ACCOUNTING PROCESSES
BASIC ACCOUNTING PROCEDURES - JOURNAL ENTRIES
By Subodh Kumar Sir
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Double entry system of accounting is more than 500
years old. “Luca Pacioli” an Italian friar &
mathematician published Summa de Arithmetica,
Geometria, Proportioni, et Proportionalita
(“Everything about Arithemetic Geometry and
proportions”). The FIrst book that described a
double entry accounting system.
Born: 1447, Sansepolcro, Italy
Died: 19 June 1517, Sansepolcro, Italy
Full name: Fra Luca Bartolomeo de Pacioli
Nationality: Italian
Following are the transactions entered into by R after he started his business.
Show how various accounts will be affected by these transactions:
2020 April (Rs in 000)
1. R started business with 5,000
2. He purchased furniture for 1,200
3. Paid salary to his clerk 1,100
4. Paid rent 1,150
5. Received interest 2,000
Develop the accounting equation from following At the end of the accounting period the
information available at the beginning of accounting balances appear as follows:
period:
Particulars (in 000) Capital ?
Capital 51,000 Loan 11,500
Loan 11,500 Trade payables 5,800
Trade payables 5,700 Fixed Assets 12,720
Fixed Assets 12,800 Inventory 22,900
Inventory 22,600 Trade receivables 17,500
Trade receivables 17,500 Cash at Bank 15,600
Cash and Bank 15,300
(a) Reset the equation and find out profit.
(b) Prepare Balance Sheet at the end of the accounting period.
Q-2 Mr. Deepak has provided following details related to his financials. Find out the missing figures:
Profits carved during the year 5,000 Liabilities at the end of the year C
Assets at the beginning of year A Closing capital 35,000
Liabilities at the beginning of year 12,000 Total liabilities including capital
Assets at the end of the year B at the end of the year 50,000
1. Personal Accounts: Personal accounts relate to persons, trade receivables or trade
payables. Example would be the account of Ram & Co., a credit customer or the
account of Jhaveri & Co., a supplier of goods. The capital account is the account of
the proprietor and, therefore, it is also personal but adjustment on account of profits
and losses are made in it. This account is further classified into three categories
1. Natural personal accounts: It relates to transactions of human beings like Ram,
Rita, etc
2. Articial (legal) personal accounts: For business purpose, business entities are
treated to have separate entity. They are recognised as persons in the eye of
law for dealing with other persons. For example: Government, Companies
(private or limited), Clubs, Co-operative societies etc.
3. Representative personal accounts: These are not in the name of any person or
organisation but are represented as personal accounts. For example:
outstanding liability account or prepaid account, capital account, drawings
account.
Impersonal Accounts: Accounts which are not personal such as machinery account,
cash account, rent account etc. These can be further sub-divided as follows:
1. Real Accounts: Accounts which relate to assets of the firm but not debt. For
example, accounts regarding land, building, investment, fixed deposits etc., are
real accounts. Cash in hand and Cash at the bank accounts are also real.
2. Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue, etc.
like salary account, interest paid account, commission received account. The net
result of all the nominal accounts is reflected as profit or loss which is transferred to
the capital account. Nominal accounts are, therefore, temporary.
Q-3 From the following information , state the nature of account and state which account
will be debited and which will be credited.
1. Started business with a capital of Rs 50,00,000.
2. Wages and salaries paid Rs 50,000
3. Rent received Rs 2,00,000
4. Purchased goods on credit Rs 9,00,000
5. Sold goods for Rs 8,16,000 and received payment in cheque.
MODERN CLASSIFICATION OF ACCOUNTS
Q-4 Show the classification of the following Accounts under traditional and accounting equation
approach:
(a)Building; (b) Purchases;
(c) Sales; (d) Bank Fixed Deposit;
(e) Rent; (f) Rent Outstanding;
(g) Cash; (h) Adjusted Purchases;
(i) Closing Inventory; (j) Investments;
(k) Trade receivables; (l) Sales Tax Payable,
(m) Discount Allowed; (n) Bad Debts;
(o) Capital; (p) Drawings;
(q) Interest Receivable account; (r) Rent received in advance account;
(s) Prepaid salary account; (t) Bad debts recovered account;
(u) Depreciation account, (v) Personal income-tax account.
Q-5 Journalise the following transactions. Also state the nature of each account involved in the Journal entry.
1. December 1, 2020, Ajit started business with capital Rs 4,00,000
2. December 3, he withdrew cash for business from the Bank Rs 2,000.
3. December 5, he purchased goods making payment through bankRs 15,000.
4. December 8, he sold goodsRs 16,000 and received payment through bank.
5. December 10, he purchased furniture and paid by cheque Rs 2,500.
6. December 12, he sold goods to Arvind Rs 2,400.
7. December 14, he purchased goods from Amrit Rs 10,000.
8. December 15, he returned goods to Amrit Rs 500.
9. December 16, he received from Arvind Rs 2,300 in full settlement.
10. December 18, he withdrew goods for personal use Rs 1,000.
11. December 20, he withdrew cash from business for personal use Rs 2,000.
12. December 24, he paid telephone charges Rs 110.
13. December 26, amount paid to Amrit in full settlement Rs 9,450.
14. December 31, paid for stationery Rs 200, rent Rs5,000 and salaries to sta Rs 2,000.
15. December 31, goods distributed by way of free samples Rs 2,000.
True and False
1. In accounting equation approach,
equity + Long-term liabilities = fixed asset + current
assets – current liabilities.
2. In the traditional
approach a debtor
becomes receiver.
3. The rule of nominal account
states that all expenses &
losses are recorded on credit
side.
4. Journal proper is
also called a subsidiary
book.
5. Capital account has
a debit balance.
6. Purchase account is
a nominal account.
7. All the personal & real account
are recorded in P&L A/c.
8. Asset side of balance sheet contains
all the personal & nominal accounts.
9. Capital account is a
personal account.
10. Journal is also
known as the book of
original entry.
Multiple
Choice
Question
1. The rent paid to landlord is credited to
(a) Landlord’s account.
(b) Rent account.
(c) Cash account.
2. In case of a debt becoming bad, the amount
should be credited to
(a) Trade receivables account.
(b) Bad debts account.
(c) Cash account.
3. A Ltd. has a ` 35,000 account receivable from Mohan. On January 20,
Mohan makes a partial payment of ` 21,000 to A Ltd. The journal entry
made on January 20 by A Ltd. to record this transaction includes:
(a) A credit to the cash received account of ` 21,000.
(b) A credit to the Accounts receivable account of ` 21,000.
(c) A debit to the cash account of ` 14,000
4. Which Financial statement represents the accounting equation -
Assets = Liabilities + Owner’s equity:
(a) Income Statement
(b) Statement of Cash Flows
(c) Balance Sheet.
5. Which account is the odd one out?
(a) Office furniture & Equipment.
(b) Freehold land and Buildings.
(c) Inventory of materials.
6. The debts written o as bad, if recovered subsequently are
(a) Credited to Bad Debts Recovered Account
(b) Credited to Trade receivables Account.
(c) Debited to Profit and Loss Account.
7. In Double Entry System of Book-keeping every
business transaction affects:
(a) Two accounts
(b) Two sides of the same account.
(c) The same account on two different dates.
8. A sale of goods to Ram for cash should be
debited to:
(a) Ram
(b) Cash
(c) Sales
JOURNAL ENTRIES
(i) Employees had taken inventory worth ` 1,00,000 (Cost
price ` 75,000) on the eve of Deepawali and the same
was deducted from their salaries in the subsequent month.
(ii) Wages paid for erection of Machinery ` 18,000.
(iv) Purchase of goods from Naveen of the list
price of ` 2,00,000. He allowed 10% trade
discount, ` 5,000 cash discount was also allowed
for quick payment.
(iii) Income tax liability of proprietor ` 1,17000 was paid
out of petty cash.
Calculate the missing amount for the following.
Assets Liabilities Capital
(a) 15,00,000 2,50,000 ?
(b) ? 1,50,000 75,000
(c) 14,50,000 ? 13,75,000
(d) 57,00,000 - 2,80,000 ?
Following is the information provided by Mr. Gopi pertaining to year
ended 31st March 2019. Find the unknowns, showing computation to
support your answer:
Particulars Particulars
Machinery 12,00,000 Trade Receivables B
Accounts Payable 1,00,000 Loans
c
Inventory 60,000 Closing Capital D
Total Liabilities including 14,15,000 Opening Capital 10,00,000
capital
Cash A Loss incurred during the 35,000
year
Bank 80,000 Capital Introduced during 1,00,000
the year
Additional Information: During the year sales of Rs. 15,55,000 was made
of which Rs. 15,00,000 have been received.
LEDGERS
POSTING
SPECIMEN OF LEDGER ACCOUNTS
Q-1 Prepare the Stationery Account of a rm for the year ended 31.12.2020 duly balanced o, from the
following
details:
2020 Rs.
Jan. 1 Inventory of stationery 480
April 5 Purchase of stationery by cheque 800
Nov. 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280
Q-3 Prepare the ledger accounts on the basis of following transactions in the books of a
trader.
Debit Balances on January 1, 2020:
Cash in Hand Rs. 8,000, Cash at Bank Rs. 25,000, inventory of Goods Rs. 20,000, Building Rs.
10,000. Trade receivables:
Vijay Rs. 2,000 and Madhu Rs. 2,000.
Credit Balances on January 1, 2020:
Trade payables: Anand Rs. 5,000, Capital Rs. 55,000
Following were further transactions in the month of January, 2020:
Jan. 1 Purchased goods worth Rs. 5,000 (payable at later date) for cash less 20% trade
discount and 5% cash discount.
Jan. 4 Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount.
Jan. 8 Purchased plant from Mukesh for Rs.5,000 and paid Rs.100 as cartage for bringing the
plant to the factory and another Rs.200 as installation charges.
Jan. 12 Sold goods to Rahim on credit Rs.600.
Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash Rs.1,000.
TRUE & FALSE
1. A ledger is also known as the principal book of accounts.
2. Cash account has a debit balance.
3. Posting is the process of transferring the accounts from ledger
to journal.
4. At the end of the accounting year, all the
nominal accounts of the ledger book are
balanced.
5. Ledger records the transactions in a chronological order.
6. If the total debit side is greater than the total of
credit side, we get a credit balance.
7. Ledger accounts of assets will always be
debited when they are increased
TRIAL BALANCE
INTRODUCTION
Preparation of trial balance is the third phase in the accounting
process. After posting the accounts in the ledger, a statement is
prepared to show separately the debit and credit balances. Such
a statement is known as the trial balance. It may also be prepared
by listing each and every account and entering in separate
columns the totals of the debit and credit sides. Whichever way it
is prepared, the totals of the two columns should agree.
RULES OF PREPARING THE TRIAL BALANCE
The balances of all The balances of all
1. assets accounts 1. liabilities accounts
2. expenses accounts 2. income accounts
3. losses 3. profits
4. drawings . 4. capital
5. cash and bank are placed in the
balances are placed in the debit credit column of the trial
column of the trial balance. balance.
OBJECTIVES OF PREPARING THE TRIAL BALANCE
Given below is a ledger extract relating to the business of X and Co. as on March, 31, 2020. You are
required to prepare the Trial Balance by the Total Amount Method.
TOTAL
METHOD
BALANCE
METHOD
Q-2 From the following ledger balances, prepare a trial balance of Anuradha
Traders as on 31st March, 2020
Account Head `
Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000
Sales return 1,000
Discount allowed 2,000
Expenses 10,000
Trade receivables 75,000
Trade payables 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500
1. Preparing trial balance is the third phase of
accounting process.
2. Trial balance forms a base for the
preparation of Financial statements.
3. Agreement of Trial balance is a conclusive proof of
accuracy.
.
4. A trial balance will tally in case of compensating
errors.
5. A Trial balance can find the missing entry from the
journal.
6. Suspense account opened in a trial balance is a
permanent account.
7. The balance of purchase returns account has a credit
balance
