12

UNIT II

Accounting Cycle

The accounting cycle is a collective process of identifying, analyzing, and recording the accounting
events of a company. It is a standard 8-step process that begins when a transaction occurs and ends
with its inclusion in the financial statements.

The key steps in the eight-step accounting cycle include recording journal entries, posting to the
general ledger, calculating trial balances, making adjusting entries, and creating financial statements.

There are eight steps to the accounting cycle.

1. Identify Transactions: An organization begins its accounting cycle with the identification of
those transactions that comprise a bookkeeping event. This could be a sale, refund, payment
to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions using journal
entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion
of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an account in
the general ledger. The general ledger provides a breakdown of all accounting activities by
account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual general
ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total
debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in
the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there
are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are
the result of corrections made on the worksheet and the results from the passage of time. For
example, an adjusting entry may accrue interest revenue that has been earned based on the
passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted
trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the
end of the period using closing entries. These closing entries include transfering net income
into retained earnings. Finally, a company prepares the post-closing trial balance to ensure
debits and credits match and the cycle can begin anew.
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Journal
In accounting and bookkeeping, a journal is a record of financial transactions in order by date.
Traditionally, a journal has been defined as the book of original entry. A journal is a detailed account
that records all the financial transactions of a business, to be used for the future reconciling of
accounts and the transfer of information to other official accounting records, such as the general
ledger. A journal states the date of a transaction, which accounts were affected, and the amounts,
usually in a double-entry bookkeeping method.

As the recording of transactions is done first in the journal, it is also called book of original entry or
prime entry. Journalizing is defined as the process of recording transactions in the journal.

Format of Journal
Journal

Debit Credit
Date Particulars L.F
Rs. Rs.

Steps in Journal

(i) Date:
The ‘Date’ column shows the date of transaction. It should be noted that all the transactions are to be
recorded in the journal in the chronological order.

(ii) Particulars:
In ‘Particulars’ column, the accounts which are to be debited and credited are written. The account(s)
to be debited is written in the first row following the word ‘Dr’ towards the end of the row. Leaving
sufficient margin on the left side in the next row, the account(s) to be credited is written and prefixed
with the word ‘To’. A brief description of the transaction is written below the credited account. This
description prefixed with ‘Being’ or ‘For’, is known as narration and is given in the brackets after
writing these two types of accounts.
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(iii) Ledger Folio (L.F.):

Folio means page and the ledger folio means page number of ledger. In this column, page number of
ledger on which debit and credit items are posted is written. In practical accounting, this column is
very useful for cross-checking and auditing the accounts of an enterprise.

(iv) Amount (Debit):

In this column, the amount of the debit account is written. At the top of this column, the unit of
measurement of monetary transactions viz. Rs. is written.

(v) Amount (Credit):

In this column, the amount of the credit account is written. At the top of this column, the unit of
measurement of monetary transactions viz. Rs. is written.

Problem no. 1

From the following information prepare Journal

Jan. 1 Started business with Cash Rs.2, 00,000

Jan. 2 Bought Furniture for Rs. 20,000

Jan. 3 Purchased goods from Anand Rs. 10,000

Jan. 4 Cash sales Rs. 15,000

Jan. 5 Sold goods to Mohan Rs. 20,000

Jan. 6 Paid Salary Rs. 18,000

Jan. 7 Interest received Rs. 5,000

Solution

Transaction Debit & Credit Reason for Debit & Credit

Started business with Cash Cash Dr. Asset Increases

Capital Cr. Capital Increases

Bought Furniture Furniture Dr. Asset Increases

Cash Cr. Asset Decreases

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Purchased goods from Anand Purchases Dr. Inventory (Asset) Increases

Anand Cr. Creditors (Liability) Decreases

Cash sales Cash Dr. Asset Increases

Sales Cr. Inventory (Asset) Decreases

Sold goods to Mohan Mohan Dr. Debtors (Asset) Increases

Sales Cr. Inventory (Asset) Decreases

Paid Salary Salary Dr. Expenses Increases

Cash Cr. Asset Decreases

Interest Received Cash Dr. Asset Increases

Interest Cr. Incomes Increases

Journal

Date Particular L/F Dr. Cr.

Amount Amount
1 Cash Dr. 2,00,00
0
To Capital Cr. 2,00,000
(Being the amount invested in to the business)
2 Furniture Dr.

To Cash Cr. 20,000 20,000

(Being the furniture purchased for cash )

3 Purchases Dr.

To Anand Cr. 10,000

10,000
(Being the purchased goods on credit)

4 Cash Dr.
15,000
To Sales Cr. 15,000
(Being the sold goods for cash)

5 Mohan Dr.
 16

To Sales Cr.

(Being the sold goods on credit)

6 Salary Dr.

To Cash Cr.

(Being the salary paid) 20,000

20,000
7 Cash Dr.

To Interest Cr.

(Being the interest received )

18,000 18,000

Problem no. 2

From the following information in the books of Sam.

Jan. 1 Sam Started business with Cash Rs., 3,00,000

Jan. 2 Purchased Machinery for Rs. 30,000

Jan. 3 Purchased goods from Krishna Rs. 10,000

Jan. 4 Sold goods Rs. 25,000

Jan. 5 Paid into Bank Rs. 20,000

Jan. 6 Paid Wages Rs. 8,000

Jan. 7 Commission received Rs. 7,000

Jan 8 Sold goods to John on credit Rs. 15,000

Jan 9 Withdrew cash from office for personal use Rs.1000

Jan 10 Received cash from John

Journal

Date Particular L/F Dr. Cr.

Amount Amount
1 Cash a/c Dr. 3,00,00
0
To Capital a/c 3,00,000
 17

(Being the amount invested in to the business)

2 Machinery a/c Dr.

To Cash a/c 30,000 30,000

(Being the Machinery purchased for cash )

3 Purchases a/c Dr.

To Krishna a/c 10,000

10,000
(Being the purchased goods on credit)

4 Cash a/c Dr.

25,000
To Sales a/c 25,000
(Being the sold goods for cash)

5 Bank a/c Dr.

To cash a/c 20,000

20,000
(Being the cash paid into bank)

6 Wages a/c Dr.

8,000
To Cash a/c 8,000
(Being the wages paid)

7 Cash a/c Dr.

7,000
To Commission a/c
7,000
(Being the Commission received )

8
John a/c Dr. 15,000
To Sales a/c
15,000

(Being the goods sold to John on credit)

9
Drawings a/c Dr.
1,000
To Cash a/c 1,000
 18

(Being the cash withdrawn for personal use)

10
Cash a/c Dr.

To John a/c

(Being the cash received from John)

Practical Problem

From the following information in the books of Ram

Jan. 1 Sam Started business with Cash Rs., 4,00,000

Jan. 2 Bought Plant for Rs. 30,000

Jan. 3 Purchased goods from Mr. Babu Rs. 10,000

Jan. 4 Cash sales Rs. 55,000

Jan. 5 Paid into Bank Rs. 30,000

Jan. 6 Paid Rent Rs. 8,000

Jan. 7 Interest received Rs. 7,000

Jan 8 Sold goods to Rahul on credit Rs. 25,000

Jan 9 Withdrew cash for personal use Rs.2000

Jan 10 Paid to Babu

Compound Journal Entry

A compound journal entry is the journal entries in the accounting system where more than one
account is debited or more than one account is credited i.e. when a transaction has to effect on more
than the three accounting heads. Compound Journal Entry means a combination of two or more
debits and credits in a single accounting entry. It means it is a journal entry with the following
combinations:

1. One debit and two or more credits, or

2. One credit and two or more debts, or
 19

3. Two or more debits and credits

Example

Mr. Ram commenced business with cash Rs. 25,000, Machinery Rs. 30,000, and Building Rs.
50,000

Cash a/c Dr. 25,000

Machinery a/c Dr. 30,000

Building a/c Dr. 50,000

To Capital a/c 1,05,000

(Being the started business with Cash, Building, Machinery)

Trade Discount
Trade discount is referred to as the discount that is offered by a seller to the buyer of the product in
the form of reduction in the price of the item. Trade discounts are offered to increase the sales of the
product and make the customers feel that they are getting the best offer. No accounts are maintained
for keeping track of the discounts that are offered.

Cash Discount
Cash discount is referred to as the discount that is offered by the seller of a product to the buyer at
the time of payment for the purchase. This reduction is provided at the value of the invoice. Cash
discount is offered to make the customer or the buyer pay for the product promptly, it helps the
business in reducing or avoiding the credit risk completely. Such discounts are mostly used in
business transactions, where a creditor will be reducing the amount to be paid by the debtor, if the
payment is processed within the time limit. Proper records are maintained for all such discount
transactions both by the buyer and seller.

Differences between the Trade Discount and Cash Discount.

Basis of Trade Discount Cash Discount

Comparison

Meaning It is the type of discount that is This discount is offered by the seller
offered by the seller to the buyer as a to the buyer on the invoice amount at
 20

reduction in the price of the product the time of making payment within
the stipulated time

Purpose of To ensure bulk sales of the product To ensure prompt payment for the
offering items purchased
discount

Accounting Not shown in any books of It is properly recorded in the books of

treatment accounting, reduction adjusted with both buyer and seller. Recorded in
final price and the discounted price profit and loss statement as an
is added to record books expense

When discount At the time the purchase is made It is allowed at the time of payment
is allowed

Allowed on Both cash and credit transactions Only transactions involving cash
transactions payment are allowed.

Example with Journal Entry

Suppose James purchased goods from Ali of the list price of Rs. 5000, on April 1, 2016. Ali allowed
10% discount to James on the list price, for purchasing goods in bulk quantity. Further, a discount of
Rs. 200 was allowed to him, for making immediate payment.

Answer:

Trade Discount

The discount allowed on the list price of the goods, i.e. 10% of Rs. 5000 = Rs. 500, is a trade
discount, which is not going to be recorded in the books of accounts.

Cash Discount

The discount received by James of Rs. 200 for making quick payment is a cash discount, as it is
allowed on the invoice price of the goods. Cash discount is entered in the books of accounts.
Therefore the journal entry in the books of James is:
 21

Purchase Returns
Purchases returns, or returns outwards, are a normal part of business. Goods may be returned to
supplier if they carry defects or if they are not according to the specifications of the buyer.

Purchase Return of Goods Purchased in Cash

Particulars Dr Cr
Cash A/C …..Dr XXX
           To Purchase Return  A/C XXX

Purchase Return of Goods Purchased on Credit

Particulars Dr Cr
Accounts Payable A/C …..Dr XXX
           To Purchase Return  A/C XXX

Sales Returns
Customers are normally entitled to return the products they purchase from a company when they are
not satisfied, usually within a specified duration after the sale. When a sales return occurs, the
customer physically returns the product and receives his cash back.
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Purchase Return of Goods Purchased in Cash

Particulars Dr Cr
Sales Return  A/C …..Dr XXX
           To Cash A/C XXX

Sales Return of Goods Purchased on Credit

Particulars Dr Cr
Sales Return  A/C …..Dr XXX
           To Accounts Receivable A/C
XXX

Ledger

It is also known as the principal book of accounts as well as the book of final entry. It is a book in
which all ledger accounts and related monetary transactions are maintained in a summarized and
classified form. All accounts combined together make a ledger and form a permanent record of all
transactions. It is the most important book of accounting as it helps in the creation of trial
balance which then acts as a base for the preparation of financial statements.

Format of Ledger

A ledger account is T-shaped, having two sides, wherein the left part of the account represents the
debit side, whereas the right part of the account, is the credit one, both the sides consist of four
columns
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Ledger Posting

When the debit and credit items are transferred from journal to the specific ledger accounts, the
process is called as Posting.

The rules with respect to the ledger posting are discussed as under:

 Individual accounts are to be opened in ledger book for each group, i.e. purchases, sales, cash etc.
and the entries from the journal are posted to their account.
 It should be kept in mind that the account name used in ledger should be the same used in the
journal.
 In the date column, we enter the date of the transaction.
 While posting the entries in the debit side, we add the prefix ‘To’ with the concerned accounts
posted in the particulars column and the prefix ‘by’ is used with the accounts entered in the
particulars column of the credit part.
 When it comes to posting the entries, the accounts debited in the journal are to be debited in the
ledger, however, reference is given to the concerned credit account.
 The accounts are balanced at the end of each month or financial year. And to do so both the sides are
totaled first and then the difference between the two sides is ascertained. This difference is called the
balance, which is added to the side which falls short. When the credit side is greater than the debit
side, it is called a credit balance which is indicated as ‘To balance c/d’. On the other hand, when the
debit side is in excess of the credit side it is termed as debit balance, which is indicated as ‘By
balance c/d’. Here, the word c/d refers to carried down. Similarly while opening the account for the
next month or period. The balance on the debit balance is taken to the debit side as ‘To Balance b/d’
and vice versa. The word ‘b/d’ expands to brought down.
 In the folio column, we will enter the page number of the journal from which entry is posted to the
ledger.
 The amount column is filled with the respective amount against the entry.

Problem no.3

Mr. Ramu has the following transactions in the month of July. Record them into the journal and
show postings in the ledger and balance the accounts.

July 1st : Ramu started business with a capital of 75,000

1st : Purchased goods from Manu on credit 25,000
2nd : Sold goods to Sonu 20,000
3rd : Purchased goods from Meenu 15,000
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4th : Sold goods to Tanu for cash 16,000

5th : Goods retuned to Manu 2,000
6th : Bought furniture for 15,000
8th : Cash paid to Manu 10,000
10th : Goods returned from Sonu 3,000
12th : Goods taken by Ramu for domestic use 3,000
17th : Cash paid for the purchase of bicycle for Ramu's son 1,500

Journal

Amount Amount
Date L/F
(Dr) (Cr)
July 1st Cash a/c Dr – 75,000
To Capital a/c – 75,000

[Being the proprietor as his capital contribution]

July 1st Purchase a/c Dr – 25,000
To Manu a/c – 25,000

[Being the value of stock purchased from Mr. Manu]

July 2nd Sonu a/c Dr – 20,000
To Sales a/c – 20,000

[Being the value of stock sold to Mr.Sonu]

July 3rd Purchase a/c Dr – 15,000
To Meenu a/c – 15,000

[Being the value of stock purchased from Mrs.Meenu]

July 4th Cash a/c Dr – 16,000
To Sales a/c – 16,000

[Being the value of stock sold to Mr. Tanu for cash]

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Amount Amount
Date L/F
(Dr) (Cr)
July 5th Manu a/c Dr – 2,000
To Purchase returns a/c – 2,000

[Being the value of stock returned to Mr. Manu ]

July 6th Furniture a/c Dr – 15,000
To Cash a/c – 15,000

[Being the value of furniture purchased]

July 8th Manu a/c Dr – 10,000
To Cash a/c – 10,000

[Being the amount paid to Mr. Manu]

July Sale Returns a/c Dr – 3,000
10th To Sonu a/c – 3,000

[Being the value of stock returned from Mr. Sonu ]

July Drawings a/c Dr – 3,000
12th To Purchase a/c – 3,000

[Being the stock taken by Ramu for domestic use]

July Drawings a/c Dr – 15,000
17th To Cash a/c – 15,000

[Being the amount of cash paid for bicycle purchases for

proprietor's son]
 26

Cash a/c

Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

1st July To Capital a/c – 75,000 6th July By Furniture a/c – 15,000
4th July To Sales a/c – 16,000 8th July By Manu a/c – 10,000
17th July By Drawings a/c 15,000
30th July By Balance c/d – 51,000

91,000 91,000
To Balance b/d 51,000

Capital Account

Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

30th July To Balance c/d – 75,000 1st July By Cash a/c – 75,000

75000 75000
By Balance b/d 75,000
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Purchase Account

Dr Cr

Date Particulars J/F Amount Date Particulars J/F Amount

01 To Manu a/c – 25,000

03 To Meenu a/c – 15,000 12 By Drawings a/c – 3,000

By Balance c/d 37,000

40000 40000

37,000
To Balance c/d

Balancing of Accounts

It represents the amount that is the same in both columns of an account. In case amounts do
not match, you should put the difference in the column with a lesser amount. If the debit
consists of the larger figure, the balance is called a debit balance. Similarly, if the credit has a
higher amount, it means the account has a credit balance.

Procedures for balancing of accounts

 Calculate the total figures in both columns of the ledger account;

 Figure out any discrepancies between the two columns. 
 Enter it in the column of the ledger with the smaller amount, so that both sides are
made equal. This is to be the balance c/f (carried forward);
  That amount of the balance c/f should be written in the column with the greater total.
The term for it is the balance b/f (brought forward);
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Difference between Journal and Ledger

No Journal Ledger

Journal is a subsidiary book of account. It Ledger is the permanent and final book of
1. is the storehouse for recording accounts. It is termed as the means of
transactions. classified transactions.

Transactions are recorded in the journal in

Transactions are posted in the ledger in
2. chronological order of dates just after their
classified form from the journal.
occurrences.

Transactions are recorded in a journal Transactions are recorded in the ledger in

3. without considering their nature of the classified form under respective heads
classification. of accounts.

4. Book of first or prime entry Book of final or secondary enyry

Preparation of trial balance is not possible The trial balance is prepared from the
5.
from the journal. ledger.

6. Final accounts cannot be prepared Final accounts can be prepared

Recording of the transaction in the journal Recording of transactions in the ledger is

7
is called journalizing. called posting.

Sub Division of Journal

In small concerns only one journal and one ledger may serve the purpose, because the number of
transactions is very small. But in large business concerns the number of transactions are numerous,
just one journal and one ledger will not do the job. That will cause much inconvenience i.e., if we
have only one journal in a large scale business, it is not possible for one bookkeeper to record all the
transactions in time. On the other hand, it will not be possible for more than one person to use the
same journal simultaneously with the result that the accounting work will fall in arrear. For this
purpose different groups of transactions are made and a separate book is provided for each group.
Each group is consisted of similar types of transactions. Journal is mainly divided into two:

1. Special journal

2. General journal
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Special Journal:

By special journal we mean, a journal in which transactions relating to a certain special group or
recorded. Special journal is again subdivided into eight groups:

1. Purchases book or purchases journal

2. Sales book or sales journal

3. Purchases returns book or purchases returns journal

4. Sales returns book or sales returns journal

5. Bills receivable book

6. Bills payable book

7. Cash book or cash journal

General Journal:

The transactions which do not fall with in the scope of above mentioned books, are recorded in this
journal e.g. purchase of an asset on credit, depreciation on assets, expenses payable, bad debts etc. It
is also known as journal proper, Modern journal or principle journal. Some authors call it only
"journal".

The main function of the above books is to supply necessary information to the ledger. All the
transactions are posted in the ledger on the basis of information available from these books, so these
books are called subsidiary books

Advantages of Subdivision of Journal:

1. Because of subdivision the books cannot be bulky and hence there will be no difficulty in
handling them.

2. Accounting work is divided amongst a large number of employees. So work is done nicely
and promptly and no work is left in arrears.

3. Each employee can be held responsible for mistakes committed by him. This serves as
caution and care to the employees.

4.  The efficiency of the employees increases because of the division of labor.

5. By keeping the book under the custody of different employees the chances of fraud and
defalcation are minimized.
 30

Cash book

The cash book is used to record receipts and payments of cash. It works as a book of original entry
as well as a ledger account. The entries related to receipt and payment of cash are first recorded in
the cash book and then posted to the relevant ledger accounts. Moreover, a cash book is a substitute
for cash account in the ledger. A company that properly maintains a cash book does not need to open
a cash account in its ledger. Receipts are recorded on the debit – the left hand side, and payments are
recorded on the credit – right hand side.

Advantages of Cash Book

 Daily cash receipts and cash payments are easily ascertained.

 Cash in hand at any time can easily be ascertained through Cash Book balance.
 Any mistake in the book can be easily detected at the time of verification of cash.
 Any defalcation of money can be detected while verifying cash.
 Since cash is verified daily, Cash Book is always kept up-to-date.

Types of cash book

There are four major types of cash book that companies usually maintain to account for their cash
flows. These are given below:

1. A single column cash book to record only cash transactions.

2. A double/two column cash book to record cash as well as bank transactions.
3. A triple/three column cash book to record cash, bank and purchase discount and sales
discount.
4. A petty cash book to record small day to day cash expenditures.

Single/Simple column cash book

It records only cash receipts and payments. This form of cash book has only one amount column on
each of the debit and credit sides of the cash book. All the cash receipts are entered on the debit side
and cash payments are entered on the credit side

Format of Single Column Cash Book

The standard format of a single column cash book is shown below:

 31

Dr. Single Column Cash Book Cr.

Date Particulars R.N L/F Amount Date Particulars V.N L/F Amount

(R.N – Receipt Number, V.N – Voucher Number)

Problem No. 4

Record the following transactions in a single column cash book and post into ledger:

Sep. 01: Cash in hand (balance b/d) Rs.2,327.

Sep. 02: Paid salaries for the month of August Rs.1,500.
Sep. 05: Cash received from S & Co. Rs.1,360.
Sep. 06: Purchased goods for cash Rs. 700.
Sep. 07: Cash sales for the first week Rs. 2,350.
Sep. 10: Paid cash for office furniture Rs.1,540.

Dr. Simple Cash Book Cr.

L/
Date Particulars R.N L/F Amount Date Particulars V.N Amount
F

01 To Balance b/d 2327 02 By Salaries 1500

05 To S & Co. 1360 06 By Purchase 700

07 To Sales 2350 10 By Furniture 1540

By Balance c/d 2297

6037 6037

To Balance b/d 2297

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Double Column Cash Book 

The double column cash book (also known as two column cash book) has two amount columns on
both debit and credit sides – one to record cash transactions and one to record bank transactions. The
cash column is used to record all cash transactions and works as a cash account whereas bank
column is used to record all receipts and payments made by cheques and works as a bank account.
Both the columns are totaled and balanced like a traditional T-account at the end of an appropriate
period which is usually one month. Since a double column cash book provides cash as well as bank
balance at the end of a period

Advantages of Double Column or Two Column Cash Book

Double Column cash book columns have the following advantages in addition to those of single cash
column book

1. It is more convenient as cash and bank accounts are kept side by side at one place.
2. It is cost and time effective as no separate bank account is required to be maintained.

Format of Double Column Cash Book

Dr. Double Column Cash Book Cr.

L/ Cash Bank Cash Bank

Date Particulars R.N Date Particulars V.N L/F
F Rs. Rs. Rs. Rs.

(R.N – Receipt Number, V.N – Voucher Number)

Problem no 5

Record the following transactions in a double column cash book for December 2016:
01 Started business with cash 80,000

04 Deposited in bank 50,000

10 Received cash from Rahul 1,000

22 Bought goods by cheque 10,000

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30 Drew from Bank for office use 2,000

31 Rent paid by cheque 1,000

Dr. Double Column Cash Book Cr.

Cash Bank Cash Bank

Date Particulars R.N L/F Date Particulars V.N L/F
Rs. Rs. Rs. Rs.

1 To Capital 80,000 4 By Bank C 50,000

4 To Cash C 50,00 22 By Purchase 10,000

0
10 To Rahul 1,000 30 By Cash 2,000

30 To Bank 2,000 31 By Rent 1,000

By Balance 33,000 37,000

c/d

83,000 50,00 83,000 50,000

0

Contra entry 

It is a transaction which involves both cash and bank. Both debit aspect and credit aspect of a
transaction get reflected in the cash book.

For example:

Cash received from deposited into bank.

Bank a/c Dr.

To Cash a/c

Cash withdrawn from bank for office use.

 34

Cash a/c Dr.

To Bank a/c

Three Column Cash Book

The three column cash book (also known as triple column cash book) has three money columns
on both debit and credit side – one on each side for recording discount, cash and bank amounts. This
cash book is prepared in the same way as simple and double column cash books are prepared.  If
there is any discount allowed it is entered in the discount column on the debit side against the
particular account. Similarly, if there is any discount received, it is entered in the discount column on
the credit side. The discount columns are just totaled and not balanced.

Format of Three Column Cash Book

Dr. Three Column Cash Book Cr.

Dat Cash Bank Cash Bank
Particulars R.N L/F Disc. Date Particulars V.N L/F Disc.
e Rs. Rs. Rs. Rs.

(R.N – Receipt Number, V.N – Voucher Number)

Problem no 6

Record the following transactions in a double column cash book for December 2016:
01 Cash in hand Rs.90,000, Cash at bank Rs.80,000

04 Deposited in bank 50,000

10 Received cash from Rahul 2,000, discount allowed to him 50

22 Bought goods by cheque 10,000

30 Drew from Bank for office use 2,000

31 Salary paid by cheque 1,000

31 Cheque paid to Sunder 5000, discount received 100

Dr. Double Column Cash Book Cr.

 35

Dat
Particulars R.N L/F Disc. Cash Bank Date Particulars V.N L/F Disc. Cash Bank
e

1 To Balance 90,000 80,000 4 By Bank C 50,00

0
4 To Cash C 50,000 22 By Purchase 10,000

10 To Rahul 50 2,000 30 By Cash C 2,000

30 To Bank C 2,000 31 By Salary 1,000

31 By Sunder 100 5,000

By Balance 1,12,000
c/d 44,00
0

50 94,000 1,30,000 100 94,00 1,30,000

0

Petty Cash Book 

The book in which those small payments are recorded, which are not convenient to record in
main Cash Book, is called petty cash book.

Petty Cash Book is maintained to record small expenses such as postage, stationery, telegram. A
separate column is allotted for each type of expenditure. The difference between the total of the debit
items and that of the ‘total column’ on the credit represents the balance of the petty cash in hand.
The person responsible for spending petty cash and recording it in a petty cash book is known
as petty cashier.

Petty cash systems

1. Ordinary system

Under ordinary system, a lump sum amount of cash is given to the petty cashier. When the whole
amount is spent, the petty cashier submits the details of petty expenditures recorded in the petty cash
book to the head or chief cashier for review.
 36

2. Imprest system

Under imprest system, a fixed amount of money known as float is given to the petty cashier to meet
petty expenditures for an agreed period which usually consists of a week or month. At the end of
agreed period, the petty cashier submits the details of all expenditures incurred by him to the chief
cashier. The total cash spent by the petty cashier during the period is reimbursed to him and the total
cash available to spend at the start of the next period becomes equal to the original sum (i.e., float).

Advantages Of The Imprest System

1. It saves the time of the chief cashier who is very busy with the main cash book.
2. It reduces the chances of misuse of cash because petty cashier is not allowed to keep idle cash
with him.
3. It reduces the chances of misappropriation as the imprest cash is a very small amount.
4. Errors are rectified very soon as the record of petty cash is checked by the cashier
periodically.
Types of Petty Cash Book

The petty cash book is of the following two types:

1. Simple Petty Cash Book

2. Analytical Petty Cash Book

Simple Petty Cash Book

Simple Petty Cash Book is just like the main cash book. Cash received by the petty cashier is
recorded on debit side and all payments for petty expenses are recorded on credit side in one column.

Format of Simple Petty Cash Book

Date Receipts Amount Date Payments V.N Amount

Analytical Petty Cash Book

It is the most advantageous method of recording petty cash payments. In this type, a separate column
for each petty expense is provided on credit side. When petty expense is recorded in total payment
column, the same amount is recorded in the relevant petty expense column.

Format of analytical petty cash book

Cash Date Particulars L.F Total Postage Stationar Travelling Misc.

 37

Received Payments y

Problem 7

The petty cashier of John and James Company paid cash for the following expenditures during
March 2021.

 March 01: Balance brought forward; petty cash Rs.1,000

 March 01:Cash Received from the main cashier Rs.2,000
 March 03: Paid for postage Rs.50
 March 05: Bought stationery Rs.100
 March 13: Bought pens and pencils Rs.80
 March 17: Paid for fuel Rs.200
 March 20: Paid Rs.300 for Travelling
 March 22: Donated Rs.500 to a charitable institution.
 March 30: Paid Telegram Rs.50

Record the above transactions in a petty cash book assuming a petty cash imprest system is used by
the John and James company.

Petty Cash Book

Cash Total Stationar

Date Particulars L.F Postage Travelling Misc.
Received Payments y
1,000 March 1 To Balance b/d

2,000 To Cash

March 3 By Postage 50 50

March 5 By Stationery 100 100

March 13 By Pens & Pencil 80 80

March 17 By Fuel 200 200

March 20 Travelling 300 300

March 22 By Donation 500 500

50 50
 38

1280 100 180 500 500

March 30 By Telegram
1720
3000 3000
March 30 By Balance b/d
1720

1280
April 1 To Balance b/d

April 1 To Cash Received

Purchase Book
Purchase book is a type of special purpose subsidiary book which is used for recording only credit
purchases of goods. Cash purchases of goods are recorded in the cash book. Purchase book is also
called a book of original entry. Purchase book does not record purchases of other assets. Those
entries are recorded in the journal proper. Entries for credit purchases of goods are recorded from the
source documents directly to the purchase book. The source documents are the invoices or bills that
are received from the supplier of goods. The main purpose of preparing a purchase book is to know
the amount of credit purchase taking place in a business at a particular point of time.

Following is the format of purchase book

Example
 39

Record the following transactions in the books of Mac and Co.

Date                                                                   Details

1 Aug Purchased from ABC Ltd. (Invoice No. 524): 2000 balls @ ₹ 5 per piece.

15 Purchased from XYZ Ltd. (Invoice No. 611): 100 bats @ ₹ 250 per piece.
Aug Trade discount 20%

29 Purchased from Con Ltd. (Invoice No. 444): 200 skates for ₹100000. Trade
Aug discount 10%

29 Purchased from ABC Ltd. (Invoice No. 741): 200 Chess for ₹2000. Trade
Aug discount 15%

30 Purchased from Con Ltd. (Invoice No. 521): 100 skates for ₹40000. Trade
Aug discount 8%

Ans:

Purchase Book

Date Invoice No. Name of the Supplier L.F.  Amount (₹)

 40

 ABC Ltd.
 1 Aug  524 10000
2000 balls@ ₹ 5 per piece.

XYZ Ltd.

15 Aug 611 100 bats@ ₹ 250 per piece.        = 25000 20000

Less: 20% T.D (25000 X 20/100)=   5000

Con Ltd.

29 Aug 444 200 skates @ ₹ 500 per piece    = 100000 90000

Less: 10% T.D.                          =   10000

ABC Ltd.

29 Aug 741 200 Chess @ ₹ 100 per piece     =  2000 1700

Less: 15% T.D.(2000 x 15/1000) =  300

Con Ltd.

30 Aug 521 100 skates @ ₹ 400 per piece    = 40000 36800

Less: 8% T.D.                            =   3200

 41

31 Aug  Total 167500

Purchase Return Book

When the goods purchased on credit are returned to the supplier, these are recorded in the Purchase
return book. Sometimes, goods purchased can be defective or low quality, etc. and hence, need to be
returned. A separate book is maintained for the purchase return and these are not deducted from the
purchases in the Purchase book. Also, Purchase return is recorded at the net amount on the invoice.

Debit note is prepared for every return of goods. It is prepared in duplicate. The original one is sent to
the supplier while the duplicate copy is kept for our own records. The Debit note contains the name of
the supplier, details of goods returned and the reason thereof. Each debit note is dated and serially
numbered.

Date Debit Note No. Name of the Supplier L.F.  Amount (₹)

Example
Record the following transactions in the books of Zen and Co. and also show the ledger accounts

Date                                                                   Details

3 Aug Returned goods purchased from MNC Ltd. (Debit Note No. 24): 2 T.V. @ ₹ 50000
 42

per piece.

Goods returned purchased from Daya Ltd. (Debit Note No. 26): 10 DVD Players @ ₹
17 Aug
2500 per piece. Trade discount 20%

Returned goods purchased from X Ltd. (Debit Note No. 28): 5 refrigerators for
30 Aug
₹60000. Trade discount 10%

Purchase Return Book

Debit  Amount
Date Name of the Supplier L.F.
Note No. (₹)

 MNC Ltd.
 3 Aug 24 100000
2 T.V. @ ₹ 50000 per piece

Daya Ltd.

17 Aug 26 10 DVD Players @ ₹ 2500 per piece. = 25000 20000

Less: 20% T.D.                                     =   5000

 43

X Ltd.

30 Aug 28 5 refrigerators @ ₹ 12000 per piece    = 60000 54000

Less: 10% T.D.                                    = 6000

Total 174000

Sales book
Sales book is a subsidiary book maintained to record credit sale of goods. Cash sale of goods and
sale of property and assets whether for cash or on credit are not recorded in the sales book. This
book is also named as sales day book, sold day book, sales journal or sale register.

The preparation of the sales book is similar to that of purchases book. The entries are made in the
sales book on the basis of copies of the invoice sent to the buyer.
 44

Illustration 5

From the transactions given below, prepare the sales book of Kumar Stationery for July 2017.

 July 5

Sold on credit to Saravana Traders

 10 packs of A4 sheets @ Rs. 250 per pack

 10 dozens of writing pads @ Rs. 850 per dozen

 Less : 10% trade discount for both

 July 8

 Sold to Raja for cash

 15 packs of A4 sheets @ Rs. 250 per pack

July 20

 Sold to Mohan & Co.

 5 white boards @ Rs. 2,200 each

 10 dozens of writing pads @ Rs. 850 per dozen

July 23

 Sold on credit to Narayanan old motor car for Rs. 5,000

July 28

 Sold to Kumaran for cash 15 packets of marker pens @ Rs. 250 per packet

 Solution
 45

Sales Return Book

Sometimes, goods sold can be defective or of low quality, etc. and hence, the customer may return
them. Thus, goods sold that are returned by the customer or buyer, are recorded in the Sales Return
Book. It is noteworthy that the return of only those goods is entered in these books that were earlier
sold on credit.

A Credit Note is prepared for every return of goods. It is prepared in duplicate. The Credit Note
contains the name of the customer, details of goods returned and reason thereof. Each Credit Note is
dated and serially numbered. The Credit Note serves as the source document for entries in the Sales
Return Book.

Date Credit Note No. Name of the Customer L.F.  Amount

 46

Bills Receivable Book

Also known as a B/R book, bills receivable book is a subsidiary or secondary book of accounting,
where all bills of exchange, which are receivable for the business, are recorded. The total value of all
the bills receivable for an accounting period is transferred to the books of accounts.

Bills Payable Book

Also known as a B/P book, bills payable book is a subsidiary or secondary book of accounting where
all bills of exchange, which are payable by the business, are recorded. The total value of all the bills
payable for an accounting period is transferred to the books of accounts.

Journal proper

Journal proper is book of original entry (simple journal) in which miscellaneous credit transactions
 47

which do not fit in any other books are recorded. It is also called miscellaneous journal. The form and

procedure for maintaining this journal is the same that of simple journal.

The use of journal proper is confined to record the following transactions:-

1. Opening entries
2. Closing entries
3. Transfer entries
4. Adjustment entries
5. Rectification entries
6. Entries for which there is no special journal
7. Entries for rare transactions

Trial Balance:

The statement which is prepared at a particular date with the ledger account balances to test the
arithmetical accuracy of the ledger accounts and also to facilitate preparation of financial
statements is called a trial balance.

Objects of Trial Balance

 The main object of the trial balance is to proof the arithmetical accuracy of accounts.
 It is prepared to check whether the debit and credit accounts of each transaction have been
recorded properly.
 For the convenient preparation of financial statements, the trial balance is prepared to bring
debit and credit ledger balances together.
 To detect mistakes in the process of accounts, if any.
 To provide information to the proper authority in time.
 To compare the balances of various ledger accounts of the current year with those of previous
year.

Preparation of Trial Balance

 48

Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts including
cash and bank balances. It is prepared on a particular date. The accounts having a debit balance are
entered in the debit amount column and credit balance accounts are entered in the credit amount
column. The totals of the two sides of the accounts may also be used to prepare trial balance. The
sum of each column should be equal. The standard format of a trial balance is given below :

Particulars Debit Rs. Credit Rs.

Method of Trial Balance:

(A)Total Method :
In this method the total of both sides of every account in the ledger is written against the name of
the respective account without balancing them in the form of debit and credit balances respectively.

Trial Balance of M/s _____ as on _____

Amount Amount
Particulars L/F
(Dr) (Cr)

Cash a/c — 2,14,500 1,90,000

Capital a/c — 0 2,00,000

Furniture a/c — 20,000 0

Rent Paid a/c — 5,000 0

Bank a/c — 1,50,000 30,000

Goods/Stock a/c — 20,000 20,000

M/s Ramdas & Brothers a/c — 5,000 10,000

Machinery a/c — 25,000 0

 49

Trial Balance of M/s _____ as on _____

Amount Amount
Particulars L/F
(Dr) (Cr)

Mr. Natekar a/c — 8,000 2,000

Wages Paid a/c — 5,000 0

Commission Received a/c — 0 500

Total 4,52,500 4,52,500

(B) Balance Method :

In Balance method, the balance of each account (which may be debit balance or credit balance) is
extracted and written against each account; we write debit balance in the debit column and credit
balance in the credit column

Trial Balance of M/s _____ as on _____

Amount Amount
Particulars L/F
(Dr) (Cr)

Cash a/c — 24,500

Capital a/c — 2,00,000

Furniture a/c — 20,000

Rent Paid a/c — 5,000

Bank a/c — 1,20,000

Goods/Stock a/c —

M/s Ramdas & Brothers a/c — 5,000

 50

Trial Balance of M/s _____ as on _____

Amount Amount
Particulars L/F
(Dr) (Cr)

Machinery a/c — 25,000

Mr. Natekar a/c — 6,000

Wages Paid a/c — 5,000

Commission Received a/c — 500

Total 2,05,500 2,05,500

Final Accounts of Sole Proprietor

Final Accounts are the accounts, which are prepared at the end of a financial year. It is prepared
to ascertain the profit and to know the financial position of the business. It gives a precise idea
of the financial position of the organization to the owners, management, or other interested
parties. Financial statements are primarily recorded in a journal; then transferred to a ledger;
and thereafter, the final account is prepared
Usually, a final account includes the following components −

 Trading Account
 Profit and Loss Account
 Balance Sheet

Trading Account

A trading account helps in determining the gross profit or gross loss of a business concern, made
strictly out of trading activities. Trading involves buying and selling of goods and services. In the
trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross
profit. Only direct revenue and direct expenses are considered in it. Trading account is prepared mainly
to know the profitability of the goods bought by the businessman.
 51

Trading account is a nominal account in nature. Activities which generate revenue for the business
such as Sales of Services or Goods, Closing Stock are shown on the credit side (Right) whereas
activities which are a part of the Cost of Goods Sold such as the purchase of raw material, opening
stock, direct expenses, etc. are shown on the debit side (Left).

Calculation of Gross profit/gross loss in the form of equation:

Gross profit = Net sales – Cost of goods sold
Net Sales = Total sales – Sales returns
Cost of goods sold = Opening stock + Net purchases +Direct expenses - Closing stock
Net purchases = Total purchase – purchase returns
Gross loss = Cost of goods sold – Net sales
Illustration 1
The following information relates to a business for the year 2020. Calculate Gross profit or loss, use
equation. Opening stock Rs.16, 000, Purchases Rs.40,000, Purchase returns 1,500, direct expenses
3,000, Sales 78,000, Sales returns 2,400, Closing stock 13,000.
Gross profit = Net sales – Cost of goods sold
 Net Sales = Total sales – Sales returns
= 78,000 – 2,400 = 75,600
 Cost of goods sold = Opening stock + Net purchases +Direct expenses - Closing stock
Net purchases = Total purchase – purchase returns
= 40,000 – 1,500 = 38,500
Cost of goods sold = 16,000 + 38,500 + 3,000 - 13,000 = 44,500
 Gross profit = 75,600 – 44,500 = 31,100

Format of Trading Account

Trading Account for the year ending…….

Particulars Amount Particulars Amount
 52

Opening Stock xxx Sales xxx xxx

Purchases xxx xxx Less Sales returns xx
Less Purchase Returns xx (Return inwards) xxx
(Return outwards) xxx
Closing Stock
Direct Expenses: xxx
Wages xxx
Fright xxx
Carriage on purchase xxx
Octroi xxx
Customs duty xxx
Excise duty xxx
Gas, water, fuel xxx
Factory expenses xxx
xxxx
Royalty Gross Loss c/d
xxxx
Gross Profit c/d

XXXX XXXX

Illustration 2
The following information relates to a business for the year 2020. Opening stock Rs.16, 000,
Purchases Rs. 40,000, Purchase returns 1,500, direct expenses 3,000, Sales 78,000, Sales returns
2,400, Closing stock 13,000.

Trading Account for the year ended 31-12-2020

Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 16,000 Sales 78,000
75,600
 53

Purchases 40,000 38,500 Less: Sales returns 2,400

Less: returns 1,500 3,000 13,000
Direct expenses 31,100 Closing stock
Gross profit c/d 88,600
88,600
=======
=====

Illustration 3
The following information relates to a business for the year 2020.
Rs.
Opening stock 1,00, 000
Purchases 6,10,000
Return outwards 10,000
Carriage on purchase 3,000
Fuel, Water 2,000
Wages 5,000
Octroi 1,000
Royalty 5,000
Sales 7,08,000
Return Inwards 8,000
Closing stock 3,30,000
Solution
Trading Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 1,00,000 Sales 7,08,000
Purchases 6,10,000 Less: Sales returns 8,000 7,00,000
Less: returns 10,000 6,00,000
3,000 3,30,000
Carriage on purchase Closing stock
Fuel, Water 2,000
Wages 5,000
 54

Octroi 1,000
Royalty 5,000
Gross profit c/d 3,14,000 10,30,000

10,30,000

Profit and Loss Account

Profit and loss account shows the net profit and net loss of the business for the accounting period. It
is debited with all indirect expenses and losses and credited with all incomes and gains. Profit and
loss account gets initiated by entering the gross loss on the debit side or gross profit on the credit
side. This value is obtained from the balance which is carried down from the Trading account.

Difference between Trading and Profit and Loss Account

The following points of difference exist between the Trading and Profit and Loss Account
 55

Parameters Trading Account Profit and Loss Account

Meaning Trading account used to find the gross Profit and loss account or Income
profit/loss of the business for an statement is used to find the net
accounting period profit/loss of the business for an
accounting period

Timing Trading Account is prepared first and Profit/Loss Account is prepared after
then profit and loss account is prepared. the trading account is prepared.

Purpose For knowing the gross profit or gross For knowing the net profit or net loss
loss of a business of a business

Stage It is the first stage in the creation of the It is the second stage in the creation
final account. of the final account.

Transfer The balance in the form of Gross loss or The balance in the form of Net loss or
of Balance Gross Profit of the trading account will Net Profit of the profit and loss
be transferred to the Profit and Loss account will be transferred to the
Account Balance Sheet

Illustration 4

From the following information prepare a Profit and Loss Account of Rajan and Bros., for the year
ending 31st December 2020.
Gross profit 12,000 Salaries 4,500
Stationary 250 Insurance 200
Carriage on sales 450 Advertising 850
Commission paid 800 Discount allowed 500
Discount received 700 Bad debts 200
Interest received 1,000

Rajan and Bros.

Profit and Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Rs. Rs.
 56

To Salaries 4,500 By Gross Profit b/d 12,000

,, Stationary 250 ,, Interest received 1,000
,, Carriage on sales 450 ,, Discount received 700
,, Commission paid 800
,, Insurance 200
,, Advertising 850
,, Discount allowed 500
,, Bad debts 200
,, Net profit 5950 13,700
--------------- =========
13,700
========

Illustration 5

From the following information prepare a Trading and Profit & Loss Account of Raman, for the year
ending 31st December 2020.
Opening stock 1,20,000
Purchase 1,51,000
Return Outwards 1,000
Wages 2,000
Salaries 10,000
Insurance 2,000
Octroi 1,500
Power 3,000
Factory Rent 1,000
Carriage inwards 4,000
Advertising 1,500
Commission paid 800
Discount allowed 500
Discount received 700
Bad debts 200
Interest received 1,000
Rent received 2,000
Sales 2,52,000
Return Inwards 2,000
Closing stock 1,30,000
 57

Solution
Trading and Profit & Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 1,20,000 Sales 2,52,000
Purchases 1,51,000 Less: Sales returns 2,000 2,50,000
Less: Return Outwards 1,000 1,50,000
2,000 Closing stock 1,30,000
Wages
Power 3,000
Octroi 1,500
Factory Rent 1,000
Carriage inwards 4,000
Gross profit c/d 98,500 3,80,000
3,80,000
Gross profit b/d 98,500
Salaries 10,000 Discount received 7,00
Insurance 2,000 Interest received 1,000
Advertising 1,500 Rent received 2,000
Commission paid 8,00
Discount allowed 5,00
Bad debts 2,00

Net Profit c/d 87,200

1,02.200 1,02.200

Balance Sheet
A balance sheet is a financial statement which summarizes the assets, liabilities, and shareholders’
equity of a business organization at a given date. It provides a base on which rate of return can be
computed and its capital structure can be evaluated. It is also known as the statement of financial
 58

position. A balance sheet can only represent the financial position of a business at a given date. It is
prepared after the preparation of trading and profit and loss account.

Objectives of Balance Sheet

1. To reveal the financial position

2. To show the picture of assets and liabilities
3. Information about debtors and creditors
4. To reveal liquidity position
5. To provide financial information balance sheet provides true and reliable financial information to
the management, government, shareholders, lenders etc.

Format of Balance Sheet of a Sole Trader

Balance sheet as on ……………
Liabilities Rs. Assets Rs.
Current Liabilities: Current Assets:
Bank overdraft xxx Cash in hand xxx
Bills payable xxx Cash at Bank xxx
Sundry creditors xxx Bills receivable xxx
Outstanding expenses xxx Sundry debtors xxx
Income received in advance xxx Prepaid expenses xxx
Short loans xxx Accrued Income xxx
Long term liabilities: Closing stock xxx
xxx
Loans (Inventory)
xxx xxx
Borrowings Loans
Capital: Investment xxx
Opening Capital xxx Fixed Assets:
xxx
Add Net profit xx Land & buildings
xxx
(Net Loss) Plant & Machinery
xxx xxx
Less Drawings xx Furniture
xxx
Less Interest in drawings xx Goodwill

XXXX
XXXX ============
==========
=

Segments of the Balance Sheet

 59

a. Assets
Assets are the things of value which are owned by the business organization. They are listed in
accounts in descending order of their liquidity. There are two types of assets – current assets (can
be converted to cash in a year or less) and non-current or long-term assets or fixed assets (can be
converted to cash in more than a year).
 Current Assets: 
 Cash and its equivalents
 Marketable securities
 Accounts receivable
 Inventory
 Prepaid expenses
 Fixed Assets:
 Fixed assets such as land, machinery, buildings, etc.
 Intangible assets such as intellectual property, goodwill, etc.

b. Liabilities
Liabilities are the things which the business owes to other parties. They include bills payable,
interests, debts, outstanding rent, outstanding salaries, etc.. There are two types of liabilities –
current liabilities (which are due within a year or less) and non-current or long-term liabilities
(which are due in more than a year).
 Current Liabilities:
 Short-term debt or current payable amount of long-term debt
 Bank loans
 Payable interest
 Expenses on utilities, taxes, rents, etc.
 Salaries payable
 Customer prepayments
 Payable dividends
 Non-Current Liabilities:
 Long-term debt and its interest
 Liability of pension funds for employee retirement accounts

c. Shareholders’ Equity
Shareholders’ equity is the amount of money which belongs to the shareholders or owners of the
business.

Illustration 6

From the following particulars, prepare a Balance Sheet as on 31 st December 2017

 60

Capital 60,000 Loan to Kumar 15,000

Premises 40,000 Investment 13,000
Furniture 7,500 Cash in hand 1,250
Bills receivable 3,500 Cash at bank 2,450
Bills payable 13,300 Drawings 3,000
Sundry Debtors 11,000 Net profit 39,900
Sundry Creditors 14,000 Closing stock 27,000
Machinery 3,500

Balance Sheet as on 31 st December 2017

Liabilities Rs. Assets Rs.

1,2
Bills payable 13,300 Cash in hand 50
Sundry creditors 14,000 Cash at Bank 2,450
Capital 60,000 Bills receivable 3,500
Add Net profit 39,900 Sundry debtors 11,000
------------- Closing stock 27,000
9 9,900 Loan to Kumar 15,000
Less Drawings 3,000 96,900 Investment 13,000
------------- Machinery 3,500
Furniture 7,500
Premises 40,000
1,24,200
======== 1,24,200
=========

Illustration 7

The following trial balance have been taken out from the books of XYZ as on 31st December, 2020.

Dr. Cr.
Rs. Rs.
Plant and Machinery 1,00,000
Opening stock 60,000
Purchases 1,60,000
Return Outwards 2000
Building 1,70,000
Carriage inward 3,400
Carriage outward 5,000
 61

Wages 32,000
Sundry debtors 100,000
Salaries 24,000
Furniture 36,000
Trade expense 12,000
Advertisement 5,000
Bad debts 1,800
Drawings 10,000
Bills receivable 50,000
Insurance 4,400
Bank balances 20,000
Sales 480,000
Return Inwards 1900
Interest received 2,000
Sundry creditors 40,000
Bank loan 100,000
Capital 171,500
 Total 795,500 795,500

Prepare the trading and profit and loss account of the business for the year ended 31.12.2005 and a
balance sheet as at that date. Value of Closing stock Rs.90,000

Solution

Trading and Profit and Loss Account

For the year ended 31st, December 2020

Particulars Amount Particulars Amount

Opening stock 60,000 Sales 4,80,000
Purchases 1,60,000 Less Returns 1,900 4,78,100
Less Returns 2,000 1,58,000
Closing stock 90,000
Carriage inward 3,400
Wages 32,000
Gross profit
3,14,700
(transferred to P&L)
5,68,100 5,68,000

Carriage outward 5,000 Gross profit 3,14,700

Salaries 24,000 Interest received 2,000
 62

Trade expenses 12,000

Advertisement 5,000
Bad debts 1,800
Insurance 4,400
Net profit (transferred
2,64,500
to capital)

3,16,700 3,16,700

Balance Sheet as on 31st, December 2020

Liabilities Rs. Assets Rs.

     Sundry creditors 40,000      Bank balance 20,000

     Bank loan 1,00,000      Bills receivable 50,000
     Sundry debtors 1,00,000
     Capital 1,71,500      Closing stock 90,000
    +Net profit 2,64,500
  4,36,000      Furniture 36,000
    -Drawings 10,000 4,26,000      Plant and Machinery 1,00,000
     Building 1,70,000

5,66,000 5,66,000

Illustration 8

From the following information, prepare trading and profit and loss account of Abdul Rahuman for
the year ending 31st December, 2016 and balance sheet as on that date. The closing stock on 31st
December, 2016 was valued at Rs.  2,000.
 63

Solution

 Illustration 9

From the following trial balance of Sharan, prepare trading and profit and loss account for the year
ending 31st December, 2017 and balance sheet as on that date. The closing stock on 31st December,
2017 was valued at Rs.  2,50,000.
 64

Solution
 65

Illustration 10
 66

Final Accounts of Sole Trader

Trading and Profit and Loss Account for the year ended 31 st December 2009
Particulars Amount Particulars Amount
Rs. Rs.
Opening stock 7,000 Sales 29,250
Less: returns 950 28,300
Purchases 15,800
---------------------
Less: returns 800 15,000
Closing stock 7,500
-----------------------
450
Carriage inwards
9,000
Wages
4,350
Gross profit c/d 35,800
35,800

Gross profit b/d 4,350

Salaries 1,100 Rent
600
Insurance 400
Discount 400
Trade expenses 1,000 4,950
Net profit 2,050 =========

4,950
==========

Balance Sheet as on 31 st December 2009

Liabilities Rs. Assets Rs.
Bank overdraft 1,900 Cash in hand 300
Bills payable 800 Sundry debtors 27,500
Sundry creditors 1,500 Closing stock 7,500
Capital 31,800 Machinery 2,300
Add Net profit 2,050 33,850 Furniture 450
------------
------------------ 38,050
38,050 ===========
==========
=
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Closing Entries:
Journal entries which are passed to close nominal accounts for the purpose of transferring them to
trading account are called closing entries.

1. Trading account Dr.

To Opening stock
To Purchases
To Direct expenses (individually)

2. Closing stock account Dr.

To Trading account

3. The gross profit or gross loss is transferred to Profit and loss account.

(a) If there is gross profit:

Trading account Dr.
To Profit and Loss Account

(b) If there is gross loss:

Profit and Loss Account Dr.
To Trading Account

ACCOUNTING CONCEPTS

Accounting concept refers to the basic assumptions and rules and principles which work as the basis
of recording of business transactions and preparing accounts. Following are the various accounting
concepts

1. Business Entity Concept

This concept assumes that, for accounting purposes, the business enterprise and its owners
are two separate independent entities. Thus, the business and personal transactions of its
owner are separate.
For example, when the owner invests money in the business, it is recorded as liability of the
business to the owner. Similarly, when the owner takes away from the business cash/goods
for his/her personal use, it is not treated as business expense.
2. Money Measurement Concept
This concept assumes that all business transactions must be in terms of money, that is in the
currency of a country. In our country such transactions are in terms of rupees. Thus, as per the
money measurement concept, transactions which can be expressed in terms of money are
recorded in the books of accounts.
For example, sale of goods worth Rs.200000, purchase of raw materials Rs.100000.
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3. Going Concern Concept

This concept states that a business firm will continue to carry on its activities for an indefinite
period of time. Simply stated, it means that every business entity has continuity of life. Thus,
it will not be dissolved in the near future. This is an important assumption of accounting, as it
provides a basis for showing the value of assets in the balance sheet;
For example, a company purchases a plant and machinery of Rs.100000 and its life span is 10
years.
4. Accounting Period Concept
All the transactions are recorded in the books of accounts on the assumption that profits on
these transactions are to be ascertained for a specified period. This is known as accounting
period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals.
5. Accounting Cost Concept
Accounting cost concept states that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation and installation and not at its
market price. It means that fixed assets like building, plant and machinery, furniture, etc are
recorded in the books of accounts at a price paid for them.
For example, a machine was purchased by XYZ Limited for Rs.500000, for manufacturing
shoes. An amount of Rs.1,000 were spent on transporting the machine to the factory site. In
addition, Rs.2000 were spent on its installation. The total amount at which the machine will
be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000. This
cost is also known as historical cost.
6. Dual Aspect Concept
Dual aspect is the foundation or basic principle of accounting. This concept assumes that
every transaction has a dual effect, i.e. it affects two accounts in their respective opposite
sides. Therefore, the transaction should be recorded at two places. It means, both the aspects
of the transaction must be recorded in the books of accounts.
For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii)
Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is
commonly expressed in terms of fundamental accounting equation :
Assets = Liabilities + Capital

ACCOUNTING CONVENTIONS

Conventions in accounting have been developed to bring about uniformity in the maintenance of
accounts. Conventions denote customs or traditions or usages which are in use since long. To be
clear, these are nothing but unwritten laws. The accountants have to adopt the usage or customs,
which are used as a guide in the preparation of accounting reports and statements. These
conventions are also known as doctrine. Following are the important accounting conventions in
use.
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1. Convention of Disclosure:

This convention requires that accounting statements should be honestly prepared and all
significant information should be disclosed therein. That is, while making accountancy records,
care should be taken to disclose all material information. Here the emphasis is only on material
information and not on immaterial information.

2. Convention of Consistency:

Rules and practices of accounting should be continuously observed and applied. In order to
enable the management to draw conclusions about the operation of a company over a number of
years, it is essential that the practices and methods of accounting remain unchanged from one
period to another. Comparisons are possible only if a consistent policy of accounting is followed.

3. Convention of Conservatism:

“Anticipate no profit and provide for all possible losses” is the essence of this convention. Future
is uncertain. Fluctuations and uncertainties are not uncommon. Conservatism refers to the policy
of choosing the procedure that leads to understatement as against overstatement of resources and
income.

4. Convention of Materiality:
American Accounting Association defines the term materiality as “An item should be regarded as
material if there is reason to believe that knowledge of it would influence the decision of
informed investor.” It refers to the relative importance of an item or event. Materiality of an item
depends on its amount and its nature.