Meaning of Accounting:

Accounting is the process of identifying, measuring, recording, classifying, summarizing,

analyzing, interpreting and communicating to the stakeholders.
Types of Account:
1. Personal Account – Natural Personal Account, Artificial Personal Account,
Representative Personal account.
2. Real Account – Tangible Real Account and Intangible Real Account
3. Nominal Account – Expenditure Account and Income Accounts.
Expenditures a/c – Salary, Rent, Electricity, Stationery, Commission, income tax and so
like.
Income a/c - Sales, Commission received, rent received,
Golden Rules:
1. Personal account – Debit the receiver and Credit the giver. – Ex. Sita’s A/c, Reliance
Industries Ltd. A/c, Outstanding commission and Accrued commission.
2. Real account – Debit what comes in and Credit what goes out.
3. Nominal account – Debit all the expenses and losses and Credit all the income and gains.

Dr. Salary A/c Cr

Date Particular Amount Date Particular Amount
28.12.202 To Cash a/c 25,000 28.12.202 By Cash a/c 60,000
0 To Sunil a/c 25,000 0 By Madhu a/c 1,00,000
29.12.202 To Bal. c/d (Credit) 1,10,000 30.12.202
0 0
31.12.202
0
1,60,000 1,60,000

Dr. Cash a/c Cr.

Date Particular Amount Date Particular Amount
To Bal. b/d 10,000 By Salary 25,000
To Salary 60,000 31.12.202 By Bal. c/d 45,000
0
70,000 70,000
01.01.202 To Bal. b/d 45,000
1
One Column cash book 1 to 1000
Date Particulars LF Cash Date Particulars LF Cash
To Sunil 25

Two Column cash book

Date Particulars LF Bank Cash Dat Particulars LF Bank Cash
e

Three column cash book

Dat Particular L Dis Cas Ban Dat Particular L Dis Cas Bank
e s F . h k e s F . h

Basic Accounting Terms

Entity:
Any entity means an economic unit that performs economic activities (Ex. Birla Industries,
Reliance Industries Ltd.)
Event:
An event is a happening of consequence to an entity (Ex. Use of raw material for production).
Business transaction:
A business transaction is an exchange in which each participant receives or sacrifices value (Ex.
Purchase of raw material for cash or on credit). It involves exchange of goods or services on cash
or credit basis. It is an economic event that relates to a business entity involving transfer of
money or money’s worth.
Voucher:
It is a document which serves as an evidence of a transaction. Ex. In case of cash purchases, cash
memos and incase of credit purchases, purchase invoices are vouchers. The vouchers act as
source documents on the basis of which transactions are recorded in the books of accounts.
Entry:
It is the record made in the books of accounts in respect of a transactions or event. An entry is
passed on the basis of vouchers.
Assets:
Assets refers to tangible objects or intangible rights of an enterprise which carry probable future
benefits. In other words. An asset is a resource controlled by the enterprise as a result of past
events and from which future economic benefits are expected to flow to the enterprise.
Classification of Assets

Current Assets Fixed Assets

Tangible Fixed Assets Intangible Fixed Asset

Current Assets: Current assets are those assets which are held (i) in the form of cash, (ii) for
their conversion into cash, and (iii) for their consumption in the production of goods or rendering
of services in the course of business. For ex., Cash in hand, cash at bank, stock of finished goods,
debtors, bills receivables, stock of raw materials, stock of work in progress, prepaid expenses,
advanced paid
Fixed assets: Fixed assets refer to those assets which are hold for the purposes of providing or
producing goods or services and those that are not held for resale in the normal course of
business. Fixed assets may be classified as follows:
a. Tangible Fixed Assets: refer to those fixed assets which can be seen and touched. For ex.,
Land and Building, Plant and Machinery and Furniture and Fixtures.
 b. Intangible Fixed Assets: refer to those fixed assets which cannot be seen and touched. For
ex., Goodwill, Patents, Trademarks, Copyright and the like.
Liabilities:
Liabilities refer to the financial obligations of an enterprise other than owner’s funds. Liabilities
may be broadly classified as follows:
a. Current liabilities refer to those liabilities which fall due for payment in a relatively
short period, (normally, a period of not more than 12 months from the date of the balance
sheet). For ex., Bills payable, Trade Creditors, Outstanding Expenses, Bank overdraft and
so on.
b. Long term liabilities: refer to those liabilities which do not fall due for payment in a
relatively short period. For ex., long term loans, debentures and the like.
Capital:
Capital is the excess of assets over external liabilities. It refers to the amount invested in an
enterprise by the proprietor (in case of proprietorship) or partners (in case of a partnership
concern). This amount is increased by the amount of profits earned and amount of additional
capital introduced and is creased by the amount of losses incurred and the amount withdrawn
(whether in the form of cash or kind). It represents the owner’s claim on the assets of the
enterprise. It is also known as owner’s equity or net assets or net worth.
Net worth = Paid up capital + Reserves and surplus
Drawings:
The term ‘Drawings’ refer to the total amount of cash or goods or any other asset withdrawn by
the proprietor (in case of a proprietorship enterprise) or partner (in case of partnership enterprise)
for personal use. For ex. In case cash of Rs. 10,000 and goods costing Rs. 5,000 are withdrawn
by a proprietor, Rs. 15,000 is called as the amount of drawings.
Purchase:
The term purchase refers to the total amount of goods obtained by an enterprise for resale or for
use in the production of goods or rendering of services in the normal course of business. The
purchases may be for cash or on credit. For ex., in case 100 units are purchased at Rs. 2 per unit
for cash, Rs. 200 is called as the amount of cash purchase. In case 200 units are purchased at Rs.
3 per unit on credit, Rs. 600 is called the amount of credit purchase.
Sales:
The term sales refers to the amount for which the goods are sold or services are rendered. The
sales may be for cash or on credit. For ex. In case 60 units are sold at Rs. 5 per unit for cash, Rs.
300 is called as the amount of cash sales. In case 120 units are sold at Rs. 6 per unit on credit, Rs.
720 is called as the amount of credit sales.
Stock (Inventory or Merchandise):
The term stock refers to tangible property held for sale in the ordinary course of business or for
consumption in the production of goods or services for sale. It includes stock of raw materials,
semi-finished goods and finished goods. For ex., in case 40 units out of 100 units (purchased at
Rs. 2 per unit) remained unsold, Rs. 80 is called as the cost of stock. The stock may be opening
stock or closing stock. Opening stock means the goods lying unsold at the beginning of the
current accounting period. Closing stock means the goods lying unsold at the end of the current
accounting period.
Trade Debtors:
The term trade debtor refers to the person from whom the amounts are due for goods sold or
services rendered on credit basis. For ex., in case 60 units are sold to Mr. X at Rs. 5 per unit on
credit, Mr. X is a Trade Debtor to the business.
Trade Creditors:
The term trade creditor refers to the person to whom the amounts are due for goods purchased or
services rendered on credit basis. For ex., in case 100 units are purchased at Rs. 2 per unit from
Mr. Y on credit, Mr. Y is a trade creditor of the business.
Receivables:
The term receivables include both the trade debtors and bills receivables. A bill of exchange is an
unconditional order in writing given by the creditor to the debtor to pay on demand or at a fixed
or determinable future time, a certain sum of money to or to the order of a specified person or to
the bearer. This bill of exchange is known as bills receivable for the creditor.
Payable:
The term payable include both the trade creditors and bills payable. This bill of exchange is
known as bills payable for the debtors.
Expenditure:
Expenditure are the costs incurred in acquiring an asset or service in the form of outflow or
depletion of assets or incurrences of liability. Cost is the measure of expenditure. It may be
expired or unexpired.
a. Expired cost or expense is that portion of the expenditure which has been consumed
during the current accounting period. It decreases equity. Expired cost is the following
two types:
a. Utilized cost is that portion of expired cost which benefits the enterprise in
producing revenue and includes cost of merchandise sold or services rendered.
For ex., commission on sales, advertisement expenses.
b. Lost Cost is that portion of expired cost which does not contribute to revenue and
is regarded as loss. For ex., loss of uninsured asset due to fire.
b. Unexpired cost or Asset is that portion of the expenditure which has not been consumed
till the end of the accounting period. In other words, it is the unconsumed portion of the
 expenditure at the end of current accounting period. It does not reduce equity. Usually,
the present unexpired cost becomes further expired cost over a long period.
Income:
Income is increase in economic benefits during an accounting period in the form of (a) inflow of
assets, or (b) decrease of liabilities, that result in increase in internal equity other than those
relating to contribution from equity participants.
Expenses:
Expenses are decrease in economic benefits during an accounting period in the form of (a)
outflow or depletion of assets or (b) incurrence of liabilities that result in decrease in internal
equity other than those relating to contribution from equity participant.
Gains:
Gains are increase in equity (not assets) from incidental transaction of an entity and form all
other transactions and other events and circumstances affecting the entity during the accounting
period except those that result from revenues or investment by equity participants. These gains
may be operating or non-operating.
Assets = Capital + Liabilities
Operating income and Non-operating income
Directly involved in the business – Operating income - Sale
Indirectly involved in the business – Non Operating income – Interest, Commission
1. Profit on sale of marketable securities is usually considered as operating gain.
2. Profit on sale of a fixed asset is usually considered as non-operating gain.
Losses:
Losses are decreases in equity (non-assets) from incidental transactions of an entity and from all
other transactions and other events and circumstances affecting the entity during the accounting
period except those result from expenses or distribution to equity participants. These losses may
be operating or non-operating.
1. Loss on sale of marketable securities, losses on writing down inventory from cost to
market value, writing off bad debts are considered as operating losses.
2. Loss on sale of a fixed asset, losses from disposal of segments of enterprises, losses on
foreign currency devaluations are usually considered as non-operating losses.
10,00,000 – 5,00,000 = 5,00,000 – 4,00,000 = -1,00,000 Loss
10,00,000 – 6,00,000 = 4,00,000 -5,00,000 = 1,00,000 Gain
Revenue:
The term revenue refers to the amount charged for the goods sold or services rendered, or
permitting others to use the enterprise’s resources yielding interest, royalty and dividend. For ex.,
sales, commission earned, interest earned, royalty earned dividend earned.
Net Profit:
Net profit means the excess of revenue over expenses. It increases owners’ equity.
Net Loss:
Net loss means the excess of expenses over revenue. It decreases owners’ equity.

Principles of Accounting:

1. Business Entity or Accounting Entity Concept or Separate Entity Concept: A

business is treated as a separate entity that is distinct from its owner(s), and all other
economic proprietors. For ex., in case of a proprietary concern, though the legal entity of
the business and its proprietor is the same, for the purpose of accounting, they are to be
treated as separate from each other.
2. Money Measurement Concept: Only those transactions which are capable of being
expressed in terms of money are included in the accounting records. In other words, the
information which cannot be expressed in terms of money is not included in accounting
records.
3. Accounting Period Concept or Periodicity Assumption or Time Period Assumption:
The economic life of an enterprise is artificially split into periodic intervals which are
known as accounting periods, at the end of which an income statement (Profit and Loss
account) and position statement (Balance Sheet) are prepared to show the performance
and financial position. The use of this assumption further requires the allocation of
expenses between capital and revenue. From 1st April to 31st March in the following year.
USA 1st Jan to 31st Dec 2021.
4. Going Concern Assumption or Continuity Assumption: The enterprise is normally
viewed as a going concern that is, continuing in operation for the foreseeable future. It is
assumed that the enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of its operations.
5. Duality Principles: Two fold aspect of a transaction is called dual aspect or duality of a
transaction. This duality is the basis of double entry records. As the name implies, the
entry made for each transaction is composed of two parts – one for debit and another for
credit.
6. Revenue Recognition Principle: this principle is mainly concerned with the revenue
being recognized in the income statement of an enterprise. Revenue is the gross inflow of
cash, receivables or other considerations arising in the course of ordinary activities of an
enterprise from the sale of goods, rendering of services and use of enterprise resources by
others yielding interests, royalties and dividends.
7. Historical Cost Concept: An asset is ordinarily recorded in the accounting records at the
price paid to acquire it at the time of its acquisition and the cost becomes the basis for the
accounts during the period of acquisition and subsequent accounting periods.
8. Matching Concern: The expenses incurred in an accounting period should be matched
with the revenues recognized in that period, that is, if revenue is recognized on all goods
sold during a period, cost of those goods sold should also be charged to that period. It is
wrong to recognize revenue on all sales, but charge expenses only on such sales as are
collected in cash till that period.
Dr. Cash A/c Cr.
Particulars Amount Particulars Amount
To Bal. b/d 5,000 By Electricity bill 1,000
To Rent 10,000 By Phone bill 500
To Salary 25,000 By other exp. 15,000
To Commission 10,000 By Bal. c/d (B/f) 33,500

50,000 50,000
 9. Objectivity Concept: According to this principle, the accounting data should be definite,
verifiable and free from personal bias of the accountant. In other words, this principle
requires that each recorded transaction or event in the books of accounts should have an
adequate evidence to support it.
Error of Omission - Number 100,000 1,00,000
Error of Commission - Character One Lakh One Lakh
10. Convention of Full Disclosure: The financial statements should act as means of
conveying and not concealing. The financial statements must disclose all the relevant and
reliable information which they purport to represent, so that the information may be
useful for the users.
11. Convention of Materiality: This principle is basically an exception to the full disclosure
principle. The full disclosure principle requires that all facts necessary to ensure that the
financial statements are not misleading, must be disclosed, whereas the materiality
principle requires that the items or events having an insignificant economic effect or not
being relevant to the user’s need not be disclosed. According to the materiality principle,
all relatively relevant items, the knowledge of which might influence the decision of the
users of the financial statements, should be disclosed in the financial statements.
12. Convention of Consistency: According to this principle, whatever accounting practices
(whether logical or not) are selected for a given category of transactions., they should be
followed on a horizontal basis from one accounting period to another to achieve
compatibility, for instance, it the inventory is valued on LIFO basis, this basis should be
followed year after year and if a particular asset is depreciated according to WDV
method, this method should be followed year after year.
13. Convention of Conservatism: This principle of ‘anticipate no profit but provide for
all probable losses’ should be applied. The valuation of stock-in-trade at a lower of cost
or net realizable value and making the provisions for doubtful debts and discount debtors
are the applications of this principle.
Accounting Equation:
Meaning: An accounting equation is a statement of equality between the resources and the
sources which finance the resources and is expressed as under:
From where will I get the money?
To where will I invest the money?
Share or debt to get the money
Buying the fixed assets and invest on current assets.
Resources = Sources of Finance
Resources means the assets. The asserts refer to the tangible objectives (ex., land and building,
plant and machinery, furniture, investments, stock, debtors, bank balance, cash balance) or
intangible rights (ex., patents, trademarks, copyright) owned by an enterprise and carrying
probable future benefits.
Sources of finance mean equities and includes internal sources (internal equity – i.e., capital)
and external sources (External equity) (i.e., liabilities). Capital refers to the amount invested in
an enterprise by its owners. Liabilities are the financial obligations of an enterprise other than the
owners’ funds (Debt – Debentures, loan from financial institutions). Thus, the aforesaid
accounting equation may be expressed as follows:
Total Assets = Total Equities
Or
Assets = Internal Equity + External Equity
Or
Assets = Capital + Liabilities
Assets = Liabilities + Capital
Matching concept

Liabilities Amount Assets Amount

Share capital Fixed Assets

Reserves and Surplus Investment

Secured Loan Current Assets, Loan and

Advances
Unsecured Loan
Miscellaneous Exp.
Current Liabilities and
Provision

XXXX XXXX

Since, the liability holders have a definite and prior claim against the assets, the capital is also
called as a residual of assets over liabilities and may be expressed as follows:
Capital = Assets – Liabilities
This equation is fundamental in the sense that it gives foundation to the double entry book
keeping. This equation holds well for all transactions and events and at all periods of time since
every transaction and event has two aspects.
Procedure for developing an accounting equation:
1. Ascertain the variables (i.e., Assets, Liabilities or Capital) of an equation affected by a
transaction.
2. Find out the effect (in terms of increase or decrease) of a transaction on the variables of
an equation.
3. Show the effect on the appropriate side of an equation and ensure that the total of right
hand side is equal to the total of left hand side.
Problem No. 1
Show the accounting equation on the basis of the following transactions.
1. Mr. X commenced business with Rs. 50,000.
2. Paid rent in advance Rs. 2,000.
3. Purchased a printer for Rs. 7,000.
4. Bought furniture form M/s Mohan Furniture’s on credit for Rs. 3,000.
5. Purchased goods from Sohan for cash Rs. 35,000.
6. Sold goods to Shyam for cash Rs. 40,000 (costing Rs. 30,000).
7. Bought goods from Ramesh for Rs. 30,000.
8. Sold goods to Shyam costing Rs. 30,000 for Rs. 50,000.
9. Purchased household goods for Rs. 15,000 giving Rs. 5,000 in cash and the balance
through a loan.
10. Goods destroyed by fire (cost Rs. 500, Sale Price Rs. 600).
11. Paid half the amount owed to Mohan Furniture’s.
12. Paid cash Rs. 500 for loan and Rs. 300 for interest.
13. Withdrew goods for personal use (cost Rs. 500, sale price Rs. 600)
14. Received Rs. 49,500 from Shyam in full settlement.
15. Paid salary Rs. 500 and salary outstanding Rs. 100.
16. Charged depreciation of Rs. 300 on furniture and Rs. 100 on printer.
17. Commission received in advance Rs. 1,000.
Sol.
Assets = Liabilities + Capital
Statement Showing Accounting Equation:
Sl. Particulars Assets = Liabilities + Capital
No.
1 Mr. X Commenced business with Rs. 50,000. 50,000 = 0 + 50,000
New Equation 50,000 = 0 + 50,000
2 Paid rent in advance Rs. 2,000 -2,000
 +2,000 0 0
New Equation 50,000 = 0 + 50,000
3 Purchased printer for Rs. 7,000 -7,000
+7,000 0 + 0
50,000 = 0 + 50,000
4 Purchased furniture from Mohan Rs. 3,000 +3,000 = 3,000 + 0
53,000 = 3,000 + 50,000
5 Purchased good from Sohan for cash Rs. -35,000
35,000 +35,000 = 0 + 0
53,000 = 3,000 + 50,000
6 +40,000
Sold good to Shyam for cash Rs. 40,000 -30,000 = 0 + 10,000
7 costing Rs. 30,000 63,000 = 3,000 + 60,000
+30,000 = 30,000 + 0
Bought goods from Ramesh for Rs. 30,000 93,000 = 33,000 + 60,000
8 (credit purchase) +50,000
-30,000 = 0 + 20,000
1,13,000 = 33,000 + 80,000
9 Sold goods to Shyam costing Rs. 30,000 for
Rs. 50,000. -5,000 = 10,000 - 15,000
1,08,000 = 43,000 + 65,000
-500 = 0 - 500
10 Purchased households goods for Rs. 15,000 1,07,500 = 43,000 + 64,500
and giving Rs. 5,000 in cash and balance
11 through a loan. (Rs. 15,000 – Rs. 5,000 = Rs. -1,500 = -1,500 + 0
10,000 credit) 1,06,000 = 41,500 + 64,500
-800 = -500 + -300
12 Goods destroyed by fire costing Rs. 500, sale 1,05,200 = 41,000 + 64,200
price Rs. 600.
13 -500 = 0 + -500
Paid half the amount owed to Mohan 1,04,700 = 41,000 + 63,700
Furniture’s (Rs. 3,000 X ½) +49,500
14 -50,000 = 0 + -500
Paid cash of Rs. 500 for loan and Rs. 300 as
1,04,200 = 41,000 + 63,200
interest
-500 = +100 - 600
15
1,03,700 = 41,100 + 62,600
Withdrew the goods for personal use (costing
-400 = 0 - 400
16 Rs. 500, sales Rs. 600)
1,03,300 = 41,100 + 62,200
+1,000 = +1,000 + 0
17 Received Rs. 49,500 from Shyam in full
settlement

Paid salary Rs. 500 and salary o/s Rs. 100

Charged dep. On furniture Rs. 300 and printer

 Rs. 100

Commission received in advance Rs. 1,000

1,04,300 = 42,100 + 62,200

Problem No. 2
Habib is wholesale trader; following transactions are record in Accounting Equation?
1. Commence business with cash Rs. 200,000 and Land Rs. 50,000.
2. Bought merchandising for cash Rs. 80,000.
3. Cash sales of worth Rs. 25,000.
4. Bought goods on credit from Salman of worth Rs. 50,000.
5. Sales on account to Mr. A Rs. 12,000.
6. Purchase furniture of the value of Rs. 5,000 by cash.
7. Received cash from Mr. A of Rs. 10,000.
8. Return defective furniture of worth Rs. 1,500.
9. Paid wages Rs. 1,000, Rent Rs. 2,000 and Bills payable Rs. 1,500.
Sol.
Statement Showing Accounting Equation of Mr. Habib
Sl. Particulars Assets = Liabilities + Capital
No.
1 Commerce business with cash Rs. 2,00,000 2,50,000 = 0 + 2,50,000
and Land Rs. 50,000. 2,50,000 = 0 + 2,50,000
-80,000
2 Bought merchandising for cash Rs. 80,000 +80,000 = 0 + 0

2,50,000 = 0 + 2,50,000
3 Cash sales of worth Rs. 25,000 +25,000 = 0 + 0
-25,000
2,50,000 = 0 + 2,50,000
+50,000 = +50,000 + 0

4 Bought goods on credit from Salman of 3,00,000 = 50,000 + 2,50,000

worth Rs. 50,000. -12,000 = 0 - 12,000

2,88,000 = 50,000 + 2,38,000

5 Sales on account to Mr. A Rs. 12,000.
-5,000
+5,000 0 0
 2,88,000 = 50,000 + 2,38,000
6 Purchase furniture of the value of Rs. 5,000 +10,000 = 0 + 10,000
by cash.

2,98,000 = 50,000 + 2,48,000

7 Received cash from Mr. A of Rs. 10,000. -1,500
+1,500 0 0

2,86,000 = 50,000 + 2,36,000

8 Return defective furniture of worth Rs. -1,000
1,500. -2,000
-1,500 = -1,500 - -3,000

9
Paid wages Rs. 1,000, Rent Rs. 2,000 and
Bills payable Rs. 1,500.

2,81,500 = 48,500 + 2,33,000

 Rs. 100 – 10 = Rs. 90 X 2 = Rs. 180 – Rs. 180 X 5% = 180 – 9 = 171.

500 units X Rs. 90 = Rs. 45,000 – Rs. 4,000 = Rs. 41,000

Problem No. 3
Mr. M had the following transactions. Use accounting equation to show their effect on his
Assets, Liabilities and Capital?
1. Invested Rs. 15,000 in cash.
2. Purchased securities for cash Rs. 7,500.
3. Purchased a home for Rs. 15,000: giving Rs. 5,000 in cash and the balance through loan
account.
4. Sold securities costing Rs. 1,000 for Rs. 1,500.
5. Purchase an old car for Rs. 2,800 cash.
6. Received cash as salary Rs. 3,600.
7. Paid cash Rs.500 for loan and Rs. 300 for interest.
8. Paid cash for expenses Rs. 300.
9. Received cash for dividend on securities Rs.200.
Sol.
Problem No. 4
Prove that the Accounting Equation is satisfied in all following transactions of Wajeeha owner of
business enterprises?
1. Started business with cash value of Rs. 500,000.
2. Rent paid in advance for a year Rs. 6,000.
3. Purchased merchandising inventory for cash Rs. 80,000 and on account Rs. 20,000 from
Mr. Tahir.
4. Purchased Marketable securities for cash Rs. 100,000.
5. Cash Sales Rs. 30,000 (cost 20,000).
6. During the period rent expires or paid Rs. 2,000.
7. Commission paid during the trading was Rs. 1,000.
8. Received cash dividend Rs. 4,000 on marketable securities.
9. Paid to Rs. 19,500 to Mr. Tahir in full settlement.
10. Withdrew inventory for personal purpose by owner of worth Rs. 6,000.

Accounting Cycle:

1. Recording of transaction: As soon as a transaction happens it is at first recorded in

subsidiary book.
2. Journal: The transactions are recorded in journal chronologically.
Format of Journal Entries
Date Particulars Ledger Debit Credit
Folio
18/1/202 Cash a/c ___ Dr. 1 10,000 -
1 To Capital a/c - 10,000
 (Being capital brought to
business)
Sales a/c __ Dr. 5,000 -
18/1/202 To Bank a/c - 5,000
1
1. Cash account
2. Capital account
3. Sales account
4. Bank account
3. Ledger: All journals are posted into ledger chronologically and in a classified manner.
Dr. Cash A/c Cr.
Date Particulars Amount Date Particulars Amount

4. Trial balance: After taking all the ledger accounts closing balances, a trial balance is
prepared at the end of the period for the preparations of financial statements.
1. While writing on debit column, either it should be an asset or expenditure.
2. While writing on credit column, either it should be liability or income.
Particulars Debit (Dr) Credit (Cr)
Furniture 50,000 -
Sales - 5,000
Purchase 2,000
Land 50000
Building 5000
Salary 25000 12000
Rent 12000
Rent received - 10000
Commission paid 10000 -
Commission received 5000
25,000 25,000

5. Adjustment entries: All the adjustments entries are to be recorded properly and adjusted
accordingly before preparing financial statements.
6. Adjusted Trial Balance: An adjusted Trial Balance may also be prepared.
7. Closing entries: All the nominal accounts are to be closed by the transferring to Trading
Account and Profit and Loss Account.
8. Financial Statement: It can now be easily prepared which will exhibit the true financial
position and operating results.
 Final account
Trading and Profit and Loss account
Profit and Loss Appropriation account
Balance Sheet
Income statement
Position statement

Problem No. 1
Journalize the following transactions in the books of Gaurav.
1. June 1, 2020, Gaurav started business with Rs. 10,00,000 of which 25% amount was
borrowed from wife.
2. June 4, Purchased goods from Aniket worth Rs. 40,000 at 20% TD (Trade Discount) and
1/5th amount paid in cash.
3. June 7, Cash purchases Rs. 25,000.
4. June 10, Sold goods to Vishakha Rs. 30,000 at 30%TD and received 30% amount in
cash.
5. June 12, Deposited cash into bank Rs. 20,000.
6. June 15, Uninsured goods destroyed by fire Rs. 5,5,00.
7. June 19, Received commission Rs. 3,500.
8. June 22, Paid to Aniket Rs. 25,500 in full settlement of a/c.
9. June 25, Cash stolen from cash box Rs. 1,000.
10. June 27, Received from Vishakha Rs. 14,500 and discount allowed Rs. 200.
11. June 30, Interest received Rs. 2,400 directly added in our bank account.
Sol.
Journal Entries in Books of Mr. Gaurav
Date Particulars LF Debit Credit
1.6.2020 Cash a/c __ Dr. 10,00,000 -
To Capital a/c - 7,50,000
To Loan from wife’s a/c (25%) - 2,50,000
(Being capital brought to the business)
4.6.2020 Purchases a/c __ Dr. 32,000 -
To Cash a/c - 6,400
To Aniket’s a/c - 25,600
(Being goods purchased at 20% trade discount
& 1/5th amount paid in cash)
Purchases a/c __ Dr.
To Cash a/c 25,000 -
7.6.2020 (Being goods purchased on cash) - 25,000
Cash a/c __ Dr.
Vishakha’s a/c __ Dr.
To Sales a/c
(Being goods sold to Vishakha at 30% TD and
10.6.202 6,300 -
 0 received Rs. 6,300 cash and remaining on 14,700 -
credit) - 21,000
(Being goods sold on cash 30% and remaining
on credit to Vishakha)
Bank a/c __ Dr.
Cash a/c
(Being cash deposited into bank)

20,000 -
12.6.202 - 20,000
0

Purchase is Rs. 40,000, trade discount 20%.

Total purchase after discount is Rs. 32,000 (Rs. 40,000 X 20%)
1/5th is on cash and remaining on credit
Rs. 32,000 X 1/5 = Rs. 6,400 – cash purchase and remaining on credit Rs. 25,600 (Rs.
32,000 – Rs. 6,400 cash paid)

Sales:
Rs. 35,000 – Rs. 5,000 = Rs. 30,000 – Rs. 2,000 = Rs. 28,000 X 3 = Rs. 84,000
Total sales Rs. 30,000 – 30% trade discount (Kinds of discount – Cash discount &
trade discount)
Net Sales = Rs. 21,000
Cash paid at 30% on Rs. 21,000 = Rs. 6,300
Credit sales = Net sales – cash sales = Rs. 21,000 – Rs. 6,300 = Rs. 14,700.

Problem No. 2
Journalize the following transactions in the books of M/s. Kothari and Sons,
1. Commenced business with Rs. 40,000.
2. Bought goods for cash Rs. 4,000.
3. Sold goods Rs. 700 (for cash)
4. Bought goods from M/s Bahndari Bros. Rs. 3,000 at 10% trade discount.
5. Purchased machinery of Rs. 5,000 from M/s Kirloskar Bros.
6. Paid for transportation of machinery Rs. 500 & installation charges Rs. 300 on it.
7. Paid quarterly interest on borrowed amount of Rs. 5,000 at 12% p.a.
8. Supplied goods to M/s Munal and Sons Rs. 3,500.
9. Paid to M/s. Bhandari Bros. Rs. 2,600 in full settlement of account.
10. M/s. Munal and Sons returned goods worth Rs. 300 and paid for Rs. 1,200 on account.
11. Received commission Rs. 250.
12. Paid conveyance to manager Rs. 450.

Problem No. 3
Journalize the following transactions in the books of Shri Ganesh.
1. Started business with cash Rs. 50,000.
2. Purchased goods Rs. 5,000.
3. Purchased goods for cash Rs. 10,000.
4. Purchased goods for Mr. Sun for cash Rs. 15,000.
5. Sold goods Rs. 6,000.
6. Sold goods for cash Rs. 12,000.
7. Sold goods to Mr. Sky for cash Rs. 18,000.
8. Purchased goods from Mr. Moon Rs. 10,000.
9. Purchased goods from Mr. Star on credit Rs. 20,000.
10. Sold goods to Mr. Sea Rs. 12,500.
11. Sold goods to Mr. Ocean on credit Rs. 25,000.
12. Mr. Sea returned goods Rs. 2,500.
13. Returned goods to Mr. Moon Rs. 2,000.
14. Received from Mr. Sea Rs. 9,900, allowed him discount Rs. 100.
15. Paid Mr. Moon Rs. 7,880 and discount allowed by him Rs. 120.
16. Withdrew for personal use Rs. 1,000.
17. Paid salary to Mr. Shivkumar Rs. 500.
18. Paid rent Rs. 5,000.
 Income statement
Particulars Amount Amount Amount
A. Net Sales
Sales (Gross) XXX
Less: Returns XXX XXX
B. Cost of Goods Sold:
Opening stock XXX
Purchases XXX
Add: Returns XXX
Direct Expenses:
Carriage/Cartage/Freight inwards XXX
Wages and Salaries XXX
Cost of goods available for sale XXX
Less: Closing Stock XXX XXX
C. Gross Profit (A- B) XXX
D. Operating Expenses:
a. Selling expenses:
Carriage outward XXX
Discount allowed XXX
Commission allowed XXX
Travelling expenses XXX
Entertainment expenses XXX
Sales promotion expenses XXX
Bad debts XXX XXX
b. Office and administration
expenses XXX
Salaries and wages XXX
Rent, rates and taxes XXX
Rapiers XXX
Insurance XXX
Printing and stationery XXX
Water and electricity XXX
Postage and telegram XXX
Staff welfare expenses XXX
Conveyance charges XXX
Miscellaneous expenses XXX XXX XXX
Depreciation XXX
E. Net Operating Profit/Loss (C – D)
F. Net Non – Operating Results: XXX
a. Interest earned XXX
Commission earned XXX
Discount earned XXX XXX
Miscellaneous income
b. Non-operating expenses & losses XXX
 Interest paid XXX XXX XXX
Loss on sale of fixed assets XXX
G. Net Profit/Loss

Position Statement
Particulars Amount Amount Amount
A. Sources of Funds:
Share capital XXX
Long term debts XXX
XXX
B. Application of Funds:
a. Net Working Capital
1. Current Assets
Cash in hand XXX
Cash at bank XXX
Bills receivables XXX
Accrued income XXX
Debtors XXX XXX
Stock XXX XXX
Prepaid expenses XXX XXX
2. Less: Current Liabilities
Bank overdraft XXX
Accrued expenses XXX
Bills payable XXX
Trade creditors XXX XXX
Income received in advance XXX XXX
b. Investment
c. Fixed assets
Furniture & fixtures XXX
Patents & trade marks XXX
Plant and machinery XXX
Land and building XXX
Goodwill XXX

XXX

Problem No. 1
The following is the trial balance of Shri and Company as on 31.03.2020.
Particulars Debit Credit
Land & building 1,42,500 -
Plant and Machinery 42,500 -
Furniture 47,500 -
Motor vehicles 47,500 -
Opening stock 75,000 -
Purchases and sales 5,25,000 6,30,000
 Returns 10,000 5,000
Carriage inwards 1,000 -
Carriage outward 2,000 -
Wages and salaries 4,000 -
Salaries and wages 20,000 -
Discount 2,000 1,000
Commission 1,500 2,000
Interest 2,500 3,000
Rent, Rate & Taxes 3,000 -
Repairs 600 -
Insurance 3,600 -
Printing & Stationery 600 -
Water & Electricity 1,200 -
Postage & Telegrams 500 -
Travelling expenses 1,600 -
Conveyance charges 1,200 -
Entertainment expenses 1,200 -
Staff welfare expenses 1,200 -
Sales promotion expenses 2,400 -
Bad debts/ bad debts recovered 1,000 500
Depreciation 20,000 -
Miscellaneous expenses/income 1,000 1,500
Debtors and creditors 2,05,000 50,000
B/R and B/P 10,000 5,600
12% investments (purchased on 1.10.2019) 50,000 -
12% loan from bank (long term) (taken on 1.11.2019) - 50,000
Cash in hand 5,000 -
Cash at bank 10,000 -
Drawings 9,000 -
Sales tax collected - 4,000
Income tax paid 1,000 -
Capital account - 5,00,000
12,52,10 12,52,100
0
Additional information:
1. Closing stock was Rs. 42,000
Sol.
Particular Amount Amount Amount
s