Accounting For Managers - Unit 2

B.
A (H) BUSINESS ECONOMICS

ACCOUNTING FOR MANAGERS
UNIT II
UNDERSTANDING FINANCIAL
ACCOUNTING THROUGH DOUBLE
ENTRY BOOK KEEPING
TOPICS TO BE COVERED:
• Data Entry in the primary and secondary books of accounts -

Preparation of Trial Balance.
• Preparation of Final Accounts (Sole Trader); Trading and Profit

and Loss account, Balance Sheet
• Understanding financial statements of a Joint Stock Company:

Format of Income statement and Position Statement as per
revised schedule VI of the Companies Act 2013.
Objectives
• Explain the principles of the double entry

bookkeeping system.
• State the rules of debit and credit for each

group of accounts.
• Describe the flow of information through an

accounting system.
Objectives (continued)
• Explain the nature and purpose of journals
and their relationship to the ledger.
• Explain the nature and purpose of a ledger.
• Record a variety of business transactions in

appropriate ledger accounts.
• Explain the nature and purpose of a Trial

Balance.
Single Entry System
 Under this system both the aspects of transaction are
not recorded.
 Only Personal accounts & cash book are opened.
 Under this system balance sheet is not prepared.

This system is therefore not considered as an
authentic one.
Double Entry Accounting System
Based on principle of dual aspect of each transaction.
For correct presentation both of them should be recorded.
Requires maintenance of records of assets, liabilities, capital, revenues

and expenditure.
Impact of each transaction can be seen or measured.
Total assets are equal to total equities.

Double entry
Some examples of double entry are :
• a debtor paying an account

• paying cash to a creditor
• the owner withdrawing assets from the
business.
• Using cash to purchase a motor vehicle
Double entry (continued)
• There are at least two entries for each

transaction:
– an amount is recorded as a debit with a
corresponding amount being recorded as a
credit.
• Double entry transactions are entered into all

Journals.
Classification of Accounts
 Personal Account
 Real Account
 Nominal Account
Personal Account
Personal Account: Personal

accounts are accounts relating to
persons or organisations with
whom the business has
transactions.
E.g Customer, Supplier, Money
lenders etc.
Real Accounts
• Real Accounts: Real accounts refer to
accounts in which property and
possession are recorded.
E.g Land, Building, Plant & Machinery,

Vehicle Cash, Bank etc.
Nominal Accounts
 Nominal Accounts: Nominal accounts
are revenue, expenses, gains, and losses.
E.g. Wages, Salary, Discount etc .
Under what headings (personal, real, and
nominal) would you classify accounts.
• Outstanding Interest A/c

• Interest Received in Advance A/c
• Income Earned but not Received A/c
• Stock A/c
• Fixtures A/c
• Bills Receivables A/c
• Bills Payable A/c
• Trading A/c
• Capital A/c of Partner
• Sales A/c
• Reserve for discount on debtors A/c
SOLUTION
1. Outstanding Interest A/c (Personal A/c)
2. Interest Received in Advance A/c (Personal A/c)
3. income Earned but not Received A/c (Personal A/c)
4. Stock A/c (Real A/c)
5. Fixtures A/c (Real A/c)
6. Bills Receivables A/c (Personal A/c)
7. Bills Payable A/c (Personal A/c)
8. Trading A/c (Nominal)
9. Capital A/c of Partner (Personal A/c)
10. Sales A/c (Nominal A/c)
11. Reserve for discount on debtors A/c (Nominal A/c)
Double Entry Accounting
System classification
Cash Based
 Cash basis of accounting is a method of accounting
in which transactions are recorded in the books of
account when cash is actually received or paid out.
Eg .Property Tax has been received of Rs.10,000/-
Cash A/C Dr Rs.10,000/-

To Property Tax Cr. Rs.10,000/-
ACCRUAL BASED
Accrual Based:-
Accrual basis of accounting is an accounting system which

recognises revenues and expenses as they are earned or
incurred , not as cash received or paid respectively.
Eg .Raised demand and sent Property Tax bills of
Rs.10,000/- on 10th May2014 and the same amount has
been received against the demand on 30 th May,2014.
Accrual Based
• 10.05-2014
• Property Tax Receivable A/C Dr 10,000/
– To Property Tax A/C Cr. 10,000/-
• 30-05-2014
• Cash/Bank A/C Dr 10,000/-
• To Property Tax Receivable A/C Cr 10,000/-

Capital and Revenue Expenditure
Capital expenditure is the expenditure

where the benefits are not fully consumed in a
year but spread over several years.
Revenue Expenditure is the expenditure

which provides benefits in the current accounting
year only. It can not be forwarded to next year or
years.
State which of the following expenditures are capital in
nature and which are revenue in nature:
• Freight and cartage on the new machine rs.150; erection charges
Rs.200.
• A sum of rs.10,000 on painting the new factory.
• Fixtures of the book value of rs.1,500 was sold off at rs.600 and new
fixtures of the value of rs.1,000 were acquired, cartage on purchase
rs.50.
• Rs.1,000 spent on repairs before using a second hand car purchased
recently.
• The sum of rs.40,000 has been spent on a machine as follows:

– Rs.20,000 for additions to increase the output; rs.12,000 for repairs
necessitated by negligence and rs.8,000 for replacement of worn-out parts.
TRADITIONAL OR GOLDEN RULES
Rule #1
• A vehicle has been purchased of Rs. 8,00,000/-
by cheque.
Concept of Debit & Credit
(Golden Rules)
• For Real Accounts: Debit what comes in and

credit what goes out.
A vehicle has been purchased of Rs.
8,00,000/- by cheque.
Journal Entry:
Vehicle A/C Dr. Rs.8,00,000/-
To Bank Cr. Rs.8,00,000/-
Rule#2
• Furniture has been purchased from Godrej &
Boyce Ltd on credit of Rs.2,00,000/-
(Golden Rules)
 For Personal Accounts :Debit the receiver and
credit the giver.
E.g. Furniture has been purchased from Godrej
& Boyce Ltd on credit of Rs.2,00,000/-
Journal Entry:
Furniture A/C Dr. Rs.2,00,000/-
To Godrej & Boyce Ltd Cr. Rs.2,00,000/-
Rule# 3
• Telephone bill amounting to Rs.25,000/- paid
by cheque.
(Golden Rules)
• For Nominal Accounts: Debit all expenses (and loses)
and Credit all incomes(and gain).
E.g Telephone bill amounting to Rs.25,000/- paid by
cheque.
Telephone Expense A/c Dr. Rs.25000/-
To Bank A/c Cr. Rs. 25000/-

General journal
General journal
General journal
EXAMPLE: JOURNAL ENTRIES
• Mr. Nirmal has the following transactions in the month of April.

• Write Journal Entries for the transactions.
• 10th April : Commenced business with a capital of 1,00,000
• 11th April : Purchased goods from Veeru for 20,000
• 13th April : Purchased Goods for Cash 15,000
• 14th April : Purchased Goods from Abhiram for cash 9,000
• 16th April : Bought Goods from Shyam on credit 12,000
• 17th April : Sold goods worth 15,000 to Tarun
• 19th April : Sold goods for cash 20,000
EXAMPLE: JOURNAL ENTRIES…. CONTD.
• 20th April : Sold goods to Utsav for cash 6,000

• 21st April : Sold goods to Pranav on credit 17,000
• 22nd April : Returned goods to Veeru 3,000
• 23rd April : Goods returned from Tarun 1,000
• 25th April : Goods taken by the proprietor for personal use 1,000
• 26th April : Bought Land for 50,000
• 27th April : Purchased machinery for cash 45,000
• 28th April : Bought computer from Intel Computers for 25,000
• 28th April : Cash sales 15,000
• 29th April : Cash purchases 22,000
• 30th April : Bought furniture for proprietor's residence and paid cash 10,000
DOUBLE ENTRY BOOK KEEPING
• A business’s transactions can be analyzed

by using the double-entry accounting
system, which recognizes the different
sides of business transactions as debits
and credits.
Double-Entry Accounting
The double-entry accounting system recognizes both the debit and credit side of a
business transaction.
double-entry accounting
A system used to analyze and record
a transaction.
debit
An entry on the left side of an account.
credit
An entry on the right side of an account.
Double-Entry Accounting
The T account gets its name from being shaped like a T.
T-account
A visual representation of a ledger account.
The T account is a tool used to analyze
transactions.
MODERN RULES
Modern Approach
• Under modern approach, accounts can be
classified in five categories:
(i) Assets Accounts
(ii) Liabilities Accounts
(iii) Capital Accounts
(iv) Revenue Accounts
(v) Expenses Accounts
Types of Accounts
I. Asset Accounts:
In this type of category, assets are grouped. For example, Land and
Building’s Account, Furniture Account, Bank Account, Cash Account,
Trade Mark’s Account, Goodwill Account etc.
II. Liabilities Accounts:
In this type of category, accounts related to those financial obligations
of an enterprise are grouped which are related to outsiders. For
example, Creditor’s Account, Salary’s Outstanding Account etc.
III. Capital Accounts:
In this type of category, accounts related to those financial obligations
of an enterprise are grouped which are related to the owner(s). For
example, Capital Account and Drawings Account.
Types of Accounts
IV. Revenue Account:
In this type of category, accounts related to selling of goods,
rendering services and other yields of the enterprise are
grouped. For example, Sales Account, Rent Received Account,
Interest Received etc.
V. Expenses Account:
In this type of category, accounts related to purchase of
goods or services and the amount incurred/lost in the
process of earning revenue are grouped. For example,
Purchase Account, Discount Allowed Account, Salaries
Account, Rent Account etc.
Rules for Asset Accounts
normal balance
The increase side of an account.
The word normal here means usual.
It is increased on the debit side (left side).
It is decreased on the credit side (right side).
The normal balance is the increase or debit side.

Rules for Liability and Owner’s Equity
Accounts
Rules for Liability and Owner’s Capital Accounts
It is increased on the credit side (right side).
It is decreased on the debit side (left side).
The normal balance is the increase or credit side.

All Rules
I. Assets: ‘Debit the Increase and Credit the Decrease’
II. Liabilities: ‘Credit the Increase and Debit the Decrease’
III. Capital: ‘Credit the Increase and Debit the Decrease’
IV. Revenues: ‘Credit the Increase and Debit the Decrease’
V. Expenses: ‘Debit the Increase and Credit the Decrease’
Business Transaction Analysis
Apply the rules of debit

and credit.
When analyzing business

transactions, you should
Complete the entry in
T-account form.
Assets and Equities Transactions
Analyzing Business Transactions

Business Transaction 1
On October 1 Crista Vargas took $25,000 from personal savings and

deposited that amount to open a business checking account in the name of
Zip Delivery Service.
Analyzing Business Transactions

On October 1 Crista Vargas took $25,000 from personal savings and

deposited that amount to open a business checking account in the name of
Zip Delivery Service.
Use a T account to analyze an owner’s investment in the business:

On October 2 Crista Vargas took two telephones valued at $200 each from her home
and transferred them to the business as office equipment.
Use a T account to analyze an owner’s investment in the business:

On October 2 Crista Vargas took two telephones valued at $200 each from her home
and transferred them to the business as office equipment.
Increase an asset and decrease another asset:

On October 4 Zip issued Check 101 for $3,000 to buy a computer system.

On October 4 Zip issued Check 101 for $3,000 to buy a computer system.
Increase an asset and increase a liability:

On October 9 Zip bought a used truck on account from Coast to Coast Auto
for $12,000.
Increase an asset and increase a liability:

On October 9 Zip bought a used truck on account from Coast to Coast Auto
for $12,000.

On October 11 Zip sold one phone on account to Green Company for $200.

On October 11 Zip sold one phone on account to Green Company for $200.
Applying the Rules of Debit
Section 4.2
and Credit
Decrease a liability and decrease an asset:

On October 12 Zip mailed Check 102 for $350 as the first installment on the truck
purchased from Coast to Coast Auto on October 9.
Section 4.2
and Credit
Decrease a liability and decrease an asset:

On October 12 Zip mailed Check 102 for $350 as the first installment on the truck
purchased from Coast to Coast Auto on October 9.
Section 4.2
and Credit

On October 14 Zip received and deposited a check for $200 from Green Company. The
check is full payment for the telephone sold on account to Green Company on October
11.
Section 4.2
and Credit

On October 14 Zip received and deposited a check for $200 from Green Company. The
check is full payment for the telephone sold on account to Green Company on October
11.
DEBIT CREDIT
Identify the normal balance for each of the following accounts by indicating
Debit or Credit.
Cash in Bank __________
Accounts Receivable __________
Richard Sims, Capital __________
Computer Equipment __________
1st National Bank (mortgage on building) __________
Car Wash Equipment __________
Building __________
Office Supplies __________
Debit and credit rules
TRANSACTION ANALYSIS
On October 18 Jill’s Car Wash bought $10,000 worth of car wash equipment by issuing
Check #111. Using the Business Transaction Analysis method in your book, list the steps
you would use to record this transaction. Assume that asset accounts for Cash in Bank
and Car Wash Equipment exist.
Step 1: Identify the accounts affected.

The accounts Car Wash Equipment and Cash in Bank are
affected.
Step 2: Classify the accounts affected.
Car Wash Equipment is an asset account. Cash in Bank is an
asset account
(continued)
On October 18 Dick’s Car Wash bought $10,000 worth of car wash equipment by issuing
Step 3: Determine the amount of increase or decrease for each

account affected.
Car Wash Equipment is increased by $10,000. Cash in Bank
is decreased by $10,000.
(continued)
On October 18 Dick’s Car Wash bought $10,000 worth of car wash equipment by issuing
Step 4: Which account is debited and for what amount?

Increases in asset accounts are recorded as debits. Debit
Car Wash Equipment for $10,000.
Step 5: Which account is credited and for what amount?
Decreases in asset accounts are recorded as credits. Credit
Cash in Bank for $10,000.
What does “double-entry accounting” mean?
Every transaction has two sides: a debit (left) side and a credit (right) side. If a business
were to buy supplies for cash, two things would happen. First, the amount of supplies
would go up, and since supplies are assets, the increase to the Supplies account would
be recorded as a debit. Second, the balance in the Cash in Bank account would go
down, and since cash is an asset, the decrease in Cash in Bank would be recorded as a
credit.
Primary Accounting Documents
• Following primary accounting documents
have to be maintained:
Receipt Vouchers
Payment Vouchers
Fund Transfer Vouchers/Contra Vouchers.
Journal Vouchers
Primary Books of Accounts
Before preparation of Financial Statements we
have to prepare following primary books of
accounts:
Cash book
Bank book ( incl. Bank Reconciliation
Statement)
Journal book
Ledger
Trial Balance
Financial Statement
 Income Statement/Trading and Profit & Loss

Account
 Balance Sheet.
Flow of information
Source documents:
• sales invoices
• purchase invoices
• cash register tapes
• Cheques
• credit notes.
Flow of information
Types of journals:
• general journal
• specialised journals.
Flow of information (continued)
Types of ledgers:
• general ledgers
• subsidiary ledgers.
• The Trial Balance

– shows all the balances of the accounts in the
General Ledger
– is the basis for the preparation of the financial
statements.
• The Statement of Financial Performance

– shows the financial performance of the business.
Functions of a journal:
• Categorizes similar items together
• provides a permanent record of the

transaction
• classifies items into debit and credit
• assists in posting transactions to the

ledger.
Cash receipts journal
Cash payments journal
Sales journal
Purchases journal
General journal
Ledgers
• T ̵ Account
Ledgers (continued)
• Columnar format
Trial Balance
Trial Balance assists in finding:

• arithmetic error
• recording only half of an entry.
PRACTICAL QUESTIONS ON
PREPARATION OF JOURNAL,
LEDGER AND TRIAL BALANCE
QUESTION 1
SOLUTION TO QUESTION 1: JOURNAL ENTRIES
SOLUTION TO QUESTION 1: LEDGER
SOLUTION TO QUESTION 1: TRIAL BALANCE
QUESTION 2
SOLUTION TO QUESTION 2: TRIAL BALANCE
Question #3
• Fahed inherited a large sum of money and decided to open up his own
business. He decided to open up a mechanic shop for fixing high end
sports cars, naming his business Fahed Fixes Fast Cars.
The following transactions took place during the month of August, 2015:
• August 1: Fahed invested 500,000 in a new business called Fahed Fixes
Fast Cars.
• August 2: Fahed transferred some mechanic tools worth 15,000 from
his home to the business.
• August 4: The business purchased repair equipment valued at 70,000
on account from ‘Tools R Us’
• August 5: The business purchased mechanic tools for 25,000 in cash.
• August 6: The business wrote check 101 for 6,000 for rent of the
mechanic shop.
Question #3…contd.
• August 10: The business received its first customer and made a minor repair for a
customer’s car for 5,000 in cash.
• August 11: The business repaired a car for 14,000 on account for customer Kobe Bryant.
• August 12: The business wrote check 102 in the amount of 10,000 as partial payment for
the repair equipment purchased on August 4th from ‘Tools R Us.’
• August 14: The business wrote check 103 in the amount of 4,800 for the insurance bill
for the month.
• August 15: The business repaired a customer’s car for 19,200 on account for customer
Derek Jeter.
• August 20: The business received a check in the amount of 8,500 as partial payment for
the repairs previously made for customer Kobe Bryant on August 11th.
Question#3…contd.
• August 21: The business paid the employee salaries for $12,000 in cash.
• August 22: Fahed withdrew $4,000 in cash for personal use.
• August 23: The business repaired a customer’s car for $7,800 in cash.
• August 24: The business received full payment for the repairs made for Derek
Jeter on August 15th.
• August 25: The business received a check for $5,500 for the repairs previously
provided on account for customer Kobe Bryant to complete the partial payment
on August 20.
• August 27: The business paid in cash for $ 8,000 for repair equipment purchased
on account for Tools R Us on August 12.
• August 28 : The business wrote a check 104 for $2,450 to purchase office
supplies.
• August 29 : The business paid an electricity bill for $4,700 in cash.
• August 31: The business repaired a car of $ 11,000 on account for the costumer
Tom Brady.
PREPARATION OF
FINANCIAL STATEMENTS
PREPARATION OF FINANCIAL STATEMENTS:
WHAT ARE THESE?
• The term ‘Final Accounts’ is a broader term.

The three following financial statements are
prepared for the preparation of final accounts:
– Trading account: It shows gross profit/loss of the
business.
– Profit & loss account: It shows the net profit/loss
of the business.
– Balance sheet: It shows the financial position of
the business
PREPARATION OF FINANCIAL STATEMENTS:
FINAL ACCOUNTS? WHY THIS NAME
• Trading, profit & loss account and balance sheet,

all these three together, are called as final
accounts.
• Final result of trading is known through Profit
and Loss Account.
• Financial position is reflected by Balance Sheet.
• These are, usually, prepared at the close of the
year hence known as final accounts
SOURCE: http://www.academia.edu/4304082/Chapter_5_Preparation_of_Final_Accounts_with_Adjustments
STARTING POINT: TRIAL BALANCE
• All business transactions are first recorded in Journal or Subsidiary Books.

• They are transferred to Ledger and balanced it.
• The main object of keeping the books of accounts is to ascertain the profit
or loss of business and to assess the financial position of the business at
the end of the year.
• The object is better served if the businessman first satisfies himself that
the accounts written up during the year are correct or al least
arithmetically accurate.
• When the transactions are recorded under double entry system, there is a
credit for every debit, when on a/c is debited; another a/c is credited with
equal amount.
• If a Statement is prepared with debit balances on one side and credit
balances on the other side, the totals of the two sides will be equal. Such a
Statement is called Trial Balance
SOURCE: http://buc.edu.in/sde_book/dip_fintally.pdf
ILLUSTRATION:
SOURCE: http://buc.edu.in/sde_book/dip_fintally.pdf
TRADING ACCOUNT
• Trading refers buying and selling of goods
• Trading A/c shows the result of buying and selling of goods
• This account is prepared to find out the difference between the Selling prices
and Cost price
• If the selling price exceeds the cost price, it will bring Gross Profit
– For example, if the cost price of Rs. 50,000 worth of goods are sold for Rs. 60,000 that
will bring in Gross Profit of Rs. 10,000
• If the cost price exceeds the selling price, the result will be Gross Loss.
– For example, if the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will
result in Gross Loss of Rs. 10,000
• Thus the Gross Profit or Gross Loss is indicated in Trading Account

PREPARATION OF TRADING ACCOUNT
• For preparing Trading Account, closing

entries shall be made in the Journal Proper
• Through these entries, items of revenue and

expenses related to the Trading Account are
closed by transferring their balances to
Trading Account
CLOSING ENTRIES- TRADING ACCOUNT
FORMAT OF TRADING ACCOUNT
BALANCING TRADING ACCOUNT
• The difference between the two sides of the Trading

Account indicates either Gross Profit or Gross Loss.
• If the total on the credit side is more, the difference

represents Gross Profit. On the other hand, if the
total of the debit side is high, the difference
represents Gross Loss.
• The Gross Profit or Gross Loss is transferred to

Profit and Loss A/C
Calculation of Gross Profit
From the following balances extracted from the books of M/s ABC. Calculate the amount of :
• Cost of goods available for sale
• Cost of goods sold during the year
• Gross Profit
(₹ )
• Opening Stock 25,000
• Credit Purchases 7,50,000
• Cash Purchases 3,00,000
• Credit Sales 12,00,000
• Cash Sales 4,00,000
• Wages 1,00,000
• Salaries 1,40,000
• Closing stock 30,000
• Sales return 50,000
• Purchases return 10,000
PREPARATION OF TRADING ACCOUNT: PRACTICAL
QUESTION
SOLUTION (TRADING ACCOUNT)
From the trial balance of
Mr. C, You are required to
prepare trading account
for the year ending March
31, 2014:
PROFIT & LOSS ACCOUNT
• Trading account reveals Gross Profit or Gross Loss.

• Gross Profit is transferred to credit side of Profit
and Loss A/c
• Gross Loss is transferred to debit side of the Profit
Loss Account
• Thus Profit and Loss A/c commences after
preparation of Trading A/C
• Profit & Loss A/c reveals Net Profit or Net loss at a
given time of accounting year.
PREPARATION OF PROFIT & LOSS ACCOUNT
• For preparing Profit and Loss Account, closing

entries shall be made in the Journal Proper.
• Through these entries, items of revenue and

expenses related to the Profit and Loss Account
are closed by transferring their balances to Profit
and Loss Account
CLOSING ENTRIES- PROFIT & LOSS ACCOUNT
FORMAT OF PROFIT & LOSS ACCOUNT
RELATIONSHIP BETWEEN TRADING AND PROFIT AND
LOSS ACCOUNT
PREPARATION OF PROFIT AND LOSS ACCOUNT: PRACTICAL
QUESTION
SOLUTION (PROFIT AND LOSS ACCOUNT)
BALANCE SHEET
• The Word ‘Balance Sheet’ is defined as “a Statement
which sets out the Assets and Liabilities of a business
firm and which serves to ascertain the financial
position of the same on any particular date.”
• It is a statement and not an account
• Purpose:
– To know the total Assets invested in business
– To know the Position of owner’s equity
– To know the liabilities of business
TWO FORMS:
• HORIZONTAL:
– On the left hand side of this statement, the
liabilities and capital are shown. On the right hand
side, all the assets are shown.
– Therefore the two sides of the Balance sheet must
always be equal.
• Assets must exceed the external liabilities
• VERTICAL:
ASSETS:
• Assets represent everything which a business owns and has money
value. Assets are always shown as debit balance in the ledger. Assets are
classified as follows.
• Tangible Assets: Assets which can be seen and felt by touch are called
Tangible Assets. Tangible Assets are classified into two:
1. Fixed Assets: Assets which are durable in nature and used in business over and
again are known as Fixed Assets.
e.g. land and Building, Machinery, Trucks, etc.
2. Floating Assets or Current Assets: Current Assets are i. Meant to be converted
into cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance,
stock, Sundry Debtors.
• Intangible Assets: Assets which cannot be seen and has no fixed shape.
E.g., goodwill, Patent.
• Fictitious assets: Assets which have no real value and will appear on the
Assets side of B/S. are known as Fictitious assets:
E.g. Preliminary expenses, Discount or creditors.
LIABILITIES:
• All that the business owes to others are called Liabilities. It also
includes Proprietor’s Capital.
• Classification of Liabilities:
– Long Term Liabilities: Liabilities will be redeemed after a long period of
time 10 to 15 years E.g. Capital, Long Term Loans.
– Current Liabilities: Liabilities, which are redeemed within a year, are

called Current Liabilities or short-term liabilities E.g. Trade creditors,
B/P, Bank Loan.
– Contingent Liabilities: Liabilities, which have the following features, are

called contingent liabilities. They are:
• Not actual liability at present
• Might become a liability in future on condition that the contemplated event
occurs.
• E.g. Liability in respect of pending suit.
PREPARATION OF BALANCE SHEET:
GROUPING AND MARSHALLING
• GROUPING of Assets and Liabilities:
– Grouping of assets and liabilities means putting various assets and liabilities
having same nature under some common headings. For example, instead of
showing the names of all customers, the consolidated amount is to be shown
under the head ‘Sundry Debtors’.
– Similarly, instead of showing the names of all persons to whom amount is
owed on account of goods purchased or services rendered, the consolidated
amount is to be shown under the head ‘Sundry Creditors’.
• MARSHALING of Assets and Liabilities:
– All assets and liabilities of a business enterprise can be shown either in an
order of
• Liquidity or
• Permanence.
– The arrangement of various assets and liabilities in either of this way is called
Marshaling of Assets and Liabilities.
FORMAT OF BALANCE SHEET:
(in order of Permanence)
FORMAT OF BALANCE SHEET:
(in order of liquidity)
ADJUSTMENT ENTRIES:
Meaning and Purpose
• Transactions omitted relate to the current year must be entered
in books.
• If a transaction entered is not related to the current year, fully
or partly, that portion of income or expense must be excluded.
• This process is made through adjustment entries in the books
of accounts.
• If we ignore to make the necessary adjustments, the trading,
profit & loss accounts do not show the true profit or loss and in
consequence balance sheet fails to depict true financial
position of the business.
– This situation defeats the very purpose of final accounts.
• Hence, adjustment entries play an important role in presenting
correct picture of accounts
PREPARATION OF FINAL ACCOUNTS:
COMPREHENSIVE
ILLUSTRATIONS
COMPREHENSIVE QUESTION 1
SOLUTION TO COMPREHENSIVE QUESTION 1
Simple question without adjustments
ADJUSTMENTS
 Closing Stock • Interest on Capital
 Outstanding expenses • Interest on drawings
• Further Bad Debts
 Accrued Income
• Provision for doubtful
 Prepaid Expenses debts
 Unearned Income • Provision for discount on
debtors
 Depreciation
• Provision for discount on
 Goods taken for personal use creditors
• Goods destroyed by fire
 Goods on sale or return basis
• Mangers Commission
 Goods given as charity
Examples of Adjustments:
Provision for doubtful debtors
#1
Kishore & co. has been a running garment business. At the end
of Dec, 2007, the firm’s books of accounts show the debtors at
Rs. 3,00,000. Out of those debtors, Rs. 10,00 are not traceable
and to be treated as bad debts. By practice, over the years, it
has been noticed that the business looses money even on the
expected realizations from the good debtors too.
The business adopts a consistent policy of making a provision of
5% on the expected good debtors towards bad and
doubtful debts.
Show the position in the financial statements.
#2
At the end of the year 2008, Radhi & Co. has observed that
their the debtors are Rs. 5,00,000.
Out of those debtors, Rs. 5,000 are not traceable and to be
treated as bad debts. By practice, over the years, it has been
noticed that the business looses money on the expected
realizations from the good debtors too. The business adopts
a consistent policy of making a provision of 5% on the
expected good debtors. Provision for bad and doubtful debts
stand at Rs. 14,500 at the end of Dec, 2007.
Show the position in the financial statements.
#3
At the end of the year 2008, Dimpy & Co. has
observed that their the debtors are Rs. 2,00,000.
Out of those debtors, Rs. 3,000 are to be treated
as bad debts. Provision for bad & doubtful debts
Rs. 4,000 is needed at the end of Dec, 2008.
• Provision for bad & doubtful debts stand at Rs.
10,500 at the end of Dec, 2007. Show the
position in the financial statements.
Examples of Adjustments
• Uninsured Goods worth Rs. 7,000 destroyed by fire, OR Goods worth

Rs. 7,000 destroyed by fire but insurance Co. admitted no claim.
• Insured Goods worth Rs. 5,000 destroyed by fire and insurance
company admitted full claim.
• Insured Goods worth Rs. 25,000 destroyed by fire but insurance Co.
admitted a claim of Rs. 23,000.
• Goods costing Rs. 12000 were sent to customer on sale or return for
Rs. 12500 on 30th Dec. and had been recorded as actual sales.
• Wages include a sum of Rs. 10,000 spent on the erection of machinery
• Purchases include two Typewriters costing Rs. 27,000
GOODS SENT ON APPROVAL: EXAMPLES
• In preparing the final account of a company it is found

that the amount of sundry debtors Rs 2,00,000
includes Rs 40,000 worth of goods sent out on
approval and debited to customers’ accounts,
– in respect of which the time for returning the goods
has not yet expired.
– These goods have been invoiced at 33 1/3% above the
cost
• A Departmental Store has credited certain items of

Sales on Approval aggregating Rs 15,000 to Sales
Account.
• Of these, goods to the value of Rs 4,000 have been
returned and taken into stock at cost Rs 2,000
though the record of return was omitted in the
accounts.
• And in respect of another parcel of Rs 3,000 (cost
being Rs 1,500) the period of approval did not expire
on the closing date.
COMPREHENSIVE QUESTION 2 • ADJUSTMENTS:
• Stock on hand on 31st

December, 2008 is Rs. 6,800.
• Machinery is to be depreciated
at the rate of 10% and Patents at
the rate of 20%.
• Salaries for the month of

December, 2008 amounting to
Rs. 1,500 were unpaid.
• Insurance includes a premium of

Rs. 170 per annum on a policy
expiring on 30th June,2009.
• Wages include a sum of Rs.

2,000 spent on the erection of a
cycle shed for employees and
customers.
• A provision for Bad and Doubtful

Debts is to be created to the
extent of 5 per cent on Sundry
Debtors
Mr. Arvindkumar had a small business enterprise. He has given the trial balance as at 31st March 2013
• ADJUSTMENTS:
1. Stock as on 31st March 2013 was

valued at Rs. 60,000
2. Write off further Rs. 6,000 as bad
debt and maintain a provision of
5% on doubtful debt.
3. Goods costing Rs. 10,000 were sent
on approval basis to a customer for
` 12,000 on 30th March, 2013. This
was recorded as actual sales.
4. RS. 2,400 paid as rent for office was
debited to Landlord’s Account and
was included in debtors.
5. (General Manager is to be given
commission at 10% of net profits
after charging his commission.
6. Works manager is to be given a
commission at 12% of net profit
before charging General Manager’s
commission and his own.
You are required to prepare final
accounts in the books of Mr.
Arvindkumar.

Accounting For Managers - Unit 2

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B.

A (H) BUSINESS ECONOMICS

• Data Entry in the primary and secondary books of accounts -

• Preparation of Final Accounts (Sole Trader); Trading and Profit

• Understanding financial statements of a Joint Stock Company:

• Explain the principles of the double entry

• State the rules of debit and credit for each

• Describe the flow of information through an

• Explain the nature and purpose of a ledger.

• Record a variety of business transactions in

• Explain the nature and purpose of a Trial

 Only Personal accounts & cash book are opened.

 Under this system balance sheet is not prepared.

For correct presentation both of them should be recorded.

Requires maintenance of records of assets, liabilities, capital, revenues

Impact of each transaction can be seen or measured.

Total assets are equal to total equities.

• a debtor paying an account

• There are at least two entries for each

• Double entry transactions are entered into all

Personal Account: Personal

E.g Land, Building, Plant & Machinery,

• Outstanding Interest A/c

Eg .Property Tax has been received of Rs.10,000/-

Cash A/C Dr Rs.10,000/-

Accrual basis of accounting is an accounting system which

• To Property Tax Receivable A/C Cr 10,000/-

Capital expenditure is the expenditure

Revenue Expenditure is the expenditure

• The sum of rs.40,000 has been spent on a machine as follows:

• For Real Accounts: Debit what comes in and

To Bank A/c Cr. Rs. 25000/-

• Mr. Nirmal has the following transactions in the month of April.

• 20th April : Sold goods to Utsav for cash 6,000

• A business’s transactions can be analyzed

The T account gets its name from being shaped like a T.

Rules for Asset Accounts

It is increased on the debit side (left side).

It is decreased on the credit side (right side).

The normal balance is the increase or debit side.

Rules for Liability and Owner’s Capital Accounts

It is increased on the credit side (right side).

It is decreased on the debit side (left side).

The normal balance is the increase or credit side.

Apply the rules of debit

When analyzing business

Analyzing Business Transactions

On October 1 Crista Vargas took $25,000 from personal savings and

Analyzing Business Transactions

On October 1 Crista Vargas took $25,000 from personal savings and

Use a T account to analyze an owner’s investment in the business:

Use a T account to analyze an owner’s investment in the business:

Increase an asset and decrease another asset:

Increase an asset and decrease another asset:

Increase an asset and increase a liability:

Increase an asset and increase a liability:

Increase an asset and decrease another asset:

Increase an asset and decrease another asset:

Decrease a liability and decrease an asset: