divided into a) Real Accounts and b) Nominal Accounts. Thus all accounts can
be classified into Personal, Real and Nominal Accounts.

Personal Accounts: Personal accounts are the accounts relating to persons with whom the business
deals. Such accounts can take the following forms:

i. Natural person’s accounts: e.g. Mohan’s Account, Sheena’s Account, Raj’s Account etc.
ii. Artificial person’s or body of person’s account: e.g. Bank Account, Firm Account, Company
Account, Club Account etc.
iii. Representative personal accounts: e.g. Outstanding Wages Account, Prepaid Rent Account,
Unexpired Insurance Account etc.

Real Accounts: Real Accounts may be of the following types:

i. Tangible Real Accounts: Tangible real accounts are the accounts of such things which can be
touched, felt, measured, purchased, sold etc. e.g. Land Account, Furniture Account, Stock
Account, and CashAccount etc.
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 ii. Intangible Real Accounts: These accounts represent such things which cannot be touched. Of
course they can be measured in terms of money e.g. Goodwill Account, Trade Mark Account,
Patent Account etc.

Nominal Account: Accounts of incomes, expenses, gains and losses are called nominal accounts.
Interest received, wages, salaries, rent, postage, profit and loss are such items, and a separate account is
opened for each of these items.

Basic Accounting Rules

Personal Accounts

Debit The Receiver

Credit The Giver

Real Accounts

Debit What comes in

Credit What goes out

Nominal Accounts

Debit Expenses and Losses

Credit Incomes and Gains

Illustration 1

From the following transactions , state the nature of account and also state which account will be
debited and which account will be credited:

a) X started business with cash b) Paid wages c) Purchased goods for cash d) Purchased goods
from Amar on credit e)Purchased machinery for cash f) Interest paid g) Dividend received h)
s.no accounts nature of account effect on business accounts
affected dr./cr.

a) cash a/c real a/c Cash comes in dr.

capital a/c personal a/c proprietor is the giver cr.

b) wages a/c nominal a/c wages is an expense dr.

cash a/c real a/c cash goes out cr.

c) purchases a/c real a/c goods comes in dr.

cash a/c real a/c cash goes out cr.

d) purchases a/c real a/c goods comes in dr.

amar’s a/c personal a/c amar the giver cr.
Machinery sold i) Outstanding for salaries

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 e) machinery a/c real a/c machinery comes in dr.
cash a/c real a/c cash goes out cr.

f) interest a/c nominal a/c interest is an expense dr.

cash a/c real a/c cash goes out cr.

g) cash a/c real a/c cash comes in dr.

dividend a/c nominal a/c dividend is a gain cr.

h) cash a/c real a/c cash comes in dr.

machinery a/c real a/c machinery goes out cr.
i) salaries a/c nominal a/c salary is an expense dr.
outstanding personal a/c salaries have to be paid cr.
salaries a/c

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 JOURNAL
The journal is the book of prime entry in which every transaction is recorded before being
posted into the ledger. It is that book of account in which transactions are recorded in a
chronological ( day to day ) order.

A Specimen ruling of a journal is as under:

Date Particulars L.F Debit Amount Credit Amount
( Rs.) (Rs.)
(i) (ii) (iii) (iv) (v)

(i) Date : The date on which the transaction took place is entered in this column. The year is
written on the top, then the date column is divided in two parts, the first part is used for
writing the month and second part is used for writing the date.
(ii) Particulars : In the first line, the name of the account to be debited is written . The word ‘Dr.’
is written at the end of the first line. In the second line some space is left and the word
‘To’ is written before the name of the account to be credited. Then the name of the
account to be credited is written. A brief explanation , usually beginning with the word
‘Being’ is written called ‘narration’. The narration explains the reason for debiting and
crediting the particular accounts and helps one to understand the nature and purpose of
the journal entry at a future date. To separate one entry from another, a line is drawn
below every entry to cover particular column only. The line does not extend to other
columns.
(iii)L.F : Stands for Ledger Folio’. In this column the page numbers on which the various accounts
appear in the ledger are entered.
(iv) Debit Amount: In this column , the amount to be debited against the debit account is
written.
(v) Credit Amount : In this column, the amount to be credited against the credit account is
written.

Illustration 2
Journalise the following transactions:
2007
April, 1 Rajesh stars business with cash 20,000
April,2 He buys goods for cash 15,000
April,4 He buys goods from Malhotra on credit 6,000
April,5 Furniture is purchased for cash 1,000
April,9 Cash sales made 1,500
April,11 Goods sold on credit to Satya Dev 4,000
April,16 Payment made to Malhotra 6,000
April,19 Cash sales 4,300
April,21 Purchases of stationery for cash 20

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 April,25 Sales on credit to Yusuf 1,770
April,30 Rent for the month paid in cash 500

Journal Entries
Date Particulars L.F. Debit Credit
Amount Amount
2007 Cash a/c ...Dr. 20,000
April, 1 To Rajesh’s capital a/c 20,000
( being cash brought in by
Rajesh as his capital )
_______________________________
April,2 Purchases a/c ...Dr. 15,000
To cash a/c 15,000
( being goods purchased for cash)
_______________________________
April,4 Purchases a/c ...Dr. 6,000
To Malhotra 6,000
( being goods purchased on credit)
_______________________________
April,5 Furniture a/c ...Dr. 1,000
Cash a/c 1,000
( being furniture purchased for cash)
_______________________________
April,9 Cash a/c ...Dr. 1,500
To sales a/c 1,500
(being cash sales made )
_____________________________
April,11 Satya Dev ...Dr. 4,000
To sales a/c 4,000
( being goods sold on credit )
_______________________________
April,16 Malhotra a/c ...Dr. 6,000
To cash a/c 6,000
( being payment made to Malhotra )
_______________________________
April,19 Cash a/c ...Dr. 4,300
To sales a/c 4,300
( being cash sales made )
_______________________________
April,21 Stationery a/c ...Dr. 20

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 To cash a/c 20
( being stationery purchased for cash)
_______________________________
April,25 Yousuf ...Dr. 1,770
To sales a/c 1,770
( being sales made to Yusuf on credit)
_______________________________
April,30 Rent a/c ...Dr. 500
To cash a/c 500
( being rent paid in cash )

Illustration 3: Give journal entries for the following.

1. Raju commenced business with Rs. 1,00,000

2. Purchased furniture for cash Rs. 50,000
3. Purchased machinery from Mahesh on credit Rs. 40,000
4. Received cash from Goyal Rs. 80,000 on account.
5. Paid rent to landlord Rs. 5,000

Journal Entries in the books of Raju

Date Particulars L.F Debit Credit

Amount Amount
(Rs.) (Rs.)
? Cash a/c ...Dr. 1,00,000
1 To Capital a/c 1,00,000
(being capital brought into business)

Furniture a/c ...Dr 50,000

2 To Cash a/c 50,000
( being furniture purchased for cash )

3 Machinery a/c ...Dr. 40,000

To Mahesh a/c 40,000
( being machinery purchased from Mahesh on credit)

4 Cash a/c ...Dr. 80,000

To Goyal 80,000
(being cash received from Goyal )

5 Rent a/c ...Dr. 5,000

To cash a/c 5,000
( being rent paid to landlord )

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Illustration 4

Journalise the following transactions.

2007

Jan 1. Pankaj commenced business with a capital of Rs. 5, 00,000

2. Deposited in bank Rs. 4, 00,000

5. Purchased goods from Krishna on credit Rs. 1, 00,000

7. Sold goods to Rama on credit Rs. 80,000

9. Purchased goods from Manish for cash Rs. 50,000

12. Sold goods for cash to Sailesh Rs. 8,500

15. Purchased machinery from Ajay Engg. Co.

Payment made by cheque Rs. 20,000

18. Issued cheque to Krishna Rs. 75,000

1. Received interest from Ashok Rs. 500

22. Cash withdrawn from bank for office use 20,000

24. Amount withdrawn from bank for personal use 8,000

27. Took loan from Rajiv Varma 1,50,00

29. Cash withdrawn from office for personal use 10,000

30. Goods withdrawn for personal use 20,000

31. Paid rent to landlord by cheque 6,000

JOURNAL

Date Particulars L.F Debit Credit

Amount Amount
(Rs.) (Rs.)
2007 Cash a/cDr. 5,00,000
Jan 1 To Capital a/c 5,00,000
( being cash brought into business as capital )

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 2 Bank a/cDr. 4,00,000
To cash a/c 4,00,000
( being cash deposited in bank)

Goods/ Purchases a/cDr.

5 1,00,000
To Krishna a/c
1,00,000
( being goods purchased from Krishna on Credit )

Rama a/c Dr.

7 To Goods / Purchases a/c 80,000
( being goods sold to Rama on credit ) 80,000

9 Goods / Purchases a/c Dr. 50,000

To cash a/c 50,000
( being goods purchased for cash )

12 Cash a/cDr. 8,500

To Goods/ Purchases a/c
( being goods sold for cash) 8,500

15 Machinery a/cDr. 20,000

To Bank a/c
( being machinery purchased payment made by 20,000
cheque)

18 Krishna a/cDr. 75,000

To Bank a/c
( being interest received ) 75,000

20 Cash a/cDr. 500

To Interest a/c
( being cash withdrawn from bank for office use) 500

22 Cash a/c Dr. 20,000

To Bank a/c
( being cash withdrawn from bank for personal use ) 20,000

24 Drawings a/cDr. 8,000

To Bank a/c
( being amount withdrawn from bank for personal 8,000
use)

27 Cash a/c Dr. 1,50,000

To Rajiv Varma Loan a/c
( being loan taken from Rajiv Varma ) 1,50,000

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 29 Drawings a/cDr. 10,000
To cash a/c
(being cash taken for personal use ) 10,000

30 Drawings a/cDr. 20,000

To Goods a/c
(being goods withdrawn for personal use) 20,000

31 Rent a/cDr. 6,000

To Bank a/c
( being rent paid by cheque) 6,000

RECORDING OF TRANSACTIONS

Accounting Process
Following are the successive steps which are in practice, taken to record transactions:

a) Entering transactions in Subsidiary Books, i.e. Journalising.

b) Preparation of ledger accounts on the basis of records in subsidiary books, i.e. Posting.
c) Balancing of ledger accounts.
d) Preparation of Trial Balance.
e) Preparation of Final Accounts ; Trading Accounting, Profit and Loss Account, in the case of
trading concerns and Manufacturing Account, Trading Account and Profit and Loss Account in
the case of manufacturing concerns.
f) Preparation of Balance Sheet.

Ledger --Principal Book of Accounts

The ledger is the principal book of accounts where similar transactions relating to a particular
person or thing are recorded. In other words, it is a set of accounts. It contains all accounts of the
business enterprise whether real, nominal or personal. The main function of a ledger is to classify or sort
out all the items appearing in the journal or other subsidiary books under their appropriate accounts so
that at the end of the accounting period each account will contain the entire information of all the
transactions relating to it in a summarised or condensed form.

The following is the specimen ruling of the standard form of ledger account.

Date Particulars J.F. Amount(Rs.) Date Particulars J.F. Amount (Rs.)

The following are the important features of the ledger account:

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 I. The ledger account is divided into two sides – the left hand side is known as debit side while the
right hand side is known as credit side. The abbreviations ‘Dr.’ And ‘ Cr.’ Are placed at the top
left and right hand corners respectively. This is more by custom than under any law.
II. The name of account is written in the middle of the account.
III. J.F. denotes folio or page number on which its journal entry may be found.

Ledger Posting

The term ‘posting ‘ means transferring the debit and credit items from the journal to their
respective accounts in the ledger.

i. Separate accounts should be opened in the ledger for posting transactions relating to different
accounts recorded in the journal.
ii. The concerned account which has been debited in the journal should also be devited in the
ledger i.e. the debit of the journal entry is posted to the debit side. However, a reference should
be made of the other account which has been debited in the journal.
iii. The concerned account which has been credited in the journal, should also be credited in the
ledger i.e. the credit of the journal entry is posted to the credit side, but a reference should be
given of the other account which has been debited in the journal.
iv. It is customary to use the words ‘To’ AND ‘ By’ while making posting in the ledger. The words
‘To’ is used with the accounts shown on the debit side of the ledger account while the word ‘By’
is used with accounts which appear on the credit side of the ledger account.
v. In the folio column, the page number of the journal from where the entry is transferred to
ledger account is written.
vi. The date of the transaction is written on the date column.

Balancing Ledger Accounts

Balancing of an account means the process of equalising the two sides of an account by putting
the difference on the side where amount is short. Where the debit side of an account exceeds the
credit side then the difference is put on the credit side, and the account is said to have a debit balance.
This balance is brought down on the debit side while opening the account. Similarly, where the credit
side of an account exceeds the debit side, the difference is put on the debit side, and the account is said
to have a credit balance. This is also brought down on credit side while opening the account. The
following steps are followed for balancing the account:

i. Total the amounts of debit and credit entries in the account.

ii. If the debit and credit sides are equal then there is no balance. The account stands
automatically balanced or closed.
iii. If the debit side total is more , put the difference on the credit side amount column, by writing
the words in particulars column “ By Balance c/d “. If the credit side total is more, put the
difference on the debit side amount column by writing the words in the particular column “ To
Balance c/d “.

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 iv. After putting the difference in the appropriate side of the account , add both sides of the
account and draw a thin line above and below the total.
v. Bring down the debit balance on the debit side by writing the words in particular column
“To Balance b/d “. Similarly bring down the credit balance on the credit side by writing the
words in the particulars column “ By Balance b/d”.

The debit balance of an account may represent either an asset or an expense . If such balance related to
a Personal Account it reflects debtors; if it relates to Real Account, it is a property, if it relates to
Nominal Account it is an expense or loss. Similarly credit balance of an account represents either a
liability or a gain. If such balance relates to Personal Account, it is a creditor, if it relates to Nominal
Account, it is a gain or income. Real Accounts usually shows debit balance. In case there is a credit
balance in a Real Account, it reflects loss on sale of the asset. It may be noted that when Nominal
Accounts are balanced on the last day of an accounting year their balance are not carried down but are
transferred to Trading and Profit and Loss Account.

Illustration 5

Record the following transactions in the Journal and post them into Ledger of Mr. Aditya Raj:

2008
March 1 Purchase of goods from Ramautar 3,20,000
March 10 Paid rent for the month 2,000
March 11 Purchase of Plant 1,00,000
March 12 Paid salaries 12,000
March 15 Paid Ramautar 1,00,000
March 20 Sold goods to Shyam 20,000
March 25 Received from Shyam 30,000
March 31 Received cash from cash sales 2,50,000
March 31 Wages paid 5,000

Journal Entries in the books of Aditya Raj

Debit Credit
Amount Amount
Date Particulars L.F. (Rs.) (Rs.)
2008
Mar-01 Purchases a/c 3,20,000
To Ramautar 3,20,000
( being purchase of goods on credit )

Mar-10 Rent a/c 2,000

To Cash a/c 2,000
( being payment of rent )

GRIET-SRC Page 16
 Mar-11 Plant a/c 1,00,000
To Cash a/c 1,00,000
( being purchase of plant )

Mar-12 Salaries a/c 12,000

To Cash a/c 12,000
( being payment of salaries )

Mar-15 Ramautar a/c 1,00,000

To Cash a/c 1,00,000
( being payment to Ramautar )

Date Particulars L.F. Debit Credit

Mar-20 Shyam a/c 20,000

To Sales a/c 20,000
( being goods sold on credit )

Mar-25 Cash a/c 30,000

To Shyam a/c 30,000
( being receipt of cash )

Mar-31 Cash a/c 2,50,000

To Sales a/c 2,50,000
( being cash sales made )

Mar-31 Wages a/c 5,000

To Cash a/c 5,000
(being payment of wages )

LEDGER
CASH ACCOUNT
Debit Credit
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008 2008
Mar-25 To Shyam 30,000 Mar-10 By Rent a/c 2,000
Mar-31 To Sales a/c 2,50,000 Mar-11 By Plant a/c 1,00,000
Mar-12 By Salaries a/c 12,000
Mar-15 By Ramautar a/c 1,00,000

GRIET-SRC Page 17
 Mar-31 By Wages a/c 5,000
Mar-31 By Balance c/d 61,000
2,80,000 2,80,000
2008
Apr-01 To Balance b/d 61,000

PURCHASES ACCOUNT
Debit Credit
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-01 To Ramautar 3,20,000 Mar-31 By Balance c/d 3,20,000
3,20,000 3,20,000
2008
Apr-01 To Balance b/d 3,20,000

RAMAUTAR'S ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-15 To Cash a/c 1,00,000 Mar-01 By Purchase a/c 3,20,000
Mar-31 To Balance c/d 2,20,000
3,20,000 3,20,000
Apr-01 By Balance b/d 2,20,000

RENT ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-10 To Cash a/c 2,000 Mar-31 By Balance c/d 2,000
2,000 2,000
2008
Apr-01 To Balance b/d 2,000

PLANT ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-11 To Cash a/c 1,00,000 Mar-31 By Balance c/d 1,00,000
1,00,000 1,00,000

GRIET-SRC Page 18
 2008
Apr-01 To Balance b/d 1,00,000

SALARIES
ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-12 To Cash a/c 12,000 Mar-31 By Balance c/d 12,000
12,000 12,000
2008
Apr-01 To Balance b/d 12,000

SHYAM'S ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-20 To Sales a/c 20,000 Mar-31 By cash a/c 30,000
Mar-31 To Balance b/d 10,000
30,000 30,000
Apr-01 By Balance b/d 10,000

SALES ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-01 To Balance b/d 2,70,000 Mar-20 By Shyam 20,000
Mar-31 By Cash a/c 2,50,000
2,70,000 2,70,000
Apr-01 By Balance b/d 2,70,000

WAGES ACCOUNT
Debit Credt
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
2008
Mar-31 To Cash a/c 5,000 Mar-31 By Balance c/d 5,000
GRIET-SRC Page 19
 5,000 5,000
Apr-01 To Balance b/d 5,000

Subsidiary Books of Account

As stated earlier journal is a book of primary entry. It means all business transactions are to be
first recorded in the journal. However, in big business houses recording of all transactions in one journal
will not only be inconvenient but also cause delay in collecting the information required. The journal is,
therefore, sub-divided into many subsidiary books. The sub-divisions of journal into various subsidiary
journals, recording transactions of similar nature are called subsidiary books.

Advantages:

1. Sub-division of the Journal into subsidiary books will make the recording work easy and quick.
2. It helps in the division of labour as accounting work may be divided among a number of clerks.
3. Easy reference becomes possible since each subsidiary book provides information relating to a
particular aspect of the business only.
4. There is a substantial reduction of clerical work.

The following are the special journals or subsidiary books:

1. Purchase Book2.Sales Book 3. Purchase Returns Book 4. Sales Returns Book

5. Bills Receivable Book 6.Bills Payable Book 7. Cash Book 8. Journal Proper

1.Purchases Book

Purchases Book , only credit purchases of goods in trade are made. Cash Purchases will be
entered in the Cash Book. Credit purchases of say office equipment, will be entered in the
journal.

Illustration 6

The purchases of a firm are as follows:

10th May, 2007 from Moonlite& Co., Mumbai:

50 Electric bulbs of 100wt. Each @ Rs. 8 each.

5 Coolers @ Rs. 400 each.

Moonlite& Co. Mumbai allows trade discount @ 10% ( Trade discount is an allowance made by
suppliers for bulk purchases ).

On 15th May, 2007 a type writer from Office Equipment Co. For Rs. 3,200 on credit.

GRIET-SRC Page 20
On 18th May, 2007 from Prakash Chand & Sons, Surat:

10 toasters @ Rs. 100 each. Prakash Chand & Sons, Surat, allows Trade Discount @ 15%.

On 20th May, 2007 100 cut-outs @ Rs. 5 each from Electric & Co. For Cash.

Invoice Ledger Details Amount

Date Particulars No Folio Rs. Rs.
May-
10 To Moonlite& Co., Mumbai
50 electric bulbs of 100 wt. @ Rs.8
each 400
5 coolers @ Rs. 400each 2000
2400
Less trade discount 10% 240 2,160

May-
18 To prakash Chand & Sons, Surat 1,000
10 Toasters @ Rs. 100 each 150 850
3,010

Note: The purchases on 15th May will be journalised and that on 20th May will be entered in the Cash
Book.

Sales Book

In Sales Book, only credit sales of goods in trade are recorded. It is maintained on the lines
similar to those on which Purchase Book is maintained. In ‘ Particular Column ‘ the name of the
customers along with details of the goods sold to them are recorded. Sales Book is prepared on the
basis of copies of invoices sent to customers. To post Sales Book, the accounts of the customers are
individually debited with respective amounts at the end of every month. Sales Account is credited with
the monthly total of the Sales Book.

Cash Sales will be entered in the Cash Book; credit sale of various assets or investments will be
journalised.

GRIET-SRC Page 21
Illustration 7

From the following transaction s write up the Sales Day Book of X &Co.

Jan. 1 Sold to Premier Traders 100 bags of sugar @ Rs. 650 per bag, less trade discount @ 5%

Jan. 10 Sold to R&Co. 10 bags of milk powder @ Rs. 500 per bag, less trade discount @ 10%

Jan 20 Sold to Tea King (P) Ltd. 10 Chest C.T.C Tea @ Rs.2,000 per Chest. Less trade discount @10%

Jan 29 Sold old office furniture on credit to Modern Furniture for Rs. 2,500.

` Sales Book
Invoice Ledger Details Amount
Date Particulars No Folio Rs. Rs.
Jan-01 Premier Traders
100 bags of sugar @ Rs.650 per bag. 65,000
Less: Trade discount @5% 3,250 61,750

Jan-10 R & Co
10 bags of milk powder @ Rs.500 per
bag 5,000
Less: Trade Discount @ 10% 500 4,500

Jan-20 Tea King (P) Ltd.

10 Chest C.T.C. tea @ Rs. 2,000 per
chest 20,000
Less: Trade discount @ 10% 2,000 18,000

Note: Sale of old furniture to be passed through Journal Proper.

3. Purchases Returns Book ( Return Outwards Book )

It record the returns of trade items purchased on credit. When goods are returned a Debit Note
is made out and sent to the party to whom the goods are returned. The ruling of this book is as follows:

` Purchase Returns Book

Debit Ledger Amount
Date Particulars Note No Folio Rs.

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 The account of eash supplier mentioned in the Purchases Return Book is debited in the ledger
with its respective amount with the words “ To Purchases Return Account”. The monthly total of this
book is credited to the Purchases Return Account with the words “ By Sundries as per Purchases Returns
Book “.

4. Sales Returns Book ( Returns Inward Book )

The book is kept to record the returns of goods on credit on receipt of the goods. The firm
prepares a Credit Note in the name of the customers and sends its original copy to the customer.
Entries are made from the credit note into the Sales Returns Book. The ruling of the sales returns book
is as follows:

` Sales Returns Book

Credit Ledger Amount
Date Particulars Note No Folio Rs.

Each Customer’s Account is credited with the amount of goods returned by him with the words
“ By Sales Returns Account”. The Sales Returns Account in the ledger gets the debit with the monthly
total of Sales Returns Book with the words “ To Sundries as per Sales Returns Book “.

Credit Note: When the seller receives back goods from the purchaser along with a “Debit Note”
the seller has to acknowledge the same by sending a “ Credit Note “ conforming the acceptance of the
debit note.

5. Bills Receivable Book

Bills are of two types . Bills Receivable and Bills Payable. These arise in settlement of accounts
between creditors and debtors. A bill is an order given by a creditor to his debtor to pay a certain sum
of money to or to the order of a specified person on a specified date.

Bills drawn by the trader and duly accepted by his debtors are called Bills Receivable. These are
entered in a separate book called ‘Bills Receivable Book’.

6. Bills Payable Book

GRIET-SRC Page 23
 This book is maintained to record all transactions relating to Bills Payable i.e. bills drawn by the
creditors and accepted by the trader in settlement of accounts.

As and when a bill is accepted by the trader, all the particulars of the bill are entered in the Bills
Payable Book.

7. Journal Proper

Journal Proper is used for recording only those transactions which cannot be recorded in any
other subsidiary book. It is generally used for recording the following types of transactions.

Opening entries, Rectifying entries, Transfer entries, Adjustment entries, Closing entries etc.

8.Cash Book

In every business there will be a large number of cash transaction i.e. Receipts and Payments of
cash. So it is necessary to maintain a separate subsidiary book for recording the cash transactions. The
separate subsidiary book maintained for recording cash transactions is called the Cash Book.

Cash Book is a book of prime, or first entry, because all cash transactions are first recorded in
the Cash Book. It is also a book of ‘final entry’ (i.e. ledger ) as cash book itself serves as cash account
and bank account. Separate Cash account and Bank account are not opened.

Importance of Cash Book

1. To find out the total cash receipts and cash payments during a particular period
2. To know the cash and bank balance at any time without the physical counting of cash
and verification of pass book.
3. To verify the correctness of cash in hand and cash at bank.

Types of Cash Book

1. Simple Cash Book or Cash Book with only Cash column.

2. Two – column or Cash Book with Cash and Discount columns.
3. Three-column or Cash Book with Cash, Discount and Bank columns.

Simple Cash Book or Cash Book with only Cash column.

A simple cash book makes a record of only cash transactions. It is like an ordinary cash account.
It is maintained by small business concerns. It has two sides- (i) Debit side or left hand side and (ii) Credit
side or right hand side. The Debit side is used for recording cash receipts and credit side is used for
recording cash payments. A single-column Cash book is ruled as follows:

Cash Book
Dr. Cr.
Date Particulars L.F. Amount(Rs.) Date Particulars L.F. Amount(Rs.)

GRIET-SRC Page 24
Two – column or Cash Book with Cash and Discount columns

This Cash Book is an extension of simple cash book. Under this method and an additional
column is provided both on debit side and credit side for recording discount allowed and discount
received. A two-column cash book is ruled as follows:

Two column
cash book
Dr. Cr.
Discount Cash Discount Cash
Date Particulars L.F (Rs.) (Rs.) Date Particulars L.F (Rs.) (Rs.)

Illustration 8

Record the following transactions in a Two-Column Cash Book.

2007

Jan. 1 cash balance 500

Jan.5 cash sales 4,000

Jan.10 paid into bank 3,000

Jan.12 Received cash from Satish ( in full settlement of his debt of Rs. 1,500 ) 1,480

Jan.14 Cash paid to Mehta ( discount allowed Rs.30 ) 770

Jan.16 Received cash from Sinha ( discount allowed 15 ) 585

Jan.22 paid cash to Ram Mohan 415

Jan.27 cash purchases 300

Jan.29 paid salaries 2,000 Jan.31

drew cheque for office use 800

Two column
Dr. cash book Cr.
L Disco Cash L Disco Cash
Date Particulars . unt (Rs.) Date Particulars . unt (Rs.)

GRIET-SRC Page 25
 F (Rs.) F (Rs.)
2007
Jan-01 To Balance b/d 500 Jan-10 By Bank a/c 3,000
Jan-05 To Sales a/c 4,000 Jan-14 By Mehta a/c 30 770
Jan-12 To Satish a/c 20 1,480 Jan-22 By Ram Mohan a/c 15 415
Jan-16 To Sinha a/c 15 585 Jan-27 By Purchases a/c 300
Jan-31 To Bank a/c 800 Jan-29 By Salaries a/c 2,000
Jan-31 By Balance c/d 880
35 7365 45 7365
Feb-01 To Balanceb/d 880

Three-column or Cash Book with Cash, Discount and Bank columns.

The cash book which contains bank column in addition to discount and cash column is called
Three column cash book. In this book one important point to be noted i.e. “Contra Entries”.

Contra Entries: If cash is deposited in the bank , it should be entered in the bank column on the debit
side as ‘To Cash ‘ and again on the credit side as ‘ By Bank ‘ . If cash is withdrawn from Bank for office
use, it should be entered in cash column on the debit as ‘To Bank’ and again on the credit side

in the Bank column as ‘By cash’. These transactions are not posted in the ledger as both the accounts(
cash and bank ) are in the cash book itself. For such entries letter “ C ” is written in L.F . column on each
side to indicate that contra effect of this transaction is recorded on the opposite side. Such entries are
called “ Contra Entries “.

Three column
cash book
Da Particul L. Discount Cash Bank Da Particul L. Discount Cash Bank
te ars F (Rs.) (Rs.) (Rs.) te ars F (Rs.) (Rs.) (Rs.)

Illustration 9

On 1st July,2007 the columnar cash book of Mitra showed that he had Rs. 200 in his cash box and
that there was a bank overdraft of Rs.800. During the day the following transactions took place: Cash
withdrawn from bank for office use 1,000

GRIET-SRC Page 26
 Paid in salaries in cash 300
cash paid to Harish & Co 650

Drawings in cash made by Mitra for household expenses 100

Received from Guha in full settlement of an account of Rs. 1,000, Rs. 180 in

Cash and cheque of Rs. 800. The cheque was immediately deposited in bank .

Bank returns a cheque of Rs. 990, received from Kulu& Sons in full settlement of Rs. 1,000

1. Paid rent by cheque 150

Cash deposited with bank 600

From above information prepare three columnar cash book.

Three column cash book

Dis
L Disco L cou
. unt(R Cash Bank . nt( Cash Bank
Date Particulars F s.) (Rs.) (Rs.)Date Particulars F Rs.) (Rs.) (Rs.)
2007 2007
Jul-
Jul-01 To Bal. b/d 200 01 By Bal. b/d 800
To Bank C 1,000 By Cash C 1,000
To Guha 20 180 800 By Salaries 300
By Harish &
To Sales 650 Co. 650
To Cash C 600 By Drawing 100
By Kulu&
To Bal.c/d 1540 Sons 10 990
By Rent 150
By Bank C 600
By Bal.c/d 380
20 2030 2940 10 2030 2,940
Jul-
Jul-02 To Bal. b/d 380 02 By Bal. b/d 1540

PETTY CASH BOOK

GRIET-SRC Page 27
 Petty Cash Book is kept to record petty cash expenses. It is maintained by separate cashier
called Petty Cashier. In this book the petty cashier records cash received by him from time to time to
meet petty expenses. He does not receive money from any other person or for any other purpose. In
petty cash, expenses are recorded and analysed in petty cash book. For purposes of analysis, it has a
number of columns.

Petty cash book may be treated either as a part of the double entry system or merely as a
memoranda book. If the former course is adopted, each payment to petty cahier is shown on the credit
side of the main cash book which is considered to have been balanced by a debit entry in the petty cash
book. The two entries are folioed against each other completing the double entry aspects. Payments
recorded in the petty cash book are directly posted to the different nominal account. Of course, entries
for expenses are made only with the periodical totals of expenses under various heads. If the latter
course is adopted, for amounts paid to petty cashier, petty cash account in the ledge is debited besides
entering the amounts ( paid to petty cashier ) on the credit side of the main cash book and recording the
amount in the petty cash book. Periodically, different nominal accounts are debited and the petty cash
account is credited in ledger for expenses recorded in petty cash book.

The balance in the petty cash account shows cash lying with the petty cashier.

Imprest System

In every business of whatever size, there are many payments which are of small amounts and
high frequency e.g. payments for postage, stationery, telegrams, carriage, cleaning, travelling etc. and
these transactions are recorded in a separate book called petty cash book. This book is maintained by
the petty cashier.

Under the imprest system of maintaining petty cash, the petty cashier is given a certain sum of
money at the beginning of the fixed period ( e.g. a month/ fortnight ) which is called float. The amount
of float is so fixed that it may be adequate to meet petty expenses for which he is authorised and
records them in his cash book. At the end of such period, the petty cashier submits the account of the
amount spent by him during the period, and the cashier gives him cash equal to the spent amount so
that the petty cashier begins the next period with the fixed amount of float.

The advantages of the imprest system are as follows:

1. It saves the time of the chief cashier.

2. Petty cashier is not allowed to keep idle cash with him if the float is found to be more than
adequate; its amount will be immediately reduced. This reduces the chances of misuse of cash
by the petty cashier.
3. As the sum of float is small, it does not provoke the person in charge of it or other in the office
to misappropriate it.
4. The record of petty cash is checked by the cashier, periodically, so that a mistake if committed is
soon rectified.
5. It enables a great saving to be effected in the posting of small items to the ledger accounts.
6. The system trains young staff to handle money responsibilities.

GRIET-SRC Page 28
Illustration 10

Prepare an analytical petty cash book from the following information.

Petty Cash Book is maintained on the basis of imprestsystem . On 20th Mar. 2007 the petty cashier had
with him Rs. 32.80. He received Rs. 67.20 to make up the expenses of the previous week. During the
week the following expenses were met by the petty cashier:

Rs-Ps

Mar.20 Bus fare 0.60

Mar.21 Revenue stamps 8.50

Cold drinks for customers 2.20

Mar.22 Cartage 4.25

Mar.24 Cooli 1.00

Telegram charges 7.60

Refreshment for customers 5.20

Mar.25 Repairs to furniture 10.00

Tax charges 8.70

Post cards 9.00

Cloth for dusters 7.40

Tea for customers 2.00

Analytical Petty Cash Book

Cust
Amt. V. Amt. Conve . Sundrie
Received Date Particulars No paid Cartage&Cooli P&T y. Ent. s
2007
32.8 Mar-20 To Bal.b/d
67.2 Mar-20 To Cash
Mar-20 By Bus Fare 0.6 0.6
Mar-21 By Rev.Stamps 8.5 8.5

By Cold Drinks for

Mar-21 cutomers 2.2 2.2
Mar-22 By Cartage 4.25 4.25
Mar-24 By Cooli 1 1

GRIET-SRC Page 29
 Mar-24 By Telegram charges 7.6 7.6

By Refreshment to
Mar-24 customers 5.2 5.2

Mar-25 By Repairs to Furniture 10 10

Mar-25 By Taxi charges 8.7 8.7
Mar-25 By Post Cards 9 9

Mar-25 By Cloth for dusters 7.4 7.4

Mar-25 By Tea for Customers 2 2

66.45 5.25 25.1 9.3 9.4 17.4
By Bal. c/d 33.5
100 100
33.55 Mar-27 By Bal. b/d
66.45 Mar-27 To Cash

TRIAL BALANCE
“Trial Balance is a statement containing the balance of all ledger accounts, as at any given date,
arranged in form of debit and credit column placed side by side and prepared with the object of
checking the arithmetical accuracy of ledger postings “. The fundamental principle of double entry
system of book-keeping is that every debit has a corresponding credit and vice-versa of equal amount.
Therefore, the total of the debit balance must equal in aggregate to the total of the credit balances
when accounts are balanced. The aggrement of the trial balance signifies that both the aspects of each
transaction have been recorded and that the books are arithmetically correct. If the trial balance does
not agree, it suggests that there are some errors which must be detected and rectified before the final
accounts can be prepared.

The main function of Trial Balance is that it acts as a device to check the arithmetical accuracy of the
accounting process, it shows the ledger posting have been properly made and balance in each account
in computed correctly. It acts as a starting point for the preparation of final accounts.

A trial balance can be prepared by any one of the following methods.

1. Total Method:

Under this method, the debit and credit totals of each account are shown in the debit and credit
columns of the trial balance.

GRIET-SRC Page 30
2. Balance Method:

Under this method, the difference of each account is extracted. If the debit side of an account is
bigger in amount than the credit side the difference is put in the debit column of the trial balance and if
the credit side is bigger, the difference is written on the credit column of Trial Balance.

Points to be noted for the preparation of Trial Balance:

1. Account dealing with assets, expenses & losses will show debit balance.

2. Accounts dealing with liabilities, incomes and gain will show credit balance.

3. ‘Sundry Debtors ‘ is the total amount due from various debtors and ‘ Sundry Creditors’ is the total
amount due to various creditors.

4. Opening stock will show debit balance, generally closing stock will not appear in Trial Balance.

5. Reserves and Provisions such as General Reserve, Provision for doubtful debts, Reserve for discount
on debtors will show credit balance. However, Reserve for Discounting on creditors will show debit
balance.

A table of the accounts appearing in trial balance on debit and credit side is given below

Debit Balance Credit Balance

Personal Personal
Accounts Accounts
Sundry Debtors Sundry Creditors
Bank Balance Bank Overdraft
Loan taken or Mortgage
Loans or Advances given loan
Drawings a/c Capital a/c
Prepaid expenses Outstanding Expenses
Real Accounts Real Accounts
(a) Dealing with goods Sales Account
Purchase Account Return Outwards Account
Nominal
Opening Stock Accounts
All incomes &
Returns Inwards gains
Interest
(b) Assets Received
Land & Building Rent Received
Plant &
Machinery Commission Received
Discount
Furniture Received
Investments Reserves & Provisions
Provision for Doubtful
Goodwill Debts

GRIET-SRC Page 31
 Nominal Provision for Discount on
Accounts Debtors
All expenses and losses General Reserve., etc
Salaries
Rent& Taxes
Carriage
Advertising
Bad Debts., etc

Illustration11

Mr. Kumar furnishes the following balance as on 31st Mar. 2007. You are required to
prepare a Trial Balance with the following information.

Particulars Rs. Particulars Rs.

Interest on Capital 24,000 Salaries 1,28,000
Creditors 6,00,000 Capital 8,00,000
Discount received 23,000 Drawings 2,46,000
Loan 1,74,000 Machinery 3,00,000
Purchase returns 40,000 Bills payable 20,000
Sales returns 6,000 Furniture 6,00,000
Advertisement 1,63,000 Debtors 5,00,000
Commission received 20,000 Bank loan 2,00,000
Rent 10,000 Patents 60,000
Purchases 19,00,000 Opening stock 12,00,000
Sales 32,60,000

You are required to prepare a Trial Balance with the following information.
Trial Balance

As on 31st Mar. 2007

Credit
Particulars Debit Balance Balance
Interest on Capital 24,000
Creditors 6,00,000
Discount received 23,000
Loan 1,74,000

GRIET-SRC Page 32
 Purchase returns 40,000
Sales returns 6,000
Advertisement 1,63,000
Commission received 20,000
Rent 10,000
Purchases 19,00,000
Salaries 1,28,000
Capital 8,00,000
Drawings 2,46,000
Machinery 3,00,000
Bills payable 20,000
Furniture 6,00,000
Debtors 5,00,000
Bank loan 2,00,000
Patents 60,000
Opening stock 12,00,000
Sales 32,60,000
Total 51,37,000 51,37,000
Bank Reconciliation Statement
A Businessman who opens a Current Account with a bank records his transactions with the
bank either in Bank Account opened in the ledger or in the Bank Column of the Columnar Cash
Book. The Term ‘Cash Book’ used in this chapter means ‘Bank Account’ in the books of
businessman. The deposits in the Bank are entered on the debit side and payments from Bank
are entered on the credit side.

At the time of opening the Bank Account, the Bank will give him a book called ‘Pass Book’. The
customer is expected to bring the Pass Book periodically to the Bank and get it up to date. The
bank may make entries in the Pass Book or issue periodically a statement called “Bank
Statement”. The Bank Pass Book or Bank Statement contains a copy of the customer’s bank
account maintained by the Bank in its books. It shows all the transactions of the customer with
the bank during a particular period. Entries in the Pass Book are made by the Bank staff. The
credit side of the Pass Book indicates the amount deposited in the bank and the debit side
shows the amount withdrawn from the bank.

When the deposit are more than withdrawals it is called Favourable Balance. In case of
Favourable Balance, the Cash Book show debit balance, the pass book Credit Balance. When
withdrawls are more than deposits then there is a Bank Overdraft. In case of overdraft the Cash
Book shows credit balance and Pass Book debit balance.

The Bank Balance as shown by the Cash Book of a merchant should generally be the same as
shown by the Bank Pass Book on any particular date. But in actual practice, these two balances

GRIET-SRC Page 33
may not be same as on a particular date. A statement known as ‘Bank Reconciliation Statement’
is prepared periodically for reconciling the balances shown by the two sets of books. Bank
Reconciliation may be defined as ‘Statement prepared to reconcile the difference between the
bank balance shown by the Cash Book and Pass Books.

The Bank Reconciliation Statement is prepared by the customer and not by the Bank. It is
prepared periodically, usually at the end of every month. It enables the customer to check the
accuracy of the entries made in cash book and pas/book. It helps the customer to keep a track
of cheques sent to bank for collection but not cleared and cheques issued but not presented for
payment

Causes for the difference between Cash Book Balance and Pass Book Balance

1. Cheques issued but not presented for payment.

2. Cheques deposited but not yet collected by Bank
3. Interest on investments, dividends, interest on deposits etc., credited in Pass Book, but
not entered in Cash Book.
4. 4. Bank Charges, interest on overdrafts, insurance premium etc., debited in Pass Book,
but not adjusted in Cash Book.
5. Amount directly deposited by the customers of the trader in his bank account.

6. Cheques deposited but not entered in Cash Book.

7. Cheques debited in Cash book but omitted to be sent to Bank
8. Errors in Cash Book or Pass Book

Problems on Bank Reconciliation Statement

1. From the following particulars prepare Bank Reconciliation Statement as at 31st Dec. 2013
(a) Bank Balance as per Cash Book on 31st December 2013 was Rs. 15,000
(b) Cheque issued but not cashed prior to 31st December 2013 amounted to Rs. 2000
(c) Cheques paid into bank, but not cleared and credited before 31st Dec. 2013 were for Rs.
2,800
(d) A cheque for Rs. 1,200 which was received from a customer was entered in the Bank
column of the cash book in December 2013 but the same was paid into Bank in January 2014.
(e) Interest on investments collected by the bankers and credited in the pass book, but not
recorded in cash book Rs. 800.
(f) Bank charges Rs. 20 debited in pass book but not entered in cash book.
(Ans : Bank balance as per pass book Rs.13,780)

GRIET-SRC Page 34
2. On 31st March 2013 the pass book of a merchant showed a credit balance of Rs. 25,000.

(a) Cheques amounting to Rs. 5,000 were deposited in the bank but only cheques of Rs. 2,000
were cleared upto 31st March.

(b) Cheques amounting to Rs.7,500 were issued, but cheques for Rs.2,400 had not been
presented for the payment in the bank upto 31s' March.

(c) In the pass book there was a credit of Rs. 150 for interest on Investment and debit of Rs. 20
for bank charges. Prepare a Reconciliation Statement showing the balance as per cash book.

(Ans : Bank balance as per cash book Rs.25,470)

3. On 31st March 2013 the bank balance of Dinesh Agnihotri appeared at Rs. 7,654 as per the
bank columns of the cash book. On reconciling with the pass book, the following facts were
ascertained.

(a) That out of the cheques for Rs.1,800 issued by him on 26th March, cheques worth Rs. 400
were presented to the bankers before 31st March and those worth Rs.500 were presented on
11th April. The other cheque were not so far cashed.
(b) That Bill Receivable for Rs. 1,000 was realised by the bankers on 29th March, but no
corresponding entry was passed in the cash book.
(c) That out of the up country cheques for Rs. 2,800 paid in on 28th March, one cheque for Rs.
900 was not yet credited by the bankers.
(d) That debit in respect of the bank charges amounting to Rs.92.50 and credits in respect of
interest on investment for Rs.150 and dividends realised Rs. 800 were not passed through the
cash book.
(e) That a wrong debit of Rs. 350 relating to some other account appeared in pass book.
You are required to ascertain the bank balance shown by the bank pass book on 31st March
2013. (Ans : Bank balance as per pass book Rs.9,661.50)
4. Prepare Bank Reconciliation Statement from the following on 31st Jan 2013
(i) Bank Balance as per Cash Book Rs.16,500
(ii) Cheques amounting to Rs. 4,000 were issued on 28th Jan out of which cheques amounting
to Rs. 2,400 were presented for payment in Feb 2013
(iii) Cheques amounting to Rs. 9,000 were deposited for collection but cheque for Rs. 3,000
have not yet been collected by the bank.

GRIET-SRC Page 35
(iv) A wrong debit of Rs. 400 appears in the Pass Book.
(v) Bank Charges Rs. 10 were entered twice in the Cash Book by oversight.
(vi) A cheque issued to a supplier for Rs. 700 was not entered in the Cash Book.
(vii) Interest on investments collected by the bank Rs.1,000 was not entered in the Cash Book.
(viii) Cheque of Rs. 1,250 issued to Khanna was wrongly entered twice on the debit side of the
Cash Book.
(ix) Pass Book showed a debit of Rs. 175 insurance premium and a credit of Rs. 35 as interest for
which no entries were found in the Cash Book.
(Ans : Bank Balance as per Pass Book ?11,920)

5. Prepare Bank reconciliation statement as at 31st December 2006 for Messers New Steel Ltd.

(i) Bank Overdraft as per cash book on 31st Dec. 2006 Rs. 2,45,900
(ii) Interest debited by bank on 26th Dec 2006 but no advice received Rs. 27,800
(iii) Cheques issued but not presented for payment Rs. 66,000
(iv) Transport subsidy received from the State Government directly by the bank but no advice
to the company Rs. 42,500
(v) Draft deposited in the bank, but not credited till 31st Dec 2006 Rs. 13,500
(vi) Bills for collection credited by bank but no advice received by the company Rs. 83,600
(vii) Amount wrongly debited to company's account by the bank, for which no details are
available Rs.7,400
(Ans : Rs.1,02,500)
6. On 31st December 2013 Dhanraj's cash book showed that he had an overdraft of Rs. 4,300 in
his Current Account with the Bank of India. On verifying the cash book with the Bank Statement
you find the following.

(i) Cheque drawn amounting to Rs. 1,500 had been entered in the Cash Book but had not been
presented for payment.
(ii) On instructions from Dhanraj the bank had transferred interest of Rs. 160 on his Savings
Deposit Account on 5th January 2014. The amount had, however, been debited in the Cash
Book on 30th December 2013.
(iii) Out of cheques of Rs. 800 deposited into the bank for collection, cheques amounting to Rs.
350 only were credited in the Pass Book before 31st December 2013.

GRIET-SRC Page 36
The receipt side of the cash book was overcast by Rs. 175.
An entry of Rs. 275 of payment by a customer direct into the bank on 29th December 2013
was informed to Dhanraj on 1st January 2014, and the same was entered in the Cash Book
immediately. Prepare Bank Reconciliation Statement as on 31st December, 2013
(Ans : Bank overdraft as per pass book Rs. 3,310)
7. From the following particulars prepare a Bank Reconciliation Statement of Sri P. Das as at
31st March 2013.
a. Balance as per Cash Book Rs. 12,500
b. Cheque issued but presented after 31-3-2013 Rs.3,000
c. Cheque deposited during the month but credited in April 2013 Rs. 2,000
d. Cheque entered in Cash Book but omitted to be sent to Bank Rs.1,500
e. Cheque received and sent to Bank without recording in Cash Book Rs. 1,000
f. Bank charges debited in Pass Book, not entered in Cash Book Rs. 100
g. Bank credited for interest, not entered in Cash Book Rs. 350
h. Dividend collected by Bank and credited in Pass Book but not debited in Cash Book Rs.
750
i. Bank paid insurance premium, not entered in Cash book Rs. 400
j. A cheque received from Mr. Khan was dishonoured but not recorded in Cash Book Rs.
900
k. As per instruction, Bank met a pay order and debited in Pass Book, but not entered in
Cash Book Rs. 300 . (Ans: Bank Balance as per Pass Book Rs.12,
400)
8. From the following particulars, prepare Bank Reconciliation Statement as at 31st Dec. 2013
(a) Bank Balance as per Cash Book on 31st December 2013 was Rs. 15,000
(b) Cheque issued but not cashed prior to 31st December 2013 amounted to Rs. 2000
(c) Cheques paid into bank, but not cleared and credited before 31st Dec. 2013 were for Rs.
2,800
(d) A cheque for Rs. 1,200 which was received from a customer was entered in the Bank column
of the cash book in December 2013 but the same was paid into Bank in January 2014.

GRIET-SRC Page 37
(e) Interest on investments collected by the bankers and credited in the pass book, but not
recorded in cash book Rs. 800.
(f) Bank charges Rs. 20 debited in pass book but not entered in cash book.
(Ans : Bank balance as per pass book Rs.13,780)
9. On 31st March 2013 the pass book of a merchant showed a credit balance of Rs.25, 000.
Cheques amounting to Rs. 5,000 were deposited in the bank but only cheques of Rs. 2,000 were
cleared up to 31st March.
Cheques amounting to Rs. 7,500 were issued, but cheques for Rs. 2,400 had not been
presented for the payment in the bank up to 31st March.
In the pass book there was a credit of Rs. 150 for interest on Investment and debit of Rs.20 for
bank charges. Prepare a Reconciliation Statement showing the balance as per cash book.
Ans : Bank balance as per cash book Rs.25,470)
10. On 31st March 2013 the bank balance of Dinesh Agnihotri appeared at Rs. 7,654 as per the
bank columns of the cash book. On reconciling with the pass book, the following facts were
ascertained.
(a) That out of the cheques for Rs. 1,800 issued by him on 26th March, cheques worth Rs. 400
were presented to the bankers before 31st March and those worth Rs. 500 were presented on
11th April. The other cheque were not so far cashed.
(b) That Bill Receivable for Rs. 1,000 was realised by the bankers on 29th March, but no
corresponding entry was passed in the cash book.
(c) That out of the up country cheques for Rs. 2,800 paid in on 28th March, one cheque for Rs.
900 was not yet credited by the bankers.
(d) That debit in respect of the bank charges amounting to Rs. 92.50 and credits in respect of
interest on investment for Rs. 150 and dividends realized Rs.800 were not passed through the
cash book.
(e) That a wrong debit of Rs. 350 relating to some other account appeared in pass book. You are
required to ascertain the bank balance shown by the bank pass book on 31st March 2013.
(Ans : Bank balance as per pass book Rs. 9,661.50)

11. Prepare Bank Reconciliation Statement

GRIET-SRC Page 38
(a) Balance as per Cash Book Rs. 2,980
(b) Cheque sent to bank for collection amounted to Rs. 5,000 out of which only cheque worth
Rs. 3,800 were collected.
(c) Cheques issued were Rs. 4,600 out of which only cheque for Rs. 3,900 were presented for
payment.
(d) A customer of Ranjit remitted directly into his bank account an amount of Rs. 5,000.
(e) Rs. 150 being the interest on temporary overdraft is recorded in the Pass Book only.
(f) A bill of exchange for Rs. 2,500 which was discounted with the bank previously is now
dishonoured.
(g) Rs. 400 being the interest on fixed deposit is recorded in the Pass Book only.
(h) Cash paid to a creditor Rs. 1,000 erroneously entered in the Bank column of the Cash Book.
(i) cheque for Rs. 600 was issued and again cancelled. Only the issue was recorded and
cancellation was not recorded.
(Ans : Bank Balance ass per Pass Book Rs. 6,830)
12. Prepare Bank Reconciliation Statement from the following on 31st Jan 2013
(i) Bank Balance as per Cash Book Rs. 16,500
(ii) Cheques amounting to Rs. 4,000 were issued on 28th Jan out of which cheques amounting
to Rs. 2,400 were presented for payment in Feb 2013
(iii) Cheques amounting to Rs. 9,000 were deposited for collection but cheque for Rs. 3,000
have not yet been collected by the bank.
(iv) A wrong debit of Rs. 400 appears in the Pass Book.
(v) Bank Charges Rs. 10 were entered twice in the Cash Book by oversight.
(vi) A cheque issued to a supplier for Rs. 700 was not entered in the Cash Book.
(vii) Interest on investments collected by the bank Rs. 1,000 was not entered in the Cash Book.
(viii) Cheque of Rs. 1,250 issued to Khanna was wrongly entered twice on the debit side of the
Cash Book.
(ix) Pass Book showed a debit of Rs. 175 insurance premium and a credit of Rs. 35 as interest
for which no entries were found in the Cash Book.
(Ans : Bank Balance as per Pass Book Rs.11,920)

GRIET-SRC Page 39
13. Prepare Bank reconciliation statement as at 31st December 2006 for Messers New Steel Ltd.
(i) Bank Overdraft as per cash book on 31st Dec. 2006 Rs.2,45,900
(ii) Interest debited by bank on 26th Dec 2006 but no advice received Rs.27,800
(iii) Cheques issued but not presented for payment Rs. 66,000
(iv) Transport subsidy received from the State Government directly by the bank but no advice
to the company Rs. 42,500
(v) Draft deposited in the bank, but not credited till 31st Dec 2006 Rs. 13,500
(vi) Bills for collection credited by bank but no advice received by the company Rs. 83,600
(vii)Amount wrongly debited to company's account by the bank, for which no details are
available Rs. 7,400 (Ans : Rs. 1,02,500)
14. The Cash Book of trader showed an overdraft balance of Rs. 1,729 on 31st March 2013.
However, this did not agree with balance in the Pass Book. On comparing the two books, the
following discrepancies were found.
(a) Out of cheques for Rs. 1,100 drawn on the bank, cheque for Rs. 600 were not presented for
payment within that date.
(b) Out of cheques for Rs. 1,680 deposited in the bank cheques for Rs. 930 only were collected
within that date.
(c) A cheque for Rs. 150 received from a customer, though entered in the bank columns of the
Cash Book was omitted to be sent to the bank for collection.
(d) Rs. 2,500 being the proceeds of a bill receivable collected by the bank appeared in the Pass
Book but not in the Cash Book.
(e) Bank charges Rs. 15 and interest on overdraft Rs. 85 appeared in the Pass Book only.
Prepare the Bank Reconciliation Statement. (Ans : Favourable Balance as per Pass Book Rs. 371)

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