BCOC-131

Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

1
THEORETICAL FRAMEWORK
UNIT 1
Nature and Scope of Accounting 5

UNIT 2
Accounting Process and Rules 23

UNIT 3
Accounting Principles 37

UNIT 4
Accounting Standards 60
Theortical Framework
PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce SOMS, IGNOU
University of Delhi, Delhi
Prof. N V Narasimham
Prof. R.P. Hooda
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.) Prof. Nawal Kishor
MD University, Rohtak Department of Commerce Prof. M.S.S. Raju
University of Delhi, Delhi
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma Dr. Subodh Kesharwani
Rani Chennamma University Department of Commerce
University of Delhi, Delhi Dr. Rashmi Bansal
Belgaon, Karnataka
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt Dr. Anupriya Pandey
Former Vice-Chancellor Dean, Faculty of Commerce &
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Faculty Members
Director, SOMS, IGNOU SOMS, IGNOU
Prof. N. V. Narasimham
Prof. A.A. Ansari Prof. Nawal Kishor
Jamia Millia Islamia, New Delhi Prof. M.S.S. Raju
Dr. Sunil Kumar
Ms. Surbhi Gupta Dr. Subodh Kesharwani
Vivekananda College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P. Sarkar
Dr. Anupriya Pandey

COURSE PREPARATION TEAM

Dr. Sunil Kumar (Unit-4) Prof. M.S.S. Raju (Course Coordinator & Editor)
Dr. Sunil Kumar (Course Coordinator & Editor)

Preparatory Course in Commerce: PCO-01 (Unit-1, 2 and 3 Revised by Dr. Sunil Kumar)
Prof. J. Satyanarayan, Osmania University, Hyderabad
Prof. V. Vishwanadham, Osmania University, Hyderabad
Dr. D. Obul Reddy, Osmania University, Hyderabad
Shri M. Satyanarayana, Badruka College, Hyderabad

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-06-5
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
2 Printed by :
BLOCK 1 THEORETICAL FRAMEWORK
This block will introduce you to the core area in Commerce. In order to
appreciate the need for accounting, You have to practice accounting and require
a clear understanding of the nature and scope of accounting, the language used
in accounting and the principles that guide the accountant. This block also deals
with basic rules of double entry system and accounting standards which provides
the basis for accounting policies in order to prepare the financial statements.
This block is structured to cover these and other related aspects. It is hoped
that this block will provide you the necessary theoretical background to
understand and appreciate accounting in the right perspective. It covers four
units.
Unit 1 explains the nature and scope of accounting and the importance of
accounting information to various parties.
Unit 2 analyse the basic rules of double entry system and their application.
Unit 3 presents some of the terms commonly used in accounting and the basic
concepts underlying accounting.
Unit 4 deals with Accounting Standards which provides the basis for accounting
policies and for preparation of financial statements.

3
Theortical Framework

4
UNIT 1 NATURE AND SCOPE OF
ACCOUNTING
Structure
1.0 Objectives
1.1 Introduction
1.2 Need for Accounting
1.3 Objectives of Accounting
1.4 Definition and Scope of Accounting
1.5 Book-Keeping, Accounting and Accountancy
1.6 Users of Financial Accounting Information
1.7 Accounting as an Information System
1.8 Branches of Accounting
1.9 Advantages of Accounting
1.10 Limitations of Accounting
1.11 Bases of Accounting
1.11.1 Cash Basis of Accounting
1.11.2 Accrual Basis of Accounting

1.12 Qualitative Characteristics of Accounting Information

1.13 Functions of Accounting
1.14 Let Us Sum Up
1.15 Key Words
1.16 Some Useful Books
1.17 Answers to Check Your Progress
1.18 Terminal Questions

1.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the need for accounting;
 identify the objectives of accounting;
 describe accounting as an information system;
 outline the scope and bases of accounting;
 distinguish between book-keeping, accounting and accountancy;
 identify the parties interested in accounting information;
 describe the functions and important branches of accounting;
 describe the advantages and limitations of accounting; and
 state the qualitative characteristics of accounting. 5
Theortical Framework
1.1 INTRODUCTION
In this unit, we shall discuss the functions, branches, advantages, limitations, and
bases for accounting. In this unit, we also intend to elaborate on the need for
accounting and then discuss the nature, scope and importance of accounting.

1.2 NEED FOR ACCOUNTING

Let us elaborate on need for accounting. Suppose you are given ten rupees
to purchase vegetables and asked to account for the amount. You have purchased
the vegetables— 1 kg of tomatoes for Rs. 4, 1 kg of potatoes for Rs. 3,
and 1 kg of brinjalsfor Rs. 2. The total amount spent is Rs. 9 and the balance
of amount with you is Re 1. Thus, you have rendered the account for Rs.
10. This is one time affair. Therefore, you could remember what you have spent.
Suppose, you are given Rs. 2,000 and asked to manage the home for a month
and render the account for the money at the end of the month. You will be
purchasing groceries, milk, vegetables, paying for electricity, school/college fees,
etc. You will be spending almost everyday. In that case, is it possible to remember
all the payments you are making everyday and render account at the end of
the month? No, it is not possible to remember, especially when the number
of payments is more. Not only that, it is not even advisable to depend on memory.
Therefore, it is better to write down (or record) whatever payments you have
made. Further, it is advisable to obtain receipts or bills for the payments you
have made, so that you can render the account, beyond doubt.
The above example is a simple one, where you have one receipt of money
i.e., Rs. 2,000 and a number of payments. But the case of business is different.
In business, you may have to purchase and sell hundreds and thousands of
times over a period of time. You will have a number of receipts and a number
of payments (known as transactions). Will it be possible for you to remember
hundreds and thousands of transactions which have taken place in your business,
that too over a period of time, say a year? It is not humanly possible to remember
all transactions which have taken place in business over a period of time. Even
if you remember all the transactions, you will find it impossible to calculate the
net effect of all such transactions i.e., profit. It, therefore, becomes necessary
to record all the transactions that have taken place in business.
Further, it is not possible for the businessman to sit at the cash counter throughout
the day. Sometimes his family members may be asked to sit at the cash counter.
As the size of the business grows, it becomes necessary to employ people to
assist the businessman. In such cases, theft of goods or cash is possible or
all the sale proceeds may not be put into the cash box. Hence, it becomes
necessary to maintain accounting records for the purpose of control, especially
when outsiders are employed. It can, thus, be seen that there is need for proper
accounting records even in case of a sole proprietorship concern. It is all the
more important in the case of other forms of business organisation.
In case of a partnership firm, all the partners may or may not be actively
participating in the day-to-day management of the business. It is, therefore,
necessary to record all the transactions in order to satisfy all the partners. In
case of a company, it is not possible for the owners (shareholders) who are
too large in number to take part in the day-to-day management of the company.
Generally, the management of the company is entrusted to paid managers. Hence,
there is a need for recording all transactions.
6
Information about the business is required for both internal and external use. Nature and Scope of
Accounting
For example, the management needs a lot of information (for their internal use)
for planning, controlling and evaluating the operations of the business. Information
is also needed by some outsiders, banks, creditors, etc. For example, it is
required for filing sales tax, income tax, and other tax returns with appropriate
tax authorities. When a firm approaches the bank for loan or the creditors for
supply of goods on credit, the bank or creditors like to know the firm’s financial
position (whether it is financially sound or not) and its profit earning capacity.
The question is how to obtain all such information. A systematic accounting record
is the only answer.
Accounting is necessary in not only business organisations, but also ‘non-
business’ organisations like schools, colleges, hospitals, libraries, etc.

1.3 OBJECTIVES OF ACCOUNTING

From the above discussion, the objectives of accounting can be stated as follows:
i) To keep systematic records: Accounting is done tokeep a systematic
record of financial transactions, like purchase of goods, sale of goods, cash
receipts and cash payments. Systematic record of various assets and
liabilities of the business is also to be maintained.
ii) To ascertain the net effect of the business operations i.e., profit or
loss of business: Weknow that the primary objective of business is to
make profit and the businessman is very much interested in knowing the
same. A proper record of income and expenses facilitates the preparation
of the profit and loss account (income statement). The profit and loss
account reveals the profit earned or loss incurred by the business firm during
a particular period.
iii) To ascertain the financial position of the business: The businessman
is not only interested in knowing the operating results, but also interested
in knowing the financial position of his business i.e., where it stands. In
other words, he wants to know when the business owes to others and
what it owns and what happened to his capital – whether the capital
increased or decreased or remained constant. A systematic record of various
assets and liabilities facilitates the preparation of a statement known as
‘balance sheet’ (position statement) which answers these questions.
iv) To provide accounting information to interested parties: Apart from
the owners, there are various other parties who are interested in knowing
about the business firm, such as the management, the bank, the creditors,
the tax authorities, etc. For this purpose, the accounting system has to furnish
the required information.
Check Your Progress A
1. Give five points in support of the need for accounting.
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................ 7
Theortical Framework 2. State the main objectives of accounting.
................................................................................................................
................................................................................................................
................................................................................................................
3. What is profit?
................................................................................................................
................................................................................................................
................................................................................................................
4. What do you understand by ‘Financial Position?
................................................................................................................
................................................................................................................
................................................................................................................

1.4 DEFINITION AND SCOPE OF ACCOUNTING

Accounting has been defined in different ways by different authorities on the
subject. Accounting is a comprehensive discipline and it is difficult to explain
satisfactorily through any single definition. However, two definitions are given
below. This should help you to understand the nature and scope of accounting.
The American Accounting Association defines Accounting as the process of
identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information. This definition
stresses three aspects viz., identifying, measuring and communicating economic
information.
In the words of the Committee on Terminology appointed by the American
Institute of Certified Public Accountants, ‘‘Accounting is the art of recording,
classifying and summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least of financial character and
interpreting the results thereof ’’. This is a popular definition of accounting and
it outlines the nature and scope of accounting activity.
A business is generally started with proprietor’s funds i.e., capital. The proprietor
may also acquire additional funds from outsiders like banks and creditors. These
funds are utilised to acquire the assets needed for business and also to carry
out other business activities. In the process many transactions and events take
place. The accountant has to identify all such transactions and events, measure
them in terms of money, and record them in appropriate books of account.
Then, he has to classify them under separate heads of accounts, summarise
periodically in the form of Profit and Loss Account and Balance Sheet; and
analyse, interpret and communicate the results thereof to the interested parties.
Accounting can thus be broadly defined as follows;
Accounting is the process of identifying, measuring, recording, classifying,
summarising, analysing. interpreting, and communicating the financial transactions
and events in monetary terms.
8
The above definitions clearly bring out the scope of accounting. This can now Nature and Scope of
Accounting
be outlined as follows:
1. Accounting is concerned with financial transactions and events which
bringabout a change in the resources (or wealth) position of the business
firm. Such transactions have to be identified first, as and when they occur.
It is not difficult because, there will be proof in the form of a bill or receipt
(called vouchers). With the help of these bills and receipts, identification
of a transaction is easy. For example, when you purchase something you
get a bill, when you make payment, you get a receipt.
2. These transactions are to be measured or expressed in terms of money,
if not done already. Generally, this problem will not arise, because the
statement of proof expresses the transaction in terms of money. For
example, if ten books are purchased at the rate of Rs. 20 each, then the
bill is prepared for Rs. 200. But, if an event cannot be expressed in
monetary terms, it will not come under the scope of accounting.
3. The transactions which are identified and measured are to be recorded
in a book called journal or in one of its sub-divisions.
4. The recorded transactions are to be classified with a view to group
transactions of similar nature at one place. The work of classification is
done in a separate book called ledger. In the ledger, a separate account
is opened for each item so that all transactions relating to it can be brought
to one place. For example, all payments of salaries are brought to salaries
account.
5. The recording and classification of many transactions will result in a mass
of financial data. It is, therefore, necessary to summarise such data
periodically (at least once a year), in a significant and meaningful form.
The summarisation is done in the form of profit and loss account which
reveals the profit made or loss incurred, and the balance sheet which reveals
the financial position.
6. The summary results will have to be analysed, interpreted (critically
explained) and communicated to interested parties. Accounting information
is generally communicated in the form of a ‘report’. Big organisations
generally present printed reports, called published accounts.

1.5 BOOK-KEEPING, ACCOUNTING AND

ACCOUNTANCY
Very often you will come across terms like bookkeeping, accounting, and
accountancy in the literature on accounting. We propose to explain them in the
following paragraphs:
You know Accounting involves a series of activities, as listed out in the scope
of accounting. These activities are; (1) identifying, (2) measuring. (3) recording,
(4) classifying, (5) summarising, (6) analysing, (7) interpreting, and
(8) communicating, the financial transactions and events. –
Book-keeping is a narrow term, which means record keeping or maintaining
books of account. It only covers the first four activities (1 to 4 above) of
accounting. 9
Theortical Framework The term ‘Accountancy’ refers to a systemiatised knowledge of accounting and
is regarded as an academic subject like economics; statistics, chemistry, etc.
It explains ‘why to do’ of various aspects of accounting. In other words, when
accounting refers to the actual process of preparing and presenting the accounts,
Accountancy tells us why and how to prepare the books of account and how
to summarise the accounting information and communicate it to the interested
parties. Thus Accountancy is a science, a body of systematised knowledge,
whereas Accounting is the art of putting such knowledge intopractice.
In general usage, however, Accountancy and Accounting are used as synonyms
(meaning the same thing). But, of late, the term accounting is becoming more
and more popular.
Cheek Your Progress B
1. Define accounting.
................................................................................................................
................................................................................................................
................................................................................................................
2. What do you mean by book-keeping?
................................................................................................................
................................................................................................................
................................................................................................................
3. What is accountancy?
................................................................................................................
................................................................................................................
................................................................................................................
4. Accounting involves a series of activities. List them.
................................................................................................................
................................................................................................................
................................................................................................................

1.6 USERS OF FINANCIAL ACCOUNTING

INFORMATION
You have learnt that many groups of people are interested in accounting
information which may help them:
i) to understand the present position of the enterprise
ii) to compare its present performance with that of its past years
iii) to compare its present performance with that of similar enterprises.
Now, let us see who such parties are and how accounting information is useful
10 to various parties.
Owners: Ownerscontribute capital and assume the risk of business. Naturally, Nature and Scope of
Accounting
they are interested to know the amount of profit earned by the business and
so also its financial position. If however, the management of the business is
entrusted to paid managers, the owners also use the accounting information to
evaluate the performance of the managers.
Managers: Accounting information, supplemented by other information, is of
immense use to managers. It helps them to plan, control and evaluate the
operations of the business. They also need such information for various decision-
making.
Lenders : The funds are provided by the owners initially, but if the business
requires more funds they are provided by banks and other lenders of money.
Before they lend money, they would like to know the solvency (i.e.., capacity
to repay debts) of the enterprise, so as to satisfy themselves that their money
will be safe and that they can expect repayment on time.
Creditors: Those who supply goods and services on credit are called creditors.
Like lenders, they too want to know about solvency of the enterprise, so as
to decide whether credit can be granted or not.
Prospective investors: A person who wants to become a partner in a
partnership concern or a person who wants to become a shareholder of a
company, would like to know how safe and rewarding the proposed investment
would be.
Tax authorities: Tax authorities of the Government are interested in the financial
statements so as to assess the tax liability of the enterprise.
Employees: The employees of the enterprise are also interested in knowing
the state of affairs of the organisation in which they are working, so as to know
how safe their interests are in that organisation.

1.7 ACCOUNTING AS AN INFORMATION

SYSTEM
Accounting is part of an organization’s information system, which includes both
financial and non-financial data. Accounting is the process of identifying,
measuring and communicating economic information to permit judgment and
decisions by users of the information. The main objective of accounting is to
provide information to the users. Accounting is also required to serve some
broad social obligations since the accounting information is used by a large body
of people such as customers, employees, investors, creditors and government.

Accounting is commonly divided into (1) Financial Accounting, and (2)

Managerial Accounting. Financial accounting refers to the preparation of general
purpose reports for use by persons outside an organization. Such users include
shareholders, creditors, financial analysts, labour unions, government regulations
etc. External users are interested primarily in reviewing and evaluating the
operations and financial status of the business as a whole.

Managerial accounting, on the other hand, refers to providing of information

to managers inside the organization. For example a production manager may
want a report on the number of units of product manufactured by various workers
in order to evaluate their performance. A sales manager might want a report
11
Theortical Framework showing the relative profitability of two products in order to pinpoint selling
efforts. The financial reports are available from the libraries or company
themselves whereas managerial accounting reports are not widely distributed
outside because they often contain confidential information. The following figure
shows that accounting is part of an organization system which includes both
financial and non financial data:

Accounting as an information system

Uses of Accounting Information

Accounting provides information for the following three general uses:-

1) Managerial decision making: Management is continuously confronted with

the need to make decisions. Some of these decisions may have immediate effect
while the others have in the long run. Decisions regarding the price of the product
like make or buy the product or to drop it, to expand its area of operations
etc., are some of the examples of decisions making. Management Accounting
provides necessary information to arrive at right conclusions.

2) Managerial planning, control and internal performance evaluation:

Managerial accounting plays an important role in the planning and control. By
assisting management in the decision making process, information is provided
for establishing the standard. Accounting also provides actual results to compare
with projections.

For example, where a marketing manager is given a target of sales revenues

of Rs. 10 crores, the amount of Rs. 10 crores will serve as a standard for
evaluating the performance of the marketing manager. If annual sales revenues
vary significantly from Rs. 10 crores, steps will be taken to ascertain the causes
for the difference. When the factors leading to the variance are not under the
control of the marketing manager, then the marketing manager would not be
held responsible for it. On the other hand the cause for variance is under the
control of marketing manager then he will be held responsible in evaluating the
performance of marketing manager. Accounting provides necessary information
to measure the variance in the actual performance.

3) External financial reporting: Accounting has always been used to supply

information to those who are interested in the affairs of the company. Various
laws have been passed under which financial statements should be
prepared in such way that required information is supplied to shareholders,
12 creditors, government etc. For example, the investors may be interested in
the financial strength of the business, creditors may require information about Nature and Scope of
Accounting
the liquidity position, government may be interested to collect details about sales,
profit, investment, liquidity, dividend policy, prices etc. in deciding social and
economic policies. Information is required in accordance with generally accepted
accounting principles so that it is useful in taking important decisions.

1.8 BRANCHES OF ACCOUNTING

Accounting, as we know it today, has evolved over many centuries in response
to the changing economic, social and political conditions. The development of
modern accounting was influenced by a number of factors such as industrial
revolution, growth of large enterprises like companies, introduction of compulsory
audit of companies, legal regulations, establishment of professional organisations
like the Institute of Chartered Accountants of India, the Institute of Cost and
Works Accountants of India, American Institute of Certified Public Accountants,
etc Economic development and technological improvements have resulted in an
increase in the scale of business operations and the advent of company form
of organisation. This has made management function more and more complex.
These factors have increased the importance of accounting and have given rise
to special branches of accounting. The important branches of accounting are
briefly explained below:
Financial Accounting: The purpose of this branch of accounting is to keep
a record of financial transactions and events so that:
a) the net result of the operations of the business (profit or loss) during an
accounting period can be ascertained;
b) the financial position (assets, liabilities and capital position) of the business
as at the end of the period can be ascertained; and
c) relevant financial information can be provided to management and other
interested parties.
Cost Accounting: The purpose of cost accounting is to analyse the expenditure
so as to ascertain the cost of each product, operation, service, etc. The price
of an article is nothing but the cost plus a certain amount of profit. Unless cost
is known, price cannot be fixed rationally. Cost accounting helps not only in
ascertaining the costs but also assists the management in controlling the costs.
Management Accounting: The purpose of management accounting is to assist
the management in taking rational policy decisionsand to evaluate the impact
of its decisions and actions. Examples of such decisions are: pricing decisions,
capital expenditure decisions, etc. This branch of accounting is primarily
concerned with presenting information that may be needed by management in
such decision-making.
In this course, we are concerned with financial accounting only.
Check Your Progress C
1. Mr. Agarwala started Agarwala Electricals shop with a capital of Rs.
1,00,000. As this amount is insufficient, he has borrowed Rs. 50,000 from
Syndicate Bank. As he is not keeping good health, he appointed Mr. Ram
Naresh to look after the business on a salary of Rs. 1,000 per month.
Pavan Electrical Works supplies electrical goods to Agarwala Electricals
13
Theortical Framework on credit. Mr. Mirchand, Mr. Sabir and Mr. Wilson are the other persons
working in Agarwals Electricals, as salesmen. Mr. Agarwals wants to expand
the business. He is not in a position to invest more money. Mr. Shyamlal
wants to join as a partner. From this, identify the names of the following
parties and write the answer in theblank space provided.
Name
i) Business firm ..............................................................
ii) Owner ..............................................................
iii) Manager ..............................................................
iv) Lender ..............................................................
v) Creditor ..............................................................
vi) Prospective Investor ..............................................................
vii) Employees ..............................................................
2. Complete the following sentences:
i) Accounting is the process of identifying, measuring and ………………
economic information to permit informed judgements.
ii) Accounting designed to serve external parties to provide information
relating to the operating activities of the business is termed as
………………………
iii) Accounting designed for operational needs of business is termed as
……………………………………..
iv) ……………………….. Accounting is more or less compulsory for
every business.

1.9 ADVANTAGES OF ACCOUNTING

The following are the advantages of a properly maintained accounting system:
1) Replaces memory: Since all the financial events are recorded in the books,
there is no need to rely on memory. The books of account will serve as
historical records. Any information required at any time can be had from
these records.
2) Provides control over assets: Accounting provides information regarding
balance of cash in hand and at bank, the stock of goods in hand, the
amount receivable from various parties, the amount invested in various other
assets, etc. Information about these matters help owner(s) and management
to make use of the assets in the best possible way.
3) Facilitates the preparation of financial statements: With the help of
information contained in the accounting records, financial statements viz.,
Profit and Loss Account and Balance Sheet can be easily prepared. These
statements enable the businessman to know the net result of the business
during an accounting period and its financial position.
4) Meets the information requirements: Various interested parties such as
owners, management, lenders, creditors, etc. get the necessary information
14 at frequent intervals which help them in their decision-making.
5) Facilitates a comparative study: The financial Statements prepared will Nature and Scope of
Accounting
enable the enterprise to compare its present position with that of its past,
and with that of similar organisations. This helps them to draw useful
conclusions and improve its performance.
6) Assists the management in many ways: It is possible to identify reasons
for the profit earned or loss suffered. The identification of reasons helps
in taking necessary steps to increase profits further, or to avoid losses.
Accounting information will also help in planning and controlling the activities
of the business.
7) Difficult to conceal fraud or theft: It is difficult to conceal fraud, theft,
etc..as there is an automatic check in the form of periodic balancing of
books of account. Further, in big organisations, the record keeping work
is divided among many persons. so that chances of committing fraud are
minimised.
8) Tax matters : The Government levies various taxes such as customs duty,
excise duty, sales tax, and income tax. Properly maintained accounting
records will help in the settlement of tax matters with the tax authorities.
9) Ascertaining value of business: In the event of sale of a business firm,
the accounting records will help in ascertaining the value of business.

1.10 LIMITATIONS OF ACCOUNTING

The accounting information is used by various parties who form judgments about
the profitability and the financial soundness of a business on the basis of such
information. It is, therefore, necessary to know about the limitations of accounting.
These are as follows:
1. They do not record transactions and events which are not of a financial
character. Hence. They do not reveal a complete picture because facts
like quality of human resources, licences possessed, locational advantage,
business contacts, etc. do not find any place in books of account.
2. The data is historical in nature. The accountants adopt historical cost as
the basis in valuing and reporting all assets and liabilities. They do not reflect
current values, it is quite possible that items like land and buildings may
have much more value than what is stated in the balance sheet.
3. Facts recorded in financial statements are greatly influenced by accounting
conventions and personal judgements. Hence, they do not reveal the true
picture. In many cases, estimates may be used to determine the value of
various items. For example, debtors are estimated in terms of collectability,
inventories are based on marketability, and fixed assets are based on useful
working life. All these estimates are materially affected by personal
judgements.
4. Data provided in the financial statements is insufficient for proper analysis
and decision making. It only provides information about the overall
profitability of the business. No information is given about the cost and
profitability of different activities.
15
Theortical Framework
1.11 BASES OF ACCOUNTING
There are two bases of accounting: (i) cash basis, and (ii) accrual basis. These
are explained below:

1.11.1 Cash Basis of Accounting

In this system, the accounting entries are made on the basis of cash received
or cash paid. In other words, transactions are recorded only when cash is
received or paid. The incomes earned but not yet received (accrued income)
or the expenses incurred but not yet paid (expenses outstanding) are completely
ignored while preparing the final accounts. For example, rent for the month of
December, 2017 is paid in January, 2018. This is taken into the Profit and
Loss Account of 2018 even though the benefit of that payment (accommodation)
is enjoyed in 2017 itself.

1.11.2 Accrual Basis of Accounting

This system of accounting attempts to record the financial effects of transactions
in the period in which they occur and not in the period in which the amount
is received or paid to the enterprise.

Accrual accounting is also called ‘Mercantile System of Accounting’. It

recognises that buying, selling and all other operations of an enterprise during
a period may not coincide with the period during which the related cash receipts
and cash payments take place. In other words, all revenues earned in a year
may or may not have been received in cash in that year. Similarly, all expenses
incurred in a year may or may not have been paid in the same year. Accrual
accounting attempts to relate the revenues and expenses to year in which they
are actually earned or incurred. For example, rent for the month of December,
2017 is paid in January, 2018. As per the accrual principle, it would be taken
to the Profit and Loss Account of the year 2017 and not 2018. This is more
logical because the benefit of payment is enjoyed in the year 2017 and not
in 2018.

The main difference between accrual accounting and cash basis of accounting
is the recognition of revenues, gains, expenses and losses. The objective of
accrual accounting is to account for the effects of transactions and events to
the extent that their financial effects are recognisable and measurable in the
periods in which they occur. The adjustments made in the final accounts in respect
of prepaid expenses (prepaid insurance, salaries paid in advance, etc.), income
received in advance (rent received in advance, interest received in advance,
etc.), income earned but not yet received (interest receivable, commission
receivable, etc.) are based on accrual accounting.

Sometimes, a business adopts a combination of both the above systems. In

that case it is called ‘Mixed or Hybrid System’. For example, the business
may consider income in cash receipt basis and expenses on accrual basis. This
is considered most conservative. In practice, most enterprise adapt the accrual
basis of accounting.
16
 Nature and Scope of
1.12 QUALITATIVE CHARACTERISTICS OF Accounting
ACCOUNTING INFORMATION
Business owners can use accounting information to conduct a financial analysis
of business operations. Accounting information often has quantitative and
qualitative characteristics. Quantitative characteristics refer to the calculation of
financial transactions. Qualitative characteristics include the business owner’s
perceived importance of financial information. Business owners often require
financial information when making business decisions. Incorrect or inappropriate
information can hamper decision-making or cause business owners to make
incorrect assessments about their companies. Some of the qualitative characteristics
of accounting information are as follows:

(i) Understandable

Accounting information must be understandable. This is an important qualitative

characteristic for small business owners. Many small business owners do not
have a strong accounting background. Financial information that is too technical
or cannot be understood by a layperson can be ineffective for business owners.
Small business owners often use professional accountants to complete various
accounting functions. Business owners should choose an accountant who can
prepare information in an easily understandable manner.

(ii) Usefulness

Business owners need accounting information that is applicable to the business

decision at hand. They can request financial statements, accounting schedules,
reconciliations or cost-benefit analysis. For example, cost allocation reports may
not provide sufficient information for business owners who must make a decision
on hiring employees. Cost allocation usually refers to applying business costs
to goods or services produced by the company, which has very little to do
with human resources. Business owners should carefully request and review
accounting information to ensure that it provides the most useful information for
the decision-making process.

(iii) Relevance
Accounting information should relate to a specific time period or contain
information regarding individual business functions. Business owners often
conduct a trend analysis when reviewing financial information. The trend analysis
compares historical financial information to the company’s current accounting
period information. Irrelevant historical information can severely distort the trend
analysis process. For example, reviewing the production process for budgets
requires relevant information on the cost of materials for budgets. Cost
information on the materials to produce COGS would be irrelevant.
(iv) Reliability
Accounting information must be reliable, so that business owners can be
reasonably assured that accounting information presents an accurate picture of
the company’s financial health. Business owners often use accounting information
to secure external financing for their business. Information that is not reliable
or accurate may cause lenders and investors to question the business’s
17
Theortical Framework management ability. Business owners may also struggle to secure external
financing with poor accounting information.
(v) Comparable
Comparability allows business owners to review their company’s accounting
information against that of a competitor. Business owners use comparison to
gauge how well their companies operate under certain market conditions. Owners
often use the leading company of an industry for the comparison process. These
companies usually have the most efficient and effective business operations. Non-
comparable accounting information can make this a difficult process. For
example, business owners should consider preparing financial statements according
to standard accounting principles. The statements can then be compared to other
company’s financial standard prepared in a similar manner.
(vi) Consistent
Consistency refers to how business owners and accountants record financial
information in a company’s general ledger. Business owners need to ensure that
financial transactions are handled the same way. Inventory purchases should be
recorded the same way as yesterday, today and tomorrow. This helps companies
create accurate historical records and limit the amount of financial accounts or
journal entries included in their general ledgers.

1.13 FUNCTIONS OF ACCOUNTING

Functions of Accounting involves the creation of financial records of business
transactions, flows of finance, the process of creating wealth in an organization,
and the financial position of a business at a particular moment in time. The
progress and reputation of any business big or small is build up on sound financial
footing. There are number of parties who are interested in accounting information
relating to a business. Financial Accounting communicates financial information
of the business concern to various parties. Financial accounting provides
information regarding the status of a business and results of its operation. Here
are the functions of accounting:
(i) Recording
This is the basic function of accounting. It is essentially concerned with not only
ensuring that all business transactions of financial character are in fact recorded
but also that they are recorded in an orderly manner. Recording is done in
the book “Journal”.
(ii) Classifying
Classification is concerned with the systematic analysis of the recorded data,
with a view to group transactions or entries of one nature at one place. The
work of classification is done in the book termed as “Ledger”.
(iii) Summarizing
This involves presenting the classified data in a manner which is understandable
and useful to the internal as well as external end-users of accounting statements.
This process leads to the preparation of the following statements: (1) Trial
Balance, (2) Income statement (3) Balance Sheet.
18
(iv) Analysis and Interprets Nature and Scope of
Accounting
This is the final function of accounting. The recorded financial data is analyzed
and interpreted in a manner that the end-users can make a meaningful judgment
about the financial condition and profitability of the business operations. The
data is also used for preparing the future plan and framing of policies for executing
such plans.
(v) Communicate
The accounting information after being meaningfully analyzed and interpreted has
to be communicated in a proper form and manner to the proper person. This
is done through preparation and distribution of accounting reports, which include
besides the usual income statement and the balance sheet, additional information
in the form of accounting ratios, graphs, diagrams, funds flow statements etc.

1.14 LET US SUM UP

1. Business has a series of transactions. It is not possible to remember all
the transactions which have taken place over a period of time, and calculate
the net effect of all such transactions i.e., profit or loss. Hence, the need
for accounting takes place.
2. Information about the business enterprise is required for both internal and
external use. To get the required information, a systematic record is
necessary.
3. The objectives of accounting are: to keep systematic records; to ascertain
the profit or loss and also the financial position; and to provide accounting
information to interested parties for rational decision-making.
4. Accounting is the process of identifying, measuring, recording, classifying,
summarising, analysing, interpreting and communicating the financial
transactions and events.
5. The series of activities mentioned above, explain the nature and outline the
scope of accounting.
6. Book-keeping is a part of accounting. It is the record keeping function
of accounting and is limited upto the classifying stage.
7. Accountancy is the systematic knowledge, while accounting is the practice
of the knowledge i.e., the actual maintenance of books of account and
provide accounting information.
8. Many groups of people like owners, management, lenders, creditors,
investors, tax authorities, employees, etc., are interested in the accounting
information of the enterprise.
9. Changes in economic environment and the increasing complexity of
management function have given rise to specialised fields of accounting such
as financial accounting, cost accounting and management accounting.
10. There are many advantages of a properly maintained accounting system.
19
Theortical Framework
1.15 KEY WORDS
Accountancy: The science of measurement of wealth. It is the systematic
knowledge of accounting.
Accounting: Process of identifying, measuring, recording, classifying, summarising
and communicating business transactions and events in terms of money.
Accounting Year : A period of 12 months at the end of which the financial
results of the enterprise are generally ascertained.
Accrual Basis of Accounting: A basis of accounting which takes into account
all incomes, gains, expenses and losses in the year in which they are earned
or incurred, and not when they are received or paid.
Book-keeping: Systematic recording of business transactions in the books of
account.
Balance Sheet: A statement prepared for ascertaining the financial position of
the business as at the end of the accounting period.
Cash Basis of Accounting: A basis of accounting in which accounts are
prepared on the basis of cash received or cash paid. No accruals -are
considered.
Cost Accounting: A branch of accounting concerned with measurement and
control of costs.
Financial Accounting: It is primarily concerned with record keeping directed
towards preparation of financial statements and other accounting reports.
Financial Position: Position of assets and liabilities of a business at a given
point of time.
Financial Statements: Summary of accounting information such as Profit and
Loss Account and Balance Sheet.
Final Accounts : Financial statements prepared at the end of the accounting
period for ascertaining the profit or loss and the financial position of the business.
They include Profit and Loss Account and the Balance Sheet.
Management: It is used in two senses:
i) to mean the process of management or managing the business, for example,
the day-to-day management is entrusted to paid managers; and
ii) to mean the persons who are incharge of carrying out the business activity
i.e., managers, for example, management wants this information. Report has
to be submitted to the management.
Management Accounting: It is concerned with the supply of information which
is useful to the management in planning, controlling and decision-making.
Profit: Excess of income over expenses.
Profit and Loss Account: A statement showing all incomes and expenses
for the accounting period. It is prepared for ascertaining the operational result
of the enterprise.
20
 Nature and Scope of
1.16 SOME USEFUL BOOKS Accounting

Bièrman, Harold & Drebin, Allan R., Financial Accounting: An Introduction

(Philadelphia: W.B. Saunders Company, 1998).
Briston, R.J., Introduction to Accountancy & Finance (London: The Macmillan
Press Ltd., 1991).
Maheshwari, S.N., Principles and Practice of Book-Keeping (New Delhi: Arya
Book Depot, 2018).
Matulich, S. & Heitger, L.E., Financial Accounting (New York: McGraw Hill
Book Company, 1990).
Patil, V.A. & Korlahalli, Principles and Practice of Book-Keeping (New Delhi:
R. Chand & Co., 2018).

1.17 ANSWERS TO CHECK YOUR PROGRESS

C 1. i) Agarwala Electricals Shop
ii) Mr. Agarwala
iii) Mr. Ram Naresh
iv) Syndicate Bank
v) Pawan Electrical Works
vi) Mr. Shyamlal
vii) Mr. Mirchand, Mr. Sabir and Mr. Wilson.
2. i) Communicating
ii) Financial Accounting
iii) Management Accounting
iv) Financial

1.18 TERMINAL QUESTIONS

1. Outline the need for accounting and briefly describe the objectives of
accounting.
2. Define accounting and explain its scope.
3. Name the different parties interested in accounting information, and explain
why do they want it.
4. What are the qualitative characteristics of accounting information? Briefly
Explain.
5. Describe the advantages and limitations of accounting.
6. Briefly discuss the functions of accounting.
7. Define accounting. Explain the need for accounting.
21
Theortical Framework 8. Write short notes on the following:
a) Book-keeping
b) Accountancy
c) Accounting
9. Distinguish between cash basis and accrual basis of accounting with
examples.

Note : These questions will help you to understand the unit better. Try
to write answers for them. But, do not submit your answers to
the University for assessment. These are for your own practice
only.

22
UNIT 2 ACCOUNTING PROCESS
AND RULES
Structure
2.0 Objectives
2.1 Introduction
2.2 Accounting Process
2.3 What is an Account?
2.4 Classification of Accounts
2.5 Principle of Double Entry
2.6 Accounting Rules
2.7 Let Us Sum Up
2.8 Key Words
2.9 Some Useful Books
2.10 Answers to Check Your Progress
2.11 Terminal Questions/Exercises

2.0 OBJECTIVES
After studying this unit, you should be able to:
 identify the different stages of accounting;
 classify accounts;
 analyze the dual effect of each transaction; and
 apply the rules of accounting, and determine the account to be debited
and the account to be credited.

2.1 INTRODUCTION
So far you have learnt the definition of accounting, its objects, advantages, the
terms commonly used in accounting, and the basic accounting concepts relevant
to record keeping. You know accounting is the art of recording, classifying and
summarising the business transactions, and interpreting the results thereof. So,
the accounting process starts with recording of transactions and ends with the
preparation of financial statements and their analysis. In this unit, we shall first
identify the different stages involved in the accounting process and then discuss
different classes of accounts, the principle of double entry, and the rules of debit
and credit which you are expected to master.

2.2 ACCOUNTING PROCESS

The accounting process consists of the following four steps:
23
Theortical Framework i) Recording the Transactions
ii) Classifying the Transactions
iii) Summarising the Transactions
iv) Interpreting the Results
Recording the Transactions
The accounting process begins with recording of transactions in the books of
original entry. The book used for the original entries is called ‘Journal’. Business
transactions are recorded in the journal as and when they occur in the order
of dates. You will learn the method of recording a transaction in the journal
in Unit 5. Entries in the journal are made on the basis of various vouchers
such as cash memos, invoices, receipts, etc.
Classifying the Transactions
The second step is to group the transactions of similar nature and post them
in different accounts in another book called the ‘Ledger’. For example, all
transactions relating to cash are brought together and are recorded at one place
in Cash Account in the ledger. Similarly, dealings with different persons are
recorded separately in the account of each person. The accounts so prepared
are totaled and balanced periodically to know the net effect of related
transactions. We shall discuss the process of posting into ledger and balancing
of accounts in detail in Unit 5.
Summarising the Transactions
The next step is to prepare a year-end summary known as ‘Final Accounts.
But before final accounts are prepared, we prepare a statement called ‘Trial
Balance’ to test the arithmetical accuracy of the work done. In other words,
the trial balance is prepared to find out whether the Principle of Double Entry
has been strictly followed or not, while recording the transaction. Then, with
the help of the trial balance and some other relevant information we prepare
the final accounts. The objectives of preparing the final accounts are: (i) to know
the net result of business activities, and (ii) to know the financial position of
the business. The final accounts consist of an income statement called ‘Trading
and Profit and Loss Account’, and a position statement called ‘Balance Sheet’.
The Trading and Profit and Loss Account is prepared to know whether the
business unit has earned profit or incurred loss. The Balance Sheet is prepared
to know the financial position of the business, i.e., what the business owns and
what it owes.
Interpreting the Results
The results are then analysed and interpreted with a view to assess the
performance of the business, its future profit-earning capacity and its ability to
pay short-term and long-term debts. The results and conclusions thus arrived
at are reported to the interested parties like investors, management, bankers,
creditors, tax authorities, etc.
The balances on various accounts shown in the Balance Sheet will then be
transferred to the new books of account for the next year. The process of
recording transactions for the next year is again started, this continuous process
24 of accounting is referred to as the ‘Accounting Cycle’ because it repeats itself
regularly and in the same order. The Accounting Cycle is presented in Chart 2.1. Accounting Process
and Rules
Chart 2.1
ACCOUNTING CYCLE

Ledger

Journal Trial Balance

Transactions Trading and Profit

Balance Sheet
and Loss Account

2.3 WHAT IS AN ACCOUNT?

We have seen that an account is a summarised record of the effect of all
transactions relating to a particular person or an item. Let us now learn more
about this term.
An account is vertically divided into two halves and resembles the shape of
the English alphabet ‘T’ as under:
Name of the account
Dr. Cr.

The left hand side is called the ‘debit side’. It is indicated by writing ‘Dr.’
(abbreviation for debit) on the left hand top corner of the account. The right
hand side known as the ‘credit side’ is indicated by writing ‘Cr.’ (abbreviation
for credit) on the right hand top corner of the account. The name of the account
is written at the top in the centre. The word ‘Account’ or its abbreviation ‘A/
c’ is added to the name of the account. The rules of recording the transactions
on the debit and credit sides shall be discussed later in this unit.

2.4 CLASSIFICATION OF ACCOUNTS

All business transactions broadly be classified into three categories: (i) those
relating to persons, (ii) those relating to property (assets), and (iii) those relating
to incomes and expenses. Hence, it becomes necessary to keep an account
for each person, each asset, and each item of income and expense. Thus, three
classes of accounts are maintained for recording all business transactions. They
are: (i) Personal Accounts, (ii) Real Accounts, and (iii) Nominal Accounts. Real
and Nominal Accounts taken together are called Impersonal Accounts.

25
Theortical Framework Personal Accounts
Accounts which show dealings with persons are called ‘Personal Accounts’.
Such dealings may relate to credit purchases of goods or credit sales of goods
or loans taken, etc. A separate account is kept in the name of each person
for recording the benefits received from, or given to, the person in the course
of dealings with him. Examples are: Krishna’s Account, Gopal’s Account, Loan
from Ratanlal Account, etc.
Personal accounts also include accounts in the names of institutions or companies
called artificial persons) such as Indian Bank Account. Nagarjuna Finance Limited
Account, the Andhra Pradesh Paper Mills Limited Account, etc.
The accounts which represent expenses payable, expenses paid in
advance, incomes receivable and incomes received in advance are also
personal accounts, though impersonal in name. For example, when salaries are
due to the employees, but not paid before closing of the books of account
for the year, an account called ‘Salaries Outstanding Account’ will be opened
in the books. The Salaries Outstanding Account is regarded as a personal
account representing the employees to whom salaries are payable by the
business. Such a personal account is called Representative Personal Account’
as it represents a particular person or a group of persons. Other examples of
representative personal accounts are: Interest Outstanding Account, Prepaid
Insurance Account, Rent Received in Advance Account, Commission Outstanding
Account. etc.
Capital Account and Drawings Account are also treated as personal accounts
as they represent dealings with the owner of the business.
Real Accounts
Accounts relating to properties or assets are known as ‘Real Accounts’. Every
business needs assets such as Machinery, Furniture, etc., for running its activities.
In. book-keeping, a separate account is maintained for each asset owned by
the business. Dealings relating to purchase or sale of the asset are recorded
through this account. Furniture Account, Machinery Account, Building Account,
etc., are some examples of real accounts. Cash Account which shows receipts
and payments of cash is also a real account. They are known as real accounts
because they represent things of value owned by the business.
Nominal Accounts
Accounts relating to expenses, losses, incomes and gains are known as
‘Nominal Accounts’. Every business unit incurs certain expenses such as
payment of salaries to employees, payment of wages to workers, etc., while
carrying out its activities. It may also suffer losses such as loss by fire, loss
by theft, etc. It may also earn certain incomes and gains such as receipt of
commission, receipt of-interest, profit on sale of an asset, etc. A separate account
is maintained for recording each item of expense, loss, income or gain. Thus,
Wages Account, Salaries Account, Commission Received Account, and Interest
Received Account are all nominal accounts. Classification of accounts is
presented in Chart 2.2.
26
 CHART 2.2 Accounting Process
and Rules
CLASSIFICATION OF ACCOUNTS
Accounts

Personal Accounts Impersonal Accounts

Real Accounts Nominal Accounts

Krishna Furniture Salaries

Gopal Buildings Wages
Loan from Ratanlal Machinery Interest
Salaries Outstanding Vehicles Rent
Insurance Prepaid Cash Commission

Check Your Progress A

1. State whether each of the following statements is True or False.
a) First recording of transactions is done in Journal.
b) Summarising of all business transactions is done in Ledger.
c) Interpretation of the results is done by preparing Trial Balance.
d) Right hand side of an account is called credit side.
e) Personal accounts include accounts of persons with whom the business
deals.
f) Accounts which represent an item of asset is called Representative
Personal Accounts.
g) Accounts relating to assets held in the name of the firm are called
Nominal Accounts.
2. Names of some accounts are given below, classify them into Personal, Real
or Nominal.

Name of Account Class of Account

a) Bank A/c
b) Interest A/c
c) Interest Outstanding A/c
d) Patents A/c
e) Loan from Gopal Das A/c
f) Loose Tools A/c
g) Commission Received in Advance A/c
h) Prepaid Salaries A/c
i) Stationery A/c
j) Electricity Charges A/c
27
Theortical Framework 3. State whether the following classification of accounts is correct or not. Give
the correct classification, wherever necessary.

Name of Account Class of If correct, put a

Account tick mark. If
wrong, state the
correct class of
account

a) Fixtures A/c Nominal Account

b) Discount Received A/c Personal Account
c) Discount Received in advance A/c Nominal Account
d Ram & Co. A/c Personal Account
e) Goodwill A/c Personal Account
f) Office Expenses A/c Real Account
g) Office Equipment A/c Nominal Account
h) Cash A/c Real Account
i) Cartage A/c Real Account
j) Import Duty/A/c Real Account

2.5 PRINCIPLE OF DOUBLE ENTRY

You have learnt earlier that a transaction results in the transfer of money or
money’s worth i.e., goods or services. Hence, every business transaction involves
a transfer and as such consists of two aspects: (i) the receiving aspect, and
(ii) the giving aspect. It is necessary to note that these two aspects go together,
as receiving necessarily implies giving and vice versa. For example, let us consider
a transaction where machinery is purchased for cash. In this case, the receiving
aspect is machinery (as machinery comes in) and giving aspect is cash (as cash
goes out). Similarly, in a transaction where wages are paid to workers, the
receiving aspect is the service of the workers and the giving aspect is cash.
The receiving and giving take place between two parties or the accounts
representing those parties. Thus, in the first example discussed above, from the
point of view of the business, Machinery Account is receiving the benefit and
Cash Account is giving the benefit. In the second example, Wages Account
is receiving the benefit in the form of service and Cash Account is giving the
benefit. These two aspects are represented in every account by the terms ‘Dr’.
and ‘Cr.’. The ‘Dr.’ represents the receiving aspect and the ‘Cr.’ the giving
aspect. The record of any business transaction will be complete only when both
of these aspects are recorded. This recording of the two aspects of each
transaction is known as ‘Double Entry’ and the system is called ‘Double Entry
System’.
Thus, every transaction affects two accounts and according to Double Entry
system entries will be made in both of them on the debit side (left hand side)
in one account and on the credit side (right hand side) in the other. In case
of the first example (machinery purchased for cash), entries will be made on
the debit side of Machinery Account and the credit side of Cash Account. In
the case of second example (wages paid to workers), entries will be made
on debit side of Wages Account and the credit side of Cash Account. Hence,
28 for every debit there must be a corresponding credit for an equal amount and
vice versa. This is known as the ‘Principle of Double Entry, and all business Nature and Scope of
Accounting
transactions are recorded in books of account according to this principle.
In order to develop a clear understanding of the receiving and giving aspects
of various business transactions and the accounts affected thereby study Table
2.1 carefully.

Table 2.1: Dual Aspect of Transactions and the Account Affected

Transaction First Aspect Second Aspect

Receiving Account Giving/Giver Account
Receiver affected affected

1. Commenced business with Cash Cash A/c Proprietor Capital A/c

Rs. 50,000 as capital.
2. Bought goods for cash Rs. 5,000 Goods Goods A/c Cash Cash A/c
3. Bought goods from Ramesh & Goods Goods A/c Ramesh & Ramesh &
Co. on credit Rs. 10,000 Co. Co. A/c
4. Sold goods for cash Rs. 12,000 Cash Cash A/c Goods Goods A/c
5. Sold goods to Ajay on credit Ajay Ajay’s A/c Goods Goods A/c
Rs. 2,500
6. Paid cash to Ramesh & Co. Ramesh Ramesh & Cash Cash A/c
Rs. 5,000 & Co. Co. A/c
7. Received Cash from Ajay Cash Cash A/c Ajay Ajay’s A/c
Rs. 1,000
8. Paid rent Rs. 1,000 Benefit of Rent A/c Cash Cash A/c
accommoda
tion
9. Purchased Typewriter Rs. 4,500 Typewriter Typewriter A/c Cash Cash A/c
10. Paid interest on loan Rs. 1,200 Benefit of Interest A/c Cash Cash A/c
using the
loan

Check Your Progress B

Manohar had the following transactions. Determine the two aspects of each transaction and the accounts
affected.

Transaction First Aspect Second Aspect

Receiving Account Giving/Giver Account
Receiver affected affected

a) Purchased machinery for

Rs. 60,000
b) Purchased goods from Karim
& Co. on credit Rs. 10,000
29
Theortical Framework
c) Sold goods for cash Rs. 2,400
d) Loan taken from bank
Rs. 25,000
e) Travelling expenses paid to
salesman Rs. 122
f) Paid electricity charges Rs. 110
g) Received Cash from Shanker
Rs 1,200
h) Paid cash to Karim & Co.
Rs. 2,000
I) Cash drawn for personal
expenses Rs. 500
j) Paid cash into bank Rs. 5,000

2.6 ACCOUNTING RULES

We have already seen that every transaction affects two accounts and this effect
will have to be entered in both of them, on the debit side in one account and
on the credit side in the other account. It is, therefore, necessary to find out
which of the two accounts is to be debited and which is to be credited. For
this purpose, one has to first identify the class to which these two accounts
belong i.e., personal, real or nominal; and then certain rules known as ‘rules
of debit and credit’ are applied. These rules are as follows:
1. For Personal Accounts: The account of the person receiving the benefit
(receiver) of the transaction (from the business) is debited and the account
of the person giving the benefit (giver) of the transaction (to the business)
is credited.
2. For Real Accounts: When an asset is coming into the business, the account
of that asset is debited. When an asset is going out of the business, the
account of that asset is credited.
3. For Nominal Accounts: When an expense is incurred or loss suffered,
the account representing the expense or the loss is debited because the
business receives the benefit thereof. When any income is earned or gain
made, the account representing the income or the gain is credited. This
is because the business gives some benefit.
The above rules have been shown in Table 2.2
Table 2.2 : Rules of Debit and Credit

Class of Account Debit Credit

Personal Accounts The Receiver The Giver
Real Accounts What comes in What goes out
Nominal Accounts Expenses and Losses Income and Gains
30
We shall now see the application of these rules, taking a few transactions. Accounting Process
and Rules
Example 1: Paid cash to Ramesh & Co. Rs. 5,000.
In this case, the two accounts affected are Ramesh & Co.’s Account and
Cash Account. Ramesh & Co.’s Account is a personal account and Cash
Account is a real account. Ramesh & Co. has received the benefit (cash
Rs. 5,000) from the business and, therefore, it has to be debited as per
the first part of the rule for personal accounts ‘debit the receiver’. As cash
has gone out, Cash Account will be credited according to the second part
of the rule for real accounts ‘credit what goes out’.
Example 2: Received cash from Ajay Rs. 1,000.
In this case, Cash Account and Ajay’s Account are the two accounts affected.
Cash Account is a real account and Ajay’s account is a personal account.
As cash has come in, Cash Account will have to be debited according to
the first part of the rule for real accounts ‘debit what comes in’. Ajay has
given the benefit (cash Rs. 1,000) to the business and, therefore, his account
will have to be credited as per the second part of the rule for personal
accounts ‘credit the giver’.
Example 3: Paid rent Rs. 1,000.
In this case, the accounts affected are Rent Account and Cash Account.
Rent Account is a nominal account and Cash Account is a real account.
As per the first part of the rule for nominal accounts, ‘debit expenses and
losses’, Rent Account will have to be debited as it is an expense to the
business. As cash has gone out, Cash Account will have to be credited
according to the second part of the rule for real accounts ‘credit what goes
out’.
Example 4: Received Rs 400 as commission.
In this case, Cash Account and Commission Account are the two accounts
affected. Cash Account is a real account and Commission Account is a
nominal account. As cash has come in, Cash Account will have to be debited
according to the first part of the rule for real accounts ‘debit what comes
in’. As per second part of the rule for nominal accounts, ‘credit incomes
and gains’, Commission Account will be credited as it is an income to the
business.
You have seen that the three rules of debit and credit explained above, make
it possible to analyse the transaction and identify the account to be debited
and the account to be credited. Even though it has been explained that there
are three different rules for the three classes of accounts, it is to be noted
that these three rules, in reality, are a manifestation of the dual aspect
concept. In other words, the account that receives the benefit of the
transaction is to be debited and the account that gives the benefit is to be
credited, irrespective of the class of account involved.
Let us now apply these rules to the transactions given in Table 2.1 and
ascertain which account is to be debited and which account is to be credited.
This has been analysed in Table 2.3. You may go through it carefully and
grasp the application of the Rules of Debit and Credit. 31
Theortical Framework Table 2.3 : Analysis of Accounts Affected

Transaction Accounts affected Class of Debit/ Reasons

Accounts Credit

1. Commenced business with i) Cash A/c ii) Capital A/c Real Debit Cash comes in Proprietor
Rs. 50,000 as capital Personal Credit gives benefit

2. Bought goods for cash i) Goods A/c ii) Cash A/c Real Real Debit Goods come in Cash goes
Rs. 5,000 Credit out

3. Bought goods from Sohan i) Goods A/c ii) Sohan A/c Real Debit Goods come in Giver on
credit Rs.10000 Personal Credit Giver

4. Sold goods for cash i) Cash A/c ii) Goods A/c Real Real Debit Cash comes in Goods go
Rs. 1,500 Credit out

5. Sold goods to Vijay on i) Vijay A/c ii) Goods A/c Personal Debit Receiver Goods go out
credit Rs. 2,500 Real Credit

6. Purchased furniture i) Furniture A/c RealReal Debit Furniture comes inCash

Rs. 4,000 ii) Cash A/c Credit goes out

7. Sold old typewriter Rs. 500 i) Cash A/c RealReal Debit Cash comes in Typewriter
ii) Typewriter A/c Credit goes out

8. Purchased postage i) Postage A/c ii) Cash A/c Nominal Debit Postage is an expenseCash
stamps Rs. 50 Real Credit goes out

9. Paid salaries Rs. 6,000 i) Salaries A/c ii) Cash A/c Nominal Debit An expense Cash goes out
Real Credit

10. Received interest Rs. 200 i) Cash A/cii) Interest A/c Real Debit Cash comes in An income
Nominal Credit

2.7 LET US SUM UP

1. The accounting process starts with recording of transactions in the journal.
From the journal, they are posted to ledger accounts. Then, a trial balance
is prepared to verify the accuracy of the work done and the final accounts
are prepared to know the profit or loss made and the financial position
of the business. Finally, the results are analysed and reported to the
interested parties.
2. Accounts are classified as Personal, Real, and Nominal Accounts. Accounts
showing dealings with persons are called personal accounts. Accounts
relating to assets are known as real accounts and those relating to expenses,
losses, incomes and gains are known as nominal accounts.
3. Every transaction consists of two aspects: (i) the receiving aspect and ii)
the giving aspect. The recording of this two-fold effect of each transaction
is called ‘Double Entry’. The principle of double entry is, for every debit
there must be an equal and a corresponding credit and vice versa.
4. Certain rules are followed for recording business transactions. In the case
of personal accounts, the rule is, ‘Debit the receiver and Credit the giver.
For real accounts, the rule is, ‘Debit what comes in and Credit what goes
out’, and for nominal accounts the rule is, ‘Debit expenses and losses and
32 Credit incomes and gains’.
 Accounting Process
2.8 KEY WORDS and Rules

Account: A summarised record which shows the effect of the transactions relating
to a particular person or thing.
Credit: Credit represents the giving aspect of a transaction.
Debit: Debit represents the receiving aspect of a transaction.
Double Entry Principle: Principle of recording both the receiving and the giving
aspects of each transaction.
Nominal Accounts: Accounts relating to expenses, losses, incomes and gains.
Personal Accounts: Accounts which relate to persons.
Real Accounts: Accounts which relate to assets.

2.9 SOME USEFUL BOOKS

Briston, R.J., Introduction to Accountancy and Finance, (London: The Macmillan
Press Ltd., 2017).
Birman, Harold & Derbin, Allan R., Financial Accounting: An Introduction,
(Philadelphia: W.B. Saunders Company, 2008).
Grewal, T.S., Double Entry Book-Keeping, (New Delhi: Sultan Chand & Sons,
2018)
Maheshwari, S.N., Principles & Practice of Accountancy Part-I, (New Delhi:
Arya Book Depot, 2018).
Patil V.A. & Korlahalli, J .S., Principles and Practice of Book-Keeping, (New
Delhi R. Chand & Co., 2018).

2.10 ANSWERS TO CHECK YOUR PROGRESS

A 1. a) True b) False
c) False d) True
e) True f) False
g) False
2. a, c, e, g, h are Personal Accounts.
d and f are Real Accounts.
b, i, j are Nominal Accounts.
3. a) Real Account b) Nominal Account
c) Personal Account d) Correct
e) Real Account f) Nominal Account
g) Real Account h) Correct
i) Nominal Account j) Nominal Account
33
Theortical Framework

B
Transaction First Aspect Second Aspect
Receiving/Receiver Account Giving/Giver Account
affected affected

a) Machinery Machinery A/c Cash Cash A/c

b) Goods Goods A/c Karim & Co. Karim & Co. A/c

c) Cash Cash A/c Goods Goods A/c

d) Cash Cash A/c Bank Bank Loan A/c

e) Benefit of Travelling Cash Cash A/c

service (Transport) Expenses A/c

f) Benefit of service Electricity Cash Cash A/c

(Electricity) Charges A/c

g) Cash Cash A/c Shanker Shanker’s A/c

h) Karim &Co. Karim & Co. A/c Cash Cash A/c

i) Proprietor Drawings A/c Cash Cash A/c

j) Bank Bank A/c Cash Cash A/c

2.11 TERMINAL QUESTIONS/EXERCISES

Questions

1. Discuss the various stages involved in the accounting process.

2. What is an Account? Describe the various classes of accounts with

examples.

3. What do you understand by the Principle of Double Entry? Give the rules
of debit and credit with suitable examples.

Exercises

I. From the following transactions, determine the accounts affected, classify

them and state whether it is to be debited or credited.
Rs.
a) Purchased typewriter for cash 5,000
b) Purchased furniture from R & Co. on credit 50,000
c) Interest received 300
d) Paid wages 800
e) Received cash from A 2,000
34
 f) Additional capital introduced into the business 5,000 Nature and Scope of
Accounting
g) Paid cash to B 1,500
h) Paid carriage 200
i) Purchased goods from F & Co. on credit 12,000
j) Sold goods for cash 1,400
Answer:
Transaction Account to be debited Nature of account Account to be credited Nature of account

a) Typewriter A/c Real Cash A/c Real

b) Furniture A/c Real R & Co. A/c Personal

c) Cash A/c Real Interest A/c Nominal

d) Wages A/c Nominal Cash A/c Real

e) Cash A/c Real A’s A/c Personal

f) Cash A/c Real Capital A/c Personal

g) B’s A/c Personal Cash A/c Real

h) Carriage A/c Nominal Cash A/c Real

i) Goods A/c Real F & Co. A/c Personal

j) Cash A/c Real Goods A/c Real

2. Ram had the following transactions. Determine the accounts to be debited

and credited:
Rs.
a) Command business with cash 1,00,000
b) Purchased goods for cash 15,000
c) Paid for advertisement 600
d) Bought goods from P & Co. on credit 20,000
e) Sold goods for cash 6,000
f) Sold goods to Z on credit 12,000
g) Paid commission 900
h) Paid salaries 8,000
i) Paid rent 600
j) Loan taken from Hiralal 50,000

35
Theortical Framework Answer:

Transaction Account to be Account to be

debited credited

a) Cash A/c Capital A/c

b) Goods A/c Cash A/c
c) Advertisement A/c Cash A/c
d) Goods A/c P & Co. A/c
e) Cash A/c Goods A/c
f) Z A/c Goods A/c
g) Commission A/c Cash A/c
h) Salaries A/c Cash A/c
i) Rent A/c Cash A/c
j) Cash A/c Loan from Hiralal A/c

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

36
UNIT 3 ACCOUNTING PRINCIPLES
Structure
3.0 Objectives
3.1 Introduction
3.2 Some Basic Terms
3.3 Accounting Principles
3.3.1 Concepts to be Observed at the Recording Stage

3.3.2 Concepts to be Observed at the Reporting Stage

3.4 Systems of Book-Keeping

3.4.1 Double Entry System

3.4.2 Single Entry System

3.5 Let Us Sum UP

3.6 Key Words
3.7 Some Useful Books
3.8 Answers to Check Your Progress
3.9 Terminal Questions/Exercises

3.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the meaning of some basic terms of accounting;
 identify assets, liabilities, incomes and expenses;
 explain the need for the nature of accounting concepts;
 develop familiarity with the basic concepts to be kept in mind at the recording
stage;
 decide what type of transactions are to be recorded in books of account;
 ascertain the amount of capital, liabilities and assets from the accounting
equation; and
 describe about the two systems of book-keeping.

3.1 INTRODUCTION
In Unit 1, you learnt about the nature, scope and importance of accounting.
You know accounting is often called the ‘Language of Business’. Language is
the means of communication. Accounting also serves this function. It communicates
the results of business operations to interested parties. Let us understand this
language first. In this unit, we intend to explain some of the terms which are
commonly used in accounting and also the basic concepts underlying the
accounting system. 37
Theortical Framework
3.2 SOME BASIC TERMS
Entity: The word entity literally means a thing that has a definite individual
existence. Business entity means a specifically identifiable business enterprise like
Khanna Jewellers, Prakash Pipes Ltd., etc. An accounting system is devised
for a specific business entity (also called ‘accounting entity’).
Event and Transaction: Anything that brings about a change in the financial
position of an entity is called an ‘event’. In other words, an event is a happening
of consequence to an entity. A transaction is a particular kind of event involving
some value between two or more entities. In other words, it is any dealing
between two or more persons involving exchange of goods or services for a
consideration usually in money.
Transactions are of two kinds (i) cash transactions and (ii) credit transactions.
Cash transaction are those in which cash is involved in the exchange. For
example, purchase of goods for cash, purchase of vehicle for cash, payment
of rent etc. In case of credit transactions cash is not paid immediately, the
settlement is postponed to a later date. For example, goods are purchased on
credit on April 15, 2018 and the cash is to be paid on August 1, 2018.
Goods: The term ‘goods’ refers to articles in which the business deals. Only
those articles which are purchased for the purpose of sale are called goods.
Other articles which are purchased for the purpose of using them in the business
are not called goods. For example, in case of a fans dealer, fans are goods.
He may be having tables and chairs. But they are not goods for him. In case
of a furniture dealer, tables and chairs are goods. He may be having fans, but
they are not goods for him.
Debtor: A debtor is one who owes some amount to the business. For example,
a customer who purchases goods on credit from the business, is a debtor to
the business.
Creditor: A creditor is one to whom the business owes some amount. One
who supplies goods or provides some services on credit to the business is a
creditor.
Books of Account: These are the different sets of records, whether in the
form of bound books or loose sheets wherein the various business events and
transactions are recorded e.g., journal and ledger. If necessary, the journal and
also the ledger may be sub-divided into a number of books.
Entry: The recording or entering a transaction or event in the books of account
is called an entry.
Journal: Journal is the book of prime entry. It is used for recording all
transactions and events of a business entity in the first stage.
Ledger: The transactions recorded in the journal are transferred to a separate
book called ledger. In this book, a separate account is opened and maintained
for each item. For example, Capital Account, Salaries Account, Furniture
Account, Building Account, etc. Ledger is the main book for accounting
information and, hence, it is sometimes called the .‘king of books of account’.
Account: An account is a classified statement of transactions relating to a person
or a thing or any other subject. It is vertically divided into two parts in T shape
(alphabet T). The benefits received by that account are recorded on the left
38
hand side (technically called the ‘debit side’) and the benefits given by that Accounting Principles
account are recorded on the right hand side (technically called the ‘credit side’).
This type of recording helps in knowing the net result i.e., whether that account
has received more or given more.
To debit an account: It means making an entry for a transaction on the debit
side (left hand side) of an account.
To credit an account: It means making an entry for a transaction on the credit
side (right hand side) of an account.
On account: It refers to a part receipt or a part payment of money in respect
of earlier credit transaction(s). For example, Mr. X owes Rs. 5,000, of which
he pays Rs. 3,000. This may be termed as, ‘received Rs. 3,000 from Mr.
X on account’.
Assets: Assets are things of value or economic resources (property) owned
by the enterprise. In other words, cash or any thing which enables the business
entity to get cash or a benefit in future is an asset. Land, buildings, machinery,
vehicles, furniture, stock of goods, cash, etc., are some examples of assets.
Expenditure: Expenditure means the spending of money or incurring a liability
for some benefit/ service received by the business entity. Purchase of machinery,
purchase of furniture, payment of salaries, rent, etc., are some examples of
expenditure. If the benefit of an expenditure is limited to one year, it is treated
as an expense (also called revenue expenditure) such as payment of salaries
and rent. On the other hand, if the benefit of an expenditure is available for
more than one accounting year, it is treated as an asset (also called capital
expenditure) such as purchase of furniture and machinery.
Equities: All claims or rights over the assets of a business firm are called equities.
Equities are of two types : (i) creditors’ equity, and (ii) owners’ equity. The
claims of the outsiders are called creditors, equity or liabilities. The claim of
the owner is called owner’s equity or capital.
Liabilities: Liabilities (also called creditors’ equity) are the amount owed by
the business firm to outsiders other than the owner(s). Loan from a bank,
creditor for goods supplied, rent payable, salaries payable, interest payable to
the lenders are some examples of liabilities.
Capital: Capital is the amount invested by the owner(s). It represents the
owner’s claim on the firm’s assets and is known as owner’s equity. It is also
called net assets or net worth.
Drawings: Drawings refer to the amount withdrawn or the value of goods taken
by the proprietor for personal use from the business.
Profit: Profit is the excess of income over expenditure during a period of time.
It is owner’s equity.
Loss: In one sense, loss means money or money’s worth lost without receiving
any benefit. For example, cash or goods lost by theft or fire accident. In the
context of Profit and Loss Account, loss represents to the excess of expenditure
over income during a period of time. In either case, loss decreases the owner’s
equity.
Income: Income, also called revenue, is the amount earned by a business entity
resulting from operations which constitute its major or central activities. For
example, sale of goods or services. 39
Theortical Framework Gain: Gain is a profit that arises from events or transactions which are incidental
to business, such as sale of an asset, winning a court case, appreciation in the
value of land and buildings, etc.
Trade discount: It is a common practice these days to print the price of an
article on its package. The price so mentioned on the article is called the
‘catalogue price’ or ‘list price’. When you buy an article, the seller may agree
to give you some concession and charge a price which is less than the list
price. Such concession or reduction in price is called ‘trade discount’. This,
is an allowance given by the seller to the buyer on the list price at the time
of sale. Trade discount is generally given by the manufacturer to the wholesaler
and by the wholesaler to the retailer. Suppose a bookseller buys 10 copies
of a book ‘Principles and Practice of Accountancy’ by R. Sriram, priced at
Rs. 25. The publisher allows a discount of 10% and charges Rs. 225 net (list
price Rs. 250 minus discount of Rs. 25). The buyer pays only the net price.
Recording in books of account is also made for the net amount only. No specific
entry is required for the trade discount.
Cash discount: When goods are sold on credit, the buyer is expected to pay
the amount on or before the due date. However, if the buyer makes the payment
before the due date, the seller may allow him some reduction in the amount
due and settle the account. Such an allowance is called ‘cash discount’. It is
allowed at the time of payment. It motivates the debtor to make prompt payment.
Suppose, the books worth Rs. 225 (net amount) were sold on February 1,
2018 on credit for one month. The due date is March 1, 2018. The bookseller
offers to make the payment on February 15, 2018. The publisher accepts Rs.
220 in settlement of the account. The balance amount of Rs. 5 is the cash
discount allowed. Cash discount must be recorded in the books of account
in order to show that the party account stands cleared and nothing more remains
due from him.
Voucher: A documentary (written) evidence of a transaction is called a voucher.
For example, if we buy goods for cash we get cash memo; if we buy on credit
we get an invoice; and so on. Entries in books of account are made with the
help of such vouchers.
Solvent: A person who is in a position to pay his debts as they become due.
Insolvent: A person who is not in a position to pay his debts in full and is
so declared by the court.
Bad debts: The amount of debt which is unrealisable from a debtor who became
insolvent.
Stock: The amount of goods lying unsold or unused. It also includes stock
of raw materials and semi-finished goods.
Check Your Progress A
1. Fill in the blanks :
i) A person who owes money to the firm is ………………………
ii) A person to whom the firm owes money is a ………………………
iii) All articles that are purchased for resale are called
………………………
iv) The property of the business in the form of land and buildings,
40 machinery, etc. is called ………………………
 v) Drawings refer to the withdrawal of cash or goods by the owner for Accounting Principles
………………………
vi) The amount of debt……………………………………… from the
debtor is termed as bad debts.
vii) The amount invested by the owner in business is called ………………..
viii) The amount received in part is called receipt on …………..
2. State in each case whether the item shall be regarded as goods or an
asset
i) Furniture purchased by Rama Furnishers for resale.
ii) Furniture purchased by Krishna Stationery Mart.
iii) Machinery purchased by Abdul Engineering Company for use in their
factory.
iv) Electric motors purchased by Punjab Machinery Stores who deal in
machinery.
v) Power looms manufactured by KCP Ltd., for sale to a textile company.
3. Mr. Rakesh started Rakesh Trading Company with a capital of Rs. 30,000.
The company also borrowed Rs. 10,000 from the State Bank of India.
The firm purchased a delivery van for Rs. 20,000, furniture for Rs. 5,000,
typewriter for Rs. 6,000, account books and other stationery for Rs. 500.
It has purchased goods on credit from M/s Gurucharan Singh & Co., for
Rs. 4,000, and from M/s Lalwani Traders for Rs. 3,000. It has sold goods
for cash to Mr. Peter for Rs. 2,000 and Mr. Ali for Rs. 4,000. It has
also paid Rs. 300 for electricity charges, Rs. 1,000 for salaries, and Rs.
500 for rent. From the above information, list out the assets, liabilities,
incomes and expenses.
Assets : ..................................................................................................
...............................................................................................................
...............................................................................................................
Liabilities : ..............................................................................................
...............................................................................................................
...............................................................................................................
...............................................................................................................
Incomes : ...............................................................................................
...............................................................................................................
...............................................................................................................

Expenses : ..............................................................................................
...............................................................................................................
...............................................................................................................
41
Theortical Framework
3.3 ACCOUNTING PRINCIPLES
Accounting is a system evolved to achieve a set of objectives as stated in
Unit 1.2. The objectives identify the goals and purposes of financial record
keeping and reporting. In order to achieve the goals, we need a set of rules
or guidelines. These guidelines are termed here as ‘Basic Accounting Concepts’.
The term ‘concept’ means an idea or thought. Basic accounting concepts are
the fundamental ideas or basic assumptions underlying the theory and practice
of financial accounting. These concepts are also termed as ‘Generally Accepted
Accounting Principles’. These are the broad working rules of accounting activity,
developed and accepted by the accounting profession. They are evolved (and
are still evolving) over a period in response to the changing business environment
and the specific needs of the users of accounting information.

The concepts guide the identification of events and transactions to be accounted

for, their measurement and recording, and the method of summarising and
reporting to interested parties. The concepts, thus, help in bringing about
uniformity in the practice accounting.

An indepth understanding of these concepts will place the student in a better

position to appreciate accounting system. Of course, it may be difficult to
comprehend all these concepts at a stretch. We, therefore, advise you to re-
visit these concepts, after giving at least one reading of this course material.

These concepts may be classified into two broad groups:

i) concepts to be observed at the recording stage i.e., while recording the

transactions, and

ii) concepts to be observed at the reporting stage, i.e., at the time of preparing
the final accounts.

It must, however, be remembered that some of them are overlapping and even
contradictory. They are listed out in Chart 3.1.
Chart 3.1
ACCOUNTING CONCEPTS

 
Concepts to be Observed Concepts to be Observed at the
at the Recording Stage Reporting Stage

 
Money Measurement Concept

Accounting Period Concept

Objective Evidence Concept

Historical Record Concept

The Materiality Concept

Business Entity Concept

Full Disclosure Concep

Going Concern Concept

Conservation Concept
Dual Aspect Concept

Consistency Concept
Matching Concept
Cost Concept

42
3.3.1 Concepts to be Observed at the Recording Stage Accounting Principles

The following concepts will guide us in identifying, measuring and recording

transactions.
Business Entity Concept
Business entity means a unit of organised business activity. In that sense, a
provision store, a cloth dealer, an industrial establishment or electricity supply
undertaking, a bank, a school, a hospital, etc. are all business entities.
From the accounting point of view, every business enterprise is an entity separate
and distinct from its proprietor(s)/owner(s). The accounting system gives
information only about the business and not about its owner(s). In other words,
we record those transactions in the books of account which relate only to the
business. The owner’s personal affairs (his expenditure on housing, food, clothing,
etc.) will not appear in the books of account of his business. However, when
personal expenditure of the owner is met from business funds it shall also be
recorded in the business books. It will be recorded as drawings by the proprietor
and not as business expenditure.
Another implication of business entity concept is that the owner of business
is to be treated as a creditor who also has a claim over the assets of the
business. As such, the amount invested by him (capital) is regarded as a liability
for the business.
The business entity concept is applicable to all forms of business organisations.
This distinction can be easily maintained in the case of a limited company because
the company has a legal entity of its own. But such distinction becomes difficult
in case of a sole proprietorship or partnership because in the eyes of the law,
the partner or the sole proprietor are not considered separate entities. They
are personally liable for all business transactions. But, for accounting purposes,
they are to be treated as separate entities. This enables them to ascertain the
profit or loss of business more conveniently and accurately.
Money Measurement Concept
Usually, business deals in a variety of items having different physical units such
as kilograms, quintals, tons, metres, litres, etc. If the sales and purchases of
different items are recorded in terms of their physical units, adding them together
will pose problems. But, if these are recorded in a common denomination, their
total becomes homogeneous and meaningful. Therefore, we need a common
unit of measurement. Money does this function. It is adopted as the common
measuring unit for the purpose of accounting. All recording, therefore, is done
in terms of the standard currency of the country where business is set up. For
example, in India, it is done in terms of Rupees, in USA it is done in terms
of US Dollars, and so on.
Another implication of money measurement concept is that only those transactions
and events are to be recorded in the books of account which can be expressed
in terms of money such as purchases, sales, payment of salaries, goods lost
in accident, etc., other happenings (non- monetary) like death of an efficient
manager or the appointment of an accountant, howsoever important they may
be, are not recorded in the books of account. This is because their effect is
not measurable of quantifiable in terms of money. 43
Theortical Framework This approach has its own drawbacks. The value of money changes over a
period of time. The value of rupee today is much less than what it was in
1961. Such a change is nowhere reflected in accounts. This is the reason why
the accounting data does not reflect the true and fair view of the affairs of
the business.
Hence, now-a-days, it is considered desirable to provide additional data showing
the effect of changes in the price level on the reported income and the assets
and liabilities of the business.

Check Your Progress B

1. Mr. Ghansyamlal carries on ready made garments business. A few

transactions are given below. Identify the transactions to be recorded in
the books of his business.
a) Purchased a typewriter for Rs. 6,000 for office use.
b) Paid salary to the office typist at Rs. 350 per month.
c) Bought a show case for Rs. 2,000.
d) Sold old domestic furniture for Rs. 500.
e) Purchased cloth for garments for Rs. 10,000.
f) A shirt worth Rs. 250 is taken home for his son.
g) Entered into an agreement to rent a shop in Sadar Bazar.
h) Paid Salaries to his salesmen, Rs. 1,000.
i) Paid Salary to his domestic servant, Rs. 100.
j) Appointed Satish as an assistant in the shop.
k) Borrowed Rs. 5,000 from Mr. Dyanchand for business purpose.
l) Mr. Rakesh, one of the salesmen, met with an accident.

2. Present the following in the form of an Accounting Equation.

Machinery Rs. 20,000

Cash Rs. 5,000
Capital Rs. 20,000
Creditors Rs. 5,000
3. The assets and liabilities of Rupak Store are given below. Find out the
amount of capital.
Cash Rs. 1,800; Stock Rs. 3,000; Debtors Rs. 2,000;
Furniture Rs. 1,200: Creditors Rs. 2,500: Wages payable Rs. 500

Objective Evidence Concept

The term objectivity refers to being free from bias or free from subjectivity.
Accounting measurements are to be unbiased and verifiable independently. For
44
this purpose, all accounting transactions should be evidenced and supported by Accounting Principles
documents such as bills, invoices, receipts, cash memos, etc. These supporting
documents (vouchers) form the basis for making entries in the books of account
and for their verification by auditors afterwards. As for the items like depreciation
and the provision for doubtful debts where no documentary evidence is available,
the policy statements made by management are treated as the necessary
evidence.
Historical Record Concept
You know that after identifying the transactions and measuring them in terms
of money, we record them in the books of account. According to the historical
record concept, we record only those transactions which have actually taken
place and not those which may take place (future transactions). It is because
accounting record presupposes that the transactions are to be identified and
objectively evidenced. This is possible only in the case of past (actually
happened) transactions. The future transactions can hardly be identified and
measured accurately. You also know that all transactions are to be recorded
in chronological (datewise) order. This leads to the preparation of a historical
record of all transactions. It also implies that we simply record the facts and
nothing else.
As you will study later we make provision for some expected losses such as
doubtful debts. This may be contrary to what is stated in historical record
concept. But this is done only at the time of ascertaining the profit or loss of
the business. It is not a routine item. This is done in accordance with another
concept called Conservatism Concept about which you will study later.
Cost Concept
Business activity, in essence, is an exchange of money. The price paid (or agreed
to be paid in case of a credit transaction) at the time of purchase is called
cost. According to the cost concept, all assets are recorded in books at their
original purchase price. This cost also forms an appropriate basis for all
subsequent accounting for the assets. For example, if the business buys a machine
for Rs. 80,000 it would be recorded in books at Rs. 80,000. In case its market
value increases later on to Rs. 1,00,000 (or decreases to Rs. 50,000) it will
continue to be shown at Rs. 80,000 and not at its market value.
This does not mean, however, that the asset will always be shown at cost.
You know that with passage of time, the value of an asset decreases. Hence
it may systematically be reduced from year to year by charging depreciation
and the asset be shown in the balance sheet at the depreciated value. The
depreciation is usually charged as a fixed percentage of cost. It bears no
relationship with changes in its market value. In other words, the value at which
the assets are shown in the balance sheet has no relevance to its market value.
This, no doubt, makes it difficult to assess the true financial position of the
business. It is, therefore, regarded as an important limitation of the cost concept.
But this approach is preferred because, firstly it is difficult and time consuming
to ascertain the market values, and secondly there will be too much of subjectivity
in assessing the current values. However, this limitation has been overcome with
the help of inflation accounting.
45
Theortical Framework Check Your Progress C
1) Mr. Vinod Pandey started business. State which of the following transactions,
and with what amount, are to be recorded in the books of his business.
a) He purchased a machine from Bombay for Rs. 10,000. He paid for
railway freight Rs.200 and total transport Rs 100.
b) He sold goods worth Rs. 1,000 to Mr. Rakesh.
c) Mr. Ramana, a friend of Mr. Pandey promised to purchase goods
worthRs. 10,000 after three months.
d) He purchased a building for his business from his friend for Rs. 25,000.
Its market value is Rs. 30,000.
e) Due to scarcity of raw materials, he paid Rs. 5,000 for materials worth
Rs. 3,000.
Dual Aspect Concept
This is the basic aspect of accounting. According to this concept, every business
transaction has a two-fold effect. In commercial context, it is a famous dictum
that “every receiver is also a giver and every giver is also a receiver”. For
example, if you purchase a machine for Rs. 8,000 you receive machine on the
one hand and give Rs. 8,000 on the other. Thus, this transaction has a two-
fold effect i.e., (i) increase in one asset and (ii) decrease in another. Similarly,
if you buy goods worth Rs. 500 on credit it will increase an asset (stock of
goods) on the one hand and increase a liability (creditors) on the other. Thus,
every business transaction involves two aspects: (i) the receiving aspect, and
(ii) the giving aspect. In case of the first example you find that the receiving
aspect is machinery and the giving aspect is cash. In the second example the
receiving aspect is goods and the giving aspect is the creditor. If complete record
of transactions is to be made, it would be necessary to record both the aspects
in books of account. This principle is the core of double entry book-keeping
and if this is strictly followed, it is called ‘Double Entry System of Book-keeping’
about which you will learn in detail later.
Let us understand another accounting implication of the dual aspect concept.
To start with, the initial funds (capital) required by the business are contributed
by the owner. If necessary, additional funds are provided by the outsiders
(creditors). As per the dual aspect concept all these receipts create corresponding
obligations for their repayment. In other words, a contribution to the business,
either in cash or kind, not only increases its resources (assets), but also its
obligations (liabilities/equities) correspondingly. Thus, at any given point of time,
the total assets and the total liabilities must be equal.
This equality is called ‘balance sheet equation’ or ‘accounting equation’. It is
stated as under:
Liabilities (Equities) = Assets
or
Capital + Outside Liabilities = Assets
The term ‘assets’ denotes the resources (property) owned by the business while
the term ‘equities’ denotes the claims of various parties against the business
46
assets. Equities are of two types: (1) owners’ equity, and (ii) outsiders’ equity. Accounting Principles
Owners’ equity called capital is the claim of the owners against the assets of
the business. Outsiders’ equity called liabilities is the claim of outside parties
like creditors, bank, etc. against the assets of the business. Thus, all assets of
the business are claimed either by the owners or by the outsiders. Hence, the
total assets of a business will always be equal to its liabilities.
When various business transactions take place, they effect the assets and liabilities
in such a way that this equality is always maintained. Let us take a few
transactions and see how this equality is maintained.
1. Mr. Gyan Chand started business with Rs. 50,000 cash. The cash
received by the business is its asset. According to the business entity
concept, business and the owner are two separate entities. Hence, the
capital contributed by Mr. Gyan Chand is a liability to the business. Thus
Capital = Assets
Rs. 50,000 = Rs. 50,000 (cash)
2. He purchased goods on credit from Chakravarthy for Rs. 5,000. This
increases an asset (stock of goods) on the one hand and a liability
(creditors) on the other. Now the equation will be
Capital + Liabilities = Assets
Rs. 50,000 + Rs. 5,000 = Rs. 5,000 + Rs. 50,000
Capital Creditors Stock Cash
3. He purchased furniture worth Rs. 10,000 and paid cash. This increases
one asset (furniture) and decreases another asset (cash). Now the equation
will be:
Capital + Liabilities = Assets
Rs. 50,000 + Rs. 5,000 = Rs. 10,000 + Rs. 5,000 + Rs. 40,000
Capital Creditors Furniture Stock Cash
This equation can be presented in the form of a Balance Sheet (a statement
of assets and liabilities) as follows:
Gyan Chand’s Balance Sheet

Capital and Liabilities Rs. Assets Rs.

Capital 50,000 Furniture 10,000

Creditors (Mr. Chakravarthy) 5,000 Stock of goods 5,000
Cash 40,000
55,000 55,000

Note that the totals on both sides of the Balance Sheet are equal. This equality
remains valid irrespective of the number of transactions and the items affected
thereby. It is so because of their dual effect or the assets and liabilities of the
business. 47
Theortical Framework Check Your Progress D
1. Find out the missing amounts on the basis of the accounting equation:
Capital + Liabilities = Assets
a) Rs. 10,000 + Rs. 15,000 = Rs ………………
b) Rs. 25,000 + Rs……….. = Rs. 60,000
c) Rs………… + Rs. 30,000 = Rs. 50,000
2. Show the dual effect of the following business transaction on assets and
liabilities of a business unit.
a) Purchased goods for cash for Rs. 500
b) Purchased goods on credit for Rs. 800
c) Paid Rs. 300 to a creditor
d) Received Rs. 500 from a debtor
3.3.2 Concepts to be Observed at the Reporting Stage
The following concepts have to be kept in mind at the time of preparing the
final accounts. Let us discuss them one by one:
i) Going concern concept
ii) Accounting period concept
iii) Matching concept
iv) Conservatism concept
v) Consistency concept
vi) Full disclosure concept
vii) Materiality concept
Going Concern Concept
Normally, the business is started with the intention of continuing it indefinitely
or at least for the foreseeable future. The investors lend money and the creditors
supply goods and services with the expectation that the enterprise would continue
for 1ong. Unless there is a strong evidence to the contrary, the enterprise is
normally viewed as a going (continuing) concern. Hence, financial statements
are prepared on a going concern basis and not on liquidation (closure) basis.
Certain expenses like rent, repairs, etc., give benefits for a short period, say
less than one year. But the benefit of some other expenditure like purchase
of a building, machinery, etc., is spread over a longer period. The expenditure
whose benefit is limited to one accounting year is fully charged to the Profit
and Loss Account of the year. But the cost of the items whose benefit is available
for a number of accounting years, their cost must be spread over a number
of years. Hence, only a portion of such expenditure is charged to the Profit
and Loss Account every year. The balance is shown in the Balance Sheet as
48
an asset. Let us take an example. Suppose a firm purchased a delivery van Accounting Principles
for Rs. 60,000 and its expected life is 10 years. It means the business will
use the van for a period of 10 years. So, the accountant has to spread the
cost of the van over 10 years. He would charge Rs. 6,000 (1/10 of its cost)
every year to the Profit and Loss Account in the form of depreciation, and
show the balance in the Balance Sheet as an asset. This is based on the
assumption that the business will continue for long and the asset will be used
for its expected life. Thus, this concept is regarded as the basic assumption
in accounting according to which the fixed assets are valued at historical cost
less depreciation and not at its realisable value.
Accounting Period Concept
You know the going concern concept assumes that the business will continue
for a long period, almost indefinitely. But the businessmen cannot postpone the
preparation of financial statements indefinitely. Therefore, he prepares them
periodically. This will also enable other interested parties such as owners,
investors, creditors, tax-authorities to make periodic assessment of its performance.
So, the life of the business enterprise is divided into what are called accounting
periods’. The profit or loss and the financial position at the end of each such
accounting period is regularly assessed.
Conventionally, duration of the accounting period is twelve months. It is called
an ‘accounting year’. Accounting year can be a calendar year i.e., January 1
to December 31 or any other period of twelve months, say, April 1 to March
31 or Dewali to Dewali.
Normally, the final accounts are prepared at the end of each accounting year.
The Profit and Loss Account is prepared for the year so as to ascertain the
profit earned or loss incurred during that year, and the balance sheet is prepared
as at the end of the year, so as to show the financial position as on that date.
However, for internal management purposes, accounts can be prepared even
for shorter periods, say monthly, quarterly or half yearly.
Check Your Progress D
1. What is the assumption under Going Concern Concept?
................................................................................................................
................................................................................................................
................................................................................................................
2. What is the accounting implication of Going Concern Concept?
................................................................................................................
................................................................................................................
................................................................................................................
3. What is the significance of an Accounting Period?
................................................................................................................
................................................................................................................
................................................................................................................ 49
Theortical Framework 4. What is the purpose of preparing the Profit and Loss Account?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
5. What does Balance Sheet reveal?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
Matching Concept
This is also called ‘Matching of Costs against Revenues Concept’. To work
out profit or loss of an accounting year, it is necessary to bring together all
revenues and costs pertaining to that accounting year. In other words, expenses
incurred in an accounting year should be matched with the revenues earned
during that year. The crux of the problem, therefore, is that appropriate costs
must be matched against appropriate revenues. For this purpose, first we have
to recognise the inflows (revenues) during an accounting period and the costs
incurred in securing those inflows. Then, the sum of the costs should be deducted
from the sum of the revenues to arrive at the net result of that period. Let
us now understand how to recognise the revenues and costs in relation to
an accounting period. For this purpose, the following rules are followed :
The Timing of Revenue Recognition
Revenue is recognised in the period in which it is earned or realised. The revenue
recognition is primarily based on realisation principle which clearly states that
in identifying revenues with a specific period one must look to when the various
transactions occurred rather than to the period in which cash inflow occurred.
Thus,
i) In case of the sale of goods (or services) revenue is regarded as realised
when sales actually take place and not when cash is received. In other
words, credit sales are treated as revenue when sales are made and not
when money is received from the debtors.
ii) Income such as rent, interest, commission etc. are recognised on a time
basis. The revenue from such items is taken to the Profit and Loss Account
of the year during which it is earned. Let us assume that the business
purchased some government securities on October 1, 2018 for Rs. 20,000
carrying interest at 12 per cent. The interest is payable half yearly on April
1 and October 1 every year. The first instalment of interest (Rs. 1,200)
is received on April 1, 2019. The Profit and Loss Account is being prepared
for the year 2018 (January 1, 2018 to December 31, 2018). The interest
amounting to Rs. 600 earned during. October 1 to December 31 must
be shown as the income from interest on investments in the Profit and
50 Loss Account for 2018 though the amount has not been received in 2018.
The Timing of Costs Recognition Accounting Principles

The matching principle holds that the expenses should be recognised in the same
period as the associated revenues. Thus,
i) The cost of goods have to be matched with their sales revenue. This means
that while preparing the Profit and Loss Account for a particular year, you
should not take the cost of all the goods produced during that year, but
consider only the cost of goods that have actually been sold during that
year. The cost of goods sold is arrived at by deducting the cost of closing
stock from the cost of goods produced.
ii) Expenses such as salaries, wages, interest, rent, insurance, etc., are
recognised on time basis. In other words, they are related to the year in
which the service is obtained or the expense is incurred, whether paid
immediately or payable at a later date.
iii) Costs like depreciation on fixed assets are also allocated on time basis.
Thus, all revenue earned during an accounting year, whether received or not,
and all costs incurred, whether paid or not have to be taken into account while
preparing the Profit and Loss Account for the year. Similarly, any amount received
or paid during the current year which actually relates to the previous year or
the following accounting year, must be eliminated from the current year’s revenue
and costs. This gives rise to another aspect viz., the accrual basis of accounting
about which you will learn later.
The Matching Concept thus has the following implications for the ascertainment
of profit or loss during a particular period.
1. We should ensure that costs should relate to the same accounting period
as the revenues. For example, when we prepare the Profit and Loss Account
for 2017, we shall take into account all those incomes that were earned
during 2017, and similarly consider only those costs which were incurred
in 2017. Any costs or incomes which relate to 2018 shall be excluded.
2. We should ensure that all costs incurred during the accounting period
(whether paid or not) and all revenues earned during that year (whether
received or not) are fully taken into account.
3. We should consider only those costs which relate to the revenue taken
into account. This is the reason why we consider only the cost of goods
sold, and not the cost of goods produced during that period.
Check Your Progress E
1. What is the main implication of the Matching Concept?
................................................................................................................
................................................................................................................
................................................................................................................
2. Name three items of revenues.
................................................................................................................
................................................................................................................
................................................................................................................ 51
Theortical Framework 3. Name three items of costs.
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
4. Fill in the blanks.
i) Profit is the excess of revenue over ……………………………
ii) Costs incurred during an accounting year should be matched against
…………………………………….
iii) Revenue realisation does not mean that revenue must be realised
in……………………………..
iv) Cost of goods are matched with their sales revenue.......................?
v) Revenue such as interest, commission, etc., are recognised as earned
with reference to …………………………………….
i) Expenses such as wages, rent, etc., are recognised on …………..basis.
Conservatism Concept
This is also known as Prudence Concept understatement of assets or revenues,
and overstatement of liabilities or costs. This is in accordance with the traditional
view which states ‘anticipate no profits but anticipate all losses’. In other words,
you should account for profits only when they are actually realised. But in
case of losses, you should take into account even those losses which may be
a remote possibility. This is why closing stock is valued at cost price or market
price whichever is lower. Provision for doubtful debts and provision for discounts
on debtors are also made according to this concept.
Consistency Concept
The principle of consistency means ‘conformity from period to period with
unchanging policies and procedures’. It means that accounting method adopted
should not be changed from year to year. For example, the principle of valuing
closing stock ‘at cost price or market price whichever is lower’ should be
followed year after year. Similarly, if depreciation on fixed assets is provided
on straight line basis, it should be followed consistently year after year.
Consistency eliminates personal bias and helps in achieving comparable results.
If this principle of consistency is not followed, the accounting information about
an enterprise cannot be usefully compared with similar information about other
enterprises and so also within the same enterprise for some other period.
Consistent use of the same methods and bases from one period to another,
enhances the utility of the financial statement.
However, consistency does not prohibit change. Desirable changes are always
welcome. But such changes should be completely disclosed while presenting
the financial statements.
52
Full Disclosure Concept Accounting Principles

You know the financial statements are the basic means of communicating financial
information to all interested parties. These statements are the only source for
assessing the performance of the enterprise for investors, lenders, suppliers, and
others. Therefore, financial statements and their accompanying foot-notes should
completely disclose all relevant information of a material nature which relate to
the profit and loss and the financial position of the business. This enables the
users of the financial statements to make correct assessment about the profitability
and financial soundness of the enterprise. It is therefore, necessary that the
disclosure should be full, fair and adequate.
Materiality Concept
This concept is closely related to the Full Disclosure Concept. Full disclosure
does not mean that everything should be disclosed. It only means that all relevant
and material information must be disclosed. Materiality primarily relates to the
relevance and reliability of information. An item is considered material if there
is a reasonable expectation that the knowledge of it would influence the decision
of the users of the financial statements. All such material information should be
disclosed through the financial statements and the accompanying notes. For
example, commission paid to sole selling agents, if any, should be disclosed
separately in the Profit and Loss Account. Similarly, if there is a change in the
method or rate of depreciation, this fact must be duly reported in the financial
statements.
A strict adherence to accounting principles is not required for items of little
significance or of non-material nature. For example, erasers, pencils, scales, etc.,
are used for a long period, but they are not treated as assets. They are treated
as expenses. This does not affect the amount of profit or loss materially.
Similarly, while showing the amounts of various items in the financial statements,
they can be approximated up to paise. Even if they are shown to the nearest
rupee or hundreds, there may not be any material effect. For example, if an
amount of Rs. 1,45,923.28 is shown as Rs. 1,45,900 it does not make much
difference for assessment of the performance of the enterprise.
However, there are no specific rules for ascertaining material or non-material
items, It is just a matter of personal judgement.
Check Your Progress F
1. What is the aim of Conservatism Concept ?
................................................................................................................
................................................................................................................
................................................................................................................
2. What do you mean by the Principle of Consistency?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................ 53
Theortical Framework 3. Why is full disclosure of relevant information considered necessary?
................................................................................................................
................................................................................................................
................................................................................................................
4. How do you make a distinction between material and non-material items?
................................................................................................................
................................................................................................................
................................................................................................................

3.4 SYSTEMS OF BOOK-KEEPING

Book-keeping as explained earlier is the art of recording business transactions
in a systematic manner. Broadly, there are two systems of book-keeping:
i) Double Entry System, and
ii) Single Entry System.

3.4.1 Double Entry System

Under the dual aspect concept you learnt that every business transaction has
two aspects: (i) the receiving aspect, and (ii) the giving aspect. For example,
when you purchase goods for cash, goods come in and cash goes out. Thus,
a transaction affects two items (also called accounts) at the same time. When
you record the transaction in the books of account of a business, it would be
better if you record the effects relating to both the items. In the above example,
the items affected are goods and cash, stock of goods increases and cash
decreases. So, we should record the increase in stock of goods and also the
decrease in cash. This involves two entries, one in Goods Account and the
other in Cash Account. This method of recording business transactions is called
‘Double Entry System’. It recognises and record both the aspects of every
transactions. According to this system, the account which involves receiving
aspect is debited and the account which involves giving aspect is credited. Thus,
for every debit there will be an equivalent credit. For this purpose certain rules
have been framed. These are discussed in Unit 5.
Advantages of Double Entry System
This system has the following advantages:
i) It provides complete and reliable record of all business transactions because
it records both effects.
ii) It supplies full information about the incomes and expenses, assets and
liabilities of the business. It, thus, helps the management in taking appropriate
decisions.
iii) The arithmetical accuracy of the books of account can be ascertained by
preparing a trial balance.
iv) The financial result of the operations of the business i.e., profit or loss,
can be easily ascertained.
54
v) The financial position of the business can also be ascertained at any point Accounting Principles
of time.

3.4.2 Single Entry System

Single entry system does not mean that only one aspect of a transaction is
recorded. An incomplete or defective double entry system is generally called
single entry system. Under this system, all transactions are not recorded and
all accounting records are not maintained. The two aspects of a transaction
are recorded in certain cases, but in certain cases only one aspect is recorded.
Certain transactions are ignored, they are not even recorded. The single entry
system is thus a mixture of double entry, single entry and no entry. The accounts
maintained under this system are incomplete and unsystematic and, therefore,
not reliable. The main defect of this system is that the arithmetical accuracy
of the books of account cannot be checked, because a trial balance cannot
be prepared. The profit and loss account and balance sheet also cannot be
prepared. This system is normally followed by small business firms.

3.5 LET US SUM UP

1. There are number of terms commonly used in accounting. The understanding
of these terms is necessary for preparing accounting records.
2. Accounting involves identifying, measuring, recording, summarising and
communicating events and transactions. For this purpose, certain guidelines
or ground rules are necessary. Basic accounting concepts or generally
accepted accounting principles guide the accountant in record keeping and
reporting.
3. Certain principles or concepts have been agreed upon. Some are observed
at the recording stage while others are relevant at the reporting stage.
4. According to business entity concept, the business enterprise and its
proprietor are treated as two separate entities, distinct from each other.
5. According to money measurement concept, all the transactions should be
recorded in terms of the standard currency of the country.
6. According to the historical record concept, only those transactions which
have actually taken place should be recorded in the order of their occurrence
i.e., date-wise.
7. The cost concept states that the amount actually received or paid for any
goods or service should be recorded and not its value.
8. As per the dual aspect concept, every transaction has two aspects. Both
the aspects are to be recorded in the books of account.
9. Double entry is a system which recognises and records both aspects of
a transaction.
10. Single entry system is an incomplete record of business transactions.
11. For ascertaining the profit and loss and the financial position of the business,
two financial statements are prepared: (i) Profit and Loss Account, and
(ii) Balance Sheet. These are called final accounts.
55
Theortical Framework 12. Final accounts are prepared at the end of each accounting year.
13. While preparing the final accounts, nine basic accounting concepts have
to be observed.
14. According to the Going Concern Concept, the firm should be considered
as a continuing unit and not as one closing down.
15. According to the Matching Concept, appropriate costs have to be matched
against the appropriate revenues for the accounting period.
16. The Concept of Conservatism implies that while calculating the profit for
an accounting period, take all losses into account but include only those
incomes which have actually arisen.
17. The Concept of Consistency implies that there should be consistency in
all accounting methods followed from period to period so as to ensure
possibility of meaningful comparisons.
18. According to Full Disclosure Concept financial reports should disclose fully
all relevant information of material nature, so that the users of those reports
can draw rational conclusions about the enterprise.
19. The Materiality Concept implies that while measuring income of a business
for an accounting period the non-material facts can be ignored.
20. There are two bases of accounting viz., cash basis and accrual basis. The
accrual basis of accounting is considered more rational.

3.6 KEY WORDS

Account: A classified statement of transactions relating to a person or a thing
or any other subject.
Assets: Anything which has economic value.
Business Entity: A business enterprise.
Capital: Owner’s investment or equity in a firm.
Cash Discount: An allowance given by the creditor to the debtor on the amount
due for prompt payment.
Creditor: One to whom the business owes some amount.
Debtor: One who owes some amount to the business.
Drawings: Amount withdrawn by the owner from the business for personal
use.
Equity: The claim or right over the assets of the firm. It includes both the
owner’s and the creditor’s claims.
Expenditure: Spending of money or incurring a liability for some benefit or
service received by the business.
Gain: Profit arising from peripheral or incidental transactions.
Goods: Goods are the mercantile things in which the business deals.
56
Income: It is the amount earned through business operations. Accounting Principles

Revenue: Amount realised for the goods sold or services rendered.

Stock: Raw materials, semi-finished goods and finished goods lying in stores.
Trade Discount: An allowance given by the seller to the buyer on the list
price at the time of sale.
Transaction: Transfer of money or money’s worth between two entities is called
a transaction.

3.7 SOME USEFUL BOOKS

Bierman, Harold & Drebin, Allan R., Financial Accounting: An Introduction
(Philadelphia: W.B. Saunders Company, 1998)
Briston, R.J., Introduction to Accounting and Finance. (London: The Macmillan
Press Ltd., 1991) Part-B. Fank Wood : Book-Keeping and Accounts. (London :
Pitman, 1996)
Maheshwari, SN., Principles and Practice of Accountancy, Part I. (New Delhi :
Arya Book Depot, 2018)
Paul V.A. & Korlahalli, J.S., Principle and Practice of Accountancy. (New Delhi :
S. Chand & Co., 2018)

3.8 ANSWERS TO CHECK YOUR PROGRESS

A 1. (i) Debtor (ii) Creditor (iii) Goods (iv) Assets (v) Personal use
(vi) Unrealisable (vii) Capital (viii) Account
2. (i) Goods (ii) Asset (iii) Asset (iv) Goods (v) Goods
3. Assets :Delivery van, furniture, typewriter, cash in hand, stock of
goods not yet sold.
Liabilities: Bank loan. M/s. Gurucharan Singh & Co., M/s. Lalwani
Traders.
Income : Amounts received from Mr. Peter and Mr. Ali.
Expenses : Account books and stationery. electricity charges, salaries
and rent.
B 1. Except d, g, i, j and l all other transactions are to be recorded.
2. C + L = A
Capital: Rs. 20,000 + Creditors Rs. 5,000 = Machinery
Rs. 20,000 + Cash Rs. 5,000
3. Capital = 1800+3000+2000+12002500-500 = Rs. 5000
C. Except ‘c’ all other transactions have to be recorded in the business books
with the following amounts:
57
Theortical Framework a) Rs. 10,300 b) Rs. 1,000

d) Rs. 25,000 e) Rs. 5,000

D 1. a) Rs. 25,000 b) Rs. 35,000 c) Rs. 20,000.

2. a) Stock increases and cash decreases

b) Stock increases and creditors increase

c) Cash decreases and creditors decrease

d) Cash increases and debtors decrease

3.9 TERMINAL QUESTIONS/EXERCISES

1. What do you mean by double entry system? Distinguish it from single entry
system.

2. What do you mean by accounting concepts? Briefly explain the accounting

concepts which guide the accountant at the recording stage.

3. Krishna has invested a capital of Rs. 80,000 on June 30, 2018. He

purchased goods from Suresh on credit, amounting to Rs. 20,000. Find
out the value of assets. (Ans: Rs. 1,00,000)

4. The assets of a business on December 31, 2018 are Rs. 50,000 and capital
is Rs. 30,000. Find out the amount of liabilities. (Ans: Rs. 20,000)

5. The following is the assets and liabilities position of Srinivasa Traders on

October 1, 2018:

Assets: Cash Balance Rs. 3,000; Furniture Rs. 5,000;

Building Rs. 50,000; Debtors Rs. 22,000.

Liabilities: Bank Loan Rs. 10,000; Creditors Rs. 15,000.

Find out the amount of capital on that date. (Ans: Rs. 55,000).

6. Write short notes on the following:

a) Going Concern Concept

b) Accounting Period Concept

7. What do you understand by matching costs against revenue? Explain briefly

the importance of the Matching Concept.

8. Explain briefly the following concepts:

a) Conservatism

b) Consistency
58
 c) Full Disclosure

d) Materiality

9. Distinguish between cash basis and accrual basis of accounting with

examples.

10. Explain briefly the main accounting concepts to be observed at the time
of preparing final accounts.

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

59
Theortical Framework
UNIT 4 ACCOUNTING STANDARDS
Structure
4.0 Objectives
4.1 Concept of a Accounting Standards
4.2 Benefits of Accounting Standards
4.3 Procedure for Issuing AS in India
4.4 Salient Features of First Time Adoption of Indian Accounting Standards
(Ind-AS):101
4.5 Currently Prevailing Accounting Standards in India
4.6 International Financial Reporting Standards
4.7 Need and Procedure of IFRS
4.8 Convergence to IFRS
4.9 Distinction between Indian AS and International AS
4.10 Measurement of Business Income
4.11 Objectives of Measurement of Business Income
4.12 Approaches for Measuring Income
4.13 Accounting Concept that is relevant to Measurement of Business Income-
Realization Concept
4.14 Let Us Sum Up
4.15 Key Words
4.16 Some Useful Books
4.17 Terminal Questions

4.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the concept of the accounting standards;
 discuss the benefits of accounting standards;
 discuss the procedures of issuing accounting Standards in India;
 describe International Financial Reporting Standards, GAAP, IAS etc;
 develop the insights about the need and procedure of issuing IFRS;
 understand how Indian economy is converging towards implementing IFRS.
 make comparison between Indian AS and International AS;
 describe the procedure for measuring business income;
 explain the accounting concepts that are relevant to measurement of business
income; and
 state the objectives of measurement of business income of business income.

4.1 CONCEPT OF ACCOUNTING STANDARDS

Accounting is the language of business. All financial information (i.e. nature of
60 financial activities, financial position, financial results, present trend and further
prospects etc.) are available through accounting. The so-called financial Acounting Standards
information is communicated to the users (both internal as well as external) of
accounting information by preparing and presenting the financial statements. As
such, it becomes necessary to develop some Generally Accepted Accounting
Principles (GAAP) while preparing the financial statements by which the language
of the business can be communicated to the users.

As per section 129 of Companies Act, 2013 the financial statements of a

company must present a true and fair view of the income and financial position
of the company. However, it does not define what constitutes a true and fair
view of a company. Since the beginning of accounting, a number of Generally
Accepted Accounting Principles have been developed consisting of accounting
concepts and conventions so as to bring comparability and uniformity in the
financial statements of various business organizations. However, even these
GAAP allow many alternatives for the treatment of same item that can be
followed by the business organizations while preparing financial statements which
leads to lack of consistency, uniformity and comparability among the financial
statements of different originations. In addition, there must not be any ambiguity
and uncertainty relating to the facts, figures and terms which are contained in
the financial statements and will be presented to the users of accounting
information.

Hence, there is a need to develop some standards which must be followed

by all the organizations so as to achieve uniformity in the financial statements.
For this purpose, International Accounting Standards Committee (IASC) was
established on 29th June, 1973. The Institute of Chartered Accountants of India
and Institute of Cost Accountants of India are members of IASC. ICAI is also
developing its own accounting standards patterned on International Accounting
Standards modified to the requirements of Indian accounting community.

Definition

In the words of Kohler, an accounting standard may be defined as ‘a

code of conduct imposed on accountants by custom, law or professional
body.’

Thus, accounting standards may be defined as the accounting principles and

rules which are to be followed for various accounting treatments while preparing
financial statements on uniform basis and which will reveal the same meaning
to all the interested groups who will use the same. Thus, the Standards are
considered as a guide for maintaining and preparing accounts.

Nature of Accounting Standards

On the basis of forgoing discussion, we can say that accounting standards are
guide, dictator, service provider and harmonizer in the field of accounting process.

Serve as a guide to the accountants: Accounting standards serve the

accountants as a guide in the accounting process. They provide basis on which
accounts are prepared. For example, they provide the method of valuation of
inventories. 61
Theortical Framework Act as a dictator: Accounting standards act as a dictator in the field of
accounting. Like a dictator, in some areas accountants have no choice of their
own but to opt for practices other than those stated in the accounting standards.
For example, Cash Flow Statement should be prepared in the format prescribed
by accounting standard.

Serve as a service provider: Accounting standards comprise the scope of

accounting by defining certain terms, presenting the accounting issues,
specifying standards, explaining numerous disclosures and implementation date.
Thus, accounting standards are descriptive in nature and serve as a service
provider.

Act as a harmonizer: Accounting standards are not biased and bring uniformity
in accounting methods. They remove the effect of diverse accounting practices
and policies. On many occasions, accounting standards develop and provide
solutions to specific accounting issues. It is thus, clear that whenever there is
any conflict on accounting issues, accounting standards act as harmonizer and
facilitate solutions for accountants.

4.2 BENEFITS OF ACCOUNTING STANDARDS

There are many benefits of accounting standards. Let us discuss the main benefits
of Accounting Standards one by one.

1) Standardized Accounting: Perhaps the most important advantage of the

FASB standard setting for businesses is the uniform set of accounting
principles it promotes. The FASB clearly states the generally-accepted
accounting principles that businesses must follow to avoid confusion. For
example, the FASB prevents businesses from using one method for
calculating inventory at the beginning of a fiscal year and finishing the year
with another method. Without the accounting standards set forth by the
FASB, businesses could use accounting methods that portray financial data
inaccurately to investors.

2) Problem Identification: The FASB standard setting provides a framework

upon which potential accounting problems are identified and corrected.
Because all businesses in the US use the same accounting principles, any
problems or inadequacies in the accounting process are quickly identified
and reported to the FASB. The FASB then investigates the problem and,
if needed, modifies or writes a new accounting rule for the accounting
process. For example, if businesses find that reporting a certain type of
liability on their income statement unfairly lowers their net income, they can
appeal to the FASB so that it can identify problems with the standard
setting.

3) Private Regulation: The FASB is a private entity with no affiliation to

the US government. Despite this, the Securities and Exchange Commission
relies on the FASB to set the accounting rules that all companies in the
US must follow. The SEC can technically create an accounting oversight
board or government agency to set accounting rules. However, using the
FASB eases the burden on the US government and lets the private sector
dictate accounting rules.
62
4) International Accounting Standard: The FASB is advantageous because Acounting Standards
it actively promotes an internationally recognized set of accounting rules.
Globalization has deeply connected foreign financial markets; a standard
set of accounting rules would make financial reporting more accurate and
fair between countries. One of the goals of the FASB is to make financial
reporting more uniform globally with the cooperation of the International
Accounting Standards Board (IASB).

4.3 PROCEDURE FOR ISSUING AS IN INDIA

There is a set procedure for issuing AS in India. Let us discuss this prodedure
in detail.

1) Determination of the need of an AS

First, the Accounting Standard Board determines the broad areas in which
accounting standards needs to be formulated.
2) Constituting Study Group
Study Group will be constituted consisting the members of the Institute
of Chartered Accountants of India. The motive behind constitution of this
group is to assist the accounting Standard Board in its activities.
3) Drafting the Standard
The Study Group Prepares draft of the proposed Standard. The proposed
draft enlists the following areas:
a) Objective of the standard.
b) Scope of the Standard.
c) Definitions of the terms used in the standard
d) Recognition & Measurement Principles
e) Presentation & Disclosure requirements.
4) Analyzing the Draft
ASB in this stage considers the Preliminary draft prepared by the Study
Group. In case anything needs to be revised than Accounting Standard
Board takes the following steps.
a) ASB makes the revision
b) ASB refers the same to the study Group
5) Circulation of the Draft
In this step, the ASB circulates the AS draft to the council members of
the Institute of Chartered Accountants of India and the following specifies
bodies for their comments.
a) The Institute of Works & Cost Accountants of India
b) The Institute of Company Secretaries of India.
c) Ministry of Company Affairs. 63
Theortical Framework d) Comptroller & Auditor General of India
e) Central Board of Direct Taxes
f) Standing Committee of Public Enterprises
g) Reserve Bank of India
h) Indian Banks Association.
i) Securities & Exchange Board of India.
j) Associated Chamber of Commerce & Industry, Confederation of
Indian Industry and Federation of Indian Chambers of Commerce &
Industry.
k) Any other body considered relevant by the ASB.
6) Holding Discussion and Finalizing Exposure Draft
ASB holds meeting with the representatives of above mentioned bodies for
the purpose of determining their views on the Draft Accounting Standard.
Based on analyses of the discussion, ASB finalizes the exposure draft of
proposed accounting standards.
7) Circulation of Exposure Draft
The exposure Draft of the proposed standards is issued for comments the
members of the ICAI and the public.
8) Finalizing the Exposure Draft
Based on the comments received, the ASB finalizes the draft of the
proposed standards. Finally ASB submits the same to the council of the
ICAI.
9) Modifying & Issuing the Accounting Standard
The council of the ICAI then considers the finalized draft standard and
if necessary modifies the same in consultation with the ASB. The ICAI then
issues the Accounting Standard after modification if any on the relevant
subject.

4.4 SALIENT FEATURES OF FIRST TIME

ADOPTION OF INDIAN ACCOUNTING
STANDARDS (Ind-AS):101
Ind-AS 101 lays out the accounting principles for first-time adoption of
Ind-AS. It prescribes the various requirements to be fulfilled during the transition
period when a company adopts Ind-AS for the first time, i.e., when it moves
from making the financial statements in accordance with Accounting Standards
(Indian GAAP) to make them in accordance with Ind-AS.
Conceptually, the accounting under Ind-AS should be applied retrospectively
at the time of transition of companies from applying Accounting Standards (Indian
GAAP) to Ind-AS. However, for and easy transition, Ind-AS 101 has provided
some exemptions for retrospective application of Ind-AS. The exemptions are
64
clearly categorised into those which are mandatory in nature (i.e., cases where Acounting Standards
the company is prohibited to apply Ind-AS retrospectively) and those which
are voluntary in nature (i.e., it is upto the company to apply or not to apply
certain requirements of Ind-AS retrospectively).
Ind-AS 101 also lists out presentation and disclosure requirements to explain
the transition to the users of financial statements. It also requires a company
to explain how the transition will affect its reported balance sheet, financial
performance and cash flows. It does not provide any exemption from the
disclosure requirements in other Ind-AS.
Objective of Ind-AS 101
The objective of Ind-AS 101 is to ensure that the entity’s first Ind-AS Financial
Statements, and its interim financial reports for the period covered by those
financial statements, contain high quality information that:
1. Is transparent for users and comparable over all periods presented,
2. Provide a suitable starting point for accounting in accordance with the Indian
Accounting Standards (Ind-AS), and
3. Can be generated at a cost that does not exceed benefits.
Scope of Ind-AS 101
An entity shall apply the Indian Accounting Standard-101 (first time adoption
of Indian Accounting Standards) in:
a) First Financial Statements after implementing Ind-AS.
b) Each Interim Financial Report in accordance with Ind-AS 34 Interim
Financial Reporting for the part of the period covered by its first Ind-
AS financial Statements.

4.5 CURRENTLY PREVAILING ACCOUNTING

STANDARDS IN INDIA
Section 133 of Companies Act, 2013 requires the companies to comply with
the prevailing accounting standards. As on 1st April, 2016 there are 32 accounting
standards specified by ICAI, all of which are mandatory to be complied by
the companies. Following is the list of these standards:
 AS 1 Disclosure of Accounting Policies
 AS 2 Valuation of Inventories
 AS 3 Cash Flow Statements
 AS 4 Contingencies and Events Occurring after the Balance Sheet Date
 AS 5 Net Profit or Loss for the period, Prior Period Items and Changes
in Accounting Policies
 AS 6 Depreciation Accounting
 AS 7 Construction Contracts (revised 2002)
 AS 8 Accounting Policies, Chanages in Accounting estimates and Errors. 65
Theortical Framework  AS 9 Revenue Recognition
 AS 10 Accounting for Fixed Assets
 AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
 AS 12 Accounting for Government Grants
 AS 13 Accounting for Investments
 AS 14 Accounting for Amalgamations
 AS 15 Employee Benefits (revised 2005)
 AS 16 Borrowing Costs
 AS 17 Segment Reporting
 AS 18 Related Party Disclosures
 AS 19 Leases
 AS 20 Earnings Per Share
 AS 21 Consolidated Financial Statements
 AS 22 Accounting for Taxes on Income.
 AS 23 Accounting for Investments in Associates in Consolidated Financial
Statements
 AS 24 Discontinuing Operations
 AS 25 Interim Financial Reporting
 AS 26 Intangible Assets
 AS 27 Financial Reporting of Interests in Joint Ventures
 AS 28 Impairment of Assets
 AS 29 Provisions, Contingent Liabilities and Contingent Assets
 AS 30 Financial Instruments: Recognition and Measurement
 AS 31 Financial Instruments: Presentation
 AS 32 Financial Instruments: Disclosure
Check Your Progress A
1. Define the term ‘Accounting Standard’.
................................................................................................................
................................................................................................................
................................................................................................................
2. What are the main objectives of accounting standards?
................................................................................................................
................................................................................................................
................................................................................................................
3. Discuss the procedure of issuing accounting standards in India.
................................................................................................................
................................................................................................................
................................................................................................................
66
4. Give any three limitations of accounting. Acounting Standards

................................................................................................................
................................................................................................................
................................................................................................................

4.6 INTERNAT1IONAL FINANCIAL REPORTING

STANDARDS
Accounting provides companies, investors, regulators and others with a standardized
way to describe the financial performance of an entity. Accounting standards
present and prepares of financial statements with a set of rules to abide by
when preparing an entity’s accounts, ensuring this standardization across the
market. Companies listed on public stock exchanges are legally required to
publish financial statements in accordance with the relevant accounting standards.
International Financial Reporting Standards (IFRS) is a single set of accounting
standards, developed and maintained by the International Accounting Standards
Board with the intention of those standards being capable of being applied on
a globally consistent basis — by developed, emerging and developing economies.
Thus, providing investors and other users of financial statements with the ability
to compare the financial performance of publicly listed companies on a like-
for-like basis with their international peers.
IFRS are now mandated for use by more than 100 countries, including the
European Union and by more than two-thirds of the G20. The G20 and other
international organisations have consistently supported the work of the Board
and its mission of global accounting standards.

4.7 NEED AND PROCEDURE OF IFRS

With the increasing globalization of financial markets and of companies, the use
of a single set of financial reporting standards across countries is viewed as
having increased the comparability of financial statements across borders. It also
reduces the cost of preparing the consolidated financial statements of groups
made up of companies conducting business all around the world.
Financial reporting standards have been in the spotlight since the banking crisis,
more specifically those requiring the measurement of financial assets and
liabilities at fair value. In September 2009, G20 leaders in Pittsburgh asked
the accounting standard setters IASB and, its US counterpart, the FASB to
work towards a single set of high quality global accounting standards by
June 2011. Convergence, however, is proving challenging and is likely to be
pushed back.
Initially, IFRS begun as an academic project aimed at creating a single set of
global standards, their actual use was kick-started by the European Union.
An EU regulation requires listed companies in Europe to adhere to International
Financial Reporting Standards (IFRS) from financial years commencing on or
after 1 January 2005 when preparing their consolidated accounts. In implementing
this in UK legislation, the Government has not yet made the use of IFRS
compulsory for any further categories of accounts, but the legislation permits
all companies to use them for individual and consolidated accounts if they wish.
67
Theortical Framework Changes have been made to UK tax legislation to accommodate these new
rules for tax purposes.
International Financial Reporting Standards (IFRS) are developed through an
international consultation process, the “due process”, which involves interested
individuals and organisations from around the world.
The due process comprises six stages, with the Trustees of the IFRS
Foundation having the opportunity to ensure compliance at various points
throughout:
1. Setting the agenda
2. Planning the project
3. Developing and publishing the Discussion Paper, including public consultation
4. Developing and publishing the Exposure Draft, including public consultation
5. Developing and publishing the Standard.
6. Procedures after a Standard are issued.
The IFRS issued by IASB and the corresponding Ind- AS are given below:

S. No. IFRS No. Title Corresponding

converged
Ind-AS

1) IFRS 1 First-time Adoption of Ind-AS 101

Indian Accounting Standards

2) IFRS 2 Share based Payment Ind-AS 102

2) IFRS 3 Business Combinations Ind-AS 103

3) IFRS 4 Insurance Contracts Ind-AS 104

4) IFRS 5 Non-current Assets Held for Sale Ind-AS 105

and Discontinued Operations

5) IFRS 6 Exploration for and Evaluation of Ind-AS 106

Mineral Resources

6) IFRS 7 Financial Instruments: Disclosures Ind-AS 107

7) IFRS 8 Operating Segments Ind-AS 108

8) IFRS 9 Financial Instruments Exposure Draft

Issued

9) IFRS 10 Consolidated Financial Statements Exposure Draft

Issued

10) IFRS 11 Joint Agreements Exposure Draft

Issued

11) IFRS 12 Disclosure of Interests in Exposure Draft

Other Entities Issued

12) IFRS 13 Fair Value Measurement Exposure Draft

Issued
68
 Acounting Standards
4.8 CONVERGENCE TO IFRS
For a country, there are two alternatives available for compliance and
implementation of the IFRS, which are (i) Adoption, (ii) Convergence
Adoption: It means acceptance of IFRS in its original form. If a country adopts
IFRS in its original form, then it is not allowed to make any change in the
language or format of the IFRS formed by IASB.
Convergence: It means implementing IFRS with modification wherever necessary
so as to suit the requirements of a particular country.
India has decided to converge it existing accounting standards to IFRS. In India,
the converged accounting standards are called Ind-AS
As per the road-map announced by Ministry of Corporate Affairs (MCA) in
March 2010, the Indian Accounting Standards (Ind-AS) converged with
International Financial Reporting Standards (IFRS) were to be applied to
specified class of companies in phases beginning with the financial year 1 April
2011. Audit observed that MCA could not notify the date of implementation
of Ind-AS as per its notified road-map. Slippages in the implementation of Ind-
AS were discussed in Chapter 4 of Audit Report No. 2 of 2014.
Subsequently, in pursuance of the Budget Statement of the Finance Minister
in February 2014, MCA after consultations with various stakeholders and
regulators, issued a press note on 2 January 2015 wherein a revised Road
map for implementation of Ind-AS converged with IFRS was laid down for
companies other than Banking Companies, Insurance Companies and Non-
Banking Finance Companies (NBFC). The Ind-AS shall be applicable to the
companies as follows:
(i) On voluntary basis for financial statements for accounting periods beginning
on or after 1 April 2015, with the comparatives for the periods ending
31 March, 2015 or thereafter;
(ii) On mandatory basis for the accounting periods beginning on or after 1
April 2016, with comparatives for the periods ending 31 March 2016,
or thereafter, for the companies specified below:
a) Companies whose equity and/or debt securities are listed or are in
the process of listing on any stock exchange in India or outside India
and having net worth of Rs. 500 crore or more.
b) Companies other than those covered in (ii) (a) above, having net worth
of Rs.500 crore or more.
c) Holding, subsidiary, joint venture or associate companies of companies
covered under (ii) (a) and (ii) (b) above.
(iii) On mandatory basis for the accounting periods beginning on or after 1
April 2017, with comparatives for the periods ending 31 March, 2017,
or thereafter, for the companies specified below:
a) Companies whose equity and/or debt securities are listed or are in
the process of being listed on any stock exchange in India or outside
India and having net worth of less than Rs. 500 crore .
69
Theortical Framework b) Companies other than those covered in paragraph (ii) and paragraph
(iii)(a) above that is unlisted companies having net worth of Rs. 250
crore or more but less than Rs. 500 crore.
c) Holding, subsidiary, joint venture or associate companies of companies
covered under paragraph (iii) (a) and (iii) (b) above.
However, companies whose securities are listed or in the process of listing
on SME exchanges shall not be required to apply Ind-AS. Such companies
shall continue to comply with the existing Accounting Standards unless they
choose otherwise.
(iv) Once a company opts to follow the Ind-AS, it shall be required to follow
the Ind-AS for all the subsequent financial statements.
(v) Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards prescribed in Annexure to the Companies
(Accounting Standards) Rules, 2006.
Companies Act, 2013 specified that the financial statements shall comply
with accounting standards notified by Central Government and shall be in
form or forms as may be provided for class or classes of companies. This
would facilitate implementation of Ind-AS in phases. Accordingly, MCA
vide its notification dated 16 February 2015 notified the Companies (Indian
Accounting Standards) Rules 2015 specifying 39 Ind-AS to be implemented
as per the above road-map. The Ind-AS have been formulated by MCA
in consultation with National Advisory Committee on Accounting Standards
(NACAS).
Challenges to convergence
1. As Ind-AS are essentially based on the concept of fair value measurement
of assets and liabilities, corresponding standards under the Income Tax Act
are essential to ensure smooth and harmonised transition. Draft Income
Computation and Disclosure Standards released by Ministry of Finance in
this regard in January 2015 are under finalisation.
2. Banks and Insurance Companies have been kept out of the proposed road
map for transition to Ind-AS in view of the specific needs and concerns
of these two sectors.
3. Issues such as cost of compliance, capacity building, managing two sets
of standards (one for entities that seek transition and the other for those
which do not) and the impact of exceptions or ‘carve outs’ on the
achievement of objectives of convergence would need to be addressed
through a well-coordinated mechanism among MCA, DPE and ICAI.

4.9 DISTINCTION BETWEEN INDIAN AS AND

INTERNATIONAL AS
The detail of difference between Accounting Standards and Ind- AS is enormous.
Also, the impact of these differences vary from industry to industry and even
from company to company. However, the major differences are listed below.
Let us discuss them in defant.

70
 Acounting Standards
Basic of Accounting Ind-AS
Distinction Standards(AS)
Need When businesses were not Today, businesses have become
that complicated and complicated and a globalised world is
accounting was done at in the need of a comprehensive
local level, then accounting standards that can be
accounting standards consistently applied globally and
based on local GAAP facilitate compatibility. Introduction of
were enough. Ind-AS is the need of the hour for India
to compete in this globalised world
The basic objective of Ind-AS are Indian version of IFRS
Objective Accounting standards is to because it will be impractical to just
remove variation in the adopt the IFRS blindly without taking
treatment of several into consideration the current Indian
accounting aspects and to scenario. International Financial
bring about standardization Reporting Standards are principles
in presentation. They based standards, interpretation and the
intent to harmonize the framework adopted by the
diverse accounting policies
International Accounting Standards
in the preparation and
Board (IASB). Since India is a
presentation of financial
member country so it has to adopt
statements by different
these standards. However, any
reporting enterprises so as
to facilitate intra-firm and changes in these IFRS would have an
inter-firm comparison. impact on books of Indian companies
to adopt these IFRS as and when
amended. So to fill the difference, Ind-
AS have been introduced which is
nothing but IFRS. These standards
have been made applicable to Indian
companies through a road map i.e., in
a systematic manner. The benefit of
these standards is that any change in
IFRS would not impact Ind- AS
directly. The Ministry of corporate
affairs can analysis such changes and
incorporate the same in Ind-AS if it
thinks it is suitable.

Pervasiveness AS are not so pervasive or Ind-AS are pervasive and cover every
widespread. area comprising reported revenues,
expenses, assets, liabilities and equity.
Basis AS are driven by ‘legal’ Ind-AS focus on ‘substance’ rather
form in a number of areas than the legal form. They are principal
and are rule based. based, Ind-AS will also result in
accounting which more closely reflects
the underlying business rationale and
true economics of transaction.
Disclosure Disclosure requirements Disclosure requirements are more
requirements are comparatively less comprehensive and multifold under
detailed. Ind-AS to enhance the transparency
and accountability of financial
statements.
71
Theortical Framework The government of India has issued notification regarding Ind- AS. Following
is the list of Ind-AS notified:
1) Ind-AS 1 Presentation of Financial Statements
2) Ind-AS 2 Inventories
3) Ind-AS 7 Statement of Cash Flows
4) Ind-AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
5) Ind-AS 10 Events after the Reporting Period
6) Ind-AS 11 Construction Contracts
7) Ind-AS 12 Income Taxes
8) Ind-AS 16 Property, Plant and Equipment
9) Ind-AS 17 Leases
10) Ind-AS 18 Revenue
11) Ind-AS 19 Employee Benefits
12) Ind-AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
13) Ind-AS 21 The Effects of Changes in Foreign Exchange Rates
14) Ind-AS 23 Borrowing Costs
15) Ind-AS 24 Related Party Disclosures
16) Ind-AS 27 Consolidated and Separate Financial Statements
17) Ind-AS 28 Investments in Associates
18) Ind-AS 29 Financial Reporting in Hyper-inflationary Economies
19) Ind-AS 31 Interests in Joint Ventures
20) Ind-AS 32 Financial Instruments: Presentation
21) Ind-AS 33 Earnings per Share
22) Ind-AS 34 Interim Financial Reporting
23) Ind-AS 36 Impairment of Assets
24) Ind-AS 37 Provisions, Contingent Liabilities and Contingent Assets
25) Ind-AS 38 Intangible Assets
26) Ind-AS 39 Financial Instruments: Recognition and Measurement
27) Ind-AS 40 Investment Property
Check Your Progress B
1. Define the term ‘IFRS’.
.................................................................................................................
.................................................................................................................
72 .................................................................................................................
2. What is the need of forming IFRS? Acounting Standards

.................................................................................................................
.................................................................................................................
.................................................................................................................
3. What are the challenges of converging accouniting standards to IFRS in
India?
.................................................................................................................
.................................................................................................................
.................................................................................................................
4. Describe the difference between AS and Ind-AS?
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................

4.10 MEASUREMENT OF BUSINESS INCOME

One of the most significant accounting concepts is “Concept of Income”.
Similarly, measurement of a business income is also an important function of
an accountant. In General term, payment received in lieu of services or goods
are called income. But we are here more concerned for a business income.
Surplus revenue over expenses incurred is called as “Business Income.
Measurement of Business Income
There are following two factors which are helpful in the estimation of an income 
 Revenues - Sale of goods and rendering of services are the way to
generate revenue. Therefore, it can be defined as consideration, recovered
by the business for rendering services and goods to its customers.
 Expenses - An expense is an expired cost. We can say the cost that
have been consumed in a process of producing revenue are the expired
cost. Expenses tell us - how assets are decreased as a result of the services
performed by a business.
Measurement of Revenue - Measurement of the revenue is based on an accrual
concept. Accounting period, in which revenue earned, is the period of revenue
accrues. Therefore, a receipt of cash and revenue earned are the two different
things. We can say that revenue is earned only when it is actually realized and
not necessarily, when it is received.
Measurement of Expenses
 In case of delivery of goods to its customers is a direct identification with
the revenue.
 Rent and office salaries are an indirect association with the revenue. 73
Theortical Framework There are four types of events (given below) that need proper consideration
about as an expense of a given period and expenditure and cash payment made
in connection with those items
 Expenditure, which are expenses of the current year.
 Some expenditure, which are made prior to this period and has become
expense of the current year.
 Expenditure, which is made this year, becomes expense in the next
accounting periods. For example, purchase of fixed assets and depreciation
in next up-coming years.
 Expense of this year, which will be paid in next accounting years. For
example, outstanding expenses.

4.11 OBJECTIVES OF MEASUREMENT OF

BUSINESS INCOME
The measurement of income is useful for more than one purpose and therefore
its objectives may be studied form different points of view:
i) As a guide to future investment: The current income positively influences
the expectations about the future. The prospective investor looks to the
income of the business enterprise as a guide to his investments decisions
of the future. The investors attempt to maximize their returns on their
investments and their decisions will be guided by income. So the allocation
of investment funds and selections of securities depend upon income levels
of an enterprise.
ii) As a tax base: Though the Income Tax Act does not define yet it does
specify what is taxable and what is deductible in arriving at the taxable
income. Accounting income provides income of a business enterprise. The
tax authorities can conveniently mobilize the revenues through taxes which
are one of the main sources of the Government’s income.
iii) As a guide to dividend policy: The dividend policy at present is directed
to determine the proportion of the current income which should be retained
and the proportion which should be distributed as dividends. So long as
dividends are aid out of current income, the rights of the creditors are
adequately protected since other resources of the business enterprise would
not be used to pay dividends. There are clear rules for measurement of
distributable profits in the Companies Act with a view to protect the interests
of the creditors.
iv) As an indicator of managerial efficiency: The efficiency of management
as decision makers and as trustees of resources is judged by the reported
income of the current year. The auditors therefore certify that the income
statement presents true and fair view of operational results. The measurement
of business income therefore provides a suitable criterion for the efficiency
of management in a competitive economy.
v) As a measure of overall efficiency and credit worthiness: Income is the
lifeblood of any business enterprise and therefore it provides that basic
standard by which the overall efficiency of the business is assessed. For
74
 creditors, profitable enterprise faces no difficulty in making timely payment Acounting Standards
on its debts. Banks and other credit institutions too depend upon current
income levels as a guide about a firm’s ability to repay loan out of future
income.

4.12 APPROACHES FOR MEASURING

INCOME
In order to measure income, four main methods or approaches can be used:
the operation approach, activities approach, balance sheet approach, or value
added approach. Let’s take a look at each of these.
Transaction/Operation Approach
Transactions are mostly related to production or the purchase of goods and
the sale of goods and all these transactions directly or indirectly related to the
revenue or to the cost. Therefore, surplus collection of the revenue by selling
goods, spent over for production or purchasing the goods is the measure of
income. This system is widely followed by the enterprises where double entry
system adopted.
The Balance Sheet or value added Approach: Comparison of the closing
values (Assets minus outsider’s liabilities) of a firm with the values at the beginning
of that accounting period is called as Balance Sheet approach. In above value,
an addition to capital will be subtracted and addition of drawings will be added
while computing the business income of a firm. Since, income is calculated with
the help of Balance Sheet hence called as Balance Sheet approach.

4.13 ACCOUNTING CONCEPT THAT IS

RELEVANT TO MEASUREMENT OF
BUSINESS INCOME -REALIZATION
CONCEPT
Realization concept in accounting, also known as revenue recognition principle,
refers to the application of accruals concept towards the recognition of revenue
(income). Under this principle, revenue is recognized by the seller when it is
earned irrespective of whether cash from the transaction has been received or
not.
In case of sale of goods, revenue must be recognized when the seller transfers
the risks and rewards associated with the ownership of the goods to the buyer.
This is generally deemed to occur when the goods are actually transferred to
the buyer. Where goods are sold on credit terms, revenue is recognized along
with a corresponding receivable which is subsequently settled upon the receipt
of the due amount from the customer.
In case of the rendering of services, revenue is recognized on the basis of stage
of completion of the services specified in the contract. Any receipts from the
customer in excess or short of the revenue recognized in accordance with
the stage of completion are accounted for as prepaid income or accrued income as
appropriate.

75
Theortical Framework Example: Motor Hundai is a car Dealer. It receives orders from the customers
in advance against 20% down payment. Motor PLC delivers the cars to the
respective customers within 30 days upon which it receives the remaining 80%
of the list price. In accordance with the revenue realization principle, motor
Hundai must not recognize any revenue until the cars are delivered to the
respective customers as that is the point when the risks and rewards incidental
to the ownership of the cars are transferred to the buyers.
Importance
Application of the realization principle ensures that the reported performance
of an entity, as evidenced from the income statement, reflects the true extent
of revenue earned during a period rather than the cash inflows generated during
a period which can otherwise be gauged from the cash flow statement.
Recognition of revenue on cash basis may not present a consistent basis for
evaluating the performance of a company over several accounting periods due
to the potential volatility in cash flows.

4.14 LET US SUM UP

1. Accounting Standards are defined as written statements of accounting rules
and guidelines or practices for preparing the uniform and consistent financial
statements.
2. Objectives of issuing accounting standards are to provide information, to
harmonise different accounting processes and to facilitate uniformity,
consistency and comparability.
3. Benefits of accounting standards – (i) true and fair financial position, (ii)
easy comparability, (iii) enhances the value of accounting information, (iv)
efficiency of management, (v) useful to accountants and auditors and (vi)
enhances credibility and reliability.
4. The authority to make accounting standards in India is Accounting Standard
Board. It follows the prescribed procedure to issue an accounting standard.
5. Procedure for issuing accounting standards-ASB assisted by study group-
exposure draft- circulation- ASB after incorporating suggestions submit to
ICAI. After that ICAI will issue standard.
6. Ind-AS 101 lays out the accounting principles for first-time adoption of
Ind-AS. It prescribes the various requirements to be fulfilled during the
transition period in moving from Accounting Standards (Indian GAAP) to
Ind-AS.
7. Section 133 of Companies Act, 2013 requires the companies to comply
with the prevailing accounting standards. As on 1st April, 2016 there are
32 accounting standards specified by ICAI, all of which are mandatory
to be complied by the companies.
8. International Financial Reporting Standards is a single set of accounting
standards, developed and maintained by the International Accounting
Standards Board with the intention of those standards being capable of
being applied on a globally consistent basis.

76
9. With the increasing globalisation of financial markets and of companies, the
use of a single set of financial reporting standards across countries is viewed
as having increased the comparability of financial statements across borders.
10. India has decided to converge its existing accounting standards to IFRS.
In India, the converged accounting standards are called Ind-AS.

4.15 KEY WORDS

Accounting Standards: Accounting Standards are defined as written
statements of accounting rules and guidelines or practices for preparing the
uniform and consistent financial statements.
ASB: The board constituted by ICAI to concieve, formulate, examine and
review the accounting standards.
GAAP: Generally Accepted Accounting Principles consist of accounting
concepts and conventions so as to bring comparability and uniformity in the
financial statements of various business organizations.
International Financial Reporting Standards: IFRS is a single set of
accounting standards, developed and maintained by the International Accounting
Standards Board with the intention of those standards being capable of being
applied on a globally consistent basis.
ICAI: Institute of Chartered Accountants of India- the apex body of accounting
professionals of India.
Ind-AS: In India, the converged accounting standards are called Ind-AS.
Ind-AS 101: Ind-AS 101 lays out the accounting principles for first-time
adoption of Ind-AS.

4.16 SOME USEFUL BOOKS

Monga, J.R., 2018. “Financial Accounting: Concepts and Applications”,
Mayoor Paper Backs, New Delhi.
Maheshwari, S.N. and S.K. Maheshwari, 2018. “Financial Accounting”,
Vikas Publishing House, New Delhi.
Sehgal, Ashok, and Deepak Sehgal, 2018. “Advanced Accounting”, Part-
I, Taxmann Applied Services, New Delhi.
Tulsian, P.C., 2018. “Advanced Accounting”, Tata Mc Graw Hill, New Delhi.
Materiality, Full Disclosure, Conservatism and Consistency.
Gupta & Chaturvedi., 2018. ‘‘Financial Accounting’’, Shree Mahavir Book
Depot (Publishers), 2603, Nai Sarak New Delhi.
Goel D. K., 2018. Accountancy (Arya Publications), 1569/30 Naiwala,
Karol Bagh, New Delhi 110 005.
Maheshwari, S.N., 2018. Introduction to Accounting, Vikas Publishing
House: New Delhi.
Gupta, R.N. & M.Radhaswamy, 2018. Advanced Accountancy, Sultan
Chand and Sons: New Delhi.
77
Theortical Framework
4.17 TERMINAL QUESTIONS
1. What are Accounting standards? What is the need of issuing accounting
standards?
2. Describe the procedure of issuing AS in India.
3. Explain the concept of IFRS.
4. Describe the convergence of AS to Ind-AS.
5. What is business income? Why income should be computed?
6. What are the principles that govern the measurement of accounting
income?
7. What are the features of Ind-AS 101?

78
 BCOC-131
Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

2
ACCOUNTING PROCESS
UNIT 5
Journal and Ledger 5

UNIT 6
Subsidiary Books 48

UNIT 7
Trial Balance 100
Accounting Process
PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.) Prof. Nawal Kishor
MD University, Rohtak Department of Commerce
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Department of Commerce
Dr. Subodh Kesharwani
Rani Chennamma University
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Faculty Members
Director, SOMS, IGNOU SOMS, IGNOU
Prof. N. V. Narasimham
Prof. A.A. Ansari Prof. Nawal Kishor
Jamia Millia Islamia, New Delhi Prof. M.S.S. Raju
Dr. Sunil Kumar
Ms. Surbhi Gupta Dr. Subodh Kesharwani
Vivekananda College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P. Sarkar
Dr. Anupriya Pandey

COURSE PREPARATION TEAM

Preparatory Course in Commerce: PCO-01
Prof. M.S.S. Raju
(Unit-4, 5 and 6 Revised by Dr. Sunil Kumar) (Course Coordinator & Editor)
Prof. J. Satyanarayan, Osmania University, Hyderabad Dr. Sunil Kumar
Prof. V. Vishwanadham, Osmania University, Hyderabad (Course Coordinator & Editor)
Dr. D. Obul Reddy, Osmania University, Hyderabad
Shri M. Satyanarayana, Badruka College, Hyderabad

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-07-2
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
Printed by :

2
BLOCK 2 ACCOUNTING PROCESS
This block introduces you to the initial stages of recording business transactions
in the books of account. It consists of three units as follows:
Unit 5 deals with the first stage of recording transactions in the books of account
i.e., Journalising and it is also devoted to the second stage of recording
transactions in the books of account i.e., posting into ledger.
Unit 6 identify the need for sub-division of journal and specifies the subsidiary
books usually maintained by business. It concentrates on the preparation of
the most important subsidiary book called Cash Book. It also describes the
nature of various banking transactions as related to business and their recording
in the Three Column Cash Book. It also covers the preparation of the remaining
subsidiary books viz., Purchases Journal, Purchases Returns Journal, Sales
Journal, Sales Returns Journal etc. It also describes the method of posting these
books into related ledger accounts.
Unit 7 deals with the preparation of Trial Balance and discusses its role in
ascertaining the arithmetical accuracy of the books of account. It also describes
the methods of rectification of errors and their effect on profits.
The three units together constitute the basic steps in accounting and facilitate
the initiation into the fundamental recording process.

3
Accounting Process

4
 Journal and Ledger
UNIT 5 JOURNAL AND LEDGER
Structure
5.0 Objectives

5.1 Introduction

5.2 What is Journal?

5.3 Form of the Journal

5.4 Steps in Journalising

5.5 Transactions of Different Types

5.5.1 Transactions Relating to Purchase and Sale of Goods for Cash

5.5.2 Transactions Relating to Purchase and Sale of Goods on Credit

5.5.3 Transactions Relating to Return of Goods

5.5.4 Transactions Relating to Purchase and Sale of Assets

5.5.5 Transactions Relating to Expenses and Incomes

5.5.6 Transactions Relating to other Receipts and Payments of Cash

5.5.7 Transactions Relating to Receipts and Payments by Cheque

5.5.8 Transactions with the Proprietor

5.5.9 Transactions Relating to Cash Discount

5.5.10 Transactions Relating to Bad Debts

5.6 Compound Journal Entry

5.7 Opening Entry
5.8 Casting and Carry Forward
5.9 What is Ledger ?
5.10 Form of a Ledger Account
5.11 Posting in to Ledger
5.12 Posting a Compound Journal Entry
5.13 Balancing Ledger Accounts
5.14 Significance of Balance
5.15 Posting an Opening Entry
5.16 Let Us Sum Up
5.17 Key Words
5.18 Answers to Check Your Progress
5.19 Terminal Questions/Exercises
5.20 Some Useful Books
5
Accounting Process
5.0 OBJECTIVES
After going through this unit, you will be able to:
 explain what journal is;
 analyse a business transaction and identify the accounts affected;
 apply rules of debit and credit, and formulate journal entries;
 prepare journal;
 post the journal entries in the respective ledger accounts;
 balance a ledger account and explain the significance of balance in an
account;
 prepare a trial balance to test the arithmetical accuracy of recording
in the books of account; and
 post an opening entry.

5.1 INTRODUCTION
You are aware that every business transaction involves transfer of money
or money’s worth between two accounts. Recording of transaction is considered
as complete only when both the receiving and the giving aspects are recorded
in the books of account. This recording takes place in two stages. In the
first stage, the transactions are recorded through a book called ‘Journal’
and in the second stage they are entered in the other book called ‘Ledger’.
You have learnt about the different stages of accounting, different classes
of accounts, and the rules of debit and credit. With this background, you
will now be able to analyse the transactions and record them in the book
of original entry i.e., Journal. In this unit, we intend to explain how exactly
the entries are made in the journal. All business transactions are recorded
in the books of account in two stages: (1) Journalising, and (2) Posting
into Ledger. In this unit, you will learn about recording in the ledger. This
involves posting journal entries into various accounts in the ledger, balancing
the accounts periodically, and preparing a Trial Balance to check the arithmetical
accuracy of all accounting entries.

5.2 WHAT IS JOURNAL ?

A Journal is called a book of prime entry (also called book of original entry)
because all business transactions are entered first in this book. The word
‘Journal’ means a daily record. The transactions are recorded in this book
in the order in which they occur i.e., they are entered in a chronological
order. In this book, both aspects i.e., the receiving aspect and the giving
aspect of the transaction, are recorded. The process of recording a transaction
in the journal is called Journalising. The entries made in the journal are called
‘journal entries’.

5.3 FORM OF THE JOURNAL

We shall now study the form of the journal. The form is given in Figure 5.1.
6
 JOURNAL Journal And Ledger

Date (1) Particulars (2) L.F. (3) Dr. Amount (4) Cr. Amount (5)

Fig. 5.1

The journal is provided with five columns. Each of these columns is meant for
recording a specific detail of the transaction.
Column (1) is used for recording the date of the transaction i.e., the date on
which the transaction has occurred. It is customary to write the year at the
top of the column. In the next line, the month is written below the year and
the date of the transaction is entered immediately after the month as follows:
(Year) 2018
(Month,date) Jan. 1
Note that the year and the month are not repeated for every transaction. Ditto
(“) mark is placed below the month to indicate that the month is the same.
Similarly when two or more transactions have taken place on the same day,
ditto mark is placed below the date.
Column (2) is called Particular’s column. This column is meant for recording
the names of the two accounts which are involved in the transaction. This is
also used for writing a brief description about the transaction called ‘narration’.
Let us note carefully the method of writing in this column.
The same of the amount to be debited is written very close to the left hand
side line i.e., the line demarcating the date column and the particulars column.
The abbreviation ‘Dr’ for debit is written on the same line against the name
of the account. The name of the account which is to be credited is written
in the next line preceded by the word ‘To’. Note that it is not written immediately
below the name of the account which has got the debit but a few spaces towards
the right. It is not necessary to write ‘Cr.’ after the name of the account to
be credited. Then, in the next line, a brief description (narration) of the transaction
is given within brackets. The narration would generally begin with a word like
‘Being’ or ‘For’. After completing narration, a line must be drawn across the
entire ‘particulars’ columns to separate one entry from the other.
Let us take an example: Sold goods for cash, Rs. 500 on May 2, 2018.
In this transaction, the two accounts are Cash Account and Goods Account.
You know, as per rules, Cash Account is to be debited and Goods Account
is to be credited. This transaction will be shown in the journal as follows: 7
Accounting Process
Date Particulars L.F. Dr. Amount Cr. Amount

Rs. Rs.
2018 Cash Account Dr.  500
May 2 To Goods Account 500
(Being cash Sale of goods)

Column (3) is known as the L.F. (Ledger Folio) Column. Folio means page number,
so it is meant for writing the number of the page in the Ledger on which the particular
account appears. The account to be debited and the account to be credited are
likely to be on different pages in the Ledger. The page numbers on which these
accounts appear are indicated against the name of each account in this column. This
column is filled at the time of posting into the ledger.
Columns (4) and (5) are called amount columns. Column (4) is called the debit
amount column and column (5) is called the credit amount column. The amount to
be debited is entered in the debit amount column against the name of the account,
and the amount to be credited is entered in the credit amount column against the
name of the account. Both the amounts will always be equal, as you have observed
in the case of the above example.

5.4 STEPS IN JOURNALISING

In recording various business transactions in the journal, the most important aspect
is the entry in the ‘Particulars’ column. Any mistake in this regard would lead to
incorrect accounting. Hence, you should analyse the transaction carefully before
making such entries. The following steps shall help you to do such analysis:
1. Take up the transaction, one by one. Read and analyse the transaction carefully
from the business entity point of view, and identify the two accounts that are
being affected by the transaction.
2. You are aware that accounts have been classified as personal, real and nominal
accounts. Hence, after identifying the two accounts that are affected by the
transaction, you must determine, in respect of each account, whether it is a
personal account or a real account or a nominal account.
3. Each class of account has its own rule of debit and credit, which you have
already learnt. Now, apply the relevant rules and decide which account is to be
debited and which is to be credited.
The three steps explained above will have to be repeated in respect of every
transaction. We have simply reinforced the point here to help you to journalise
correctly.
Besides identifying the accounts to be debited and credited, you should be equally
careful about the date of the transaction and the amounts with which each account is
to be debited or credited. Now let us take a transaction, analyse it and see how a
complete journal entry will be made.
Sold goods to Saran Brothers on credit for Rs. 500 on January 3, 2018
Step 1: From the business point of view, it is a sale of goods on credit. In this case,
the receiving aspect is Saran Brothers (as they receive the goods) and the giving
aspect is Goods (as goods go out). So, the two accounts affected are ‘Saran Brothers’
8 Account’ and ‘Goods Account’.
Step 2: The next step is to classify the accounts identified in the Step 1. You are Journal and Ledger
aware that Saran Brothers’ Account is a personal account because it relates to
persons, and Goods Account is a real account as it relates to property of the business.
Step 3: The rule for personal accounts is ‘debit the receiver and credit the giver’.
Saran Brothers receive the goods. So, Saran Brothers’ Account will be ‘debited’.
The rule for real accounts is ‘debit what comes in and credit what goes out’. Goods
go out of business. So, Goods Account will be credited.
Having identified that Saran Brothers’Account is to be debited and Goods
Account is to be credited, the entry will be recorded in the journal as follows:
Date Particulars L.F. Dr. Amount Cr. Amount

Rs. Rs.
2018 Saran Brothers Dr.  500
Jan. 3 To Goods Account 500
(Being goods sold on credit)

Check Your Progress A

1. State whether the following are True or False:
a) Journal is a book of original entry.
b) Journal records all transactions in a business in the order in which they
occur.
c) The process of recording a transaction is called posting.
d) In the journal entry ‘Dr.’ must be written against the name of the
account debited, and ‘Cr.’ against the name of the account credited.
e) Narration must be written for every transaction entered in the Journal.
2. What are the steps to be followed in journalising the business transaction?
..................................................................................................................
..................................................................................................................
..................................................................................................................
..................................................................................................................

5.5 TRANSACTIONS OF DIFFERENT TYPES

Study carefully the following illustrations where entries for particular type of
transactions are presented. Later, some comprehensive illustrations will be given
which shall include transactions of all types.
5.5.1 Transactions Relating to Purchase and Sale of Goods
for Cash
Most common transactions in business relate to buying and selling of goods. Purchase
and sale of goods can take place either on cash basis or on credit basis. In illustration
1, we take up transactions relating to purchase and sale of goods for cash.
Illustration 1
Enter the following transactions in the journal. 9
Accounting Process 2018 Jan. 1. Bought goods for cash 38,000
2. Sold goods for cash 2,500
3. Purchased goods for cash from Ajeet 8,000
4. Sold goods to Kishan for cash 3,500
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

Rs. Rs.
2018 Goods Account Dr. 38,000
Jan. 1 To Cash Account 38,000
(Being cash purchase of goods)
“ 2 Cash Account Dr. 2,500
To Goods Account 2,500
(Being cash sale of goods)
“ 3 Goods Account Dr. 8,000
To Cash Account 8,000
(Being cash purchase of goods)

“ 4 Cash Account Dr. 3,500

To Goods Account 3,500
(Being cash sale of goods)

If you carefully go through the four transactions given above, you will notice that in
the first two transactions, there is no mention of the names of the parties with whom
the transactions took place. In the other two transactions, the names of the parties
concerned are clearly given. However, it has not made any difference in the journal
entries. They remain the same, because while recording cash purchase or cash sale
it is not necessary to involve personal accounts of the parties concerned. For the
business, the dual effect of such transactions is only on (i) cash account, and (ii)
goods account.

5.5.2 Transactions Relating to Purchase and Sale of Goods

on Credit
In case of purchase and sale of goods on credit, cash is not paid immediately. The
settlement of the account is postponed to a later date. Hence, while recording such
transactions, it is necessary to involve the personal accounts of the parties concerned.
In case of credit sale, the personal account of the buyer is debited. He becomes a
debtor, signifying that the party is under an obligation to pay later. Similarly, in case
of credit purchase, the personal account of the party is credited. He becomes a
creditor, signifying that the business is under an obligation to pay them at a later date.
Now let us consider some transactions of purchase and sale of goods on credit and
understand how they are recorded in journal.
Illustration 2
Journalise the following transactions:
2018 Rs.
March 1 Sold goods to Anand on credit 18,000
“ 4 Bought goods on account from Ram 48,000
10 “ 6 Purchased goods from Shyam 13,000
Solution: Journal and Ledger

JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount
Rs. Rs.
2018 Anand’s Account Dr. 18,000
March 1 To Goods Account 18,000
(Being goods sold on credit)
March 4 Goods Account Dr. 48,000
To Ram’s Account 48,000
(Being goods purchased on credit)
March 6 Goods Account Dr. 13,000
To Shyam’s Account 13,000
(Being goods purchased on credit)

You have seen that it is necessary to involve the personal account of the party, when
purchase or sale of goods is on credit. You must have noticed that terms like ‘on
credit’ and ‘on account’ indicate that it is a credit transaction. It is not always necessary
to use such terms. For example, transactions can be worded as ‘Bought goods from
Mahesh’, ‘Sold goods to Suresh’, without using the terms ‘on ‘on credit’ or ‘on
account’. These are also credit transactions.
Sometimes a transaction may merely read as ‘bought goods’ or ‘sold goods’. Here
it is not clearly stated whether these are cash or credit transactions. Remember that
in case of a credit transaction, the name of the party concerned is always given. In
the above transactions, names of the parties concerned are not stated. Hence,
these shall be treated as cash transactions.
Check Your Progress B
1. Explain the distinction between cash and credit transactions.
................................................................................................................
................................................................................................................
................................................................................................................
2. Some transactions are given below. State whether they are cash transactions
or credit transactions.
Transaction State whether a cash
transaction or a credit
transaction
a) Bought from Rahul, goods worth
Rs. 10,000 .
b) Purchased goods for Cash, Rs. 5,000
from Tagore
c) Bought on account from Bose, goods for
Rs. 8,000
d) Bought goods for Rs. 16,000
e) Sold goods to Chatterjee Rs. 2,000
11
Accounting Process
f) Sold goods to Trivedi for cash Rs. 3,000

g) Sold goods to Lal on account, Rs. 4,000

h) Sold goods Rs. 6,000

5.5.3 Transactions Relating to Return of Goods

Goods may be returned for various reasons. When goods are returned by a customer,
his liability to that extent gets reduced. Hence, it is necessary to give him a credit for
the goods returned. Similarly, when the business returns some goods to its supplier,
the liability of the business stands reduced to that extent. Hence, the supplier’s account
will be debited.
Illustration 3
Journalise the following transactions:
2018 Rs.
April 10 Anand returned goods 500
“ 12 Returned goods to Ram 700
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount
Rs. Rs.
2018 Goods Account Dr. 500
April 10 To Anand’s Account 500
(Being goods returned by Anand
April 12 Ram’s Account Dr. 700
To Goods Account 700
(Being goods returned by Anand)
Note: In illustrations 1, 2 and 3 above you find that all transactions relating to
goods (be it purchase, purchase return, sale or sale return) have been recorded
through the Goods Account. However, it would be more purposeful and convenient
to record different types of transactions relating to goods, through separate accounts.
This helps you to ascertain the amount of purchase and sale for a given period more
quickly and correctly. Hence, in practice, instead of one Goods Account, five
separate accounts are maintained, as shown below:
i) For recording all cash and credit purchases of goods—Purchases Account.
ii) For recording all cash and credit sales of goods—Sales Account.
iii) For recording goods returned to suppliers—Returns Outward Account or
Purchase Returns Account.
iv) For recording goods returned by customers—Returns Inward Account or Sales
Returns Account.
v) For goods in stock as at the end of the year—Stock Account.
In the comprehensive illustrations 9 and 10, entries have been made according to
the above practice. Purchase of goods has been debited to Purchases Account, and
sale of goods has been credited to Sales Account, and so on.
12
5.5.4 Transactions Relating to Purchase and Sale of Assets Journal and Ledger

Assets like machinery, furniture, vehicles, etc. are brought for use in the business
and not for resale. Hence, when an asset is bought, the particular asset account is
debited. Similarly, when an asset is sold, the account of that asset is credited.
Assets may also be bought for cash or on credit. You have already noted the difference
in the treatment of transactions relating to cash and credit purchases. The same
treatment is followed in case of transactions relating to purchase and sale of assets.
Illustration 4
Journalise the following transactions:
2018 Rs.
May 1 Purchased buildings 1,75,000
“ 4 Sold old machinery to Joshi 1,500
“ 8 Bought furniture from Gopal & Company for cash 1,10,000
“ 9 Bought motor vehicles from Allied Motors 90,000
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount
Rs. Rs.
2018 Building Account Dr. 1,75,000
May 1 To Cash Account 1,75,000
(Being building purchased)
“ 4 Joshi’s Account Dr. 1,500
To MachineryAccount 1,500
(Being machinery sold to him)
“ 8 Furniture Account Dr. 1,10,000
To Cash Account 1,10,000
(Being furniture purchased)
“ 9 Motor Vehicle Account Dr. 90,000
ToAllied Motor’s Account 90,000
(Being motor vehicles purchased)

5.5.5 Transactions Relating to Expenses and Incomes

You know the expenses and incomes are generally paid/received in cash. So in case
of expenses, we debit the concerned expense account and credit cash account. In
case of incomes, we debit cash account and credit the concerned income account.
Now let us take some examples of such transactions.
Illustration 5
Journalise the following transactions:
2018 Rs.
April 2 Paid salaries 18,000
“ 3 Paid rent to landlord Rajesh 2,000
“ 6 Received interest on investments 1,300
“ 7 Received commission from Mahesh 1,900 13
Accounting Process
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

May 2 Salaries Account Dr. 18,000
To Cash Account 18,000
(Being salaries paid)
May 3 Rent Account Dr. 2,000
To Cash Account 2,000
(Being rent paid)
May 6 Cash Account Dr. 1,300
To Interest Received Account
(Being interest received 1,300
on investments)
May 7 Cash Account Dr. 1,900
To Commission Received
Account 1,900
(Being commission received)

In the second transaction in the above illustration, rent was paid to Rajesh, the
landlord, but the debit has been given to the nominal account (Rent Account) and
not to the personal account of Rajesh. Similarly, when commission was received
from Mahesh (fourth transaction), it is the Commission Received Account that has
been credited and not the personal account of Mahesh who paid the commission.
This is so because these are cash transactions, and no debtor/creditor relationship is
created as there is no obligation yet to be fulfilled.
There is another point to be noted in this context. In illustration 5, you have seen that
when rent is paid, Rent Account has been debited (it is an expense) and when
interest is received, Interest Received Account has been credited (it is an income).
In business, certain nominal accounts like Salaries Account, Wages Account, and
Postage Account would involve only payments, as these will always be expenses.
But certain other items like interest, commission, rent, etc., can sometimes be an
expense, sometimes an income. In such case, it is better to maintain separate accounts
for their payments and receipts.

5.5.6 Transactions Relating to other Receipts and Payments

of Cash
Apart from cash purchase, cash sale, payment of expenses, and receipt of incomes,
there are many other transactions which involve movement of cash. For example,
the business may receive cash from its debtors (customers from the goods were
sold on credit), pay cash to creditors (suppliers of goods on credit), receive or
repay loan, etc. In the earlier illustrations, you have learnt that whenever cash is
paid, Cash Account is credited, and whenever cash is received, Cash Account is
debited. The same treatment will be applicable to the other cash transactions as
given in illustration 6
Illustration 6

14 Enter the following transactions in the journal:

 Journal and Ledger
2018 Rs.
April 1 Received cash from Anand, on account 9,000
“ 2 Paid to Ram on account 6,000
“ 3 Took a loan from Chetan 30,000
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

April 1 Cash Account Dr. 9,000
To Anand’s Account 9,000
(Being cash received on account)
“ 2 Ram’s Account Dr. 6,000
To Cash Account 6,000
(Being cash paid on account)
“ 3 Cash Account Dr. 30,000
To Loan from Chetan Account 30,000
(Being loan taken)

In business, sometimes loans are taken to augment the capital invested by the
proprietor. In such cases, the word ‘loan’ is added to the name of the party concerned
to distinguish this account from the other accounts. For example, in illustration 6, a
loan was taken from Chetan, the credit was given to Loan from Chetan Account
and not to Chetan’s Account.
Similarly, a business unit may give a loan. In such a case, also the word loan is added
to the name of the account. For example, a business unit has given loan to Sohan,
the debit will be given to Loan to Sohan Account, and not to Sohan’s Account.

5.5.7 Transactions Relating to Receipts and Payments by

Cheque
So far, all payments and receipts which have been discussed were in the form of
cash. But you know that payments and receipts are also made through cheque.
Although we intend to discuss the various banking transactions later. You must at
this stage, learn about the journal entries for payments and receipts by cheque.
When payment is made by cheque the credit will be given to Bank Account because
the bank balance will be reduced. Similarly, when payment is received by cheque,
the amount will be debited to Bank Account as the cheque is deposited in the bank
which increases the bank balance. Some examples are given in illustration 7.
Illustration 7
Journalise the following transactions:
2018 Rs
April 2 Paid to Ram on Account by cheque 9,000
“ 4 Received cheque from Shiva on account 6,000
15
Accounting Process JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

April 2 Ram’s Account Dr. 9,000
To Bank Account 9,000
(Being paid to him by cheque)
“ 4 Bank Account Dr. 6,000
To Shiva’s Account 6,000
(Being ammount received from
him by cheque)

5.5.8 Transactions with the Proprietor

You have already learnt that the business and its proprietor are treated as separate
entities. This necessitates maintaining of separate accounts in the ledger for recording
the transactions between the proprietor and the business. Whatever the proprietor
brings into the business is treated as capital and is credited to the Capital Account.
Similarly, when the proprietor withdraws cash from the business for his personal use
he is debited with the amount withdrawn. Such debit is given to a separate account
called Drawings Account. Drawings Account is also debited when the proprietor
takes goods from business for his domestic use.
As explained earlier, both the Capital Account and the Drawings Account are treated
as personal accounts belonging to the proprietor. Some examples of transactions
with the proprietor are given in illustration 8.
Illustration 8
Enter the following transactions in the Journal:
2018 Rs.
May 1 Ganesh commenced business with a capital of 1,00,000
“ 2 He withdraw cash for personal use 7,000
“ 3 He introduced additional capital 18,000
“ 4 He took goods for domestic use 1,000
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

May 1 Cash Account Dr. 1,00,000
To Capital Account 1,00,000
(Being capital bought in)
‘‘ 2 Drawings Account Dr. 7,000
To Cash Account (Being cash 7,000
ithdrawn for personal use)
‘‘ 3 Cash Account Dr. 18,000
To Capital Account (Being 18,000
additional capital brought in)
‘‘ 4 Cash Account Dr. 1,000
To Capital Account 1,000
(Being additional capital brought in)
16
5.5.9 Transaction Relating to Cash Discount Journal and Ledger

You have learnt earlier about two types of discounts allowed to customers: (i) trade
discount, and (ii) cash discount. Trade discount is not shown in the books of account
since it is adjusted in the invoice itself and the entry in the books of account is made
for the net amount only. But the case of cash discount is different. At the time of sale,
the buyer is debited with the net amount of the invoice. Later if cash discount is
allowed at the time of payment, it must be adjusted in the personal account of the
debtor. This would show that his account stands cleared, and nothing more remains
due.
When cash discount is allowed to the debtor, it is a loss to the business and so
debited to Discount Allowed Account and credited to the personal account of the
debtor. Similarly, when cash discount is allowed by the creditor, it is a gain to the
business so it is credited to Discount Received Account and debited to the personal
account of the creditor.
The entries relating to cash discount shall be illustrated under compound journal
entry.
5.5.10 Transactions Relating to Bad Debts
When a debtor becomes insolvent, the business shall not be able to realise full amount
due from him. A part of it will remain unrealised. The unrealised amount is called
‘bad debt’. It is a loss to the business and so debited to Bad Debts Account, and
credited to the personal account of the debtor.
If the amount treated as bad debts is recovered later on, the same shall be
a gain to the business. Hence, it will be credited to Bad Debts Recovered
Account and debited to Cash Account. Note that the bad debts so recovered
shall not be credited to the personal account of the debtor.
Look at journal entry from transaction on April 10 under illustration 12 and see how
bad debts are recorded.
Illustration 9
Ramesh commenced business on January 1, 2018. His transactions for the month
are given below. Journalise them.
2018 Rs.
Jan. 1 Commenced business with a capital of 1,50,000
“ 2 Bought goods from Ajeet and Co. 35,000
“ 3 Sold goods for cash 6,000
“ 4 Purchased furniture 6,000
“ 7 Purchased goods on account from Gautam & Co. 18,000
“ 8 Returned goods to Gautam & Co. 600
“ 8 Paid for advertisement 1,000
“ 10 Cash sales 5,000
“ 13 Sold goods to Venkat 6,000
“ 14 Venkat returns goods 400
“ 19 Paid Ajeet and Co. on account 18,000
17
Accounting Process “ 25 Paid office expenses 300
“ 26 Received from Venkat on account 3,000
‘‘ 31 Paid salaries 5,000
“ 31 Drew cash for private expenses. 3,000
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

Jan. 1 Cash Account Dr. 1,50,000
To Capital Account 1,50,000
(Being capital bought in)
“ 2 Purchase Account Dr. 35,000
To Ajeet and Co’s Account 35,000
(Being credit purchase)
“ 3 Cash Account Dr. 6,000
To Sales Account 6,000
(Being cash sales)
“ 4 Furniture Account Dr. 8,000
To Cash Account 8,000
(Being furniture purchased)
“ 7 Purchase Account Dr. 18,000
To Gautam & Co’s Account 18,000
Being credit Purchases)
“ 8 Gautam & Co’s Account Dr. 600
To Returns Outwards Account 600
(Being goods returned to Gautam
& Co.)
“ 8 Advertisement Account Dr. 1,000
To Cash Account 1,000
(Being payment, for advertisement)
“ 10 Cash Account Dr. 5,000
To Sales Account 5,000
(Being cash sales)
“ 13 Venkat’s Account Dr. 6,000
To Sales Account 6,000
(Being credit sales)
“ 14 Returns Inwards Account Dr. 400
To Venkat’s Account 400
(Being goods returned by Venkat
“ 19 Ajeet Co’s Account Dr. 18,000
To Cash Account 18,000
(Being cash paid on account)
18
 Journal and Ledger
“ 25 Office Expenses Account Dr. 300
To Cash Account 300
(Being office expenses)
“ 26 Cash Account Dr. 3,000
To Venkat’s Account 3,000
(Being cash received on account)
“ 31 Salaries Account Dr. 5,000
To Cash Account 5,000
(Being salaries paid)
“ 31 Drawings Account Dr. 3,000
To Cash Account (Being 3,000
cash withdrawn for personal use)
Illustration 10
Journalise the following transactions:
2018 Rs.
June 1 Cash sale to Ashok 1,800
“ 2 Bought goods from Vinod 10,000
“ 3 Old newspapers sold 100
“ 4 Paid Municipal taxes by cheque 900
“ 4 Paid for repairs to machinery 600
“ 8 Received commission by cheque 1,700
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount
2018 Rs. Rs.
June. 1 Cash Account Dr. 1,800
To Sales Account 1,800
(Being cash sales)
“ 2 Purchase Account Dr. 10,000
To Vinod’s Account 10,000
(Being credit purchase)
“ 3 Cash Account Dr. 100
To Miscellaneous Income Account 100
(Being the income received by
sale of old newspaper)
“ 4 Municipal Taxes Account Dr. 900
To Bank Account (Being 900
Municipal taxes paid by cheque)
“ 4 Repairs Account Dr. 600
To Cash Account 600
(Being repairs to machinery)
“ 8 Bank Account Dr. 1,700
To Commission Account 1,700
(Being commission received
by cheque) 19
Accounting Process Check Your Progress C
1. Name the accounts which are maintained in lieu of Goods Account.
i) .........................................................................................................
ii) .........................................................................................................
iii) .........................................................................................................
iv) .........................................................................................................
v) .........................................................................................................
2. Select the best answer.
a) The amount bought in by the proprietor in the business, should be credited
to :
i) Proprietor’s Account
ii) Drawings Account
iii) Capital Account
b) Purchase of furniture should be debited to
i) Furniture Account
ii) Goods Account
iii) Equipment Account
c) Return of goods to a supplier should be credited to
i) Goods Account
ii) Returns Outward Account
iii) Supplier’s Account
d) Wages paid to Billu should be debited to
i) Billu’s Account
ii) Cash Account
iii) Wages Account
e) Loan taken from Krishna should be credited to
i) Krishna’s Account
ii) Loan from Krishna Account
iii) Bank Account
f) Payment made by cheque should be credited to
i) Bank Account
ii) Cheque Account
iii) Cash Account
20
 g) Cash discount allowed to a debtor should be debited to Journal and Ledger

i) Customer’s Account
ii) Allowances Account
iii) Discount Allowed Account
h) In case of bad debts, the amount should be debited to
i) Debt Account
ii) Bad debts Account
iii) Discount Allowed Account
3. Distinguish between trade discount and cash discount.
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
4. What is bad debt?
.................................................................................................................
.................................................................................................................
.................................................................................................................
5. How do you deal with the amount treated as bad debt which is recovered later
on?
.................................................................................................................
.................................................................................................................
.................................................................................................................

5.6 COMPOUND JOURNAL ENTRY

You have seen transactions which involve only two accounts. Sometimes, a transaction
may involve more than two accounts. Sometimes, there may be more transactions
of the same nature taking place on the same date. In such situations, if we pass
separate journal entries, it may take more time and also require more space. Hence,
such transactions may be recorded by means of a single journal entry. Such an entry
is called a ‘compound journal entry’. It may be recorded in the following three
ways:
a) by debiting one account and crediting two or more accounts; or
b) by debiting two or more accounts and crediting one account; or
c) by debiting several accounts and crediting several accounts.
Take, for example, the following transactions:
21
Accounting Process a) Paid cash to Ganesh Rs. 490. He allowed Rs. 10 as discount and
settled his account. This transaction involves three accounts: (i) Ganesh’s
Account, (ii) Cash Account, and (iii) Discount Received Account. The journal
entry will be:
Rs. Rs.
Ganesh’s Account Dr. 500
To Cash Account 490
To Discount Received Account 10
(Being cash paid to him in full settlement of the account)
b) Sold goods to Rao & Sons Rs. 800 and Sharma Bros. Rs. 500, on
May 5, 2018.
These two transactions are of the same nature and have taken place on the
same date. Their entries can be combined by passing the following compound
journal entry.
Rs. Rs.
Rao & Sons Account Dr. 800
Sharma Bros. Account Dr. 500
To Sales Account 1,300
(Being sale made)
c) A running business with the following assets and liabilities was
purchased from Tularam for Rs. 64,000
Building Rs. 40,000 Furniture Rs. 12,000
Stock Rs. 20,000 Creditors Rs. 8,000
The journal entry will be: Rs. Rs.
Building Account Dr. 40,000
Furniture Account Dr. 12,000
Stock Account Dr. 20,000
To Creditors 8,000
To Tularam’s Account 64,000
(Being assets and liabilities taken over)

5.7 OPENING ENTRY

When a new accounting year begins, the previous year’s balances in different
accounts are brought forward to the new books of accounts. This is done by
means of a journal entry called ‘opening entry’. In this entry, all assets accounts
are debited and liabilities accounts (including owner’s capital account) are
credited. If, however, capital account balance is not given, it can be worked
out by deducting other liabilities from the total assets. This will become clear
from illustration 11.
22
Illustration 11 Journal and Ledger

Mr. Avinash has the following balances of assets and liabilities on December 31,
2018.
Cash in hand Rs. 2,500 Stock of goods Rs. 22,500
Furniture Rs. 5,000 Bank Loan Rs. 10,000
Pass the opening entry on January 1, 2019.
Solution:
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2019 Rs. Rs.

June. 1 Cash Account Dr. 2,500
Stock Account Dr. 22,500
Furniture Account Dr. 5,000
To Bank Loan Account 10,000
To CapitalAccount (Being 20,000
balances brought forward from
the previous year)

Check Your Progress D

1. What is a Compound entry ?
..............................................................................................................
..............................................................................................................
..............................................................................................................
2. Complete the following sentences:
a) A compound entry is passed for transactions involving …………
b) A compound entry is passed if there are more transactions of same
nature on…………………………………
c) A compound entry can be passed by debiting one account and
crediting……………..
d) A compound entry can be passed by crediting one account and
debiting…………
e) In opening entry, all assets are debited and all are credited … ………
3. On December 31, 2018, the assets and liabilities of Chemico Industries
were as follows:
Machinery Rs. 11,000 Furnitur Rs. 3,000
Stock Rs. 24,000 Debtors Rs. 17,000
Cash Rs. 3,000 Creditors Rs. 29,600
Loan Rs. 5,400
Calculate the capital of M/s Chemico Industries as on January 1, 2019 to
enable you to pass an opening entry. 23
Accounting Process
5.8 CASTINGAND CARRY FORWARD
Journal is totalled periodically (daily or weekly), depending upon the volume of
business and the number of transactions. Totalling is called ‘casting’. You have to
total both the debit amount column and the credit amount column. Since every debit
has an equal and corresponding credit, the totals of the two columns should always
be equal. If, however, they do not tally, it implies that there is some error. In that
case, you must go through the entire work and locate the error and get the correct
total.

When the transactions during a particular period are many and cannot be journalised
in the same page, then it would be necessary to total the two amount columns on
that page and carry forward the total to the next page. This is done by writing ‘Total
c/f’ against the totals in the particulars column and entering the amount in both amount
columns. These totals are then brought forward on the next page by writing ‘Total b/
f’ in the particulars column and entering the amount in both the amount columns. You
must draw a line in the particulars column before making the remaining entries in the
journal.

Illustration 12

Enter the following transactions in the journal:

2018

April 1 Bought an almirah for Rs. 450, and paid Rs. 30 for cartage.

“ 2 Proprietor took away goods worth Rs. 200 for personal use.

“ 3 Gave goods worth Rs. 100 in charity.

“ 4 Sold an old machine for Rs. 2,000.

“ 5 Paid insurance premium Rs. 90.

“ 6 Purchased goods worth Rs. 5,000 for cash less 20 trade discount.

“ 7 Received Rs. 980 from Kisan Chand, and allowed him Rs. 20 cash
discount.

“ 8 Rs. 500 were due to Ghanshyam. Paid Rs. 480 in full settlement of his
account.

“ 9 Cash of Rs. 560 was stolen from the cash box.

“ 10 Han Singh, a debtor became insolvent. He owed Rs. 400. A final

composition of 50 paise in a rupee was received.

“ 11 Sold goods to Karim Rs. 800.

“ 12 Paid into bank Rs. 400.

24
Solution: Journal and Ledger
JOURNAL
Date Particulars L.F. Dr. Amount Cr. Amount

2018 Rs. Rs.

June.1 Furniture A/c Dr. 480
To Cash A/c (Being Purchase of 480
an almirah for Rs. 450, Cartage
paid Rs. 30)
“ 2 Drawings A/c Dr. 200
To Purchases A/c (Being goods 200
taken away by the proprietor for
personal use)
“ 3 Charity A/c Dr. 100
To Purchases A/c (Being goods 100
given in charity)
“ 4 Cash A/c Dr. 2,000
To Machinery A/c (Being sale of 2,000
old machinery)
“ 5 Insurance A/c Dr. 90
To Cash A/c (Being payment of 90
insurance premium)
“ 6 Purchase A/c Dr. 4,000
To Cash A/c
(Being purchase of goods) 4,000
“ 7 Cash A/c Dr. 980
Discount Allowed A/c Dr. 20
To Kishan Chand 1000
(Being cash received from him,
discount allowed Rs. 20)
“ 8 Ghanshyam Dr. 500
To Cash A/c
To Discount Received A/c 480
(Being cash paid to him, discount 20
received Rs. 20)
“ 9 Loss by Theft A/c Dr. 560
To Cash A/c (Being loss by theft) 560
“ 10 Cash A/c Dr. 200
Bad Debts A/c Dr. 200
To Hari Singh (Being cash 400
received from him, discount
allowed Rs. 20)
“ 11 Karim Dr. 800
To Sales A/c (Being credit sales) 800
“ 12 Bank A/c Dr. 400
To Cash (Being cash paid 400
into bank)
10,530 10,530
25
Accounting Process
The following clarifications with regard to Some transactions will help you to
understand their journal entries.
Transaction 1. Rs. 30 paid as cartage have been included in the cost of the
furniture purchased and debited to Furniture Account. You know, furniture is a
fixed asset. Any expenditure incurred in relation to the purchase of a fixed asset
is included in the cost of the fixed asset and as such debited to that asset itself.
Transaction 2. When goods are taken away by the proprietor for his personal
use, it is treated as his drawings and so debited to Drawings Account. Further,
the proprietor can be charged with only the cost of the goods taken and not the
selling price. Hence, it is considered appropriate to reduce the purchases of the
business by the amount of goods taken by him, as if the goods were purchased
partly for the business and partly for the proprietor.
Transaction 3. The argument applicable to transaction 2 also holds good for the
goods given in charity.
Transaction 5. Note that the amount paid as insurance premium is debited to
Insurance Account and not to Insurance Premium Account. The premium is just
an instalment for an insurance policy taken to cover the risk. The head of account
is insurance.
Transaction 6. The entry has been made for the net amount only. Nothing has
been debited to Discount Account. You have learnt that debit to Discount Account
is needed only in case of cash discount and not in case of trade discount.
Transaction 10. Hari Singh became insolvent. Only half the amount due could
be recovered from him. The balance is bad debt. It is a loss to the business and
so has been debited to Bad Debts Account.
You would observe a few more points in the above illustration
a) Instead of writing full word ‘Account’ its abbreviation ‘A/c’ has been used.
This is what we normally do. In fact the current practice is not to write
anything, just the name of the account is enough.
b) The word ‘Account’ or its abbreviation ‘A/c’ has not been used against
personal names. This again is a common practice. Writing ‘A/c’ is confined
to real and nominal accounts only.
c) While carrying forward the total from one page to another, no lines have
been drawn below the totals. A line is drawn only in the particulars column
after writing ‘Total b/f’.

5.9 WHAT IS LEDGER?

Ledger is a book which contains all accounts affected by various transactions in
a business. Ledger can be termed as a classified and summarised record of
business transactions relating to all personal, real and nominal accounts.
All transactions which are first recorded in the journal, must invariably be posted
into the concerned accounts in the ledger. This is necessary because Journal is just
a chronological record of transactions, identifying the accounts to be debited and
credited. It does not help us to know the net effect of various transactions
26 affecting a particular account. This can only be achieved by recording the effect
of all transactions on each account at one place. Let us illustrate this. Suppose, Journal and Ledger
Mohan Brothers have been selling goods on credit to Suresh. Suresh is allowed
to make part payments and make further purchases even before the old balance
is cleared. No doubt, all transactions relating to the goods sold to him and the
amounts received from him would be duly recorded in the journal (or its sub-
divisions). But the journal, by itself, will not be in a position to readily provide
information as to whether Suresh, at a given point of time, owes them any money
and if so, how much. This is because the entries for transactions with him have
been made at different places in the journal and you will have to go through all
entries to obtain the required information. If however, all sales made to Suresh
and the amounts received from him are shown at one place, say, in Suresh’s
Account in the ledger, the required information would be readily available. This
is true of all accounts, be they personal accounts, real accounts or nominal
accounts.
Ledger, thus is a book where all accounts are maintained and into which all
journal entries are posted. As all transactions must ultimately be recorded in the
respective accounts, the ledger is called the ‘Book of Final Entry’. it is also called
the ‘Principal Book of Accounts’. In fact transactions can even be directly recorded
into various ledger accounts. But, normally, this is not done because in that case
we will not have any date wise record of all transactions and the details thereof.
Such record is necessary for future reference.
To sum up (i) the ledger contains all the personal, real and nominal accounts, (ii)
the ledger is a permanent, ultimate and up-to-date record of all transactions, and
(iii) the ledger provides a means of easy and ready reference.
The ledger is a bound volume with the pages numbered consecutively. Alphabetical
index is also shown at the beginning so that the page in which an account appears
can be easily ascertained. In certain modern business, loose-leaf ledgers are
maintained, instead of one bound volume. Banks maintain loose-leaf ledgers for
customer’s deposit accounts.

5.10 FORM OF A LEDGER ACCOUNT

As stated earlier, an account is the summarised record of all the transactions
relating to a particular person or an item. The form of an account is given below:

NAME OF THE ACCOUNT

Dr. Cr.

Date Particular Folio Amount Date Particular Folio Amount

Rs. Rs.

You are already familiar with ‘T’ form of an account. A page is folded vertically in
the middle to make it into two halves. Actually, folding is not necessary as usually
pre-printed books are available. Sometimes, two pages are taken together as a unit.
In that case, the entire page on the left hand side is considered as the debit side and
the other page on the right hand side is treated as the credit side.
27
Accounting Process The columns in ledger account are very much similar to those in journal. In the
journal, you have two amount columns because the dual aspect of each transaction
has to be analysed and presented side by side. In the ledger account, the first
three columns of the journal, viz., date, particulars and folio, appear on both the
debit and the credit side and so also the amount column. However, the column
meant for entering the page number in ledger is merely called .‘folio’, whereas in
the journal it is called ‘ledger folio’. It is important to note this similarity at the
outset, as it would make ledger posting an easy task.
Let us look at the form of ledger account once again. In the middle of the top
of the account, the ‘Name of the Account’ is given. It will be written as ‘Shyam’s
Account’, or ‘Furniture Account’ or ‘Rent Account’, as the case may be. You
also find that Dr. and Cr. appear at the two extreme ends of the top line of the
account. The left hand side is designated as debit side and is indicated by writing
‘Dr.’ on the left hand top corner. Similarly, ‘Cr.’ is written on the right hand top
corner to indicate the credit side. When an account is to be debited, the entry is
made on the debit side and when it is to be credited, the entry is made on the
credit side.

5.11 POSTING IN TO LEDGER

The journal entries form the basis for recording in the ledger accounts, and the
process of entering transaction in the ledger is called ‘Posting’. When a journal
entry has to be posted in the concerned ledger accounts, the following procedure
is adopted.
1. Every journal entry will have to be posted into all those accounts which have
been debited and credited in the journal entry. For example, for cash sales,
Cash Account is debited and Sales Account is credited in the journal. When
this entry is posted in the ledger, it must be posted in Cash Account as well
as in Sales Account.
2. Posting will be made on the debit side of the account which has been debited
in the journal, and the credit side of the account which has been credited in
the journal. In case of above example of the cash sales, posting will be made
on the debit side of Cash Account, as it has been debited in journal and the
credit side of Sales Account, as it had been credited in the journal.
3. Whether the posting is made on the debit side or the credit side, first of all
the date of the transaction (as given in the journal) will be entered in the date
column. The method of recording the date in the ledger account is the same
as in journal.
4. While posting on the debit side of an account, in the particulars column, we
shall write the name of the account which had been credited in the journal
and add the word ‘To’ before the name. Similarly while posting on the credit
side of an account, we shall write the name of the account which has been
debited in the journal and add the word ‘By’ before the name. In case of
the above example, we shall write ‘To Sales A/c’ in particulars column on
the debit side of Cash Account and ‘By Cash A/c’ in particulars column on
28 the credit side of the Sales Account.
5. The journal entries contain ‘narration’. But it is not required in the ledger Journal and Ledger
accounts. Similarly, there is no need to draw a line between the two entries
in an account as is done in the journal. Note that posting in the ledger
account is considered complete only when both the debit and the credit
aspects of all journal entries have been posted.
6. In the folio column, we shall mention the page number of the journal where
the concerned journal entry appears. At the same time, the page number of
the ledger accounts will be entered in the ‘L.F.’ column in the journal so as
to complete the cross reference.
7. The amount involved in the journal entry shall be entered in amount columns
of both the accounts.
Now let us take a transaction, Journalise it, and then show how the posting is
done in the ledger.
Illustration 13
Purchased machinery for cash, Rs. 50,000 on April 4, 2018. This transation will
appear in the journal and the ledger as under:

JOURNAL

Date Particulars L. F. Dr. Cr.

Amount Amount

2018 Rs. Rs.

Apr.4 Machinery A/c Dr. 50,000
To Cash A/c 50,000
(Being machinery purchased)

LEDGER
Machinery Account
Dr. Cr.

Date Particulars Folio Amount Date Particular Folio Amount

2018 Rs. Rs.

April 4 To Cash A/c 50,000

Cash Account
Dr. Cr.
Date Particulars Folio Amount Date Particular Folio Amount

2018 Rs. 2018 Rs.

April 4 By 50,000
Machinary

Now we take a few more transactions and illustrate further the ledger posting aspect
of the transactions, from the journal entries.

29
Accounting Process Illustration 14
Journalise the following transactions and post them into the ledger.
2018 April Rs.
2" Cash Sales 15,000
2" Paid Salaries 6,000
6" Sold goods to Pankaj 10,000
10" Cash purchases 5,000
13" Paid for stationery 100
18" Goods taken by proprietor for personal use 1,000
23" Bought goods from Manoj 13,000
25" Received from Pankaj on account 4,000
27" Sold goods for cash 4,000
30" Received interest on investments 1,400

Date Particulars L. F. Dr. Cr.

Amount Amount

2018 Rs. Rs.

April 2 Cash Account Dr. 15,000
To Sales Account 15,000
(Being cash sales)
“ 2 Salaries Account Dr. 6,000
To Cash Account 6,000
(Being salaries paid)
“ 6 Pankaj’s Account Dr. 10,000
To Sales A/c 10,000 10,000
(Being goods sold to Pankaj
on credit)
“ 10 Purchases Account Dr. 5,000
To Cash Account 5,000
(Being cash purchase)
“ 13 Stationery Account Dr. 100
To Cash Account 100
(Being stationery purchased)
“ 18 Drawings Account Dr. 1,000
To Purchases Account 1,000
(Being goods taken for
personaluse)
“ 23 Purchases Account Dr. 13,000
To Manoj’s Account (Being goods 13,000
purchased fromManoj on credit)
30
 Journal and Ledger
“ 25 Cash Account Dr. 4,000 4,000
To Pankaj’s Account
(Being the amount received)
“ 27 Cash Account Dr.
To Sales Account 4,000 4,000
(Being cash sales)
“ 30 Cash Account Dr.
To Interest Account (Being interest 1,400 1,400
received on investments)

LEDGER
Cash Account
Dr. Cr.
Date Particular Folio Amount Date Particular Folio Amount
2018 Rs. 2018 Rs.
April 2 To Sales A/c 15,000 April 2 By Salaries A/c 6,000
“ 25 To Pankaj’s A/c 4,000 “ 10 By Furniture A/c 5,000
“ 27 To Sales A/c 4,000 “ 13 By Stationery A/c 100
“ 30 To Interest A/c 1,400
Sales Account
2018 Rs.
April 2 By Cash A/c 15,000
“ 6 By Pankaj’s A/c 10,000
“ 27 By Cash A/c 4,000

Salaries Account
2018 Rs.
April 2 To Cash A/c 6000

2018 Rs. 2018 Rs.

April 6 To Sales A/c 10,000 April 25 By Cash A/c 4,000

Purchase Account
2018 Rs. 2018 Rs.
April 10 To Cash A/c 5,000 April 18 By Drawings A/c 1,000
“ 23 To Manoj’s A/c 13,000
Stationery Account
2018 Rs.
April 13 To Cash A/c 100
Drawings Account
2018 Rs.
April 18 To Purchases A/c 1,000

31
Accounting Process Manoj’s Account
2018 Rs.
April 23 By Purchase A/c 13,000

Interest Account
2018 Rs.
April 30 By Cash A/c 1,400

5.12 POSTING A COMPOUND JOURNAL ENTRY

Normally we post a journal entry into two accounts, on the debit side of one
account and the credit side of the other account. This is because most journal
entries have only two accounts. But it is not so in case of a compound journal
entry which involves more than two accounts. A compound entry will be posted
on the debit side of two or more accounts and the credit side of one account,
or on the debit side of one account and credit side of two or more accounts. This
will depend upon the number of accounts that have been debited and credited in
the journal entry. Take, for example, a journal entry for the following transactions:
On May 31, 2018 Mohan, a customer, paid cash Rs. 950 in settlement of
his account of Rs. 1,000.
The journalentry for this transaction will be:
2018 Rs. Rs.
May 31 Cash A/c Dr. 950
Discount Allowed A/c Dr. 50
To Mohan (Being amount 1,000
received in full settlement)
In this journal entry, two accounts have been debited and one account has been
credited. It will be posted in the debit side of both Cash Account and Discount
Allowed Account, and the credit side of Mohan’s Account. In the Particular column
of the debit side of Cash Account and Discount Allowed Account we shall write ‘To
Mohan’. On the credit side of Mohan’s Account, in Particulars column we shall
write ‘By Cash A/c’, and then in the next line ‘By Discount Allowed A/c’ and show
the respective amounts in the Amount column. See the posting of this compound
journal entry as given below:
Cash Account
2018 Rs.
May 31 To Mohan 950
Discount Allowed Account
2018 Rs.
May 31 To Mohan 50
Mohan’s Account
2018 Rs.
May 31 By Cash A/c 950
“ 31 By Discount Allowed A/c 50
32
Alternatively, in Mohan ‘s Account we can simply write ‘By Sundries’ in Particulars Journal and Ledger
column and show full amount in the Amount column.
The above example should help you to also correctly post a compound journal
entry where one account has been debited and two or more accounts have been
credited, or where many accounts have been debited and many accounts have been
credited.
Check Your Progress E
1. What is Ledger?
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. What is posting?
.................................................................................................................
.................................................................................................................
.................................................................................................................
3. State whether each of the following statements is True or False.
a) Posting is done in the journal.
b) Posting will be made on the debit side of an account which had been
debited in the journal.
c) The word ‘To’ is used with the name of an account while making posting
on the credit side of an account.
d) No narration is written while posting into ledger accounts.
e) Every journal entry will be posted only into those accounts which have
been debited in the journal.
f) Compound journal entry is posted to more than two accounts.

5.13 BALANCING LEDGER ACCOUNTS

In the above illustration, you have seen that many transactions are likely to involve a
particular account, and there are a number of entries on both sides of an account. At
the end of a day, a week or a month, it would be necessary to know the net effect of
various transactions entered in an account. For example, it would be important and
useful to know as to what is still due from a customer. We can get this information by
working out the difference between the total of debit entries and the total of credit
entries in customer’s account. This process is termed as ‘balancing of an account.
For example, look at the Pankaj’s Account in illustration 14. You find that there are
two transactions, one on each side. Pankaj has been debited with Rs. 10,000 for
credit sales to him, and credited by Rs. 4,000 for the amount paid by him. The
difference between the amount debited and the amount credited is Rs. 6,000. This
amount of Rs. 6,000 is the ‘balance’ in his account which he still owes to the business.
Where the debit side total is more than the credit side total, as in this case, it is called
a debit balance. It is shown, in particulars column, on the credit side by writing ‘By 33
Accounting Process Balance c/d’ and totals on both sides made equal. After totaling the two sides of the
account, the same balance is shown on the debit side, on the next date, by writing
‘To Balance b/d’ in particulars column. The term c/d is an abbreviation for carried
down and b/d is for brought down. Such balancing of accounts is done periodically,
say, daily (as in the case of cash account), weekly, monthly or at any other convenient
time, as and when needed.
Let us see the balancing of Pankaj’s Account.
Pankaj’s Account
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
Rs. Rs.

2018 2018
April 6 To Sales A/c 10,000 April 25 By Cash A/c 4,000
“ 30 By Balance c/d 6,000
10,000 10,000
May 1 To Balance b/d 6,000
In another situation, the total of the credit side may be more than the total of the
debit side. In that case, it will be called credit balance. It will be shown on the debit
side by writing ‘To Balance c/d’ in particulars column and the totals of the two sides
made equal. After totalling the two sides of the accounts, the same balance will be
shown on the credit side on the next date, by writing ‘By Balance b/d’ in particulars
column.
Let us now explain the procedure of balancing an account stepwise.
1. Total both the amount columns (debit and credit) and ascertain the difference
in two totals (use a separate rough sheet for this purpose). If there is no difference
between the totals of the two sides, it means there is nil balance on this account.
This means, the account is closed. However, if there is some difference in the
two totals, such difference is called the ‘balance’. If the debit side total is
more than the credit side total (as in Pankaj’s Account), the difference
is called debit balance. If, on the other hand, the total of the items on
the credit side is greater than the total of the debit side, the difference
is called credit balance.
2. Put the difference between the two sides on the side showing a smaller total.
3. Enter the date on which balancing is being done, in the date column. Note that
balancing is not a transaction, as this does not involve any transfer between
two accounts.
4. If the balance is entered on the debit side, then write in particulars column ‘To
Balance c/d’. In case, the balance is entered on the credit side, write in particulars
column ‘By Balance c/d’ (c/d stands for carried down).
5. Now total both the amount column. There might be more entries on one side,
as compared to the other. Even then, the totals must be written on the same
horizontal line. Draw one line across both the amount columns, on the same
horizontal line. Draw one line across both the amount columns, on the same
34
 horizontal line. Put the totals on both the sides, which will now be identical and Journal and Ledger
then draw line immediately beneath the totals.
6. The closing balance (which was carried down) has now to be brought down
on the side which was showing the bigger total. In other words, at the beginning
of the next period, the debit balance is shown on the debit side and credit
balance on the credit side of the account. It is called opening balance, The
balance brought down is usually given the date following the balance date.
After entering the date in the date column, if the balance brought down is on the
debit side, write ‘To Balance b/d’ in particulars column. Similarly, if the balance
brought down is on the credit side, write ‘By Balance b/d’ (b/d stands for
brought down), particulars column. Suppose an account was balanced on June
30, and the closing balance was entered on the credit side as ‘By Balance c/d’.
On July 1, this balance would be entered on the debit side as ‘To Balance b/d’
below the total.
You have now understood the method of balancing an account. Usually a page is
allotted to an account and all transactions affecting that account are posted there.
Sometimes, when transactions are numerous, more number of pages can be set
apart for such an account. When the balance is proposed to be brought down on
the same page, then the abbreviations, c/d and b/d are used. However, when there
is not much space in the same page, and the balance has to be carried forward either
to the next page, or some other page, the abbreviations ‘c/f’ (carried forward) and
‘b/f’ (brought forward) are used in place of ‘c/d’ and ‘b/d’. The page numbers are
entered in the Folio columns to show as to where the balance has been carried
forward and from where it has been brought forward.
Sometimes, there may be no difference between the totals of the two sides. In such
cases, there will be no closing balance and no opening balance. However, to signify
that the balancing has been done, totals are entered on both the sides and the account
is closed.
Now let us take up comprehensive illustration and reinforce what you have learnt so
far regarding journalising, posting into ledger and balancing the accounts.
Illustration 15
Journalise the following transactions, post them into ledger and balance the accounts:
2018 Rs.
March 1 Ashok commenced business with cash 1,20,000
“ 2 Purchased furniture for cash 24,000
“ 2 Purchased goods from Vijay 36,000
“ 3 Sold goods 4,800
“ 4 Paid rent 3,000
“ 6 Sold goods to Arun 9,000
“ 7 Arun returned goods 450
“ 10 Bought goods from Dinesh 24,000
“ 11 Returned goods to Dinesh 600
“ 14 Paid for advertising 1,500
35
Accounting Process “ 15 Paid for stationery 300
“ 17 Drew for personal use 2,400
“ 20 Cash Sales 9,600
“ 21 Received from Arun 2,550
“ 23 Paid to Vijay 12,000
“ 24 Sold goods to Sanjay 15,000
“ 28 Cash sales 6,000
“ 31 Paid salaries 6,000
“ 31 Paid municipal taxes 1,200
“ 31 Paid printing charges 1,500
Solution:
JOURNAL
Date Particulars L. F. Dr. Cr.
Amount Amount

2018 Rs. Rs.

March 1 Cash Account Dr 1,20,000
To Capital Account 1,20,000
(being Capital brought in)
“ 2 Furniture Account Dr. 24,000
To Cash Account 24,000
(Being furniture purchased)
“ 2 Purchases Account Dr. 36,000
To Vijay’s Account 36,000
(Being credit purchases)
“ 3 Cash Account Dr. 4,800
To Sales Account 4,800
(Being cash sales)
“ 4 Rent Account Dr. 3,000
To Cash Account (Being rent paid) 3,000
“ 6 Arun’s Account Dr. 9,000
To Sales Account 9,000
(Being credit sales)
“ 7 Returns Inwards Account Dr. 450
To Arun’s Account 450
(Being goods returned by Arun)
“ 10 Purchases Account Dr. 24,000
To Dinesh’s Account 24,000
(Being credit purchases)
“ 11 Dinesh’s Account Dr. 600
To Returns Outwards Account 600
36 (Being goods returned to Dinesh)
 Journal and Ledger
“ 14 Advertising Account Dr. 1,500
To Cash Account (Being the 1,500
amount paid for advertising)
“ 15 Stationary Account Dr. 300
To Cash Account 300
(Being the payment for stationery)
“ 17 Drawings Account Dr. 2,400
To Cash Account (Being cash 2,400
withdrawn for Personal use)
“ 20 Cash Account Dr. 9,600
To Sales Account 9,600
(Being cash sales)
“ 21 Cash Account Dr. 2,550
To Arun’s Account (Being the 2,550
amount received from Arun)
“ 23 Vijay’s Account Dr. 12,000
To Cash Account 12,000
(Being the amount paid to Vijay)
“ 24 Sanjay’s Account Dr. 15,000
To Sales Account 15,000
(Being credit sales)
“ 28 Cash Account Dr. 6,000
To Sales Account 6,000
(Being Cash sales)
“ 31 Salaries Account Dr. 6,000
To Cash Account 6,000
(Being salaries paid)
“ 31 Municipal Taxes Account Dr. 1,200
To Cash Account 1,200
(Being municipal taxes paid)
“ 31 Printing Charges Account Dr. 1,500
To Cash Account 1,500
(Being Printing charges paid)

LEDGER
Cash Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

March 1 To Capital A/c 1,20,000 March 2 By Furniture A/c 24,000
March 3 To Sales A/c 4,800 March 4 By Rent A/c 3,000
March 20 To Sales A/c 9,600 March 14 By Advertising A/c 1,500
March 21 To Arun A/c 2,550 March 15 By Stationery A/c 300 37
Accounting Process
“ 28 To Sales A/c 6,000 “ 17 By Drawings A/c 2,400
“ 23 By Vijay A/c 12,000
“ 31 By Salaries A/c 6,000
“ 31 By Municipal Tax A/c 1,200
“ 31 By Printing Charges A/c 1,500
“ 31 By Balance c/d 91,050
1,42,950 1,42,950
Apr. 1 To Balance b/d 91,050

Sales Account
2018 Rs. 2018 Rs.
Mar. 31 To Balance c/d 44,400 Mar.3 By Cash A/c 4,800
“ 20 By Arun A/c 9,000
“ 24 By Cash A/c 9,600
“ 28 By Sanjay A/c 15,000
44,400 By Cash A/c 6,000
44,400
Apr. 1 To Balance b/d 44,400

Arun’s Account
2018 Rs. 2018 Rs.
Mar. 6 To Sales A/c 9,000 Mar. 7 By Returns Inwards 450
“ 21 By Cash A/c 2,550
“ 31 By Balance c/d 6,000
9,000 9,000
Apr. 1 To Balance b/d 9,000

Return Inward Account

2018 Rs. 2018 Rs.
Mar. 7 To Arun A/c 450 Mar. 31 By Balance c/d 450
Apr. 1 To Balance b/d 450

Dinesh Account
2018 Rs. 2018 Rs.
Mar.11 To Return Outward A/c 600 Mar. 10 By Purchase A/c 24,000
“ 31 To Balance c/d 23,400 24,000
24,000 Apr. 1 By Balance b/d 23,400
Return Outward Account
2018 Rs. 2018 Rs.
Mar.31 To Balance c/d 600 Mar.11 By Dinesh’s 600
Apr. 1 By Balance b/d 600
38
 Advertising Account Journal and Ledger

2018 Rs. 2018 Rs.

Mar.14 To Cash A/c 1,500 Mar. 31 By Balance c/d 1,500
Apr. 1 By Balance b/d 1,500

Capital Account
2018 Rs. 2018 Rs.
Mar. 31 To Balance c/d 1,20,000 Mar. 1 By Cash A/c 1,20,000
Apr. 1 By Balance b/d 1,20,000
Furniture Account
2018 Rs. 2018 Rs.
Mar. 2 To Cash A/c 24,000 Mar. 31 By Balance c/d 24,000
Apr. 1 To Balance b/d 24,000

Purchase Account
2018 Rs. 2018 Rs.
Mar. 2 To Vijay’s A/c 36,000 Mar. 31 By Balance c/d 60,000
“ 10 To Dinesh’s c/d 24,000
60,000
Apr. 1 To Balance b/d 60,000

Vijay’s Account
2018 Rs. 2018 Rs.
Mar. 23 To Cash A/c 12,000 Mar. 2 By Purchase A/c 36,000
“ 31 To Balance c/d 24,000 36,000
36,000 Apr. 1 To Balance b/d 24,000
Rent Account
2018 Rs. 2018 Rs.
Mar. 4 To Cash A/c 3,000 Mar. 31 By Balance c/d 3,000
Apr. 1 To Balance b/d 3,000

Stationery Account
2018 Rs. 2018 Rs.
Mar.15 To Cash A/c 300 Mar. 31 By Balance c/d 300
Apr. 1 To Balance b/d 300
Drawings Account
2018 Rs. 2018 Rs.
Mar.17 To Cash A/c 2,400 Mar. 31 By Balance c/d 2,400
Apr. 1 To Balance b/d 2,400

39
Accounting Process Sanjay’s Account
2018 Rs. 2018 Rs.
Mar.24 To Sales A/c 15,000 Mar.31 By Balance c/d 15,000
Apr. 1 To Balance b/d 15,000
Salaries Account
2018 Rs. 2018 Rs.
Mar.31 To Cash A/c 6,000 Mar.31 By Balance c/d 6,000
Apr. 1 To Balance b/d 6,000
Municipal Taxes Account
2018 Rs. 2018 Rs.
Mar.31 To Cash A/c 1,200 Mar.31 By Balance c/d 1,200
Apr. 1 To Balance b/d 1,200
Printing Charges Account
2018 Rs. 2018 Rs.
Mar.31 To Cash A/c 1,500 Mar. 31 By Balance c/d 1,500
Apr. 1 To Balance b/d 1,500

Note :Nominal Accounts are balanced for the purpose of preparing the Trial Balance
which is being explained in the next section.

5.14 SIGNIFICANCE OF BALANCE

You have learnt that the ‘balance in an account signifies the net effect of all transactions
related to it during a given period. It may be a debit balance or a credit balance or a
nil balance depending upon whether the debit or the credit total is higher. Let us now
understand the significance of a balance in respect of the various types of accounts
in the ledger.
Personal Accounts
Personal accounts are more frequently balanced as compared to any other class of
accounts. Balance in a personal account indicates whether the party concerned
owes to the business or the other way round. When it shows a debit balance, it
means that the party owes that amount to the business. In other words, he is a
debtor to the business. Similarly, when it shows a credit balance, it would mean that
the business owes that amount to him i.e., he is creditor of the business if however,
the account shows a nil balance, it means that the account has been cleared, nothing
is due to him or due from him.
Real Accounts
Real accounts are normally balanced at the end of the accounting period primarily
for the purpose of preparing the final accounts. The cash account, however, is balanced
everyday because the actual cash is to be verified and confirmed with the closing
balance shown by CashAccount. All real accounts show a debit balance as there
are assets (property) accounts.
Nominal Accounts
40
Nominal accounts are not usually balanced, but closed by transfer to Profit and Journal and Ledger
Loss Account, at the time of preparing the final accounts (at the end of the accounting
period). However, to start with, for the purpose of understanding the procedure
involved, nominal accounts have also been balanced. Even otherwise, the difference
between the debit side and credit side totals have to be worked out for preparing
the trial balance (you will learn about the trial balance later). The accounts which
relate to expenses or losses will show a debit balance; whereas those relating to
incomes and gains will have a credit balance. This is because all expenses and losses
are debited and all incomes and gains are credited.

Check Your Progress F

1. Why do you balance an account ?

.................................................................................................................

.................................................................................................................

.................................................................................................................

2. Explain the procedure for balancing a ledger account.

.................................................................................................................

.................................................................................................................

.................................................................................................................

3. Name the types of accounts that are balanced.

.................................................................................................................

.................................................................................................................

.................................................................................................................

5.15 POSTING AN OPENING ENTRY

So for, you have learnt about the opening entry which is passed in the journal for all
assets and liabilities brought from the previous year. The posting of the opening
entry is very different from the posting of other journal entries. We open the concerned
accounts in the new ledger for all items that appear in the opening entry. Then, in the
accounts which have been debited in the opening entry we shall write ‘To Balance
b/f in the Particulars column on the debit side of those accounts and show the
respective amount in the Amount column. Similarly, in the accounts that have credited
in the opening entry, we shall write ‘By Balance b/f in the particulars column on the
credit side of those accounts and show the respective amount in the Amount column.
Thus, the posting is complete.

As a matter of fact, the account which have been debited or credited in the opening
entry merely represent the closing balances of various personal and real accounts
from the previous year. These are now entered in the ledger accounts of the current
year as opening balances through the opening entry. Illustration 16 should help you
to understand the posting of the opening entry.
41
Accounting Process Illustration 16
Post the following opening entry into ledger:
2018 Rs. Rs.
Jan. 1 Cash A/c Dr. 5,000
Stock A/c Dr. 20,000
Furniture A/c Dr. 2,000
Shah & Co. Dr. 2,000
Prem Chand Dr. 1,500
To Ramesh Lal 3,000
To Rakesh 1,000
To Capital A/c 26,500
(Being and opening entry for assets
and liabilities b/f from last year)

Solution :
Cash Account
2018 Rs.
Jan. 1 To Balance b/f Rs.5,000

Stock Account
2018 Rs.
Jan. 1 To Balance b/f 20,000

Furniture Account
2018 Rs.
Jan. 1 To Balance b/f 2,000

Shah’s Account
2018 Rs.
Jan. 1 To Balance b/f 2,000

Prem Chand’s Account

2018 Rs.
Jan. 1 To Balance b/f 1,500

Ramesh Lal’s Account

2018 Rs.
Jan. 1 By Balance b/f 3,000
Rakesh’s Account
2018 Rs.
Jan. 1 By Balance b/f 1,000
Capital Account
2018
Jan. 1 By Balance b/f 26,500
42
 Journal and Ledger
5.16 LET US SUM UP
1. The journal is the book of prime entry in which all business transactions must
be carried first. Each transaction is analysed so that the two-fold aspect of
each transaction is clearly presented in the form of a ‘Journal Entry’.
2. While journalising the transaction, it is necessary to remember the difference
between the treatment of cash and credit transaction, as it is necessary to decide
whether the personal account of the party concerned is to be involved or not.
3. Entries relating to Goods Account are made in five separate accounts depending
upon the nature of the transactions. These accounts are:
(i) Purchase Account, (ii) Sales Account, (iii) Purchase Returns Account, (iv)
Sales Returns Account, and (v) Stock Account.
4. A compound journal entry is one where two or more accounts receive the
debit (or the credit, as the case may be) and the corresponding credit (or the
debit, as the case may be) is given to the other account (or accounts).
5. An opening entry is one which is passed at the beginning of the year to bring
forward the previous year’s balances of assets and liabilities.
6. Ledger’is a book which contains all the accounts affected by various
transactions.
7. Journal by itself does not help us to know the net effect on the various
transactions affecting a particular account. Hence, all journal entries are posted
into ledger accounts.
8. Posting is made on the debit side of the accounts which have been debited in
the journal, and the credit side of the accounts which have been credited in the
journal.
9. As various transactions are posted to different accounts during a particular
period of time, it is necessary to ascertain the net effect of all the posting made.
This is done by balancing an account.

5.17 KEY WORDS

Balance: The difference between the total of debits and total of credits appearing
in an account. It signifies the net effect of the transactions posted to that account.
Compound Entry: A journal entry involving more than two accounts.
Journal: A book of original entry where achronological record of transactions is
first made.
Journal Entry: An entry made in the journal.
Journalising: The process of recording the business in the journal.
Ledger: A book which contain all accounts affected by various transactions in
business.
Opening Entry: A journal entry passed at the beginning of the year to bring forward
the previous year’s assets and liabilities.
Posting: A process of entering transactions into ledger accounts. 43
Accounting Process
5.18 ANSWERS TO CHECK YOUR PROGRESS
A 1. a) True b) True c) False d) False e) True

B 2. a) Credit b) Cash c) Credit d) Cash e) Credit f) Cash g) Credit h) Cash

C 2. a Capital A/c

b) Furniture A/c

c) Returns Outwards A/c

d) Wages A/c

e) Loan from Krishna A/c

f) Bank A/c

g) Discount Allowed A/c

h) Bad Debts A/c

5. Credit to Bad Debts Recovered A/c

D 2. a) More than two accounts

b) the same date

c) two or more accounts

d) two or more accounts

e) liabilities

3. Rs. 23,000

E 3. a) False b) True c) False d) True e) False f) True

5.19 TERMINAL QUESTIONS/EXERCISES

Questions

1. Give the form of journal.

2. What is a journal entry?

3. Explain the steps to be followed in journalising.

4. What is narration?

5. Explain as to why the journal is called a book of original entry.

6. What is a compound journal entry? Give examples.

7. What is an opening entry? Show how is it recorded?

8. Explain the rules regarding posting of journal entries into ledger accounts.

9. What is Balancing an Account? Explain how an account is balanced?

44
Exercises Journal and Ledger

1. Journalise the following transactions:

2018 Rs.
Feb. 1 Purchased goods for cash 18,000
“ 2 Purchased goods on credit from Mithun 37,000
“ 5 Sold goods to Mahesh 10,000
“ 8 Cash sales 8,000
“ 9 Cash sales to Jayant 7,000
“ 11 Returned goods to Mithun 4,000
“ 12 Mahesh returned goods 1,000

2. Give journal entries to record the following transactions:

2018 Rs.
March 1 Purchased furniture from Jay for cash 38,000
“ 2 Bought plant and machinery on credit from Satish 1,10,000
“ 5 Sale of old furniture 1,800
“ 6 Paid to Raman 3,700
“ 8 Received from Suresh 2,500
“ 11 Paid salaries 1,500
“ 13 Purchased stationery 250
“ 15 Paid rent 2,250
“ 17 Received commission 400

3. Journalise the following transactions :

2018 Rs.
April 1 Tarun started business with Cash 8,00,000
“ 2 Bought plant and machinery 1,00,000
“ 2 Bought furniture from Naveen 50,000
“ 3 Purchased typewriter 3,000
“ 4 Purchased goods 70,000
“ 6 Paid wages 8,000
“ 8 Bought loose tools 3,000
“ 9 Cash Sales 15,000
“ 10 Sales to Anil 20,000
“ 12 Paid wages 8,000
“ 13 Purchased goods from Uday 40,000
“ 15 Returned goods to Uday 2,000
“ 18 Purchased stationery 400
“ 20 Bought postage stamps 150
“ 23 Paid insurance premium 600
“ 25 Paid miscellaneous charges 600
“ 26 Paid printing charges 500
“ 29 Paid salaries 20,000
“ 30 Paid to Naveen 25,000

45
Accounting Process 4. The following are the transactions of Gurunath for the month of January.
Journalise the transactions:
2018 Rs.
Jan 1 Cash paid into bank 20,000
“ 2 Bought stationery 100
“ 3 Bought goods for cash 8,500
“ 4 Sold goods for cash 4,500
“ 5 Bought office furniture from Pramod & Bros. and 2,500
paid Rs. 100 as cartage
“ 6 Sold goods to Maneesh 3,000
“ 8 Received cheque from Maneesh 3,000
“ 9 Paid Pramod & Bros. by cheque 1,500
“ 11 Sold goods to Anil 2,500
“ 15 Bought goods from Sinha & Co. 3,000
“ 16 Bought goods for cash 1,000
“ 19 Sold goods to Praveen 1,300
“ 22 Received from Praveen Rs. 1,250 in full
ettlement of his account 1,250
“ 24 Paid salaries 2,000
“ 26 Drew for private expenses 1,000
“ 31 Paid rent 1,000
5. Journalise the following transactions and post them into the Ledger.
2018 Rs.
Jan. 1 Manoj commenced business with cash 48,000
“ 2 Deposited into bank 36,000
“ 3 Purchased goods for cash 2,000
“ 4 Bought furniture for office use 5,600
“ 10 Drew from Bank for office use 4,000
“ 13 Goods sold to Rahul 2,400
“ 15 Bought goods from Anil 1,600
“ 18 Paid trade expenses 400
“ 19 Received cash from Rahul 2,400
“ 25 Paid wages 200
“ 28 Paid Anil in full settlement 1,590
“ 30 Paid rent 400
“ 31 Interest on capital 400
6. Enter the following transactions in the journal of Harnath and post them into the
Ledger.
2018 Rs.
Feb. 1 Commenced business with cash 60,000
“ 2 Bought goods from Madhan 30,000
“ 2 Purchased fittings for cash 4,800
“ 2 Sold goods to Chetan 9,600
“ 3 Paid Madhan on account 18,000
“ 4 Sold goods to Pradeep 12,000
“ 5 Received cheque from Chetan in full
settlement of his account 9,550
“ 6 Paid wages 480
46
 “ 8 Bought goods for cash 3,600 Journal and Ledger
“ 9 Sold goods to Ravi 20,400
“ 10 Purchased goods from Promod 15,600
“ 11 Paid Madhan in final settlement 12,000
“ 12 Paid carriage on goods sold 240
“ 13 Paid wages 480
“ 14 Bought goods from Mahesh 18,000
“ 16 Sold goods to Shyam 21,600
“ 17 Shyam paid on account 24,000
“ 18 Purchased goods from Hareesh 9,000
“ 19 Sold goods for cash 9,600
“ 20 Paid wages 480
“ 21 Sent cheque to Hareesh 9,000
“ 22 Sold goods to Sunil 15,600
“ 23 Bought goods from Amar 28,800
“ 24 Bought goods for cash 8,400
“ 25 Sent cheque on account to Amar 28,000
“ 26 Received from Sunil on Account 15,600
“ 27 Paid wages 500
“ 28 Paid rent 1,100
7. Enter the following transactions in journal, and post them into the ledger.
2018 Rohan commenced his business with the following assets. Rs.
Mar. 1 Plant and Machinery 1,00,000
Stock 36,000
Furniture 26,000
Cash 2,500
His transactions for the month were
“ 2 Sold goods to Sanjay 16,000
“ 3 Bought goods from Murari 26,000
“ 4 Sanjay paid cash 10,000
“ 6 Returned damaged goods to Murari 720
“ 10 Paid Murari on account 11,280
“ 15 Bought goods from Govind 21,600
“ 18 Sold goods to Krishna 30,000
“ 20 Received cash from Krishan 24,000
“ 20 Krishna returned damaged goods 1,600
“ 26 Paid to Govind 14,400
“ 31 Paid salaries 3,000
“ 31 Paid rent 1,000
5.20 SOME USEFUL BOOKS
Grewal T.S. Double Entry Book-Keeping (New Delhi: Sultan Chand & Sons, 2018)
Maheshwari, S.N. Principles and Practice of AccountancyPart-I (New Delhi: Arya
Book Depot, 2018)
Patil, V.A. &Korlahalli, S. Principles and Practiceof Book-Keeping (Ne 36 Delhi:
R. Chand & Co., 2018 )

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.
47
Accounting Process
UNIT 6 SUBSIDIARY BOOKS
Structure
6.0 Objectives
6.1 Introduction
6.2 Need for Sub-division of Journal
6.3 Subsidiary Books
6.4 Advantages of Subsidiary Books
6.5 Cash Book
6.6 Single Column Cash Book
6.6.1 Recording in Single Column Cash Book
6.6.2 Posting the Single Column Cash Book
6.6.3 Balancing the Single Column Cash Book

6.7 Two Column Cash Book

6.7.1 Recording in Two Column Cash Book
6.7.2 Posting the Two Column Cash Book
6.7.3 Balancing the Two Column Cash Book

6.8 Petty Cash Book

6.8.1 Imprest System
6.8.2 Recording, Posting and Balancing the Petty Cash Book

6.9 What is a Bank?

6.10 Types of Bank Accounts
6.10.1 Advantage of having a Bank Account
6.10.2 How to Open and Operate a Bank Account

6.11 Crossing of Cheques

6.12 Endorsement and Dishonour of Cheques
6.13 Three Column Cash Book
6.13.1 Recording in Three Column Cash Book
6.13.2 Posting the Three Column Cash Book
6.13.3 Balancing the Three Column Cash Book
6.13.4 Special Points Regarding Cheques Received

6.14 Purchases Journal

6.14.1 Invoice
6.14.2 Recording in the Purchases Journal
6.14.3 Posting the Purchases Journal

6.15 Purchases Returns Journal

6.15.1 Debit Note
6.15.2 Recording in the Purchases Returns Journal
6.15.3 Posting the Purchases Returns Journal

48
6.16 Sales Journal Subsidiary Books
6.16.1 Recording in the Sales Journal
6.16.2 Posting the Sales Journal

6.17 Sales Returns Journal

6.17.1 Credit Note
6.17.2 Recording in the Sales Returns Journal
5.17.3 Posting the Sales Returns Journal

6.18 Journal Proper

6.19 Let Us Sum Up
6.20 Key Words
6.21 Answers to Check Your Progress
6.22 Terminal Questions/Exercises

6.0 OBJECTIVES
After studying this unit, you should be able to:
 appreciate the need for special journals;
 sub-divide the journal into various special journals;
 identify the type of transactions recorded in special journal;
 prepare simple cash book and balance it;
 post cash book entries into ledger;
 prepare cash book with discount column;
 post discount column entries into ledger;
 describe imprest system;
 prepare petty cash book and post it into ledger;
 describe the functions of a bank;
 explain the advantages of opening a bank account;
 describe how to open bank account;
 explain the functions of pay-in-slip book, cheque book and the pass book;
 appreciate the importance of crossing and endorsement;
 record banking transactions in a three column cash book;
 post three column cash book into ledger;
 prepare purchases and purchases returns journals and post them into ledger;
 prepare sales and sales returns journals and post them into ledger;
 prepare bills books and post them into ledger; and
 state various transactions recorded in journal proper. 49
Accounting Process
6.1 INTRODUCTION
You learnt how to record the business transactions in journal and then post them
into ledger. You know that journal is a book of prime entry in which all transactions
are to be recorded first. But, in practice, the number of transactions happens to
be so large that it becomes difficult to record them in one book. Hence, the
journal is sub-divided into a number of special journals, called subsidiary books.
In this unit, you will learn about the most important subsidiary book called Cash
Book. We shall discuss various types of cash books, study how transactions are
recorded in the Single Column Cash Book, Two Column Cash Book and Three
Column Cash Book and how they are posted into ledger. You shall also learn
about the Imprest System and the preparation, posting and balancing of Petty
Cash Book.
Further, you will learn how to record cash transactions in Single Column Cash
Book, Two Column Cash Book and Three Column Cash Book and post them
into ledger. In three column cash book, we have an additional column for banking
transactions. As a prelude, we shall first discuss how to open an account in a
bank, the advantages of opening a bank account, the functions of pay-in-slip,
cheque book and pass book, and the importance of crossing and endorsement
of cheques. Then, we shall learn how various transactions with a bank are recorded
in the Three Cash Book and posted into ledger.
In this unit, we also intend to take up the books like: (i) Purchases Journal, (ii)
Purchases Returns Journal, (iii) Sales Journal (iv) Sales Returns Journal, (v) Journal
Proper. You will also learn how transactions are recorded in each of these books
and how they are posted into ledger.

6.2 NEED FOR SUB-DIVISION OF JOURNAL

The system of having only one book of prime entry may work for a small
organisation where the number of transactions is usually small. But, when the
number of transactions are large, it is practically impossible to record all the
transactions through one journal. It is because:
i) the journal can be handled by only one person and the work becomes too
heavy for him;
ii) the transactions may not be recorded promptly, as all transactions have to
be recorded in the same book; and
iii) the journal becomes bulky and voluminous.
In order to overcome these difficulties and to facilitate speedy recording of various
transactions, the journal is sub-divided into a number of special journals called
‘Subsidiary Books’.

6.3 SUBSIDIARY BOOKS

Before we list various books into which the journal is sub-divided, let us understand
the basis for its sub-division. You may adopt any basis. But, the principle generally
followed is that transactions of the same nature are to be recorded at one place.
For example, the cash receipts and cash payments may be grouped into one
category and recorded in a separate book. Similarly, all credit purchases of goods
may be grouped into one category, all credit sales of goods into another category
and recorded in separate books.
50
In practice, the journal is sub-divided in such a way that a separate book is used Subsidiary Books
for each category of transactions which are repetitive in nature and are sufficiently
large in number. In any large business, the following subsidiary books are generally
used.
1. Cash Book: It is used for recording all receipts and payments of cash,
including cash purchases and cash sales of goods.
2. Purchases Journal: It is used for recording credit purchases of goods only.
3. Purchases Returns Journal: It is used for recording goods returned to
suppliers.
4 Sales Journal: It is used for recording credit sales of goods only.
5. Sales Returns Journal: It is used for recording goods returned by the
customers.
6. Bills Receivable Journal: It is used for recording bills of exchange and
promissory notes received from the debtors.
7. Bills Payable Journal: It is used for recording bills of exchange and
promissory notes accepted by the business in favour of creditors.
8. Journal Proper: This book is used for recording all such transactions which
are not covered by any of the above mentioned special journals, for example,
credit purchases of fixed assets, opening entry, rectification entries, etc.
It must, however, be noted that there is no rigidity as to the number of special
journals. Depending on the necessity, the number of journals may be increased or
decreased.

6.4 ADVANTAGES OF SUBSIDIARY BOOKS

The following are the advantages of having a number of subsidiary books:
i) Classification of transactions becomes automatic: As there is a separate
book for each type of transactions, the transactions of same nature are
automatically. Brought at we place. For example all credit purchase of
goods are recorded in the purchses book.
ii) Reference becomes easy: If any reference is required, it can be traced
easily by referring to the appropriate subsidiary book. You do not have to
go through all the transactions recorded in the journal.
iii) Facilitates division of work: The division of journal into various subsidiary
books facilitates division of work among many persons. This, in turn, facilitates
prompt recording of transactions and saves a lot of time.
iv) More particulars: More details about the transactions can be given in
subsidiary books than would be possible in one book.
v) Responsibility can be fixed: The work of maintaining a particular book
can be entrusted to a particular person. He will be responsible for keeping
it up-to-date and in order.
vi) Facilitates checking: When the Trial Balance does not agree, the location
of errors will be relatively easy. 51
Accounting Process Check Your Progress A
1. Write the number of correct alternative in the box.
a) A separate journal is kept for
i) each transaction
ii) each type of transactions
iii) each type of transactions which are repetitive in nature and sufficiently
large in number

b) Cash Book contains

i) all receipts and payments of cash
ii) all receipts only
iii) all payments only
c) Journal Proper is meant for recording
i) credit purchase of fixed assets
ii) return of goods
iii) all such transactions for which no special journal has been kept by
the business
d) Purchases Journal is kept to record
i) all purchases of goods
ii) all credit purchases of goods
iii) all credit purchases
e) Sales Journal is used to record
i) cash sales
ii) credit sales of assets
iii) credit sales of goods

6.5 CASH BOOK

Having outlined various subsidiary books, we shall now discuss the most important
subsidiary book called ‘Cash Book’. In any business there would be numerous
cash transactions which involve either receipts or payments of cash. Cash sales,
receipt of cash from debtors, cash purchases, payments to creditors, payment of
various expenses such as salaries, wages, rent, taxes, etc., are some examples of
transactions involving cash. All these are recorded in cash book, receipts on one
side and payments on the other.
Every business unit, small or big, maintains a cash book. It enables the businessman
to know and verify the amount of cash in hand from time to time. As a matter of fact,
52 cash book plays a dual role. It is a book of prime entry and also serves the purpose
of a Cash Account. It is designed in the form of a ledger account and records cash Subsidiary Books
receipts on the debit side and payments on credit side. It is also balanced in the
same way. Hence, when cash book is maintained, there is no need to have a Cash
Account in the ledger.
There are different types of cash books maintained by the business. These are:
1. Simple or Single Column Cash Book
2. Two or Double Column Cash Book
3. Three or Triple Column Cash Book
We shall now consider them one by one and learn how they are prepared and
posted into ledger.

6.6 SINGLE COLUMN CASH BOOK

Look at the proforma of a Single Column Cash Book shown in Figure 6.1. Doesn’t
it look like a ledger account? Yes, it does. In fact a Single Column Cash Book is
nothing but a Cash Account. It is used for recording all cash receipts and cash
payments and serves the purpose of Cash Account as well. It is called Single Column
Cash Book just because it has only one amount column on each side.
Single Column Cash Book
Dr. Cr.
Date Particulars L.F. Amount Date Particular L.F. Amount
Rs. Rs.
To (write the To (write the
name of the name of the
account to be account to be
credited) debited)
Fig. 6.1

6.6.1 Recording in Single Column Cash Book

You know that Cash Account is a real account. According to rules, Cash Account
is to be debited when cash is received and credited when cash is paid. Hence,
the debit side of the cash book is used for recording all cash receipts and the
credit side for all cash payments. Let us now discuss how entries are made in this
book.
As explained above, whenever cash is received, it is to be recorded on the debit
side. The date on which it is received is recorded in the date column. The name
of the account from which it is received is mentioned in the particulars column.
In the L.F. (Ledger Folio) column the page number of the account in the ledger,
where the posting is made, is to be recorded at the time of posting. The amount
column is meant for recording the amount received. Similarly, whenever cash is
paid, it is recorded on the credit side. Here, in particulars column, we write the
name of the party to whom payment is made, and complete the other columns
in the same manner as on the debit side.

6.6.2 Posting the Single Column Cash Book

As said earlier, Cash Book also serves the purpose of a Cash Account, so there
53
Accounting Process is no need to open a Cash Account in the ledger. When a cash transaction is
recorded in the cash book, posting of the cash aspect of the transaction in Cash
Account stands fully covered. What remains to be posted is the other aspect of
the transaction. The posting of this aspect will complete the double entry. The
rules of posting therefore are:
i) for all transactions entered on the debit side of the cash book, credit the
concerned accounts in the ledger individually by writing ‘By Cash Account’.
ii) for all transactions entered on the credit side, debit the concerned accounts
in the ledger individually by writing ‘To Cash Account’.
Thus, the posting into the ledger accounts is completed. Note that the transactions
entered on the debit side of the cash book are to be posted on the credit side
of the accounts in the ledger and vice versa.
6.6.3 Balancing the Single Column Cash Book
You have already learnt how to balance a ledger account. The cash book is
balanced just like any other ledger account. The cash book will always show a
debit balance. This is because the cash payments can never exceed the amount
of cash available. For example, if you have Rs. 10 in your pocket, can you pay
Rs 15? You cannot. So the total of the debit side in the cash book will always
be more than the total of the credit side. This difference indicates the cash in hand.
It shall be entered on the credit side by writing ‘By Balance c/d’ in particulars
column and showing the amount in the amount column. Now total the amount
columns and you will find that the two sides are equal.
After closing the cash book, the balance is shown on the debit side by writing ‘To
Balance b/d’. It becomes the opening balance of cash for the next period. Note
that the cash book shall generally show a debit balance and occasionally a nil
balance. Look at illustration 1. It shows the recording, posting and balancing of
a Single Column Cash Book.
Illustration 1
From the following particulars of M/s Naveen & Co., prepare a Simple Cash
Book and balance the same. Also show postings into the ledger accounts.
2018 Rs.
July 1 Naveen started business with a capital of 25,000
“ 2 Opened a bank account and deposited 20,000
“ 5 Purchased goods for cash 3,000
“ 6 Sold goods for cash 4,000
“ 8 Purchased furniture 1,000
“ 10 Purchased goods from Ramlal on credit 2,500
“ 12 Sold goods to Chhotelal on credit 3,000
“ 16 Sold goods for cash 1,000
“ 17 Paid to Ramlal on account 2,500
“ 19 Received from Chhotelal 2,000
“ 22 Withdrawn cash from bank 3,000
“ 25 Paid electricity bill 50
“ 28 Paid rent to the landlord 350
“ 31 Paid salary to the clerk 500
54
Solution: Subsidiary Books
Cash Book of Naveen & Co.
Dr. Cr
Date Particular I.F. Amount Date Particular I.F. Amount

2018 Rs. 2018 Rs.

July, 1 To Capital A/c 25,000 July, 2 By Bank A/c 20,000
“ 16 To Sales A/c 4,000 “ 5 By Purchases A/c 3,000
“ 19 To Sales A/c 1,000 “ 8 By Furniture A/c 1,000
“ 22 To Chhotelal 2,000 “ 17 By Ramlal 2,500
To Bank A/c 3,000 “ 25 By Electricity Charges A/c 50
“ 28 By Rent 350
“ 31 By Salaries A/c 500
“ 31 By Balance c/d 7,600
35,000 35,000
Aug.1 To Balance b/d 7,600

Note: Transactions of July 10 and 12 are credit transactions. So they are not recorded in the cash book.
LEDGER
Capital Account
Dr. Cr.
2018 Rs.
July 1 By Cash A/c 25,000
Sales Account
2018 Rs.
July 6 By Cash A/c 4,000
“ 16 By Cash A/c 1,000
Chhotelal’s Account
2018 Rs.
July 19 By Cash A/c 2,000
Bank Account
2018 Rs. 2018 Rs.
July, 2 To Cash A/c 20,000 July 22 By Cash A/c 3,000
Purchase Account
2018 Rs.
July, 5 To Cash A/c 3,000
Furniture Account
2018 Rs.
July, 8 To Cash A/c 1,000
Ramlal’s Account
2018 Rs.
July, 17 To Cash A/c 2,500 55
Accounting Process
Electricity Charges Account
2018 Rs.
July, 25 To Cash A/ 50
Rent Account
2018 Rs.
July, 28 To Cash A/c 350
Salaries Account
2018 Rs.
July, 31 To Cash A/c 500

Check Your Progress B

1. Fill in the blanks:
a) All ……… … …………….transactions are recorded in the cash book.
b) Cash receipts are recorded on the ……........……….side of the cash
book and cash payments are recorded on the ............................ side of
the cash book.
c) Cash book also serves the purpose of … …… ………… ………………
d) Transactions entered on the debit side of the cash book are to be posted
on the ……………………….side of the accounts in the ledger.
e) Cash book always shows a …………………………….balance.
f) Cash book balance reflects ………………………………….in hand.
2. Why does cash book always show a debit balance?
.................................................................................................................
.................................................................................................................
.................................................................................................................

6.7 TWO COLUMN CASH BOOK

Previously you learnt about the cash discount. When cash is received from a debtor,
some discount may be allowed to him. Similarly, when payment is made to a creditor,
some discount may be allowed by him. This is termed as Cash Discount and it has to
be recorded in the books of account. While making compound journal entries for
such transactions, you learnt that cash and discount go together. You know that
receipts from debtors and payments to creditors are to be recorded in the cash
book. Now the question arises as to how to record the cash discount. One method
is to record the discount aspect separately in the journal. But this would be
cumbersome, and the possibility of failing to record can also happen. Hence,
accountants have developed a practice of recording the discount aspect in the cash
book itself. For this, an extra amount column is added on both sides of the cash
book. Look at the proforma shown in Figure 6.2. The discount allowed to debtors
56 is recorded on the debit side and the discount received from creditors is recorded
on the credit side. Thus, now there are two amount columns on both sides of the Subsidiary Books
cash book, one for discount and the other for cash. It is called ‘Two Column Cash
Book’.
Two Column Cash Book
Dr. Cr.
Date Particulars L.F. Discount Cash Date Particulars L.F. Discount Cash
Allowed Received
Rs. Rs. Rs. Rs.

Fig. 6.2

6.7.1 Recording in Two Column Cash Book

Recording of cash transactions in a Two Column Cash Book is similar to Single
Column Cash Book. As for cash discount, it is entered on the debit side if allowed
to the debtor and on the credit side if received from the creditor. Study cash book
entries for transactions of August 7 and 12 in illustration 2.

6.7.2 Posting the Two Column Cash Book

The entries in the cash columns of Two Column Cash Book are posted to the ledger
accounts in the same way as we did in the case of Single Column Cash Book. The
entries in the discount columns are also to be posted to the respective personal
accounts. The entries in discount allowed column will be posted to the credit side of
the respective personal accounts by writting ‘By Discount Allowed A/c’. Similarly,
the entries in the discount received column will be posted to the debit side of the
respective personal accounts by writing ‘To Discount Received A/c’. For example,
Cash received from Devi Traders Rs. 490, and discount allowed Rs. 10: This
transaction will be entered in particulars column on the debit side of the cash book
by writing ‘To Devi Traders A/c’. An amount of Rs. 10 will be shown in discount
allowed column and Rs. 490 in cash column. Its posting into Devi Traders’Account
in the ledger will be made as follows:
Devi Traders Account
Dr. Cr.
Rs.
By Cash A/c 490
By Discount Allowed A/c 10

As for the transactions relating to cash, the double entry is complete as soon as
postings have been made to the respective personal accounts. But it is not so for the
discount aspect. The cash book does not serve the purpose of discount account.
We have to open ‘Discount Allowed Account’ and ‘Discount Received Account’ in
the ledger. The total of discount allowed columns on the debit side of the cash book
is posted to the debit side of the ‘Discount Allowed Account’ in the ledger by writing
‘To Sundries’. Similarly, the total of discount received column on the credit side of
the cash book is posted to the credit side of the ‘Discount Received Account’ in the
ledger by writing ‘By Sundries’. This will complete the double entry in respect of
discount allowed and discount received. Note that the postings in the two discount
accounts are made only for the totals and not for the individual transactions. Thus, 57
we save time and labour.
Accounting Process 6.7.3 Balancing the Two Column Cash Book
In case of Two Column Cash Book, only the cash columns are balanced. Procedure
is similar to Single Column Cash Book. The discount columns are not balanced,
they are simply totalled. This is because the two discount columns relate to two
separate accounts—the Discount Allowed Account and the Discount Received
Account.
Study illustration 2 carefully. You will understand how transactions are recorded in
the Two Column Cash Book and posted to the ledger accounts.
Illustration 2
From the following transactions of M/s. Joshi & Sons, prepare Cash Book and
show the ledger postings:
2018 Rs.
Aug.1 Cash in hand 4,270
“ 5 Purchased an old typewriter for 1,500
“ 7 Received cash from Singh & Co. Rs. 1,980 and allowed
discount of 20
“ 10 Cash Sales 5,500
“ 12 Paid to Ram Narain Rs. 2,970 and he allowed a discount of 30
“ 14 Sold old newspapers for Rs. 60.
“ 16 Received from Prasad Rs. 985 in full settlement of his
account for 1,000
“ 18 Purchased goods worth from Sanjeev Bros. at a trade 2,000
discount of 10% and paid cash.
“ 20 Sold goods worth for cash at a trade discount of 5%. 1,000
“ 24 Settled the account of Tiwari of by paying the necessary amount
after deducting a discount of 3%. 500
“ 30 Paid rent 500
“ 30 Deposited in the bank the cash in excess of 1,490
Notes:
Solution :
Joshi & Sons
Cash Book (With Discount and Cash Columns)
Rs. Rs.
Date Particular L.F. Discount Cash Date Particula L.F. Discount Cash
Allowed Received
2018 Rs. Rs. 2018 Rs. Rs.

Aug.1 To Balance b/d 4,270 Aug. 5 By Typewriter A/c 1,500

“ 7 To Singh & Co. 20 1,980 “ 12 By Rain Narain 30 2,970
“ 10 To Sales A/c 5,500 “ 18 By Purchases A/c 1,800
“ 14 To Old News- “ 24 By Tiwari 15 485
papers A/c 60 “ 30 By Rent A/c 500
“ 16 To Prasad 15 985 “ 30 By Bank A/c 5,000
“ 20 To Sales A/c 950 “ 31 By Balance c/d 1,490

35 13,745 45 13,745

Sep. 1 To Balance b/d 1,490

58
1. The cash in hand on August 1, 2018 is not a transaction but the balance Subsidiary Books
brought down from the previous month. It has been shown on the debit side
of the cash column as ‘To Balance b/d’. No posting to any account is
necessary for the balance.
2. The transactions of August 18 and 20 are recorded at net amounts i.e., after
adjusting trade discount. Earlier you learnt that trade discount is not to be
shown in the books.
3. Cash in excess of Rs 1,490 is deposited in the bank. It means the closing
balance of cash is Rs 1,490. The actual difference between the debit and
credit cash columns would work out at Rs 6,490. Hence, the amount
deposited in the bank is Rs 5,000 (6,490-1,490).

LEDGER
Singh & Co. Account
Dr. Cr.
2018 Rs.
Aug. 7 By Cash A/c 1,980
“ 7 By Discount Allowed 20
Sales Account
2018 Rs.
Aug 10 By Cash A/c 5,500
Aug. 20 By Cash A/c 950
Old Newspapers Account
2018 Rs.
Aug. 14 By Cash A/c 60
Prasad’s Account
2018 Rs.
Aug. 16 By Cash A/c 985
Aug. 16 By Discount Allowed 15
Typewriter Account
2018 Rs.
Aug. 5 To Cash A/c 1,500
Ram Narain’s Account
2018 Rs.
Aug. 12 To Cash A/c 2,970
Aug. 12 To Discount Received A/c 30
Purchases Account
2018 Rs.
Aug. 18 To Cash A/c 1,800

59
Accounting Process Tiwari’s Account
2018 Rs.
Aug. 24 To Cash A/c 485
Aug. 24 To Discount Received 15
Rent Account
2018 Rs.
Aug. 30 To Cash A/c 500
Bank Account
2018 Rs.
Aug. 30 To Cash A/c 5,000
Discount Allowed Account
2018 Rs.
Aug. 31 To Sundries A/c 35
Discount Received Account
2018 Rs.
Aug. 31 By Sundries A/c 45

Check Your Progress C

1. How are the cash discount transactions normally recorded in the Cash Book?
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. A few statements are given below. Mention against each whether it is True or
False.
a) Trade discount is not recorded in the books of account. ..................
b) Cash discount can be recorded through Journal or ..................
through Cash Book
c) Two Column Cash Book has an extra column for ..................
discount on the debit side.
d) No posting is required in personal accounts ..................
for cash discount
e) Discount columns in the Cash Book are not balanced, ..................
they are merely totalled.
3. How do you post entries from the discount allowed and discount received
columns to the Discount Allowed Account and Discount Received Account in
the ledger?
................................................................................................................
................................................................................................................
60
 Subsidiary Books
6.8 PETTY CASH BOOK
In every business, there will be numerous small payments in cash such as payments
for postage, telegrams, stationery, cartage, conveyance, entertaining the customers,
minor repairs, etc. If all these petty payments are recorded in the cash book along
with other payments, the cash book will be overloaded. Hence, a separate book
called ‘Petty Cash Book’ is maintained for recording all such small (petty) payments.
A person called petty cashier is entrusted with the work of making the small payments
and maintaining the Petty Cash Book. The sum of money given to the petty cashier
for making small payments is called petty cash.
6.8.1 Imprest System
Generally, Petty Cash Book is maintained on Imprest System. Under this system, an
estimate is made of the amount required for petty payments for a certain period, say
a week or a month. This amount is handed over to the petty cashier in advance. The
petty cashier is required to obtain vouchers for all expenses he incurs. At the end of
the period, the petty cashier presents the Petty Cash Book together with the vouchers
to the chief cashier. The chief cashier verifies the entries in the Petty Cash Book and
pays to the petty cashier a sum equal to the amount spent by him. The original
amount of the petty cash with which the petty cashier had started is thus restored.
This system of advance at the beginning and reimbursing the amount spent from time
to time is called ‘Imprest System’. For example, on June 1, Rs. 200 is given as
advance for petty payments to the petty cashier. He spent Rs. 185 on various items
during the month. The chief cashier, after verifying the expenses with the vouchers,
would pay Rs 185 to him. Thus on July 1, the petty cashier would again have Rs.
200 (Rs. 185 paid by the chief cashier plus the old balance of Rs. 15), the imprest
amount. This system provides an adequate check on petty payments.
6.8.2 Recording, Posting and Balancing the Petty Cash Book
Look at illustration 3. You will find only one column each for receipts, cash book
folio, date, particulars, and voucher no. But, it provides a number of amount columns
for recording the payments of various petty expenses. This facilitates the analysis of
payments under different heads and their posting to appropriate expense account.
The headings under which petty expenses are generally categorised are: (i) printing
and stationery, (ii) postage and telegrams, (iii) cartage, (iv) conveyance (v)
entertainment, and (vi) miscellaneous.
When the head cashier advances money to the petty cashier, either in cash or by
cheque, an entry is made in the cash or bank column of the main cash book on the
credit side by writing ‘By Petty Cash A/c’. The petty cashier, on receiving the cash,
records it in the particulars column of the Petty Cash Book by writing ‘To Cash A/
c’ (if cash is received) or ‘To Bank A/c’ (if cheque is received) and enters the
amount in receipts column. When he makes payments, each payment is entered in
the particulars column by writing the name of expense incurred. The amount is first
entered in the total payments column and then in the column specified for the
concerned expense.
The Petty Cash book is balanced periodically, say weekly or monthly. The various
expense accounts in the ledger are individually debited with the periodic totals (as
per Petty Cash Book) by writing ‘To Petty Cash A/c’. The Petty Cash Account in
the ledger is credited with the total expenditure incurred during the period by writing
By Sundries as per Petty Cash Book’. The Petty Cash Account is then balanced. It
will normally have a debit balance which will be equal to the actual cash with the
petty cashier. Illustration 3 shows recording in Petty Cash Book and its posting into
the ledger. 61
Accounting Process Illustration 3
2018 Rs.
Aug
“ 1 Received a cheque from head cashier 250.00
“ 2 Paid to printing of letter heads 40.00
“ 4 Purchased postal stamps 15.00
“ 5 Paid for cartage on goods purchased 9.00
“ 7 Paid auto fare 6.00
“ 9 Tea expenses for customers 4.75
“ 12 Sent telegram to Calcutta 8.50
“ 14 Paid for stationery 16.25
“ 15 Paid taxi fare 12.75
“ 17 Paid for postage 42.50
“ 19 Paid tips to office boys 8.00
“ 20 Paid for cartage 14.50
“ 22 Paid for cold drinks offered to customers 6.00
“ 25 Payments made to coolies 9.75
“ 27 Purchase of postal envelopes 3.60
“ 28 Rickshaw charges 3.00
“ 30 Cartage on goods purchased 10.00
Balance the Petty Cash Book at the end of August and show the amount of the
cheque to be issued to the petty cashier on September 1, 2018. Also show the
Solution ledger postings.
Petty Cash Book

Receipts Cash Date Particulars Vou Pay- Print- Post- Cart- Conve- Enter- Misc- Re-
Book cher ments ing age age yance tain lane marks
Folio No. & & ment ous
No. Particulars Sta Tele-
tion gram
ery

Rs. 2018 Rs. Rs. Rs. Rs. Rs. Rs. Rs.

250.00 Aug. 1 To Bank A/c
“ 2 By Letter heads 40.00 40.00
“ 4 By Postal stamps 15.00 15.00
“ 5 By Cartage 9.00 9.00
“ 7 By Auto fare 6.00 6.00
“ 9 By Tea expenses 4.75 4.75
“ 12 By Telegram 8.50 8.50
“ 14 By Stationery 16.25 16.25
“ 15 By Taxi fare 12.75 12.75
“ 17 By Postage 42.50 42.50
“ 19 By Tips to office boy 8.00 8.00
“ 20 By Cartage 14.50 14.50
“ 22 By Cold drinks 6.00 6.00
“ 25 By Coolies 9.75 9.75
“ 27 By Envelopes 3.60 3.60
“ 28 By Rickshaw 3.00 3.00
“ 30 By Cartage 10.00 10.00
Total Payments 209.60 56.25 69.60 43.25 21.75 10.75 8.00
“ 31 By Balance b/d 40.40
250.00 Total 250.00 L.F. L.F. L.F. L.F. L.F. L.F.
40.40 Sept 1 To Balance b/d
209.60 “ 1 To Bank A/c

62
 LEDGER Subsidiary Books
Petty Cash Account
Dr. Cr.
2018 Rs. 2018 Rs.
Aug. 1 To Bank A/c 250.00 Aug. 31 By Sundries as per 209.60
Petty Cash Book
“ 31 By Balance c/d 40.40

250.00 250.00

Sept 1 To Balance b/d 40.40

“ 1 To Bank A/c 209.60
Bank Account

2018
Aug. 1 By Petty Cash A/c 250.00
Sept.1 By Petty Cash A/c 209.60

Printing and Stationery Account

2018 Rs.
Aug. 31 To Petty Cash A/c 56.25

Postage and Telegram Account

2018 Rs.
Aug. 31 To Petty Cash A/c 69.60

Cartage Account

2018 Rs.
Aug. 31 To Petty Cash A/c 43.25

Conveyance Account

2018 Rs.
Aug. 31 To Petty Cash A/c 21.75

Entertainment Account

2018 Rs.
Aug. 31 To Petty Cash A/c 10.75

Miscellaneous Expenses Account

2018 Rs.
Aug. 31 To Petty Cash A/c 8.00
63
Accounting Process
6.9 WHAT IS A BANK?
You might have heard the names of State Bank of India, Andhra Bank, Allahabad
Bank. You may also be having an account with some bank. Now, let us have an
idea what exactly a bank is and what it does. Bank is an organisation which deals in
money by accepting deposits and lending to those who need it. Accepting deposits
is the primary function of a bank. It accepts demand deposits and time deposits.
Demand deposits are those deposits which are payable on demand, and time deposits
are those which are repayable after a specified period. The bank pays interest on
the deposits (except deposits on current account).
Lending of money is another important function of a bank. It lends money to needy
persons and organisations in the form of short-term advances, term loans, and
overdraft facility. The bank collects interest on the amount lent.
The bank also renders various other services to its customers such as (i) collecting
amounts due to the customer like interest, dividends, etc., (ii) making payments on
behalf of the customer; (iii) issuing letters of credit, (iv) providing travellers cheques
(v) providing safe deposit lockers for safe custody of valuables, and (vi) tarnishing
guarantee on behalf of customers. etc. The bank charges some amount for the services
rendered to its customer.

6.10 TYPES OF BANK ACCOUNTS

There are broadly three types of accounts: (i) savings bank account, (ii) current
account, and (iii) fixed deposit account. In case of savings bank account, there are
certain restrictions on the number and amount of withdrawals. It is mainly intended
to encourage savings. Hence, it is not considered suitable for business purposes.
Business firms generally open current account. There are no restrictions on the number
and amount of withdrawals in case of a current account. Any amount can be withdrawn
any number of times from a current account.
Fixed deposit account is meant for deposits for a fixed period. Withdrawal of fixed
deposits is allowed only on maturity. It is used by people generally for long term
savings.

6.10.1 Advantages of Having a Bank Account

Now-a-days, every business firm has an account with a bank. The business generally
retains a small sum of money with itself for immediate use and deposits the rest in a
bank. The money deposited in a bank is as good as money on hand. There are
various advantages of maintaining an account with the bank. These are:
1. Money is safe and it also earns some interest.
2. The bank provides various types of loans.
3. It is easy and safe to make payments by issuing cheques.
4. Money can be sent or transferred to other places at a nominal charge through
a bank.
5. The bank helps in collection of bills, cheques, etc., on behalf of its customers.

64
6 If ‘standing instructions’ are given to the bank, it collects interest on debentures, Subsidiary Books
dividend on shares, etc., and makes payment of insurance premium, pension,
subscriptions, etc., on behalf of its customers.

6.10.2 How to Open and Operate a Bank Account?

If you want to open a bank account you have to apply to the bank on a prescribed
form. You are also required to be introduced to the bank by a person known to the
bank (possibly an account holder). The banker, after satisfying himself about the
applicant, accepts the initial deposit in cash and opens an account in your name.
Thus, you become a customer of the bank. Your account is given a number for easy
identification. When an account is opened, the banker gives to its customer (i) a
pass book, (ii) a pay-in-slip book and (iii) a cheque book.
i) Pass Book: The pass book is a copy of the customer’s account as maintained
by the bank. In other words, it is nothing but a true copy of the transactions
with the bank, as they appear in the customer’s account in the bank’s ledger. In
case of a current account, the bank may not issue a pass book. In that case, it
would furnish a statement of account from time to time. Whether it is a pass
book or a statement of account, the proforma is as given in Figure 6.3.
Pass Book

Date Particulars Dr. Cr. Dr. or Cr. Initials

Withdrawals Deposits Balance

Rs. Rs. Rs.

Fig. 6.3
When an amount is deposited in the bank, it is entered in the deposit column (Cr.).
When an amount is withdrawn, it is entered in the withdrawal column (Dr.). After
every deposit or withdrawal, the balance is worked out and shown in the balance
column in the pass book. It is also indicated whether it is a Dr. balance or a Cr.
balance. Usually, the pass book shows a credit balance, which means the customer
has money in his account. But when the customer has withdrawn more than what he
has deposited, the pass book shows a debit balance called overdraft.
ii) Pay-in-Slip Book: It contains printed forms which are used for depositing
cash and cheques into the bank. Look at the form of a pay-in-slip as shown in
Figure 6.4.
The first part is called counterfoil and the second part is the main pay-in-slip.
When you submit it to the bank along with the amount to be deposited, the
bank will stamp and sign the counterfoil and give it back to you. The main pay-
in-slip is retained by the bank for further processing. The counterfoil is for
your own record and future reference. The cash book entry for deposit is also
made with the help of the counterfoil. 65
Accounting Process Specimen of Pay-in-Slip

Fig. 6.4
iii) Cheque Book: A cheque book contains a number of leaves (10 to 20 or 50
leaves) called cheques. A cheque is an instrument used for withdrawing money
from the bank. It is an unconditional order on the bank made by its customer,
instructing the bank to pay the amount specified therein to the person named in
the cheque or to his order. The person who draws a cheque is called ‘drawer’.
The bank on whom the cheque is drawn is called ‘drawee’. The person in
whose favour the cheque is drawn (or to whom it is payable) is called ‘payee’.
Look at Figure 6.5 for specimen of a cheque. In this cheque, Mr. S. Jain is the
drawer. He has drawn and signed the cheque. The Bank of Baroda on whom
the cheque is drawn, is the drawee. Mr. P. Ram Dev is the payee as the cheque
is payable to him.
While writing a cheque, care must be taken to write the date, the name of the party
to whom payment has to be made, and the amount to be paid both in words and
figures. It must be signed by the account holder. The signature on the cheque must
tally with the specimen signature which the bank has.
A cheque can be a bearer cheque or an order cheque. In case of a bearer cheque,
the bank pays the amount to any person who presents it at the counter of the bank
without much fuss. But, in case of an order cheque, identification of the party claiming
payment is necessary, specially if he wants payment at the counter.
Specimen of Cheque

66 Fig. 6.5
 Subsidiary Books
6.11 CROSSING OF CHEQUES
If two parallel lines are drawn on the left hand top corner of the cheque, it is called
‘Crossing’, and such a cheque is called a ‘Crossed Cheque’. A crossed cheque
cannot be encashed directly at the counter. It has to be deposited in an account with
a bank This makes it safe, as the party to whom the payment is made can be easily
identified.

Crossing can be ‘General Crossing’ or ‘Special Crossing’. General crossing is one

where two parallel lines are drawn across the cheque with or without the words
‘&Co.’, ‘Not Negotiable’, ‘A/c Payee’ as shown in Figure 6.6. In case of special
crossing, the name of a particular bank is also mentioned. This implies that the amount
of cheque is payable only to the bank named in the crossing. Look at Figure 6.6.
The name of ‘Bank of Baroda, Agra’ is written within the two parallel lines. Payment
of this cheque can be collected only through Bank of Baroda, Agra.
Crossing of a Cheque

General Crossing Special Crossing

Fig. 6.6

In case of general crossing, payment can be made to any bank which present the
cheque for payment. The use of words ‘A/c Payee Only’ means that the cheque
can be paid only into the account of the payee named in the cheque. The words
‘Not Negotiable’ provide further safeguard against stolen and forged cheques. But
‘& Co.’ has no special connotation.

6.12 ENDORSEMENT AND DISHONOUR OF

CHEQUES
A cheque is a negotiable instrument. It can be transferred to another person by
‘endorsement’ (except in case of a bearer cheque which can be transferred by mere
delivery). The endorsement is done by signing at the back of the cheque and writing
the name of the party to whom it is to be transferred. For example, if a cheque
payable to Mr. P. Ram Dev is to be endorsed in favour of Mr. Kishan Lal, Mr. P.
Ram Dev will write at the back of the cheque as follows:
67
Accounting Process Pay to Kishan Lal or Order
P. Ram Dev
(Signature)
Thus, endorsement can be defined as signing at the back of the cheque for the
purpose of negotiation. The person who endorses the cheque is called endorser (P.
Ram Dev in this example) and the person to whom it is endorsed is called endorsee
(Kishan Lal in this example). Kishan Lal can now collect payment of this cheque.
Dishonour of Cheques :When a cheque is presented for payment, there are two
possibilities. It may be paid or the payment may be refused. When the payment of a
cheque is refused, it is said to be dishonoured. The bank refuses the payment for the
following reasons:
1. When no date is written on the cheque, or a future date is written, or it is more
than three months old.
2. If the amount written in words differs from the amount written in figures.
3. When the cheque is not signed or when the signature on the cheque does not
tally with the specimen signature with the bank.
4. When the drawer does not have sufficient balance in his account.
5. When the drawer requests the bank in writing to stop payment on that cheque.
6. If the bank has come to know about the death of the drawer or his becoming
insolvent or insane.
Check Your Progress D
1. List the main functions of a bank.
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. What is a pass book?
.................................................................................................................
.................................................................................................................
.................................................................................................................
3. What is a pay-in-slip?
.................................................................................................................
.................................................................................................................
.................................................................................................................
4. What is a cheque ?
.................................................................................................................
.................................................................................................................
.................................................................................................................
5. What do you mean by crossing a cheque?
.................................................................................................................
.................................................................................................................
68 .................................................................................................................
6 What do you understand by endorsement? Subsidiary Books
.................................................................................................................
.................................................................................................................
.................................................................................................................

6.13 THREE COLUMN CASH BOOK

Generally, business firms deposit the day’s collections in a bank, retaining only a
small amount for immediate use. They prefer to make payment by cheque as it is
more safe and convenient. So, bank transactions are more numerous than cash
transactions.
The bank transactions can also be recorded in the cash book along with cash
transactions. It is done by providing an additional column for bank on both sides of
the cash book. Look at the proforma of a Three Column Cash Book in Figure 6.7.
A bank column in the cash book, also serves the purpose of a bank account and
avoids the need to have a ‘Bank Account’ in the ledger. The bank column on the
debit side records all deposits made in the bank and the bank column on the credit
side records all withdrawals from the bank. We shall now have three amount columns,
one each for discount, cash and bank. Hence, it is called a Three Column or Triple
Column Cash Book.
Three Column Cash Book
Dr. Cr.

Date Particulars L.F. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
Allowed Received

Rs. Rs. Rs. Rs. Rs. Rs.

Fig. 6.7

6.13.1 Recording in Three Column Cash Book

All receipts of cash or cheques are to be recorded on the debit side: When
payment is received in cash, the amount is recorded in the cash column. If it is by
cheque, it is recorded in the bank column. The date on which it is received, and the
name of the person from whom it is received, are recorded in the date and particulars
columns respectively.
If any discount is allowed to a party on receipt of cash or cheque, it is recorded on
the debit side in the discount allowed column as usual.

69
Accounting Process All cash and cheque payments are to be recorded on the credit side: When
payment is made by cash, the amount is recorded in the cash column. If it is made by
cheque, it is recorded in the bank column. The date on which payment is made, and
the name of the person to whom payment is made, are recorded in the date and
particulars columns respectively,
Discount received, if any, at the time of making payment is to be recorded on the
credit side in the discount received column as usual.
Contra Entry: The word ‘contra’ means ‘the other side’. if the double entry of a
transaction is complete in the cash book itself such entry is called ‘contra entry’.
Contra entry arises only when cash account and bank account are simultaneously
involved in a transaction. It happens only when either cash is deposited in the bank
or cash is withdrawn from it. In both cases, entries have to be made in cash as well
as bank columns. When cash is deposited in the bank, it is recorded (i) in bank
column on the debit side of the cash book, and (ii) in cash column on the credit side
of the cash book. Similarly, when cash is withdrawn from the bank, it is recorded on
the (i) debit side in cash column, and (ii) on the credit side in bank column. It must,
however, be noted that if cash is withdrawn from bank for personal use of the
owner, it is recorded only on the credit side of cash book in bank column as drawings.
In order to denote contra entries, the capital letter ‘C’ is written in the L.F. column
on both sides of the cash book. It means that the corresponding aspect of the
transaction is entered on the other side (contra) of the same page of the cash book.
The letter ‘C’ also indicates that the relevant entry need not be posted into the
ledger, as the double entry is complete in the cash book itself.
6.13.2 Posting the Three Column Cash Book
All the entries recorded in the Three Column Cash Book are to be posted to their
respective ledger accounts, except the contra entries. For posting the entries recorded
on the debit side of the cashbook, credit the accounts concerned in the ledger by
writing ‘By Cash A/c’ if the entry is in cash column, and ‘By Bank A/c’ if the entry is
in bank column. If discount is also involved, credit the concerned personal account
by writing ‘By Discount Allowed A/c’. Totals of the discount allowed and discount
received columns shall be posted to the respective discount accounts the same way
as for Two Column Cash Book.
6.13.3 Balancing the Three Column Cash Book
The cash and bank columns are balanced separately like any other ledger account.
As stated earlier, the Cash Account always shows a debit balance. The bank account
also normally shows a debit balance. But, sometimes it may show a credit balance
which indicates a bank overdraft. It reflects the amount withdrawn from the bank in
excess of what is deposited in the bank.
The procedure of recording the closing and opening balances is the same as in Two
Column Cash Book. Note that the discount columns will not be balanced. They are
simply totalled.
Study illustration 4 carefully. You will follow the recording, posting and balancing of
a Three Column Cash Book.
Illustration 4
Enter the following transactions in the Three Column Cash Book of Galaxy
70 Enterprises and show the ledger postings:
 Subsidiary Books
2018
July 15 Cash in hand 800
“ 15 Balance in bank account 4,500
“ 16 Purchased goods and issued cheque 3,000
“ 17 Cash sales 4,000
“ 18 Received from Saniad in full settlement of
his account Rs.4,000 cheque 2,000
cash 1,950
“ 20 Cash deposited into bank 5,000
“ 21 Paid Rama Krishna by cheque 2,970
Received discount 30
“ 22 Received from Bose 1,680
Discount allowed 20
“ 24 Cash withdrawn for office purpose 2,000
“ 25 Paid Mahantha in cash 3,000
Discount allowed by him 40
“ 26 Paid for stationery 100
“ 28 Deposited cash into bank 2,000
“ 30 Cash withdrawn from bank for personal
use of proprietor 500
Solution :
Joshi & Sons
Cash Book (With Discount and Cash Columns)
Rs. Rs.
Date Particular I.F. Discount Cash Date Particula I.F. Discount Cash Bank
Allowed Received

2018 Rs. Rs. 2018 Rs. Rs.

July.15 To Balance c/d 800 4,500 July 16 By Purchase A/c 3,000
“ 17 To Sales A/c 4,000 “ 20 By Bank A/c C 5,000
“ 18 To Samad 50 1,950 2,000 “ 21 By Rama Krishna 30 2,970
“ 20 To Cash A/c C 5,000 “ 24 By Cash A/c C 2,000
“ 22 To Bose 20 1680 “ 25 By Mahanta 40 3000
“ 24 To Bank A/c C 2,000 “ 26 By Stationery A/c 100
“ 28 To Cash A/c C 2,000 “ 28 By Bank A/c C 2,000
“ 30 By Drawings A/c 500
“ 31 By Balance c/d 330 5,030
70 10,430 13,500 70 10,430 13,500
Aug. 1 To Balance b/d 330 5030

LEDGER
Sales Account

2018
July 17 By Sales A/c 4,000
71
Accounting Process Sanad’s Account

2018
July 18 By Discount Allowed 50
“ 18 By Cash A/c 1,950
“ 18 By Bank A/c 2,000

Bank Account

2018
July 22 By Discount Allowed 20
“ 22 By Cash A/c 1,680

Purchase Account

2018 Rs.
July 16 To Bank A/c 3,000

Rama Krishna’s Account

2018 Rs.
July 21 To Discount allowed 30
“ 21 To Bank A/c 2,970
Mahendra’sAccount

2018 Rs.
July 25 To Discount Received A/c 40
“ 25 To Cash A/c 3,000
Stationery Account

2018 Rs.
July 26 To Cash A/c 100

Drawings Account

2018 Rs.
July 30 To Bank A/c 500

Discount Allowed Account

2018 Rs.
July 31 By Sundries as
per Cash book 70
Discount Received Account

2018
July 31 By Sundries as 70
per Cash book
72
In illustration 4, you will notice that the total of bank column on the debit side is more Subsidiary Books
than the total of bank column on the credit side of the cash book. This indicates that
there is money in the bank. If, however, the total of bank column on the debit side is
less than the total on the credit side, it will reflect an overdraft in the bank. You will
find this in Illustration 5.

6.13.4 Special Points Regarding Cheques Received

Generally, cheques received from various parties are deposited in the bank on the
same day. However, for some reason, if a cheque is not sent to the bank on the day
of receipt, it can be entered in the cash column, treating the cheque as cash. Then,
the day it is sent to the bank, it can be recorded in the cash book as cash deposit in
the bank in the form of a contra entry. For example, on April 8, a cheque for Rs. 500
is received from Rao and it is sent to the bank on April 11. The entries in cash book
will appear as follows:
Banking Transactions and Three Column Cash Book
Cash Book
(Cash and Bank Column only)
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
Rs. Rs. Rs. Rs.
2018 2018
Apr. 8 To Rao 500 Apr. 11 By Bank a/c C 500
“ 11 To Cash A/c C 500

Normally, this procedure is avoided. The entry is made directly in the bank column
on the day the cheque is deposited in the bank. In the absence of any specific
instructions, it can be presumed that the cheque received from a party was sent to
the bank for collection on the same day.
Sometimes, a cheque received by the firm may not be deposited in the bank but
may be endorsed to a third party. In that case, the cheque received will be recorded
first in the cash column on the debit side of the cash book and then on its credit side
in the cash column. This ensures entries in the personal accounts of (i) the party from
whom it is received, and (ii) the party to whom it is endorsed. For example, on April
12, a cheque for Rs. 800 was received from Ganpati and it was endorsed on April
14, in favour of Shiva, a creditor of the firm. The entries in cash book will appear as
follows:
Cash Book
(Cash Column only)
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

2018 Rs. 2018 Rs.
Apr. 12 To Ganpati 800 Apr. 14 By Shiva a/c 800

Sometimes, a cheque sent to the bank for collection may be dishonoured. In that
case, the bank will return the cheque along with the advice stating the cause of
dishonour. Whatever the firm may do to realise its payment from the concerned 73
Accounting Process
party, the entry for dishonour of the cheque must immediately be recorded in the
cash book. The entry will be made on the credit side in bank column. This nullifies
the effect of the entry made earlier at the time of receiving and depositing the cheque
in the bank. For example, on April 16, a cheque for Rs. 750 was received from
Yogesh and sent to bank for collection on the same day. The bank dishonoured the
cheque and returned it on April 20. The entries in the cash book will appear as
follows:
Cash Book
(Bank Column only)
Dr. Cr.

Date Particulars L.F. Amount Date Particulars L.F. Amount

2018 Rs. 2018 Rs.
Apr. 16 To Yogesh 750 Apr. 20 By Yogesh 750

Check Your Progress E

Fill in the blanks.
1. All deposits into the bank are recorded in bank column on
the………………… side of the cash book.
2. All withdrawals from the bank are recorded in bank column on the …………
…………… side of the cash book.
3. If debit as well as the credit aspects of a transaction are recorded in the cash
book itself it is called…………………
4. When a cheque received on a particular date is not deposited the same day
into bank, it is entered in ............. column on the debit side of the cash book.
5. When a cheque received is endorsed, it is recorded in cash column on……
…………… sides of the cash book.
6. When a cheque is returned dishohoured, it is recorded on the…………………
side of the cash book in bank column.
Illustration 5
Record the following transactions in Three Column Cash Book of Balaji Agencies
and balance the same.
2018 Rs.
July 1 Cash in hand 40,000
“ 2 He opened a current account with a bank 36,000
“ 3 Purchased goods for cash 600
and by cheque 1,500
“ 5 Sold goods for cash 800
“ 6 Sold goods to Mohan and received a cheque for the same 1,200
“ 8 Deposited Mohan’s cheque in the bank 1,200
“ 9 Purchased stationery by cheque 200
“ 10 Cash sales 2,000
74
 “ 11 Issued cheque for cash purchase of furniture to Woodland 2,500 Subsidiary Books

“ 12 Deposited cash in the bank 3,000

“ 13 Misra paid directly into bank account 1,000
“ 15 Received from Madhu cash 1,000
cheque 1,400
Allowed him discount 50
“ 16 Paid to Ravi in cash 500
cheque 2,500
Received discount 40
“ 17 Received a cheque from Joseph 1,500
“ 18 Withdrew cash from the bank for office use 1,500
“ 20 Balaji paid his son’s college fees in cash 400
“ 22 Paid Subhan & Co. by cheque 975
Received discount 25
“ 24 Joseph’s cheque returned dishonoured 1,500
“ 25 Received a cheque from Gagan. It was endorsed to Ram 700
“ 26 Withdrew from bank for personal use 1,600
“ 27 Issued cheque for purchase of machinery 40,000
“ 28 Paid sundry expenses in cash 200
“ 30 Paid rent by cheque 600
“ 31 Deposited Cash in excess of 500

Balaji Agencies Cash Book

Date Particulars L.F. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
Allowed Received

2018 Rs. Rs. Rs. 2018 Rs. Rs. Rs.

July 1 To Balance b/d 40,000 July 2 By Bank A/c C 36,000
“ 2 To Cash A/c C 36,000 “3 By Purchases A/c 600 1,500
“ 5 To Sales A/c 800 “8 By Bank A/c C 1,200
“ 6 To Sales A/c 1,200 “9 By Stationery A/c 200
“ 8 To Cash A/c C 1,200 “ 11 By Furniture A/c 2,500
“ 10 To Sales A/c 2,000 “ 12 By Bank A/c C 3,000
“ 12 To Cash A/c C 3,000 “ 16 By Ravi 40 500 2,500
“ 13 To Misra 1,000 “ 18 By Cash A/c C 1,500
“ 15 To Madhu 50 1,000 1,400 “ 20 By Drawings A/ c 400
“ 17 To Joseph 1,500 “ 22 By Subhan & Co 25 975
“ 18 To BankA/c C 1,500 “ 24 By Joseph 1,500
“ 25 To Gagan 700 “ 25 By Ram 700
“ 31 To Cash A/c C 4,100 “ 26 By Drawings A C 1,600
“ 31 To Balance c/d 4,675 “ 27 By Machinery A/c 40,000
“ 28 By Sundry exp.A/c 200
“ 30 By Rent A/c 600
“ 31 By Bank A/c C 4,100
“ 31 By Balance c/d 500
50 47,200 52,875 65 47,200 52,875
Aug.1 To Balance b/d 500 Aug.1 By Balance b/d 4,675

75
Accounting Process Note :
1. When cheques are received from parties, unless otherwise specified, it is
assumed that they are deposited in the bank on the same day. But, in case of
the transaction dated July 6, the cheques was received on July 6, but was
deposited in the bank on July 8. Hence on July 6, it is recorded as the cash
column on the debit side, and on July 8, it is shown as cash deposit through a
contra entry.

2. On July 17, Joseph gave a cheque for Rs. 1,500 which was duly entered on
the debit side. On July 24, the cheque was returned dishonoured. When a
cheque is dishonoured, the rule is to reverse the entry made earlier. Hence, on
July 24, an entry has been passed on the credit side in the bank column. This
nullifies the entry made on July 17.

3. On July 25, a cheque was received from Gagan which was endorsed to Ram.
It has been first entered in the cash column on the debit side on July 25, and
then on the credit side on the same date.

4. The credit side total of the bank column is Rs 52,875 and the debit side total is
Rs 48,200. It means that there is a credit balance of Rs. 4,675 in the bank
account. As you know this is a case of overdraft. On July31, it has been shown
on the debit side of the cash book making two sides equal, and then on August
1, it is recorded on the credit side of the bank column.

6.14 PURCHASES JOURNAL

While studying sub-division of journal, you learnt that Purchases Journal is used for
recording credit purchases of goods and raw materials. The goods or raw materials
can be purchased either on cash basis or on credit basis. When they are purchased
on cash basis, the entry is made in the cash book. But when they are purchased on
credit, they are recorded in the Purchases Journal. Note that the credit purchases of
fixed assets like typewriter, vehicle, etc., are not recorded in this book. They are
recorded in Journal Proper about which you will learn later. The Purchases Journal
is also called ‘Purchases Book’, ‘Purchases Day Book’, and ‘Invoice Book’.

6.14.1 Invoice
When you purchase something from a shop, you receive a bill Such bill is called
‘invoice’. It contains the details pertaining to the quantity, description, price, total
amount, and trade discount, if any. Thus, an invoice is a business document giving
full details of the goods purchased. It is a ‘Purchase Invoice’ or ‘Inward invoice’ for
the purchaser and a ‘Sales Invoice’ or ‘Outward Invoice’ for the seller. Entries in the
Purchases Journal are made on the basis of the purchase invoices received (inward
invoices). Look at Figure 6.8 for a specimen of an invoice.

76
 Invoice Subsidiary Books

Book Lovers Private Limited

Hyderabad
No.3891 Date: 15-7-2018
To
M/s. Book Paradise, Nagpur

Quantity Particulars Rate per Total

unit

Rs. Rs.
10 Copies Principles and Practice of Accountancy 25.00 250.00
by R. Srirani
Less: Discount 10% 25.00
(Rupees two hundred and twenty five only) 225.00

xxxxx
For Book Lovers Private Limited

Fig. 6.8
6.14.2 Recording in the Purchases Journal
Look at Figure 6.9. It shows the Proforma of a Purchases Journal.
Purchases Journal
Date Name of Inward invoice L.F. Amount Remarks
the supplier Number
(1) (2) (3) (4) (5) (6)

Rs.

Fig. 6.9
The Purchases Journal has six columns.
Column 1: It is meant for writing the date of purchase.
Column 2: In this column, you write the name and address of the supplier.
Column 3: The inward invoice number is recorded in this column. As stated earlier,
when you purchase goods on credit, you get an invoice from the supplier. Although
it bears a number, you have to accord your own serial numbers to all inward invoices
for easy reference. It is this serial number which will be entered in the inward invoice
column of the Purchase Journal.
Column 4: In this column, you will write the page number of the account in ledger
where posting is done.
Column 5: In this column, the amount payable to the supplier is recorded. You must
note that the amount payable is arrived at after deducting the trade discount, if any.
For example, see the invoice given in Figure 6.8. The amount payable is Rs. 225. If,
some sales tax is also involved, the amount payable should include that also.
77
Accounting Process Column 6:Any other relevant information is to be recorded in this column. Information
such as the date on which the amount of the bill is payable and the date on which it
is actually paid may be noted in this column.

6.14.3 Posting the Purchases Journal

The transactions recorded in the Purchases Journal are to be posted to their respective
personal accounts in the ledger. When a purchase is made on credit, the supplier
becomes the creditor for the firm. Hence, every credit purchase recorded in the
Purchases Journal is posted on the credit side of the personal account of the supplier
by writing ‘By Purchases A/c’ in particulars column. The Purchases Journal is totalled
periodically, say, weekly or monthly. This total is posted to the debit side of Purchases
Account in the ledger by writing ‘To Sundries—as per Purchases Journal’.
Thus, you observe that posting of Purchases Journal involves two steps: (i) posting
each purchase to the credit of the respective personal accounts of suppliers, and (ii)
posting the total purchases to the debit of the Purchases Account. With this, double
entry for credit purchases is complete. Look at illustration 6 for recording i the
Purchases Journal and its posting into ledger.
Illustration 6
Record the following transactions in the Purchases Journal of M/s. Dharam Chand
& Co., and show the ledger postings.
2018 Rs.
July 1 Bought goods from Shreedhar 5,000
“ 2 Purchased goods from Shreekant 4,000
“ 3 Purchased from Shreenivas goods worth 2,500
“ 4 Shreedhar sold us goods 1,500
“ 5 Purchased goods from Shreenivas subject to a 3,000
trade discount of 10%
“ 6 Bought from Shreekant goods worth with discount of 20% 3,500
Dharam Chand & Co.
PURCHASES JOURNAL

Date Name of the supplier Inward L.F. Amount Remarks

invoice
number

Rs.
2018 Shreedhar 25 5,000
July 1 Shreekant 26 4,000
“ 2 Shreenivas 27 2,500
“ 3 Shreedhar 28 1,500
“ 4 Shreenivas 29 2,700
“ 5 Shreekant 30 2,800
“ 6 Total 18,500

78
Note: i) The inward invoice numbers are imaginary. Subsidiary Books
ii) Sometimes, the particulars of items purchased can also be given with
each entry.
But it is considered unnecessary because the details are available in
the invoice, the serial numbers of which are duly given in the Purchases
Journal.
LEDGER
Shreedhar’s Account
Dr. Cr.

2018 Rs.
July 1 By Purchases A/c 5,000
“ 4 By Purchases A/c 1,500

Shreekant’s Account

2018 Rs.
July 2 By Purchases A/c 4,000
“ 6 By Purchases A/c 2,800

Shreenivas’s Account

2018 Rs.
July 3 By Purchases A/c 2.500
“ 5 By Purchases A/c 2,700

Purchases Account

2018 Rs.
July, 31 To Sundries - as per
Purchase Journal 18,500

6.15 PURCHASES RETURNS JOURNAL

In any business, sometimes goods purchased may have to be returned to the supplier
either partly or fully. This may become necessary when they are found to be defective,
damaged in transit, inferior quality, short weight, received too late (off season), or
not in conformity with the order given. If the number of such returns is small, they
can be recorded in the journal itself. But, if it is large, a separate book called ‘Purchases
Returns Journal’ should be used for recording these transactions. This book is also
called ‘Returns Outwards Journal’.

6.15.1 Debit Note

When you return goods to supplier, a statement called ‘Debit Note’ is sent to the
supplier. It informs the supplier that his account has been debited to the extent of the
value of goods returned. You know that when goods were purchased, the supplier’s
account was credited. Debiting his account now means that the amount payable to
him has been reduced by the value of goods returned. The debit note also contains
other particulars such as the name and address of the supplier, the description of the
goods returned, etc. The specimen of a debit note is shown in Figure 6.10. 79
Accounting Process
Debit Note
Book Paradise
Nagpur
Debit Note

No. 587 Date: 20-7-18

To
M/s. Book Lovers Pvt. Ltd. Hyderabad.
WE HAVE DEBITED YOUR ACCOUNT FOR
GOODS RETURNED AS FOLLOWS

Rs. Ps. Rs. Ps.

2 Copies of ‘Principles and Practice of
Accountancy’ by
Sriram @ Rs, 25 each 50.00
Less: Trade discount allowed by you @ 10% 5.00
(Rupees forty five only) 45.00

xxxxx
For Book Paradise

Fig. 6.10

6.15.2 Recording in the Purchases Journal

Look at Figure 6.11. It shows the Proforma of a Purchases Returns Journal.
Purchase Returns Journal
Date Name of Inward invoice L.F. Amount Remarks
the supplier Number
(1) (2) (3) (4) (5) (6)

Rs.

Fig. 6.11
Like the Purchase Journal, the Purchases Returns Journal also has six columns. As
usual, the date on which the goods are returned is recorded in the first column. The
name and address of the supplier to whom goods are returned are entered in the
second column. Write the serial number of the debit note in the third column. The
page number of the account in the ledger where posting is done will be entered in the
L.F. column. In the fifth column, the value of goods returned is entered. At the time
of original purchase, if some trade discount had been given, the same should also be
adjusted so as to arrive at the value of goods returned. If there is any other relevant
80 information, the same may be recorded in the remarks column.
6.15.3 Posting the Purchases Returns Journal Subsidiary Books

The transactions recorded in the Purchases Returns Journal are to be posted to their
respective personal accounts in the ledger. Separate accounts in the name of each
supplier already exists in the ledger (opened at the time of purchase). The entries
made in the Purchases Returns Journal will be posted to the debit of each supplier’s
account by writing To Purchases Returns A/c’.
The total of the Purchases Returns Journal is posted to the credit side of the Purchases
Returns Account’ in the ledger by writing ‘By Sundries—as per Purchases Returns
Journal’.
Look at illustration 7 for the procedure of recording in the Purchases Returns
Journal and its posting into the ledger.
illustration 7 (Continuation of illustration 6)
Enter the following transactions in the Purchases Returns Journal of M/s. Dharam
Chánd and Co. and show the ledger postings.
2018 Rs.
July 5 Returned goods to Shreekant (vide invoice No. 26) 200
“ 10 Returned goods to Shreenivas (vide invoice No. 29) 90
“ 12 Returned goods to Shreekant (vide invoice No. 30) 120
Dharam Chand & Co.
PURCHASES RETURNS JOURNAL

Date Name of the supplier Debit L.F. Amount Remarks

note
number

2018 Rs.
July 5 Shreekant 16 200
“ 10 Shreenivas 17 90
“ 12 Shreekant 18 120
---------
“ 31 Total 410
- ---------

Note : Debit Note numbers are imaginary.

LEDGER
Shreekant’s Account

2018 Rs. 2018 Rs.

July 5 To Purchases Return A/c 200 July 2 By Purchases A/c 4,000
“ 12 To Purchases Return A/c 120 “ 6 By Purchases A/c 2,800

81
Accounting Process Shreenivas’s Account

2018 Rs. 2018 Rs.

July10 To Purchases Return A/c 90 July 3 By Purchases A/c 2,500
“ 5 By Purchases A/c 2,700

Purchase Returns Account

2018 Rs.
July 31 By Sundries –
as per Purchase
Returns Journal 410

6.16 SALES JOURNAL

This book is used for recording only the credit sales of goods. Note that the cash
sale of goods or sale of fixed assets (cash or credit) are not recorded in this book.
The Sales Journal is also called ‘Sales Day Book’, or ‘Sales Book’.

6.16.1 Recording in the Sales Journal

The ruling of the Sales Journal is similar to that of Purchases Journal. The difference
is only with regard to the second column. In Purchases Journal, the second column
is used for recording the name of the supplier. But, in case of Sales Journal, it is used
for writing the name of the customer.
When goods are sold on credit, an invoice is given to the buyer. The seller generally
has a bound invoice book. It contains consecutively numbered invoices in duplicate.
While the original copy is given to the buyer, the duplicate remains in the book itself.
The entries in the Sales Journal are made with the help of the duplicate copies which
are duly numbered. The procedure for recording in the Sales Journal is similar to
that of the Purchases Journal.

6.16.2 Posting the Sales Journal

All entries made in the Sales Journal are posted to the respective personal accounts
in the ledger. In a credit sale, the customer becomes a debtor to the firm. Hence,
every credit sale recorded in the Sales Journal is posted on the debit side of the
personal account of individual customers by writing ‘To Sales A/c’ in particulars
column. Then, the total of the Sales Journal is posted on the credit side of the Sales
Account by writing ‘By Sundries—as per Sales Journal’.
Look at illustration 8 and study how credit sales of goods are recorded in the Sales
Journal and how they are posted into ledger.
Illustration 8
Prepare the Sales Journal of M/s. Bharat Furniture Works, Delhi from the following
transactions:
2018
Aug. 1 Sold to Doulath Furniture House, Delhi
50 Chairs @ Rs. 150 each
82
 10 Tables @ Rs. 500 each Subsidiary Books
At a trade discount of 10%
“ 4 Supplied the following furniture, as per the order, to Kesav Memorial School,
Mehraulli
100 Chairs @ Rs. 135 each
40 Tables @Rs. 450 each
2 Almirahs @Rs. 750 each
5 Black boards @ Rs. 800 each
“ 10 Supplied on credit to Pyarelal Furniture Palace, Okhla
10 Sofa sets @ Rs. 800 each
10 Dining tables @ Rs. 500 each
5 Cots @ Rs. 600 each
5 Dining tables @ Rs. 800 each
Trade discount 10%
Solution :
Bharat Furniture Works
Sales Journal

Date Name of the supplier Debit L.F. Amount Remarks

note
number

2018 Rs.
Aug. 1 Doulath Furniture House, Delhi 107 11,250
“ 4 Kesav Memorial School, Mehrauli 108 37,000
“ 10 Pyarelal Furniture Palace, Okhla 109 18,000
“ 31 Total 66,250

Note: i) Invoice numbers are imaginary,

ii) Sometimes, the particulars of items sold can also be given with each
entry, but it is considered unnecessary because the details are available
in the invoices and the serial numbers of which are duly given in the
Sales Journal.
LEDGER
Daulath Furniture House Account
Dr. Cr.
2018 Rs.
Aug 1 To Sales A/c 1,250

Kesav Memorial School, Mehrauli

2018 Rs.
Aug 4 To Sales A/c 37,000

83
Accounting Process Pyarelal Furniture Palace

2018 Rs.
Aug 10 To Sales A/c 18,000

Sales Account

2018 Rs.
Aug 31 By Sundries – as
per Sales Journal 66,250

6.17 SALES RETURNS JOURNAL

When customers return the goods to the business, it will be recorded in a separate
book called ‘Sales Returns Journal’. Normally, if the number of such returns is
small, they can be recorded in the journal itself. But if their number is large, it is
better to maintain a separate book called Sales Returns Journal. This book is also
called ‘Returns Inwards Journal’.

6.17.1 Credit Note

When a customer returns goods, a statement called ‘Credit Note’ is sent to him.
The credit note informs the customer that his account has been credited to the extent
of the value of goods returned. You know that when goods were sold, the customer’s
account was debited. Now crediting his account means the amount payable by him
stands reduced by the value of goods returned. The credit note also contains other
information such as the name and address of the customer, description of the goods
returned, etc. The credit notes are consecutively numbered and are prepared in
duplicate. The original is sent to the customer and the duplicate is carefully filed. The
specimen of a credit note is shown in Figure 6.12.
Credit Note
Book Lovers Private Limited
Hyderabad

No.698 Date: 25-7-2018

M/s. Book Paradise
Nagpur
WE HAVE CREDITED YOUR ACCOUNT FOR
GOODS RETURNED AS FOLLOWS

Rs. Ps. Rs.Ps.

2 Copies of ‘Principles and Practice of Accountancy’
by Shriram @Rs. 25 each 50.00
Less: Trade discount allowed @ 10% 5.00
(Rupees forty five only). 45.00

xxx
For Book Lovers Pvt. Ltd

84 Fig. 6.12
Note: Normally the customer, while returning the goods, may also send a debit Subsidiary Books
note. But quite often they do not do so. Hence, the seller always prepares a
credit note for his record. If debit note is also received, it may be filled
along with the respective credit note.
6.17.2 Recording in the Sales Returns Journal
The ruling of the Sales Returns Journal is similar to that of Purchases Returns Journal.
The difference is only with regard to the second column. In Purchases Returns Journal,
the second column is used for recording the name of the supplier. But in case of
Sales Returns Journal, it is used for writing the name of the customer. The Procedure
for recording in the Sales Returns Journal is also similar to that the Purchases Returns
Journal. The entries in the Sales Returns Journal are made with the help of duplicate
copy of the credit notes.
6.17.3 Posting the Sales Returns Journal
The transaction recorded in the Sales Returns Journal are posted to the respective
personal accounts in the ledger. Separate accounts in the name of each customer
already exist in the ledger (opened at the time of sale). Credit the customers’ accounts
individually by writing ‘By Sales Returns A/c’. Then post the total of the Sales Returns
Journal to the debit side of the Sales Returns A/c by writing ‘To Sundries—as per
Sales Returns Journal’.
Look at illustration 9 and study how sales returns have been recorded in the Sales
Returns Journal and posted into ledger.
Illustration 9 (Continuation of illustration 8)
2018
Aug. 5 Received a debit note along with one chair and a table from Doulath
Furniture House, Delhi, saying that the legs of the chair and table are
broken (remember, each chair was sold at Rs. 150 and each table at Rs.
500 with a trade discount of 10%).
10 Received 2 chairs and 2 tables along with a letter from Kesav Memorial
School, Mehrauli, saying that they were damaged (chairs were sold at Rs.
135 each and tables at Rs. 450 each).
16 Received a debit note from M/s. Pyarelal Furniture Palace, Okhla, stating
that the mirrors of two dressing tables were found defective and so returned.
Enter the above transactions in the Sales Return Journal of M/s Bharat
Furniture Works, Delhi, and show the ledger postings.
Bharat Furniture Works
SALES RETURNS JOURNAL

Date Name of the supplier Credit L.F. Amount Remarks

note
number
2018
Aug.5 Doulath Furniture House, Delhi 56 585
“ 10 Kesav Memorial School, Mehrauli 57 1,170
“ 16 Pyarelal Furniture Palace, Okhla 58 200

“ 31 Total 1,955

Note : Credit Note numbers are imaginary. 85

Accounting Process
LEDGER
Doulath Furniture House Account
Dr. Cr.

2018 Rs. 2018 Rs.

Aug 1 To Sales A/c 11,250 Aug 5 By Sales Returns A/c 585

Kesav Memorial School Account

2018 Rs. 2018 Rs.

Aug 4 To Sales A/c 37,000 Aug 10 By Sales Returns A/c 1,170

Pyarelal Furniture Palace Account

2018 Rs. 2018 Rs.

Aug 10 To Sales A/c 18,000 Aug 16 By Sales Returns A/c 200
(Allowance granted)

Sales Returns Account

2018 Rs.
Aug 31 To Sundries - as per
Sales Returns Journal 1,955

These postings were made from Sales Journal, when goods were sold (refer
illustration 9).
Check Your Progress F
1. What is an invoice?
................................................................................................................
................................................................................................................
................................................................................................................
2. What is a debit note?
................................................................................................................
................................................................................................................
................................................................................................................
3. What is a credit note?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
86
4. Fill in the blanks Subsidiary Books

a) Purchases Journal records credit purchase of ………..only.

b) Sales Journal records all …………..sales of goods.
c) A ………….is sent to a customer when he returns the goods.
d) Total purchases are posted to ………….Account at the end of every
month.
e) Total of Sales Journal is posted on the ....................... side of Sales Account
at the end of every month.
f) Sales Returns are also called ...................
g) Purchase Returns are also called……………..
h) Debit Note is sent to the supplier when the goods are ….................…
…….. to him.

6.18 JOURNAL PROPER

By now, you know what a journal is and what its sub-divisions are. You also know
that the special journals discussed earlier take care of certain types of transactions
which are repetitive and numerous. However, there are a number of transactions
which do not occur frequently and hence do not warrant preparation of special
journals. But they have to be recorded somewhere. For them, the proper place is
the original journal itself, which is now called ‘Journal Proper’. Thus all events and
transactions which cannot be recorded in any of the special journals maintained by
the firm, shall be recorded in the Journal Proper. Examples of such transactions are:
a) Opening Entry
b) Closing Entries
c) Transfer Entries
d) Adjustment Entries
e) Rectification Entries
f) Miscellaneous Entries
a) Opening Entry: An opening entry is passed in the journal for opening a new
set of accounts. This may be needed at the time of the commencement of
business or at the commencement of new accounting year.
If a person commences business only with cash, there is no need to pass a
journal entry. The cash brought in is just entered in the cash book. But, if he
also brings some other assets, then an opening entry is passed in Journal Proper,
debiting the concerned assets accounts and crediting the Capital Account.
In case of a running business, an opening entry is passed at the commencement
of a new accounting year to incorporate various balances of assets and liabilities
brought forward from the previous year into current year’s books.
b) Closing Entries: At the end of the accounting year, when final accounts are
prepared, the nominal accounts are closed by transferring them to Trading
87
Accounting Process Account or Profit and Loss Account. The journal entries passed for this purpose
are called ‘Closing Entries’.
c) Transfer Entries: When an amount is to be transferred from one account to
another, you have to pass an entry in the Journal Proper in order to effect the
transfer. Such entries are called ‘Transfer Entries’. Suppose, you want to transfer
proprietor’s total drawings made during the year to his Capital Account. The
proprietor’s total drawings appear in Drawings Account which shows a debit
balance. You will transfer the balance of Drawings Account to Capital Account
by passing the following entry in the Journal Proper.
Capital Account Dr.
To Drawings Account
(Transfer entry)

d) Adjustment Entries: At the time of preparing the final accounts, it is necessary

to bring into the books of account certain unrecorded items like closing stock,
depreciation on fixed assets, interest on capital, expenses incurred but not yet
paid, income earned but not yet received, etc. Entries passed in the Journal
Proper to record such items are called ‘Adjustment Entries’. These entries are
explained in detail later.
e) Rectification Entries: You may commit errors while recording transactions
in various books, and while posting, totalling, balancing, etc. Such errors are
generally corrected through entries in Journal Proper and are known as
‘Rectification Entries’.

f) Miscellaneous Entries: In addition to the entries mentioned above, if there is

any transaction which cannot be recorded in any of the special journals, it will
be entered in the Journal Proper. Example of such transactions are:
i) Credit purchases of fixed assets, investments, etc.

ii) Credit sales of fixed assets, investments etc.

iii) Withdrawal of goods from the business by the owner for his personal use.
iv) Loss of goods by theft, accident, fire, etc.

v) Special allowances received from suppliers or given to customers.

vi) Endorsement or dishonour of bills.

vii) Writing off bad debts.

Look at illustration 10 for entries of such transactions in the Journal Proper.
Illustration 10

Enter the following in the Journal Proper of Rajani Enterprises.

2018
Aug. 3 Sold office van on credit for Rs. 15,000 to Ahmed Ali.
“ 8 The owner has taken away goods worth Rs. 1,000 for his domestic use.
“ 15 Fire broke out in the premises and goods worth Rs. 5,000 were destroyed.
88
“ 21 Bill drawn on Singh returned dishonoured when presented for payment, Subsidiary Books
Rs. 2,000.
“ 25 Amount due Rs. 500 from Bahadur is irrecoverable, as he has been declared
insolvent.
“ 28 Misra, a customer, informed that some goods were damaged in transit. An
allowance of Rs. 50 was granted to him for repairs.
Solution :
JOURNAL PROPER

Date Particulars L.F. Debit Credit

Rs. Rs.

2018
Aug. 3 Ahmed Ali Dr. 15,000
To Office Van A/c 15,000
(Being the credit sale of office van to Ali)
“ 8 Drawing A/c Dr. 1,000
To Purchases A/c 1,000
(Being the withdrawal of goods
By the owner for domestic use)
“ 15 Loss by Fire A/c Dr. 5,000
To Purchases A/c 5,000
(Being loss of goods by fire accident)
“ 21 Singh Dr. 2,000
To Bills ReceivableA/c 2,000
(Being the dishonour of bill by Singh)
“ 25 Bad Debts A/c Dr. 500
To Bahadur 500
(Being the amount irrecoverable
from Bahadur)
“ 28 Allowances A/c Dr. 50
To Misra 50
(Being an allowance granted for
repair of goods damaged in transit

6.19 LET US SUM UP

1. Journal is the book of original entry in which normally all transactions are
recorded. But when transactions are numerous, there are many difficulties in
recording all of them in one journal. Hence, the need for sub-division of journal
arises.
2. In business many transactions are of repetitive nature. The journal is therefore
sub-divided in such a way that a separate book is used for each category of
transactions which are repetitive in nature and are sufficiently large in number.
3. Depending on the requirements of business, the special journals used are:
(i) Cash book (ii) Purchases Journal, (iii) Sales Journal, (iv) Purchase
Returns Journal (v) Sales Returns Journal (vi) Journal Proper 89
Accounting Process 4. All cash transactions are recorded in cash book. There are different types of
cash books. The most commonly used are: (i) Single Column Cash Book, (ii)
Two Column Cash Book, and (iii) Three Column Cash Book.
5. The Single Column Cash Book has only one amount column on both sides. All
cash receipts are recorded on the debit side and all cash payments on the
credit side.
6. The Two Column Cash Book has an additional amount column for cash discount
on both sides. The discount allowed is recorded on the debit side and the
discount received on the credit side.
7. Petty Cash Book is prepared for recording payments of various petty expenses.
This saves a lot of labour and time.
8. The main functions of a bank are to accept deposits and lend money to business.
It also provides various other services to its customers.
9. There are three types of accounts available in the bank. The businessman
generally opens current account.
10. When an account is opened in the bank, the depositor receives a pass book, a
pay-in-slip book, and a cheque book.
11. A cheque is an instrument used for withdrawal of money from the bank. It can
also be used for making payments to other parties.
12. For safety, the cheques can be crossed. Crossing can be general or specific.
13. The Payee of a cheque can endorse it to a third party by putting his signature at
the back of the cheque.
14. The bank can refuse payment of a cheque. Refusing to pay is called dishonouring
the cheque.
15. The Three Column Cash Book has three amount columns on each side. One of
these three columns is for recording banking transactions of the firm.
16. All deposits into the bank are recorded in the bank column on the debit side of
the cash book, and all withdrawals on the credit side.
17. The bank column in the cash book serves the purpose of bank account. Hence,
there is no need to open bank account in the ledger.
18. Purchases Journal is meant for recording all credit purchase of goods. Inward
invoice is the basis for recording in the Purchases Journal.
19. Purchases Returns Journal is used for recording goods returned to the suppliers.
Debit note is the basis for recording in Purchases Returns Journal.
20. Sales Journal is meant for recording all credit sales of goods. Outward invoice
is the basis for recording in the Sales Journal.
21. Sales Returns Journal is used for recording goods returned by the customers.
Credit note is the basis for recording in it.
22. All transactions which cannot be recorded in any of the special journals will be
recorded in the journal itself, which is now called Journal Proper.
90
 Subsidiary Books
6.20 KEY WORDS
Adjustment Entry : An entry passed to bring into account certain unrecorded
items like closing stock, outstanding expenses and incomes, at the time of preparing
final accounts.
Bearer Cheque : A cheque payable at the counter of the bank without identification.
Cash Book : A special journal used for recording all cash receipts and cash
payments.
Cash Discount : An allowance given by the creditor to the debtor for prompt
payment.
Closing Entries : Entries passed at the end of each accounting year to close the
nominal accounts by transferring them to Trading and Profit and Loss Account.
Credit Note : A statement sent by the seller to his customer informing that his
account is credited to the extent of the goods returned by him or allowance granted
to him.
Cheque : An instrument used for withdrawing money from the bank.
Crossed Cheque : A cheque on which two parallel lines have been drawn. It is not
payable at the counter.
Contra Entry : When both the debit and credit aspects of a transaction are recorded
in the cash book itself.
Debit Note : A statement sent by the purchaser to his supplier informing that his
account is debited to the extent of the goods returned or allowance claimed.
Dishonour : Refusal to pay the cheque by the bank
Endorsement : A written statement signed by the payee at the back of the cheque
for its transfer.
Imprest System : A system of advancing a fixed amount to the petty cashier
periodically.
Invoice : A bill or a statement issued by the seller to the purchaser giving details of
goods sold.
Opening Entry : An entry passed to open a new set of accounts.
Order Cheque : A cheque in respect of which identification of the payee is
necessary.
Pass Book : A book or a statement supplied by the bank to its customer showing
his transactions with the bank.
Pay-in-slip : A slip or a challan used for depositing cash or cheques in the bank.
Petty Cash Book : A cash book prepared for recording small payments of cash.
Subsidiary Book : Any special journal used for recording a particular category of
transactions.
Special Crossing : A crossing specifying the name of bank through whom the
cheque can be presented for payment. 91
Accounting Process Transfer Entry : An entry passed to transfer an amount from one account to another
account.

6.21 ANSWERS TO CHECK YOUR PROGRESS

A a) iii b) i c) iii d) ii e) iii
B a) Cash b) debit, credit c) Cash Account d) credit e) debit f) cash
C 2. a) True b) True c) False d) False e) True
E 1) Debit 2) Credit 3) Contra entry 4) Cash 5) Both 6) Credit
F 4. (a) goods (b) credit (c) credit note (d) Purchases (e) credit (f) returns
inwards (g) returns outwards (ii) returned
G 6. (a) True (b) False (c) False (d) True (e) False (f) False (g) True
(h) False

6.22 TERMINAL QUESTIONS / EXERCISES

Questions
1. Why is journal sub-divided? Name the special journals and state the type of
transactions entered in each of them.
2. Explain the following in about 10 lines each.
a) ‘Cash Book is both a journal and a ledger’
b) Imprest system
c) Types of Cash Books
d) Posting of Two Column Cash Book.
3. What are the advantages of maintaining a Petty Cash Book? Explain the method
of balancing and posting the Petty Cash Book.
4. Explain the following in about ten lines each.
a) Bank Column in cash book serves the purpose of a Bank Account in the
ledger
b) Advantages of having a bank account.
c) Effect of crossing a cheque.
d) Contra Entry.
5. State the reasons for the following:
a) All entries in Three Column Cash Book are not posted into the ledger.
b) The total in the cash column on the debit side of the cash book is always
more than its credit side, but it is not true of the bank column.
c) When a cheque received is endorsed to a third party, it must be entered
on both sides of the cash book.
6. Why is a cheque dishonoured? How do you record it in the cash book?
92
7. Give the proforma of Purchases Journal. Explain the method of recording the Subsidiary Books
transactions in the Purchases Journal and its posting into ledger.
8. How does Debit Note differ from Credit Note? Discuss the utility of these
notes.
9 Write short notes on the following:
a) Returns Inward Journal
b) Returns Outward Journal
10. What is a Journal Proper? List the transactions recorded in the Journal Proper.
Exercises
1. Enter the following transactions of Motilal Stores in the Single Column Cash
Book and balance the same.

2018 Rs.
Jan.1 Motilal started business with a capital 20,000
“ 2 Purchased furniture 5,000
“ 2 Purchased goods 3,000
“ 3 Paid cartage 75
“ 5 Sold goods for cash 2,800
“ 10 Paid to Ratan Lal 2,000
“ 18 Sold goods for cash 1,000
“ 25 Paid wages 225
“ 28 Paid rent 500
“ 30 Purchased goods 2,000

(Answer: Cash in hand Rs. 11,000)

2. From the following transactions of Mani Ram Agencies, prepare a Single Column
Cash Book, balance it, and post it into ledger.

2018 Rs.
Jan. 1 Mani Ram started business with cash 40,000
“ 2 Opened a bank account and deposited 15,000
“ 5 Purchased furniture 8,000
“ 8 Purchased goods 12,000
“ 10 Sold goods for cash 7,000
“ 15 Sold goods on credit to Rajan 6,000
“ 20 Purchased electrical fan 450
“ 25 Received cash from Rajan 6,000
“ 28 Paid rent 550
“ 29 Deposited into the bank 10,000
“ 31 Paid wages 1,500

Hint:Credit sales are not a cash transaction. Hence, not recorded in the Cash Book.
(Answer: Cash in hand Rs. 5,500) 93
Accounting Process 3. Enter the following transactions of Gupta Emporium in Two Column Cash Book
and balance it.

2018
Apr. 1 Cash in hand Rs. 3,000
“ 3 Paid to S.K, Basu Rs. 580 and received discount Rs. 20.
“ 5 Purchased goods for cash Rs. 2,000
“ 8 Received from N.K. Prasad Rs. 960, and allowed him
discount of Rs. 40
“ 15 Sold goods on credit to Adinarayan Rs. 2,000
“ 20 Cash sales Rs. 600 -
“ 25 Paid to Narayan Rs. 1,150 in full settlement of his account of Rs. 1,200
“ 28 Received from Adinarayan Rs. 1,950 in full settlement of his account
“ 29 Rent paid Rs. 600
“ 30 Took cash for personal use Rs. 500

(Answer: Cash balance Rs. 1,680. Discount allowed total Rs. 90, Discount received
total Rs. 70).
4. Prepare Two Column Cash Book of M/s. Sanjay Enterprises from the following
transactions. Also show the ledger postings.

2018 Rs.
Apr. 1 Cash in hand 3,000
“ 3 Purchased goods 800
“ 5 Paid to Gupta 600
Discount allowed by him 40
“ 7 Sold goods 1,000
“ 9 Received from Pannalal 1,960
Discount allowed to him 40
“ 12 Received cash from Nagesh in full settlement of his
account Rs. 1,000 970
“ 15 Paid to Rakesh after deducting 2.5% discount 1,170
“ 18 Received from Shanker 590
Discount allowed to him 10
“ 24 Paid wages 100
“ 27 Paid for stationery 60
“ 29 Paid to Kartar Singh in full settlement of his account Rs. 800 780
“ 30 Deposited cash into bank in excess of 800

(Answer: Amount deposited in the bank Rs. 3,210. Discount allowed total Rs. 80.
Discount received total Rs. 90).
5. Prepare a Petty Cash Book on the Imprest System from the following particulars
of M/s. Preetam Industries.

94
 Subsidiary Books
2018 Rs.
July 1 Received a cheque for petty cash 150.00
“ 2 Paid bus charges 1.50
Paid cartage 5.00
“ 3 Paid for postage and telegrams 15.25
Paid wages to casual workers 10.00
“ 4 Paid for Stationery 4.75
“ 5 Paid for repairs of chairs 15.00
Bus Charges 1.00
“ Cartage 4.50
“ 6 Purchased locks 35.00
“ 7 Tea expenses to customers 4.00
“ 15 Repair to typewriter 7.00
“ 20 Paid tanga charges 6.00
“ 24 Paid taxi fare to manager 18.00
“ 26 Purchased stamps 5.00
“ 29 Auto charges 7.00

(Answer: On August 1, 2018, petty cashier will be given a cheque for Rs. 139)
6. Enter the following transactions in the Three Column Cash Book of M/s.
Shreelekha & Co.

2018 Rs.
May 1 Cash in hand 1,134
“ 1 Cash at bank 25,350
“ 2 Deposited into bank 1,000
“ 4 Received from Ram Lal 1,580
and discount allowed 20
“ 8 Purchased furniture for cash 500
“ 11 Paid to Jai Kishan by cheque 1,490
“ received discount 10
“ 15 Received from Gopal by cheque 1,000
“ 16 Cash sales 1,570
“ 20 Deposited into bank 2,000
“ 21 Purchased an old motor car for office and paid by cheque 10,480
“ 22 Paid by cheque to Ranganath 734
and received discount 6
“ 24 Withdrew from bank for office use 500
“ 27 Purchased goods for cash 600
“ 28 Withdrew from bank for personal use 1,000
“ 31 Paid establishment expenses through bank 900

(Answer: Discount allowed Rs. 20; Discount Received Rs. 16; Cash Balance
Rs. 684; Bank Balance Ps. 14,246.)
95
Accounting Process 7. Record the following transactions in Three Column Cash Book of M/s Modern
Commercials, and post them into ledger.

2018 Rs.
Jan. 1 Cash balance 700
Bank balance (overdraft) 1,400
“ 2 Cash sales 900
“ 3 Paid into bank 1,000
Paid to Alag by cheque 1,225
“ 5 Discount allowed by him 25
“ 10 Paid to Prasad 150
“ 14 Paid wages 250
“ 16 Received a cheque from Dasgupta in full settlement 980
of a claim of Rs
“ 20 Paid for stationery 150
“ 21 Purchased by cheque 600
“ 23 Received a cheque from Ram. It was endorsed to Shyam 800
“ 24 Paid Ranga by cheque 245
and discount received 5
“ 29 Withdrew from bank for office use 250
“ 31 Cash drawn for personal use 150

(Answer: Discount Allowed Rs. 20; Discount Received Rs. 30; Cash Balance
Rs. 150; Bank Overdraft Rs. 1,740.)
8. Prepare a Three Column Cash Book from the following transactions and post
them into ledger.

2018 Rs.
Aug 1 Cash in hand 700
“ 1 Cash at bank 10,000
“ 3 Cash sales 6,000
“ 5 Paid rent by cheque 2,400
“ 9 Cash deposited in the bank 6,000
“ 10 Wages paid 100
“ 11 Purchased stationery 180
“ 13 Received cheque from Roy 780
Discount allowed 20
“ 15 Purchased goods 400
“ 16 Withdrawn from bank for office use 2,000
“ 18 Issued cheque to Gagan 1,340
Received discount 60
“ 20 Withdrew cash for personal use 400
“ 20 Received cheque from Nath 1,000
“ 24 Nath’s cheque dishonoured 1,000
96
 “ 26 Issued cheque for furniture purchased 600 Subsidiary Books
“ 28 Received interest on securities by cheque 300
“ 30 Paid salaries 480

(Answer: Discount Allowed Rs. 20; Discount Received Rs. 60; Cash Balance Rs.
1,140; Bank Balance Rs. 10,740.)
9 From the following particulars, prepare the Purchases Book of Devi Stationers
and also show the ledger postings.
2018
Aug. 5 Purchased from Madan Mohan & Sons on credit 5 reams of white paper
@ Rs. 75 per ream,
10 Purchased from Gopikrishna Bros. 5 dozen ink bottles @ Rs. 52 per dozen
at a discount of 10%.
14 Purchased from Avanti Pen Stores 3 dozen ball pens @ Rs. 15 per dozen
at a discount of 20%.
18 Purchased 100 pencils from Muralidhar & Co. @ Rs. 0.75 each.
25 Purchased a typewriter on credit from Office Equipment Limited for
Rs. 4,500.
28 Purchased one dozen pen stands @ Rs. 100 per dozen for cash.
30 Purchased 5 dozen of note books on the credit from Rama & Co.
@ Rs. 24 per dozen.
(Hint: Transactions dated August 25 and 28 are not to be entered in Purchases
Book.)
(Answer: Total of Purchases Book Rs. 840)
10. Enter the following in the Purchases Returns Book of Lakshmi Traders.
Also show their ledger postings.
2018 Rs.
June 2 Returned goods to Sharma Bros. 350
“ 4 Returned goods to Eswar & Sons. 500
“ 6 Returned goods to Venkat & Co. on which a discount of
10% was received. 600
“ 8 Allowance claimed from Ranga & Co. for goods damaged. 450
“ 10 Goods returned to Suryanarayana 200
(Answer: Total of Purchases Returns Book Rs. 2,040)
11 Write up the Sales Book of Kiran Associates, wholesale cloth dealers,
from the following transactions and post them into ledger.
2018
Aug.16 Sold to Patel Nanded:
100 metres of silk @ Rs. 45 per metre.
75 metres of velvet @ Rs. 12 per metre.
“ 18 Sold to Hassen, Gulbarga:
97
Accounting Process 60 pieces of two by two cloth @ Rs. 10 per piece.
100 pieces of velvet @ Rs. 8 per piece.
“ 20 Sold to Shankaraiah, Vikarabad:
50 pieces of dhoties @ Rs. 50 per dhoti.
40 towels @ Rs. 8 per towel.
“ 25 Sold to Koteswara Rao, Vijayawada:
100 metres of shirting cloth @ Rs. 40 per metre.
60 sarees @ Rs. 75 per sari.
“ 28 Krishna Murthy, Warangal, purchased from us:
100 metres of long cloth @ Rs. 15 per metre.
100 metres of coarse cloth @ Rs. 9 per metre.
(Answer: Sales Book Total Rs. 20,520)
12. From the following particulars of Sriram Stationers, prepare the Sales Returns
Book and show their ledger posting.
2018
July 5 M/s Sridevi Stationers returned:
4 dozens 100 page note books @ Rs. 18 per dozen.
2 dozens 200 page note books @ Rs. 30 per dozen.
“ 10 Ramakrishna & Bros. returned @
3 dozen ink bottles @ Rs. 30 per dozen.
1 dozen gum bottles @ Rs. 20 per dozen.
2 dozen erasers @ Rs. 6 per dozen.
“ 15 Sanjeev & Co. returned:
5 dozen pencils @ Rs. 12 per dozen.
2 dozen reflis @ Rs. 5 per dozen.
(Answer: Sales Returns Book Total Rs. 336)
13. Enter the following transactions in proper subsidiary books of Chekra
Enterprises.
2018 Rs.
Aug. 1 Sold goods to Ram Singh 2,550
“ 2 Bought goods from Dhillon 1,200
“ 3 Sold goods to Gopinath 2,500
“ 4 Purchased goods from Habeeb 3,600
“ 5 Ram Singh returns goods 350
“ 6 Goods returned to Dhillon 200
“ 9 Gopinath returned goods 150
“ 10 Returned goods to Habeeb 260
“ 12 Bought goods from Sanyal 4,750
“ 13 Sold goods to Sailo 6,200
“ 14 Sold goods to Michael 4,850
“ 15 Purchased goods from Anthony 3,940
“ 18 Returned goods to Sanyal 320
“ 19 Sailo returned us goods 230
98
 “ 22 Michael returned goods 150 Subsidiary Books
“ 25 Returned goods to Anthony 250
“ 27 Sold goods to Solanki 5,340
“ 28 Purchased goods from Gopalan 4,670
“ 29 Sold goods to Harbinder Singh subject to trade discount of 5% 2,000
“ 30 Purchased goods from Bhandari subject to a trade 1,000
discount of 10%

(Answer: Totals of Purchases Book Rs. 19,060, Purchases Returns Book Rs. 1,030,
Sales Book Rs. 23,340, and Sales Returns Book Rs. 880)
14. The following are the bill transactions of Saptagiri Agencies, Hyderabad. All
bills accepted by Saptagiri Agencies are payable at the Andhra Bank,
Hyderabad. Prepare Bills Receivable and Bills Payable Journals and post them
into ledger.
2018
Aug. 3 A bill is drawn on Ram Narayan of Hyderabad, payable after three months
for Rs. 5,000. It was duly accepted by him on the same day, payable at
State Bank of India, Hyderabad.
“ 5 Accepted a bill dated August 1, 2018 drawn by Agarwal of Lucknow,
payable after 60 days, for Rs. 3,000.
“ 8 Drew a bill on Milkha Singh of Chandigarh for Rs. 4,000 payable after 2
months at Punjab National Bank, Chandigarh. The bill is received on
August 16, duly accepted.
“ 12 Accepted a bill dated August 6, 2018 drawn by Ghanshyam Oza of
Rajkot, payable after one month, for Rs. 2,500.
“ 18 Received an acceptance dated August 12, 2018 from N. Mirdha of
Jaipur, payable at State Bank of Bikaner, Jaipur 90 days after date, for
Rs. 6,000. It was endorsed to S. Sakeecha of Bhopal on the same day.
“ 22 Accepted the bill dated July 14, 2018 drawn by P. Obul Reddy, Tirupathi,
for Rs. 3,500, payable after 2 months.
“ 23 A bill is drawn on S. Mukherjee of Calcutta for Rs. 9,000 payable at
Allahabad Bank, Calcutta, 90 days after date. The bill was received duly
accepted on August 28, 2018, and was discounted with Andhra Bank,
on the same day.
“ 30 Accepted the bill dated August 25, 2018 drawn by Paleirio of Panaji, for
Rs. 2,800, payable after 30 days.
(Answer: Total of Bills Receivable Book Rs. 24,000. Bills Payable Book Rs. 11,800)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.
99
Accounting Process
UNIT 7 TRIAL BALANCE
Structure
7.0 Objectives
7.1 Introduction
7.2 What is a Trial Balance?
7.3 Preparation of a Trial Balance
7.4 Preparation of Trial Balance from a Given List of Balances
7.5 Causes for the Disagreement of a Trial Balance
6.6 Locating Errors when the Trial Balance Disagrees
7.7 Errors not Disclosed by Trial Balance
7.8 Advantages of a Trial Balance
7.9 Limitations of a Trial Balance
7.10 Rectification of Errors
7.10.1 Rectification of One-sided Errors
7.10.2 Rectification of Two-sided Errors

7.11 Suspense Account and Rectification

7.12 Effect of Rectifying Entries on Profits
7.13 Let Us Sum Up
7.14 Key Words
7.15 Some Useful Books
7.16 Answers to Check Your Progress
7.17 Terminal Questions/Exercises

7.0 OBJECTIVES
After studying this unit, you should be able to:
 define trial balance;
 prepare trial balance from a given set of balances;
 explain the causes of disagreement of a trial balance;
 describe the procedure for locating the errors;
 describe the types of errors which remain undisclosed by the trial balance;
 explain the advantages and limitations of trial balance;
 rectify errors before preparing the final accounts;
 explain the use of suspense account;

100  prepare the suspense account;

 rectify errors located during subsequent accounting years; and Trial Balance

 compute the effect of rectifying errors on profits.

7.1 INTRODUCTION
You have learnt the method of recording transactions in journal and its sub-
divisions. You have also learnt their posting to various accounts in the ledger. This
process of recording and posting continues throughout the year. At the end of the
year it becomes necessary to check the arithmetical accuracy of the books of
account before the final accounts can be prepared. For this purpose, we prepare
a statement called Trial Balance. In this unit, you will study about the preparation
of Trial Balance and the extent upto which it can be relied upon for testing the
accuracy of accounts. You will also learn about the errors that will be disclosed
by Trial Balance and the method of locating such errors.
You know that Trial Balance is prepared to verify the arithmetical accuracy of
accounting records. When the Trial Balance does not tally, it means there are
errors in the books of account and you will also learn about the errors that affect
the Trial Balance and also study the procedure for locating such errors. In the
process of rechecking, a number of errors are detected. These errors must be
rectified before preparing the final accounts. In this unit, you will also learn about
the method of rectifying various errors and study the effect of the rectification on
the profit of the business. You are advised to go through this unit once again and
note the errors that are usually committed in the process of recording various
transactions in subsidiary books and their postings.

7.2 WHAT IS A TRIAL BALANCE ?

Numerous transactions take place in business everyday. They are first recorded
in some books of original entry i.e., Journal Proper or one of its sub-divisions.
Then they are posted to the appropriate accounts in the ledger. Each ledger
account is balanced periodically so as to ascertain the net effect of various
transactions posted therein. In the process, some accounts may get closed, while
the others may show a debit or a credit balance. Based on these balances, the
final accounts are prepared for ascertaining the profit or loss and the financial
position of the business. The quality and reliability of the results obtained depend
largely on the correctness of the entries made in various books of account.
Hence, it is necessary to ascertain the accuracy of these entries before we proceed
with the preparation of final accounts. For this purpose, we prepare a statement
called ‘Trial Balance’, which shows balance of all ledger accounts. The ruling of
trial balance is similar to that of journal. We write the name of each account in
the particulars column. If the account shows a debit balance, its amount is entered
in the debit balances column and if it shows a credit balance the amount is entered
in the credit balances column. You know that the total of the debit balances
column must tally with the total of the credit balances column, because for every
debit there is a corresponding credit and vice versa. When the two totals tally,
it is considered as a preliminary proof of the arithmetical accuracy of entries in
the books of accounts. It is an assurance that posting into ledger has been
correctly done and that equality between debits and credits has been maintained
throughout. If, however, the two totals do not tally it implies that there are errors
in the books of account. 101
Accounting Process Trial Balance can thus be defined as a statement (or a schedule) listing, in
separate columns, the debit and credit balances of all ledger accounts on a
particular date. It indicates whether or not the books of account have been written
in accordance with the rules of double entry and ensures, to a great extent, the
arithmetical accuracy of accounting entries.

7.3 PREPARATION OF A TRIAL BALANCE

At the outset, it is necessary to note that Trial Balance is a statement of balances. Its
preparation does not involve passing of any journal entries. We simply balance various
accounts in the ledger and list all accounts which show some balance, whether it is
debit or credit. You are aware that when cash book is maintained, the ledger does
not contain cash and bank accounts. Hence, cash and bank balances are taken from
the cash book. If the number of personal accounts is large, you may prepare separate
statements of balances for all debtors and creditors and show only the total debtors
and total creditors in the trial balance.
Let us now take a comprehensive example covering all types of transactions, record
them in appropriate books, post them into ledger, and prepare a trial balance. Look
at illustration 1. It shows the accounting process right upto the preparation of Trial
Balance.
Illustration 1
The following is the Balance Sheet of Kapil Dev as on March 31, 2018.

Liabilities Rs. Assets Rs.

Capital 50,000 Cash in hand 15,000

Stock 50,000
Loan from bank 8,000 Due from Khanna 1,500
Due to Saluja Bros. 15,000 Due from Mittal 2,500
Furniture 4,000
73,000 73,000

The following transactions took place during April, 2018:

Rs.
April 2 Paid wages and salaries 6,000
“ 2 Cash sales of bicycles 3,000
“ 3 Purchased 20 bicycles on credit from Mehra
Cycle Co. @ Rs. 600 per bicycle 12,000
“ 5 Sold 30 bicycles to Mittal @ 900 per bicycle 27,000
“ 8 Paid to Saluja Bros. in full settlement of their account 14,600
“ 10 Received from Mittal 2 bicycles as defective, and sent
him a credit note 1,800
“ 13 Paid rent 1,750
“ 15 Purchased from Saluja Bros. on credit
20 cycle rims @ Rs. 100 each 2,000
102 20 cycles hubs @ Rs. 20 each 400
 “ 18 Sold to Rao 10 bicycles © Rs. 800 per bicycle 8,000 Trial Balance
“ 20 Returned to Saluja Bros. 10 cycle hubs being cracked 200
“ 21 Rao returned 2 bicycles, and sent him credit note 1,600
“ 22 Mittal Paid 14,000
“ 24 Purchased one typewriter on credit from Kutub
Typewriter Co. 6,500
“ 25 Cash sales 3,500
“ 28 Khanna paid; no hope of getting the balance 1,000
“ 30 Rao paid 6,200
Discount allowed 200
“ 30 Paid to Mehra Cycle Co. on accoun 10,000
Prepare Journal Proper and the subsidiary books involved. Show their postings into
ledger and prepare a Trial Balance.

Cash Book
Dr. Cr.
Date Particulars L.F. Discount Cash Date Particulars L.F. Discoun Cash

2018 Rs. Rs. 2018 Rs. Rs.

Apr. 1 To Balance b/d 15,000 Apr.2 By Wages and 6,000
“ 2 To Sales A/c 3,000 Salaries A/c
“ 22 To Mittal 14,000 “ 8 By Saluja Bros. 400 14,600
“ 25 To Sales A/c 3.500 “ 13 By Rent Alc 1,750
“ 28 To Khanna 1,000 “ 30 By Mehra Cycle Co. 10,000
“ 30 To Rao 200 6,200 “ 30 By Balance c/d 10,350
200 42,700 400 42,700
May 1 To Balance b/d 10,350

PURCHASES JOURNAL

Date Particulars Invoice No. L.F. Amount

2018 Rs.
Apr. 3 Mehra Cycle Co. 12,000
“ 15 Saluja Bros. 2,400
“ 30 Total 14,400

PURCHASES RETURNS JOURNAL

Date Particulars Debit Note L.F. Amount

No.

2018 Rs.
Apr. 20 Saluja Bros. 200
“ 30 Total 200

103
Accounting Process SALES JOURNAL

Date Particulars Invoice No. L.F. Amount

2018 Rs.
Apr. 5 Mittal 27,000
“ 18 Rao 8,000
“ 30 Total 35,000

SALES RETURNS JOURNAL

Date Particulars Credit L.F. Amount

Note No.

2018 Rs.
Apr.10 Mittal 1,800
“ 21 Rao 1,600
“ 30 Total 3,400

JOURNAL

Date Particulars L.F. Dr. Cr.

Amount Amount

2018 Rs. Rs.

Apr. 1 Cash A/c Dr. 15,000
Stock A/c Dr. 50,000
Khanna Dr. 1,500
Mittal Dr. 2,500
Furniture A/c Dr. 4,000
To Capital A/c 50,000
To Bank Loan A/c 8,000
To Saluja Bros. 15,000
(Opening balances of assets and liabilities
being brought in on April 1, 2018
“ 24 Typewriter A/c Dr.
To Kutub Typewriter Co. 6,500
(Being purchase of typewriter on credit) 6,500
“ 28 Bad Debts A/c Dr. 500
To Khanna 500
(Being amount still due from Khanna,
now written off as bad debt)
“ 30 Total 80,000 80,000

104
 LEDGER Trial Balance
Capital Account
Dr. Cr.

2018 Rs. 2018 Rs.

Apr.30 To Balance c/d 50,000 Apr. 1 By Balance b/d 50,000
May 1 By Balance b/d 50,000

Saluja Bros Account

2018 Rs. Rs.

Apr. 8 To Cash A/c 14,600 Apr, .1 By Balance b/d 15,000
“ 8 To Discount A/c 400 “ 15 By Purchases A/c 2,400
“ 20 To Returns Outward A/c 200
“ 30 By Balance c/d 2,200
17,400 17,400
May 1 By Balance b/d 2,200

Bank Loan Account

Rs. Rs.
2018 2018
Apr, 1 By Balance b/d 8,000
Apr. 30 To Balance c/d 8,000
8,000 May 1 By Balance b/d 8,000

Mehra Cycle Co. Account

2018 Rs. 2018 Rs.

Apr. 30 To Cash A/c 10,000 Apr. 3 By Purchases A/c 12,000
“ 30 To Balance c/d 2,000

12,000 12,000
May 1 By Balance b/d 12,000

Khanna’s Account

Rs. Rs.
2018 2018
Apr. 1 To Balance b/d 1,500 Apr, 28 By Cash A/c 1,000
“ 30 By Bad Debts A/c 500
1,500 1,500

105
Accounting Process Mittal’s Account

2018 Rs. 2018 Rs.

Apr. 1 To Balance b/d 2,500 Apr. 10 By Return Inward A/c 1,800
“ 5 To Sales A/c 27,000 “ 22 By Cash A/c 14,000
“ 30 By Balance c/d 13,700
29,500 29,500
May 1 To Balance b/d 13,700

Rao’s Account

2018 Rs. 2018 Rs.

Apr. 18 To Sales A/c 8,000 Apr. 21 By Return Inward A/c 1,600
“ 30 By Cash A/c 6,200
“ 30 By Discount A/c 200
8,000 8,000

Furniture Account

2018 Rs. 2018 Rs.

Apr. 1 To Balance b/d 4,000 Apr. 30 By Balance c/d 4,000
May 1 To Balance b/d 4,000

Typewriter Account

2018 Rs. 2018 Rs.

Apr. 24 To Kutub Type Writer Co. 6,500 Apr. 30 By Balance c/d 6,500
May 1 To Balance b/d 6,500

Stock Account

2018 Rs. 2018 Rs.

Apr. 1 To Balance b/d 50,000 Apr. 30 By Balance c/d 50,000
May 1 To Balance b/d 50,000

Sales Account

2018 Rs. 2018 Rs.

Apr, 2 By Cash A/c 3,000
“ 25 By Cash A/c B 3,500
“ 30 By Sundries as per
Sales Book 35,000

106
 Purchase Account Trial Balance

2018 Rs.
Apr. 30 To Sundries as per Purchase Book 14,400

Return Outwards Account

2018 Rs.
Apr, 30 By Sundries as per
Returns Outward Book 200

Return Inwards Account

2018 Rs.
Apr, 30 To Sundries as per
Returns Inward Book 3,400

Wages & Salaries Account

2018 Rs.
Apr. 2 To Cash A/c 6,000

Rent Account

2018 Rs.
Apr. 13 To Cash A/c 1,750

Bad Debts Account

2018 Rs.
Apr. 28 To Gupta 500

Discount Account

2018 Rs. 2018 Rs.

Apr.30 To Sundries - as per Cash Book 200 Apr. 30 By Sundries - as per
Cash Book 400

Kutub Typewriter Co.

2018 Rs. 2018 Rs.

Apr. 30 To Balance c/d 6,500 Apr, 24 By Typewriter A/c 6,500
May 1 By Balance b/d
Trial Balance as on April 30, 2018
Name of Account L.F. Dr. Cr.
Balances Balances
Rs. Rs.
Cash in hand 10,350
Capital 50,000
Saluja Bros. 2,200
107
Accounting Process Bank Loan 8,000
Mehra Cycle Co. 2,000
Kutub Typewriter Co. 6,500
Mittal 13,700
Furniture 4,000
Typewriter 6,500
Stock 50,000
Sales 41,500
Purchases 14,400
Returns Outwards 200
Returns Inwards 3,400
Wages & Salaries 6,000
Rent 1,750
Bad Debts 500
Discount Allowed 200
Discount Received 400

Total 1,10,800 1,10,800

Note: 1. You should know that the Trial Balance can also be prepared on the
basis of the totals of all debits and credits in various accounts. But, this
method is not followed any more. Hence it has not been discussed.
2. In this illustration, you will find that some accounts have not been
balanced. It is because these are all nominal accounts which are to be
closed by transfer to the Trading and Profit & Loss Account.

7.4 PREPARATION OF TRIAL BALANCE

FROM A GIVEN LIST OF BALANCES
Normally when a trial balance is to be prepared, you have full details of ledger
accounts with you. You can, therefore, easily ascertain whether a particular account
has a debit balance or credit balance, and prepare the Trial Balance without any
difficulty. But, sometimes, you are given only a list of balance. The nature of each
balance is not mentioned. In other words, it is not clearly indicated whether the
account is showing a debit balance or credit balance. Can you prepare a Trial Balance
in such a situation? No you can’t unless you know the nature of each balance. You
will not know whether to show a particular balance in the debit column or in the
credit column of the Trial Balance.
Hence, when you are asked to prepare a Trial Balance from a given list of balances
and it is not clearly indicated whether a particular account has a debit balance or
credit balance, you will first have to determine the nature of each balance. In this
exercise, your knowledge of rules of debit and credit should help you. For example,
you are aware that in case of nominal accounts all expenses and losses are debited
and all incomes and gains are credited. Hence, accounts like salaries, wages, etc.,
will show debit balances and the accounts like interest received, discount received,
etc., will show credit balances. Similarly, you know the rules for real and personal
accounts. The accounts of assets like cash in hand, machinery, etc., will show debit
108 balances and accounts like capital, creditors, etc., will show credit balances. For
convenience, however, a few guidelines may help you to determine quickly the nature Trial Balance
of each balance. These are:

a) All accounts of expenses (including purchases) and losses will be debit balances.

b) All accounts of incomes (including sales) and gains will be credit balances.

c) All accounts of assets will be debit balances.

d) All accounts of liabilities will be credit balances.

e) Capital Account will normally be a credit balance.

f) Drawings Account will be a debit balance.

The difficulty may arise with regard to items like commission, discount, rent and
interest, because these can take the form of expenses as well as incomes. In such
cases, the nature of balance is usually indicated by mentioning (Dr.) or (Cr.) against
each item, or the word ‘received’ or ‘paid’ is usually added. So you can treat them
correctly without much difficulty. If, however, there is one item for which no such
indication is given and you find it difficult to identify the nature of its balance, you just
proceed with the preparation of Trial Balance. At the time of totalling the amount
columns in the trial balance, you will find that the total of one column is less than the
other. This implies that the unindicated balance pertains to the column which is short.
For example, there is an item of commission Rs. 300. But it is not indicated whether
it is paid or received. When you prepare the trial balance, you find that the debit
total is short by Rs. 300. This means that Commission Account has a debit balance.
Now, if you show it as such in the Trial Balance, it will tally.

Look at illustration 2. The Trial Balance has been prepared from a given list of
balances where the nature of each balance is not indicated. Study illustration carefully
and note how each item has been shown in the Trial Balance.

Illustration 2

Prepare a Trial Balance from the following balances taken from the books of
Sudhakaras on March 31, 2018.

Rs. Rs.
Capital 1,80,000 Discount Received 360
Stock (1-4-2017) 49,200 Bills Payable 12,270
Sales 2,43,600 Sundry Creditors 31,110
Gas & Water 2,520 Returns Outwards 19,200
Land & Buildings 60,000 Bank Charges 3,000
Machinery 55,470 Drawings 14,550
Debtors 1,07,400 Trade Expenses 2,970
Commission (Dr.) 4,410 Cash 2,400
Plant 30,810 Bank 15,780
109
Accounting Process Carriage 3,370 Purchases 96,480
Rent Received 1,290 Rates & Taxes 2,520
Insurance 3,180 Furniture 3,750
Returns Inwards 5,970 Bills Receivable 4,410
Salaries 19,640
Solution :
Trial Balance as on March 31, 2018

Name of Account L.F. Dr. Cr.

Balances Balances

Rs. Rs.
Capital — 1,80,000
Stock (1-4-2017) 49,200 —
Sales — 2,43,600
Gas and Water 2,520 —
Land & Buildings 60,000 —
Machinery 55,470 —
Debtors 1,07,400 —
Commission (Dr.) 4,410 —
Plant 30,810 —
Carriage 3,370 —
Rent Received — 1,290
Salaries 19,640 —
Insurance 3,180 —
Returns Inwards 5,970 —
Discount Received — 360
Bills Payable — 12,270
Sundry Creditors — 31,110
Returns Outwards — 19,200
Bank Charges 3,000 —
Drawings 14,550 —
Trade Expenses 2,970 —
Cash 2,400 —
Bank 15,780 —
Purchases 96,480 —
Rates & Taxes 2,520 —
Furniture 3,750 —
Bills Receivable 4,410 —

Total 4,87,830 4,87,830

110
In illustration 2, the Trial Balance has tallied i.e., the total of debit balances is equal Trial Balance
to the total of credit balances. This implies that each balance has been entered in the
appropriate amount column.
However, you require constant practice to determine the correct nature of items.
Hence, another illustration is given where the accountant has not been able to correctly
place the balances and, consequently, the Trial Balance does not tally. Look at
illustration 3. The total of debit balances (Rs. 10,83,600) is different from the total
of credit balances (Rs. 7,16,400). It is because a number of balances have been
entered in the wrong amount columns. To cite one example, stock (an asset) is a
debit balance but it has been wrongly entered in the credit column. Now, go through
all items and identify those which have not been correctly shown in the given Trial
Balance. Then, study the Revised Trial Balance and note how they are actually
shown. This should help you gain clarity about the nature of various balances.
Illustration 3
Given below is a Trial Balance prepared by an inexperienced accountant and the
Trial Balance has not tallied. Rewrite the Trial Balance.
Trial Balance of Buddhu & Co. as on December 31, 2018

Name of Account L.F. Dr. Cr.

Balances Balances
Rs. Rs.
Capital — 1,12,600
Buildings 1,70,000 —
Motor Car — 30,000
Sales 6,00,000 —
Purchases — 3,40,000
Furniture 25,000 —
Stock — 44,000
Bank Overdraft 12,000 —
Cash 3,000 —
Interest on Bank Loan — 4000
Discounts Received 2,600 —
Discounts Allowed — 4,600
Salaries 14,000 —
Wages — 12,000
Printing & Stationery 4,000 —
Investments 10,000 —
Advertisement 6,000 —
Legal Charges 2,000 —
Audit Fees 1,000 —
Bad Debts 3,000 —
Debtors 2,31,000 —
Creditors — 1,72,800

Total 10,83,600 7,16,400

111
Accounting Process Revised Trial Balance of Buddhu & Co.
as on December 31, 2018

Name of Account L.F. Dr. Cr. Remarks

Balances Balances
Rs Rs.
Capital — 1,12,600 —
Buildings 1,70,000 — Asset Dr.
Motor Car 30,000 — Asset Dr.
Sales — 6,00,000 Income Cr.
Purchases 3,40,000 — Expense Dr.
Furniture 25,000 — Asset Dr.
Stock 44,000 — Asset Dr.
Bank Overdraft — 12,000 Liability Cr.
Cash 3,000 — Asset Dr.
Interest on Bank Loan 400 — Expense Dr.
Discounts Received — 2,600 Income Cr.
Discounts Allowed 4,600 — Expense Dr.
Salaries 14,000 — “
Wages 12,000 — “
Printing & Stationery 4,000 — “
Investments 10,000 — Asset Dr.
Advertisement 6,000 — Expense Dr.
Legal Charges 2,000 — “
Audit Fees 1,000 — “
Bad Debts 3,000 — “
Debtors 2,31,000 — Asset Dr.
Creditors — 1,72,800 Liability Cr.
Total 9,00,000 9,00,000

Check Your Progress A

1. Define Trial Balance
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. Mention against each item whether it will generally show a debit balance or a
credit balance.
Item Nature of Balance
(Debit or Credit)
a) Opening Stock ............................
b) Bad Debts ............................
c) Carriage Inwards ............................
112
 d) Carnage Outwards ............................ Trial Balance
e) Returns Inwards ............................
f) Returns Outwards ............................
g) Loan from Bank ............................
h) Drawings ............................
i) Goodwill ............................
j) Bill Payable ............................
k) Cash at Bank ............................
1) Interest on Loan ............................
m) Discount Allowed ............................
n) Freehold Premises ............................
o) Insurance ............................
p) Salaries Payable ............................

7.5 CAUSES FOR THE DISAGREEMENT OF A

TRIAL BALANCE
As mentioned earlier, when the Trial Balance does not tally, it means that there are
errors in the books of account. Let us now analyse the errors which usually affect
the Trial Balance and lead to its disagreement.
1. Omission of posting in one account: You are aware that both the debit and
credit aspects of a transaction have to be posted in the ledger accounts. If you
post it to the debit of one account and forget its posting to the credit of the
other concerned account, it is bound to affect the Trial Balance. For example,
an amount of Rs. 200 received from Ali, correctly entered on the debit side of
the cash book but is not posted to the credit side of Ali’s Account. This error
shall result in the lower credit and hence the Trial Balance will not tally.
2. Double posting in one account: If by mistake you post an entry two
times to the debit or to the credit of an account it would result in extra
debit or credit and as such cause disagreement in the Trial Balance. If,
however, the whole entry is posted twice i.e., both the debit and the credit
aspects are posted twice, it won’t affect the Trial Balance. It is because
both the debit and the credit sides will be equally affected.
3. Posting on the wrong side of an account: When an entry is posted
on the wrong side of an account i.e., instead of debit side it is posted
on the credit side, it would also cause disagreement in the Trial Balance.
In such a situation, the difference will be for double the amount. For example,
Rs. 300 received from Khan which is correctly entered on the debit side
of the Cash Book, but while posting it to Khan’s Account, it is wrongly
posted to the debit side instead of the credit side. This would mean that
a debit of Rs. 600 (Rs. 300 in Cash Account and Rs. 300 in Khan’s
Account) has no corresponding credit. So, in the Trial Balance, the credit
side will be lower by Rs. 600.
4. Posting wrong amount in an account: If you post an entry to the correct
side of an account but commit an error in writing the amount, this would
affect the Trial Balance. Suppose, in the above example you post the entry
113
Accounting Process correctly on the credit side of Khan’s Account but the amount is wrongly
put as Rs. 200. It would cause a difference of Rs. 100. In the Trial Balance,
the credit side will be lower by Rs. 100.
5. Wrong totalling of the subsidiary book: If any subsidiary book is overcast
or undercast, it affects the concerned account in ledger. Suppose the correct
total of Sales Journal is Rs. 5,600, but it is actually totalled as Rs. 5,300.
You know that the total of Sales Journal is posted to the credit side of
the Sales Account. So, the Sales Account will be short by Rs. 300, and
the Trial Balance will not tally.
6. Omitting to post the total of a subsidiary book: If the total of a subsidiary
book is not posted to the concerned account, it would affect the Trial
Balance. Such mistake relates only to the account where posting was to
be done and as such affects only one account. Take for example, the Sales
Journal. If its total of Rs. 18,900 is not posted to the credit of Sales Account,
the credit side on the Trial Balance will be lower by Rs. 18,900.
7. Wrong totalling or balancing of an account: When an account is wrongly
totalled or wrongly balanced, this would affect the Trial Balance. Suppose
the debit side of Shyam’s Account is totalled as Rs. 1,300 instead of Rs.
1,100. It would lead to wrong balance in Shyam’s Account. Consequently,
the debit total in the Trial Balance will be higher by Rs. 200. Similarly,
if the totalling is correctly done but a mistake is committed in balancing
the account, it would also cause a difference in the Trial Balance.
8. Omission of an account from Trial Balance: You know that all accounts
which show some balance must be included in the Trial Balance. If you
forget to write the balance of any account in the Trial Balance, it will not
tally. In practice, cash book balances are often omitted from Trial Balance.
9. Writing the balance of an account on the wrong side of the Trial
Balance: If the balance of an account which is to be shown in the debit
column of the Trial Balance is actually shown in the credit column, the
Trial Balances will not tally. It will be affected by double the amount. You
noticed such error in respect of many items in illustration 3.
10. Wrong totaling of the Trial Balance : If a mistake is committed in totalling
the Trial Balance amount columns of the Trial Balance itself, the Trial Balance
will not tally. Thus, you learn about various errors which may cause differences
in the Trial Balance. Note that these errors affect only one aspect (debit
or credit). This upsets the debit-credit correspondence leading to the
disagreement of the Trial Balance.

7.6 LOCATING ERRORS WHEN THE TRIAL

BALANCE DISAGREES
When a Trial Balance disagrees, an attempt must be made to locate the errors and
rectify them. If all errors are rectified and the Trial Balance is revised, it will tally.
The following routine procedure is usually adopted for locating the errors.
a) Check the totals of both the debit and the credit columns of the Trial Balance.
b) If the difference still persists, ascertain the exact amount of difference; and then
114
 i) See whether an account having that balance has been omitted from the Trial Balance
Trial Balance. Suppose the debit column in Trial Balance is short by
Rs. 630, it is just possible that an account with a debit balance of
Rs. 630 has not been entered in the Trial Balance.

ii) Check whether an account with a balance equal to that difference has
been entered twice in the Trial Balance.

iii) Take the half amount of difference, see whether there is any account
with such balance in the Trial Balance and, if so, check whether it is
entered in the correct column or not. If an account with a debit balance
of Rs. 315 has been entered in the credit column, the debit column
becomes short by Rs. 630.

c) Verify whether (i) the balances of all the accounts are included in the Trial
Balance, (ii) they are entered in the correct column, and (iii) their amounts
have been correctly written. If no errors are found upto this stage, or the
errors located have been duly corrected, but still the Trial Balance does not
tally, there is need to take further action. You may take the following steps:

d) Check the totals of the lists of sundry debtors and sundry creditors.

e) Check the totals and balances of all accounts in the ledger.

f) Check the totals and the postings of all subsidiary books.

g) Check the postings of all amounts equal to the difference in Trial Balance.
It is possible that a posting has been omitted. Similarly, check the postings
of all amounts equal to half the difference. It is possible that the amount has
been posted on the wrong side of the concerned account.

h) See that correct amounts have been brought forward from the previous
pages.

i) Verify that all opening balances have been correctly entered in various
accounts.

j) Compare the current year’s Trial Balance with that of the previous year. Any
variation noticed should be carefully checked.

The procedure outlined above, if carefully followed, should normally reveal all the
errors. The errors are then rectified and a Revised Trial Balance is prepared. If
no other errors exist, the Revised Trial Balance is likely to tally. However, if the
Revised Trial Balance also does not tally, there is no alternative but to recheck
the entire accounting work done during the year. Sometimes, all these efforts fail
to reveal the errors. In such a situation, the difference may be placed to the debit
or credit of a Suspense Account (as the case may be) and you may proceed with
the preparation of the final accounts. Later on, as and when the errors come to
light, they will be corrected through proper rectifying entries in the journal.

7.7 ERRORS NOT DISCLOSED BY TRIAL

BALANCE
As stated earlier, the Trial Balance is only a reasonable proof (not a conclusive
proof) of the arithmetical accuracy of accounting entries. There is no guarantee 115
Accounting Process that when the Trial Balance has tallied, there will be no errors left. As a matter
of fact, there are a number of errors which do not affect the Trial Balance at all.
They are:
1. Errors of Principle: When a transaction has not been recorded as per the
rules of debit and credit, or some other accounting principle has been ignored,
the errors so arising are called ‘Errors of Principle’. Example of such errors
are:
i) A credit purchase of a fixed asset recorded in the Purchases Journal
instead of the Journal Proper: This results in debiting the Purchases
Account instead of the concerned fixed asset account. It means that
a capital expenditure has been treated as a revenue expenditure. This
is an error of principle. This does not disturb the debit-credit
correspondence. Hence, the Trial Balance will not be affected.
ii) An expenditure incurred on repairs of machinery debited to Machinery
Account: As per rules it should have been debited to Machinery Repair
Account, as it is a revenue expenditure. Debiting to Machinery Account
amounts to treating it as a capital expenditure. It is therefore an error
of principle. This also does not affect the Trial Balance because the
debit has been duly recorded, though in the wrong account.
iii) Salary paid to Shyam recorded in the Cash Book as a payment to
Shyam: This results in debiting Shyam’s personal account instead of
the Salaries Account. This is also an error of principle and does not
affect the Trial Balance.
2. Errors of Omission: When a transaction is completely or partially omitted
to be recorded in books of account, it is called an ‘Error of Omission’. If
the transaction is omitted to be recorded in the subsidiary books or its
posting is completely omitted, it is called an ‘Error of Complete Omission’.
If, however, the posting is done in one account, but omitted to be done in
the other, it is called an ‘Error of Partial Omission’. For example, if a credit
purchase of goods from Shyam is not recorded in the Purchases Journal or
a credit purchase of furniture from Ram is duly recorded in the Journal
Proper but no posting is done in any of the two accounts involved, then
these will be termed as errors of complete omission. If the purchase of
goods from Shyam is recorded in the Purchases Journal but is omitted to
be posted in Shyam’s Account, it will be called an error of partial omission.
Other examples of partial omission are: omission in carrying forward the
total from one page to the other, omission to balance an account, and so on.
The errors of complete omission do not, affect the Trial Balance. But
the errors of partial omission would certainly cause disagreement of
the Trial Balance because they would lead to either short debit or
short credit.
3. Some Errors of Commission: When an error is committed in recording a
transaction in the subsidiary book with a wrong amount, or is committed in
posting it to a wrong account or to the wrong side of an account, it is called
an ‘Error of Commission’. Errors like double posting, wrong totalling of an
account, wrong carry forward, wrong balancing, etc., are also regarded as
errors of commission. Such errors will generally affect the Trial Balance.
116 But, if an error of commission is committed while recording a transaction in
 any of the subsidiary books, it shall not affect the Trial Balance because Trial Balance
both the debit and the credit are equally affected. Suppose, a machine of
Rs. 5,000 purchased on credit from Gautam is recorded in the journal for
Rs. 5,500. It means both the debit and the credit have been recorded for
Rs. 5,500. Hence, the Trial Balance remains unaffected.
4. Compensating Errors: Those errors which nullify the effect of each other
are called ‘Compensating Errors’. In other words, compensating errors refer
to such a group of errors wherein the effect of one error is compensated by
the effect of another error or errors. Such errors do not affect the Trial
Balance. For example, while posting an entry of Rs. 200 to the debit of
Ram’s personal account, we wrongly wrote Rs: 400. Then, while posting an
entry of Rs. 500 to the debit of some other account we wrote Rs. 300. The
first error will result in a higher debit of Rs. 200 whereas the second error
will result in a lower debit of Rs. 200. Thus, the effect of the first error is
nullified by the effect of the second error. So the Trial Balance will not
be affected. Take another example. The Purchases Journal is overcast by
Rs. 1,000 which means the Purchases Account will be debited in excess by
Rs. 1,000. The sales fournal also, by mistake, is overcast by Rs. 1000 which
means the sales account will be credited in excess by Rs. 1000. These two
mistakes together result in excess debit of Rs. 1,000 as well as an excess
credit of Rs. 1,000. Thus, they cancel out each other and the Trial Balance
remains unaffected.
Check Your Progress B
1. Select one of the following alternatives and tick the correct answer.
a) Overcastting of Purchases Journal would affect:
i) Sales Account ( )
ii) Purchases Account ( )
iii) Supplier’s Account and Purchases Account ( )
b) Sales to Benson Rs. 500 posted to his account as Rs. 50 would affect:
i) Sales Account ( )
ii) Benson’s Account ( )
iii) Cash Account ( )
c) Sales to Gill recorded in Purchases Journal would affect:
i) Sales Account ( )
ii) Sales Account, Purchases Account and Gill’s Account ( )
iii) Purchases Account and Gill’s Account ( )
d) Purchases made on credit not recorded at all would affect:
i) Purchases Account ( )
ii) Supplier’s Account ( )
iii) Purchases Account and Supplier’s Account ( )
117
Accounting Process e) Amount paid to Billu posted to the credit side of his account would affect:
i) Billu’s Account ( )
ii) Cash Account ( )
iii) Cash Account and Billu’s Account ( )
f) Amount received from Sita Ram posted to the credit of Mela Ram would
affect:
i) Sita Ram’s Account ( )
ii) Mela Ram’s Account ( )
iii) Sita Ram’s Account and Mela Ram’s Account ( )
2. Give two examples of errors of principle.
...............................................................................................................
...............................................................................................................
...............................................................................................................
3. Give two examples of compensating errors.
...............................................................................................................
...............................................................................................................
...............................................................................................................
4. A few errors committed in Ahluwalia’s books of account are given below.
State which errors would affect the Trail Balance.
a) Sales of Rs. 950 to Ram completely omitted from books of account.
b) Purchases of Rs. 720 from Shyam entered in the Purchases Journal as
Rs.700.
c) Purchases Journal is overcast by Rs. 1,000.
d) Sales Returns Journal is undercast by Rs. 200.
e) Amount paid to Agarwal wrongly posted to the debit of Mittal’s Account.
f) Bank overdraft shown under debit column in the Trial Balance.
g) Sales of Rs. 500 to Sadiq entered in Sales Journal as sales to Mushtaq.

h) Wages paid for installation of machinery debited to Wages Account.

7.8 ADVANTAGES OF A TRIAL BALANCE

The following advantages accrue from a Trial Balance:
1. It is a reasonable proof of the arithmetical accuracy of accounting entries. If
the two sides of a Trial Balance tally, it is an indication that the books of
account are arithmetically correct. Of course, there may still be some errors
left.
118
2. It contains the balances of all ledger accounts on a particular date. Thus it Trial Balance
serves as a summary of the results of all transactions during the period. The
position of each account can be judged simply by looking at the Trial Balance.
The ledger may be referred only if some further details are required in
respect of a particular account.
3. It acts as a basis for preparing the final accounts i.e., Profit & Loss Account
and the Balance Sheet. Of course, one can prepare these statements even
by taking each balance directly from the ledger. But, that will be too
cumbersome.
4. Regular preparation of a trial balance ensures that the accounting staff will
work carefully. They will keep the accounts up to date and strive hard to
avoid mistakes.

7.9 LIMITATIONS OF A TRIAL BALANCE

The following can be considered as the limitations of Trial Balance:
1. Trial balance does not disclose all types of errors. Certain types of errors
remain undetected even when the Trial Balance tallies. Hence, it is not a
conclusive proof of the accuracy of the books of account.
2. A Trial Balance does not provide any additional information. You can not
have any idea about the net result of the trading activity or about the financial
position directly from the Trial Balance. Thus, the Trial Balance serves a
limited purpose only.
Notwithstanding the limitations expressed above, the Trial Balance serves a
useful purpose as a preparatory step in the preparation of final accounts.

7.10 RECTIFICATION OF ERRORS

Any error when located must be rectified. However, the rectification should not
be made by overwriting or by striking off the wrong entry. This would destroy the
authenticity of the books of account. Hence, the errors should always be corrected
by making suitable entries called rectifying entries. For purposes of rectification,
the errors are divided into two categories: (i) one-sided errors, and (ii) two-sided
errors.
One-sided Errors : Certain errors affect only one side of an account, either the
debit side or the credit side. Such errors are called ‘one-sided errors’. Examples
of one-sided errors are:
i) Rs. 100 received from Deshmukh was posted to his account as Rs. 10. It
means Deshmukh’s Account has been credited with Rs. 10 instead of Rs.
100 and there is no mistake in the Cash Book. Thus, this error has affected
only one side of an account.
ii) Thw Purchase Book is overcast by Rs. 1000. This will affect the debit side
of Purchases Account where the total of the Purchases Book is posted, and
no other account is affected.
Two-sided Errors : Certain errors may affect two or more accounts. Such errors
are called ‘two-sided errors’. Examples of two-sided errors are:
i) A credit sale of Rs. 1,080 to Anand was wrongly recorded in the Sales
Book for Rs. 1,800. This error will affect two accounts viz., Anand’s Account
and Sales Account. Anand’s Account has been debited by Rs. 1,800 instead 119
Accounting Process of Rs. 1,080. The Sales Account has also been credited by an additional
amount of Rs. 720 (Rs. 1,800—Rs. l,080),because the Sales Book shows
a higher total.
ii) A sale of Rs. 500 made to Kamal has been posted on the debit side of
Kishore’s Account. This error will affect two accounts viz., Kamal’s Account
and Kishore’s Account. An entry of Rs. 500 does not appear on the debit
side of Kamal’s Account whereas Kishore’s Account has been wrongly
debited with that amount.
7.10.1 Rectification of One-sided Errors
Generally errors are corrected by passing suitable journal entries. You know
passing a journal entry means debiting one account and crediting another. But in
the case of one-sided error only one account is involved. So it cannot be corrected
by passing journal entry. It is rectified by noting the correction on the appropriate
side. Take the first example of one-sided error. Deshmukh’s Account was credited
short by Rs. 90. This will be corrected by an additional entry for Rs. 90 on the
credit side of his account as follows:
Deshmukh’s Account
Dr. Cr.

By Difference in amount Rs.

received from him posted on ...... 90

In the second example of one-sided error, the Purchases Account is debited in

excess by Rs. 1,000. This will be corrected by crediting the Purchases Account
with Rs. 1,000 as follows:
Purchases Account
Dr. Cr.

By Overcasting of Purchases Rs.

Book for the month of ......... 1,000

The wrong total in the Purchases Book will be circled with red ink and the correct
total entered above or below the circle. The person doing the rectification will also
put his initials.
Let us take a few more examples of one-sided errors and study how they will be
rectified.
1. The Sales Returns Book for the month of June was undercast by Rs.
10 : You know the periodical total of the Sales Returns Book is posted to the
debit side of Sales Returns Account. So, a mistake in totalling the Sales Returns
Book will affect only the Sales Returns Account. It has been debited short by
Rs. 10. So, this error can be corrected by an additional entry for Rs. 10 on the
debit side of Sales Returns Account as shown below:
Sales Returns Account
Dr. Cr.

To Undercasting of Sales Returns Rs.

Book for the month of June 10
120
2. A payment of Rs. 1,000 towards interest was posted twice to Interest Trial Balance
Account : You know when interest is paid it is recorded on the credit side of
the Cash Book and posted On the debit side of Interest Account. The error
lies in repeating the posting to interest Account. Thus, it has affected only the
Interest Account which now shows an excess debit of Rs. 1,000. This will be
corrected by crediting the Interest Account with Rs. 1,000 as follows:
Interest Account
Dr. Cr.

By Double posting from Cash Rs.

Book on …… now, rectified 1,000

3. A receipt of Rs. 300 towards commission was omitted to be posted : You

know receipt of commission is recorded on the debit side of the Cash Book
and posted on the credit side of the Commission Account. The error lies in
omitting to post. Hence, it has not been credited by Rs. 300. This error can be
corrected by making the posting now as shown below:
Commission Account
Dr. Cr.

By Omission of posting from Rs.

Cash Book …………. 300

4. A credit sale for Rs. 1,000 to Tiwari was posted to the credit side of his
account: You know a credit sale is entered in the Sales Book and posted on
the debit side of the customer’s account from the Sales Book. This error relates
to posting on wrong side of Tiwari’s Account. His account should have been
debited and not credited. To correct this error, we have not only to remove the
wrong credit of Rs. 1,000 from his account but also give a debit of Rs. 1,000
to his account. Hence, the error can be rectified by debiting Tiwari’s Account
with double the amount i.e. Rs, 2,000 as shown below:
Tiwari’s Account
Dr. Cr.

To Posting of sales made to him on Rs.

credit side on ……. Now rectified 2,000

Check Your Progress C

1. What do you understand by one-sided error?
..................................................................................................................
..................................................................................................................
..................................................................................................................
2. The following errors have been committed in the books of account.
i) Purchase Book was overcast by Rs. 500.
ii) Sales Book was undercast by Rs. 600.
121
Accounting Process iii) Payment made to Krishna has not been posted to his account.
iv) Rs. 675 received from Rahul was posted to the debit of his account.
v) A total of Rs. 67 in the discount allowed column of the Cash Book was
posted to the Discount Allowed Account as Rs. 76.
vi) Payment of Rs. 750 towards salaries was posted twice to Salaries Account.
3. You are required to answer the following questions.
a) State the name of the account affected by each error.
i) ..................................................................................................
ii) ..................................................................................................
iii) ..................................................................................................
iv) ..................................................................................................
v) ..................................................................................................
vi) ..................................................................................................
b) State how you will rectify each error.
i) ................................................................................................
ii) ................................................................................................
iii) ................................................................................................
iv) ................................................................................................
v) ................................................................................................
vi) ................................................................................................

7.10.2 Rectification of Two-sided Errors

You have learnt that one-sided errors are corrected by noting the Correction on the
appropriate side of the account affected by the error. These cannot be rectified by
suitable journal entries because only one account was involved. But, the two-sided
errors are mostly rectified by journal entries. It is because such errors affect two or
more accounts and in most cases the debit and credit are equally affected. Take the
case of first example of two-sided errors given earlier. A credit sale of Rs. 1,080 to
Anand was wrongly recorded in the Sales Book as Rs. 1,800. The two accounts
affected are: (i) Anand’s Account which shows an excess debit of Rs. 720, and (ii)
Sales Account which stands credited in excess by Rs. 720. To rectify this error, we
must credit Anand’s Account with Rs. 720 and debit the Sales Account with Rs.
720. So, a journal entry can be passed as follows:
Rs. Rs.
Sales Account Dr. 720
ToAnand 720
(Being sales of Rs. 1,080 to Anand wrongly recorded in the
Sales Book as Rs. 1,800, now rectified)
122
Take the second example of two-sided errors given earlier. A sale of Rs. 500 Trial Balance
made to Kamal was posted to the debit side of Kishore’s Account. The two
accounts affected are: (i) Kamal’s Account which has not been debited by Rs.
500, and (ii) Kishore’s Account which has been wrongly debited with Rs. 500.
To rectify this error we have to debit Kamal’s Account with Rs, 500 and credit
Kishore’s Account with Rs. 500. So, journal entry for the rectification of this error
will be as follows:
Rs. Rs.
Kamal Dr. 500
To Kishore 500
(Being rectification of wrong
debit to Kishore for sale made to Kamal)
Now let us take a few more examples of two-sided errors and see how they will
be rectified
1. Sale of old machinery to Chakraborty for Rs. 600 was wrongly entered
in the Sales Book. You know the correct entry for this transaction would
be as follows:
Rs. Rs.
Chakraborty Dr. 600
To Machinery Account 600
Instead of the above entry, the transaction was recorded as
Rs. Rs.
Chakraborty Dr. 600
To Sales Account 600
Thus, debit to Chakraborty’s Account is correctly given. But is has affected two
other accounts (i) Machinery account: which has not been credited, and (iii) Sales
Account which has been wrongly credited. This can be rectified by debiting the
Sales Account since it has been wrongly credited, and crediting the Machinery
Account which has not been credited. Hence, a rectifying entry can be passed
Rs. Rs.
Sales Account Dr. 600
To Machinery Account 600
(Being rectification of wrong credit to sales for the sale of old machinery)
2. A credit sale of Rs. 7,600 to Sharma was recorded in the Sales Book
for Rs. 6,700: It means the entry in the Sales Book has been made with
Rs. 900 (Rs. 7,600 – Rs. 6,700) short. So, this error has affected two
accounts: (i) Sharma’s Account which is having a short debit of Rs. 900, and
(ii) the Sales Account which is having a short credit of Rs. 900. It can be
rectified by debiting Sharma’s Account and crediting Sales Account. The
rectifying journal entry will be as follows:
Rs. Rs.
Sharma Dr. 900
To Sales Account 900
(Being the rectification of a credit sale for Rs. 7,600 wrongly recorded as
Rs. 6,700)

123
Accounting Process 3. A credit sale of Rs. 2,000 to Sinha was wrongly passed through the
Purchases Book. This should have been recorded in the Sales Book and
the correct entry would have been:
Rs. Rs.
Sinha Dr. 2,000
To Sales Account 2,000
Since it was wrongly passed through Purchases Book, the effective entry is:
Rs. Rs.
Purchases Account Dr. 2,000
To Sinha 2,000
By comparing the above two entries, you will notice that:
i) Sinha’s Account which should have been debited with Rs. 2,000 is actually
credited with Rs. 2,000. So, to rectify this error in his account. You have to
debit Sinha’s Account with double the amount—Rs. 2,000 to cancel the
wrong credit and another Rs. 2,000 to give the correct debit.
ii) Sales Account has not been credited with Rs. 2,000. So, to rectify error, the
Sales Account should now be credited with Rs. 2,000.
iii) Purchases Account has been wrongly debited with Rs. 2,000. So, to rectify
this error, the Purchases Account should be credited with Rs 1000.
After identifying the three accounts involved and nature of correction required in
each account, you can easily make out the rectifying journal entry. This will as
follows:
Rs. Rs.
Sinha Dr. 4,000
To Purchases Account 2,000
To Sales Account 2,000
(Being the rectification for a credit sale wrongly passed through the Purchases
Book)
4. Repairs to machinery amounting to Rs. 400 was wrongly debited to
Machinery Account : You know when routine repairs are made, such
expenditure is debited to Repairs Account and not to the concerned asset
account. So, in this case the debit should have gone to Repairs Account and
not to Machinery Account. To rectify this error, we should now debit the
Repairs Account and credit the Machinery Account. Thus, the rectification
entry will be:
Rs. Rs.
Repairs Account Dr. 400
To Machinery Account 400
(Being the rectification of wrong debit to Machinery Account for routine repairs)
Illustration 4
How would you rectify the following errors in the books of Kiran & Co.?

124 1. The Sales Returns Book has been undercast by Rs. 500.
2. The total of the Bills Receivable Book amounting Rs. 4,500 has been posted Trial Balance
to the credit of Bills Receivable Account.
3. While posting Purchases Book to the ledger, the personal account of Kumar
has been credited with Rs. 221 instead of Rs. 212.
4. Rs. 10,000 paid for the purchase of a TV set for the proprietor is debited
to General Expenses Account.
5. An amount of Rs. 1,000 paid by Pran has been credited to the account of
Praneet.
6. Goods sold to Inder for Rs. 1,200 have been entered in the Purchases
Book.
Solution:
1. This error will be rectified by entering Rs. 500 on the debit side of Sales
Returns Account by writing “To Undercasting of Sales Returns Book for.
the Month of ………………..Rs. 500”.
2. This error will be rectified by entering an amount of Rs. 9,000 on the debit
side of Bills Receivable Account by writing “To Wrong posting of the total
of Bills Receivable Book on the opposite side …………………… Rs.
9,000”.
3. Kumar’s Account has been credited with an excess amount of Rs. 9 (Rs.
221— Rs. 212). This error will be rectified by debiting his account with
Rs. 9 by writing “To Difference in amount posted from the Purchases Book
on ………………………Rs. 9”.
4. The following journal entry is required for rectification:
Rs. Rs.
Drawings A/c Dr. 10,000
To General Expenses A/c 10,000
(Being rectification of purchase of TV wrongly debited to
General Expenses A/c)
5. The following journal entry is required for rectification:

Rs. Rs.
Praneet Dr. 1,000
To Pran (Being rectification of wrong credit to 1,000
Praneet for the amount paid by Pran)
6. The following journal entry is required for rectification:
Rs. Rs.
Inder Dr. 2,400
To Purchases A/c 1,200
To Sales A/c 1,200
(Being rectifying entry for sale to Inder wrongly entered
in the Purchases Book)
Illustration 5
How would you rectify the following errors: 125
Accounting Process 1. Rs. 3,000 received from the sale of old machinery has been wrongly posted
to Sales Account.
2. Rs. 600, the cost of repairing the machinery has been wrongly charged to
Machinery Account.
3. Goods purchase for Rs. 500 from Sanjay has been wrongly debited to
Furniture Account.
4. A sales of Rs. 600 has been wrongly credited to the customer’s account.
5. A payment of Rs. 460 on account of rent has been posted twice to the Rent
Account.
6. An item of Rs. 197 has been debited to a personal account as Rs. 179.
Solution:
1. The following journal entry is required for rectification:
Rs. Rs.
Sales A/c Dr. 3,000
To Machinery A/c 3,000
(Being rectifying entry for sale of
old machinery credited to Sales A/c)
2. The following journal entry is required for rectification:
Rs. Rs.
Repairs A/c Dr. 600
To Machinery A/c 600
(Being rectification of wrong debit to
Machinery A/c instead of Repairs A/c)
3. The following journal entry is required for rectification:
Rs. Rs.
Purchases A/c Dr. 500
To Furniture A/c 500
(Being rectifying entry for purchase
wrongly debited to Furniture A/c)
4. This error will be rectified by debiting the customer’s account with Rs. 1,200
(double of Rs. 600) by writing “To Wrong posting from Sales Book on the
credit side on ….…………. Rs. 1,200”
5. This error will be rectified by entering Rs. 460 on the credit side of the Rent
Account by writing “By Double posting from Cash Book on ….Rs. 460 “
6. The personal A/c has been debited Rs. 18 short (Rs. 197-179). To rectify
this error, the personal A/c will be debits with the difference by writing “To
Difference in amount posted on …………………….. Rs. 18”.
Check Your Progress D
1. Following errors have been detected:
a) A credit purchase of goods from Chetan amounting to Rs. 15,000 has been
wrongly passed through the Sales Book.

126
b) A Sale of an old Typewriter for Rs. 800 was passed through the Sales Trial Balance
Book.
c) Rs. 700 withdrawn for personal use has been debited to General Expenses
Account.
d) A credit sale of Rs. 2,300 to Zatin was omitted from Sales Book.
e) Purchase of a wooden cupboard for Rs. 3,000 has been passed through the
Purchases Day Book.
You are required to answer the following questions.
1. In case of each error name the accounts affected.
a) i) ..................................................................................................
ii) ..................................................................................................
b) i) ..................................................................................................
ii) ..................................................................................................
c) i) ..................................................................................................
ii) ..................................................................................................
d) i) ..................................................................................................
ii) ..................................................................................................
e) i) ..................................................................................................
ii) ..................................................................................................
2. In case of each error, write the effect on the accounts involved.
a) i) ..................................................................................................
ii) ..................................................................................................
b) i) ..................................................................................................
ii) ..................................................................................................
c) i) ..................................................................................................
ii) ..................................................................................................
d) i) ..................................................................................................
ii) ..................................................................................................
e) i) ..................................................................................................
ii) ..................................................................................................

7.11 SUSPENSE ACCOUNT AND RECTIFICATION

You have learnt the method of rectifying the errors. This method is used for
rectifying the errors located before preparing the final accounts. After the corrections
have been made, a revised Trial Balance is prepared which should normally tally.
But, if it does not tally, it means there are still some errors which have not been 127
Accounting Process detected. As considerable time and effort have already been spent in locating and
rectifying the errors, it may not be possible to wait any longer because it will delay
the preparation of final accounts. Hence, in such situation the usual practice is to
place the difference to Suspense Account and tally the Trial Balance for the time
being. If the total of the debit column in the Trial Balance is more than the total
of its credit column, the difference is placed to the credit of Suspense Account
and the Trial Balance will tally. Similarly, if the credit column total is more than
the debit column total, the difference is placed to the debit of Suspense Account.
The Suspense Account thus created is shown in the Balance Sheet and is carried
forward to the next year.
Note that the Suspense Account is not the result of any transaction. It merely
represents the net effect of errors which still remain undetected. Therefore, during
the next accounting year, after the errors are located and rectified, the Suspense
Account will get closed. Let us now understand how errors will be corrected
during the next year. As for the two sided errors, there is no change in the method
of rectification. These errors do not affect the agreement of Trial Balance and
hence do not involve the Suspense Account. They are rectified by means of the
journal entries as usual. This is not the case in respect of one-sided errors. When
one-side errors were to be corrected before preparing the Trial Balance we did
it by writing an appropriate note in the concerned account. But, when they are
to be corrected during the next year i.e., after Suspense Account has been
created, the rectification will be through an appropriate journal entry. The one-
sided error usually affects only one account. So to pass a journal entry for
rectification of such error, we shall now take Suspense Account as the other
account involved. For example, Rs. 580 received from Shyam were posted to his
account as Rs. 850. It means Shyam’s Account is to be debited with Rs. 270.
You can now pass the following journal entry to rectify this error:
Rs. Rs.
Shyam A/c Dr. 270

To Suspense Account (Being rectification entry) 270

Thus all errors, whether they are two-sided or one- sided will now be rectified
by means of journal entries.

Let us assume that a businessman could not tally his Trial Balance. The difference
of Rs. 1 between the totals of the two columns was put against the Suspense
Account on its debit side and the Trial Balance was made to tally temporarily. The
Suspense Account was carried forward to the next accounting year. The following
errors were then located:

1. An amount of Rs. 99 was omitted to be posted to the credit of a customer’s

account from the Cash Book.

2. The Sales Book was overcast by Rs. 100.

The first error involved the omission of posting to the credit of customers account.
So, to rectify this error, you will have to credit customer’s account with Rs. 99.
As the Suspense Account is in existence, the corresponding debit would be given
to the Suspense Account. Thus, the journal entry will be:

128
 Rs. Rs. Trial Balance

Suspense A/c Dr. 99

To Customer’s A/c 99
(Being the rectification of omission in posting)
The second error refers to Sales Book being overcast by Rs. 100. It means that the
Sales Account has been credited with Rs. 100 in excess. To rectify this error, the
Sales Account will have to be debited with Rs. 100. The corresponding credit would
be given to Suspense Account. The rectifying entry will be:
Rs. Rs.
Sales A/c Dr. 100
To Suspense A/c 100
(Being the rectification of overcastting in Sales Book)
The Suspense Account, after posting the two rectification entries, would appear as
follows:
Suspense Account
Dr. Cr.
Rs. Rs.
To Difference in Trial Balance 1 By Sales A/c 100
To Customer’s A/c 199
100 100

With the posting of the two rectification entries the Suspense Account got closed.
Note that the opening balance in Suspense Account simply shows the net effect of
these errors. Sometimes, the balance of Suspense Account is not given. In
that case it can be worked out after completing the posting of the rectification
entries.
Suppose in the above example, the amount with which the Suspense Account was
opened was not given. Leave the first line blank on both the debit and credit sides of
the Suspense Account and post the rectification entries. The difference between the
totals of two sides will be considered as the balance with which the Suspense Account
was opened. This is based on the assumption that there are no more errors remaining
undetected.
Look at illustrations 6, 7 and 8 and study how errors are rectified when Suspense
Account is in existence.
Illustration 6
The Trial Balance of Siva did not tally. The credit side exceeded by Rs. 1,455. This
amount was entered in the debit column against Suspense Account and the Trial
Balance was made to tally.
Later, the following errors were discovered.
1. Goods worth Rs. 1,250 were sold to Mahesh on credit. This was entered in
the Sales Book but was not posted.
2. Goods worth Rs. 313 were returned by Ahmed. The amount was credited to
his account but was not recorded in the Returns Inwards Book.
129
Accounting Process 3. Manoj paid Rs. 670 but his account was wrongly credited with Rs. 607.
4. An amount of Rs. 375 owed by Dinesh was omitted from the schedule of
Sundry Debtors.
5. The Sales Book was undercast by Rs. 420.
Rectify the errors and show the Suspense Account.
Solution:
JOURNAL

Rs. Rs.
1. Mahesh Dr. 1,250
To Suspense A/c (Being sales to 1,250
Mahesh not posted)
2. Returns Inwards A/c Dr. 313
To Suspense A/c 313
(Being goods returned not recorded in
Returns Inwards Book though credited to
personal account)
3. Suspense A/c Dr. 63
To Manoj (Being Cash paid by 63
Manoj underposted)
4. Sundry Debtors A/c Dr. 375
To Suspense A/c (Being Dinesh’s 375
debit omitted from the list of Sundry Debtors)
5. Suspense A/c Dr 420
To Sales A/c (Being rectification of 420
overcasting in Sales Book)

Suspense Account
Dr. Cr.

Rs. Rs.
To Difference in Trial Balance 1,455 By Mahesh 1,250
To Manoj 63 By Returns Inwards A/c 313
To Sales A/c 420 Sundry Debtors A/c 375
1,938 1,938

Illustration 7
Kishan, the accountant, found certain errors in the books. He transferred the
difference in the Trial Balance to the credit of a Suspense Account. Subsequently,
the following errors were discovered. Pass the necessary journal entries to rectify
the errors and show the Suspense Account.
1. An amount of Rs. 300 paid as Commission was not posted to Commission
Account.
2. Rs. 3,400 paid towards rent was wrongly entered in the Rent A/c as Rs. 4,300.
130
3. Discount Received column of the Cash Book was undercast by Rs. 100. Trial Balance

4. Cash sales not posted to the Sales Account amounted to Rs. 1,000.

Solution:
JOURNAL

Rs. Rs.
1. Commission A/c Dr. 300
To Suspense A/c 300
(Being the omission of posting to
commission A/c rectified)
2. Suspense A/c Dr. 900
To Rent A/c 900
(Being excess debit to Rent Account
now rectified)
3. Suspense A/c Dr. 100
To Discount ReceivedA/c 100
(Being rectification of undercasting in the
discount received column of the Cash Book)
4. Suspense A/c Dr. 100
To Sales A/c 100
(Being the omission of posting to sales
account now rectified)

Suspense Account
Dr. Cr.

Rs. Rs.
To Rent A/c 900
To Discount Received A/c 100 By Balance b/d 1,700
(balancing figure)
To Sales A/c 1,000 By Commission A/c 300
2,000 2,000

Illustration 8
Rectify the following errors assuming that a Suspense Account was opened.
1. A purchase made from Anthony & Co. for Rs. 8,000 was not entered in the
Purchases Book.
2. An amount of Rs. 500 received from Mr. Roy was credited to Ray’s A/c.
3. A sale of Rs. 600 to Gopal was debited to his account as Rs. 6,000.
4. Salaries paid amounting to Rs. 1,000 was wrongly debited to Wages Account.
5. Rs. 450 received on account of interest stands wrongly credited to Commission
Account. 131
Accounting Process 6. The total of Returns Outwards Book amounting to Rs. 560 was hot posted in
the ledger.

7. A credit sale of Rs. 250 to Rakesh was wrongly credited to his Account.

8. A credit sale of Rs. 520 to Madhu debited to him as Rs. 250.

9. A credit purchases from Kailash of Rs. 400 was debited to him.

10. In Cash Book, the total of Discount Allowed column of Rs. 304 has been
carried forward as Rs. 403.

JOURNAL

Rs. Rs.
1. Purchases A/c Dr. 8,000
To Anthony & Co. 8,000
(Being the omission of credit purchases,
now rectified)
2. Ray Dr. 500
To Roy 500
(Being credit given to Ray’s account instead of
Roy’s account, now rectified)
3. Suspense A/c Dr. 5,400
To Gopal 5,400
(Being excess debit given to Gopal’s A/c,
now rectified)
4. Salaries A/c Dr. 1,000
To Wages A/c 1,000
(Being debit to Wages A/c instead of
Salaries A/c, now rectified)
5. Commission A/c Dr. 450
To Interest A/c 450
(Being credit given to Commission A/c
instead of interest A/c, now rectified)
6. Suspense A/c Dr. 560
To Returns Outwards A/c 560
(Being the omission of posting total of
Returns Outwards Book, now rectified)
7. Rakesh Dr. 500
To Suspense A/c 500
(Being wrong credit given to Rakesh,
now rectified)
8. Madhu Dr. 270
To Suspense A/c 270
(Being short amount debited to
Madhu now rectified)

132
 9. Suspense A/c Dr. 800 Trial Balance
To Kailash 800
(Being debit given to Kailash instead
of credit, now rectified)
10. Suspense A/c Dr. 99
To Discount Allowed A/c 99
(Being excess amount carried forward in
Cash Book, now rectified)

Suspense Account
Dr. Cr.

Rs. Rs.
To Gopal 5,400 By Balance b/d (balancing figure) 6,089
To Returns Outward A/c 560 By Rakesh 500
To Kailash A/c 800 By Madhu 270
To Discount Allowed A/c 99
6,859 6,859

Check Your Progress E

1. The following errors were found in the books of Raghavan. The Trial Balance
was out by an excess credit of Rs. 3,720. The difference has been placed to
the debit of Suspense Account.
a) The discount column of the Cash Book on the debit side has been overcast
by Rs. 25.
b) A credit sale of Rs. 1,525 to Rajesh has been wrongly posted to the
credit of his account.
c) The total of the Purchases Returns Book has been overcast by Rs. 605.
d) A sum of Rs. 784 received from Nagesh has been posted to his account
as Rs. 874.
S. No. Account to be debited Account to be credited
a) ........................................ ........................................
b) ........................................ ........................................
c) ........................................ ........................................
d) ........................................ ........................................

7.12 EFFECT OF RECTIFYING ENTRIES ON

PROFITS
You have seen that the creation of Suspense Account helps in tallying the Trial
Balance and avoiding delay in the preparation of final accounts. The errors still
remain to be detected and rectified. So, the Profit and Loss Account prepared
from such Trial Balance is subject to the undetected errors. The profit thus arrived
at may be less or more than the actual profits. Similarly, when the errors are 133
Accounting Process detected and rectified during the next year, the rectifying entries will have their
effect on the profit of the next year.
The profit is affected only if the errors involve accounts which usually appear in
the Trading and Profit and Loss Account (nominal accounts) and not those which
appear in the Balance Sheet (real and personal accounts).
Let us understand it with the help of an example. Suppose Rs. 24,000 paid for
salaries during 2017 was posted to the Salaries Account as Rs. 20,400. This
error has resulted in short debit of Rs. 3,600 to Salaries Account and so the
salaries charged to Profit and Loss Account are short by Rs. 3,600. This would
overstate the profits of 2017. When this error will be detected in 2018 and the
rectifying entry passed, Rs. 3,600 will be added to salaries of 2018 and so the
profit of 2018 will be decreased by Rs. 3,600. Thus, both the errors and the
rectifying entries affect the profit. The effect of rectifying entries will be the reverse
of the effect of errors.
The effect of errors and their rectification on the profits has been presented in a
summarised form in Table 7.1.

Table 7.1: Effect of Errors and Rectifying Entries on Profits

Nature of Error Effect of Error on Effect of Rectifying

in Nominal Accounts Profit Entry on Profit

Excess debit reduces increases

Excess credit increases reduces
Short debit increases reduces
Short credit reduces increases
Omission of debit increases reduces
Omission of credit reduces increases

Look at illustration 9. It shows rectifying entries and their effect on profits.

Illustration 9
A businessman finds that he could tally his Trial Balance of 2017 only by opening a
Suspense Account. During 2018, he discovered the following errors:
1. The Discount Allowed column of the Cash Book was overcast by Rs. 25.
2. Sale of old machinery amounting to Rs. 550 had been credited to Sales A/c.
3. A Sale of Rs. 780 to Ahmed had been debited to his account as Rs. 870.
4. The total of Bill Payable Book amounting to Rs. 4,000 for the month of June
was not posted into the ledger.
Rectify the above errors and prepare the Suspense A/c. Also explain the effect of
rectifying errors on the profits of 2018.

134
Solution: Trial Balance

JOURNAL

Rs. Rs.
1. Suspense A/c Dr. 25
To Discount Allowed A/c 25
(Being the rectifying entry for
overcasting of discount allowed column)
2. Sales A/c Dr. 550
To Machinery A/c 550
(Being the rectifying entry for sales of
Machinery wrongly credited to Sales Account)
3. Suspense A/c Dr. 90
To Ahmed 90
(Being rectifying entry for excess
debit to Ahmed’s Account)
4. Suspense A/c Dr. 4,000
To Bill Payable A/c 4,000
(Being the rectifying entry for omission
of posting of the total of Bills Payable Book)

Suspense Account
Dr. Cr.

Rs. Rs.
To Discount Allowed A/c 25 By Balance b/d (balancing figure) 4,115
To Ahmed 90
To Bills Payable A/c 4,000
4,115 4,115

Effect on Net Profit of 2018

Rectifying Entry Increases Decreases

Rs. Rs.
1. Credit to Discount Allowed A/c 25 —
2. Debit to Sales A/c — 550
3. No nominal A/c is involved A/c — —
4. No nominal account is involved — —
25 550
Net decrease in Profits 525

In the above illustration, you observed that errors were committed during 2017 and
the rectifying entries were passed in the books of 2018. This unnecessarily affected
the profits of 2018. In order that the profits of the year in which rectifying entries are
passed is not affected, a new account called Profit and Loss Adjustment Account is
opened. Now, all amounts which are to be debited or credited to nominal accounts 135
Accounting Process in the rectifying entries will be debited or credited to the Profit and Loss Adjustment
Account. The balance of the Profit and Loss Adjustment Account is directly adjusted
in Capital. The current year’s profit will thus remain unaffected.
The rectifying entries 1 and 2 of illustration 9 which involve debit and credit to
nominal accounts can now be shown as follows:
JOURNAL

Rs. Rs.
1. Suspense A/c Dr. 25
To Profit and Loss Adjustment A/c 25
(Being the rectification of overcasting
the discount allowed column)
2. Profit & Loss Adjustment A/c Dr. 550
To Machinery A/c 550
(Being the rectification for wrong
credit given to Sales Account)

The Profit and Loss Adjustment Account will be as follows:

Profit and Loss Adjustment Account
Dr. Cr.

Rs. Rs.
To Machinery A/c 550 By Suspense A/c 25
By Capital A/c (Transfer) 525
550 550

Check Your Progress F

1. State how the rectification of the following errors will effect the profits. Assume
that a Suspense Account has been created.
i) The total of the discount allowed column of the Cash Book, amounting to
Rs. 40, had been posted to the credit of Discount Received Account.
........................................................................................................
........................................................................................................
ii) The total of the Purchases Book has been overcast by Rs. 100.
........................................................................................................
........................................................................................................
iii) The Returns Outwards Book has been overcast by Rs. 80.
........................................................................................................
........................................................................................................
iv) Rs. 105 spent on repairs to furniture had been debited to Furniture
Account.
........................................................................................................
136 ........................................................................................................
 v) A cheque for Rs. 100 received from Mohinder, had been recorded in the Trial Balance
Cash Book, but it was not posted to Mohinder’s Account.
........................................................................................................
........................................................................................................
........................................................................................................

7.13 LET US SUM UP

1. It is necessary to prepare a Trial Balance before preparing the final accounts.
It verifies the arithmetical accuracy of the books of account.
2. When a Trial Balance does not tally, it means that there are errors in books
of account. A series of steps are taken to locate errors.
3. There are certain errors which affect the Trial Balance and there are some
which do not.
4. Errors of principle, errors of complete omission, certain errors of commission
in subsidiary books, and the compensating errors are not disclosed by the
Trial Balance.
5. Though the Trial Balance has its limitations, it is useful in ensuring the
arithmetical accuracy of the books of account.
6. When the Trial Balance does not tally it means that there are errors in the
books of account. Attempts are made to locate the errors and rectify them.
7. One-sided errors which affect only one account are rectified by means of
a suitable note on the relevant side in the concerned account.
8. Two-sided errors, involving two or more accounts, are rectified by means
of journal entries.
9. If the Trial Balance does not tally even after the detected errors have been
rectified, the difference is put against a Suspense Account to avoid delay
in preparing the final accounts.
10. The Suspense Account is carried forward to the next accounting year and
as and when the errors are located, they are rectified.
11. When the Suspense Account is in existence, all errors are rectified by
means of journal entries.
12. When all the errors are rectified, the Suspense Account gets closed.
13. When errors are rectified during the next account year, the rectification
entries involving nominal accounts affect the profits of the next year. To
avoid such effect, Profit and Loss Adjustment Account can be opened and
its balance is directly adjusted in capital.

7.14 KEY WORDS

Compensating Errors : A group of errors wherein the effect of an error is
counter-balanced (or compensated) by the effect of one or more errors, as a
result of which the agreement of Trial Balance remains unaffected.
137
Accounting Process Errors of Principle An error committed by ignoring or misapplying some principles
of accounting while recording a transaction in the books of account.
Errors of Complete Omission: An error committed in completely omitting to
record a transaction in the books of account.
Errors of Partial Omission : An error committed in omitting to post one aspect
of an entry in the ledger.
Errors of Commission : A clerical error committed while recording or posting
of a transaction.
One-sided error : An error which affects the debit or credit side of one account
only.
Profit and Loss Adjustment Account : An account opened for avoiding the
effect of rectifying entries in respect of previous year’s errors on the profit or loss
of the current year.
Suspense Account : An account opened to make the Trial Balance tally
temporarily. It represents the net effect of undetected one-sided errors.
Two-sided errors : An error which involves two or more accounts and both the
debit and credit aspects.

7.15 SOME USEFUL BOOKS

Frank Wood. Book-keeping and Accounts (London: Pitman, 1996)
Greweal. TS. Double Entry Book-keeping (New Delhi: Sultan Chand & Sons,
2018)
Maheshwari, S.N. Principles and Practice of Accountancy (New Delhi: Arya
Book Trial Balance Depot, 2018)
Frank Wood, 1996. Book-keeping and Accounts, Pitman Publishing Limited:
London.
Grewal, T.S. 2018. Double Entry Book-keeping, Sultan Chand & Sons: New
Delhi.
Maheshwari, S.N. 2018. Principles and Practice of Accountancy, Arya Book
Depot: New Delhi.
Patil, V.A., and Korlahalli, J.S. 2018. Principles and Practice of Book-keeping,
R. Chand & Co.: Delhi.

7.16 ANSWERS TO CHECK YOUR PROGRESS

A2 (a) Debit (b) Debit (c) Debit (d) Debit (e) Debit (f) Credit
(g) Credit (h) Debit (i) Debit (j) Credit (k) Debit (l) Debit
(m) Debit (n) Debit (o) Debit (p) Credit
B1 (a) i (b) ii (c) ii (d) iii (e) i (f) ii
B4 Errors (c), (d) and (f) would affect the Trial Balance
C2 a) i) Purchases Account
138
 ii) Sales Account Trial Balance

iii) Krishna’s Account

iv) Rahul’s Account
v) Discount Allowed Account
vi) Salaries Account
b) i) Credit Purchases Account with Rs. 500
ii) Credit Sales Account with Rs. 600
iii) Debit Krishna’s Account
iv) Credit Rahul’s Account with Rs. 1,350
v) Credit Discount Allowed Account with Rs. 9
vi) Credit Salaries Account with Rs. 750
D 1 a) i) Chetan’s Account
ii) Purchases Account
iii) Sales Account
b) i) Typewriter Account
ii) Sales Account
c) i) Drawings Account
ii) General Expenses Account
d) i) Zatin’s Account
ii) Sales Account
e) i) Furniture Account
ii) Purchases Account
2 a) i) Chetan’s Account debited with Rs. 15,000 instead of being credited.
ii) Purchases Account not debited with Rs. 15,000
iii) Sales Account credited in excess with Rs. 15,000
b) i) Typewriter Account not credited
ii) Sales Account credited in excess
c) i) Drawings Account not debited
ii) General Expenses Account debited in excess
d) i) Zatin’s Account not debited
ii) Sales Account not credited
e) i) Furniture Account not debited
ii) Purchases Account debited in excess 139
Accounting Process E a) i) Debit Suspense Account
ii) Credit Discount Allowed Account
b) i) Debit Rajesh’s Account
ii) Credit Suspense Account
c) i) Debit Purchases Returns Account
ii) Credit Suspense Account
d) i) Debit Nagesh’s Account
ii) Credit Suspense Account
F1 i) Profit will decrease by Rs. 80 because the rectifying entry will involve
debiting Rs. 40 to Discount Allowed Account and Rs. 40 to Discount
Received Account.
ii) Profit will increase by Rs. 100.
iii) Profit will decrease by Rs. 80.
iv) Profit will decrease by Rs. 105.
v) No effect on profit.
The net effect will be a decrease in the Profits by Rs. 165.

7.17 TERMINAL QUESTIONS/EXERCISES

Questions
1. Why do you regard Trial Balance as a test of the arithmetical accuracy of the
books of account? List the errors that will be disclosed by the Trial Balance.
2. If the Trial Balance does not tally, it means there are some errors in books of
account. How are these errors located? Describe the procedure fully.
3. Is the Trial Balance a conclusive proof of the accuracy of the books of account?
Discuss the errors not disclosed by the Trial Balance.
4. What are the different types of errors that are usually committed in recording
transactions? Explain with examples.
5. State the advantage of preparing a Trial Balance. Also give its limitations, if any.
6. What are one-sided errors? Give five examples. Explain the method of rectifying
one-sided errors.
7. What are two-sided errors? Give five examples and show how two-sided
errors are corrected?
8. What is a Suspense Account? When is it opened? How do you rectify the
error when a Suspense Account that has already been opened?
9. Does rectification of errors in a subsequent accounting period always affect the
trading result of the current accounting period? Explain with examples.

140
Exercises Trial Balance

1. On January 1, 2018 the balance of Tanali Traders stood as follows:

Cash in hand Rs. 2,000; Cash at bank Rs. 12,300; Stock in trade Rs. 51,700;
Furniture Rs. 8,200; Debtors Rs. 6,600 (Shyam Rs. 3,500, Shanker Rs. 2,600,
Laxman Rs. 500); Creditors Rs. 7,100 (Reddy & Co. Rs. 3,020, Kishore Rs.
4,080); Capital Rs. 73,700.
Their transactions during the month of January were as follows:
2018 Rs.
Jan. 1 Borrowed from Globe Finance Co 10,000
“ 2 Bought goods for cash 2,300
“ 2 Purchased from Reddy & Co 5,500
“ 3 Paid into bank 9,000
“ 5 Received cheque from Shyam 3,500
“ 6 Sold goods for cash 1,200
“ 7 Sold to Shanker 8,700
“ 8 Paid Kishore by cheque 2,000
Discount received 100
“ 9 Received cheque from Shanker on account 5,000
“ 9 Received credit note from Reddy & Co. for goods
returned to them 380
“ 10 Sold goods to Thomas 10,000
“ 10 Drew cash from the bank 1,000
“ 12 Purchased postage stamps 300
“ 14 Bought of Bose & Sons 9,300
“ 16 Paid Globe Finance & Co. by cheque in part payment of loan 5,000
“ 17 Received cash from Laxman 500
“ 21 Paid Reddy & Co. by cheque 6,000
“ 23 Carriage paid 100
“ 24 Withdrew cash for private expenses 1,500
“ 28 Paid salaries in cash 800
“ 30 Rent due to landlord 500
“ 31 Purchased furniture on credit from Joseph 600
“ 31 Paid interest to Globe Finance Co. 100
141
Accounting Process Enter the above transactions in the appropriate books, post them into ledger and
prepare a Trial Balance.
(Answer: Cash in hand Rs. 600, Cash at bank Rs. 15,800, Trial Balance Total Rs.
1,13,600.)
2. From the details given below prepare a Trial Balance as at March 31, 2018.
Rs. Rs.
Purchases 80,000 Salaries & Wages 42,500
Discount (Dr.) . 6,500 Sales 1,50,000
Travelling Expenses 2,500 Carriage Outwards 225
Carriage Inwards 1,375 Repairs 1,500
Insurance 750 Miscellaneous Expenses 275
Commission Paid 1,625 Buildings 20,000
Rent and Rates 2,500 Machinery 7,500
Cash in hand 125 Horses and Carts 2,500
Cash at bank 13,625 Stock in Trade (1-4-2017) 29,500
Sundry Debtors 16,025 Capital 68,525
Sundry Creditors 10,500
(Answer: Total of Trial Balance Rs. 2,29,025.)
3. From the following details, prepare a Trial Balance as on June 30, 2018.
Rs. Rs.
Opening Stock 40,000 Drawings 10,000
Purchases 4,10,000 Wages 7,300
Sales 4,29,000 Salaries 11,000
Purchase Returns Sales 1,250 Outstanding Expenses 1,000
Returns 2,500 Prepaid Expenses 750
Carriage Inwards 1,500 Postage 900
Carriage Outwards 2,500 Discount Received 375
Bank Overdraft 21,000 Discount Allowed 1,000
Cash 4,000 Bed Debts 750
Capital 1,27,750 Sundry Debtors 1,00,000
Sundry Creditors 37,500 Interest 3,500
Loans 41,375 Interest Received 300
Investments 10,000 Provisions for Bad Debts 1,750
Accrued Income 600 Furniture & Fixture 7,500
Machinery 47500
(Answer: Total of Trial Balance. Rs. 6,61,300.)
4. The following Trial Balance is incorrectly drawn up and shows a difference of
Rs. 5,180. Rewrite it correcting the errors.
142
 Lakshman Singh & Co. Trial Balance
Trial Balance as on December 31, 2018

Name of Account L.F. Dr. Cr.

Balances Balances

Rs. Rs.
Bank Overdraft 600 ..
Depreciation --- 330
Bank 3,300 ---
Wages --- 160
Insurance -- 270
Fixtures 1,700 ---
Capital 20,200 ---
Stock(1-1-18) --- 550
Rates 200 ---
Cash 120 ---
Stock (3 1-12-18) 900 ----
Sales --- 8,600
Purchases --- 5,200
Drawings --- 350
Premises --- 16,980
Insurance 300 ..
Difference 5,180 ..

Total 32,500 32,500

(Answer: Total of Trial Balance Rs. 29,460.)

(Hint: Stock (31-12-18) will not be shown in the Trial Balance.)
5. Owing to three obvious errors, the following Trial Balance does not agree.
Correct the errors and prepare a Trial Balance as on March 31, 2018
Rs. Rs.
Stock on 1-4-2017 20,000 Loan Account 30,000
Purchases 98,000 Debtors 84,000
Wages Rent, 30,000 Capital 1,00,000
Rates & Taxes 2,000 Provision for Bed Debts 5,600
Salaries 16,000
General Expenses 1,800
Discount Allowed 1,000
Plant and Machinery 30,000
Creditors 40,000 143
Accounting Process Cash at Bank 16,000
Furniture & Fixtures 10,000
Sales 2,57,200
Returns on Sales 4,000
Cost of Lease 1,20,000
6,46,000 2,19,600

(Answer: Total of the Trial Balance Rs. 4,32,800.)

6. An inexperienced accountant provides you with the following Trial Balance. In
case you find it to be incorrect, prepare it again so as to remove its defects.
Trial Balance as on June 30,2018

Name of Account LF. Dr. Balances Cr. Balances

Rs. Rs.
Stock (opening) 10,500
Building 31,500
Bills Payable 1,800
Bank Overdraft 1,500
Capital 45,000
Furniture 12,000
Discount Allowed 90
Sales 39,000
Loan from Suresh 2,400
Carriage Inwards 270
Bills Receivable 3,000
Purchases 24,000
Salaries 3,300
Investments 3,000
Interest on Investments 1,650
Returns Inwards 900
Returns Outwards 300
Insurance Premium 360 .
Interest on Loan 30
Advertisement 1,200
Drawings 1,500

91,650 91,650

(Answer: Total of Trial Balance Rs. 91,650)

144
7. From the following transactions of Shanker, write up Journal Proper and the Trial Balance
other subsidiary books involved. Show their postings into ledger and prepare
a Trial Balance.
2018 Rs.
Mar. 1 Assests:
Cash in hand 1,000
Cash at bank 34,000
Stock of goods 20,000
Machinery 50,000
Furniture 5,000
Sudhir owes 5,000
Naveen owes 12,500
Liabilities:
Loan 20,000
Sum owing to Samuel 10,000
“ 2 Bought goods on credit from Naresh 5,000
“ 3 Cash sales 2,000
“ 4 Sold goods to Raman 5,000
“ 5 Received from Sudhir in settlement of his account 5,000
“ 6 Payment made to Samuel by cheque, in full settlement 9,950
“ 9 Old furniture sold for cash 500
“ 10 Cash purchases 4,000
“ 11 Naveen pays by cheque which was deposited into ban 12,500
“ 11 Paid for repairs to machinery 500
“ 13 Purchased goods from Shyam 5,000
“ 13 Paid carriage on these goods 250
“ 16 Received cheque from Raman 5,000
“ 17 Paid to Shyam by cheque 5,000
“ 18 Bank intimates that cheque of Raman has been returned unpaid
“ 19 Cash sales 3,000
“ 21 Cash deposited into bank 2,500
“ 25 Paid municipal taxes in cash 500
“ 26 Old newspaper sold 50
“ 28 Paid for advertisements 500
“ 31 Paid rent by cheque 600
(Answer: Cash in hand Rs. 2,800; Cash at bank Rs. 33,450; Total of Trial
Balance Rs. 1,32,600.).
Hint: Find out the opening capital before working on the problem. 145
Accounting Process 8. Rectify the following errors:
a) Goods amounting to Rs. 3,000 sold to Pran, were correctly entered in
the Sales Book, but posted to his account as 30,000.
b) The total of the Sales Book for the month was undercast by Rs. 5,000.
c) Rs. 6,000 paid for the cash purchase of furniture was not posted to the
Furniture Account.
d) A credit purchase of Rs. 9,000 from Arjun was wrongly passed through
the Sales Book.
9. Rectify the following errors:
a) Rs. 690, the amount of rent paid to the landlord, was debited to his
personal account.
b) Goods purchased for the personal use of the proprietor, costing Rs.
600, was debited to the Purchases Account.
c) Rs. 1,080 paid as wages for construction of a room was debited to the
Wages Account.
d) Total of Purchases Book of one page was carried forward to the next
page as Rs. 876 instead of Rs. 786.
e) Discount allowed amounting to Rs. 25 had been credited to Discount
Received Account.
f) Total of Sales Book of one page was carried forward to the next page
as Rs. 872 instead of 782.
10. Rectify the following errors:
a) Rs. 700 received on account of a bad debit written off earlier, credited
to customer’s personal account.
b) Goods returned by Murari amounting to Rs. 250 has been entered in
the Returns Outwards Book.
c) An amount of Rs. 800 withdrawn by the proprietor for his personal use
has been debited to General Expenses Account.
d) Discount allowed to Kurien amounting to Rs. 47 has not been entered
in the discount column of the Cash Book, but it has been posted to the
Customer’s personal account.
e) A cash sale to Ashok for Rs. 690 was recorded in the Cash Book and
also in the Sales Book. Postings were made from both the books.
f) The Bank Column on the credit side of the Cash Book was overcast
by Rs. 50.
11. Rectify the following errors:
a) A credit purchase of goods from Manoj, amounting to Rs. 1,800, has
been wrongly passed through the Sales Book.
b) A credit sale of Rs. 600 to Anand was posted to his credit.
146
 c) The Returns Inwards Journal has been undercast by Rs. 1,800. Trial Balance

d) Rs. 1,450 paid as commission was wrongly debited to Interest Account.

e) Rent paid for proprietor’s residence amounting to Rs. 2,000 was debited
to the Rent Account.
f) A credit sale of Rs. 1,400 to Roshan was entered in the Returns
Outwards Book.
12. Correct the following errors found in the books of Rohit, whose Trial Balance
was out by Rs. 1,746 (excess debit), and the difference was posted to a
Suspense Account. Also show Suspense Account.
a) The Sales Returns Book has been totalled Rs. 54 short.
b) The Purchases Book has been totalled Rs. 150 more.
c) Goods purchased amounting to Rs. 750 has been posted to the debit
of Supplier’s (Srinath) Account.
d) The Sales Book has been totalled Rs. 150 short.
(Answer : Suspense Account gets closed).
13. On taking out a Trial Balance, a book-keeper finds an excess credit of Rs.
2,460. Being desirous of closing the books, he places the difference to a
Suspense Account, which is carried forward. In the next period, he discovers
the following errors. Pass the rectifying entries and prepare the Suspense
Account.
a) The total of Returns Inwards Book has been totalled Rs. 400 short.
b) A sum of Rs. 4,800 written off as depreciation on machinery, has not
been posted to the Depreciation Account.
c) A discount of Rs. 1,000 allowed to a customer has been posted to his
account as Rs. 100.
d) The Sales Book was undercast by Rs. 4,000.
e) Purchase of Rs. 480 was posted as Rs. 840 in the supplier’s account.
(Answer : Suspense Account still shows a debit balance of Rs. 1,800)
14. A book-keeper failed to balance his Trial Balance. He places the difference
to a newly opened Suspense Account which is carried forward. The following
errors were subsequently discovered. Give journal entries to rectify these
errors and show the Suspense Account.
a) The total of Purchases Day Book had been undercast by Rs. 200.
b) Purchase of a Typewriter on credit from Harnath for Rs. 9,600 was
entered in the Purchases Book.
c) Goods returned by Hari amounting to Rs. 2,000 has been entered in
the Returns Outwards Book, however, the posting was done correctly
to Hari’s Account.
d) A Cash sales of Rs, 2,500 to Sommnath, correctly entered in the Cash
Book was posted to the credit of his personal account. 147
Accounting Process e) A cheque received from Mahinder for Rs. 8,160 had been debited in
the Cash Book, but the double entry had not been completed.
(Answer : Suspense Account was started with a credit balance of Rs. 3,960)
15. The Trial Balance prepared by Dhanraj did not tally and the difference was
transferred to a Suspense Account. Subsequently, the following errors were
found. Rectify the errors and show the Suspense Account. Also explain the
effect of rectifying entries on the profits.
a) A sale of Rs. 1,600 to Kamalnath was posted to Karunanath.
b) Insurance paid amounting to Rs. 250 was posted twice.
c) A sale of Rs. 1,500 for old machinery was passed through the Sales
Book.
d) A Purchase of Rs. 600 from Kamesh was not passed through the
books.
e) Rs. 80, the debit balance of Commission Account was omitted from the
Trial Balance.
f) The Purchases Returns Book was undercast by Rs. 700.
(Answer : Suspense Account was started with a credit balance of Rs. 870; Profit
will decrease by Rs. 1,230).

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

148
 BCOC-131
Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

3
FINAL ACCOUNTS
UNIT 8
Depreciation 5

UNIT 9
Final Accounts-I 26

UNIT 10
Final Accounts-II 61
Final Accounts
PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.)
Prof. Nawal Kishor
MD University, Rohtak Department of Commerce
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Rani Chennamma University Department of Commerce Dr. Subodh Kesharwani
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Faculty Members
Director, SOMS, IGNOU SOMS, IGNOU
Prof. N. V. Narasimham
Prof. A.A. Ansari Prof. Nawal Kishor
Jamia Millia Islamia, New Delhi Prof. M.S.S. Raju
Dr. Sunil Kumar
Ms. Surbhi Gupta Dr. Subodh Kesharwani
Vivekananda College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P. Sarkar
Dr. Anupriya Pandey

COURSE PREPARATION TEAM

Accountancy-I: ECO-02
Prof. M.S.S. Raju
(Unit-7, 8 and 20 Revised by Dr. Sunil Kumar) (Course Coordinator & Editor)
Dr. N.K. Kakkar, Ramjas College Dr. Sunil Kumar
University of Delhi, Delhi (Course Coordinator & Editor)
Prof. V. Vishwanadham, Osmania University, Hyderabad
Dr. P.C, Maheshwari, St. John’s College, Agra
Dr. A. S Chawla, Punjabi University, Patiala

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
2 Printed by :
 Depreciation
BLOCK 3 FINAL ACCOUNTS
After recording and posting all business transactions in the appropriate books
of account and testing the arithmetical accuracy of these records with the help
of Trial Balance, we prepare a summary at the end of the accounting year.
The purpose is to ascertain the profit or loss and the financial position of the
business. The summary is prepared in the form of a Profit and Loss Account
(also called Income Statement) and a Balance Sheet (also called Position
Statement). These two financial statements are termed as Final Accounts. This
block consists of 3 units (Unit 8 to 10) deals with the concepts to be observed
for ascertaining the profit or loss and the financial position of the business,
and the method of preparing the final accounts.
Unit 8 discusses the causes and objectives of providing depreciation, the factors
influencing the amount of depreciation to be charged and the two commonly
used methods of providing depreciation.
Unit 9 describes the method of preparing simple final accounts involving no
adjustments. It also explains the preparation of a Manufacturing Account which
may be prepared by manufacturing establishments.
Unit 10 deals with the adjustments required in respects of certain expenses
and incomes at the time of preparing the final accounts and explains how they
are incorporated in the Profit and Loss Account and the Balance Sheet.

3
Final Accounts

4
 JournalDepreciation
and Ledger
UNIT 8 DEPRECIATON
Structure
8.0 Objectives
8.1 Introduction
8.2 What is Depreciation?
8.3 Depreciation and other Related Concepts
8.4 Causes of Depreciation
8.5 Objectives of Providing Depreciation
8.6 Factors Influencing Depreciation
8.7 Methods of Recording Depreciation
8.8 Methods for Providing Depreciation
8.8.1 Fixed Instalment Method
8.8.2 Diminishing Balance Method
8.8.3 Difference between Fixed Instalment Method and Diminishing Balance
Methods
8.8.4 Change of Method

8.9 Let Us Sum Up

8.10 Key Words
8.11 Some Useful Books
8.12 Answers to Check Your Progress
8.13 Terminal Questions/Exercises

8.0 OBJECTIVES
After going through this unit you should be able to:
 define depreciation;
 distinguish depreciation from other related concepts;
 state the causes of depreciation;
 describe the objectives of providing depreciation;
 state the factors influencing the amount of depreciation;
 explain the methods of recording depreciation;
 list various methods of providing depreciation; and
 prepare accounts under fixed instalment and diminishing balance methods of
providing depreciation.

8.1 INTRODUCTION
While preparing final accounts you have to provide for depreciation on all fixed
assets so as to work out the correct amount of profit or loss for the accounting 5
Final Accounts period. Adjustments usually contain an item asking you to charge depreciation on
various fixed assets at some given rate and you know how to show it in final accounts
In this unit we shall have a detailed discussion on depreciation and study the basic
factors influencing the amount of depreciation and various methods of providing and
accounting for the same.

8.2 WHAT IS DEPRECIATION ?

You are already familiar with the distinction between revenue expenditure and capital
expenditure. You are aware that when the benefit of an expenditure is available
beyond the accounting year (for one or more years) such an expenditure is treated
as capital expenditure and it often results in acquisition of an asset. Since many
accounting years are likely to receive benefits on account of the use of such an asset,
the cost of investment must necessarily be allocated over the period of its useful life
and charged to the Profit and Loss Account. Allocation of the appropriate amount
to each period is called depreciation which represents the expire portion of
the cost of an asset.
It would be useful to discuss different definitions given by various authorities in the
subject for a proper appreciation of the meaning of depreciation.
Pickles defined depreciation as “the permanent and continuous diminution in the
quality, quantity or value of an asset.”
According to Spicer and Pegler, “Depreciation may be defined\as a measure of the
exhaustion of the effective life of an asset from any cause during a given period.”
These definitions refer to certain basic aspects like permanent and continuous
diminution, exhaustion of effective life but they are not comprehensive. Let us see
some more definitions.
According to ICMA (Institute of Cost and Management Accounts, London)
terminology, “Depreciation is the diminution in intrinsic value of the asset due to use
and/or lapse of time.”
According to Walter B. Meigs and others, “The concept of depreciation is closely
linked to the concept of business income. Since part of the service potential of the
depreciable asset is exhausted in he revenue getting process each period, the cost of
these services must be deducted from revenue in measuring periodic income; the
expired cost must be recovered before a business Is considered as well off as at the
beginning of the period. Depreciation is a measure of this cost.”
According to the institute of Chartered Accountants in Austria, “Depreciation
represents that part of the cost of a fixed asset to its owner which is not recoverable
when the asset is finally put out of use by him. Provision against this loss of capital is
an integral cost of conducting the business during the effective commercial life of the
assets and is not dependent upon the amount of profit cleared.”
From the above definitions it is clear that depreciation refers to that part of the cost
of fixed asset which has expired on account of its usage and or the passage of time.
It is thus the ‘lost usefulness’, ‘expired utility’, or ‘reduction in the intrinsic value’ of
a fixed asset.
Depreciation is charged on almost all fixed assets, possible exceptions being land,
6 antiques, etc. Usually the value of land and antiques appreciates over a period of
time, because they do not have finite economic life as in the case of machinery or Depreciation
furniture,

8.3 DEPRECIATION AND OTHER RELATED

CONCEPTS
Sometimes the terms depletion, amortisation etc., are used interchangeably with
depreciation. These terms in fact are used in a different context. Let us understand
the distinction between depreciation and such related concepts.
Depreciation and Depletion : The term ‘depletion’ is used in respect of the
extraction of natural resources from wasting assets such as quarries, mines, etc. and
refers to, the reduction in the available quantity of the material. As a matter of fact,
depletion is regarded as a method of computing the depreciation on wasting assets.
Thus, it has a limited application. Depreciation, on the other hand, Is a wider term
and refers to a reduction in the value of all kinds of fixed assets arising from their
wear and tear.
Depreciation and Amortisation : The terms ‘amortisátion’ refers to writing off the
proportionate value of the intangible assets such as copyrights, patents, goodwill,
etc., while depreciation refers to the writing off the expired cost of the tangible
assets like machinery, furniture, building etc.
Depreciation and Obsolescence: Obsolescence refers to the decrease in usefulness
arising on account of the external factors like change in technology, new inventions.
change of style, etc. Thus, it is caused mainly on account of the asset becoming out
of date, and old fashioned. Deprecation on the other hand, is a functional loss
generally arising on account of wear and tear, Obsolescence, in fact, is regarded as
one of the causes of depreciation.
Depreciation and Fluctuation : Fluctuation refers to an increase or decrease in the
market price of an asset. Such a change is. usually temporary. Depreciation differs
from fluctuation in the following respects.
i) Depreciation is concerned with book value of asset while fluctuation is related
to the market value.
ii) Depreciation refers only to the decrease while fluctuation refers to either increase
or decrease.
iii) Depreciation reflects a permanent decrease while fluctuation is only a temporary
phenomenon.

8.4 CAUSES OF DEPRECIATION

The causes of depreciation can be stated as follows:
1. Wear and Tear : Wearing out of the asset on account of its constant use is
called wear and tear. This causes a definite reduction in the value of the asset
and is regarded as the major source of depreciation.
2. Lapse of Time : Normally, the passage of time also causes some reduction in
the value of fixed assets because as they become old their value stands reduced.
That is why the depreciation is usually charged on time basis. in case of certain
assets like lease, patents, etc., the value decreases with passage of time as they
generally have a fixed number of years of legal life. For example, a building is
taken on lease for a period of 10 years costing Rs. 1,00,000. The yearly 7
Final Accounts depreciation of lease will amount to Rs. 10,000 (1/10 of Rs. 1,00,000) and
charged as such to the Profit and Loss Account every year.
3. Obsolescence: The acquisition of an improved model may render the existing
machine obsolete. As the new machine performs the same operation more
quickly and/or more economically existing machine is said to have become out
of date or obsolete. This causes a drastic reduction in the value of existing
machinery and the amount of depreciation is bound to be heavy.
4. Depletion: Some assets are of a wasting character. For example mines, quarries,
oil wells etc.. Due to continuous extraction of materials the natural resources
get depleted. Depreciation, in case of such assets is often computed on the
basis of actual depletion. For example, a coal mine has the coal deposits of
200 million tons. In the first year we extract 10 m. tons of coal. The depreciation
in the first five years shall amount to 10/200 of the cost of mine.
On the basis of the causes mentioned above, it can be said that depreciation
is a permanent and continuous reduction in the value of an asset due to wear
and tear, passage of time, obsolescence, depletion or any other cause.

8.5 OBJECTIVES OF PROVIDING DEPRECIATION

You know depreciation is treated as a loss and is chargeable to the Profit and Loss
Account every year. The justification for charging depreciation can be explained as
follows
1. Ascertaining the true profits: Depreciation represents the expired cost of a
fixed asset caused by its usage hi business, This cost is a part of the total
expenses incurred in earning the revenue during an accounting period and must
be taken into account for arriving at the correct amount of profit or loss for the
period. If depreciation is not charged, the expenses and losses will understand
and the Profit and Loss Account will show higher profits making the concern
pay higher taxes.
2. Ascertaining the true cost of production : Depreciation on machinery and
other fixed assets in the factory is an important component of the cost of
production specially when the unit is not labour intensive. So if no provision is
made for depreciation, the cost calculations will be incorrect.
3. Presentation of true financial position: The value of fixed assets reduces
from year to year on account of their usage and passing of time. They must be
shown in the Balance Sheet at their reduced values otherwise it will not reflect
the true financial position of the business. Hence depreciation must be taken
into account. It will enable the concern to show fixed assets at their proper
values in the Balance Sheet.
4. Funds for replacement of assets : Charging depreciation reduces the profits
available for distribution It enables the. concern to retain a part of its profit and
thus accumulate funds for the replacement of the assets as and when necessary.
Check Your Progress A
1. What is depreciation?
................................................................................................................
................................................................................................................

8 ................................................................................................................
2. How is depreciation different from amortisation ? Depreciation

................................................................................................................
................................................................................................................
................................................................................................................
3. State whether the following statements are True or False.
i) Depreciation is charged also on current assets.
ii) Profits will be overstated if depreciation is not charged.
iii) Expenses will be understated if depreciation is not charged
iv) If adequate maintenance expenditure is incurred, depreciation need not
be charged.
v) Depreciation is charged to reduce the value of asset to its market value,
vi) Depreciation is charged only on the original purchase price of the asset.
vii) When market value of an asset is higher than book value, depreciation is
not charged.
viii) The main cause of depreciation is wear and tear caused by its usage.

8.6 FACTORS INFLUENCING DEPRECIATION

The amount of depreciation to be charged to the Profit and Loss Account in respect
of a particular fixed asset is affected by following factors:
1. Cost of the asset : Cost of the asset should include purchase price and all
other costs incurred to bring the asset to usable condition like transportation
costs, erection charges, etc. It is to be noted that financial charges, such as
interest on loan taken for the purchase of the asset is not to be included in the
original cost of an ‘asset.
2. Estimated working life of the asset: The useful or economic life of the asset
can be stated in terms of time i.e., years, months, hours or in terms of quantity,
i.e., number of units of output or any other operating measure such as kilometres
in the case of lorries, motor vans, etc.
3. Estimated Scrap value : Scrap Value (also called salvage value, residual
value) refers to the estimated amount expected to be realized when the asset is
sold to the end of its useful life. While the original cost of an asset can be
correctly determined, useful life and salvage value can only be estimated, based
on certain assumptions.
The total amounts of depreciation to be written off during the life time of an asset is
calculated as follows
Rs.
Total Cost of Asset …..
Less Estimated Scrap Value …..
Total amount of Depreciation to be written off during its useful life …..
9
Final Accounts For example, a machine was bought for Rs. 1,00,000 and a sum of Rs. 24,000 was
spent towards its transportation and erection charges. It was estimated that the
machine has a useful life of 10 years and that the residual value expected to realise at
the end of its useful life is Rs. 14,000. The total amount of depreciation to be written
off during the economic life of an asset can be calculated as shown below:
Rs.
Original cost of the asset 1,00,000
Add Transportation and erection charges 24,000
1,24,000
Less Estimated residual value 14,000
Total amount of depreciation to be written off during its useful life 1,10,000
After determining the total amount of depreciation to be written off during the life
time of an asset the next step is to decide the amount of depreciation to be charged
every year. In the above situation the annual amount of depreciation to be written off
may be considered s 1/10 of the total amount of depreciation because its estimated
life is 10 years.
However, there are various methods of calculating the amount of depreciation to be
charged from year to year.

8.7 METHODS OF RECORDING DEPRECIATION

There are essentially two methods of recording depreciation in the books of account:
(1) when Provision for Depreciation Account is maintained, and (2) when Provision
for Depreciation Account is not maintained. Under the first method, the amount of
depreciation is credited to the ‘Provision for Depreciation Account’ every year and
the concerned asset account continues to appear at its original cost. Of course,
while preparing the Balance Sheet, the accumulated balance of the Provision for
Depreciation Account is shown by way of deduction from the cost of the asset.
Under the second method, no Provision for Depreciation Account is opened. The
amount of depreciation is directly credited to the concerned asset account every
year. The asset account would thus appear in books at the depreciated value (written
down value). Of course, it will be shown in the Balance Sheet giving the details of
the opening balance, purchase and sale of the asset, and the depreciation provided
during the year.
The following are the journal entries passed for the related transactions under the
two methods.
1. When Provision for Depreciation Account is maintained
a) For charging depreciation:
Depreciation Account Dr.
To Provision for DepreciationAccount
(Being depreciation provided)
b) For transferring depreciation to Profit and Loss Account:
Profit and Loss Account Dr.
To DepreciationAccount
10 (Being transfer of depreciation)
 c) When the asset is sold: Depreciation
i) Bank Account Dr.
ToAsset Account
(Being the sale proceeds)
ii) Provision for Depreciation Account Dr.
ToAsset Account
(Being transfer of provision for depreciation on the asset sold)
iii) Asset Account Dr.
To Profit and Loss Account
(Being transfer of profit on sale of the asset)
or
Profit and Loss Account Dr.
ToAsset Account
(Being transfer of loss on sale of the asset)
2. When Provision for Depreciation Account is not maintained
a) For charging depreciation:
Depreciation Account Dr.
ToAsset Account
(Being depreciation provided)
b) For transferring depreciation to Profit and Loss Account
Profit and Loss Account Dr.
To DepreciationAccount
(Being transfer of depreciation)
c) When the asset is sold:
i) Bank Account Dr.
ToAsset Account
(Being sale proceeds)
ii) Asset Account Dr.
To Profit and Loss Account
(Being transfer of profit on sale of asset)
or
Profit and Loss Account Dr.
ToAsset Account
(Being transfer of loss on sale of the asset)
A firm can adopt any method for recording depreciation. But in practice, most of the
firms follow the second method under which provision for Depreciation Account is
not opened and all entries are made directly in the concerned asset account. Hence,
we shall follow this method for the treatment of depreciation.

8.8 METHODS FOR PROVIDING DEPRECIATION

As stated earlier there are various methods of calculating the amount of depreciation
to be charged from year to year. Different methods are adopted to suit the nature of 11
Final Accounts each asset. It is also possible that different concerns may follow different methods
for depreciating the same asset. The following are the principal methods for providing
depreciation.
1. Fixed Instalment Method
2. Diminishing Balance Method
3. Annuity Method
4. Depreciation Fund Method
5. Insurance Policy Method
6. Revaluation Method
7. Depletion Method
8. Machine Hour Rate Method
Of the above eight methods used for providing depreciation, the first two viz., Fixed
Instalment Method and Diminishing Balance Method are the most commonly used
methods. These are taken up in this unit and the remaining method shall be discussed
in Unit 21.

8.8.1 Fixed Instalment Method

This method is also called ‘equal instalment method’ or ‘straight line method’. Under
this method. a fixed and equal amount is charged as depreciation every year during
the life time of an asset. When this amount of depreciation is presented on a graph
paper it would show a straight line parallel to the X-axis, and hence the alternative
name ‘straight line method’. This method writes off a fixed percentage of the original
cost of the asset every year so that the asset is reduced to zero or its salvage value
at the end of its working life. The annual amount of depreciation to be charged under
this method can be calculated with the help of the following formula:
Original Coat - Scrap Value
Annual Depreciation =
Life of the Asset in number of years
C S
Or D 
N
Look at illustration 1 and see how the amount of annual depreciation has been
calculated and the concerned asset account prepared from year to year.
Illustration 1
Ravikiran & Sons purchased machinery on January 1, 2015 for Rs. 22,000 and
spent Rs. 3,000 on its erection. The asset is expected to last for four years after
which its break up value is estimated to Rs. 5,000. Find out the amount of depreciation
to be charged every year and show how the Machinery Account would appear for
four years assuming that the machine is sold for Rs. 1,000 at the end. Also show
how the balance of Machinery Account would appear in the Balance Sheet.
Solution:
The annual depreciation is calculated as follows :

C S
D
12 N
 Depreciation
(22, 000  3, 000  5, 000)

4
20, 000

4
= Rs. 5,300
Machinery Account
Dr. Cr.

2015 2015
Rs. Rs.
Jan. 1 To Bank A/c 22,000 Dec. 31 By Depreciation A/c 5,000
Jan. 1 To Cash A/c (erection charges) 3,000 " 31 By Balance c/d 20,000
25,000 25,000
2016 2016
Jan. 1 To Balance b/d 20,000 Dec. 31 By Depreciation A/c 5,000
" 31 By Balance c/d 15,000
20,000 20,000
2017 2017
Jan.1 To Balance b/d 15,000 Dec. 31 By Depreciation A/c 5,000
" 31 By Balance c/d 10,000
15,000 15,000
2018 2018
Jan. 1 To Balance b/d 10,000 Dec. 31 By Depreciation A/c 5,000
" 31 By Bank A/c 1,000
By Balance c/d 4,000
10,000 10,000

Balance Sheet as on December, 31, 2015

Rs.
Machinery 22,000
Add : Erection charges 3,000
25,000
Less : Depreciation 5,000 20,000

Balance Sheet as on December, 31,2016

Machinery 20,000
Less : Depreciation 5,000
15,000

13
Final Accounts Balance Sheet as on December, 31,2017

Machinery 15,000
Less : Depreciation 5,000
10,000

Balance Sheet as on December, 31,2018

Machinery 10,000
Less : Depreciation 5,000
5,000
Less : Sale proceeds 1,000
4,000
Less : Write off 4,000

In practice, the purchase and sale of an asset, is a continuous exercise. Hence, you
should know how the calculation of depreciation will be made in such situations and
the transactions recorded in the concerned asset account. Look at illustration 2 and
study how the asset account appears in such situations.
Illustration 2
Arivind & Co. purchased a plant worth Rs. 2,00,000 on January 1, 2017. On June
30, 2017 an additional plant was bought for Rs. 50,000. On December 31, 2018 a
part of the plant bought on January 1, 2017 costing Rs. 4,000 was sold for Rs.
3,000.
Prepare Plant and Machinery Account for years 2017 and 2018 providing
depreciations at 10% per annum on fixed instalment method. The accounts are
closed on December 31, every year.
Solution:
Plant and Machinery Account
Dr. Cr.

2017 2017
Rs. Rs.
Jan. 1 To Bank A/c 2,00,000 Dec. 31 By Depreciation A/c 22,500
Jan. 1 To Bank A/c (erection charges) 50,000 “ 31 By Balance c/d 2,27,500
2,50,000 2,50,000
2018
Jan. 1 To Balance b/d 2,27,500 2018
Dec. 31 By Bank A/c 3,000
“ 31 By Depreciation A/c 25,000
By P & L A/c 200
By Balance c/d 1,99,300
2,27,500 2,27,500

14
Working Notes: Depreciation

1. Depreciation for 2017 Rs.

On Rs. 2,00,000 for one year 20,000
(10/10,00 of 2,00,000)
On Rs. 50,000 for six months 2,500
(10/100 × 50,000 × 6/12)
22,500
2. Depreciation for 2018
On Rs. 2,50,000 for one year
(10/100 of 2,50,000) 25,000
3. Loss on Sale of Plant
Depreciated value of plant sold
as on December 31, 2018
(Rs. 4,000-Rs. 800) 3,200
Less : Sale Proceeds 3,000
Loss on Sale
200
Advantages
1. It is easily understandable and is simple to apply.
2. Amount of depreciation does not vary from year to year.
3. Under this method the book value of asset is reduced either to zero or scrap
value as the case may be.
4. In this method deprecation charge spreads equally over the entire period of its
anticipated working life. Therefore, it is considered particularly suitable for
those assets which get depreciated more on account of lapse of time such as
lease-holds, patents etc.
Disadvantages
1. It does not reflect the correct charge on account of depreciation when the
effective utilisation of the asset varies from year to year.
2. It does not recognise the reality that as an asset becomes older, the amount
spent for repairs and renewals goes on increasing. It is common knowledge
that when the asset is brand new, repair bill would be either nil or very small.
But, as the machine is progressively subjected to wear and tear, the repairs bill
would increase considerably. Thus the combined charge on account of
depreciation and repairs will not be uniform throughout the life of the asset. The
increasing repairs bill unjustifiably burden the later years of asset life with heavier
combined charges.
3. It does not take into account the loss of interest on the money invested in the
asset. Certain other methods (annuity method) while calculating depreciation
also take interest aspect into account.

8.8.2 Diminishing Balance Method

Under this method, though the rate of depreciation is fixed, it is calculated on the
written down value of the asset. Consequently the amount of depreciation to be 15
Final Accounts charged goes on reducing from year to year. For example, a machine was purchased
on January 1, 2016 for Rs. 10,000. It is to be depreciated at 15% per annum under
the diminishing balance method. In this case, the depreciation for 2016 would be
Rs. 1,500 (15% of 10,000), for 2017 it would be Rs. 1,275 (15% of 8,500), and
for 2018 it would work out as Rs. 1,084 (15% of 7,225). Thus you will notice that
the annual depreciation goes on reducing. Hence, it is also known as ‘reducing
insta1met method’. This method is considered better than the fixed instalment method
because with reducing instalments of depreciation the combined effect of repairs
and depreciation will be more or less uniform throughout the life of the asset.
Look at illustration 3 and see how the amount of depreciation is computed every
year and recorded in the concerned asset account.
Illustration 3
Kishore Ltd. purchased a tractor costing Rs. 1,00,000 on January 1, 2014. The
rate of depreciation to be charged was fixed at 20% per annum. Write up Tractor
Account for five years ending December 31, 2018, under diminishing balance method.

Tractor Account
Dr. Cr.

2014 2014
Rs. Rs.
Jan. 1 To Bank A/c 1,00,000 Dec. 31 By Depreciation A/c 20,000
Dec. 31 By Balance c/d 80,000
1,00,000 1,00,000
2015 2015
Jan. 1 To Bank A/c 80,000 Dec. 31 By Depreciation A/c 16,000
Dec. 31 By Balance c/d 64,000
80,000 80,000
2016 2016
Jan. 1 To Bank A/c 64,000 Dec. 31 By Depreciation A/c 12,800
Dec. 31 By Balance c/d 51,200
64,000 64,000
2017 2017
Jan. 1 To Bank A/c 51,200 Dec. 31 By Depreciation A/c 10,240
Dec. 31 By Balance c/d 40,960
51,200 51,200
2018 2018
Jan. 1 To Bank A/c 40,960 Dec. 31 By Depreciation A/c 8,192
Dec. 31 By Balance c/d 37,768
40,960 40,960

Now look at illustration 4. It deal with the situation when additions and disposals
are made during the course of the year and a part of the asset is replaced.
16
Illustration 4 Depreciation

Harinath purchased on January 1, 2016, a plant for Rs. 50,000. On July 1, 2016 an
additional plant worth Rs. 20,000 was purchased and on July 1. 2017, the plant
purchased on January 1, 2016 having become obsolete is sold off for Rs. 20,000.
On July 1, 2018, a new plant was purchased for Rs. 60,000 and the plant purchased
on July 1, 2016 was sold for Rs. 15,000. Depreciation is to be provided at 10%
p.a. on the written down value every year. Show the Plant Account.
Plant Account
Dr. Cr.

2016 2016
Rs. Rs.
Jan. 1 To Bank A/c 50,000 Dec. 31 By Depreciation A/c 6,000
Jan. 1 To Bank A/c (erection charges) 20,000 “ 31 By Balance c/d 64,000
70,000 70,000
2017 2017
Jan. 1 To Balance b/d 64,000 July, 1 By Bank A/c 20,000
Dec. 31 By P & L A/c 22,750
(loss on sale)
Dec. 31 By Depreciation A/c 4,150
Dec. 31 By Balance c/d 17,100
64,000 64,000
2018 2018
Jan. 1 To Balance b/d 17,100 July, 1 By Bank A/c 15,000
Jan. 1 To Bank A/c 60,000 Dec. 31 By P & L A/c 1,245
(loss on sale)
Dec. 31 By Depreciation A/c 3,855
Dec. 31 By Balance c/d 57,000
77,100 77,100

Working Notes:
1. Depreciation for 2016 Rs.
10% on Rs. 50,000 for one year 5,000
10% on Rs. 20,000 for six months 1,000
6,000
2. Depreciation for 2017
10% on Rs. 45,000 for six months 2,250
(upto June 30, 2017)
10% on Rs. 19,000 for one year 1,900
4,150 17
Final Accounts 3. Loss on plant sold on July 1, 2017
Depreciated value as on 2017
50,000 — 5,000 — 2,250 42,750
Less : Sale proceeds 20,000
Loss on sale 22,750
4. Depreciation for 2018
10% on Rs. 17,100 for six months 855
10% on Rs. 60,000 for six months 3,000
3,855
5. Loss on plant sold on July 1, 2018
Depreciated value as on 1.7.2018
20,000 — 1,000 — 1,900 — 855 16,245
Less: Sale proceeds 15,000
Loss on sale 1,245
Advantages
This method is also simple to understand and easy to follow, though calculation of
depreciation is slightly complicated. It ensures a fairly even charge to Profit and
Loss Account on account of both depreciation and repairs. This is possible because
the amount of depreciation decreases year after year while the charge for repairs
goes n increasing year after year.
Disadvantages
One of the important limitations of this method is that the value of an asset cannot be
brought down to zero. Hence, even after the asset is put out of use it may have
certain book value. This method also does not take into account the loss of interest
on the money invested in the asset. The determination of a suitable rate of depreciation
is also difficult under this method. The formula generally used for this purpose is as
follow:
Scrap Value
Rate of Depreciation  1  n
Original Cost

This looks quite complicated as compared to the fixed installment method. This
method is considered suitable for assets like plant and machinery where the repairs
are insignificant in earlier years but increase considerably in later years. It is popularly
known as ‘written down value method’ because the depreciation is computed on
the written down value every year. There are however, other methods of computing
depreciation under the diminishing balance method such as ‘sum of year digits
method’ and ‘double declining balance method’. These are also called accelerated
depreciation method, because under all these methods the amount of depreciation
charged in earlier years is more compared to that of the later years.

18
8.8.3 Difference between Fixed Instalment Method and Depreciation

Diminishing Balance Method

The difference between the fixed instalment method and the diminishing balance
method can be summarised as follows:

Fixed Instalment Method Diminishing Balance Method

1. Depreciation is calculated on Depreciation is calculated written down

the original cost value

2. Depreciation instalment is Depreciation instalment goes on reducing

the same every year. every year.

3. The balance in the asset The balance in the asset account will never
account will reduce to zero at reduce to zero.
the expiry of the working life
of the reduce to zero. asset.

4. The combined cost on account The combined cost on account of

of depreciation and repairs is depreciation and repairs is more or less
low during the initial years and equal throughout.
high during later years.

5. Calculation of the rate of Calculation of the rate of depreciation is

depreciation is easy. difficult

6. It is suitable for assets which It is suitable for assets which require heavy
get depreciated more on repairs in later years of their working life.
account of the expiry of time

Check Your Progress B

1. List the factors influencing the amount of depreciation.
................................................................................................................
................................................................................................................
................................................................................................................
2. Name various methods of computing depreciation.
................................................................................................................
................................................................................................................
................................................................................................................
3. State whether the following statements are True or False.
i) Depreciation is a temporary change in the value of an asset.
ii) While calculating depreciation, the scrap value (salvage value) must be
taken into account.
iii) Under fixed instalment method of providing depreciation the combined
effect of repairs and depreciation is uniform over the year
19
Final Accounts iv) Under the diminishing balance method it would be possible to reduce the
value of an asset to zero.
v) The interest involved in the investment on assets purchased is ignored
under both the fixed instalment and the diminishing balance methods.
vi) When a Provision for Depreciation Account is maintained, the asset is
shown at the original cost in the Balance Sheet

8.8.4 Change of Method

Sometimes a firm may decide to change the method of depreciation it had adopted
i.e., it may change the method of depreciation from fixed instalment method to reducing
instalment method or vice versa. If it decides to implement the change with
prospective, effect, there is no problem because no adjustment is necessary in respect
of depreciation charged in earlier years. All that is necessary is to charge depreciation
from that year onwards according to the new method decided.
However, when it is decided to change the method with retrospective effect i.e.,
with effect from a prior date (usually from the date of acquisition of an asset) it
would be necessary to adjust the depreciation charged till date. Suppose a firm was
depreciating its machinery under the fixed instalment method during the past three
years. It has now decided to change the method to written down value method with
retrospective effect. In such a case it would be necessary to take the following
steps:
1. Calculate the amount of depreciation already charged till the date of change
according to old method.
2. Calculate the amount of depreciation that would have been charged under the
new method now proposed to be adopted.
3. If the amount of depreciation under the new method is more than what was
charged under the old method, such difference should be credited to the asset
account in current year and debited to the Profit and Loss Account.
4. If, on the other hand, the amount of depreciation under the new method is less
than what was charged under the old method such a difference should be debited
to the asset account in current year and credited to the Profit and Loss Account.
5. As the difference in depreciation amount is adjusted to the current value of
asset in the asset account, the asset account will appear at its new value, from
the date of change and depreciation will be charged according to the new
method in subsequent years.
Look at illustration 6. It will help you to clearly understand the procedure to be
followed when a change of method is desired with retrospective effect.
Illustration 5
Sharat & Sons purchased a car for Rs. 1,00,000 on January 1, 2015. The car was
depreciated at 10% under the written down value method. On January1, 2018 they
wanted to change the method of depreciation from reducing instalment method to
straight line method without & changing the rate. Show the asset account from 2015
to 2018.
20
Solution: Depreciation

Car Account
Dr. Cr.

2015 2015
Rs. Rs.
Jan. 1 To Bank A/c 1,00,000 Dec. 31 By Depreciation A/c 10,000
Dec. 31 By Balance c/d 90,000
1,00,000 1,00,000
2016 2016
Jan. 1 To Bank A/c 90,000 Dec. 31 By Depreciation A/c 9,000
Dec. 31 By Balance c/d 81,000
90,000 90,000
2017 2017
Jan. 1 To Bank A/c 81,000 Dec. 31 By Depreciation A/c 8,100
Dec. 31 By Balance c/d 72,900
81,000 64,000
2018 2018
Jan. 1 To Bank A/c 72,900 Dec. 31 By P & L A/c (diff.) 2,900
Dec. 31 By Depreciation A/c 10,000
Dec. 31 By Balance c/d 60,000
72,900 72,900
2019
Jan. 1 To Balance b/d 60,000
Notes: 1. If the firm had followed the fixed instalment method right from the
beginning (1.1.2015), the value of car as on 1.1.2018 would be Rs.
70,000 worked out as follows:
Rs.
Original cost 1,00,000
Less: Depreciation for years 30,000
at Rs. 10,000 p.a. (10% of 1,00,000)
Value of Car as on 1.1.2018 70,000
But from the Car Account you find that the opening balance on 1.1.2018
is Rs. 72,900. This means that under the written down value method
the amount of depreciation charged during the three years was Rs.
27,100 (1,00,000 — 72,900) as against Rs. 30,000 required under
the fixed instalment method. Hence. the difference between the two
amounts i.e., Rs. 2,900 (30,000 — 27,100) must be charged as
additional depreciation so as to adjust the asset account.
21
Final Accounts 2 The depreciation to be charged for the year 2018 would be Rs. 10.000
i.e., 10% on Rs. 1,00,000 as required under the fixed instalment
method. From this year onwards Rs. 10,000 will be charged as
depreciation every year.

8.9 LET US SUM UP

Depreciation is a permanent and gradual diminution in the value of an asset caused
by usage and effusion of time.

It represents the expired cost of a fixed asset which mist be charged to the Profit
and Loss Account and deducted from the value of the asset concerned Unless it is
so treated, the Profit and Loss Account will not show true profit or toss for the year
and the Balance Sheet will not reflect the correct financial position. The amount of
depreciation to be charged is determined by taking into account: (i) the cost of
asset, (ii) the estimated useful life, and (iii) the estimated salvage value.

There are essentially two methods of recording the depreciation in books of a account
(i) By maintaining a Provision for Depreciation Account, and (ii) Without maintaining
a Provision for Depreciation Account.

When a provision for Depreciation Account is maintained the depreciation is credited

to this account from year to year. Its accumulated balance is transferred to the asset
account only at the end of the life of the asset or when the same is sold. But when
provision for Depreciation Account-is not maintained, the depreciation is directly
credited to the asset account every year. Of course, in the Balance Sheet the asset
will always be shown at the depreciated value.

There are various methods of calculating the amount of depreciation. Of these, the
two most common methods are : (i) fixed instalment method, and (ii) diminishing
balance method, Under the fixed instalment method an equal amount is charged as
depreciation year after year while under the diminishing balance method the amount
of depreciation goes on reducing year after year. Both have their merits and demerits.
But, the diminishing balance method is considered better because the combined
cost on account of depreciation and repairs is uniformly distributed over the working
life of an asset. Although the amount of depreciation under these two methods differ,
the method of recording it in the books of account is the same.

Sometimes, a concern may decide to change the method of depreciation. If the

change is to take effect from current years, it does not involve much problem. But if
it is with retrospective effect, it would require the calculation of depreciation according
to both the methods and the difference will have to be adjusted before the depreciation
cap be charged according to changed method.

8.10 KEY WORDS

Amortisation: Writing off the expired cost of an intangible asset.

Depreciation: Permanent and gradual diminution in value of a fixed asset.

Obsolescence: Becoming out of date, a cause for depreciation in value of asset.

Residual Value: Expected realisable amount, when the asset is sold out at the end
22 of its useful life.
Salvage Value: Same as residual or scrap value. Depreciation

Written Down Value: Book value of an asset after deducting depreciation from
the original cost. It is also called depreciated value.

8.11 SOME USEFUL BOOKS

Gupta R.L and M. Radhaswamy, 2018. Advanced Accountancy, Volume 1,
Sultan Chand & Sons, New Delhi.
Maheshwari S.N., 2018. Introduction to Accounting, Vikas Publishing House:
New Delhi.
Path, V.A. and J. S. Korlahalli, 2018. Principles and Practice of Accounting,
R. Chand & Co., New Delhi.
Shukla, M.C. and T.S. Grewal, 2018. Advanced Accounts, S. Chand & Co.,
New Delhi.
William Pickles, 1992. Accountancy, E . L. B .S. and Pitman, London.

8.12 ANSWERS TO CHECK YOUR PROGRESS

A 3. i) False ii) True iii) True iv) False v) False vi) False vii) False viii) True
B 3. i) False ii) True iii) False iv) False v) True vi) False.

8.13 TERMINAL QUESTIONS/EXERCISES

Questions
1. Define depreciation. Distinguish it from depletion, amortisation and
obsolescence.
2. Explain the need and significance of depreciation. What factors should be
considered for determining the amount of depreciation?
3. Enumerate the methods of calculating depreciation. Discuss the advantages
and disadvantages of fixed instalment method.
4. What are the merits and demerits of written down value method? Distinguish it
from the straight line method.
5. Describe the methods of recording depreciation in books of account. How is
the balance of the Provisions for Depreciation Account shown in the Balance
Sheet?
Exercises
1, A cold storage plant was purchased on July 1, 2016 for Rs. 1,00,000. Show
the V plant Account under (a) the Straight Line Method and (b) the..Written
Down Value Method. Rate of depreciation charged is 20%. What is the balance
of plant at the end of the third year?
(Answer : Balance at the end of the third year (a) under Straight Line Method
Rs. 40,000; and (b) under Written Down Value Method: Rs. 51,200). 23
Final Accounts 2. Suresh purchased plant and machinery for Rs. 50,000 on July 1, 2014. The
asset was to be depreciated at the rate of 10 per cent per annum on written
down value basis. The machinery was sold on January 1, 2018 for Rs. 32,000.
Write up Machinery Account assuming accounting year to end on December
31 every year.
(Answer: Loss on sale Rs. 2,627)
3. On 1-8-2016, a machine was purchased by a manufacturing concern for Rs.
60,000 and it spent for its overhaul and installation Rs. 10,000. Its effective life
was estimated to be ten years and residual value at the end of its life time was
estimated to be Rs. 10,000. Show Machine Account for the first three years
assuming that the concern decided to depreciate it under the fixed instalment
method. The accounting year ends on December 31.
(Answer: Balance of Machine Accounts as on January 1, 2019: Rs. 55,000)
4. Ashok Ltd has bought machinery for Rs. 1,00,000 including a boiler worth Rs.
10,000. The Machinery Account has been credited for depreciation on the
written down value method for the past four years at the rate of 10%. During
the fifth year the boiler became useless on account of damage to some of its
vital parts; the damaged boiler is sold for Rs. 5,000. Write up the Machinery
Account.
(Answer: Loss on sale of machinery Rs. 1,561; Balance of Machinery Account
as at the end of fifth year Rs. 59,049.)
5. Navrang & Co., whose accounting year is the calendar year, purchased
machinery costing Rs. 60,000 on July 1, 2016. It purchased further machinery
on September 1, 2016 costing Rs. 30,000. On January 1, 2018 one-third of
the Machinery installed on June 1, 2016 became obsolete and was sold for Rs.
5,000. Depreciation is being written off on fixed instalment system, at 10%
per annum. Prepare the machinery account as would appear in the ledger of
the company for the years 2016, 2017 and 2018.
(Answer: Balance of Machinery Account as on January 1, 2019 : Rs. 53,000).
6. On October 1, 2016 Raghavan & Sons purchased machinery for Rs. 30,000
and spent Rs. 3,000 on installing it. On January 1, 2017, the firm purchased
another machinery for Rs. 20,000. On June 30, 2018 the machinery purchased
on January 1, 2017 was sold for Rs. 16,000 and on the same date a fresh
plant was installed at a cost of Rs. 25,000.
The company writes off 10% depreciation on the diminishing balance method.
The accounts are closed every year on December 31. Show the Machinery
account for the years 2016, 2017 and 2018.
(Answer : Balance of Machinery Account as on January 1, 2019: Rs. 39,950)
7. On July 1, 2015, a company purchased a plant for Rs. 2,00,000. Depreciation
was provided at 10% per annum on straight line method on December 31,
every year. With effect from January 1, 2017 the company decided to change
the method of depreciation to diminishing balance method @ 15% per annum
with retrospective effect. On July 1, 2018, the plant was sold for Rs. 1,20,000.
Prepare Plant Account from 2015 to 2018).

24 (Answer : Loss on sale of plant: Rs. 3,637.

8. Work out problem No. 7 assuming that (a) the asset was originally depreciated Depreciation
on written down value method at 20% and that (b) now it is desired to change
the method to fixed instalment method with retrospective effect, rate of
depreciation remaining same.
(Answer: Profit on sale of plant Rs. 40,000).

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

25
Final Accounts
UNIT 9 FINAL ACCOUNTS-I
Structure
9.0 Objectives
9.1 Introduction
9.2 Final Accounts and Trial Balance
9.3 Trading and Profit and Loss Account
9.3.1 Trading Account
9.3.2 Profit and Loss Account
9.3.3 Closing Entries

9.4 Balance Sheet

9.5 Vertical Presentation of Final Accounts

9.6 Manufacturing Account

9.7 Let Us Sum Up

9.8 Key Words

9.9 Some Useful Books

9.10 Answers to Check Your Progress

9.11 Terminal Questions/Exercises

9.0 OBJECTIVES
After studying this unit, you will be able to:

 explain the purpose of preparing final accounts;

 prepare a trial balance from a given list of balances;

 prepare trading and profit and loss account;

 prepare balance sheet;

 prepare manufacturing account and calculate cost of goods produced; and

 present the final accounts in vertical form.

9.1 INTRODUCTION
You know that the final accounts are primarily prepared for ascertaining the operational
result and the financial position of the business. They consist of (1) Profit and Loss
Account, and (ii) Balance Sheet. The Profit and Loss Account reveals the profit
earned or loss incurred (operational result) during the accounting year and the Balance
Sheet indicates the financial position as at the end of the year. In this unit, you will
learn about the basic framework of final accounts including their presentation in
26 vertical form.
 Final Accounts-I
9.2 FINAL ACCOUNTS AND TRIAL BALANCE
You know final accounts are prepared with the help of a Trial Balance which shows
all the ledger balances as at the end of an accounting period. Generally, when you
are asked to prepare final accounts, you are given a properly prepared Trial Balance
and you have no difficulty in identifying the items of incomes, expenses, assets, and
liabilities. But, sometimes you may not be given a proper Trial Balance. You may
simply be asked to prepare the final accounts from the list of closing balances extracted
from the books of some firm. In such a situation, it will be helpful if you first prepare
the Trial Balance and then the final accounts. Hence it is important that you should
know how to prepare the Trial Balance from a given list of balances.
Normally when a Trial Balance is to be prepared, you have full details of ledger
accounts with you. You can easily ascertain whether a particular account has a debit
balance or a credit balance, and prepare the Trial Balance without any difficulty.
The problem arises when you are given a list but it is not indicated whether the
account has a debit balance or a credit balance. Under such a situation you will have
to determine the nature of each balance before you prepare the Trial Balance. In this
exercise, your knowledge of rules of debit and credit will help you. For example you
know that in case of nominal accounts all expenses and losses are debited and all
incomes and gains are credited. Similarly, you know the rules for real and personal
accounts according to which the account of assets like cash, machinery debtors,
etc. will show debit balances while accounts like capital, creditors, etc. will show
credit balances. For convenience however, a few guidelines should help you. They
are
a) All accounts of expenses (including purchases) and losses will be debit balances.
b) All accounts of Income (including sales) and gains will be credit balances.
c) All accounts of assets will be debit balances.
d) Allaccounts of liabilities will be credit balances.
e) Capital Account will normally be a credit balance.
f) Drawings Account will be a debit balance.
However, the problem may arise with regard to some items like rent, discount,
commission and interest as they can be expenses as well as incomes. In such cases,
the nature of the balance is usually indicated by mentioning (Dr.) or (Cr.) against
each item, or the word ‘received’ or ‘paid’ is written after each item. This helps you
to treat the item correctly. But, if there is only one item for which no such indication
is given you can proceed with the preparation of Trial Balance and work out the
totals of both the columns. You will find that the total of one column will be less than
the other. This means that the unidentified balance pertains to the column which is
short. For example, there is an item of commission of Rs. 300 appearing in the list of
balances and it is not indicated whether it is paid or received. When you prepare the
Trial Balance you will find that the debit total is short by Rs. 300. This would mean
that the Commission Account has a debit balance. Now if you show it as such in the
Trial Balance, it will tally.
Look at illustration 1 and see how the Trial Balance has been prepared from a given
list of balances where the nature of each balance has not been indicated. 27
Final Accounts Illustration 1
Prepare a Trial Balance from the following balances extracted from the books of
Sudhakaras on March 31, 2018.
Rs. Rs.
Opening Stock 40,000 Drawings 10,000
Purchases 4,10,000 Wages 7,300
Sales 4,29,000 Salaries 11,000
Purchases Returns 1,250 Outstanding Expenses 1,000
Sales Returns 2,500 Prepaid Expenses 750
Carriage Inwards 1,500 Postage 900
Carriage Outwards 2,500 Discount Received 375
Bank Overdraft 21,000 Discount Allowed 1,000
Cash 4,000 Bad Debts 750
Capital 1,27,750 Sundry Debtors 1,00,000
Sundry Creditors 37,500 Interest 3,500
Loans 41,375 Interest Received 3 00
Investments 10,000 Provision for Bad Debts 1,750
Accrued Income 600 Furniture & Fixture 7,500
Machinery 47,500
Solution:
Trial Balance to Sudhakar as on March 31, 2018

Particulars Dr. Cr.

Balances Balances

Rs. Rs.
Opening Stock 40,000
Purchases 4,10,000
Sales 4,29,000
Purchases Returns 1,250
Sales Returns 2,500
Carriage Inwards 1,500
Carriage Outwards 2,500
Bank Overdraft 21,000
Cash 4,000
Capital 1,27,750
Sundry Creditors 37,500
Loans 41,375
Investments 10,000
Accrued Income 600
Machinery 47,500
Drawings 10,000
Wages 7,300
28
Salaries 11,000 Final Accounts-I
Outstanding Expenses 1,000
Prepaid Expenses 750
Postage 900
Discount Received 375
Discount Allowed 1,000
Bed Debts 750
Sundry Debtors 1,00,000
Interest 3,500
Interest Received 300
Provision for Bad
Debts 1,750
Furniture & Fixture 7,500

Total 6,61,300 6,61,300

In illustration 1, the Trial Balance has tallied i.e, the total of debit balances column is
equal to the total of credit balances column. This would mean that each balance has
been entered in the appropriate amount column of the Trial Balance. This is not
always true. It is quite possible that even when the Trial Balance has tallied, some
balances may not have been entered in the correct columns. Look at illustration 2.
You will find that the Trial Balance has tallied (the totals of both Dr. balancesand Cr.
balances is the same i.e., Rs. 91,650 but there are a number of items which have
been shown in the wrong columns. For example, bank overdraft which should have
been shown in the Cr. balances column has been included in the Dr. balancescolumn
and Furniture which should have appeared in Dr...balancescolumn has been shown
in the Cr. balances column. So, the Trial Balance has been rewritten and all items
shown correctly. Such situation arises on account of the compensating effect of the
errors which is very rare.
Illustration 2
An inexperienced accountant provides you with the following Trial Balance. In case
you find it to be incorrect,1 prepare it again so as to remove its defects.
Trial Balance as on June 30, 2018

Name of Account L.F. Dr. Cr.

Balances Balances

Stock (Opening) Rs. Rs.

Buildings Bills 10,500
Payable Bank 31,500
Overdraft 1,800
Capital 1,500
Furniture 45,000
Discount Allowed 12,000
Sales 90
Loan from Suresh 39,000
29
Final Accounts Carriage Inwards 2,400
Bills Receivable 270 3,000
Purchases 24,000
Salaries 3,300
Investments 3,000
Interest on Investments 1,650
Returns Inwards 900
Returns Outwards 300
Insurance Premium 360
Interest on Loan 30
Advertisement 1,200
Drawings 1,500

Total 91,650 91,650

Solution:
Revised Trial Balance as on June 30, 2018

Name of Account L.F. Dr. Cr.

Balances Balances

Rs. Rs.
Stock (opening) 10,500
Buildings 31,500
Bills Payable 1,800
Bank Overdraft 1,500
Capital 45,000
Furniture 12,000
Discount Allowed 90
Sales 39,000
Loan from Suresh 2,400
Carriage Inwards 270
Bills Receivable 3,000
Purchases 24,000
Salaries 3,300
Investments 3,000
Interest on investments 1,650
Returns Inwards 900
Returns Outwards 300
Insurance Premium 360
Interest on Loan 30
Advertisement 1,200
Drawings 1,500

91,650 91,650
30
Check Your Progress A Final Accounts-I

1) Mention against each item whether it will generally show a debit balance or a
credit balance.
Items Nature of Balance
Debit or Credit
i) Sales Returns …………………………
ii) Carriage Inwards …………………………
iii) Carriage Outwards …………………………
iv) Capital …………………………
v) Loss by fire …………………………
vi) Overdraft …………………………
vii) Drawings …………………………
viii) Returns Outwards …………………………
ix) Bills Receivable ……...…………………
x) Goodwill …………………………
xi) Rent Paid …………………………
xii) Commission Received in Advance ……………………… …

9.3 TRADINGAND PROFITAND LOSS ACCOUNT

You know the Profit and Loss Account is prepared for ascertaining the profit or loss
of the business. This is worked out in two stages. In the first stage, we work out the
gross profit or gross loss and in the second stage, the net profit or net loss. Hence,
the profit and Loss Account is divided into two sections. The first section is called
Trading Account. It reveals the gross profit or gross loss. The second section is
called Profit and Loss Account which shows the net profit or net loss.

9.3.1 Trading Account

As stated above, the Trading Account is prepared for ascertaining the gross profit
or gross loss. The gross profit is defined as the excess of sales revenue over cost of
goods sold. This can be presented in the form of an equation as follows.
Gross Profit = Net Sales — Cost of Goods sold
Where i) Net Sales = Total Sales — Sales Returns
ii) Cost of Goods Sold = Opening Stock + Net Purchases
+ Direct Expenses — Closing Stock
You know the terms ‘Opening Stock’ and ‘Closing Stock’ refer to the value of
unsold goods as at the beginning of the year and at the end of the year respectively.
Such stock may also include the semi-finished goods and raw materials. In order to
arrive at the cost of goods sold. the opening stock is added to the net purchases
while the closing stock is deducted. The term ‘Direct Expenses’ refer to those
31
Final Accounts expenses which are incurred on the goods purchased till they are brought to the
place of business for sale These include expenses such as freight, insurance, import
duty, dock dues, clearing charges, octroi duty, carriage, cartage, etc. The
administrative expenses, selling and distribution expenses, interest paid, etc. are
termed as indirect expenses and therefore, are excluded from the cost of goods
sold.
Look at illustrations 3 and 4 and study how Cost of Goods Sold and the Gross
Profit are computed.
Illustration 3
The following figures have been extracted from the books of a firm. Calculate the
Cost of Goods Sold.
Rs.
Stock as on 1.1.2018 1,00,000
Purchases for 2018 15,00,000
Purchases Returns 40,000
Carriage Inwards 20,000
Octroi 80,000
Freight 15,000
Stock as on 31.12.2018 1,70,000
Solution:
Opening Stock 1,00,000
Add: Net Purchases
(Purchases Rs. 15,00,000
Purchases Returns Rs. 40,000) 14,60,000
Carriage Inwards 20,000
Octroi 80,000
Freight 15,000
16,75,000
Less: Closing Stock 1,70,000
Cost of Goods Sold 15,05,000
Illustration 4
On January 1, 2018 a firm had stock of goods valued at Rs. 20,000. During the
year the following transactions took place.
Rs.
Sales 5,00,000
Purchases 3,00,000
Carriage Inwards 3,000
Freight Inwards 5,000
Sales Returns 10,000
Clearing charges 22,000
Purchases Returns 5,000
32 The closing stock of goods on December 31, 2018 is Rs. 40,000.
Solution: Final Accounts-I

Rs. Rs.
Sa1e 5,00,000
Less: Sales Returns 10,000
Net Sales 4,90,000
Less: Cost of Goods Sold
Opening Stock 20,000
Add: Purchases 3,00,000
3,20,000
Less: Purchases Return 5,000
3,15,000
Add:
Carnage Inwards 3,000
Freight Inwards 5,000
Clearing Charges 22,000
3,45,000
Less: Closing Stock 40,000
3,05,000
Gross Profit 1,85,000
Form of Trading Account :The Equation for Gross Profit is also known as Trading
Account Equation. This equation forms the basis of preparing the Trading Account.
The Trading Account, like any other account in the ledger, has two sides—debit and
credit. The opening stock,purchases (less returns) and all direct expenses are shown
on the debit side of the Trading Account while sales (less returns) and the closing
stock on the credit side. The gross profit appears as the last item on the debit side
which, in fact is the excess of the total of credit side over the total of debit side. If
however, the total of the debit side exceeds the total of the credit side, it will be
treated as gross loss. This is shown as the last item on the debit side of the Trading
Account. The gross profit/gross loss thus worked out is transferred to the Profit and
Loss Account. Look at the Figure 9.1 for the form of Trading Account.
Fig. 9.1
Form of Trading Account
Trading Account of
(Day, Month and Year)
Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To Opening Stock ..... By Sales .....
To Purchases ..... Less: Sales Returns .....
Less Purchases Returns ..... .....
To Direct Expenses (specify individually) ..... By closing Stock .....
To Gross Profit
(Transferred to Profit .....
and Loss Account) ..... ..... 33
Final Accounts
Based on the data given in illustration 4, the Trading Account will be prepared as
follows.
Trading Account of . .. .
for the year ending December 31, 2018
Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To Opening Stock 20,000 By Sales 5,00,000 Rs.

To Purchases 3,00,000 Less: Returns 10,000 4,90,000
Less: Returns 5,000 2,95,000
To Carriage Inwards 3,000 By Closing Stock 40,000
To Freight 5,000
To Clearing Charges 22,000
To Gross Profit 1,85,000
(Transferred to (P&LA/c)

5,30,000 5,30,000

Some Important Points

1. Purchases : This item refers to the goods purchased for resale and includes
both cash and credit purchases. The purchases of assets which are meant for
permanent use in business such as machinery furniture, etc., are not included in
the purchases. The amount taken to Trading Account will be the net amount of
purchases (after deducting purchase returns/returns outwards.) If the proprietor
has taken away some goods from the business for his personal use, the same
should also be deducted from the total purchases.
2. Sales: It includes both cash and credit salesof goods and refers to the net
amount of sales (after deducting sales returns-returns inwards). Sales of old
furniture, car, machinery, etc. are not included in the sales. Similarly, sales of
old newspapers etc. are also excluded from sales. Such items are shown as
miscellaneous income in the Profit and Loss Account.
3. Wages: Wages are usually treated as a direct expense and so shown in the
Trading Account. The difficulty arises when wages are clubbed with salaries
(an indirect expense) and the Trial Balance includes a single amount for ‘Wages
and Salaries’. In such a situation, the amount may be shown in the Trading
Account. It is based on the assumption that the item includes the salaries of the
supervisory staff in the factory itself. But, if the item in the Trial Balance reads
‘Salaries and Wages’ it will be taken to the Profit and Loss Account on the
assumption that the item includes wages of the office staff only. It should be
noted that wages paid in connection with the purchases of fixed assets or the
construction of building should not be charged to Trading Account. They are to
be included in the cost of the concerned fixed asset. There is another important
aspect in relation to wages which must be clarified. If a Manufacturing Account
is prepared the wages paid to the factory labour is debited to Manufacturing
34 Account about which you will learn later in this unit.
4. Freight, Carriage and Cartage: When paid in connection with purchases of Final Accounts-I
goods, they are shown in the Trading Account. Such freight and carriage are
also termed as ‘Freight Inwards’ and ‘Carriage Inwards’ respectively. ‘Freight
Outwards’ and ‘Carriage Outwards’ relate to sales and therefore taken to the
debit of Profit and Loss Account.
5. Royalties: Royalties refer to the payments made for the use of copyright or a
patent. The amount of royalty is generally based on the quantity produced. It
is, therefore, treated as a direct expense and charged to Trading Account. But
if it is calculated on the basis of quantity sold as in case of books, it is shown in
the Profit and Loss Account. Royalties are also paid to the Government for
extraction of minerals such as coal, diamond, gold, etc. These are charged to
the Profit and Loss Account of the mining companies. You will learn about the
accounting of such royalties later under a separate course.

9.3.2 Profit and Loss Account

After ascertaining the gross profit by preparing the Trading Account, the businessman
proceeds to prepare the Profit and Loss Account in order to work out the net profit/
net loss. You know the net profit is the excess of gross profit and other incomes over
the indirect expenses and losses. So, while preparing the Profit and Loss Account,
we show gross profit and other incomes such as rent received, discount received,
commission received, interest and dividends etc. on the credit side, and all indirect
expenses and losses on the debit side. Indirect expenses include all administrative,
selling and distribution expenses such as salaries, rent and taxes, postage and
stationery, insurance, depreciation, interest paid, office lighting, advertising, packing
carriage outwards, etc., while losses refer to items like loss by fire, loss by theft etc.
The difference between the two sides of the Profit and Loss Account represent
either the net profit or net loss. If the total of the credit side is higher than the total of
the debit side, the difference is called net profit and if the debit side total exceeds the
credit side total, the difference is called net loss. The net profit/net loss belongs to
the proprietor and it is therefore transferred to his Capital Account. Look at figure
9.2. It shows various expenses, losses, incomes, etc., which usually appear in the
Profit and Loss Account
Fig. 9.2
Profit and Loss Account …………………..
for the period ended …………………
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.

To Gross Loss, if any, By Gross Profit, if any

(Transferred from (Transferred from
TradingAccount) TradingAccount)
To Salaries By Interest Received
To Rent, Rates and Taxes By Discount Received
To Postage and Telegrams By Rent Received
To Telephone Charges By Commission Received
To Printing and Stationery By Dividend Received 35
Final Accounts To Legal Expenses By Other Incomes and Gains
To Insurance By Net Loss
To Office Lighting (Transferred to
To Bad Debts Capital Account)
To Depreciation
To Advertising
To Travelling Expenses
To Carriage Outwards
To Trade Expenses
To Discount Allowed
To Interest Paid
To Repairs and Renewals
To Loss by Fire
To Loss by Theft
To Other Expenses and
Losses, if any
To Net Profit
(Transferred to
CapitalAccount)

Notes:
1. The heading for the Profit and Loss Account, as in the case of the Trading
Account, indicates the name of the business or proprietor and the period for
which it is being prepared.
2. In addition to the items shown in the above form, there are certain items such
as depreciation, bad debts, provision for doubtful debts, interest on capital,
interest on drawings, etc., which appear in the Profit and Loss Account as a
result of the adjustment entries. We shall discuss them in Unit 10.
Some Important Points
1. Rent, Rates and Taxes: These are charges levied by the municipal bodies
on the house property. It is a common item of indirect expenses debited to the
Profit and Loss Account.
2. Insurance: Generally, assets are insured to cover the risk of loss, say, by fire.
Premium paid to the insurance company should be treated as a business
expense. When assets such as factory building, factory machinery, etc. are
insured, the insurance premium should be debited to Trading Account. If on the
other hand, the premium is paid for insurance of assets in the office building,
office furniture, etc., it should be charged to Profit and Loss Account.
3. Bad Debts: Bad debts denote the amount which could not be recovered from
the debtors to whom the goods were sold on credit. It is a loss and so debited
to the Profit and Loss Account. You will learn more about their treatment in
Unit 9.
4. Depreciation: Depreciation means decrease in the value of fixed assets due
to normal wear and tear. You know that every fixed asset such as machinery,
furniture, vehicle, etc. depreciates in value on account of its constant use. Such
reduction in their value is a loss to the business and so charged to the Profit and
Loss Account. If, however, a Manufacturing Account is also prepared,
36 depreciation on machinery and factory building is charged to the Manufacturing
 Account, while depreciation on office building, office furniture, office equipment, Final Accounts-I
etc. is charged to the Profit and Loss Account.
5. Trade Expenses: This item represents various small expenses incurred in the
business. They are also called General Expenses, Sundry Expenses or
Miscellaneous Expenses.
6. Packing:The cost of packing materials such as polythene bags, wrapping
materials, etc. for delivery is a distribution expense and hence charged to Profit
and Loss Account. Where packing is essential to make the products fit for sale
in the market as in the case of cigarettes, biscuits, medicines, oil, etc. it is called
‘packaging’ and such expenditure is charged to the Trading Account.
7. Samples: Generally, samples of goods are distributed free of charge to increase
sales. The cost of such samples should be treated as a selling expense and so
debited to Profit and Loss Account.
8. Income Tax: It is the tax payable by a person on his income. In the case of a
sole trading concern, the tax paid by the proprietor on the profits of the business
is treated as a personal expense. Hence, it should be added to drawings or
directly deducted from capital.
Illustration 5
Prepare Profit and Loss Account from the following balance extracted from,the
books of a business for the year 2018.
Rs.
Gross Profit 1,85,000
Salaries 20,000
Rent and Rates 5,000
Stationery 1,000
Postage 500
Insurance 2,000
Repairs 1,500
Depreciation 5,000
Advertisement 5,000
Discount (Dr.) 500
Commission of Salesmen 5,000
Bad Debts 2,000
Loss by Fire 2,000
Interest on Investments 2,500
Profit on sale of Investments 2,000
Solution:
Profit and Loss Account of …………..…
for the year ending December 31, 2018
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Salaries 20,000 By Gross Profit 1,85,000
To Rent and Rates 5,000 (Transferred from
To Stationery 1,000 Trading A/c)
37
Final Accounts To Postage 500 By Interest on Investments 2,500
To Insurance 2,000 By Profit on Sale of
To Repairs 1,500 Investments 2,000
To Depreciation 5,000
To Advertisement 5,000
To Discount 500
To Commission to Salesmen 5,000
To Bad Debts 2,000
To Loss by Fire 2,000
To Net Profit
(Transferred to
CapitalAccount) 1,40,000

1,89,500 1,89,500

In Practice, the Trading Account and the Profit and Loss Account are combined and
one account called ‘Trading and Profit and Loss Account’ is prepared. This account
is divided into two parts. The first part shows the Gross Profit and the second part
shows the Net Profit.
Look at illustration 6 and see how combined Trading and Profit and Loss Account
will be prepared.
Illustration 6
From the following figures, prepare Trading and Profit and Loss Account of Lakshmi
& Co. for the year ended December 31, 2018.
Rs.
Stock on January 1, 2018 40,000
Purchases 98,000
Commission Received 650
Rent, Rates and Taxes 8,600
Salaries & Wages 12,000
Sales 1,62,100
Returns Inwards 2,400
Returns Outwards 3,000
Sundry Expenses 2,500
Bank Charges 50
Discount Received 750
Carriage on Purchases 2,000
Discount Allowed 530
Carriage on Sales 1,700
Lighting and Heating 2,200
Postage 300
Income from Investments 500
Commission Paid 1,000
Interest paid on a bank loan 550
The stock on December 31, 2018 was valued at Rs. 26,000

38
 Final Accounts-I
Solution:
Trading and Profit & Loss Account of Lakshmi & Co.
for the year ended December 31, 2018
Dr. Cr.

Particulars Amount Particulars Amount

To Opening Stock 40,000 By Sales 1,62,100

To Purchases 98,000 Less: Returns 2,400 1,59,700
Less: Returns 3,000 95,000 By closing Stock 26,000
To Carriage on Purchase 2,000
To Gross Profit c/d 48,700
1,85,700 1,85,700
To Rent. Rates and Taxes 8,600 By Gross Profit b/d 48,700
To Salaries and Wages 12,000 By Commission Received 650
To Sundry Expenses 2,500 By Discount received 750
To Bank Charges 50 By Income from Investments 500
To Discount Allowed 530
To Carriage on Sales 1,700
To Postage 300
To Commission Paid 1,000
To Interest paid on loan 550
To Lighting & Heating 2,200
To Net Profit 21,170

50,600 50,600

9.3.3 Closing Entries

You learnt that all nominal accounts which represent items of expenses and incomes
are closed at the end of the accounting year by transfer to either the Trading Account
or the Profit and Loss Account. The journal entries passed for such transfer are
called closing entries. You also know that accounts relating to expenses and losses
always show debit balances while those representing incomes show credit balances.
In order to close an account which shows a debit balance and is to be transferred to
the Trading Account we credit the account concerned with an amount equal to its
balance and debit the Trading Account, For example, the Carriage Inwards Account
Shows a debit balance of Rs. 6,000. The closing entry for this will be as follows:
Rs. Rs.
Trading A/c Dr. 6,000
To Carriage Inwards A/c 6,000
Similarly, an account which shows a credit balance, will be closed by debiting it with
an amount equal to the balance and crediting the Trading Account or Profit and Loss
Account, as the case may be. The closing entries are passed in the Journal Proper
and it is necessary to pass such entries for preparing the Trading and Profit and Loss
Account. The entries required for the items which are to be transferred to the Trading
Account are as follows: 39
Final Accounts 1. Trading Account Dr.
To Stock Account (opening)
To Purchases Account
To Sales Returns Account
To Direct Expenses Accounts (to be credited individually)
2. Sales Account Dr.
Purchases Returns Account Dr.
Stock Account (closing) Dr.
To Trading Account
Trading Account
To Profit and Loss Account
(for Gross Profit)
Note: If there is gross loss, the closing entry will be just the reverse of the above.
When the closing entry is passed for gross profit or gross loss, the Trading Account
stands closed.
The entries required for items to be transferred to the Profit and Loss Account are
as follows:
1. Profit and Loss Account Dr.
To Expenses/LossesAccounts
(to be credited individually)
2. Incomes/Gains Accounts Dr.
(to be debited individually)
To Profit and Loss Account
3. Profit and Loss Account Dr.
To CapitalAccount
(for Net Profit)
Note: If there is net loss, the closing entry will be just the reverse of the above.
Let us see how closing entries for the items given in illustration 4 will be passed.
These are as follows:
JOURNAL

Name of Account L.F. Dr. Cr.

Balances Balances

2018 Rs. Rs.

Dec. 31 Trading A/c Dr. 1,42,400
To Opening Stock A/c 40,000
To Purchase A/c 98,000
To Sales Returns A/c 2,400
To Carnage Inwards A/c 2,000
(Being closing entry)
Dec. 31 Sales Ac Dr. 1,62,100
Purchases Returns A/c Dr. 3,000
Closing Stock A/c Dr. 26,000
To Trading A/c 1,91,100
40 (Being closing entry)
Dec. 31 Trading A/c Dr. 48,700 Final Accounts-I
To Profit and Loss A/c 48,700
(Being transfer of gross profit)
Dec. 31 Profit and Loss A/c Dr. 29,430
To Rent, Rates & Taxes A/c 8,600
To Salaries &Wages A/c 12,000
To Sundry Expenses A/c 2,500
To Bank Charges A/c 50
To Discount Allowed A/c 530
To Carriage Outwards A/c 1,700
To Postage A/c 300
To Commission Paid A/c 1,000
To Interest Paid A/c 550
To Lighting &Heating A/c 2,200
(Being closing entry)
Dec. 31 Commission Received A/c Dr. 650
Discount Received A/c Dr. 750
Income from Inv. A/c Dr. 1,500
To Profit and Loss A/c 2,900
(Being closing entry)
Dec. 31 Profit and Loss A/c Dr. 21,170
To Capital A/c 21,170
(Being transfer from NP)

Check Your Progress B

1. Distinguish between Direct and Indirect Expenses.
................................................................................................................
................................................................................................................
................................................................................................................

2. What is the purpose of preparing a Trading Account?

................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
3. State whether the following statements are Trueor False.
i) The gross profit is the difference of total sales and credit sales
…………………………….…………..………….
ii) Direct expenses are those expenses which are directly attributable to
purchase of goods for resale …………………… ……….
iii) Stock is valued at cost or market price whichever is lower ……..
...........………. 41
Final Accounts iv) The net profit is the excess of gross profit and other incomes over the
indirectexpenses and losses …… ……….…………..………….
v) Income tax paid in case of a proprietary x concernischarged to Profitand
Loss Account …………………….…………..….
vi) Trade Expensesarecharged to Trading Account ………………….…
4 Fill in the blanks:
i) CarriageOutwardsisan example of ……………. expenses.
ii) Cost of goods sold is equal to opening stock plus ………less .......... .
iii) Cost of samples distributed free of cost are treated as …………expenses.
iv) All direct expenses are debited to …………….Account.
v) Loss on Account of theft is ……………… to Profit and Loss Account.
vi) Wages and salaries are charged to…………… ….…………..
5 Ascertain the cost of goods sold from the following data:
Rs.
Direct Expenses 8,000
Opening Stock 12,000
Purchases 80,000
Interest Paid 500
Closing Stock 10,000

9.4 BALANCE SHEET

After ascertaining the net profit or net loss by preparing the Trading and Profit and
Loss Account, the final step in preparing final accounts is the preparation of Balance
Sheet. The purpose of Balance Sheet is to ascertain the financial position of a business
i.e., to know what the business owes and what it owns on a certain date. Hence it
shows all assets and liabilities of the business as at the end of the accounting year.
You know that final accounts are prepared from the Trial Balance. All items of
expense and income appearing in Trial Balance are transferred to the Trading and
Profit and Loss Account. The remaining items which represent the balances of personal
and real accounts are shown in the Balance Sheet. The accounts showing debit
balances represent assets and those showing credit balances represent liabilities.
Look at Figure 9.3 and note how various assets and liabilities appear in the Balance
Sheet.
Table 9:3 : Balance Sheet of ………..
as on ……………..
Dr. Cr.

Liabilities Amount Assets Amount .

Current Liabilities Rs. Current Assets Rs.
Bank Overdraft ……… Cash in hand ………
Bills Payable ……… Bills Receivable ………
Sundry Creditors ……… Cash at bank ………
42
 Sundry Debtors ……… Final Accounts-I
Long-term Liabilities Closing Stock ………
Loan ……… Investments and
Mortgages ……… Fixed Assets
Capital Balance ..... Vehicles ………
Add: Net Profit ..... Furniture ………
Plant & Machinery ………
Less: Drawings ..... ……… Land & Buildings ………
Goodwill ………
……… ………
You should know that the Balance Sheet is prepared to ascertain the financial position
at a particular point of time and not for a period. Hence the heading of the Balance
Sheet will always read ‘Balance Sheet as on ……….‘(usually last date of the
accounting year).
The total of assets should always be equal to the total of liabilities. If however, they
do not tally, it would mean that some errors have been committed while preparing
the final accounts. You must recheck the treatment of all items including the arithmetical
aspect, and make the corrections where necessary so that the Balance Sheet tallies.
Assets: The term ‘assets’ denote the economic resources (property) of the business
and includes all current and fixed assets. You know current assets are those assets
which are likely to be realised within a period of one year (or during the normal
operating cycle) and includes cash, stock, debtors, bills receivable, short-term
investments, etc. The fixed assets, on the other hand, are those assets which are
acquired for use in the business over a long period. They may be tangible like
machinery and furniture, or intangible like goodwill, patents, etc. The assets also
include certain expenses and losses which have not been written off in full. Examples
of such expenses are: formation expenses, expenses incurred on issue of shares and
debentures, unwritten amount of expenditure on advertising, etc. These are shown
as the last item under ‘Assets’ in the Balance Sheet.
Liabilities: The term ‘liabilities’ denote all claims against the assets of the business
whether those of the outsiders (creditors) or those of the owners of the business.
The outsider’s claim may be sub-divided into (i) current liabilities, and (ii) long-term
liabilities. These are shown separately in the Balance Sheet (see Figure 9.3). The
current liabilities are those obligation which are likely to be met within one year (or
during the normal operating cycle). The long-term liabilities refer to item like loans
which are not to be paid in the near future. The owner’s claim is shown as capital
after adjusting it with the amount of net profit and drawings during the year.
Look at illustration 7 and see how Balance Sheet is prepared from given list of
balances.
Illustration 7
From the following balances extracted from the books of Deepak Brothers, prepare
Balance Sheet as on December 31, 2018.
Rs. Rs.
Capital 12,00,000 Bills Payable 40,000
Net Profit for 2018 6,00,000 Debtors 2,50,000 43
Final Accounts Land & Buildings 7,00,000 Bills Receivable 50,000
Loan 1,60,000
Plant & Machinery 4,00,000 Bank Overdraft 20,000
(after depreciation) Cash in hand 60,000
Furniture (afterdepreciation)50,000 Loose Tools 50,000
Investment 3,50,000 Goodwill 1,00,000
Creditors 2,00,000 Closing stock 1,85,000
Trade marks 25,000
Solution:
Balance Sheet of Deepak Brothers as on December 31, 2018

Liabilities Amount Assets Amount

Current Liabilities Rs. Current Assets Rs,

Bank Overdraft 20,000 Cash in Hand 60,000
Bills Payable 40,000 Bills Receivable 50,000
Sundry Creditors 2,00,000 Sundry Debtors 2,50,000
Stock in Hand 1,85,000
Investments 3,50,000
Long-term Liabilities
Loan 1,60,000
Capital Fixed Assets
Balance as on Loose Tools 50,000
Jan. 1, 2018 12,00,000 Furniture 50,000
Add: Net Profit 6,00,000 18,00,000 Plant & Machinery 4,00,000
Land & Buildings 7,00,000
Trade Marks 25,000
Goodwill 1,00,000
22,20,000 22,20,000
Now Look at illustration 8. It shows how the Trading and Profit and Loss Account
and the Balance Sheet are prepareed from a given Trial Balance.
Illustration 8
From the following Trial Balance of Gupta & Sons, prepare Trading and Profit and
Loss Account for the year ended December 31, 2018 and a Balance Sheet as on
that date.
Trial Balance

Particulars Dr. Cr.

Balances Balances
Rs. Rs.
Capital 5,00,000
Sales 10,00,000
Sales Returns 25,000
Purchases 5,00,000
Purchase Returns 15,000
Inventory on 1.1.2018 60,000
Land &Pilings 4,00,000
44 Plant & Machinery 2,50,000
Furniture 1,00,000 Final Accounts-I
Wages 50,000
Carriage Inwards 10,000
Carriage Outwards 5,000
Cartage 5,000
Salaries 40,000
Loan 2,60,000
Debtors 1,50,000
Creditors 85,000
Bills Receivable 40,000
Acceptances 10,000
General Expenses 20,000
Rent & Rates 10,000
Investments 50,000
Cash in Hand 50,000
Bank Overdraft 10,000
Discount Allowed 4,500
Depreciation on
Plant & Machinery 50,000
Interest on Investments 5,000
Interest on Bank Overdraft 500
Goodwill 60,000
Bad Debts 5,000
18,85,000 18,85,000

The inventory on December 31, 2018 was valued at Rs. 1,00,000.

Solution:
Trading and Profit & Loss Account of Gupta & Sons
For the year ended December 31, 2018
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Inventory (Opening) 60,000 By Sales 10,00,000
To Purchases 5,00,000 Less: Returns 25,000 9,75,000
Less: Returns 15,000 4,85,000 By Inventory (Closing) 1,00,000
To Wages 50,000
To Carriage Inwards 10,000
To Cartage 5,000
To Gross Profit c/d 4,65,000
10,75,000 10,75,000
To Carriage Outwards 5,000 By Gross Profit b/d 4,65,000
To Salaries 40,000 By Interest on Investment 5,000
To General Expenses 20,000
To Rent and Rates 10,000
To Discount 4,500
To Bad debts 5,000
To Depreciation 50,000
45
Final Accounts To Interest on Bank
overdraft 500
To Net Profit
(Transferred to 3,35,000
CapitalAccount)
4,70,000 4,70,000

Balance Sheet of Gupta & Sons as on December 31, 2018

Liabilities Amount Assets Amount

Rs. Rs.
Capital 5,00,000
Add: Net Profit 3,35,000 8,35,000 Goodwill 60,000
Loan 2,60,000 Land & Building 4,00,000
Creditors 85,000 Plant & Machinery 2,50,000
Acceptances 10,000 Furniture 1,00,000
Bank Overdraft 10,000 Investment 50,000
Inventory (closing) 1,00,000
Debtors 1,50,000
Bills Receivables 40,000
Cash in Hand 50,000
12,00,000 12,00,000

Note: In the above Balance Sheet all assets and liabilities have been shown ü’ the
order of permanence.

9.5 VERTICAL PRESENTATION OF FINAL

ACCOUNTS
The Trading and Profit and Loss Account and the Balance Sheet have so far been
presented as a two-sided statement.But, in practice, it is not necessary to present
the final accounts in this form. Nowadays many firms present them in a simpler and
more intelligible form which is called a ‘narrative style’ or ‘vertical presentation’.
According to this style the Trading and Profit and Loss Account as well as the
Balance Sheet are shown in the form of vertical statements. This form of presentation
is adopted by many companies for publication of their final accounts. It helps the
users of financial statements to appreciate the significance of different items without
any difficulty. They can easily interpret the data and judge the profitability and the
financial position of the company.
Look at Figure 9.4 and study how various items are shown in the Trading and Profit
and Loss Account and the Balance Sheet in vertical form.
Table 9.4 : Trading and Profit and Loss Account of .........for ........... the
year ended ...........................
Rs. Rs.
SALES ………
Less Cost of Goods Sold:
Opening Stock ………
Add: Purchases ………
Add: Direct Expenses ………
46
 ……… Final Accounts-I
Less Closing Stock ………
………
GROSS PROFIT ………
Add Other incomes ………
Less Indirect Expenses :
Salaries ………
Rent ………
Sundry Expenses ………
Insurance ……… ………
NET PROFIT ………

Balance Sheet of…………….

as on …………

Fixed Assets:
Land and Buildings ………
Plant and Machinery ………
Furniture and Fixtures ………
Vehicles ………
………
Current Assets:
Stock-in-hand ………
Debtors ………
Cash at bank ………
Cash in hand ………
………
Less Current Liabilities:
Creditors ..............
Bills Payable .............. ………
Working Capital ………
Financed by:
Capital:
Balance as on 1.1.2018 ………
Add Net Profit for the year ………
………
Less: Drawings ……… ………
Loans ………
………

Look at illustration 9 and study how Trading and Profit and Loss Account and the
Balance Sheet have been prepared for vertical presentation.
Illustration 9
From the information given in illustration 6, prepare Trading and Profit and Loss
Account and the Balance Sheet in the vertical form.

47
Final Accounts Solution:
Trading and Profit and Lass Account of Gupta & Sons
for the year ended December 31, 2018
Sales Less Returns Rs. Rs.
(Rs. 10,00,000—Rs. 25,000) 9,75,000
Less: Cost of Goods Sold:
Inventory (beginning) 60,000
Add: Purchases less Returns
(Rs. 5,00,000—Rs. 15,000) 4,85,000
Add: Wages 50,000
Add: Carriage Inwards 10,000
Add: Cartage 5,000
6,10,000
Less: Inventory (ending) 1,00,000 5,10,000

GROSS PROFIT 4,65,000

Add: interest on Investments 5,000

4,70,000
Less: Indirect Expenses:
Cartage 5,000
Salaries 40,000
General Expenses 20,000
Rent and Rates 10,000
Discount 4,500
Bad Debts 5,000
Interest on Bank Overdraft 500
Depreciation 50,000
1,35,000
NET PROFIT 3,35,000

Balance Sheet of Gupta & Sons as on December 31, 2018

Fixed Assets:
Goodwill 60,000
Land & Building 4,00,000
Plant & Machinery 2,50,000
Furniture 1,00,000
Investments 50,000
8,60,000
Current Assets:
Inventory (ending) 1,00,000
Debtors 1,50,000
Bills Receivables 40,000
Cash in hand 50,000
48 3,40,000
Less: Current Liabilities: Final Accounts-I

Creditors 85,000
Acceptances 10,000
Bank overdraft 10,000 1,05,000 2,35,000
Working Capital 10,95,000
Financed by:
Capital Balance on 1.1.2018 5,00,000
Add: Net Profit 3,35,000 8,35,000
Long Term Loans 2,60,000
10,95,000

Check Your Progress C

1. What is a Balance Sheet?
................................................................................................................
................................................................................................................
................................................................................................................
2. Why firms use vertical form of presenting the final accounts?
................................................................................................................
................................................................................................................
................................................................................................................
3. Complete the following sentences choosing one of the two alternatives given
within brackets.
i) Assets represent …………balances of personal and real accounts. (debit!
credit)
ii) All liabilities which become due within one year are classified as
………..liabilities. (long-term/current)
iii) Unwritten off amount of a deferred revenue expenditure is shown on the
………….side of the Balance Sheet. (asset/liabilities)
iv) Totals of assets and liabilities are always …………..(different/equal)
v) Loose Tools are classified as …………assets. (fixed/current)
vi) Mortgages are classified as …………..liabilities. (current/long-term)

9.6 MANUFACTURINGACCOUNT
In case of trading concerns you can find out the cost of goods and the gross profit
by preparing a Trading Account. But a manufacturing concern has to first prepare
another account called Manufacturing Account with the help of which it works out
the cost of goods produced. The cost of goods produced is then transferred to the
Trading account for ascertaining the cost of goods sold and the gross profit.
A manufacturing concern purchases raw materials from the market and converts
them into finished goods for sale. The cost of goods produced thus includes two
major costs: (i) cost of raw materials consumed, and (ii) cost of conversion. These
are explained below. 49
Final Accounts Cost of Raw Materials Consumed: This represents the cost of rawmaterials
used in course of manufacture which can be worked out by adjusting the opening
and closing stocks of raw materials in the purchases of raw materials. For example,
a firm purchased raw materials worth Rs. 6,50,000 during 2018, and its stock of
raw materials on January 1, 2018 (opening stock) was Rs. 70,000 and on December
31, 2018 (closing stock) Rs. 90,000. The cost of raw materials consumed during
2018 will be worked out as follows:
Rs.
Opening Stock of Raw Materials 70,000
Add: Purchases of Raw Materials 6,50,000
7,20,000
Less: Closing Stock of Raw Materials 90,000
Cost of Raw Materials Consumed 6,30,000
The direct expenses incurred on the purchases of raw materials such as freight,
import duty, dock dues, cartage, etc. can also be included in the cost of raw materials
consumed. But the usual practice is to show them separately on the debit side of the
Manufacturing Account.
Cost of Conversion:This includes all expenses incurred in the factory such as wages
paid to labour, salaries of supervisory staff, factory rent and rates, motive power,
repairs to plant and machinery, depreciation on plant and machinery, etc. All these
expenses are debited to the Manufacturing Account.
Look at Figure 9.5 for the performing of a Manufacturing Account.

Manufacturing Account of Fig. 9.5 for the period end ...........................

Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To Work-in progress at ...... By Sale of Scrap .......
the beginning
To Raw Materials Consumed: By Work-in-
Opening Stock of Raw Materials ...... Progress at the end .......

Add: Purchases of Raw Materials ...... By Cost of Goods .......

Produced
Less: Closing Stock of Raw Materials ...... ...... (Transferred to
Trading Account)
To Carriage Inwards ......
To Freight, Import ......
Duty, Dock Dues, etc. ......
To Manufacturing Wages ......
To Motive Power ......

50
To Coal, Gas and Water ...... Final Accounts-I
To Oil and Grease ......
To Factory Lighting & Heating ......
To Factory Insurance ......
To Repairs to Factory Building ......
To Repairs to Plant and Machinery ......
To Depreciation on Factory Buildings ......
To Depreciation on Plant ......
and Machinery ...... ......

Some Important Points

Scrap: The term ‘scrap’ is used for waste materials coming out of the manufacturing
process. Cuttings of cloth in readymade garments factory and metal cuttings in
engineering factories are some examples of scrap. Any amount realised from the
sale of scrap must be adjusted in the cost of goods produced. Hence, it is credited
to the Manufacturing Account.
Work-in-Progress: It is quite likely that at the end of the year, there may be certain
goods which are still in the process of manufacture. Such goods are called ‘semi-
finished goods’ or ‘work-in-progress’. There will always be some work-in- progress
at the beginning as well as at the end of the accounting year. Their cost must be
adjusted while working out the cost of goods produced. Hence the opening work-
in-progress is shown on the debit side of the Manufacturing Account while the closing
work-in-progress s shown on its credit side.
Stock of Finished Goods: Besides the stock of raw materials and semi-finished
goods every firm will have the stock of finished goods. This is to be adjusted in the
cost of goods sold and not in the cost of goods produced. Hence, it is not shown in
the Manufacturing Account. As you learnt earlier, it will be shown in the Trading
Account.
Look at illustration 10 and see how Manufacturing Account is to be prepared.
Illustration 10
Prepare Manufacturing Account from the following particulars relating to the year
2018.
Rs.
Purchases of Raw Material 1,00,000
Stock on 1.1.2018
Raw Materials 10,000
Work-in-Progress 5,000
Finished goods 25,000
Factory wages 15,000
Factory Rent 5,000
Fuel & Power 2,000
Carriage Inwards 1,000
Repairs of Plant 2,000
Depreciation on Plant 5,000 51
Sale of Scrap 500
Final Accounts Stock on 31.12.2018 20,000
Raw Materials 7,500
Work-in-Progress 30,000
Finished Goods
Solution:
Manufacturing Account for the year ended December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Work-in-Progress at
the beginning 5,000 By Sale of Scrap 500
To Raw Materials Consumed By Work-in-Progress
at the end 7,500
Opening Stock 10,000 By Cost of Goods 1,17,000
Add: Raw Purchased 1,00,000 Produced
1,10,000 (transferred to Trading
Less: Closing Stock 20,000 90,000 Account)
To Factory Wages 15,000
To Factory Rent 5,000
To Fuel & Power 2,000
To Carriage Inwards 1,000
To Repairs of Plant 2,000
To Depreciation on Plant 5,000

1,25,000 1,25,000

You will observe that the stock of finished goods has not been shown in the
Manufacturing Account. As stated earlier, it is to be taken to the Trading Account.
Now, suppose the sales for the year 2018 were Rs. 1,60,000. The Trading Account
will appear as follows
Trading Account of for the year ending December, 31 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Opening stock of Finished Goods 25,000 By Sales 1,60,000
To Cost of Goods Produced
(Transferred from Mfg. A/c) 1,17,000 By Closing stock of
Finished Goods 30,000
To Gross Profit (Transferred to Profit
& Loss A/c) 48,000

1,90,000 1,90,000

You have learnt that a manufacturing concern has to prepare Manufacturing Account
before preparing the Trading and Profit and Loss Account. Though considered
desirable but many firms do not do so because it is not compulsory. You will also
generally be asked to prepare only the Trading Account without preparing the
52
Manufacturing Account. In such a situation you will show all items of Manufacturing Final Accounts-I
Account in the Trading Account itself. In other words, cost of raw materials
consumed, expenses on purchases of raw materials, all manufacturing expenses, the
opening and closing work-in-progress, sale of scrap, etc. will also be shown in the
Trading Account. But, as per common practice, the items like depreciation and
repairs to plant and machinery and factory building will be shown in the Profit and
Loss Account and not in the Trading Account.

9.7 LET US SUM UP

At the end of the accounting year the businessman prepares the final accounts with
the help of a Trial Balance. The final accounts consist of (i) Profit and Loss Account
and (ii) Balance Sheet. The Profit and Loss Account is prepared for ascertaining the
net profit/net loss of the business during the year and the Balance Sheet is prepared
for ascertaining its financial position as at the end of the year.
The Profit and Loss Account is divided into two sections. The first section called
Trading Account reveals the gross profit or gross loss and the second section called
Profit and Loss Account shows the net profit or net loss. Gross profit is defined as
the excess of sale revenue over the cost of goods sold which also includes the direct
expenses. The net profit is worked out by-crediting the Profit and Loss Account
with the amount of gross profit and other incomes and debiting it with all indirect
expenses and losses. In practice, we usually prepare a combined Trading and Profit
and Loss Account. It is also necessary to pass closing entries for transferring all
expenses and incomes to the Trading and Profit and Loss Account.
The Balance Sheet shows all assets and liabilities of the business. The assets represent
the debit balances of the real and personal accounts plus the unwritten off amounts
of deferred revenue expenses. The liabilities, on the other hand, represent the credit
balances of real and personal accounts including capital. The total assets should
always be equal to the total of liabilities.
The manufacturing concerns may also prepare a Manufacturing Account for
ascertaining the cost of goods produced, which is then transferred to the Trading
Account for ascertaining the cost of goods sold and the gross profit. This, however,
is not compulsory. Most manufacturing concerns prepare the Trading Account directly
y showing all-expenses incurred in the factory (including cost of raw materials
consumed) in the Trading Account itself.

9.8 KEY WORDS

Closing Stock: Goods remaining unsold at the end of the accounting year.
Cost of Conversion: Expenses incurred in the factory (for converting raw materials
into finished goods.)
Cost of Goods Sold: Difference between the cost of goods available for sale and
the cost of goods in stock.
Cost of Production: It is the cost of goods produced which includes cost of raw
materials consumed and all manufacturing expenses.
Current Assets: Assets which are likely to be realised within a period of one year
or during the operating cycle. They are also called floating assets. 53
Final Accounts Current Liabilities: Liabilities which are likely to be paid within one year or during
the operating cycle. They are also called short-term liabilities.

Direct Expenses: Expenses incurred on the goods purchased till they are brought
to the place of business.

Fictitious Assets: Expenses and losses not yet written off and shown as assets in
the Balance Sheet.

Fixed Assets: Assets acquired for use in the business for a long period. They are
also called non-current assets.

Gross Profit: Excess of sales revenue over the cost of goods sold.

Indirect Expenses: All expenses other than direct expenses. These include expenses
incurred in connection with general administration, financial matters and selling and
distribution of goods.

Intangible Assets: Assets in the form of rights which cannot be seen or touched
such as goodwill, patents, etc.

Net Profit: Excess of gross profit and other incomes over the indirect expenses
and losses in the business.

Non-Current Liabilities : Liabilities payable after a long time. They are also called
long-term liabilities.

Owner’s Capital: Claim of owners against the assets of the business. It is also
called owner’s equity and is equal to excess of assets over outside liabilities.

Opening Stock: Stock of goods as at the beginning of the accounting year.

Scrap: Waste material which arises in the course of manufacture.

Tangible Assets: Assets which have physical form and can be seen and touched
such as buildings, machinery, etc.

Work-in-Progress: Goods in respect of which some work still remains to be done.

They are also called semi-finished goods.

9.9 SOME USEFUL BOOKS

Maheshwari, S.N. 2018. Introduction to Accounting, Vikas Publishing House:
New Delhi.

Patil, V.A. and J.S. Korlahalli. 1986. Principles and Practice of Accounting,
R. Chand & Co., New Delhi.

William Pickles. 1992. Accountancy, E.L.B:s. and Pitman: London.

Gupta, R.L. and M. Radhaswamy. 2018. Advanced Accountancy; Sultan Chand

& Sons: New Delhi.

Shukla, M.C. and T.S. Grewal. 2018. Advanced Accountancy, S. Chand &
Co.: New Delhi.
54
 Final Accounts-I
9.10 ANSWERS TO CHECK YOUR PROGRESS
A 1. i) Debit ii) Debit iii) Debit iv) Credit v) Debit
vi) Credit vii) Debit viii) Credit ix) Debit x) Debit
xi) Debit xii) Credit

B 3. i) False ii) rue iii) True iv) True v) False vi) False.

4. i) indirectii) purchases, closing stock iii) selling iv) Trading v)debited

vi) Trading Account

5. Rs. 90,000

C 3. i) debit ii) current iii) asset iv) equal v) fixed vi) long-term

9.11 TERMINAL QUESTIONS/EXERCISES

Questions

1. Distinguish between:
a) Cost of Goods Sold and Cost of Goods Processed
b) Gross Profit and Net Profit
c) Direct Expenses and Indirect Expenses
d) Trading Account and Manufacturing Account
e) Profit and Loss Account and Balance Sheet

2. Give closing entries for Trading and Profit and Loss Account.

3. What is a Balance Sheet? Describe different methods of arranging assets and

liabilities.

Exercises

1. Find out the Cost of Goods Sold from the following figures extracted from the
books of Allied Ltd. for the year 2018:

Rs.
Stock (1.1.2018) 50,000
Purchases 10,00,000
Sales 15,00,000
Purchases Returns 50,000
Stock (31-1-2018) 70,000
Direct Expenses 60,000
Indirect Expenses 1,00,000

(Answer: Rs. 9,90,000)

55
Final Accounts

2. Find out the Cost of Goods Sold and Gross Profit from the following figures:

Rs.
Inventory in the beginning 60,000
Purchases Less Returns 6,00,000
Carriage Inwards 20,000
Cartage Outwards 30,000
Cartage and Freight 10,000
Wages 50,000
Sales Less Returns 12,00,000
Inventory at the end 40,000

(Answer: Cost of Goods Sold Rs, 7,00,000; Gross Profit Rs. 5,00,000.)
3. From the data given in Question No. 2 prepare Trading Account
4. From the following balances of Shyam Sunder, prepare Profit and Loss Account
for the year ended March 31, 2018.
Rs.
Office Expenses 5,280
Advertising 3,000
Legal Charges 5,000
Postage and Telephone Charges 6,400
Salaries and Wages 60,000
Travelling Expenses 2,500
Interest Received 600
Rent, Rates and Taxes 20,800
Insurance 2,400
Office Lighting 1,500
Stationery 1,200
Repairs 920
Miscellaneous Income 800
Commission Paid 4,000
Bank Charges 200
The Gross Profit for the year was Rs. 73,000
(Answer: Net Loss Rs. 38,000)
5. The following balances have been extracted from the books of Plaza Electricals
Ltd. for the year 2018.
Rs.
Sales 5,00,000
Purchases 3,00,000
Return Inwards 10,000
56
Return Outwards 15,000
Opening Stock 30,000 Final Accounts-I
Wages 20,000
Carnage Inwards 5,000
Carriage Outwards 3,000
Salaries 25,000
General Expenses 10,000
Rent and Rates 4,000
Advertisement 5,000
Bad debts 3,000
Insurance 3,000
Trade Expenses 2,000
Depreciation 5,000
It was further given that the value of stock on December 31, 2018 was Rs. 50,000.
You are required to prepare Trading and Profit and Loss Account of Plaza Electrical
Ltd. for the year ending December 31, 2018.
(Answer: Gross Profit Rs. 2,00,000; Net Profit Rs. 1,40,000)
6. From the following data pertaining to the transactions of Mehta Bros. for the
year 2018, prepare Trading and Profit and Loss Account for the year ending
December 31, 2018.
Rs.
Sales 10,00,000
Purchases 6,00,000
Sales Returns 20,000
Purchases Returns 10,000
Inventory (beginning) 40,000
Wages 50,000
Carriage Inwards 20,000
Carriage Outwards 15,000
Trade Expenses 10,000
Cartage and Freight 5,000
Salaries 30,000
General Expenses 10,000
Insurance 6,000
Rent & Rates 5,000
Distribution Expenses 6,000
Discount Received 1,000
Discount Allowed 2,000
Bad Debts 2,000
Depreciation 8,000
Interest on Investments 20,000
Interest on Bank Deposits 1 ,000
Interest on Bank Overdraft 500
57
Loss of Goods by Fire 2,500
Final Accounts It was further given that the value of Inventory on December 31, 2018 was Rs.
80,000
(Answer: Gross Profit Rs. 3,55,000: Net Profit Rs. 2,80,000,
7 . From the following balances of Hitesh, prepare a Balance Sheet as on December
31, 2018
Rs.
Hitesh’s Capital 41,000
Drawings 6,100
Wife’s Loan 4,000
Sundry Creditors 45,000
Cash in Hand 250
Cash at Bank 4,000
Sundry Debtors 40,500
Patents 2,000
Plant and Machinery 20,000
Land and Building 26,000
Stock in Hand 36,500
Net Profit for the year was Rs. 45,350
(Answer: Balance Sheet Total Rs. 1,29,250)
8. From the following Trial Balance of Sameer, prepare Trading and Profit and
Loss Account for the year ended September, 30, 2018, and Balance sheet as
on that date.
Trial Balance as on September 30, 2018
Name of Account Dr. Cr
Balances Balances
Rs. Rs
Capital 40,000
Drawings 7,500
Stock on July 1, 2017 8,000
Purchases 47,250
Sales 90,000
Carriage Inwards 2,300
Returns .Inwards 2,000
Returns Outwards 1,500
Wages 7,000
Plant and Machinery 30,000
Furniture and fittings 7,500
58
 Coal, Gas and Water 2,100 Final Accounts-I
Power 2,000
Salaries 9,000
Discount Allowed 750
Discount Received 600
Office Rent 2,400
Factory Rent 3,000
Postage and telephone 900
Insurance 250
Sundry Expenses 800
Trade Debtors 20,000
Trade Creditors 27,150
Cash in hand 700
Cash at Bank 4,100
Carriage Outwards 1,700
1,59,250 1,59,250
The Stock on September 30, 2018 was valued at Rs. 9,250.
(Answer:Gross Profit Rs. 27,100; Net Profit Rs. 11,900; Balance Sheet Total Rs.
71,550)
9. The following figures have been extracted from the books of a manufacturer.
Rs.
Stock 1.1.2018
Raw Materials 25,000
Work-in-Progress 10,000
Finished Goods 50,000
Purchases of Raw Materials 3,00,000
Factory Wages 40,000
Factory Rent 5,000
Fuel & Power 5,000
Carriage Inwards 2,500
Repairs of Plant 25,000
Depreciation on Plant 25,000
Sale of Scrap 2,000
Stock on 31.12.2018
Raw Materials 40,000
Work-in-Progress 15,000
Finished Goods 60,000
You are required to prepare a Manufacturing Account and ascertain the Cost of
Goods Produced.
(Answer:Cost of Goods Produced: Rs. 3,75,500)
59
Final Accounts 10. From the following Trial Balance, prepare Manufacturing Account and the
Trading and Profit and Loss Account for the year ended March 31, 2018, and
Balance Sheet as at the end of the year.

Name of Account Dr. Cr

Balances Balances
Rs. Rs
Opening Stock of Raw Materials 60,000
Opening Stock of Finished Goods 32,000
Opening Stock of the Work-in- Progress 10,000
Capital 1,44,000
Purchase of Raw Materials 5,00,000
Sales 8,00,000
Purchase of Finished Goods 16,000
Carriage Inwards 8,000
Wages 1,00,000
Salaries (75% Factory) 52,000
Commission 6,000
Bad Debts 4,000
Insurance 8,000
Rent, Rates and Taxes
(50% Factory) 24,000
Postage and Telegram 5,600
Miscellaneous Expenses 3,200
Travelling and Conveyance
(50% Factory) 7,000
Carriage Outwards 5,200
Machinery 80,000
Furniture 10,000
Debtors 1,20,000
Creditors 1,07,000
10,51,000 10,51,000
The Closing Stocks are as follows:
Raw Materials 80,000
Work-in-Progress 24,000
Finished Goods 16,000
(Answer: Cost of Production Rs. 6,26,750; Gross Profit Rs. 1,41,250; Net Profit
Rs. 79,000; Balance Sheet Rs. 3,30,000.

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.
60
 Final Accounts-II
UNIT 10 FINALACCOUNTS-II
Structure
10.0 Objectives
10.1 Introduction
10.2 Need for Adjustments
10.3 Treatment of Adjustments in Final Accounts
10.3.1 Closing Stock
10.3.2 Outstanding Expenses
10 3.3 Prepaid Expenses
10.3.4 Accrued Income
10.3.5 Income Received in Advance
10.3.6 Depreciation
10.3.7 Interest on Capital
10.3.8 Interest on Drawings
10.3.9 Interest on Loan
10.3.10 Bad Debts
10.3.11 Provision for Bad Debts
10.3.12 Provision for Discount on Debtors
10.3.13 Provision for Discount on Creditors
10.3.14 Manager’s Commission
10.3.15 Abnormal Loss of Stock
10.3.16 Drawings of Goods by the Proprietor

10.4 Preparation of Final Accounts with Adjustments

10.5 Adjustments given in Trial Balance
10.6 Let Us Sum Up
10.7 Key Words
10.8 Some Useful Books
10.9 Answers to Check Your Progress
10.10 Terminal Questions/Exercises

10.0 OBJECTIVES
After studying this unit you should be able to:
 explain why adjustment entries are necessary at the time of preparing the final
accounts;
 list the items in respect of which adjustments are usually made;
 pass the necessary adjustment entries; and
 prepare final accounts with adjustments.
61
Final Accounts
10.1 INTRODUCTION
In Unit 8 you learnt about the preparation of simple final accounts. They did not involve
any adjustments. In practice, however, you are always required to make some
adjustments while preparing the final accounts. It is because there may be many expenses
and incomes relating to the current year which are still to be brought into the books of
account. Then there may be certain items recorded in current year’s books which
actually relate to the previous year or the next year. Unless such items are duly adjusted
in the books of account, the final accounts will not reveal the true and fair view of the
state of affairs of the business. In this unit you will learn about all items which require
adjustments and study how such adjustments are made in books of account and how
they are incorporated in the final accounts.

10.2 NEED FOR ADJUSTMENTS

You know that the financial reporting requires the summarisation of business operations
for a specific accounting period. It is quite possible that certain transactions recorded in
current year’s books may partly relate to the previous year or to the following year. It
is also possible that certain expenditure incurred during the current year has not yet
been paid and so not recorded. Similarly, there may be certain incomes earned during
the current year which have not been recorded because they have not yet been received;
If such items are not adjusted or brought into current year’s books of account, the
summary presented in the form of final accounts will not reveal the true picture. Let us
take the example of an amount of Rs. 600 paid on July 1, 2018 towards insurance
premium. You know any general insurance usually covers a period of twelve months.
Suppose the accounting year is ending on December 31, 2018 it would mean that half
the amount of insurance premium paid on July 1, 2018 pertains to the next accounting
year i.e., 2019. Therefore, while preparing the final accounts of 2018, the expenditure
on insurance premium that should be debited to the Profit and Loss Account is Rs. 300
(Rs. 600 paid Rs. 300 pertaining to 2019). The remaining amount of Rs. 300 will be
carried forward and charged to the Profit and loss Account of 2019. Take another
example. The wages of workers for the month of December, 2018 were paid on January
7, 2019. This means the Wages Account of 2018 does not include the wages for the
month of December 2018. Such unpaid wages termed as ‘Wages outstanding’ have to
be brought into the books and debited to the Trading Account along with the wages
already paid. Similarly, adjustment may also become necessary in respect of certain
incomes received in advance or those which are outstanding as at the end of the
accounting year. Apart from these, there are certain items which cannot be recorded on
day-to-day basis such as depreciation, interest on capital, etc. They are generally adjusted
at the time of preparing the final accounts.
All items which need alteration or which are to be brought into books at the time of
preparing final accounts are called ‘adjustments’. The purpose of making various
adjustments is to ensure that the final accounts reveal the true financial position of the
business. Therefore, when you are to prepare the final accounts of any business, you
are provided with a Trial Balance and some additional information in respect of the
adjustments to be made.

10.3 TREATMENT OF ADJUSTMENTS IN FINAL

ACCOUNTS
There are several items which need adjustment at the time of preparing the final accounts.
Some of the important and common adjustments are listed below:
62
1. Closing Stock Final Accounts-II

2. Outstanding or Accrued Expenses

3. Prepaid or Unexpired Expenses
4. Outstanding or Accrued Incomes
5. Incomes Received in Advance (Unearned Income)
6. Depreciation
7. Interest on Capital
8. Interest on Drawings
9. Interest on Loan
10. Bad Debts
11. Provision for Bad Debts
12. Provision for Discount on Debtors
13. Provision for Discount on Creditors
14. Manager’s Commission
15. Abnormal Loss
16. Drawing of Goods by the Proprietor
Let us now discuss the nature of each item of adjustment and its treatment in the final
accounts. In this connection you must remember that the general principle of. double
entry has to be fully followed. Hence, for bringing any item into the books of account or
adjusting the amount of any expense or income, you have to ensure that theamount is
debited to one account and credited to another; and while showing it in the final accounts
the item should appear at two places, one representing the debit and the other representing
the credit, otherwise the Balance Sheet will not tally. Usually, each adjustment will first
appear in the Trading and Profit and Loss Account and then in the Balance Sheet.

10.3.1 Closing Stock

You know that all goods purchased or produced during the year are not completely
sold out by the end of the year. Some goods always remain unsold as at the end of the
year which are called ‘Closing Stock’. The Closing Stock does not usually appear in
the Trial Balance. It is mostly given in the form of additional information. Since Gross
Profit/Gross Loss cannot be worked out without accounting for the closing stock it is
brought into books by means of the following adjustment entry.
Closing Stock A/c Dr.
To Trading A/c
The closing stock is treated in the final accounts as follows:
i) On the credit side of Trading Account: shown as a separate item, and
ii) On the assets side of the Balance Sheet: shown as a separate item under Current
Assets.
63
Final Accounts Adjusted Purchases and Closing Stock: Sometimes the closing stock may be giver in
the Trial Balance itself. This would mean that both the opening and the closing stocks
have been adjusted in the purchases. In such a situation, the opening stock will not
appear in the Trial Balance. The Trial Balance will show only the figures of adjusted
purchases and the closing stock. The adjusted purchases are in fact the cost of goods
sold. They have been worked out by adding the opening stock to purchases and
subtracting the closing stock therefrom. Hence, the adjusted Purchases are shown on
the debit side of the Trading Account. In such a situation there is no need to show
closing stock in the Trading Account as it already stands adjusted in purchases. It will
be shown only on the asset side of the Balance Sheet.

10.3.2 Outstanding Expenses

Outstanding expenses are those expenses which have been incurred during the current
accounting year but have not been paid till the end of the year. They are also called
‘expenses accrued’. The common examples of such expenses are the salaries, wages
and rent for the last month of the accounting year paid in the first month of the next year.
Since they remained unpaid as at the end of accounting year, no entry might have been
passed in the books of account. So, they must be taken into account while preparing
the Trading and Profit and Loss Account otherwise it will not reveal the correct amount
of profit or loss. The following adjustment entry is passed in respect of outstanding
expenses.
Concerned Expense A/c Dr.
To Outstanding Expenses A/c
The outstanding expenses will be treated in final accounts as follows:
i) Added to the concerned expenses in the Trading and Profit and Loss Account,
and
ii) Shown on the liabilities side of the Balance Sheet as a separate item under Current
Liabilities.

10.3.3 Prepaid Expenses

Sometimes, the benefit of some expenses will be available not only in the current
accounting year but also during the next year. That portion of expense the benefit of
which is yet to be received is called ‘prepaid expense’. It is also called ‘unexpired
expense’. Examples of such expenses are unexpired insurance, interest paid in advance,
etc. In such situations it is necessary to find out the unexpired portion and ad just it in
the concerned expense, Thefollowing adjustment entry is passed in respect of the prepaid
expenses:
Prepaid Expenses A/c Dr.
To Concerned Expense A/c
The Prepaid expenses will be treated in final accounts as follows:
i) Subtracted from concerned expense in the Trading and Profit and Loss Account,
and
ii) Shown on the assets side of the Balance Sheet as a separate item under Current
Assets.

64
10.3.4 Accrued Income Final Accounts-II

Accrued Incomes are those incomes which have been earned during the current
accounting year but have not been received till the end of the year. They are also
called ‘outstanding incomes’ or ‘incomes earned but not yet received’. Examples of
such incomes are commission receivable, income on investments due but not yet
received, etc. The following adjustment entry is passed in respect of accrued income.
Accrued Income A/c Dr.
To Concerned Income A/c
The Accrued income is treated in final accounts as follows:
i) Added to the concerned income in the Profit and Loss Account, and
ii) Shown on the asset side of the Balance Sheet as a separate item under Current
Assets.

10.3.5 Income Received in Advance

Any income which belongs to the next accounting year but has been received during
the current accounting year is called ‘income received in advance’ or ‘unearned
income. It is the income in respect of which the service is yet to be provided. Examples
of such incomes are rent received in advance, interest received in advance, etc. In
such a situation, the unearned portion of the income will have to be adjusted while
preparing the final accounts. The following adjusting entry is passed in respect of the
unearned income.
Concerned Income A/c Dr.
To Income Received in Advance A/c
The unearned income is treated in final accounts as follows:
i) Deducted from the concerned income in the Profit and Loss Account, and
ii) Shown on the liabilities side of the Balance Sheet as a separate item under
Current Liabilities.
Look at illustration 1 and see how adjustments are made in the final accounts in
respect of outstanding expenses, prepaid expenses, outstanding incomes and incomes
received in advance.
Illustration 1
Show how you will record the following items in the Profit and Loss Account and
the Balance Sheet.
The Trial Balance showed the following balances as on December 31, 2018:
Rs.
Salaries 10,000
Wages 20,000
Rent Received 6,600
Commission Received 2,000
Interest on Investments 6,000
Additional Information
i) Salaries amounting to Rs. 2,000 are outstanding. 65
Final Accounts ii) Wages include Rs. 1,560 paid in advance.
iii) Interest on investment includeRs. 1,200 for the months of January, February and
March, 2019.
iv) Rent for the month of December amounting to Rs. 600 is not yet received.
Gross profit for the year is Rs. 40,000 and other expenses amounted to Rs. 10,000
Profit and Loss Account for the year ended December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Salaries 10,000 By Gross Profit b/d 40,000
Add: Outstanding 2,000 12,000 By Rent Received 6,600
To Wages 20,000 Add: Outstanding 600
Less: Prepaid 1,500 18,500 7,200
To Other Expenses 10,000 By Commission Received 2,000
To Net Profit By Interest on
(Transferred to Capital A/c) 13,500 Investments 6,000
Less: Received
in Advance 1,200 4,800

54,000 54,000

Balance Sheet
As on December 31, 2018

Liabilities Amount Assets Amount

Current Liabilities: Rs. Currents Assets: Rs,

Salaries Outstanding 2,000 Wages Prepaid 1,500
Interest Received in Advance 1,200 Rent Outstanding 600

10.3.6 Depreciation
Depreciation means decrease in the value of fixed assets due to their usage and the
passage of time. You know the fixed assets are used for the purpose, of earning revenue.
Therefore, the fall in their value should be considered as an expense or loss incurred in
realising such revenue and should be charged to the Profit and Loss Account.
Depreciation is not recognised on day-to-day basis. It is brought into the books only at
the end of the accounting period by passing the following journal entry.
Depreciation A/c Dr.
To Concerned Asset A/c
Depreciation is treated in final accounts as follows:
i) On the debit side of the Profit and Loss Account: shown as a separate item giving
details of depreciation on each fixed asset, and
ii) Deducted from the concerned asset in the Balance Sheet.
Sometimes depreciation is given in the Trial Balance itself. This is possible only if the
entry in respect of depreciation has already been passed in the books of account. In
66
such a situation depreciation will be shown in the Profit and Loss Account only. Final Accounts-II
It need not be adjusted in the fixed assets in the Balance Sheet because the fixed assets
already stand reduced by the amount of depreciation.
Depreciation is generally calculated at the given rate for the period for which the asset
has been used in the accounting year. Thus, if an-asset is purchased during the current
year the depreciation should be calculated from the date of acquisition till the end of the
year. If the date on which the additions were made is not given, you should calculate
depreciation on additions also for the full year. In the case of old assets, depreciation is
calculated on the opening balance. Look at illustration 2 and study how depreciation is
treated at the time of preparing the final account.
Illustration 2
The following are the balances of assets as on January 1, 2018:
Rs.
Plant and Machinery 1,20,000
Furnitur 18,000
A new machinery costing Rs. 30,000 was acquired on July, 1, 2018. Depreciation is to
be provided on Plant and Machinery at 10% and on furniture at 5% per annum. Show
how depreciation will be shown in the final accounts.
Solution :
Calculation of Depreciation
Rs.
On Furniture at 5% on Rs. 18,000 900
On Plant and Machinery:
10% on Rs. 1,20,000 for one year 12,000
10% on Rs. 30,000 for six months 1,500 13,500
14,400
Solution:
Treatment in Final Accounts

Particulars Amount Particulars Amount

Rs. Rs.
To Depreciation :
Plant and Machinery 13,500
Furniture 900 14,400

Balance Sheet as on December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
Fixed Assets:
Plant and Machinery 1,20,000
Add: New Machinery 30,000
1,50,000
Less: Depreciation 13,500 1,36,500
Furniture 18,000
Less: Depreciation 900 17,100
67
Final Accounts 10.3.7 Interest on Capital
You know thefinds provided by the proprietor to the business constitute capital.
Sometimes, the proprietor may like to know the profits made by the business after
taking into consideration the interest on this capital. In such a situation interest is allowed
at a certain rate on the capital. It is calculated on the capital at the beginning of the year.
If, however, any additional capital is introduced during the year, interest on additional
capital will also be calculated from the date on which it was brought into Final Account,
the business. Such interest is treated as an expense for the business and the following
adjustment entry is passed to bring it into the books of account.
Interest on Capital A/c Dr.
To Capital A/c
Interest on capital is treated in final accounts as follows:
i) On the debit side of Profit and Loss Account: shown as a separate item of expense
and
ii) Added to Capital on the liabilities side of Balance Sheet. You should note that
normally no interest on capital is to be provided.
10.3.8 Interest on Drawings
In case interest is allowed to the proprietor on his capital, it is a usual nractice to also
charge interest on his drawings. Interest on drawings will be a gain for the business and
the following adjustments entry is passed to bring it into the books of account.
Capital A/c or Drawings A/c Dr.
To Interest on Drawings A/c
Interest on Drawings is treated in final accounts as follows:
i) On the credit side of Profit and Loss Account: shown as a separate item, and
ii) Deducted from Capital on the liabilities side of Balance Sheet.
Interest on drawings is calculated at a given rate from the date of withdrawal till the end
of the year. In case no date is mentioned, the interest is charged for six months assuming
the amounts were drawn evenly throughout the year. Look at illustration 3 and see how
interest on drawings is calculated when the amount and the dates of withdrawal are
given.
Illustration 3
Rs.
Feb. 1 4,000
Apr. 1 6,000
Jul. 1, 6,000
Oct 31 2,000
Dec. 31 5,000
Calculate the interest chargeable to the proprietor if the rate of interest on drawings is
15% per annum.
68
Solution: Final Accounts-II

Date Amount Months upto Product

December 31 23
(1) (2) (3) (4)
Feb. 1 4,000 11 44,000
Apr. 1 6,000 9 54,000
Jul. 1 3,000 6 18,000
Oct. 31 2,000 2 4,000
Dec. 31 5,000 0 0

1,20,000

15 1
Interest on Drawings   1, 20, 000   Rs.1,500
100 12

Another way of calculating interest on drawings is to calculate it individually on each

withdrawal and then add them.

10.3.9 Interest on Loan

If the firm has taken some loan, it has to pay interest thereon. Hence, when we notice a
loan Account in the Trial Balance, we must find out whether the full amount of due on
loan has been paid or not. The rate of interest and the date on which the loan was taken
is usually given. If, however, the date on which loan was taken is not given, it means that
it is an old loan and full year’s interest has to be provided. In any case, you should
calculate the exact amount of interest due and find Out from the Trial Balance whether
the same has been paid or not. Generally, you will find that the interest has been paid
but it is less than what is due. In such a situation, the difference is regarded as outstanding
interest and the same must be adjusted at the time of preparing the final accounts.
Suppose there is an item of 10% loan (taken on April 1, 2018) of Rs. 20,000 appearing
in the Trial Balance. Assuming the accounting year ends on December 31, the total
interest on loan will work out as Rs. 1,500 (at 10% on Rs. 20,000 for nine months). On
going through the Trial Balance you find that the interest paid is Rs. 1,000 only. It means
Rs. 500 (Rs. 1,500— Rs. 1,000) is the outstanding interest. This must be shown in final
accounts accordingly i.e., Rs. 1,500 (Rs. 1,000 + Rs. 500 outstanding) as interest on
loan on the debit side of the Profit and Loss Account and Rs. 500 as outstanding
Interest under current liabilities in the Balance Sheet.
It is possible that the adjustments given outside the Trial Balance already include this
item. But, if they do not even then you have to account for it. This is called an implied
adjustment.
Check Your Progress A
1. Fill in the blanks
i) Every adjustment has a ............................ effect.
ii) Closing stock is shown on the side ........................ of the Balance Sheet.
69
Final Accounts iii) Prepaid expenses are also called .......................... expenses.
iv) Income received in advance is .......................... for the business.
v) .................... is a decrease in the value of a fixed asset due to wear and tear.
vi) Interest on Drawings is from .................. the capital in the Balance Sheet.
2 State whether the following statements are True or False.
i) Every adjustment affects either Trading and Profit and Loss Account or the
Balance Sheet.
ii) Outstanding expense is first added to the relevant expense account and then
shown on the liabilities side of the Balance Sheet.
iii) Interest on loan is an income for the business.
iv) Depreciation is deducted from the relevant fixed asset in the Balance Sheet
and Profit and Loss Account

v) Proprietor is always entitled to interest on the capital invested.

10.3.10 Bad Debts

Sometimes, a debtor may fail to pay his debt either partially or completely. The amount
of debt which cannot be recovered from the debtor is called Bad Debts and it will be a
loss to the business. The following journal entry is passed when a debt becomes bad.
Bad Debts A/c Dr.
To Concerned Debtor’s A/c

The effect of this entry will be (i) debtor’s personal account stands, closed, and (ii) a
new account called ‘Bad Debts Account is opened in the books.
The total amount of bad debts incurred during the year appears as a separate item in
the Trial Balance and the sundry debtors appear at the reduced amount. The bad debts
like any other expense or loss are charged to the Profit and Loss Account.
Bad Debts given outside the Trial Balance: Sometimes, the bad debts to be written off
may be stated outside the TrialBalance as an adjustment item, It means that such bad
debts have not yet been written off. In other words, the entry for such bad debts has
not been passed. It is necessary to record such bad debts at the time of preparing the
final accounts. This is done by passing the following adjustment entry:
Bad Debts Account Dr.
To Sundry Debtors
Such additional bad debts usually called ‘further bad debts’ are treated in finalaccounts
as follows:
i) On the debit side of Profit and Loss Account: shown as addition to bad debts
already written off, and
ii) On the assets side of the Balance Sheet: shown as deduction from Sundry Debtors.
It is important to remember the difference between the treatment of bad debts given
inside the TrialBalance and the bad debts given outside the Trial Balance. The bad
debts given inside the Trial Balance and also those given outside the Trial Balance will
70
be shown in the Profit and Loss Account. But only those bad debts will be deducted Final Accounts-II
from Sundry Debtors in the Balance Sheet which are given outside the Trial Balance.

10.3.11 Provision for Bad Debts

In any business where goods are sold on credit, bad debts usually occur. When it is
certain that a debt will not be recovered, the amount is written off as bad debt. But, it is
also likely that some of the remaining debts may not be recovered in full. From experience
we know that certain percentage of amounts due from debtors may not be recovered.
This will be a loss to the business. You have learnt that accordingly to ‘conservatism
concept’ all possible losses must be provided for. Hence, it is a common practice to
make a suitable provision for doubtful debts at the time of preparing the final accounts.
Otherwise, the Profit and Loss Account will not reveal the correct amount of profit or
loss and the Balance Sheet will not show the true position of sundry debtors. The
Provision for doubtful debts is usually calculated as a certain percentage of the total
amount due from sundry debtors after writing of all known bad debts.
Provision for doubtful debts is also called ‘Provision for Bad Debts’ or ‘Provision for
Bad and doubtful Debts. Such a provision is made by debiting the amount of doubtful
debts to the Profit and Loss Account. Thus, the journal entry for creating such provision
will be as follows:
Profit and Loss A/c Dr.
To Provision for Bad Debts A/c
You will notice that when a debt is irrecoverable it is written off by crediting it to the
personal account of the respective customer. But, when a debt is doubtful of recovery,
the personal account of the customer will not be credited as the recovery is still possible.
Hence, the creation of provision for bad debts does not affect the balance of debtors
personal accounts. However, while showing sundry debtors in the Balance Sheet the
amount of such provision is subtracted therefrom.
When provision for bad debts already exists in the books, the provision created for
doubtful debts at the end of a particular year will be carried forward to the next year
and it will be used for meeting the loss due to bad debts incurred during the next year.
The provision for bad debts brought forward from the previous year is called ‘opening
provision’ or ‘old provision’. When such provision already exists, the loss due to bad
debts during the current year will be adjusted against the Same, and while making
provision for bad debts required at the end of the current year called ‘new provision’
the balance of old provision should also be taken into account. Let us take an example
and understand how these adjustments are done. Suppose old provision on January 1,
2018 was Rs. 1,000. The bad debts written off during 2018 amounted to Rs.600 and
the new provision required on December 31, 2018 is Rs. 1,500. In such a situation, the
Profit and Loss Account will be debited with Rs. 1,100 as calculated below:

Rs.
Existing Provision for Bad Debts 1,000
Less: Bad Debts 600
Surplus provision available 400
Provision required at the end of the year 1,500
Less: Surplus of old provision 400
Amount to be debited to Profit and Loss Account 1,100
71
Final Accounts The above aspects will be shown on the debit side of the Profit and Loss Account as
follows:
Profit and Loss Account of the year ended………
Dr. Cr.

Rs. Rs.
To Provision for Bad Debts
Bad Debts 600
Add: New Provision 1,500
2,100
Less: Old Provision 1,000 1,100

If however, the total of new provision and the actual bad debts are less than the old
provision, the details will be shown on the credit side of the Profit and Loss Account as
follows:
Profit and Loss Account for the year ended……….
Dr. Cr.

Rs. Rs.
By Provision for Bad Debts
Old Provision …….
Less: Bad Debts …….
Less: New Provision ….…

In this connection you should note the following points.

1. If some bad debts are given in adjustments (further bad debts) they should also be
taken into account.
2. The new provision should be calculated on sundry debtors after adjusting the
amount of further bad debts.
3. In Balance Sheet only the further bad debts as given in adjustments and the new
provision for bad debts should be subtracted from sundry debtors.
The following are the journal entries required when the provision for bad debts exists in
the books:
a) Forwriting off further bad debts given outside the Trial Balance:
Bad Debts A/c Dr.
To Sundry Debtors
b) For transferring the total bad debts to the provision for Bad DebtsAccount:
Provision for Bad debts A/c Dr.
To Bad Debts A/c
c) For debiting the Profit and Loss Account with the excess of the new pr’ the
total bad debts over the old provision:
72
 Profit and Loss Account A/c Dr. Final Accounts-II
To Provision for Bad Debts A/c
d) For crediting the Profit and Loss Account with excess of the old provision
over the total baddebts plus new provision:
Provision for Bad Debts A/c Dr.
To Profit and Loss A/c
Look at illustration 4 and see how bad debts and provision for bad debts are recorded
in the final Accounts.
Illustration 4
An extract from a Trader’s Trial Balance on December 31, 2018 is given below:

Name of the Account Dr. Cr.

Rs. Rs.
Sundry Debtors
Band Debts 64,000
Provision of Bad Debts 4,000 7,000

Adjustments:Write off further bad debts Rs. 2,000 and create a provision for doubtful
debts at 5% on debtors. Pass the necessary journal entries and show Bad Debts and
Provision for Bad Debts Accounts. Also show their treatment in the final accounts.
Journal

2018 Rs Rs.
Dec.31 Bad Debts A/c Dr. 2,000
To Sundry Debtors 2,000
(Being bad debts written off)
“ 31 Provision for Bad Debts A/c Dr. 6,000
To Bad Debts A/c 6,000
(Being bad debts transferred to
Provision for Bad Debts Account)
“ 31 Profit and Loss A/c Dr. 2,100
To Provision for Bad Debts A/c 2,100
(Being the Provision required for doubtful debts)

Bad Debts Account

2018 Rs. 2018 Rs.

Dec. 31 To Balance b/d 4,000 Dec. 31 By Prov. Fro Bad Debts 6,000
Dec. 31 To Sundry Debtors 2,000
6,000 6,000

73
Final Accounts Provision for Bad Debts Account

2018 Rs 2018 Rs.

Dec. 31 To Bad Debts A/c 6,000 Dec. 31 By Balance b/d 7,000
“ 31 To Balance c/d 3,100 By Profit and Loss A/c 2,100
9,100 2019 9,100
Jan. 1 By Balance b/d 3,100

Note : The new provision for bad debts has been calculated at 5% on Rs. 62,000
(sundry debtors Rs. 64,000 – further bad debts Rs. 2,000)
Profit and Loss Account
For the year ended December 31, 2018

Rs. Rs.
To Provision for Bad Debts
Bad Debts 4,000
Add : Further Bad Debts 2,000
Add : New Provision 3,100
9,100
Less : Old Provision 7,000 2,100

Balance Sheet
as at December 31, 2018

Rs. Rs.
Current Assets :
Sundry Debtors 64,000
Less : Further Bad Debts 2,000
62,000
Less : Provision Bad Debts 3,100 58,900

10.3.12 Provision for Discount on Debtors

You know cash discount is allowed to debtors as an incentive for prompt payment.
When the discount is allowed it is recorded through the Cash Book and posted to the
credit side of the concerned debtor’s personal accounts. But, in the case of debts
outstanding at the end of the current year, discounts will be allowed in the next year if
the debtors make prompt payments. So, as in the case of anticipated loss on account of
doubtful debts, a provision must be made for the discount likely to be allowed to the
debtors in the next year, such a provision is known as the ‘Provision for Discount on
Debtors’ it is also calculated as a percentage on the net sundry debtors (remaining after
subtracting the provision for bad debts and further bad debts). For example, if Sundry
Debtors amount to Rs. 40,000 and the firm wants to create a provision for bad debts
at 5% and a provision for discount at 2% on the debtors they will be calculated as
follows:
i) The Provision for bad debts will be calculated at 5% on Rs. 40,000. It will amount
to Rs. 2,000.
74
ii) The Provision for discount at 2% will be calculated on the debtors after subtracting Final Accounts-II
the provision for bad debts i.e., on Rs. 38,000 (Rs. 40,000— Rs. 2,000). It will
amount to Rs. 760.
Note that when both provision for bad debts and provision for discount on debtors are
to be calculated, the provision for bad debts is calculated first and then provision for
discount is worked out on debtors after subtracting the provision for bad debts.
The adjustment entry for provision for discount on debtors is as follows:
Profit and Loss A/c Dr.
To Provision for Discount on Debtors A/c
(Being the Provision made for discount on debtors)
The Provision for discount on debtors will be shown in the final accounts as follows:
i) On the debit side of Profit and Loss Account: shown as a separate item, and
ii) On the assets side of Balance Sheet: shown as a deduction from Sundry Debtors.
The balance of the provision for Discount on Debtors Account will be carried forward
to the next year and the discounts allowed if any, in the next year will be set off against
the provision for itself. The method of dealing with discounts allowed and provision for
discount on debtors in the next year is similar, to the method followed in case of bad
debts and provision for bad debts.

10.3.13 Provision for Discount on Creditors

When prompt payment is received we allow cash discount to debtors. Similarly, we
receive discount from the creditors when prompt payments are made by us. So the
expected gain on account of discounts receivable from creditors in the next year should
also be taken into account at the time of preparing the final accounts. Such a provision
is called ‘Provision for Discount on Creditors’.
It is calculated as a percentage on Sundry Creditors. The creation of such a provision,
however, goes against the Conservatism Concept. Hence, it is usually avoided in practice.
But you must learn how it is treated in final accounts if such a provision is required.
The adjustment entry for provision for discount on creditors is passed as follows:
Provision for Discount on Creditors A/c Dr.
To Profit and Loss Account
(Being the Provision made for discount on creditors)
The provision for discount on creditors will appear in the final accounts as follows:
i) On the credit side of Profit and Loss Account: shown as a separate item, and
ii) On the liabilities side of the Balance Sheet: shown as a deduction from Sundry
Creditors.
The balance of the Provision for Discount on Creditors Account will also be carried
forward to the next year and the discount received, if any, will be adjusted against the
provision itself.

10.3.14 Manager’s Commission

Sometimes, the manager may also be entitled to a commission on profits earned by the
business. Such commission is usually calculated as a fixed percentage on profits. Suppose 75
Final Accounts the Net Profit of a firm after taking into consideration all expenses except the manager’s
commission is Rs. 60,000 and the manager is entitled to a commission of 5% on profits
before charging such commission. His commission will work out as Rs. 3,000. However,
it is still to be paid and therefore should be treated as an outstanding expense. It will be
debited to Profit and Loss Account and also shown as a current liability in the Balance
Sheet.
In the above example, manager’s commission has been calculated on profits before
charging the commission. But, sometimes, it is to be calculated on profit after charging
such commission. In such a situation, the commission will be calculated by the following
formula:
Percentage of Commission

Percentage of Commission
 Net Profit before Commission
100 + Percentage of Commission

If, in the above example, the manager’s commission were to be calculated on profits
after charging such commission, it will be as follows.

5 5
 60,000   60,000  Rs. 2,857
100  5 105

The above amount can also be verified. After charging manager’s commission the Net
Profit will work out to Rs. 57,143 (Rs. 60,000—Rs. 2,857). Now calculate 5% on
Rs. 57,143. It works out to Rs. 2,857 which means the amount of commission calculated
by the given formula is correct.
10.3.15 Abnormal Loss of Stock
In the course of business some loss of stock may also occur. It may occur in transit or
at the godown. Such loss of stock may be normal or abnormal. Normal loss is due to
inherent characteristics of goods such as evaporation, subdivision, drying up of goods,
etc. On the other hand, if the loss occurs on account of reasons which are accidental or
very rare, the loss is termed as abnormal loss. The examples of such losses are theft of
goods, destruction of goods by fire, etc.
The abnormal loss does not require any special treatment in the books of account. It is
absorbed by the remaining units whose cost is inflated by such loss. But, the abnormal
loss has to be shown separately in the books of account. After the amount of such loss
is ascertained, the following adjustment entry is passed.
Loss by Fire A/c Dr.
To TradingAccount
(Being stock lost by fire)
To avoid the burden of loss due to abnormal circumstances the businessmen may get
the stock insured. Thus, the loss may be
1. Uninsured,
2. Fully insured, or
3 . Partially insured.
76
Let us see what will be the accounting treatment in the above three situations. Final Accounts-II

1. When the stock’s is not insured: In case the stock is not insured the total abnormal
loss will be transferred to the Profit and Loss Account and the following entry will
be passed.
Profit and Loss A/c Dr
To Loss by Fire A/c
2 When the stock Isfully Insured: When the stock is fully insured, the total amount of
loss is paid by the insurance company. In that case the company does not suffer fly
loss.
So, nothing is debited to the Profit and Loss Account. The journal entry passed is
as follows.
Insurance Company Dr.
To Loss by Fire A/c
3. When the loss is partially insured: In case the loss is partially insured the amount of
insurance claim is debited to Insurance Company’s Account and the remaining
loss (the amount to be borne by the business) is debited to Profit and Loss Account.
The following journal entry is passed.
Insurance Company Dr.
Profit and Loss A/c Dr.
ToAbnormal Loss A/c
Thus, the treatment of abnormal loss in final accounts is as follows.
a) Credit the Trading Account with the total loss.
b) i) In case of uninsured stock debit Profit and Loss Account with full amount.
ii) In case of fully insured loss, insurance claim will be shown as an asset in the
Balance Sheet.
iii) In case of partially insured loss, the amount of insurance claim is shown as an
asset in the Balance Sheet and the remaining amount of loss is debited to the
Profit and Loss Account.
Look at illustration 5 and see how abnormal loss is treated in the books of account.
Illustration 5
On December 30, 2018 the stock worth Rs. 40,000 was destroyed by fire. The stock
was insured and the insurance company admitted a claim of Rs. 30,000 only. Pass the
necessary journal entries and show how it will be treated in final accounts.
Journal

Date Particulars Dr. Cr.

Amount Amount

2018 Loss by Fire A/c Dr. 40,000

Dec.31 To TradingA/c
(Being stock lost by fire) Rs. 40,000

77
Final Accounts “ 31 Insurance Company Dr. 30,000
Profit and Loss A/c Dr. 10,000
To Lossby Fire A/c 40,000

Trading Account
For the year ended December 31, 2018
Dr. Cr.

Rs.
By Loss of Fire 40,000

Profit and Loss Account

For the year ending December 31, 2018
Dr. Cr.

Rs. Rs.
To Loss by fire 40,000
Less: Insurance claim 30,000 10,000

Balance Sheet
As at December 31, 2018
For the year ending December 31, 2018
Dr. Cr.

. Rs.
Current Assets:
Claim due from insurance company 30,000

10.3.16 Drawing of Goods by the Proprietor

You know when the proprietor takes away some goods from the business for his personal
use it is recorded in books of account by passing the following journal entry.
Drawings Account Dr.
To Purchases Account
So, if you find that it has not been recorded in the books of account, you have to make
the necessary adjustment in final accounts. The treatment in final accounts will be as
follows:
i) On the Debit side of the Trading Account: Deduct it from Purchases.
ii) On the Liabilities side of the Balance Sheet: Deduct it from capital either as a
separate item or by including it in drawings.
Check Your Progress B
1. Why do you create a provision for bad debts?
......................................................................................................................
......................................................................................................................
......................................................................................................................
78
2. Why provision for discount on creditors is regarded against the Conservatism Final Accounts-II
Concept?
......................................................................................................................
......................................................................................................................
......................................................................................................................
3. The Trial Balance shows the following balances.
Rs.
Debtors 20,000
Bad Debts 100
Provision for had Debts 200
Adjustments:
a) Bad Debts of Rs. 200 not yet written off.
b) Create a provision for Doubtful Debts at 5% on Debtors
c) Discount on Debtors is to be provided at 2%.
Calculate the provision for Bad Debts and provision for Discount on Debtors.
4. Stock worth Rs. 20,000 was lost by fire. Insurance claim was admitted for
three-fourth of the value of goods lost. What amount you will (1) credit to the
Trading A/c, (ii) debit to the Profit & Loss A/c, and (iii) show on the asset side of
the Balance Sheet.

10.4 PREPARATION OF FINAL ACCOUNTS WITH

ADJUSTMENTS
You know there are various items which require adjustment at the time of preparing the
final accounts. You have learnt how each adjustment is recorded in books through a
journal entry and how it is reflected in the final accounts. However, while preparing the
final accounts with adjustments you should remember that there is no need to pass the
journal entries for any adjustment unless specifically asked to do so. All adjustments
must be shown directly in the final accounts. Look at illustration 6 and 7 and see how
final accounts are prepared with adjustments.
Illustration 6
From the following Trial Balance of Gupta & Sons, prepare Trading and Profit and
Loss Account for the year ended December 31, 2018 and a Balance Sheet as on that
date.
Trial Balance

Name of the Account Debit Balances Credit Balances

Rs. Rs.
Capital 5,00,000
Sales 10,00,000
Sales Returns 25,000
79
Final Accounts Purchases 5,00,000
Purchases Returns 15,000
Inventory as on 1.1.18 60,000
Land & Buildings 4,00,000
Plant & Machinery 3,00,000
Furniture 1,00,000
Wages 50,000 -
Carriage Inwards 10,000
Provision for Bad Debts 7,000
Carriage Outwards 5,000
Cartage 5,000
Salaries 40,000
Loan 2,60,000
Debtors 1,50,000
Creditors 70,000
Rent 8,000
Bills Receivable 40,000
Acceptances 10,000
General Expenses 20,000
Rent & Rates 10,000
Investments 50,000
Cash in hand 50,000
Bank Overdraft 10,000
Discount 4,500
Bad Debts 5,000 -
Interest on Investments 5,000
Interest on Bank Overdraft 500
Goodwill 60,000

Total 18,85,000 18,85,000

Additional Information
1. The value of inventory on December 31, 2018 was Rs. 1,00,000.
2. Depreciation is to be provided on: Land & Building @ 5% p.a. Furniture @ 10%
p.a. Plant & Machinery Rs. 50,000.
3. Provision for Bad Debts is to be maintained @ 5% on debtors.
4 Wages are outstanding to the extent of Rs. 4,000 and Salaries to the extent of Rs.
3,000.
5. Rent and Rates are prepaid to the extent of 1/4th of the amount paid.
6. Interest on Investment outstanding is Rs. 1,000.
7. Rent to the extent of Rs. 2,000 has been received in advance.

80
 Final Accounts-II
Solution:
Trading & Profit and Loss Account
for the year ended December 31, 2018
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Inventory as on 1.1.18 60,000
To Purchases 5,00,000 By Sales 10,00,000
Less: Purchases Returns 15,000 4,85,000 Less: Sales Returns 25,000 9,75,000
To Wages 50,000 By Inventory as on 31.12.18 1,00,000
Add: Wages Outstanding 4,000 54,000
To Carriage Inwards 10,000
To Cartage 5,000
To Gross Profit c/d 4,61,000 .
10,75,000 10,75,000
To Carriage Outwards 5,000 By Gross Profit b/d 4,61,000
To Salaries 40,000 By Rent 8,000
Add: Outstanding 3,000 43,000 Less: Received in advance 2,000 6,000
To General Expenses 20,000
By Interest on Investment 5,000
To Rent & Rates 10,000 Add: Outstanding 1,000 6,000
Less: Prepaid 2,500 7,500

To Discount Allowed 4,500

To Bad Debts 5,000 .
Add: New Provision 7,500
12,500
Less: Old Provision 7,000 5,500
To Depreciation on Plant
& Machinery 50,000
To Interest on Overdraft 500
To Depreciation
Land & Building 20,000
Furniture 10,000 30,000
To Net Profit (Transferred to
Capital A/c) 3,07,000

4,73,000 4,73,000

Balance Sheet as on December 31, 2018

Liabilities Amount Assets Amount

Rs. Rs.
Capital Fixed Assets
Balance 5,00,000 Goodwill 60,000
Add: Net Profit 3,07,000 8,07,000 Land & Building 4,00,000
Less: Depreciation 20,000 3,80,000 81
Final Accounts
Long Term Liabilities
Loan 2,60,000 Plant & Machinery 3,00,000
Less: Depreciation 50,000 2,50,000
Current Liabilities
Creditors 70,000 Furniture 1,00,000
Acceptances 10,000 Less: Depreciation 10,000 90,000
Bank Overdraft 10,000 Investments
Wages Outstanding 4,000 Current Assets
Salaries Outstanding 3,000 Cash in hand 50,000
Rent Received in Advance 2,000 Debtors 1,50,000
Less: Provision for
Bad Debts 7,500 1,42,500
Bills Receivable 40,000
Closing Stock 1,00,000
Prepaid Rent & Rates 2,500
Interest on Investment
Outstanding 1,000
11,66,000 11,66,000
Illustration 7
From the following balances extracted from the book of Aristo Ltd., prepare a Trading
and Profit and Loss Account for the year ended December 31, 2018 and a Balance
Sheet as on that date.
Trial Balance

Name of the Account Debit Balances Credit Balances

Rs. Rs.

Capital 2,00,000
Sales 5,00,000
Sales Returns 10,000
Purchases 2,40,000
Purchases Returns 10,000
Stock on 1.1.2018 40,000
Land & Buildings 2,00,000
Plant & Machinery 1,00,000
Wages 25,000
Furniture 50,000
Provision for Bad Debts 5,000
Salaries 25,000
Debtors 82,000
Creditors 1,00,000
Bad Debts 3,000
Bills Payable 30,000
82
Investments 50,000 Final Accounts-II
General Expenses 20,000
Cash in hand 5,000
Cash at bank 15,000
Depredation on Land & Buildings 20,000

8,45,000 8,45,000

Additional Information
1. The inventory on 31.12.18 has been valued at Rs. 80,000. The inventory of the
value of Rs 20,000 was destroyed by fire on 1.12.18 and a claim of Rs. 15,000
was admitted by the insurance company.
2 Depreciation is to be provided on Plant & Machinery and furniture at 10% per
annum.
3. Debtors are bad to the extent of Rs. 2,000. Provision for bad debts is to be
made at 5% on debtors and a provision for discount on debtors at 2%.
4. Wages for outstanding to the extent of Rs. 5,000.
5. Salaries are prepaid to the extent of Rs. 2,000.
6. Create a provision for discount on creditors at the rate of 1%.
7 Create a provision for repairs to the extent of Rs. 4,000.

Trading & Profit and Loss Account for the year ended December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Opening Stock 40,000 By Sales 5,00,000
Less: Sales Returns 10,000 4,90,000
To Purchases 2,00,000
By Closing Stock 80,000
Less: Purchases Returns 10,000 1,90,000
To Wages 25,000 By Loss by Fire 20,000
Add: Outstanding 5,000 30,000
To Gross Profit c/d 3,30,000
5,90,000 5,90,000

To Salaries 25,000
Less: Prepaid 2,000 23,000 By Gross Profit b/d 3,30,000
By Provision for
Discount on Creditors 1,000
To Bad Debts 3,000
Add: Further Bad Debts 2,000 .
Add: New Provision 4,000
9,000
Less: Old Provision 5,000 4,000
To General Expenses 20,000
To Depreciation on Land & Buildings 20,000
To Loss by Fire 5,000 83
Final Accounts

To Depreciation on Plant & Machinery 10,000

To Depreciation on Furniture 5,000
To Provision for Discount on Debtors 1,520
To Provision for Repairs 4,000
To Net Profit (Transferred to
Balance Sheet) 2,38,480
. 3,31,000 3,31,000

Balance Sheet as on December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
Capital 2,00,000 Land & Buildings 2,00,000
Add: Net Profit 2,38,480 Plant & Machinery 1,00,000
4,38,480 Less: Depreciation 10,000 90,000
Creditors 1,00,000 Furniture 50,000
Less: Provision for Discount 1,000 99,000 Less: Depreciation 5,000 45,000
Bills Payable 30,000 Investments 50,000
Wages Outstanding 5,000 Cash in Hand 5,000
Provision for Repairs 4,000 Cash at Bank 15,000
Closing Stock 80,000
Debtors 82,000
Less: Further Bad Debts 2,000
Less: Provision for Bad 80,000
Debts @ 5% 4,000
76,000
Less: Provision for
Discount 1,520 74,480
Insurance Claim Outstandings 15,000
Salaries Prepaid 2,000
5,76,480 5,76,480

Notes: 1. Depreciation on Land & Buildings is given in the Trial Balance. Hence, it
is shown in the Profit and Loss Account only.
2 . Provision for Bad Debts has been calculated at 5% on debtors after
subtracting further bad debts.
3. Provision for Discount on Debtors has been calculated at 2% on debtors
after subtracting further bad debts as well as provision for bad debts.
4. Loss by fire has been charged to Profit and Loss Account after taking
into consideration the claim from insurance company.

84
 Final Accounts-II
10.5 ADJUSTMENTS GIVEN IN TRIAL BALANCE
You know that the adjustments are usually given outside the Trial Balance and they are
shown at two places in the final accounts. But, sometimes a few adjustment items
appear in the Trial Balance itself. In illustration 7 you noticed it in respect of depreciation
on Land & Buildings. It is possible that items like outstanding or prepaid insurance also
appear in the Trial Balance. This happens when the journal entry in respect of an
adjustment has already been passed and the same has been posted into the concerned
ledger accounts. For example, when you pass journal entry for the adjustment for
outstanding salaries, you will debit Salaries Account and credit Salaries Outstanding
Account. The Salaries Account already exists in the ledger and the amount of outstanding
salaries is also posted thereto. This leads to an increased balance in Salaries Account.
But the Salaries Outstanding Account does not exist in the ledger. This will have to be
opened and the outstanding amount credited thereto. When the Trial Balance is prepared,
it will show the increased balance of Salaries Account in the debit balances column and
the balance of Sal:- vies Outstanding Account in the credit balances column. Now the
question arises how to treat it in the final accounts. In such a situation, you will simply
show Salaries Outstanding in the liabilities. No addition will be made to salaries in the
Profit and Loss Account because salaries given in Trial Balance already include this
amount. Thus, when salaries outstanding appear in the Trial Balance it is shown in final
accounts only at one place. This applies to all items of adjustments when they are
included in the Trial Balance.
In actual practice all adjustment items with the exception of closing stock are invariably
incorporated in the Trial Balance before preparing the final accounts. The Trial Balance
so prepared is called ‘Final Trial Balance’ or ‘Adjusted Trial Balance’.
Look at Chart 10.1 and note how each item of adjustment is treated in final accounts.
(i) if it is given outside the Trial Balance, and (ii) if it appears in the Trial Balance itself.

Chart 10.1
Treatment of Adjustment Items in Final Accounts

S.No. Item Treatment In Final Accounts

If given in Adjustments If given in Trial Balance

1. Closing Stock i) Credit side of Trading A/c : Assets side of Balance Sheet
Shown as a separate item only
ii) Assets side of
Balance Sheet :
Shown as a separate
item under Current
Assets

2 Outstanding Expenses i) Debit side of Trading Liabilities side of Balance Sheet

A/c or Profit and Loss only.
A/c: Added to the concerned
expense
ii) Liabilities side of
Balance Sheet. Shown
as a separate item under Current
Liabilities 85
Final Accounts

3. Prepaid Expenses i) Debit side of Profit and Loss A/c: Assets side of Balance Sheet
Deducted from the concerned only.
expense
ii) Assets side of Balance Sheet:
Shown as a separate item under
Current Assets

4. Outstanding incomes i) Credit side of Profit and Loss A/c: Assets side of Balance Sheet
Added to the concerned income only.
ii) Asset side of Balance Sheet:
Shown as a separate item under
Current Assets

5. Income Received in i) Credit side of Profit and Loss A/c: Liabilities side of Balance Sheet
Advance Deducted from concerned income only.
ii) Liabilities side of Balance
Sheet. Shown as a separate
item under Current Liabilities

6. Depreciation i) Debit side of Profit and Loss A/c: Debit side of Trading & Profit
Shown as a separate item and Loss Account only.
ii) Assets side of Balance Sheet:
Deducted from the concerned
fixed asset

7. Interest on Capital i) Debit side of Profit and Loss A/c: Debit side of Profit and Loss
Shown as a separate item Account only.
ii) Liabilities side of Balance Sheet:
Added to Capital

8. Interest on Drawings i) Credit side of Profit and Loss Credit side of Profit and Loss
A/c: Shown as a separate item Account only.
ii) Liabilities side of Balance Sheet:
Deducted from Capital

9. Interest on Loan i) Debit side of Profit Debit side of Profit and Loss
and Loss A/c: Shown Account only.
as a separate item
ii) Liabilities side of
Balance Sheet: Added to Loan.

10. Bad Debts i) Debit side of Profit and Loss A/c: Debit side of Profit and Loss
Added to Bad Debts Account only.
ii) Assets side of Balance Sheet:
Deducted from Sundry Debtors

11. Provision for bad debts i) Debit side of Profit and Loss Deduct from sundry debtors
A/c: shown as a separate item assuming it is a closing balance.
ii) Assets side of Balance Sheet:
Deducted from Sundry Debtors

86
 Final Accounts-II
12. Provision for Discount i) Debit side of Profit and Loss A/c: Debit side of Profit and Loss
on Debtors Shown as a separate item Account only.
ii) Assets side of Balance Sheet:
Deducted from Sundry Debtors

13. Provision for Discount i) Credit side of Profit and Loss A/c: Credit side of Profit and
on Creditors Shown as a separate item Loss Account only.
ii) Liabilities side of Balance Sheet:
Deducted from Sundry Creditors

14. Manager’s Commission i) Debit side of Profit and Loss A/c: Liabilities side of Balance
Shown as a separate item Sheet only.
ii) Liabilities side of Balance Sheet:
Shown as a separate item

15. Abnormal Loss i) Credit side of Trading A/c: Debit side of Profit and
Shown as a separate item with Loss Account only.
full amount of loss
ii) Debit Profit & Loss A/c with the
uncovered Loss
iii) Insurance claim will be shown on
Assets side of Balance Sheet
under Current Assets

16. Drawing of Goods i) Debit side of Trading A/c: Deduct from Capital.
by the Proprietor Deducted from purchases
ii) Liabilities side of Balance Sheet:
Deducted from capital

Illustration 8
From the following Trial Balance of Pitam Stores prepare Trading and profit and Loss
Account for the year ended December 31, 2018 and the Balance Sheet as on that
date.
Trial Balance

Account Debit Balances Credit Balances

Rs. Rs.
Capital 60,000
Drawings 5,000
Purchases 1,00,000
Sales 2,10,000
Opening Stock 20,000
Wages 15,000
Wages Outstanding 5,000
Carriage Inwards 2,000
Salaries 13,000
Insurance 1,500 87
Final Accounts Insurance Prepaid 1,500
Income from Investments 30,000
Accrued Income from Investments 10,000
Machinery 50,000
Buildings 95,000
Cash in hand 2,000
Debtors 35,000
Creditors 60,000
Depreciation on Buildings 5,000
Rent 10,000
3,65,000 3,65,000

Additional Information : The value of stock on December 31, 2018 was Rs. 40,000.
Solution:
Trading and Profit and Loss Account for the year ended December 31, 2018

Particulars Amount Particulars Amount

Rs. Rs.
To Opening Stock 20,000 By Sales 2,10,000
To Purchases 1,00,000 By Closing Stock 40,000
To Wages 15,000
To Carriage Inwards 2,000
To Gross Profit c/d 1,13,000
2,50,000 2,50,000
To Salaries 13,000 By Gross Profit b/d 1,13,000
To Insurance 1,500 By Income from
To Rent 10,000 Investments 30,000
To Depreciation on Building 5,000
To Net Profit
(Transferred to Capital A/c) 1,13,500

1,43000 1,43,000

88
 Balance Sheet as on December 31, 2018 Final Accounts-II

Dr Cr.

Liabilities Amount Assets Amount

Rs. Rs.
Capital 60,000 Building 95,000
Add: Net Profit 1,13,500 Machinery 50,000
1,73,500 Closing Stock 40,000
Less: Drawings 5,000 1,68,500 Debtors 35,000
Creditors 60,000 Cash in Hand 2,000
Wages Outstanding 5,000 Insurance Prepaid 1,500
Accrued Income 10,000
from Investments

2,33,500 2,33,500

10.6 LET US SUM UP

At the time of preparing the final accounts a number of items need adjustments. It is
because certain expenses may relate to two or more accounting years or certain expenses
incurred during the current year may still remain to be paid. Unless Such adjustments
are made, the final accounts will not reveal the true picture. Such items are usually
given outside the Trial Balance and are shown at two places in the final accounts so as
to complete the double entry.
Adjustment entries can be passed in the journal for each item of adjustment. But, normally
they are directly adjusted in the final accounts. In practice the adjustment entries are
always passed for such items and a revised Trial Balance called ‘Adjusted Trial Balance’
or ‘Final Trial Balance’ is prepared. In such a situation, the adjustments will appear in
the Trial Balance itself. Any item of adjustment which appears in the Trial Balance is
shown only at one place in the final accounts.

10.7 KEY WORDS

Abnormal Loss: Loss caused by abnormal causes.
Adjustment Entry: Journal entry passed to make an adjustment in the relevant accounts.
Adjustment Item: An item given outside the Trial Balance which requires adjustment
at the time of preparing final accounts.
Adjusted Purchases: Amount of purchases after adjusting both the opening and closing
stocks.
Adjusted Trial Balance: Trial balance prepared after incorporating various adjustments.
Depreciation: A permanent decrease in the value of a fixed asset caused by wear and
tear or the passage of time.
Doubtful Debts: Debts of doubtful recovery.
Outstanding Expenses: Expenses incurred during the accounting year but not yet
paid. 89
Final Accounts Outstanding Incomes: Incomes earned during the accounting year but not yet received.
Prepaid Expenses: Expenses paid but the benefit of which is yet to be received.
Unearned Income: Income in respect of which the services are yet to be rendered

10.8 SOME USEFUL BOOKS

Maheshwari, S.N., 2018. Introduction to Accounting, VikasPublishing House: New
Delhi.
Patil, V.A. and J.S. Korlahalli, 2018. Principles and Practice of Accounting, R. Chand
& Co., New Delhi.
William Pickles. 1992. Accountancy, E.LB.S. and Pitman, London.
Gupta, R.L. and M. Radhaswamy, 2018. Advanced Accountancy, Sultan Chand &
Sons, New Delhi.
Shukla, M.C. and T.S. Grewal, 2018. AdvancedAccountancy, S. Chand & Co., New
Delhi.

10.9 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) dual ii) asset iii) unexpired iv) liabilityv) Depreciation vi) subtracted
2. i) False ii) True iii) False iv) True v) False
B 3. Provision for Bad Debts Rs. 990
Provision for Discount on Debtors Rs. 376.20
4. i) Rs. 20,000 ii) Rs. 5,000 iii) Rs. 15,000

10.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. Why some adjustments become necessary at the time of preparing the final
accounts? Name any two items of adjustment and explain how they are shown in
the final accounts?
2. Distinguish between:
a) Outstanding Expenses and Unexpired Expenses
b) Provision for Discount on Debtors and Provision for Discount on Creditors
c) Normal Loss and Abnormal Loss
Exercises
1. Give journal entries for the following adjustments:
i) Interest received in advance Rs. 600
ii) Interest on drawings Rs. 1,200
iii) Provision for discount on creditors Rs. 200
iv) Loss of goods by theft Rs. 8,500
90 v) Drawings of goods by the proprietor Rs. 750
2. The following information is extracted from the books of a businessman: Final Accounts-II

Debtors as on 31.12.2018 Rs. 25,000

Bad Debts during 2018 Rs. 1,000
Provision for Bad Debts is to be maintained at 5% of debtors.
A Provision for discount on debtors is also to be made at 2%. You are required
to calculate the amounts to be set aside in respect of provision for bad debts and
provision for discount on debtors respectively.
(Answer: Provision for Bad Debts Rs. 1,250; Provision for Discount on Debtors
Rs. 475)
3. The Proprietor withdrew the following amounts during the year ended
December 31, 2018. Rs.
Feb. 28 4,000
May 1 6,000
Aug. 31 5,000
Nov. 1 2,000
Dec. 1 1,000
Calculate interest on drawings if the rate is 6% per annum.
(Answer: Rs. 565)
4. From the following Trial Balance of Puri & Sons as on June 30, 2018, prepare
Trading and Profit and Loss Account and the Balance Sheet.
Trial Balance

Name at the Account Debit Credit

Rs. Rs.
Capital 1,00,000
Drawings 5,000
Purchases less returns 2,00,000
Sales less Returns 5,00,000
Inventory (beginning) 50,000
Wages 20,000
Carriage Inwards 3,000
Salaries 25,000
Freight 2,000
Trade Expenses 5,000
Rent 20,000
Packing Charges 2,000
Land & Buildings 2,00,000
Plant & Machinery 2,50,000
91
Final Accounts Furniture 50,000
Bad Debts 5,000
Debtors 75,000
Creditors 80,000
Cash in hand & at bank 5,000
Bills Receivable 3,000
Loan 2,00,000

Total 9,00,000 9,00,000

Additional Information :
i) Inventory (ending): Rs.. 30,000.
ii) Depreciation is to be provided as follows:
Land&building @ 5%p.a.
Plant & Machinery @ 4% p.a.
Furniture @ 10% p.a.
iii) Debtors are bad to the extent of Rs. 5,000
iv) Salaries are outstanding to the extent of Rs. 5,000.
v) Wages are prepaid to the extent of Rs. 2,000.
vi) Rent received in advance Rs. 3,000.
(Answer: Gross Profit Rs. 2,57,000; Net Profit Rs. 2,02,000; Balance Sheet total
Rs. 5,85,000)
5. From the following Trial Balance of Kawatra stores, prepare Trading and
Profit and Loss Account for the year ended December 31, 2018, and a Balance
Sheet as on that date.
Trial Balance

Name at the Account Debit Credit

Capital
Drawings 20,000
Purchases 4,00,000
Purchases Returns 10,000
Sales 7,00,000
Sales Returns 20,000
Inventory (beginning) 1,00,000
Land & Building 3,00,000
Plant & Machinery 1,50,000
Goodwill 50,000
Trade Marks 30,000
Wages. 40,000
Trade Expenses 20,000
Furniture 50,000
Provision for Bad Debts 10,000
92 Debtors 1,07,000
Bad Debts 3,000 Final Accounts-II
Salaries 60,000
Creditors 1,00,000
Acceptances 80,000
Investments 10,000
Rent 15,000
Distribution Expenses 5,000
Cash in hand and at bank 10,000
Depreciation on Furniture 10,000

Total 4,00,000 4,00,000

Additional information:-
i) The inventory on December 31, 2018 was valued at Rs. 1,50,000. Inventory of
the value Rs. 10,000 was destroyed by fire on 1.12.2018. It was fully insured
and a claim of Rs. 10,000 was admitted by the insurance company.
ii) Depreciation is to be provided on the following assets:
Land & Buildings @ 5% p.a.
Plant &Machinery @ 12½% p.a.
iii) Debtors are bad to the extent of Rs. 2,000. Provision of 5% on debtors is to be
created in respect of bad debts and a provision for discount on debtors is to be
created at 2% of debtors.
iv) Wages are outstanding to the extent of Rs. 10,000.
v) Rent is prepaid to the extent of Rs. 5,000.
vi) The general manager is to be provided a commission of 2% on net profits before
charging such commission.
(Answer: Gross Profit Rs. 3,00,000; Net Profit Rs. 1,55,887;
Balance Sheet total Rs. 8,29,005)
6. From the following Trial Balance of V. Ramana, prepare his final accounts for
the year ended December 31, 2018

93
Final Accounts
Name of the Account Dr. Cr.

Rs. Rs.
Capital 70,000
Drawings 10,000 2,95,000
Adjusted Purchases 2,32,500 2,95,000
Sales
Cash in hand 3,800
Cash at bank 12,800
Salaries 18,000
Freight 1,200
Advertising 800
General Expenses 5,400
Furniture 10,800
Expenses Outstanding 2,500
Depreciation 2,200
Building 39,000
Discount 700
Insurance 600
Prepaid Insurance 300
Rent Received 6,000
Rent Received in Advance 3,000
Trade Debtors 14,100
Trade Creditors 24,000
Loss by Fire 2,000
Commission 1,500
Stock on December 31, 2017 49,200 4,03,000
Total 4,03,000 4,03,000

7. The Trial Balance of S Karim as on December 31, 2018

Name of the Account Dr. Cr.

Rs. Rs.
Capital 1,10,000
Drawings 15,000
Gross Profit earned during 2018 32,000
Salaries and Wages 22,000
Rent and Taxes 8,400
Cash in hand 2,300
Bank Overdraft 8,600
Sundry Debtors and Creditors 36,000
Insurance (including premium of 41,000
94
 Rs.400 per annum paid upto 1,000 Final Accounts-II
March 31, 2018) 5,000
Loose Tools 500 800
Bad Debts
Provision for Bad Debts 300
Entertainment Expenses 2,100
Commission 2,600
General Charges 12,000
Furniture and Fixtures 60,000
Plant and Machinery 19,800
Stock on December 31, 2017
1,89,000 1,89,000

Prepare the Profit and Loss Account for the year ending December 31, 2018 and the
Balance Sheet as on that date.
(Answer : Net Loss Rs. 11,100: Balance Sheet total Rs. 1,30,500

Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University.
These are for your practice only.

95
 BCOC-131
Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

4
HIRE PURCHASE AND INLAND BRANCHES
UNIT 11
Hire Purchase Accounts-I 5

UNIT 12
Hire Purchase Accounts-II 29

UNIT 13
Branch Accounts-I 67

UNIT 14
Branch Accounts-II 91
 PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.)
Department of Commerce Prof. Nawal Kishor
MD University, Rohtak
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Rani Chennamma University Department of Commerce Dr. Subodh Kesharwani
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE Faculty Members

SOMS, IGNOU
Prof. Madhu Tyagi Prof. N. V. Narasimham
Director, SOMS, IGNOU Prof. Nawal Kishor
Prof. M.S.S. Raju
Prof. A.A. Ansari Dr. Sunil Kumar
Jamia Millia Islamia, New Delhi Dr. Subodh Kesharwani
Dr. Rashmi Bansal
Ms. Surbhi Gupta Dr. Madhulika P. Sarkar
Vivekananda College Dr. Anupriya Pandey
University of Delhi, Delhi

COURSE PREPARATION TEAM

Accountancy-II: ECO-14
Prof. N V Narasimham, Editor
(Unit-1, 2, 4, 5 and 6 Revised by Dr. Sunil Kumar)
Prof. M.S.S. Raju
Prof. S. N. Mehrotra, Banaras Hindu University, Varanasi (Course Coordinator & Editor)
Prof. T.P. Maitin Patna University, Patna
Dr. Sunil Kumar
Prof. R. K. Grover (Retd.), SOMS, IGNOU (Course Coordinator & Editor)
Mr. Amitabh K. Nag Chartered Accountant, Calcutta

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
Printed by :

2
BLOCK 4 HIRE PURCHASE AND INLAND
BRANCHES
Now a days it is quite common to sell goods on the basis of payment in
instalments. This may take the form of hire purchase or instalment payment
system. In both cases, the price charged by the vendor is higher than the cash
price because it would include the amount of interest for deferment of payment.
Hence, while recording such transactions in books of account, one has to keep
this aspect in view. The accountants have developed suitable methods for
recording all transactions relating to such purchases and sales. In this block,
you will study the methods of recording these transactions in the books of the
seller as well as the buyer in Unit 11 and Unit 12.
Large business houses usually operate through a network of branches spread
over a wide area. To ensure operational efficiency, each branch is treated as
a separate profit centre. Hence, there is need for devising suitable system of
branch accounting.
In this block, Unit 13 and Unit 14 deal with the systems of accounting for
branches.
Unit 11 deals with the hire purchase system and its accounting treatment in
the books of the vendor and the buyer, where goods sold on hire purchase
basis are of substantial sales value.
Unit 12 describes the accounting treatment in case of default and repossession
of goods by the vendor under the hire purchase agreement. It also discusses
the accounting treatment when goods are sold under the instalment payment
system. It also explains the method of maintaining basic record for transactions
relating to goods of small value sold on hire purchase, and discusses the systems
of ascertaining profit or loss on such business during an accounting period.
Unit 13 deals with the accounting system for dependent branches which do
not keep full accounting records.
Unit 14 explains the accounting system of independent branches (excluding
foreign branches) which keep full accounting records.
Hire Purchase and Inland
Branches

4
 Hire Purchase Accounts-I
Journal and Ledger
UNIT 11 HIRE PURCHASE ACCOUNTS-I
Structure
11.0 Objectives
11.1 Introduction
11.2 Nature of Hire Purchase Agreement
11.3 Legal Position
11.3.1 Definition
11.3.2 Characteristics of Hire Purchase Agreement
11.3.3 Rights of Hirers

11.4 Ascertaining the Interest and Cash Price

11.4.1 Ascertainment of Interest
11.4.2 Ascertainment of Total Cash Price

11.5 Accounting Records in the Books of the Purchaser

11.5.1 When the Asset is Recorded at Full Cash Price
11.5.2 When the Asset is Recorded at Cash Price Actually Paid

11.6 Accounting Records in the Books of Vendor

11.7 Let Us Sum Up
11.8 Key Words
11.9 Answers to Check Your Progress
11.10 Terminal Questions/Exercises

11.0 OBJECTIVES
After studying this unit, you should be able to:
 explain what a hire purchase agreement is;
 describe the legal position to a hire purchase agreement;
 calculate interest and cash price in relation to a hire purchase agreement;
and
 pass the basic accounting entries in the books of both purchaser and vendor.

11.1 INTRODUCTION
When the goods are sold, the purchaser may either make the full payment at
one time or may defer the payment. When the payment is deferred, the amount
may be paid in monthly, quarterly or yearly instalments. When the price of an
article is paid by instalments, the total amount paid is higher than the actual
cash price of the article. The excess price is the charge for interest and the
risk involved. This arrangement of making the payment in instalments is
beneficial to both the seller and the buyer. The seller is able to sell more goods
and the buyer can buy expensive items with his limited resources. There are
two systems of deferred payments, namely, (i) Hire Purchase System, and
5
Hire Purchase and Inland (ii) Instalment Payment System. In this unit, we will learn in detail about the
Branches
Hire Purchase System.

11.2 NATURE OF HIRE PURCHASE AGREEMENT

A hire purchase agreement is one under which the buyer takes delivery of goods,
promising to pay the price in certain number of instalments and until full payment
is made, to treat the payment as hire charges for using the said goods. In fact,
a hire purchase agreement stipulates that (i) the delivery of goods will be given
by the owner of goods to the hire purchaser, (ii) payment will be made in
instalments, (iii) each instalment will be treated as hire charge so that if default
in respect of payment of even the last instalment is made, the seller will be
entitled to take away the goods without compensating the hire purchaser in any
form, and (iv) if all instalments are paid and the other conditions are fulfilled,
the ownership of the goods will pass to the buyer.
Therefore in case of hire purchase, the seller i.e., the vendor gives only the
possession of the goods and retains the ownership with him until the last
instalment is paid. In other words, the hire purchaser is only the user of the
goods and not the owner. In case, he fails to pay the instalments, the vendor
will take his goods back. Apart from that, the vendor will not pay back the
amount received from the purchaser. Such an amount will be treated as hire
charge for the goods. Therefore, till the last instalment is paid, the hire purchaser
has got an option, whether to purchase that particular article or not.
As mentioned earlier, the payment made by the hire purchaser under this system
is always more than what he pay if he decide to go for cash purchase. The
reason is that, apart from the cash price, the hire purchase price includes:
i) interest for payment being made over a period of time,
ii) the payment for the risk taken by the seller,
iii) expenditure on the registration, insurance and delivery of goods, etc.

11.3 LEGAL POSITION

11.3.1 Definition
According to Section 2(c) of the Hire Purchase Act. 1972, the hire purchase
agreement is an agreement under which the goods are let on hire and the hirer
has an option to purchase them in accordance with the terms of the agreement
under which:
i) possession of goods is delivered by the owner thereof to a person on
condition that such person pays the agreed amount in periodical instalments,
ii) the property in the goods is to pass to such person on the payment of
the last such instalments, and
iii) such person has a right to terminate the agreement at any time before the
property so passes.

11.3.2 Characteristics of Hire Purchase Agreement

Following are the characteristics of the hire purchase agreement.
6
i) It must be in writing and must he signed by all the parties thereto (Section Hire Purchase Accounts-I
3)
ii) According to Section 4 of Hire Purchases Act, 1972, the agreement must
state
a) the hire purchase price of the goods to which the agreement relates;
b) the cash price of the goods, that is to say, the price at which the
goods may be purchased by the hirer for cash;
c) the date on which the agreement shall be deemed to have commenced;
d) the number of instalments by which the hire purchase price is to be
paid, the amount of each of those instalments and the date (the mode
of determining the date upon which it is payable) and the person to
whom and the place where it is payable; and
e) the goods to which the agreement relates, in a manner sufficient to
identify them.
Apart from the above mentioned conditions, a full description of the amount
to be paid in cash or by cheque, if any, should be given in the agreement.

11.3.3 Rights of Hirers

As per the Hire Purchase Agreement, the hirer has got the right to return the
goods to the vendor. Apart from this, the Hire Purchase Act gives the following
rights to the hirer.
1) The owner (or the vendor) cannot terminate the hire purchase agreement
for default in payment of hire or due to an unauthorised act or breach
of expressed conditions unless a notice in this regard in writing is given
to the hirer. The notice period is (i) one week where the hire is payable
at weekly or less than that interval, and (ii) two weeks in other cases.
2) In the following cases, the right to repossess the goods will not exist unless
it is sanctioned by the court.
i) Where the hire-purchase price is less than Rs. 15, 000 and one half
of the hire purchase price has been paid.
ii) Where the hire purchase price is higher, three-quarters of the hire
purchase price has been paid. However, the right of repossession will
lapse in case of motor vehicles where the hire purchase price is less
than Rs. 5,000 and one-half of the amount has been paid. In other
cases (where H.P. price is Rs. 5,000 or more), it happens if three-
quarters of the hire purchase price has been paid. The Central
Government has the power of raising the limit to nine-tenths where
the hire purchase price is Rs. 15,000 or more.
3) The hirer has the right of receiving from the owner, on payment of Re. 1
for expenses, a statement showing the amount paid by or on behalf of
the hirer, the amount which has become due under the agreement which
remains unpaid together with the dates concerned and the amount which
has not yet become payable under the agreement and the dates and the
modes concerned.
7
Hire Purchase and Inland 4) If the amount paid by the hirer till the date of the repossession of the
Branches
goods and the value of the goods on the date of the repossession taken
together exceeds the hire purchase price, the excess is payable to the hirer.
For ascertaining the value of the goods, the owner or the vendor has the
right of deducting reasonable expenses for repossessing the goods for
storing the goods or repairing them, for selling them, and for payment of
arrears of taxes.
Cheek Your Progress A
1. Fill in the blanks
i) A contract for sale of goods may be either a sale or an ………..
to sell.
ii) A hire purchase sale is an agreement to ………..
iii) The ownership of goods under a hire purchase agreement is to
……….. upon fulfilment of certain…………..
iv) Under a hire purchase agreement payments are made in ………..
v) Each instalment payment is treated as ………..
vi) If the purchaser fails to pay even the last instalment, the seller will
be entitled ……….. to the goods.
vii) From the legal point of view, a hire purchase agreement should be
made in ………..
viii) A hirer has the right to ……….. the agreement before payment of
the last instalment by paying the seller the agreed amount.
ix) A hirer may assign his ……….,………. and interest under a hire
purchase agreement.
2. State whether the following statements are True or False.
i) A hire purchase agreement is an ‘outright’ sale transaction.
ii) If the hirer fails to pay the last instalment, the amounts paid earlier
are considered as hire charges.
iii) A hire purchase agreement is an ‘executed contract’ and an instalment
sale is an ‘executory contract’.
iv) If the hirer opts for full payments before the due dates, a rebate should
be available to him.
v) A seller cannot repossess the goods if the purchaser fails to pay the
last instalment only.
vi) The Hire Purchase Act, 1972 is in operation now.

11.4 ASCERTAINING THE INTEREST AND CASH

PRICE
As mentioned earlier, when the goods are sold on hire purchase, the price so
charged by the vendor is always higher than the cash price. The excess price
8 i.e., the difference between the hire purchase price and the cash price, includes
the interest charges and the compensation for risk. However, for accounting Hire Purchase Accounts-I
purposes, the difference between the two prices is treated as the payment for
interest. Thus, the hire purchase price includes:
i) the cash price, which is a capital expenditure for purchase of an asset,
and
ii) the interest, which is an item of revenue nature. Since the cash price is
of capital nature and the interest payment is of revenue nature, both will
be treated in a different manner in the books of account. It is, therefore,
necessary to separate the hire purchase price into cash price and interest.
However, it may be noted that the Cash Down Payment made immediately
after signing the agreement will not include the element of interest. Another
point to be kept in mind is that the interest element in each instalment
is not same. It keeps on reducing with every instalment. This is so because
the interest is charged on the balance of the principal amount due and
not on the full amount. For proper allocation, therefore, we must know
the cash price, the hire purchase price and the amount of interest.

11.4.1 Ascertainment of Interest

While calculating interest, we may be faced with any of the following two
situations:
a) When rate of interest, total cash price and instalments are given
b) When total cash price and instalments are given but the rate of interest
is not given.
In both the above mentioned cases, the interest has to be calculated. Let us
now take them one by one.
a) When Rate of Interest, Total Cash Price and Instalments are given
In this situation, before calculating the element of interest included in each
instalment, it will be helpful to ascertain the total amount of interest involved.
This will be ascertained by subtracting the Total Cash Price from the hire
purchase price. Then the following steps should be followed for calculating
the amount of interest on each instalment.
i) Calculate the outstanding cash price at the time of first instalment by
subtracting down payment from the total cash price.
ii) Calculate interest on the first instalment. This is to be calculated on
the outstanding cash price at the time of first instalment by applying
the given rate of interest. In this connection, you should keep in view
the mode of instalments i.e., whether the instalment is annual, half-
yearly or quarterly. Usually, in case of purchases for heavy equipment,
the instalment is annual.
iii) Calculate the amount of cash price included in the first instalment by
subtracting the amount of interest as calculated in step (ii) from the
amount of the first instalment.
iv) Calculate the outstanding cash price at the time of second instalment
by subtracting the amount of cash price of the first instalment from
the outstanding cash price at the time of first instalment i.e., (i) — 9
Hire Purchase and Inland (iii).
Branches
v) Calculate, interest on the second instalment by applying the rate of
interest to the outstanding cash price at the time of second instalment.
The amount of the subsequent instalments can be worked out in the same
manner i.e., by first calculating the outstanding cash price at the time of
the instalment due and then applying the rate of interest to this amount.
However, the amount of interest on the last instalment is worked out
differently. This can be done by simply subtracting the outstanding cash
price at the time of last instalment from the amount of the last instalment.
Alternatively, you can work it out by subtracting the sum of interests of
all previous instalments from the total amount of interest included in the
hire purchase price. The amount of interest so calculated can also be verified
by applying the rate of interest to the outstanding cash price at the time
of last instalment. Of course, there may be a small difference due to the
fact that the hire purchase price is not fixed by inclusion of the exact amount
of interest. It is usually fixed as a round figure. However, if the difference
happens to be a large amount, you should check all calculations of interest
and outstanding cash price at the time of each instalment.
illustration 1 will help you to calculate the interest with the help of the
above mentioned procedure.
Illustration 1
A Ltd. purchased a Machine on hire purchase from Z Ltd. on January 1, 2016,
paying Rs. 8,000 immediately and agreeing to pay three annual instalments of
Rs. 8,000 each on December 31, every year. The cash price of the machine
is Rs. 29,800 and the vendors charge interest @ 5% per annum. Calculate
the amount of interest paid by the buyer to the seller every year.
Solution :
The total interest = Hire Purchase Price  Cash Price
Hire Purchase Pric = Cash Down Payment + Instalments
= 8,000 + 3(8,000)
= 8,000 + 24,000
= Rs. 32,000
Cash Price = Rs. 29,800
So Total Interest = 32,000 — 29,800 = Rs. 2,200
Now, we can calculate the interest on each instalment as follows.
i) Outstanding Cash Price at the time of first instalment
Total Cash Price  Down Payment
= 29,800  8,000
= Rs. 21,800
ii) Interest on first instalment
Rate of Interest
Outstanding Cash Price 
100

10
 Hire Purchase Accounts-I
5
= 21,800 
100
= Rs. 1,090
iii) Cash Price of first instalment
Instalment  Interest on first instalment
= 8,000  1,090
= Rs. 6,910
iv) Outstanding Cash Price at the time of second instalment
Outstanding Cash Price atthe time of 1st instalment  Cash Price of the
first Instalment
= 21,800  6,910
= Rs. 14,890
v) Interest on second instalment
= 14,890  5
= Rs. 745
100
vi) Cash Price of second instalment
= 8,000  745 = Rs. 7,255
vii) Outstanding Cash Price at the time of last instalment
= 14,890  7,255 = Rs. 7,635
viii) Interest on the last instalment
= Instalment  Outstanding Cash Price at the time of last instalment
= Rs. 8,000  7,635
= Rs.365
Alternatively, Total Interest  Sum of Interest of all previous years.
= 2,200  (1,090 + 745)
= 2,200  1,835
= Rs. 365

Verification
Rate of Interest
Outstanding Cash Price at the time of last instalment 
100

5
= 7,635 
100

= Rs. 382

As indicated earlier, the amount calculated above is not the same as calculated
in step (viii). But the difference is small i.e..Rs. 17 (382  365).

11
Hire Purchase and Inland For Steps from (i) to (viii) following table would he helpful.
Branches

(1) (2) (3) (2-3)

Total Cash Instalment Interest Cash Price of
Price Paid Paid the Instalment
Rs. Rs. Rs. Rs.

Total Cash Price 29,800

Less Down Payment 8000 8000 8000
5
Amount outstanding at the 21,800 8000 (21,800  ) (8,000-1,090)
time of Ist Instalment 100

Cash price of the Instalment 6,910 1,090 6,910

5
Amount outstanding at the 14890 8000 (14,890  ) (8,000-745)
time of 2nd Instalment 100
Cash price of the Instalment 7,255 745 7,255
Amount outstanding at the 7635 8,000 (8,000-7,635) 7,635
time of 3rd Instalment Cash
7635 365
You should calculate interest and cash price with the help of the above table.
It makes your task easier.
b) When Total Cash Price and Instalments are given, but rate of
interest is not given:
When the total cash price, down payment and the amount of each instalment
is given, but the rate of interest is not given, the interest will be calculated by
procedure mentioned below.
i) Calculate the total interest by subtracting the total cash price from the total
hire purchase price
ii) Calculate the amounts of hire purchase outstanding at the beginning of each
year after subtracting the down payment
iii) Find out the ratio of outstanding amounts calculated in step (ii). If the
amount of each instalment is equal, the ascertainment of ratio is simple.
For example, if there are four instalments of equal amounts, the ratio will
be 4 : 3 : 2 : 1 and if there are three instalments of equal amounts, it
will be 3 : 2 :1.
iv) Apply this ratio to the total interest and calculate the interest on each
instalment.
Let us now take an example and clarify the calculation of interest included in
each instalment.
Illustration 2
Taking the relevant data from illustration 1 excluding the rate of interest element
12 in each instalment.
Hire Purchase Price Rs. 32,000 [8,000 + 3 (8,000)] Hire Purchase Accounts-I
Cash Price Rs. 29,800
Down Payment Rs. 8,000
Solution:
Total Interest = Rs. 32,000  29,800
= Rs. 2,200

Beginning Amount (Rs.) Ratio Interest (Rs.)

of the year Outstanding

1 24,000 3 1,100
3
(32,000-8,000) (2,200  )
6
2 16,000 2 733
2
(24,000-8000) (2,200  )
6
3 8,000 1 367
1
(16,000-8,000) (2,200  )
6
2,200

You will observe that the amounts of interest for each instalment calculated with
the help of ratio in illustration 2 is almost the same as calculated with a given
rate of interest in illustration 1.

11.4.2 Ascertainment of Total Cash Price

Sometimes, the total cash price is not given. In such a situation, we cannot
proceed with the accounting for hire purchase transaction because in the books
of the buyer, the amount to be capitalised cannot be more than the cash price.
The different methods of calculation of cash price are as below:

i) Without the help of annuity table

ii) With the help of annuity table

Let us now discuss both the methods

i) Without the Help of Annuity Table

Under this method, interest is calculated starting with the last instalment. Suppose
there are three instalments, the interest will be calculated first on the third
instalment, then on the second and lastly on the first instalment. No interest
is calculated on down payment as it doesnot involve any element of interest.

You know that the interest is to be calculated on the outstanding amount of

cash price. But since it is not known, it will have to be calculated with the
help of total amount due on hire purchase price. For this purpose, we will have 13
Hire Purchase and Inland to use the following formula for calculating first the interest involved in each
Branches
instalment and then subtract this amount of interest from the total amount due,
so as to work out the outstanding amount of cash price.

rate of interest
Interest = Total amount due at the time of instalment 
100  rate of interest

Let us now see what steps are followed for the calculation of Cash Price due
at the time of each instalment assuming there are three yearly instalments.

a) Calculate the interest on the instalment of the third year, deduct interest
from this instalment. The resultant figure is the outstanding cash price at
the time of third (last) instalment.

b) Add the cash price calculated under (a) above to the instalment amount
of the second year. Calculate the interest on the sum so obtained and
subtract it from the total amount due at the end of the second year to
get the outstanding cash price at the time of second instalment.

c) Add the cash price calculated under (b) above to the instalment amount
of the first year and calculate the interest on the sum so obtained. Deduct
this amount of interest from the total amount due at the end of the first
year. The resultant figure is the cash price due at the time of the first
instalment.

d) Add the cash price calculated under (c) above to the down payment, if
any. The sum so obtained will be the total cash price.

Illustration 3 will help you to understand the calculation of cash price.

Illustration 3

Renuka purchased a Machine on January 1, 2015 on hire purchase basis for

Rs. 5,000 payable as under :

Rs.

Down Payment 930

At the end of 1st year 1,426

(1st instalment)

At the end of 2nd year 1804

(2nd instalment)

At the end of 3rd year 840

(3rd instalment)
Rate of interest 5% p.a.
Calculate the Cash Price of the Machine and interest paid with each instalment.

14
Solution : Hire Purchase Accounts-I

Amount Interest
Rs. Rs.

Total Amount Due on 3rd Instalment (last) 840

Less Interest 40 40

5
Outstanding Cash Price of 3rd Instalment 800 (840  )
105
Add 2nd Instalment 1,804
Total Amount due on 2nd Instalment 2,604
Less Interest 124 124
5
Outstanding Cash Price of 2nd Instalment 2,480 (2,604  )
105
Add 1st Instalment 1,426
Total Amount dues on Ist Instalment 3,906
Less Interest 186 186
5
Outstanding Cash Price of Ist Instalment 3,720 (3,906  )
105
Add Down Payment 930
Total Cash Price 4650 350

So Total Cash Price is Rs. 4,650 and Total Interest Rs. 350.
Note: This calculation can be verified by following the procedure given for
calculation of interest on each instalment when cash price, instalments,
down payment and rate of interest are given.
ii) With the Help of an Annuity Table
If the annuity table is available, calculation of interest involved in each instalment
is simplified. In the annuity table, the rate of interest is given in the rows and
the years in the columns. With reference to the table, the present value of each
instalment can be calculated. The sum of these present values as calculated,
if added to the cash down payment gives us the cash price. The procedure
is as follows:
a) See the given rate of interest in the row and the year in the column and
find out the corresponding figure in the table.
b) This figure is the present value of Re. 1
c) Multiply the present value of Re. 1 with the amount of the instalment.
d) The resulting figure is the present value of the instalment. This is nothing
but the amount of cash price included in the instalment.
e) Calculate the present values of all the instalments in same manner.
f) Add the present values of all the instalments to the down payment if any.
The resultant figure will be the total cash price. 15
Hire Purchase and Inland illustration 4 will help us to understand the calculation of total cash price with
Branches
the help of the annuity table.
Illustration 4
X Ltd. purchased a Machine on hire purchase system. The payment is made
as follows:
Rs.
Down Payment 232.50
1st Instalment 356.50
2nd Instalment 451
3rd Instalment 210
The payments are made at the end of 1st year, 2nd year and 3rd year
respectively. The rate of interest is 5% p.a. The annuity table shows that
the present value of Re. 1 for one, two and three years is .9524, .9070
and .8639 respectively. Calculate the cash price of the Machine.
Solution:

(1) (2) (1  2)
Instalement Present Present value
Value of of the
Re. 1 instalement

Cash Down 232.50 1 232.50

1st Instalment 356.50 .9524 339.53
2nd Instalment 451.00 .9070 409.08
3rd Instalment 210.00 .8619 189.42
Total 1,250.00 1,162.53

So the Total Cash Price is Rs. 1,162.53

Check Your Progress B
1. Calculate total interest and interest on each instalment for the following
cases.
i) Cash Price of a Machinery is Rs. 349. Down payment is Rs. 100
to be followed by three annual instalments of Rs. 100 each. The rate
of interest is 10%.
.........................................................................................................
.........................................................................................................
.........................................................................................................
ii) Cash price of a Machine is Rs. 1900. Payment is to be made in
3 equal instalments of Rs. 800 each.
.........................................................................................................
.........................................................................................................

16 .........................................................................................................
2. Calculate cash price for each of the following cases. Hire Purchase Accounts-I

i) The price of a Machinery is to be paid in four instalments of Rs. 5,000

each, the first one being made as initial payment. The rate of interest
is 5% p.a. and the instalment is paid annually.
.........................................................................................................
.........................................................................................................
.........................................................................................................
ii) The price of a Machinery is to be paid in five annual instalments of
Rs. 10,000 each. The rate of interest is 5% p.a. The first instalment
is to be paid at the end of the first year. At 5% interest the present
value of Re. 1 payable at the end of each year for 5 years is
Rs. 4.3294.
.........................................................................................................
.........................................................................................................
.........................................................................................................

11.5 ACCOUNTING RECORDS IN THE BOOKS

OF THE PURCHASER
You know, there are two parties to a hire purchas e agreement i.e., the Vendor
and the Purchaser. Both these parties have to maintain books of account and
record all the transactions relating to that particular hire purchase.
Before explaining the accounting records, let us first see what information is
required for recording the hire purchase transaction in the books of account.
The list of items required for accounting records is as follows:
1. Date of Purchase and down payment
2. Date at which the instalments become due
3. Date of closure of accounts
4. Cash Price
5. Hire Purchase Price
6. Number, Amount and Mode of each instalment
7. Rate of Interest
8. Rate of Depreciation
9. Method of Depreciation
Let us now see how accounting records are maintained in the books of the
purchaser. There are two methods by which the purchaser can record the hire
purchaser transaction in the books of account. These are as follows:
i) When the asset is recorded at the full cash price, and
ii) When the asset is recorded at the cash price actually paid.
17
Hire Purchase and Inland Let us now discuss these methods in detail.
Branches
11.5.1 When the Asset is Recorded at Full Cash Price
In this method, when the asset is purchased on hire purchase, it is assumed
that the purchaser has full intention of paying all the instalments. It is believed
that hire purchase is just a method of financing fixed assets. Under this method,
on purchase of plant and machinery, the Plant & Machinery Account (Fixed
Asset) is debited with the total amount of Cash Price, and the corresponding
credit is given to Hire Vendor’s Account. Interest is recognised and accounted
for at the time of instalments becomes due by debiting the Interest Account
and crediting the Hire Vendor’s Account. For the purpose of accounting for
initial cash down payment and annual instalments, the Hire Vendor’s A/c is
debited on the relevant date, and the credit is given to Bank Account. The
following journal entries are passed in the books of the purchaser.
1 When the asset is purchased on hire purchase
Asset A/c Dr.
To Hire Vendor A/c
(With the total cash price)
2 For cash down payment
Hire Vendor A/c Dr.
To Bank A/c
3 When the first instalment becomes due
Interest A/c Dr.
To Hire Vendor A/c
4 When the first instalment is paid
Hire Vendor A/c Dr.
To Bank A/c
5 For Depreciation Charge (at the end of accounting period)
Depreciation A/c Dr.
To Asset A/c
6 For transfer of interest and depreciation to Profit & Loss A/c
Profit& Loss A/c Dr.
To Interest A/c
To Depreciation A/c
Entries 3 and 4 will be repeated for all subsequent instalments.
With the help of the journal entries, we can easily prepare the Asset Account
and the Hire Vendor’s Account. Look at illustration 5 and see how the journal
entries are passed and ledger accounts are made in the books of the purchaser.
Illustration 5
ABC Ltd. bought a machine on 1.1.2016 from XYZ Ltd. under a hire purchase
system of payment under which three annual instalments of Rs. 2,412 would
be paid. There is no down payment and the cash price is Rs, 6,000. The rate
of interest would be 10% and depreciation @20% p.a. would be charged on
straight line basis.

18
Solution Hire Purchase Accounts-I

Let us first find out all the information required.

1) Date of Purchase  January 1, 2016; No down payment.
2) Date at which the instalments become due  December 31, 2016, 2017
and 2018.
3) Date of closure of accounts  December 31.
4) Cash Price  Rs. 6,000.
5) Hire Purchase Price  Rs. 2,412 x 3 = Rs. 7,236.
6) Number, amount and mode of each instalment  3 instalments of Rs. 2,412
each payable annually.
7) Rate of Interest  10% p.a.
8) Rate of Depreciation  20% p.a.
9) Method of Depreciation  Straight Line.
Journal Entries in the Books of ABC Ltd

Date Particulars Amount Amount

(Dr.) (Cr.)

2016 Rs. Rs.

Jan. 1 Machinery A/c Dr. 6,000
To XYZ Ltd. 6,000
(Being a machine purchased on
hire purchase)
Dec.31 Interest A/c Dr. 600
To XYZ Ltd. 600
(Being the charge of interest @ 10%
on Rs. 6,000)
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c
(Being the charge of depreciation) 1,200
Dec.31 XYZ Ltd. A/c Dr. 2,412
To Bank A/c 2,412
(Being thepaymentofannual instalment)
Dec.31 Profit & Loss A/c Dr. 1,800
To Interest A/c 600
To Depreciation A/c 1,200
(Being the annual charges transferred
to Profit & Loss A/c)
2017
Dec.31 Interest A/c Dr. 418
To XYZ Ltd. 418
(Being the charge of interest @ 10%
on Rs. 4,188) 19
Hire Purchase and Inland
Branches
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c 1,200
(Being the annual charge of
depreciation)
Dec.31 XYZLtd. A/c Dr. 2,412
To Bank A/c 2,412
(Being the payment of annual instalment)
Dec.31 Profit & Loss A/c Dr. 1,618
To Interest A/c 418
To Depreciation A/c 1,200
(Being the transfer of annual charges to
Profit & Loss A/c)
2018
Dec.31 Interest A/c Dr. 218
To XYZ Ltd. 218
(Being the charge of interest @ 10%
on Rs. 2,194)
Dec.31 Depreciation A/c Dr. 1,200
To Machinery A/c 1,200
(Being theannual charge of depreciation)
Dec.31 XYZ Ltd. A/c Dr. 2,412
To Bank A/c 2,412
(Being the 3rd and final instalment paid)
Dec.31 Profit & Loss A/c Dr. 1,418
To Interest A/c 218
To Depreciation A/c 1,200
(Being the transfer of annual charges to
Profit & Loss A/c)
Ledger Accounts in the Books of ABC Ltd
Machinery Account
Dr. Cr.

2016 Rs. 2016 Rs.

Jan. 1 To XYZ Ltd 6,000 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 4,800
6,000 6,000
2017 2017
Jan. 1 To Balance b/d 4,800 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 3,600
4,800 4,800
2018 2018
Jan. 1 To Balance b/d 3,600 Dec. 31 By Depreciation A/c 1,200
Dec. 31 By Balance c/d 2,400

20 3,600 3,600
 XYZ LTD (Hire Vendor) Account Hire Purchase Accounts-I

Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Bank A/c 2,412 Jan. 1 By Machinery A/c 6,000
Dec.31 To Balance c/d 4,188 Dec. 31 By Interest A/c 600
6,600 6,600
2017 2017
Dec.31 To Bank A/c 2,412 Jan. 1 By Balance b/d 4,188
Dec.31 To Balance c/d 2,194 Dec. 31 By Interest A/c 418
4,606 4,606
2018 2018
Dec.31 To Bank A/c 2,412 Jan. 1 By Balance b/d 2,194
Dec. 31 By Interest A/c 218
2,412 2,412

Working Notes :

Rs.

Cash Price 6,000

10
Add : Interest on Ist Instalment (  6, 000 ) 600
100
6,600
Less : Ist Instalment 2,412
Amount outstanding at the time of 2nd Instalment 4,188

10
Add : Interest on 2nd Instalment (  4,188) 418
100
4,606

Less : 2nd Instalment 2,412

Amount outstanding at the time of 3rd instalment 2,194
Add : Interest on 3rd Instalment 218
2,412

11.5.2 When the Asset is Recorded at Cash Price

Actually Paid
You know that in case of hire purchase, the ownership of the goods passes
to the hire purchaser after the last instalment has been paid. Since the goods
do not become the property of the purchaser, he does not have any right to
debit the asset at its full price. Hence, no entry is passed when the asset is
purchased unless it involves down payment. The entries are passed as and when
the instalments become due and the amount is paid towards the price of the
article. The journal entries are as follows : 21
Hire Purchase and Inland 1. When the asset is purchased
Branches
No entry
2. When the down payments is made
Asset A/c Dr.
To Bank A/c
3. When the instalment becomes due
Asset A/c Dr. (cash price part of instalment)
Interest A/c Dr. (interest on instalment)
To Hire Vendor
4. When instalment is paid
Hire Vendor Dr.
To Bank A/c
5. When depreciation is charged
Depreciation A/c Dr.
To Asset A/c
6. When interest and depreciation accounts are closed by transfer
to Profit & Loss A/c
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
It should be noted that though the asset account is debited with the amount
of the cash price paid (not full cash price), the depreciation is charged on the
full cash price. The Balance Sheet will reflect the amount of cash price debited
to the asset account minus depreciation charged.
Look at the illustration 6 and see how accounting records are maintained in
case the asset is recorded at cash price actually paid.
Illustration 6
Solve illustration 6 by debiting the asset account at cash price actually paid.
Solution:
Journal Entries in the Books of ABC Ltd.

Date Particulars Amount (Dr.) Amount (Cr.)

Rs. Rs.

2016
Dec. 31 Machinery A/c Dr. 1,812
Interest A/c Dr. 600
To XYZ Ltd. 2,412
(Being first instalment due)
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being first instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
22 charged)
 Hire Purchase Accounts-I
Dec. 31 Profit & Loss A/c Dr. 1,800
To Depreciation A/c 1,200
To Interest A/c 600
(Being annual charges
transferred to Profit &
Loss A/c)
2017
Dec. 31 Machinery A/c Dr. 1,994
Interest A/c Dr. 418
To XYZ Ltd.
(Being third instalment due) 2,412
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being third instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
charged)
Dec. 31 Profit & Loss A/c Dr. 1,618
To Depreciation A/c 1,200
To Interest A/c 418
(Being annual charges
transferred to Profit & Loss A/c)
2018
Dec. 31 Machinery A/c Dr. 2,194
Interest A/c Dr. 218 2,412
To XYZ Ltd.
(Being third instalment due)
Dec. 31 XYZ Ltd Dr. 2,412
To Bank A/c 2,412
(Being third instalment paid)
Dec. 31 Depreciation A/c Dr. 1,200
To Asset A/c 1,200
(Being annual depreciation
charged)
Dec. 31 Profit & Loss A/c Dr. 1,418
To Depreciation A/c 1,200
To Interest A/c 218
(Being annual charges
transferred to Profit & LossA/c)

Note:Depreciation has been charged on straight line method @20% p.a. at

the full cash price of Rs. 6,000.

23
Hire Purchase and Inland
Branches 11.6 ACCOUNTING RECORDS IN THE BOOKS
OF VENDOR
So far as the vendor is concerned, a hire purchase sale is just like an ordinary
sale with the exception that payment is deferred over a period of time for which
the vendor charged interest. He debits the Hire Purchaser’s A/c with full cash
price and credit is given to Sales A/c. The interest amount is debited to Hire
Purchaser’s A/c as and when the instalments become due. Instalment amounts
received are credited to the Hire Purchaser’s A/c and debited to Bank A/c.
The journal entries passed are as follows:
1 On sale of goods under hire purchase
Hire Purchaser A/c Dr
To Sales A/c (with full cash price)
2 On receiving cash price down payment
Bank A/c Dr
To Hire Purchaser A/c
3 On instalment becoming due
Hire purchaser A/c Dr.
To Interest A/c
4 On getting payment on the due instalment
Bank A/c Dr.
To Hire Purchaser A/c
With the help of above entries, you can easily prepare the Hire Purchaser’s
A/c and Interest A/c. Look at illustration 7 and see how accounting records
are maintained in the books of the vendor.
Illustration
On January 1, 2017, IFB Ltd. acquired machinery from JK Ltd. for Rs. 1,886
(cash price) under a hire purchase agreement where Rs. 400 was the initial
payment and two instalments of Rs. 800 each would be paid. Interest @ 6%
p.a. would be charged. Prepare the ledger accounts in the books of J.K. Ltd.,
assuming rate of depreciation @ 10% (straight line).
Solution:
In the books of JK. Ltd.
IFB LTD.

Dr. Cr.

2017 Rs. 2017 Rs.

Jan. To Sales A/c 1 1,886 Jan. 1 By Bank A/c 400
Dec. 31 To Interest A/c 89 Dec. 31 By Bank A/c (1st Inst.) 800
Dec. 31 By Balance c/d 775
1,975 1,975
2018 2018
Jan. 1 To Balance b/d 775 Dec. 31 By Bank A/c (2nd Inst.) 800
Dec. 31 To Interest A/c 25
800 800
24
 Interest Account Hire Purchase Accounts-I

2017 Rs. 2017 Rs.

Dec. 31 To Profit & Loss A/c 89 Dec. 31 By IFB Ltd. 89
89 89
2018 2018
Dec. 31 To Profit & Loss A/c 25 Dec. 31 By IFB Ltd 25
25 25

Working Note
Statement having calculation of hire purchases interest and the amount of principal in each
instalment.

Rs. Interest Cash Price

Rs. Rs.

Cash Price 1,886 — 400

Less: Down Payment 400
1,486
Add: Interest on 1st instalment to be paid on 89
Dec. 31, 2017 @ 6%
1,575
Less : 1st Instalment on Dec. 31, 2017 800 89 711
775
Add: Interest on 2nd instalment @ 6% 25

800
Less: 2nd Instalment on Dec. 31, 2018 800 25 775

Check Your Progress C

1. Enlist the information required before solving the hire purchase problem.
.................................................................................................................
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. State whether following statements are True or False.
i) When the asset is recorded at full cash price, the hire purchase
becomes a method of financing the fixed asset.
ii) When the asset is recorded at the price actually paid, the Asset
A/c is debited and the Hire Vendor’s A/c is credited with full cash
price.
iii) The Hire Vendor debits the hire purchaser’s A/c and credits the sales
A/c on sale of goods with cash price. 25
Hire Purchase and Inland iv) When the asset is recorded at cash price actually paid no entry is
Branches
passed when the instalment becomes due.
v) The Hire Vendor’s A/c is in the nature of a personal account.

11.7 LET US SUM UP

In the hire purchase agreement, the buyer takes the delivery of the goods and
promises to pay the price in instalments. Under this agreement, though the buyer
takes the possession of the goods, but he does not have the ownership. The
ownership of the goods passes only after the last instalment has been paid.
In case the buyer fails to pay any of the instalments, the seller can take back
the possession of the goods.
The hire purchase price is always more than the cash price, the difference
between the two is the interest charged for deferred payment. If any two of
the three items of information i.e., hire purchase price, cash price and interest,
are given, the third can be found out with the help of the formula HP = CP
+ Interest (HP is hire purchase price and CP is cash price).
Both the parties to hire purchase agreement i.e., the vendor and the purchaser,
record the hire purchase transactions in their books.
The purchaser can prepare accounting records in two ways (i) when the asset
is recorded at full cash price, or (ii) when the asset is recorded at the cash
price actually paid.
The purchaser mainly maintains two accounts i.e., the Hire Vendor Account and
the purchaser, record the hire purchase transactions in their books. The vendor
on the other hand maintains the Hire Purchaser ’s
Account and the Interest Account.

11.8 KEY WORDS

Agreement to Sell : In a contract of sale, when the ownership of goods sold
is to pass to the buyer subject to fulfilment of certain conditions, such sale is
termed as an agreement to sell.
Cash Price: The amount to be paid in outright sale on cash.
Down Payment: Initial payment made at the time of purchase under hire
purchase agreement.
Hire Charges: If the hirer in a hire purchase agreement fails to pay even the
last instalment, the amounts he has paid so far will be treated as hire charges
for using the asset.
Hire Purchase: An agreement to sell under which the buyer takes the delivery
of goods promising to pay the price in instalments and until full payment is made,
to treat payment as hire charges for using the goods.
Hire Purchaser: The purchaser in a hire purchase contract.
Hire Vendor: The seller in a hire purchase agreement who agrees to receive
the price in instalments, and has the right to treat the amounts paid by the hirer
as hire charges if the hirer fails to pay the last instalment.
26
Instalment Payment System: When the price in a contract of sale is paid Hire Purchase Accounts-I
over a period of time but at fixed intervals, the system of payment is called
instalment payment system.

11.9 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) agreement ii) sell iii) pass, conditions iv) instalment v) hire charges
vi) repossess vii) writing viii) terminate ix) right, title

2. i) False ii) True iii) False iv) True v) False vi) False

B 1. i) Total interest = Rs. 51(25+17+9)

ii) Total interest = Rs. 500 (264+178+58)
2. i) Cash Price = Rs. 18,616, ii) Cash Price = 43,294

C 1. i) True ii) False iii) True iv) False v) True

11.10 TERMINAL QUESTIONS/EXERCISES

Questions
1) What are the characteristics of a hire purchase agreement?
2) Describe the rights of a hirer under hire purchase agreement.
3) What steps would you take to calculate the interest when the total cash
price instalments are given?
Exercises
1. Based on particulars given below, give entries in the books of the purchaser
and the seller under the hire purchase system :
a) Ramesh & Co.Purchaser, Date of PurchasJan. 1, 2018, goods
purchasedTrucks, Cash PriceRs. 1,49,000, Instalments Rs. 40,000
on signing of the agreement. Rest in three instalments of Rs. 40,000
each, Rate of interest5%, Depreciation 10% on the diminishing
balance.
b) All particulars as above except that the rate of interest is not given.
c) All particulars as in (a) above except that the cash price is not given.
2. Hire Purchases Ltd. purchased Motor Car on hire purchase system. Rs.
12,000 was payable on delivery i.e., on 1.1.18 and the rest in four equal
instalments of Rs. 12,000 each payable at the end of each year. The seller,
Hire Vendors Ltd. agreed to charge interest @ 5% on the yearly balances.
The cash price of the Car was Rs. 54,551. Depreciation @ 25% on written
down values was to be written off in each year.
Give the necessary journal entries and ledger accounts in the books of
Hire Purchasers Ltd.
(Answer:Total Interest Rs. 5,449. The written down value of the Car at
the of fourth year is Rs. 17,260)
27
Hire Purchase and Inland 3 Dinesh Ltd., on April 1, 2015, purchased a machine from Rajesh Ltd.,
Branches
on hire purchase basis. The cash price of the machine was Rs. 25,000.
The payment was to be made Rs. 5,000 on the date of the contract and
the balance in four annual instalments of Rs. 5,000 each plus interest at
5% per annum payable on December 31 each year, and the first such
instalment being payable on 31.12.15. Depreciation is to be charged @10%
on original cost.
Show the journal entries and ledger accounts in the books of both the
parties.
(Answer: The amount of total interest Rs. 2,500, balance of Machinery
A/c on 1.1.19 Rs. 15,000).
4. An engineering company purchased a Machine on Hire Purchase System
over a period of three years paying Rs. 846 as initial payment on 1.1.16
and further annual payments of Rs. 2000 due on 31.12.16, 31.12.17 and
31.12.18. The cash price of the Machine was Rs. 6,000 and the vendor
company was to charge interest at 8% p.a. on outstanding balances.
Show the appropriate ledger accounts in the books of the hire purchaser
assuming depreciation @ 10% p.a. was to be charged on the Machine,
Assume that capitalisation was to be done at the time of payment of each
instalment.
(Answer : Interest (total) Rs. 846).

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

28
 Hire Purchase
Journal Accounts-II
and Ledger
UNIT 12 HIRE PURCHASE ACCOUNTS -II
Structure
12.0 Objectives
12.1 Introduction
12.2 Default and Repossession
12.2.1 Rights of the Hire Vendor
12.2.2 Restrictions on the Owner

12.3 Accounting for Default and Repossession

12.3.1 Complete Repossession
12.3.2 Partial Repossession

12.4 Instalment Payment System

12.5 Accounting for Instalment Payment System
12.5.1 Books of the Buyer
12.5.2 Books of the Vendor

12.6 Basic Record for Goods of Small Value Sold on Hire Purchase
12.7 Relevant Terms
12.8 Ascertainment of Profit
12.8.1 Treatment of Goods Repossessed
12.8.2 Calculation of Missing Figures

12.9 Stock and Debtors System

12.10 Let Us Sum Up
12.11 Key Words
12.12 Answers to Check Your Progress
12.13 Terminal Questions/Exercises

12.0 OBJECTIVES
After studying this unit, you should be able to:
 explain default and repossession in relation to a hire purchase contract;
 pass accounting entries for complete and partial repossession of goods in
the books of both hire vendor and hire purchaser;
 describe the instalment payment system and distinguish it from hire purchase
system;
 pass accounting entries in case an asset is bought under the instalment
payment method;
 explain the basic record maintained for hire purchase transactions of goods
of small value;
29
Hire Purchase and Inland  explain the terms like cost price, goods sold on hire purchase, hire purchase
Branches
stock, hire purchase debtors, etc. considered relevant for ascertainment of
profit on hire purchase business;
 prepare hire purchase trading account and ascertain the profit/loss on hire
purchase business; and
 ascertain the profit or loss on hire purchase business through stock and
debtors method.

12.1 INTRODUCTION
In Unit 11, you learnt about the nature, legal position and the accounting treatment
of a hire purchase contract. So far as the accounting treatment goes, we
discussed a simple situation where the purchaser had paid all the instalments
and consequently the ownership was transferred to him. But sometimes the
purchaser is unable to pay all instalments. In such a situation, the vendor has
the right to take back the possession of goods and treat the instalments paid
as hire charges for the use of the asset. But, in practice, he may arrive at some
compromise with the hire purchaser. In this unit, you will learn how default in
payment of instalments is treated in the books of account of both the parties.
We shall also discuss the accounting treatment in case the asset is purchased
under instalment payment system as against the hire purchase system.
So far we have discussed the system of maintaining accounting records related
to hire purchase transactions for goods of substantial sales value. In practice,
however, the goods bearing small value like fridge, TV, scooter, etc. are also
sold on hire purchase basis. The retailers often keep separate records for these
transactions and compute the profit on hire purchase business separately. This
involves a peculiar method of accounting and profit ascertainment. In this unit,
we shall also discuss the accounting treatment of hire purchase transactions for
goods of small value and study the methods of ascertaining the profit or loss
on such transactions during an accounting period.

12.2 DEFAULT AND REPOSSESSION

‘Default’ is the failure to act, appear or pay i.e., failure to meet obligation. Under
a hire purchase agreement, the hirer has obligation to pay up to the last instalment
so that the ownership of goods smoothly passes to him. If he fails to meet
this obligation, it will be treated as default on his part.
Possession of goods means physical holding of goods. You know that under
hire purchase agreement, the vendor simply transfers the possession of goods.
He does not transfer the ownership, and if the hirer fails to pay even the last
instalment, the vendor has the legal right to recover the possession of the goods.
This act of recovery of possession is termed as ‘repossession’.
The legal position of the hire vendor and hire purchaser (hirer) in case of default
is complicated. The Hire Purchase Act of 1972 did codify this issue first, but
as this Act was not put to operation, the legal position is not very clear. However,
the relevant provisions of the said Act are discussed below.

30
 Hire Purchase Accounts-II
12.2.1 Rights of the Hire Vendor
1. Rights of hire vendor to terminate hire purchase agreement: Where
the hirer makes more than one default in payment of instalment as provided
in the agreement, the hire vendor (the owner) shall be entitled to terminate
the agreement by giving the notice of termination in writing.
2. Rights of the hire vendor on termination: Where a hire purchase
agreement is terminated, the hire vendor (the owner) shall-be entitled (i)
to enter the premises of the hirer and seize the goods, (ii) to retain the
hire charges already paid and to recover the arrears of hire charges due,
and (iii) to claim damages for non-delivery of the goods.

12.2.2 Restrictions on the Owner

The above rights of the owner are, however, subject to the following restrictions:
1. Rights of hirer in case of seizure of goods by the owner: Where
the owner seizes the goods lent under a hire purchase agreement, the hirer
may recover from the owner the amount, if any, by which the hire purchase
price falls short of the aggregate of two amounts (a) the amounts paid
in respect of the hire purchase price up to the date of seizure, and (b)
the value of the goods on the date of seizure.
2. Restrictions on owner’s right to repossess: Where goods have been
let under a hire purchase agreement, and the statutory amount of the hire
purchase price has been paid, the owner shall not enforce any right to
recover possession of the goods from the hirer otherwise than by verdict
of any competent court.

12.3 ACCOUNTING FOR DEFAULT AND

REPOSSESSION
You know that when the purchaser fails to pay any of the instalments, the hire
vendor can take back the possession of the goods. The amount already paid
to the vendor as a part of the payment for the asset is treated as the hire
charge. So far as the repossession of goods is concerned, the vendor can either
take back the whole of the asset or a part of it. Let us now discuss what
entries will be passed in case of (i) complete repossession and (ii) the partial
repossession.

12.3.1 Complete Repossession

When the hire purchaser does not pay the instalment, the vendor can take back
the possession of goods. In case the vendor takes the possession of all the
goods, it is called complete repossession. It means the vendor will close Hire
Purchaser’s Account in his books and vice versa. The journal entries passed
are as follows:
i) All the entries (except the entry for payment) are passed as usual up to
the date of default.
ii) For closing the account of the purchaser
Goods Repossessed A/c Dr.
To Hire Purchaser
(Transfer of balance) 31
Hire Purchase and Inland iii) For repairs and other expenses on the repossessed goods
Branches
Goods Repossessed A/c Dr.
To Cash A/c
(Repairs and other expenses)

iv) For resale of goods repossessed

Cash A/c Dr.
To Goods Repossessed A/c

v) Any balance left in Goods Repossessed Account is either profit or

loss, which is ultimately transferred to’ Profit & Loss A/c.

In case of profit the entry will be :

Goods Repossessed A/c Dr.
To Profit & Loss A/c

In case of loss, the above entry will be reversed.

In the books of Hire Purchaser

i) All the entries (except the entry for payment) are passed as usual up to
the date of default, including the entry for depreciation.

ii) For closing the account of the vendor

Hire Vendor A/c Dr.
To Asset A/c

iii) For closing the Asset Account

Profit & Loss A/c Dr.
To Asset A/c

Generally there is a loss to the hire purchaser, so the above entry is passed
for loss on seizure of goods. In case of profit, the above entry will be reversed.

Look at illustration 1 and see how entries are passed and the books are closed
in case of complete repossession.

Illustration 1

On January 1, 2017, ABC Ltd. sold some plant & machinery costing Rs. 28,000
(cash price) to XYZ Ltd. on hire purchase. Payment was to be made as Rs.
7,500 cash down and three instalments of Rs. 7,500 at the end of each year.
Rate of interest was @ 5% p.a. The rate of depreciation for the asset was
10% p.a.

XYZ Ltd. made the down payment and paid the first instalment. But they could
not pay the second instalment. Consequently, ABC Ltd. repossessed the goods.

ABC Ltd. spent Rs, 300 on repairs and disposed off the asset for Rs. 15,350.
32 Open ledger accounts in the books of both the parties.
Solution: Hire Purchase Accounts-II

Books of XYZ Ltd.

Plant & Machinery Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2017 Rs. 2017 Rs.

Jan.1 To ABC Ltd 28,000 Dec.31 By Depreciation 2800
(10% on 28,000)
Dec.31 By Balance c/d 25,200
28,000 28,000
2018 2018
Jan. 1 To Balance b/d 25,200 Dec. 31 By Depreciation 2,520
(10% on 25,200)
Dec. 31 By ABC Ltd 14,726
Dec. 31 By Profit and Loss A/c 7,954
25,200 25,200

ABC Ltd’s Account

2017 Rs. 2017 Rs.

Jan.1 To Cash A/c 7,500 Jan. 1 By Plant & Machinery 28,000
(down payment) Dec.31 By Interest A/c 1,025
Dec.31 To Cash A/c 7,500
(first instalment)
Dec. 31 To Balance c/d 14,025
29,025 29,025
2018 2018
Dec. 31 To Plant & Machinery 14,726 Jan.1 By Balance b/d 14,025
A/c (default) Dec.31 By Interest A/c 701
14726 14,726

Books of ABC Ltd

XYZ Ltd’s Account
2017 Rs. 2017 Rs.
Jan.1 To Sales A/c 28,000 Jan.1 By Cash A/c 7,500
Dec.31 To Interest A/c 1,025 Dec.31 By Cash A/c 7,500
(5% on 20,500) Dec.31 By Balance c/d 14,025
29,025 29,025
2018 2018
Jan.1 To Balance b/d 14,025 Dec.31 By Goods Repossessed 14,726
Dec. 31 To Interest A/c 701 A/c
(5% on 14,025) 14,726 14,726
33
Hire Purchase and Inland
Branches
Goods Repossessed Account

2018 Rs. 2018 Rs.

Dec.31 To XYZ Ltd A/c 14,726 Dec.31 By Cash A/c (sales) 15,350
Dec.31 To Cash A/c (repairs) 300
Dec.31 To Profit & Loss A/c 324
(profit on sale)
15,350 15,350

12.3.2 Partial Repossession

Sometimes, in case of default, the vendor enters into a compromise with the
hirer and does not repossess the complete goods. But, he repossesses a part
of the goods called partial repossession. In this case, some part of the asset
is still left with the buyer.
So far as the accounting treatment of partial possession is concerned, interest
and depreciation entries are passed as usual in the books of both the parties
upto te date of default, but not the entry for payment.
As some part of the asset is left with the hire purchaser, the hire vendor does
not close the Hire Purchaser’s Account in his books, nor does the hire purchaser
close the Hire Vendor’s Account in his books. They ascertain the current value
of the asset repossessed with the help of an agreed rate of depreciation (it
is usually an enhanced rate). The hire vendor debits the same to the Goods
Repossessed Account and credits it to the Hire Purchaser’s Account. Similarly,
the hire purchaser debits the Hire Vendor’s Account and credits the Asset
Account with the agreed value of the asset repossessed. As for the part of
asset left with him, the hire purchaser applies the normal rate of depreciation
and shows the depreciated value as a balance in the Asset Account. The
balancing figure in the asset account will show the profit or loss on default and
it will be transferred to the Profit & Loss Account.
Look at the illustration 2 and see how accounts are prepared in case of partial
repossession.
Illustration 2
Jalani Distributors sold three light commercial vans to Jain Enterprises on January
1, 2017 on hire purchase system. The price of each van was Rs. 90,000 payment
of which was to be made as follows
i) Rs. 30,000 as down payment for each van,
ii) Remaining amount in 3 annual equal instalments along with interest @15%.
Jain Enterprises were charging depreciation @ 20% each year on written down
value method. After payment of 1st instalment as on December 31, 2017, they
could not pay further instalments. It was agreed between the parties for
repossession of two vans adjusting their value against the amount due. For the
purposes of repossession, depreciation @ 30% p.a. was charged.
Repossessed goods were repaired at a cost of Rs. 2,000 and were then sold
for Rs, 92,000, Calculate the value of repossessed stock and show the necessary
accounts in the books of both the parties.
34
Solution Hire Purchase Accounts-II

In the books of Jain Enterprises

Light Commercial Vans Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2017 Rs. 2017 Rs.

Jan, 1 To Jalani Distributors 2,70,000 Dec. 31 By Depreciation A/c 54,000
(Rs. 90,0003) (20% on 2,70,000)
Dec. 31 By Balance c/d 2,16,000
2,70,000 2,70,000
2018 2018
Jan. 1 To Balance b/d 2,16,000 Dec. 31 By Depreciation A/c 43,200
(20% on 2,16,600)
Dec. 31 By Jalani Distributors 88,200
(value of two vans on
repossession)
Dec. 31 By Profit & Loss A/c 27,000
(loss on repossession)
Dec. 31 By Balance c/d 57,600
2019 2,16,000 2,16,000
Jan. 1 To Balance b/d 57,600

Jalani Distributors’ Account

2017 Rs. 2017 Rs.

Jan. 1 To Bank A/c 90,000 Jan. 1 By Light Commercial 2,70,000
(down payment) Vans A/c
(Rs. 30,0003)
Dec.31 To Bank A/c 87,000 Dec 31 By Interest A/c 27,000
(first instalment
Rs. 60,000+27,000) 15
(1,80, 000  )
100
Dec.31 To Balance c/d 1,20,000
2,97,000 2,97,000
2018 2018
Dec. 31 To LightCommercial 88,200 Jan. 1 By Balance b/d 1,20,000
Vans A/c
Dec. 31 To Balance c/d 49,800 Dec. 31 By Interest 18,000
15
(1, 20, 000  )
1,38,000 100 1,38,000
2019
Jan. 1 By Balance b/d 49,800
35
Hire Purchase and Inland Books of Jalani Distributors
Branches
Jain Enterprises’ Account

2017 Rs. 2017 Rs.

Jan.1 To Sales A/c 2,70,000 Dec. 31 By Bank A/c
(down payment) 90,000
Dec. 31 To Interest A/c 27,000 Dec. 31 By Bank A/c 87,000
(Ist instalment)
15
(  1,80, 000)
100
Dec. 31 By Balance c/d 1,20,000
2,97,000 2,97,000

2018 2018
Jan. 1 To Balance b/d 1,20,000 Dec. 31 By Goods Repossessed A/c 88,200
Dec. 31 To Interest A/c 18,000 Dec. 31 By Balance c/d 49,800
15
( 1, 20, 000)
100
1,38,000 1,38,000
2019
Jan. 1 To Balance b/d 49,800

Goods Repossessed Account

2018 Rs. 2018 Rs.

Dec. 31 To Jain enterprises 88,200 Dec. 31 By Cash A/c (sale) 92,000
Dec. 31 To Cash A/c (repairs) 2,000
Dec. 31 To Profit & Loss A/c 1,800
(profit on sale)
92,000 92,000

Working Notes
1 Calculation of the value of repossessed asset Rs.
Cost Price of two vans (90,0002) 1,80,000
Depreciation
30
First year ( 1,80, 000) 54,000
100
30
Second year ( 1,80, 000  54, 000) 37,800 91,800
100
Value of repossessed stock 88,200
2 Loss on Repossession Rs.
Cost Price of two vans (90,0002) 1,80,000
36 Depreciation
 Hire Purchase Accounts-II
20
First year (  1,80, 000) 36,000
100

20
Second year ( 1,80, 000  36, 000) 28,800 64,800
100
Depreciated value of two vans 1,15,200
Less : Value of the two vans at higher rate of depreciation
for repossession 88,200
Loss on repossession 27,000

12.4 INSTALMENT PAYMENT SYSTEM

Instalment Payment System also called the Deferred Instalments is a system
where the buyer is given the ownership as well as the possession of the goods
right at the time of signing the contract. The buyer has the facility to pay the
price in instalments. The features of Instalment Payment System are as follows:
i) It is an outright sale.
ii) The possession as well as the ownership is passed to the buyer on signing
of the contact.
iii) The buyer can make the payment in instalments.
iv) In case of default in payment, the seller cannot repossess the goods.
v) The amount paid up to the default is not forfeited and the seller can sue
the buyer for the amount due.
From the above discussion we can see that the Instalment Payment System
has some similarities with the Hire Purchase System, but there are some points
of difference as well. They are as follows:

Hire Purchase System Instalment Payment System

i) It is an agreement of hiring. i) It is an agreement of sale.

ii) The buyer gets only the possession ii) The buyer gets possession
of goods on signing the contract. on signing of the contract.
iii) In case of default, the goods iii) The goods cannot be
can be repossessed repossessed in case of default.
iv) In case of default, the payment iv) The payment made up to the
made up to the date of default date of default is a payment
is forfeited and treated as hire towards the price of the asset
charge. and cannot be forfeited. The
seller can at the most sue the
buyer for the amount due.
v) The buyer cannot sell, destroy, v) Buyer can sell, destroy, damage,
transfer, damage or pledge the . transfer or pledge the goods.
goods.
37
Hire Purchase and Inland
Branches 12.5 ACCOUNTING FOR INSTALMENT PAYMENT
SYSTEM
You know that the ownership of goods passes to the buyer immediately on
the signing of the contract. Hence, while accounting for the purchase under the
Instalment payment system, this fact should be taken into account. Accordingly,
the buyer credits the vendor with the full amount payable to him (inclusive of
total interest) and debits the assets with cash price and the Interest Suspense
Account with the total amount of interest being the difference between the full
amount payable and the cash price. The Interest Suspense Account is credited
with the actual amount of interest at the time of each instalment by transferring
the same to Interest Account. Similarly, the vendor debits the buyer with the
full amount and credit sale with cash price and Interest Suspense Account with
total interest. He transfers the actual amount of interest to Interest Account at
the time of each instalment by debiting Interest Suspense Account and crediting
the Interest Account.
Thus, from accounting point of view, the main point of difference between
Instalment Payment System and the Hire Purchase System relates to the treatment
of interest. But in practice, even this may be dispensed with.
The asset account is maintained by the buyer in a manner similar to that of
Hire Purchase System i.e., depreciation is charged in the usual manner and the
depreciated value of the asset is shown in the Balance Sheet. It should be noted
that the balance in Vendor’s Account shall be shown on the liability side every
year.
Let us now study the journal entries both in the books of the buyer and seller
under Instalment Payment System.
12.5.1 Books of the Buyer
The buyer passes the following journal entries in his books.
i) When the Asset is purchased
Asset A/c Dr. (with cash price)
Interest Suspense A/c Dr. (difference between cash price
To Vendor (with Instalment price) and instalment)

ii) For cash down payment

Vendor A/c Dr
To Bank A/c

iii) For interest due at the time of instalment

Interest A/c Dr.
To Interest Suspense A/c

iv) For the payment of instalment

Vendor A/c Dr
To Bank A/c
38
v) For Depreciation at the end of the accounting year Hire Purchase Accounts-II

Deprecation A/c Dr.

To Asset A/c
vi) For transfer of interest and depreciation to Profit & Loss A/c
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
After passing the above mentioned journal entries, the purchaser prepares the
following ledger accounts.
i) Asset A/c
ii) Vendor’s A/c
iii) Interest Suspense Account
iv) Interest Account
Look at the illustration 3 and see how ledger accounts are maintained in the
books of the buyer when goods are purchased under Instalment Payment System.
Illustration 3
Fire industries Ltd. purchased a plant on 1.1.2016 from MMC Ltd. under
instalment payment system. The cash price was Rs. 20,000 payable as Rs, 6,384
for down payment and the balance by three equal annual instalment of Rs. 5,000
each including 5% interest. Depreciation @ 10% was to be charged as per
W.D.V. method.
Show the necessary ledger accounts in the books of Fire Industries Ltd.
Solution : In the books of Fire Industries Ltd.
MMC Ltd. Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To Bank A/c 6,384 Jan. 1 By Plant A/c 20,000
Dec.31 To Bank A/c (1st Inst.) 5,000 Dec.31 By Interest Suspense A/c 1,384
Dec.31 To Balance c/d 10,000
21,384 21,384
2017 2017
Dec.31 To Bank A/c (2nd Inst.) 5,000 Jan. 1 By Balance b/d 10,000
Dec.31 To Balance c/d 5,000
10,000 10,000
2018 2018
Dec.31 To Bank A/c (3rd Inst.) 5,000 Dec.31 By Balance b/d 5,000
5,000 5,000
39
Hire Purchase and Inland
Branches
Plant Account
Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To MNC Ltd. 20,000 Dec. 31 By Depreciation A/c 2,000
Dec. 31 By Balance c/d 18,000
20,000 20,000
2017 2017
Jan. 1 To Balance b/d 18,000 Dec. 31 By Depreciation A/c 1,800
Dec. 31 By Balance c/d 16,200
18,000 18,000
2018 2018
Jan. 1 To Balance b/d 16,200 Dec. 31 By Depreciation A/c 1,620
Dec. 31 By Balance c/d 14,580
16,200 16,200

Interest Suspense Account

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To MNC Ltd. 1,384 Dec.31 By Interest A/c 681
Dec.31 By Balance c/d 703
1,384 1,384
2017 2017
Jan. 1 To Balance b/d 703 Dec. 31 By Interest A/c 465
Dec. 31 By Balance c/d 268
703 703
2018 2018
Jan. 1 To Balance b/d 238 Dec. 31 By Interest A/c 238
238 238

Interest Account

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Dec.31 To Interest Suspense A/c 681 Dec. 31 By Profit & Loss A/c 681
681 681
2017 2017
Dec.31 To Interest Suspense A/c 465 Dec. 31 By Profit & Loss A/c 465
465 465
2018 2018
Dec.31 To Interest Suspense A/c 238 Dec. 31 By Profit & Loss A/c 238
238 238
40
Working Note: Hire Purchase Accounts-II

Statement showing calculation of Interest for deferment period

Particulars Amount Principal Interest Total

Rs. Rs. Rs. Rs.

(a) (b) c = (a+b)
Cash Price 20,000
(6384+13616)
1.1.16
Less : Down payment 6,384 6,384 6,384
13,616
31.12.16
Add : Interest @ 5% 681
5
(  13, 616)
100
14,297
Less : Ist Instalment 5,000 4,319 681 5,000
9,297
31.12.17
Add : Interest @ 5% 465
5
(  9, 297)
100
9,762
Less : 2nd Instalment 5,000 4,535 465 5,000
4,762
31.12.18
Add : Interest @ 5% 238
5
(  4, 762)
100
5,000
Less : 3rd Instalment 5,000 4,762 238 5,000
Total NIL 20,000 1,384 21,384

12.5.2 Books of the Vendor

The vendor passes the following journal entries when the goods are sold on
instalment payment system.
i) When the goods are sold
Purchaser Dr. (with total price)
To Sales A/c (with cash price)
To Interest Suspense A/c (with the difference between
the total price and cash price)
ii) For cash received as down payment
Bank A/c Dr.
To Purchaser A/c
41
Hire Purchase and Inland iii) For interest due on instalment
Branches
Interest Suspense A/c Dr.
To Interest A/c
iv) For receipt of the amount of instalment
BankA/c Dr.
To Purchaser A/c
v) For transfer of interest to Profit & Loss A/c
Interest A/c Dr.
To Profit & Loss A/c
Like the buyer, the vendor also prepares certain Ledger accounts. They are
i) Buyer’s Account
ii) Interest Suspense Account
iii) Interest Account
Look at the illustration 4 and see how the accounts are maintained in the books
of the vendor when the goods are sold on instalment payment system.
Illustration 4
We consider the problem given in illustration 3 and prepare ledger accounts
in the books of the vendor.
Solution:
In the books of MMC Ltd.
Fire Industries Ltd. Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2016 Rs. 2016 Rs.

Jan.1 To Sales A/c 20,000 Jan. 1 By Bank A/c (down payment) 6,384
Dec.31 To Interest Suspense A/c 1,384 Dec.31 By Bank A/c (Ist Instalment) 5,000
Dec.31 By Balance c/d 10,000
21,384 21,384

2017 2017
Jan. 1 To Balance b/d 10,000 Dec.31 By Bank A/c (2ndInstalement) 5,000
Dec.31 To Balance c/d 5,000
10,000 10,000
2018 2018
Jan.1 To Balance b/d 5,000 Dec.31 By Bank A/c (3rd Instalment) 5,000
5,000 5,000
42
 Interest Suspense Account Hire Purchase Accounts-II

Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Interest A/c 681 Jan. 1 By Fire Industries Ltd A/c 1,384
Dec.31 To Balance c/d 703 2016
1,384 1,384
2017 2017
Dec.31 To Interest A/c 465 Jan. 1 By Balance b/d 703
Dec.31 To Balance c/d 238
703 703
2018 2018
Dec.31 To Interest A/c 238 Jan. 1 By Balance b/d 238
238 238

Interest Account
Dr. Cr.

2016 Rs. 2016 Rs.

Dec.31 To Profit & Loss A/c 681 Dec.31 By Interest Suspense A/c 681
681 681
2017 2017
Dec.31 To Profit & Loss A/c 465 Dec.31 By Interest Suspense A/c 465
465 465
2018 2018
Dec.31 To Profit & Loss A/c 238 Dec.31 By Interest Suspense A/c 238
238 238

Check Your Progress A

1. Fill in the blanks
i) Default is ……………to act, appear or pay.
ii) Possession of goods means ……………..of goods.
iii) The act of…………. of …………….is termed as repossession.
iv) Where a hire purchase agreement is …………..due to default in
payment, the hire vendor shall be entitled to enter the premises of
the hirer and …………….the goods.
v) In case of termination due to default in payment the hire vendor
is entitled to …………….for non-delivery of goods.
vi) Under an instalment payment system, the buyer gets the
................................. of the goods on the date of…………………
2. State whether the following statements are True or False.
i) Under a hire purchase agreement, failure in payment of only the last
instalment would be considered as a default. 43
Hire Purchase and Inland ii) On default, the vendor under the instalment payment system is entitled
Branches
to retain the amount which has already been paid and recover the
arrears of hire due.
iii) After repossession, a hire vendor has no right to resell the goods
repossessed.
iv) In case of an instalment payment system, the buyer is entitled to dispose
off the goods he has bought.
v) Under an instalment payment system, the buyer can return the goods
at any time.

12.6 BASIC RECORD FOR GOODS OF SMALL

VALUE SOLD ON HIRE PURCHASE
You are aware of the fact that with advancement of technology and improvement
in the standard of living of the people both in India and abroad, the demand,
for consumer durables like fridge, T.V., automobiles, etc. has increased manifold
over the years. To meet this demand explosion, the dealers have come up with
innovative schemes which attract the prospective consumers to purchase such
goods. One such scheme is the sale on hire purchase basis. The consumers
with limited resource are naturally interested in buying under this scheme in view
of the benefits of deferred payment at reasonable rate of interest. Hence, a
large volume of transactions in these goods are being conducted everyday.
It should be noted that these transactions take place between a retailer (dealer)
and the consumers, and not between two business units. Hence, the accounting
is important only for the vendor and not the buyer. Let us now study how
a hire vendor(retailer) maintain the account when goods of small value are sold
on hire purchasebasis.
In case of hire purchase transactions of numerous goods of small value, it
becomes practically inconvenient for a particular dealer of these items to maintain
separate accounts for each transaction. Hence, the accounting system is designed
in such a way that overall control can be exercised on all the transactions during
a particular accounting period through control accounts. However, for individual
transactions, detailed record may be kept in a subsidiary book called ‘Hire
Purchase Sale Register showing the necessary information as may be required
to control individual accounts of the buyers. A specimen of the register is given
in Figure 12.1.
S.No Date of Name of Name of Cost Hire Cash No. of Instalments Due To t a l Instal- Instal-
Agreement Article Customer Price Purchase Down Instalments install- ments ments
Price Payment ments due not yet
received but due
not
paid
1 2 3 4

Fig 12.1: Hire Purchase Sales Register

44
In Hire Purchase Sales Register as given in Figure 12.1, you will observe that, Hire Purchase Accounts-II
besides the details of individual hire purchase transactions, there are columns
showing cost price, hire purchase price, cash down payment, instalments
received, instalments due but not yet paid, and instalments not yet due. The
figures are very relevant for the accounting for hire purchase transactions and
the ascertainment of profit/loss from hire purchase business and, therefore, the
accountant must be careful in recording the amounts and the casting (totalling)
of these columns. The totals of these columns are posted to the relative control
accounts periodically, say monthly, quarterly, half yearly, or yearly by passing
the necessary journal entries.

12.7 RELEVANT TERMS

In connection with the accounting for goods of small value sold on hire purchase
basis, we have to define certain terms before we study different methods of
ascertaining the profit or loss on such transactions. These relevant terms are
1. Cost price of goods sold on hire purchase
2. Value of goods sold on hire purchase
3. Cash received
4. Hire Purchase Debtors
5. Hire Purchase Stock
6. Stock at shop
1. Cost price of Goods Sold on Hire Purchase : You know the hire vendor
is only a dealer. He purchases goods from various manufacturers and sells
them to the consumers under hire purchase system. Naturally, he sells the
goods at a price higher than the price at which he has bought. His mark-
up on hire purchase sales is bound to be more than even the cash price
because he has also to cover the loss of interest on such transactions.
Normally, interest is accounted for separately as you studied in the case
of sale of goods of a substantial value. But, in the case of sale of goods
of small value, Interest is ignored and the profit is worked out on
the basis of the difference between cost price and hire purchase
price. This is called ‘loading’. Loading is generally given in terms of
percentage on cost or as percentage of hire purchase price. Usually you
are provided with the figure of hire purchase price and you have to work
out the cost price with the help of loading. Alternatively, both the hire
purchase price and cost price are given and you may have to work out
the loading for the purpose of ascertaining profit or loss in hire purchase
business.
2. Goods Sold on Hire Purchase: For the purpose of finding out the profit
or loss on the hire purchase business during an accounting period, we need
the figure of the value of goods sold on hire purchase. This reflects the
hire purchase price of all the goods sold on hire purchase basis during
the accounting period. This is mostly given. If, however, the value of goods
sold on hire purchase is not given, it can be worked out by applying the
loading rate to the cost of goods sold on hire purchase. Alternatively, it
can be worked out with the help of the first part of the Hire Purchase
Trading Account.
45
Hire Purchase and Inland 3. Cash Received : This refers to the total amount received during the
Branches
accounting period in respect of hire purchase sales whether they relate to
previous years or the current year. This includes the amount of down
payment and the amount of instalments paid during the year.
4. Hire Purchase Debtors : It is also known as instalments due but not
yet paid’ or ‘Instalment due, customers paying’. Thus, it refers to the
total amount of such instalments which have fallen due during the accounting
period but have not yet been paid by the hire purchase customers. For
purposes of profit on hire purchase business, the total of ‘cash received’
and ‘hire purchase debtors’ is taken as the ‘realised sales’ during an
accounting period, and not the goods sold on hire purchase.
5. Hire Purchase Stock : You know when goods are sold on hire purchase
basis, customer makes some down payment and agrees to pay the balance
in instalments. Some of these instalments become due during the accounting
year when goods were sold to him while others shall become due during
the following year/years. The instalments which have not become due during
the current year, are called ‘instalments not yet due’ or ‘hire purchase stock’.
It should be noted that hire purchase stock does not mean stock of goods
in the shop. It is a special term used for the total amount of
instalments which have not become due during the current year. It
represents the unrealised sales and needs adjustment of loading involved.
This amount is required for the purpose of ascertaining profit or loss on
hire purchase business.
The amount of ‘instalments not yet due’ (hire purchase stock) is usually
given. But, if it is not given, the same can be worked out with the help
of Hire Purchase Trading A/c.
6. Stock at Shop: ‘Stock at shop’ should not be confused with ‘hire purchase
stock’. You know that hire purchase stock represents the instalments not
yet fallen due. But, the stock at shop is a common term used for unsold
goods lying in store. The amount of stock at shop is not relevant to the
ascertainment of profit or loss of the hire purchase business. This however,
can be helpful in ascertaining the cost of goods sold on hire purchase which,
in turn, helps the ascertainment of the value of goods sold on hire purchase
(if not given) by adding the loading thereto.

12.8 ASCERTAINMENT OF PROFIT

For the ascertainment of profit or loss on goods of small value sold on hire
purchase, we have to prepare a ‘Hire Purchase Trading Account’. It is just
like the Consignment Account prepared for ascertaining the profit/loss on
consignment of goods invoiced at selling price. For preparing the Hire Purchase
Trading Account, we require the amounts of goods sold on hire purchase, cash
received, goods repossessed, hire purchase debtors (both at the beginning and
the end), and hire purchase stock (both at the beginning and at the end).
These figures can be extracted from the Hire Purchase Sales Register
or the relevant control accounts and taken to Hire Purchase Trading
Account by passing the necessary closing entries in the journal. Further,
we shall have to ascertain the percentage of loading and the amount of expenses
46 incurred on hire purchase business.
The proforma of Hire Purchase Trading Account is given in Figure 12.2 Hire Purchase Accounts-II

Hire Purchase Trading Account

Dr. Cr.

To H.P. Stock (opening) ... By Cash Received ...

To H.P. Debtors (opening) ... By Goods Repossessed
(market value) ...
To Goods Sold on H.P ... By H.P. Stock (closing) ...
(at H.P. price)
To Stock Reserve ... By H.P. Debtors (closing) ...
(loading on closing H.P. stock)
To Expenses ... By Stock Reserve ...
(loading on opening H.P. stock)
To Net Profit (transferred to ... By Goods Sold on H.P. ...
P&L A/c) (loading)
... ...

Fig. 12.2: Proforma of Hire Purchase Trading Account

The proforma of Hire Purchase Trading Account as given in Figure 12.2 is

the usual form in which the Hire Purchase Trading Account is prepared. But,
it is better to divide it into two parts as shown in Figure 12.3, the first part
to contain only those items which are recorded at H.P. price and the second
part showing the adjustment of loading and the expenses, losses, etc. relating
to hire purchase business for ascertaining the profit or loss.
Hire Purchase Trading Account
Dr. Cr.

To H.P. Stock (opening) .. By Cash Received ...

To H.P. Debtors (opening) ... By Goods Repossessed
(Instalments unpaids) ...
To Goods Sold on H.P ... By H.P. Stock (closing) ...
(at H.P. price) By H.P. Debtors (closing) ...
... ...
To Loss on Goods Repossessed ....
(dif. between market value or cost
and unpaid instalments)
To Stock Reserve ... By Stock Reserve ...
(loading on closing H.P. stock) (loading on opening H.P. stock)
To Expenses By Goods Sold on H.P.
(on hire purchase business) ... (loading)
To Net Profit
(transferred to P&L A/c) ...
... ...
Fig. 12.3 : Another Proforma of Hire Purchase Trading Account 47
Hire Purchase and Inland It should be noted that the totals of two sides in the first part of the Hire
Branches
Purchase Trading Account will be equal. If they are not equal, it would mean
that there is some mistake. Not only that, the first part can also help us in
finding out the amount of any item which is missing (being the balancing figure)
provided all the other figures are given.
Look at illustration 5 and see how profit is ascertained in respect of goods
of small value sold on hire purchase with the help of Hire Purchase Trading
Account.
Illustration 5
Capital Electronics & Co. started business on 1.1.18 for selling electronic goods
on hire purchase basis. During the year end on 31.12.18, the following
transactions were made.
a Krishna purchased a T.V. costing Rs. 3,000 at Rs. 4,500 payable Rs. 1,500
as down payment and the balance in 12 monthly instalments of Rs. 250
each,
b) Vim purchased one Grinder costing Rs. 1,000 at Rs. 1,500 payable Rs.
300 as down payment and the balance in 12 monthly instalments of Rs.
100 each,.
c) Arjun purchased a Refrigerator costing Rs. 2,400 at Rs. 3,000 payable
Rs. 600 as down payment and the balance in 12 monthly instalment of
Rs. 200.
As on 31.12.18, Krishna could not pay one instalment out of the seven
instalments due, Vim could not pay one instalment out of the five instalments
due, and Arjun could not pay the two instalments out of eight instalments due.
Calculate the profit or loss on Hire Purchase Transactions.
Solution:
Hire Purchase Trading Account
Dr. Cr.
Rs. Rs.
To Goods Sold on 9,000 By Cash Received 5,500
By Goods Repossessed .....
Hire Purchase By Hire Purchase Stock (closing) 2,750
By Hire Purchase Debtors (closing) 750
9,000 9,000
To Stock Reserve 810 By Goods Sold on Hire 2,600
(loading on closing Purchase (closing)
H.P. stock)
To Net Profit transferred 1,790
to P & L A/c
2,600 2,600

48
Working Notes: Hire Purchase Accounts-II

a) Goods sold on hire purchase (H.P. Price) Rs.

i) TV purchased by Krishna 4,500
ii) Grinder purchased by Vim 1,500
iii) Refrigerator purchased by Arjun 3,000
Total 9,000
b) Cash received
i) From Krishna [Rs. 1,500 + (250 × 6)] 3,000
ii) From Vim [Rs. 300 + (100 × 4)] 700
iii) From Arjun[Rs. 600 + (200 × 6)] 1,800

Total 5,500
c) Amount of instalment due but not paid (H.P. Debtors)
i) From Krishna Rs. 250 × 1 250
ii) From Vim Rs. 100 × 1 100
iii) From ArjunRs. 200 × 2 400
Total 750
d) Amount of instalment which are not due (H.P. Stock)
i) From Krishna
Amount not due Rs. 250 × 5 1,250
ii) From Vim
Amount not due Rs. 100 × 7 700
iii) From Arjun
Amount not due Rs.200 × 4 800
Total 2,750
e) Loading
i) On goods sold on hire purchase
Hire Purchase Price  Cost Price
= (4,500 + 1,500 + 3,000)  (3,000 + 1,000 + 2,400)
= 9,000  6,400
= Rs. 2,600
ii) On hire purchase stock (Closing)
HP. Stock Loading
Rs. Rs.
1,500
Krishna 1,250 (  1, 250) = 417
4,500
500
Vim 700 (  700) = 233
1,500
600
Arjun 800 (  800) = 160
3, 000

Total 810
49
Hire Purchase and Inland 12.8.1 Treatment of Goods Repossessed
Branches
You know when the hire purchase customer commits default in payment of
instalments,the vendor may repossess the goods. The amount of instalments
unpaid (also termed as instalments due) in respect of such goods are shown
on the credit side of the first part of the Hire Purchase Trading Account as
shown in its proforma given in Figure 12.3.
If the market value of such goods is given or they have been sold out immediately
on repossession, the difference between the unpaid amount and the market value
(or sale value, if sold out) is treated as loss or profit on goods repossessed.
If it is loss, the same is debited in the second part of the Hire Purchase Trading
Account, and if it is profit (it is rare), the same can be shown on its credit
side. The difficulty arises when the market value or sales value of
repossessed goods is not available. In such asituation, you will have to
adjust the loading involved in the unpaid instalment in respect of such
goods because its true value is equal to its proportionate cost. Thus, having
credited the first part of Hire Purchase Trading Amount with amount of the
unpaid instalments, you must debit the amount of loading included in the unpaid
instalments. Alternatively, if you are preparing Hire Purchase Trading Account
without dividing it into two parts, credit the Hire Purchasing Trading Account
with its true value/market value/sale value itself. In that case, no adjustment will
be necessary.
Look at illustration 6 and see how goods repossessed have been treated in
the Hire Purchase Trading Account.
Illustration 6
Easy Payment Ltd. sells goods on hire purchase basis at a profit of 50% on
cost, The following particulars are given for the year ending December 31, 2018.
Prepare the Hire Purchase Trading Account.
Rs.
Hire Purchase Stock (opening) 18,000
Instalments due, customers paying (opening) 10,000
Goods sold on hire purchase during the year
(at hire purchase price) 1,74,000
Cash received from customers 1,20,000
Goods repossessed valued at (instalments due Rs. 6,000) 3,000
Hire Purchase Stock at the end 60,000
Instalments due (at the end), customers paying 16,000
Expenses 19,000
Solutions :

50
 Hire Purchase Trading Account Hire Purchase Accounts-II

Dr. Cr.

Date Particulars Amount Particulars Amount

Rs. Rs.
To Hire Purchase Stock (opening) 18,000 By Cash Received 1,20,000
To Hire Purchase Debtors (opening) 10,000 By Goods Repossessed (instalments unpaid) 6,000
To Goods sold on Hire Purchase 1,74,000 By Hire Purchase Debtors (closing) 16,000
By Hire Purchase Stock (closing) 60,000
2,02,000 2,02,000
To Loss on Goods Repossessed 3,000 By Stock Reserve 6,000
(diff. between instalments unpaid (Loading on opening H.P. stock)
and market value)
By Goods sold on Hire Purchase
(loading) 58,000
To Stock Reserve (loading on
closing H.P. stock) 20,000
To Expenses 19,000
To Profit & Loss A/c 22,000
(Profit)
64,000 64,000

Working Notes:
I Loading
50
a) On Opening H.P. Stock (18, 000  ) = Rs. 6,000
150
50
b) OnGoodsSoldonH.P. (1, 74, 000  ) = Rs. 58,000
150
50
c) OnClosing H.P. Stock (60, 000 
) = Rs. 20,000
150
2 Loss on Goods Repossessed: Amount of unpaid instalments - Market Value
= 6,000- 3,000 = Rs. 3,000

Alternatively
Hire Purchase Trading Account
Dr. Cr.
Rs. Rs.
To Hire Purchase Stock (opening) 18,000 By Cash Received 1,20,000
To Hire Purchase Debtors (opening) 10,000 By Goods Repossessed (market value) 3,000
To Goods sold on Hire Purchase 1,74,000 By Hire Purchase Debtors (closing) 16,000
(H.P. Price) 51
Hire Purchase and Inland
Branches
To Stock Reserve (loading on
closing H.P. stock) 20,000 By Hire Purchase Stock (closing) 60,000
To Expenses 19,000 By Stock Reserve
(loading on opening H.P. stock) 6,000
To Net Profit 22,000 By Goods sold on Hire Purchase
(transferred to P & L A/c) (loading) 58,000
2,63,000 2,63,000

12.8.2 Calculation of Missing Figures

Many times some of the figures needed to calculate the profit or loss on sale
of goods of small value on hire purchase are missing. These items may be H.P.
Stock (at the beginning or at the end), instalments due (opening or closing),
purchases, cash received, etc. Therefore, it becomes necessary to first calculate
the figures of these items and then prepare the Hire Purchase Trading Account.
If there is only one figure missing, the same can be worked out with
the help of the first part of the Hire Purchase Trading Account. But, if
more than one figure is missing, the following steps should be taken for the
calculation of the missing figures.
1. Prepare three memorandum accounts in the order mentioned below:
i) Memorandum Stock at Shop Account,
ii) Memorandum Stock out with Customers Account or Hire
Purchase Stock Account, and
iii) Memorandum Instalments Due Account or Hire Purchase Debtors
Account.
2. Fill up all the figures given.
3. Start with the account having maximum figures available. This will help you
to find out the missing figure of that account.
4. Transfer the figure so calculated to the relevant account.
5. Stock at Shop Account shows all figures at cost, whereas Hire Purchase
Stock Account and Hire Purchase Debtors Accounts show all figures at
hire purchase price. Therefore, while transferring any figure from Stock at
Shop Account to the other accounts, the figure should be raised to hire
purchase price. Similarly, while transferring any amount from other accounts
to the Stock at Shop Account, the figure has to be brought down to cost.
6. The process of transfer will continue until all the amounts are filled in these
accounts. The Proforma of the three accounts is given below.

Memorandum Stock at Shop Account

Dr. Cr.
To Balance b/d Rs. By Goods Sold on Hire Rs.
Purchase (at cost)(1)
To Purchases By Balance c/d

52
 Memorandum Hire Purchase Stock Account Hire Purchase Accounts-II

Dr. Cr.

Rs. Rs.
To Balance b/d By Instalment Due (2)
To Goods Sold on Hire By Goods Repossessed
Purchase(at HP. price) (1) (instalments not yet fallen due)
By Balance c/d

Memorandum Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.
To Balance b/d By Cash Received from
Customers
To Stock with Customer By Goods Repossessed
Account (total instalments (instalment due but not paid)
fallen due) (2) By Balance c/d

illustration 7 will help you to understand the calculation of missing figure for
the preparation of Hire Purchase Trading Account.
Illustration 7
Home Appliances Ltd sells goods on hire purchase terms at a profit of 25%
on hire purchase price. Following are the transactions for the year ended
December 31, 2018.
Rs.
January, 1 Stock out on hire at cost 6,000
Stock on hand (at shop) 1,000
Instalment due 600
Cash Received 16,000

December, 31 Stock out on hire (at cost) 6,900

Stock on hand (at shop) 1,400
Instalment due 1,000
Calculate the profit or loss on hire purchase under Debtors Method.
Hire Purchase Trading Account
Dr. Cr.

Rs. Rs.
To Stock with Customers 8,000 By Cash Received 16,000
To Instalment Due 600 By Stock with Customers 9,200
To Goods Sold on Hire
Purchase 17,600 53
Hire Purchase and Inland By Instalment Due 1,000
Branches
26,200 26,200
To Stock Reserve (loading) 2,300 By Stock Reserve (loading) 2,000
To Profit & Loss A/c 4,100 By Goods sold on Hire
(Profit) Purchase (loading) 4,400
6,400 6,400

Working Note :
Calculation of Missing Figure :

Memorandum Stock at Shop Account

Dr. Cr.

Rs. Rs.
To Balance b/d 1,000 By Stock with Customers 13,200
To Purchases 13,600 By Balance c/d 1,400
(balance figure)
14,600 14,600

Memorandum Stock with Customers Account

Dr. Cr.

Rs. Rs.
To Balance b/d 8,000 By Instalment Due 16,400
To Stock at Shop 17,600 By Balance c/d 9,200
(at hire purchase price)
(missing figure)
25,600 25,600

Memorandum Instalments Due Account

Dr. Cr.

Rs. Rs.
To Balance b/d 600 By Cash Received 16,000
To Stock with Customers 16,400 By Balance c/d 1,000
(missing figure)
17,000 17,000

Check Your Progress B

1. Fill in the blanks

i) The accounting treatment of goods of small value is recorded in the

books of …………..only.

54 ii) The vendor maintains a ……………….register.

 iii) The vendor prepares …………………Account to calculate profit or Hire Purchase Accounts-II
loss on hire purchase business.
iv) Goods sold on hire purchase are shown on the …………………side
of the Hire Purchase Trading Account.
v) Loss on goods repossessed by the vendor is equal to the difference
between the market value of the goods repossessed and the.……
in respect of such goods.
vi) Three Accounts prepared for the calculation of missing figures are stock
at Shop Account, ……………Account and Instalments Due Account.
2. What do you understand by Hire Purchase Debtors?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
3. What do you mean by Hire Purchase Stock?
................................................................................................................
................................................................................................................
................................................................................................................

12.9 STOCK AND DEBTORS SYSTEM

The profit or loss for an accounting period on goods of small value sold on
hire purchase basis can also be ascertained by another method called ‘Stock
and Debtors System’. This system is similar to the system followed in case
of branch accounts. Under this system, we make use of the four control accounts
viz (i) Hire Purchase Stock Account, (ii) Hire Purchase Debtors Account, (iii)
Goods Sold on Hire Purchase Account, and (iv) Goods Repossessed Account;
and prepare Hire Purchase Adjustment Account for working out the profit or
loss on the hire purchase business. The Hire Purchase Adjustment Account
is similar to the second part of the Hire Purchase Trading Account wherein
entries are made for the loading involved in the goods sold on hire purchase
and the opening and closing balances of hire purchase stock (instalments not
yet due), and shows the expenses and losses re1ating to the hire purchase
business. The balancing figure in the Hire Purchase Adjustment Account
represents the profit or loss on the hire purchase business.

The following journal entries are passed under this system to open the necessary
accounts in the ledger.
1. For goods sold on hire purchase
Hire Repossessed A/c Dr.
To Goods sold on H.P. A/c
2. For total instalments due during the year
Hire Purchase Debtors A/c Dr
To Hire Purchase Stock A/c
55
Hire Purchase and Inland 3. For cash received
Branches
Cash A/c Dr.
To Hire Purchase Debtors A/c
4. For goods repossessed (unpaid instalments)
Goods Repossessed A/c Dr.
To Hire Purchase Stock A/c
5. For loading on goods sold on H.P.
Goods sold on H.P. A/c Dr.
To Hire Purchase Adjustment A/c
6. For loading on opening H.P. stock
Stock Reserve A/o Dr.
To Hire Purchase Adjustment A/c
7. For loading on closing H.P. stock
Hire Purchase Adjustment A/c Dr.
To Stock Reserve A/c
8. For loss on goods repossessed
Hire Purchase Adjustment A/c Dr.
To Goods Repossessed A/c
(With difference between instalments unpaid and market value of goods
repossessed or for loading only)
9. For expenses on hire purchase business
Hire Purchase Adjustment A/c Dr.
To Expenses A/c
10. For transfer of profit on hire purchase business
Profit & Loss A/c Dr.
To Hire Purchase Adjustment A/c
In case of loss, the entry can be reversed
11. For closing goods sold on Hire Purchase Account
Goods Sold on H.P. A/c Dr.
To Trading (Stock at shop) A/c
Look at illustrations 8 and 9 and see how profit or loss is ascertained with
the help of control accounts under the Stock and Debtors System.
Illustration 8
Prepare necessary accounts in the books of S.S.K. & Co. who sold goods
at a profit @ 25% on cost price, with the help of the following information.
Follow Stock and Debtors System.
Stock in Shop
On 1.4.18 15,000
On 31.3.19 12,500

Goods with customers on hire purchase on 1.4.18 18000

Purchases for shop stock 32,300
Goods sold on H.P. during the year 18-19 43,500
Instalments received 30,000
56
Overdue Instalments Hire Purchase Accounts-II
On 1.4.18 1,000
On 31.3.19 1,500
Solution:
Hire Purchase Stock Account
Dr. Cr.

Rs. Rs.
To Balance b/d 18,000 By Hire Purchase Debtors A/c (1) 30,500
To Goods Sold on Hire 43,500
Purchase A/c By Balance c/d 31,000
61,500 61,500
To Balance b/d 31,000

Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.
To Balance b/d 1,000 By Bank A/c 30,000
To Hire Purchase 30,500 By Balance c/d 1,500
Stock A/c (1)
(amount of instalments due-
balancing figure)
31,500 31,500
To Balance b/d 1,500

Goods Sold on Hire Purchase Account

Dr. Cr.

Rs. Rs.
To Hire Purchase Adjustment A/c 8,700 By Hire Purchase Stock A/c 43,500
To Shop Stock 34,800
43,500 43,500

Hire Purchase Adjustment Account

Dr. Cr.
Rs. Rs.
To Stock Reserve A/c 6,200 By Stock Reserve A/c 3,600
(loading on closing H.P. Stock) (loading on opening H.P.stock)
To Profit & Loss A/c 6,100 By Goods Sold on H.P. A/c 8,700
(balancing figure) (loading)
12,300 12,300

Working Notes:
Loading is 25% on cost. The figures of items on which loading is to be calculated are
given at H.P. price. Hence, the loading on various items has been calculated as follows: 57
Hire Purchase and Inland
Branches
25
i) On goods sold on H.P. = 43,500 × = Rs. 8,700
125
25
ii) On opening H.P. stock = 18,000 × = Rs. 3,600
125
25
iii) On closing H.P. stock = 31,000 × = Rs. 6,200
125
Illustration 9
Taking the information from illustration 6, ascertain the profit on hire purchase business by following
the Stock and Debtors system
Hire Purchase Stock Account
Dr. Cr.

Rs. Rs.

To Balance b/d 18,000 By Hire Purchase Debtors A/c 1,28,000

(at hire purchase price) (balancing figure)
To Goods Sold on Hire Purchase A/c 1,74,000 By Goods Repossessed A/c 6,000
(at hire purchase price)
By Balance c/d
(at hire purchase price) 60,000
1,92,000 1,92,000
To Balance b/d 60,000

Hire Purchase Debtors Account

Dr. Cr.

Rs. Rs.

To Balance b/d 10,000 By Cash A/c 1,20,000

To Hire Purchase Stock A/c. 1,26,000 By Balance c/d 16,000
(total instalment due—
balancing figure)
1,36,000 1,36,000
To Balance b/d 16,000

Goods Repossessed Account

Dr. Cr.

Rs. Rs.
To H.P. Stock A/c 6,000 By H.P. Adjustment A/c 3,000
(loss being the diff. between
instalments unpaid and its market value)
By Balance c/d 3,000
6,000 6,000
To Balance b/d 3,000
58
 Hire Purchase Adjustment Account Hire Purchase Accounts-II

Dr. Cr.

Rs. Rs.
To Stock Reserve A/c 20,000 By Stock Reserve A/c 6,000
(loading on closing H.P. stock) (loading on opening H.P. Stock)
To Loss on Goods Repossessed 3,000 By Goods Sold on Hire
(diff. between instalment due and Purchase A/c
market price) (loading) 58,000
To Expenses A/c 19,000
To Profit & Loss A/c 22,000
64,000 64,000

Check Your Progress C

1. Fill in the blanks:
i) Hire Purchase Adjustment Account shows the ………..on the opening
and closing stocks, and the goods sold on hire purchase.
ii) Hire Purchase Debtors Account is credited with the closing balance
and……….
iii) The Goods Sold on Hire Purchase are shown at ………….in Shop
Stock Account.
iv) The loss on goods repossessed is shown on the debit side of
…………………. Account.
v) The balance of ……………Account represents the value of stock
with customers at ………………………. Price.
2. List the accounts opened for ascertaining the profit or loss on hire purchase
business under the Stock and Debtors System.
................................................................................................................
................................................................................................................
................................................................................................................

12.10 LET US SUM UP

Under the hire purchase agreement, the hire vendor delivers only the physical
possession of the goods to the buyer (the hirer) and not the title of the goods.
Title passes when the payment of the last instalment is made. If the buyer makes
default, the hire vendor has the right to repossess the goods. But the vendor
can also enter into a compromise and repossess a part of the goods. When,
on default by the buyer, the vendor repossesses only a part of the goods,
he reassesses its value and adjusts the same against the amount due from hirer.
The basic difference between the hire purchase system and the instalment
payment system relates to the point of time when the title of the goods passes
from the seller to the buyer. In case of hire purchase system, the title of the 59
Hire Purchase and Inland goods passes at the time of payment of the last instalment while in case of
Branches
instalment payment system it passes at the time of signing the contract. Accounting
treatment in both systems is more or less the same. The only difference relates
to the treatment of interest. In case of hire purchase system, the actual amount
of interest is debited to the purchaser as and when the instalments fall due.
But, in case of instalment payment system, the buyer is debited with the total
amount of interest right at the time of sale by crediting it to Interest Suspense
Account. This account is debited with the actual amount of interest as and when
the instalments fall due. Under this system, the buyer is treated as a debtor
for the full amount including total interest. However, in practice, even this may
be dispensed with.
When the goods of small value are sold on hire purchase terms, a special
accounting treatment is required. The accounting records of sale of such goods
are maintained by the vendor only. He keeps a Hire Purchase Sale Register
with appropriate columns. The totals of these columns are posted in different
control accounts periodically.
There are two methods of ascertaining profit or loss on goods of small value
sold on hire purchase. They are (i) Debtors method under which Hire Purchase
Trading Account is prepared, and (ii) Stock and Debtors Method.
The Hire Purchase Trading Account is like Consignment Account; the first part
of which shows the opening H.P. stock, opening H.P. debtors and the goods
sold on hire purchase on the debit side; and cash received, goods repossessed
and closing H.P. stock and H.P. debtors on the credit side. The total of these
two sides should be equal. Its second part mainly shows the loading on goods
sold on hire purchase, loading on opening and closing stocks, the loss on goods
repossessed and the expenses on hire purchase business. The difference
represents the profit or loss on hire purchase business which is transferred to
the Profit & Loss Account.
Sometimes, certain items needed to prepare Hire Purchase Trading Account
may be missing. These can be ascertained by preparing three memorandum
accounts (i) Stock at Shop Account, (ii) Stock with Customers Account, and
(iii) Instalments Due Account. If, however, only one item is missing, it can be
ascertained directly from the first part of the Hire Purchase Trading Account.
Under Stock and Debtors Method, the accounts prepared for ascertaining the
profit or loss on hire purchase business are : (i) Goods sold on Hire Purchase
Account, (ii) Hire Purchase Stock Account, (iii) Hire Purchase Debtors Account,
(iv) Goods Repossessed Account, and (v) Hire Purchase Adjustment Account.
The Hire Purchase Adjustment Account is nothing but the second part of Hire
Purchase Trading Account which shows the profit or loss on Hire Purchase
sale. It is similar to Branch Adjustment Account prepared in case of branch
accounts.

12.11 KEY WORDS

Default: Failure on the part of the hirer (the buyer of the goods) to pay
instalment.
Instalment Sale: An ordinary sale transaction where the payments are made
on deferred terms, but the buyer becomes the owner of the goods immediately
60 on completion of the transaction.
Passing of Title: Transfer of ownership. Hire Purchase Accounts-II

Seizure: Repossession of goods within the provision of the law. A hire purchase
agreement may give the right to the hire vendor to seize the goods he has sold
if the hirer (the buyer) makes default in payment of instalments.
Control Accounts: Accounts prepared with aggregate figures to check the
accuracy of respective accounts-like H.P. Stock. H.P. Debtors, etc.
Hire Purchase Debtors: Amount of instalment due but not yet paid.
Hire Purchase Stock: Instalments not yet fallen due.
Hire Purchase Trading Account : An account prepared for ascertaining the
profit or loss on goods of small value sold on hire purchase basis.
Stock Reserve: Amount of loading involved in hire purchase stock.
Stock at Shop: Stock of unsold goods lying in the store.

12.12 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) failure ii) physical holding iii) recovery, possession
iv) terminated, seize, v) damages vi) title, initial payment.
2. i) False ii) True iii) False iv) True v) False
B 1. i) vendor ii) hire purchase sales iii) hire purchase trading iv) debit
v) instalment unpaid vi) stock with customers.
C 1. i) loading ii) cash received iii) cost iv) hire purchase adjustment
v) hire purchase stock, hire purchase.

12.13 TERMINAL QUESTIONS/EXERCISES

Questions
1. Explain the terms ‘Default’ and ‘Repossession’ both in relation to a hire
purchase transaction and an instalment sale transaction.
2. What are the rights of a hire vendor in case of default under the Hire
Purchase Act, 1972?
3. What are the rights of hirer in case of seizure and repossession of goods
under the Hire Purchase Act, 1972?
4. Describe the difference between the accounting treatment under the hire
purchase system and the instalment payment system.
5. Discuss in detail the similarities and dissimilarities of Hire Purchase System
and Instalment Payment System.
6. Describe how you can keep a detailed record of individual transactions
in subsidiary book.
7. State the journal entries passed to open various accounts under Stock
and Debtors System as applicable to hire purchase business.
8. Distinguish between ‘Stock and Debtor System’ and ‘Hire Purchase
Trading A/c Method’ (Debtors System) of ascertaining profit or loss on
goods of small value sold on hire purchase basis.
61
Hire Purchase and Inland Exercises
Branches
I. PQR Ltd. sold a piece of Machinery to RST Ltd. on 1.1.15 under a
hire purchase agreement. The payments were to be made in four annual
instalments of Rs. 4,230 each at the end of each year. The rate of interest
@ 5% was to be charged. RST Ltd. defaulted at the time of the third
instalment and POR Ltd. repossessed the machinery. RST Ltd. charged
depreciation @ 10% p.a. on W.D.V. method.
Show necessary ledger accounts in the books of RST Ltd.
(Answer : Cash Price Rs, 15,000, Total Interest Rs. 1920, Loss on
repossession Rs. 2,676).
2. Karim Ltd. purchased some furniture from Solman Ltd. on hire purchase
system on 1.1.17 at a cash price of Rs. 60,000, of this Rs. 15,480 was
to be paid as down payment and the balance in five annual instalments
of Rs. 10,000 each. The rate of interest was charged @ 4% p.a. Karim
Ltd., could only pay the first instalment and, on default, Solman Ltd.
repossessed the goods which were revalued by charging depreciation @
15% p.a. on straight line method. On 1.3.19 Solman Ltd. incurred Rs.
1,500 for reconditioning of the goods and sold them at Rs. 45,000.
Show the ledger accounts in the books of Solman Ltd.
(Answer: Amount due from Karim Ltd. on 31.12.18 Rs. 37,753; Profit
taken to P & L A/c in 2018 Rs. 4,247 : Profit on resale in 2019 Rs.
1,500. )
3. Fair Ltd. purchased on 1.1.16 machinery valued at Rs. 12,000 from Unfair
Ltd. under a hire purchase system under which the payments were to
be made in three equal annual instalments of Rs. 4,000. The interest @
6% p.a. was to be charged and paid along with the instalments. Fair
Ltd. could not pay the second instalment and it was agreed that Unfair
Ltd. would partly repossess Machinery costing Rs. 8,000 at Rs. 4,500
provided Fair Ltd. paid the arrear interest to-date. Show ledger accounts
in the books of Fair Ltd. assuming that depreciation @ 10% p.a. was
charged on W.D.V. method.
(Answer: Loss on partial repossession Rs. 1,980, value of the machinery
carried forward Rs. 3,240. Total amount of interest paid Rs. 1,200).
4. Ajay purchased five trucks on hire purchase on July 1, 2016. The cash
price of each truck was Rs. 1,00,000. He was to pay 25% of the cash
price as down payment with the delivery and the balance in five yearly
instalments together with the interest @ 5% per annum. Ajay fails to pay
the third instalment due on June 30, 2019. It was agreed that two trucks
would be returned to the vendor and the value of these two trucks would
be adjusted against the amount due. The trucks to be returned will be
valued at depreciation of 25% p.a. on W.D.V. method. The repossessed
trucks were overhauled at a cost of Rs 4,000 and sold for Rs. 90,000.
Show the necessary ledger accounts in the books of both the parties.
Books are closed on June 30 every year and depreciation @ 20% per
annum is charged.

62
 (Answer: Goods Repossessed Rs. 84,375. Loss on Goods repossessed Hire Purchase Accounts-II
Rs. 18,025. Balance due to Hire Vendor Rs. 1,88,297)
5. Harish purchased from Ramesh some motor pumps on 1.1.17 under
instalments payment system. The cash price was Rs. 74,466 which was
to be paid Rs. 20,000 as down payment and the balance in three equal
annual instalments of Rs. 20,000 including interest @ 5% p.a.

Show the ledger accounts in the books of Harish and Ramesh assuming
depreciation @ 10% p.a. on straight line method.

(Answer: Total Interest for Interest Suspense A/c Rs. 5,534 adjusted
Rs. 2,723 in 2017, Rs. 1,859 in 2018 and Rs. 952 in 2019).

6. Lokesh purchased on 1.1.17 some machinery from Suresh under instalment

payment system under which Rs. 6,000 was to be paid as down payment
and the rest in 3 equal annual instalments at interest @ 5%. The cost
price was Rs. 22,350. Depreciation was charged @ 10% on W.D.V.
method.

Show the ledger accounts in the books of both the parties.

(Answer: Total interest for Interest Suspense A/c Rs. 1,650 adjusted as
Rs. 818 in 2017, Rs. 558 in 2018 and Rs. 274 in 2019)
7. Premier Trader Co., a hire vendor, furnished the following information for
the year ended 31.12.2018.
Rs.
Goods with hire purchase Customers
(at hire purchase price) on 1.1.2018 32,000
Goods sold on hire purchase during the year 1,60,000
(at hire purchase price) ,
Cash received during the year 1,12,000
Goods received back 600
(instalments unpaid Rs. 4,000) at market value
Goods with hire purchase customers 72,000
(at hire purchase price) on 31.12.2018
Prepare Hire Purchase Trading Account in the books of Premier Trader
Co. who sold goods on hire purchase at cost plus 60%.
(Answer: Profit Rs. 41,600; Missing figure : H.P. Debtors at the end
of Rs. 4,000)

63
Hire Purchase and Inland 8. From the following transactions of Lee Ltd., a hire vendor, prepare the
Branches
necessary accounts under Debtors Method in its books for the year ended
1
31.12.18. The goods are sold at cost plus 33 %
3
Rs.
January 1, 2018 Stock in the shop 2,000
Instalments due 1,200
Stock with customers at H.P. price 16,000
December 31.12.18 Stock in the shop 2,800
Instalments due and unpaid 2,000
Stock with customers at H.P. price 18,400
Cash received during the year 32,000
Expenses on hire purchase business 3,000
Purchases 27,200
(Answer: Goods sold on Hire Purchase at H.P. price Rs. 35,200; Profit
Rs. 5,200)

9. H.C. Sales, a hire vendor, was engaged in hire purchase business. The
following information is provided to you for the year ended December
31, 2018, in respect of his business.

January 1, 2018 Stock with Customers at H.P. price 4,500

Instalment due 2,500
December 31,2018 Cash received form customers 30,000
Goods repossessed
(instalments due Rs. 1,000)
at market value 650
Instalment due 4,500
Goods sold on hire purchase 43,500

Prepare necessary accounts under Stock and Debtors System assuming

H.P. Price at cost plus50%.

(Answer: Net profit Rs. 10,650; missing figure H.P. Stock at end
Rs. 15,000)

10. Following information was available for the year ended June 30, 2018,
in respect of Auto Dealers Ltd. who was engaged in hire purchase
business. Calculate the amount of profit under Stock and Debtors Method.
July 1, 2017 Instalments due 4,000

Stock, at shop 12,000

Stock out with customers (at H.P.Price) 25,000

Cash received during the year 2,00,000

64
 Purchases 1,67,000 Hire Purchase Accounts-II

Goods repossessed
(instalments due Rs. 3,000) valued at 500

June 30, 2018 Instalments due 6,000

Stock at shop 11,000

Stock out with customers (at H.P. Price) 30,000

The goods were sold on purchase at 20% on hire purchase price.

(Answer : Profit Rs. 38,500)
11. Girdhari also sells goods on hire purchase basis. The hire purchase price
is fixed by adding 50% to the cost. The following are the figures relating
to his hire purchase business for the year 2018.
Rs.
H.P. Stock as on 1.1.2018 36,000
H.P. Debtors as on 1.1.2018 900
Goods sold on hire purchase at H.P. price 2,71,800
Cash received during the year 2,77,200
Total amount of instalments that fell due during 2018 2,78,100

A customer to whom goods had been sold for Rs. 3,600 paid three
instalments of Rs. 300 each. His fourth instalment fell due on December
1, 2018 which he failed to pay. Consequently, the goods were repossessed
on December 27, 2018 after due legal notice. Prepare the necessary
accounts under the Stock and Debtors System for the year ending
December 31, 2018.
(Answer: Profit Rs. 92,600; Missing figures; H.P. Stock at the end Rs.
27,300 and H.P. Debtors at the end Rs. 1,500 after crediting Rs. 2,400
and Rs. 300 for goods repossessed.)

12.14 SOME USEFUL BOOKS

Maheshwari. S.N., 2018: Introduction to Accounting Vikas Publishing House,
New Delhi.

MongaJ.R..Ahuja G.C. & Ashok Sehgal, 2018 :Advanced Accounting National

Publishing House Sew Delhi.

William Pickes, 2002, Accountancy, E.L.B.S. and Pitman, London

Gupta R L. and M. Radbaswamy, 2018.Advanced Accounting Sultan Chand

& Sons, New Delhi

Shukla.M.C..Grewal T.S. & S.C. Gupta, 2018 Advanced Accounts S. Chand

& Co. Ltd., New Delhi.
65
Hire Purchase and Inland
Branches Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

66
 Branchand
Journal Accounts-I
Ledger
UNIT 13 BRANCH ACCOUNTS-I
Structure
13.0 Objectives
13.1 Introduction
13.2 Need for Branch Accounting
13.3 Types of Branches
13.4 Accounting for Dependent Branches
13.5 Debtors System
13.5.1 Cost Price Method
13.5.2 Invoice Price Method

13.6 Final Accounts System

13.7 Stock and Debtors System
13.8 Let Us Sum Up
13.9 Key Words
13.10 Answers to Check Your Progress
13.11 Terminal Questions/Exercises

13.0 OBJECTIVES
After studying this unit, you should be able to:
 describe the need for branch accounting;
 explain the different types of branches from accounting point of view;
 describe three systems of maintaining branch accounts for a dependent
branch;
 prepare branch account under the debtors system both at cost price and
at invoice price;
 prepare branch account under the final accounts system; and
 prepare the necessary accounts under the stock and debtors system.

13.1 INTRODUCTION
A business may be split up into a number of divisions. The divisions are known
as departments if located under the same roof. On the other hand, if divisions
are located at different places of the same town, country or world, they are
called branches. For example, Cottage Emporium has various divisions like
garments, furniture, gift items, jewellery, etc. They are located in the same building
and so are called departments. Snowhite has its showrooms in Connaught Place,
Nehru Place, Karol Bagh, South Extension and Kamlanagar. These are all
branches of Snowhite. Similarly, Bata has its branches all over the country and
Leventies all over the world. Each branch is treated as a separate profit centre 67
Hire Purchase and Inland and hence the profit or loss is to be worked out separately for each branch.
Branches
Moreover, the firm has to keep strict control over various activities of each
branch and ensure its smooth functioning. The accountants, therefore, have
developed some specialised accounting methods for the recording of transactions
at branch level and for incorporating the net effect of all branch transactions
in the firm’s books.
From accounting point of view, the branches are divided into three categories
(i) dependent branches, (ii) independent branches, and (iii) foreign branches.
In this unit, you will learn how the accounts of dependent branches are maintained
and how their profit or loss is worked out.

13.2 NEED FOR BRANCH ACCOUNTING

As stated earlier, each branch is treated as a separate profit centre. Hence,
it should record various transactions in such a manner that its profit or loss
can be worked out and incorporated in the firm’s overall results at the end
of the accounting year. Moreover, the branches conduct all activities under the
direction and control of the head office which may need a variety of information
from time to time about the functioning of each branch. This becomes possible
only if the branches keep proper books of account. Thus, the main reasons
of keeping branch accounts can be summarised as follows :
i) to find out the profit or loss of each branch for the accounting period;
ii) to ascertain the financial position of each branch at the end of the accounting
year;
iii) to incorporate the net effect of branch transactions and their assets and
liabilities in a firm’s final accounts;
iv) to estimate requirements of cash and stock for each branch;
v) to evaluate the progress and performance of each branch;
vi) to calculate the commission for payment to the managers, if based on profit
of branch;
vii) to assess the prospects for expansion of business in each branch; and
viii) to meet audit requirements.

13.3 TYPES OF BRANCHES

From accounting point of view, the branches can be divided into the following
categories:
1) Branches not keeping full system of accounting;
2) Branches keeping full system of accounting;
3) Foreign branches.
Let us have an idea about their main characteristics.
Branches not Keeping Full System of Accounting: The branches not keeping
full system of accounting are also called dependent branches. The main features
68
of such branches are: Branch Accounts-I

i) They sell only those goods which are received from the head office and
are not usually allowed to make purchases in the open market except with
the permission of the head office.

ii) Goods are supplied by the head office to such branches either at cost
price or at invoice price.

iii) All major expenses of the branch are paid by the head office. The branch
manager is allowed to incur only petty expenses like cartage, postage, etc.
out of the petty cash provided to him for which he is required to maintain
a simple petty cash book.

iv) The amount received from cash sales and debtors is either remitted to the
head office daily or deposited in the account of head office in some local
bank.

v) The branch manager is normally expected to sell the goods for cash, but
he may be authorised to sell goods on credit in certain cases.

vi) Such branches do not keep complete books of account. They simply
maintain record of sales and prepare debtors accounts, if necessary. They
are also required to maintain a stock register and furnish weekly or monthly
statements giving complete information about stock position and movement
of goods to the head office. This enables the head office to keep proper
control over stock at branches.

Branches Keeping Full System of Accounting: Branches keeping full system

of accounting are called independent branches. They are allowed to purchase
goods from the market and also supply to the head office, if necessary. They
can incur expenses from the cash realised and operate the bank account in
their own names. Thus, they operate as independent units for all practical
purposes. Their only link with the head office is that they are owned by the
head office and whatever profit they earn or loss they incur ultimately belongs
to the head office.

Such branches keep a complete set of books on the double entry system and
prepare their own Trial Balance, Trading and Profit & Loss Account and Balance
Sheet. Such branches open Head Office Account in their books and record
all transactions between the branch and the head office in this account.

Foreign Branches: When a branch is located in a foreign country, it is called

a foreign branch. Such branches will keep their books of account in foreign
currency. The Distinctive feature of foreign branches is that financial information
received from them will be in foreign currency which has to be converted into
the currency of the country of the head office before it is incorporated in the
head office books. For example, if an Indian company has a branch in Nairobi,
the branch Trial Balance will be in Kenyan shillings. The Trial Balance must
be converted into rupees before it can be incorporated in head office books.
For all practical purposes, however, foreign branches are treated as independent
branches.

Look at Figure 13.1 for complete classification of branches. 69

Hire Purchase and Inland Classification of Branches
Branches

Inland Branches Foreign Branches

Branches not keeping Branches keeping

full system of Accounting full system of Accounting
(Dependent Branches) (Independent Branches)
Fig. 13.1

13.4 ACCOUNTING FOR DEPENDENT

BRANCHES
You know that the dependent branches do not keep a complete set of books.
Most of their transactions are recorded at the head office level. The accounting
system adopted by head office for a branch depends up on the size of a branch
and the degree of control to be exercised by the head office. The following
are the various methods by which the head office usually keeps branch accounts
in its books:
i) Debtors System: This system is adopted generally for those branches
which are fairly small in size. Under this system, the head office simply
opens a Branch Account for each branch in which it records all transactions
relating to the branch. The Branch Account is prepared in such a manner
that it also helps in ascertaining the branch profit or loss.
ii) Final Accounts System: Under this system, the head office prepares a
Trading and Profit and Loss Account in order to find out profit or loss
of each branch and a Branch Account to find out the amount due to, or
due from that branch. In this case, the Branch Account simply acts as
a personal account.
iii) Stock and Debtors System: Under this system, the head office does not
open any Branch Account. For each branch, it prepares a Branch Stock
Account, a Branch Expenses Account, a Branch Adjustment Account and
Goods sent to Branch Account in order to find out the profit or loss of
each branch.

13.5 DEBTORS SYSTEM

As stated earlier, under debtors system, the head office simply opens a
Branch Account for each branch in which it records all transactions relating
to the branch. The Branch Account also helps in ascertaining the profit or loss
of the branch.
Goods may be invoiced to a branch at cost or at selling price (also called
invoice price). Accordingly, there are two methods of preparing the Branch
Account: (1) Cost Price Method, and (ii) Invoice Price Method. Let us now
study the preparation of Branch Account under both of these methods.
70
13.5.1 Cost Price Method Branch Accounts-I

When goods are invoiced at cost, the following journal entries are passed in
the books of the head office to record various transactions relating to the branch.
1) For Goods sent to Branch
Branch A/c Dr.
To Goods Sent to Branch A/c
(Being goods sent to branch)
2) For return of goods to head office
Goods Sent to Branch A/c Dr
To Branch A/c
(Being goods returned by the branch)
3) For amount sent to branch for expenses
Branch A/c Dr.
To Bank A/c
(Being cheque sent to branch for expenses)
4) For amount received from branch
Bank A/c Dr.
To Branch A/c
(Being cash or cheque received from branch)
5) For closing goods sent to branch account
Goods Sent to Branch A/c Dr.
To Purchases/Trading A/c
(Being balance transferred to Trading Account)
6) For closing balances of assets at the branch
Branch Assets A/c (Individually) Dr.
To Branch A/c
(Being closing balances of assets brought into account)
7) For closing balances of liabilities at the branch
Branch A/c Dr.
To Branch Liabilities A/c (Individually)
(Being closing balances of liabilities brought into account)
8) For transferring profit or loss to the General Profit and
Loss Account
i) If profit
Branch A/c Dr.
To General Profit and Loss A/c
(Being branch profit transferred to General P & L A/c)
ii) If loss
General Profit and Loss A/c Dr.
To Branch A/c
(Being branch loss transferred to General P & L A/c)
The closing balances of branch assets and liabilities are shown in the Balance
Sheet of the head office. At the beginning of the next year, the entry numbers
6 and 7 are reversed so as to show opening balances in the Branch Account.
The Branch Account will appear as given in Figure 13.2. 71
 Figure 13.2
Hire Purchase and Inland
Branches Branch Account
Dr. Cr.

To Opening Balances By Opening Balances

Stock Creditors
Debtors Outstanding expenses
Petty Cash By Bank
Furniture Cash Sales
Prepaid expenses Collections from Debtors
To Goods Sent to Branch A/c (for remittances)
To Bank A/c (for expenses of By Goods Sent to Branch A/c
any payment made by the H.O. (goods returned by the
on behalf of the Branch) branch to head office)
To Closing Balances By Closing Balance
Outstanding expenses Petty Cash
Creditors Stock
To Profit, if any Debtors
(transferred to General Furniture (at depreciated value)
Profit & Loss A/c) Prepaid Expenses
By Loss, if any
(transferred to General
Profit & Loss A/c)

Look at illustrations 1 and 2 and study how Branch Account is prepared with the help of the given
information.
Illustration 1
From the following particulars relating to Delhi Branch for the year ending December 31, 2018, prepare
Branch Account in the books of head office.
Rs. Rs.
Stock at Branch on 1-1-2018 15,000 Cheques sent to Branch:
Debtors at Branch on 1-1-2018 30,000 Salaries 9,000
Petty Cash at Branch on 1-1-2018 300 Rent and Taxes 1,500

Goods sent to Branch 2,52,000 Petty Cash 1,100 11,600

Cash sales 60,000 Goods returned by branch 2,000

Received from Debtors 2,10,000 Stock at Branch on 31-12-2018 25,000
Credit Sales 2,28,000 Petty Cash at Branch on 31-12-2018 200
Debtors at Branch on 31-12-2018 48,000

72
Solution: Branch Accounts-I
Head Office Ledger
Delhi Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d By Cash:
Branch Stock 15,000 Cash Sales 60,000
Branch Debtors 30,000 Received from
Branch Petty Cash 300 Debtors 2,10,000 2,70,000
To Goods sent to Branch A/c 2,52,000
To Bank A/c By Goods sent to Branch A/c 2,000
Salaries 9,000
Rent & Taxes 1,500
Petty Cash 1,100 11,600 By Balance c/d
To Profit (transferred to General Branch Stock 25,000
P & L A/c) 36,300 Branch Debtors 48,000
Branch Petty Cash 200
3,45,200 3,45,200

Illustration 2
Sankat Mochan Ltd., Varanasi opened a branch at Madras on January 1, 2018. The following particulars
are available in respect of the branch for the year 2018.

Rs. Rs.
Goods sent to branch 75,000 Cash remittance to branch towards Petty Cash 6,000
Cash sales at branch 50,000 Petty Cash at branch on 31-12-2018 500
Credit sales at branch 60,000 Debtors at branch on 31-12-2018 5,000
Salaries of branch staff paid by Stock at branch on 31-12-2018 27,000
Head Office 15,000
Office expenses of branch
paid by Head Office 12,000

Prepare Branch Account to show the profit/loss from the branch for the year 2018.
Solution
Books of Sankat Mochan Ltd. Madras Branch Account
Dr. Cr.
Rs. Rs.
To Goods sent to Branch A/c 75,000 By Bank A/c
To Bank A/c Cash Sales 50,000
Salaries 15,000 Received from Debtors 55,000 1,05,000
Office expenses 12,000 27,000
To Bank A/c (for petty expenses) 6,000 By Balance c/d:
To Profit (transferred to General Branch Petty Cash 500
P & L A/c) 29,500 Branch Debtors 5,000
Branch Stock 27,000
1,37,500 1,37,500
73
Hire Purchase and Inland
Branches
Note: The amount of cash received from debtors is not given. It has been found by preparing the
Memorandum Branch Debtors Account as follows:
Memorandum Madras Branch Debtors Account
Dr. Cr.

Rs. Rs.
To Credit Sales 60,000 By Cash Received (balancing figure) 55,000
By Balance c/d 5,000
60,000 60,000

Some Peculiar Items

Petty cash expenses: No entry is made in respect of petty cash expenses
incurred by the branch out of its petty cash. As per practice, the Branch Account
is debited with the opening balance of petty cash and the amount of petty cash
sent by Head Office, and it is credited with the closing balance of petty cash.
This amounts to a net debit to Branch Account which is equal to the
amount of petty expenses incurred by branch. For example, the opening
balance of petty cash with a branch was Rs. 200, the cash sent by Head Office
for petty expenses was Rs. 300 and the petty expenses incurred by branch
were Rs. 400. When we debit the Branch Account with Rs. 200 (opening petty
cash balance) and Rs. 300 (amount sent by head office) and credit it with
Rs. 100 (closing petty cash balance), the Branch Account stands debited by
a net amount of Rs. 400 (Rs. 200 + Rs. 300 — Rs. 100) which is equal
to the amount of petty cash expenses (Rs. 400) incurred by the branch.
Credit sales, sales returns, bad debts, discount allowed to debtors etc. :
All these items relate to branch debtors and will not be shown in the Branch
Account. The reasoning is similar to that of petty cash expenses. When the
Branch Account is debited with the opening balance of branch debtors and
credited with cash received from debtors and the closing balance of branch
debtors, the amount of credit sales automatically stand accounted for.
Shortage or surplus of stock: It is possible that, at the time of checking
the stock of a branch, certain amount of shortage or surplus is detected. These
are not to be shown in the Branch Account because the closing stock credited
to the Branch Account is the actual amount of stock and thus the shortage
or surplus is automatically covered.
Depreciation of fixed assets: This is also not shown in the Branch Account
because, as per practice, the closing balance of the fixed asset after deducting
the amount of depreciation is shown on the credit side of the Branch Account.
Thus you should note that while preparing the Branch Account for dependent
branches, the following Items will be ignored:
1) Petty Cash Expenses
2) Credit Sales
3) Sales Returns
74 4) Bad Debts
5) Discount Allowed to Debtors Branch Accounts-I

6) Shortage or Surplus of Stock

7) Depreciation
Look at illustration 3 and see how Branch Account is prepared without
specifically showing the above items, if given.
Illustration 3
Pratap Tractors Ltd., Allahabad, has a branch at Hissar. From the following
particulars relating to the branch for the year ending December 31, 2018, prepare
the Branch Account in the head office books:

Stock at Branch on 1-1-2018 10,000 Discount allowed to Debtors 100

Branch Debtors on 1-1-2018 4,000 Cash sent to Branch:
Petty Cash on 1-1-2018 500 Rent 2,000
Furniture on 1-1-2018 2,000 Salaries 2,400
Prepaid Insurance on 1-1-2018 150 Petty Cash 1,000
Salaries Outstanding on1-1-2018 1,00,000 Insurance (upto 31-3-2019) 600
Goods sent to Branch 80,000 Good Returned by Branch 1,000
Cash Sales 30,000 Good Returned by Debtors 2,000
Credit Sales 40,000 Stock at Branch on 31-12-2018 5,000
Cash received from Debtors 35,000 Petty Expenses paid by Branch 850
(direct to HO)
Cash paid by Debtors 2,000
Provide depreciation on furniture @ 10% p.a.
Solution :
Hisar Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d By Balance b/d
Branch Stock 10,000 Branch Outstanding Salaries 1,00,000
Branch Debtors 4,000
Branch Petty Cash 500 By Cash:
Branch Furniture 2,000 Cash Sales 30,000
Branch Prepaid Insurance 150 Cash Received from Debtors 37,000 67,000
To Goods Sent to Branch 80,000 By Balance c/d
Less : Return from 1,000 79,000 Branch Stock 5,000
Branch Branch Petty Cash 650
To Bank Branch Debtors 4,900
Rent 2,000 Branch Furniture 1,800
Salaries 2,400 Branch Prepaid Insurance 150
Petty Cash 1,000
Insurance 600
6,000
To Profit (transferred to General
P & L A/c) 77,850
1,79,500 1,79,500
75
Hire Purchase and Inland Notes:
Branches
1) Cash received from debtors include Rs. 2,000 which the debtors directly
paid to the head office.
2) Branch petty cash balance at the end is not given. It is ascertained as
follows:
Petty Cash at the beginning 500
Add: Amount sent by head office 1,000
1,500
Less: petty cash expenses 850
Petty Cash Balance 650
3) Furniture at the end has been shown after deducting Rs. 200 for
depreciation.
4) Prepaid insurance on 31-12-2018 is one-fourth of Rs. 600.
5) The closing balance of branch debtors is not given. It has been worked
out by preparing the Memorandum Branch Debtors Account as follows:

Memorandum Branch Debtors Account

Rs. Rs.
To Balance c/d 4,000 By Cash Received from Debtors 37,000
To Sales (Credit) 40,000 By Sales Returns 2,000
By Discount Allowed 100
By Balance c/d (balancing figure) 4,900
44,000 44,000

13.5.2 Invoice Price Method

As in the case of consignment, the goods may he invoiced to branches at a
price higher than the cost (termed as invoice price). This is done primarily to
have an effective control over stock with branches and keep the margin of profit
secret from the branch manager. In such a situation, all entries relating to goods
are made in the Branch Account at invoice price and necessary adjustments
for loading (difference between I.P. and C.P.) are recorded at the end by passing
the following additional journal entries:
1) For adjustment of loading in opening stock at branch
Stock Reserve A/c Dr.
To Branch A/c
2) For adjustment of loading in goods sent to branch less returns
Branch A/c Dr.
To Goods Sent to Branch A/c
3) For adjustment of loading in closing stock at branch
Branch A/c Dr.
76 To Stock Reserve A/c
Look at illustration 4 and see how Branch Account is prepared when goods Branch Accounts-I
are invoiced at a price higher than cost.
Illustration 4
The Mukund Gas Co., Varanasi have a sales branch at Ghaziabad and invoiced
1
goods to the branch at cost price plus 33 per cent. It is arranged that all
3
cash received by the branch is to be paid daily to the Head Office Account
with the Banaras State Bank Ltd. and the necessary advice sent to the Head
Office. From the following particulars, prepare Branch Account and Goods Sent
to Branch Account in the Head Office ledger showing the actual profit or loss
of the branch for the year ending December 31, 2018.
Rs. Rs..
Stock on 1.1.2018 12,000 Rent, Rates and Taxes 3,200
(at invoice price)
Goods Sent to Branch 96,000 Salaries and Wages 4,800
(at invoice price)
Debtors on 1-1-2018 1,500 Debtors on 31-12-2018 1,600
Cash Sent to Head Office 77,100 Goods Returned to Head Office 16,000
(at invoice price)
Sales 77,000 Shortage of stock 200
(at invoice price)
Solution :
Books of Mukumd Gas. Co., Varanasi
Ghaziabad Branch Account
Dr. Cr.
Rs. Rs.
To Balance b/d
Branch Stock 12,000 By Cash Received 77,100
Branch Debtors 1,500 By Goods Returned by Branch A/c 16,000
To Goods Sent to Branch 96,000 By Stock Reserve A/c 3,000
(loading in op. stock)
To Bank A/c By Goods Sent to Branch A/c 20,000
(loading in goods sent less returns)
Rent, Rates & Taxes 3,200 By Balance c/d
Salaries & Wages 4,800 8,000 Branch Stock 14,800
To Stock Reserve A/c 3,700 Branch Debtors 1,600
(loading in Cl. Stock)
To Profit (Transferred to 11,300
General P & L A/c)
1,32,500 1,32,500
77
Hire Purchase and Inland Goods Sent to Branch Account
Branches

Rs. Rs.
To Ghaziabad Branch A/c 16,000 By Ghaziabad Branch A/c 96,000
To Ghaziabad Branch A/c 20,000
(loading on Rs. 80,000)
To Trading A/c (transfer) 60,000
96,000 96,000

Notes : 1) The branch stock at the end has not been given. It can be worked out by preparing
Memorandum Branch Stock Reserve Account as follows :
2) Loading is 25% of invoice price.
Memorandum Branch Stock Account

Rs. Rs.
To Balance b/d 12,000 By Goods returned to Head Office 16,000
To Goods received form Head Office 96,000 By Sales 77,000
To Goods returned to Customers ... By Shortage of stock 200
By Balance c/d 14,800
1,08,000 1,08,000

It should be noted that all figures in Memorandum Branch Stock Account

have been recorded at the invoice price.
Check Your Progress A
1. What do you mean by dependent branch?
................................................................................................................
................................................................................................................
................................................................................................................
2. Fill in the blank:
i) The branch expenses paid by the Head Office are …..........….. to
the Branch Account.
ii) The balance in Goods sent to Branch Account is transferred
to…....................… Account.
iii) If the cost price is Rs. 100 and the invoice price is cost plus 20%
on invoice price, the invoice price is Rs ……………
iv) Loading is the ……...................…..between cost price and invoice
price.
v) If opening or closing stock is not given, the same can be worked
out by preparing ……….. Account at ………price.
78
3. List the items which are not to be shown in Branch Account prepared Branch Accounts-I
under the Debtors System.
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................

13.6 FINAL ACCOUNTS SYSTEM

The profit or loss of a dependent branch can also be worked out by preparing
a Memorandum Branch Trading and Profit & Loss Account. This account is
prepared on the basis of cost of goods sent to the branch (not the invoice
price). Apart from the Branch Trading and- Profit & Loss Account, the Head
Office also maintains the Branch Account. But, under this system, the Branch
Account is in the nature of a personal account which shows only the mutual
transactions between the head office and the branch. The balance of Branch
Account, therefore, represents the net assets of the branch.
Look at illustration 5 and study how profit or loss is ascertained and how Branch
Account is maintained under the final accounts system.
Illustration 5
A-one Ltd., Bhopal has a branch at Madras to which the goods are sent at
cost plus 25%. The Madras branch keeps its own Sales Ledger and remits
all cash received to the Head Office every day. All expenses are paid by the
head office. The transactions for Madras Branch during the year ending
December 31, 2018 were as follows:
Rs. Rs.
Stock (1-1-2018) 11,000 Return Inwards 500
Debtors (1-1-2018) 100 Cheques Sent to Branch
Petty Cash 100 Rent 600
Cash Sales 2,650 Wages 200
Credit Sales 23,950 Salary and other Expenses 900
Goods Sent to Branch 20,000 Stock (31.12.2018) 13,000
Collection on Ledger A/c 21,000 Debtors (31.12.2018) 2,000
Goods Returned to H.O. 300 Petty Cash (31.12.2018)
(Including miscellaneous
income Rs. 25 not remitted) 125
Bad Debts 300
Allowances to Customers 250
Prepare the Memorandum Branch Trading and Profit & Loss Account and
Madras Branch Account for the year ending December 31, 2018.
79
Hire Purchase and Inland
Branches

Solution:
Memorandum Branch Trading and Profit & Lass Account for the year ending 31.12.2018
Dr. Cr.

Rs. Rs.
To Opening Stock 8,800 By Sales
(11,000 – 2,200) (1/5 loading) Cash 2,650
To Goods sent to Branch 16,000 Credit 23,950
(20,000 – 4,000) (1/5 loading) 26,600
To Wages 200 Less Returns 500 26100
To Gross Profit c/d 11,740 By Goods sent to HO. 240
(300-60) 1/5 loading
By Closing Stock 10,400
(13,000 – 2,600) (1/5 loading)
36,740 36,740
To Bad Debts 300 By Gross Profit b/d 11,740
To Allowances 250 By Misc. Income 25
To Rent 600
To Salaries and other expenses 900
To Profit transferred to General 9,715
Profit & Loss A/c
11,765 11,765

Madras Branch Account

Rs. Rs.
To Balance b/d By Bank A/c
Stock 8,800 Cash Received from
Debtors 100 Debtors 21,000
Petty Cash 100 Cash Sales 2,650
To Goods sent to Branch A/c 16,000 By Goods Sent to Branch 240
(returns to H.O.)
To Bank A/c By Balance c/d
Rent 600 Stock 10,400
Wages 200 Debtors 2,000
Salaries and other expenses 900 Petty Cash 125

To Profit as per Branch Trading 9,715

and P & L A/c
36,415 36,415
80
 Branch Accounts-I
13.7 STOCK AND DEBTORS SYSTEM
Under Stock and Debtors System, the Head Office does not open a Branch
Account in its books. It maintains a few control accounts for recording the
various branch transactions. These accounts usually are : (1) Branch Stock
Account, (ii) Branch Debtors Account, (iii) Branch Expenses Account, (iv)
Branch Cash Account, (v) Goods Sent to Branch Account, and (vi) Branch
Fixed Assets Account. At the end of the accounting year, it prepares the Branch
Adjustment Account and the Branch Profit & Loss Account. This system is
used only when goods are invoiced at selling price which the branch is not
allowed to vary.

Let us now study the working of each account opened by the Head Office
when such a system is followed.

Branch Stock Account: This is the most important account which helps the
Head Office in controlling the branch stock. It shows all branch transactions
relating to goods. The goods sent to branches and the sales returns are shown
on its debit side, and the sales (both cash and credit) and the goods returned
to head office on the credit side. All these items are recorded at the invoice
price. Hence, if the figure of any of these items is given at cost, the same
should be converted into invoice price before recording it in the Branch Stock
Account. The balance of this account would show the unsold goods (stock)
lying with the branch. If it is found that the actual stock with the branch is
less than the balance shown by the Branch Stock Account, it means that there
is a ‘shortage’ in the stock with the branch. Similarly, if the actual stock with
the branch is more than the balance shown by the Branch Stock Account, it
would reflect ‘surplus’. Both situations warrant investigation. But, so far as their
recording goes, the shortage will be shown on the credit side of the Branch
Stock Account and if there is surplus, the same will be recorded on its debit
side. Then, the balance of the Branch Stock Account will be the exact amount
of actual stock with the branch. In other words, while preparing the Branch
Stock Account, you will show the actual stock with branch as the balance in
this account, and then if the totals of both sides do not tally, you will show
the difference as shortage or surplus as the case may be.

Branch Debtors Account: This account shows all transactions relating to branch
debtors. The credit sales are shown on its debit side, and cash received from
debtors, sales returns, bad debts, discount allowed, etc. on the credit side. The
balance of this account represents the closing debtors of the branch.

Branch Expenses Account: This account shows all expenses incurred by the
branch. In addition, the items like bad debts, discount allowed, depreciation
on branch fixed assets, etc. are also debited to this account. This account is
closed by transfer to the Branch Adjustment Account.

Branch Cash Account: This account shows all cash transactions of the branch
where the branch is not required to remit all collection of cash immediately
to the Head Office, but use it for branch expenses and remit the balance to
the Head Office from time to time. This account helps the Head Office to keep
control over branch cash. Normally, the dependent branch is not allowed the
freedom to retain cash collections. Hence, this account need not be maintained.
81
Hire Purchase and Inland Branch Fixed Assets Account: The Head Office maintains separate account
Branches
for each type of branch asset such as furniture, equipment, building, etc. These
accounts are prepared in the usual manner. The depreciation on branch fixed
assets is, however, debited to Branch Expenses Account and credited to the
respective account.
Goods Sent to Branch Account: This account is prepared in the same manner
as in case of branches to which the goods are sent at the invoice price.
Branch Adjustment Account: This account is like a Trading Account of the
branch. It is prepared to ascertain the gross profit or gross loss made at the
branch by recording the loading (difference between invoice price and cost price)
on various items. The loading on branch closing stock and shortage is shown
on its debit side while the loading on branch opening stock, goods sent to branch
(less returns) and surplus on the credit side. The balance of this account reflects
the gross profit or gross loss which is transferred to Branch Profit & Loss
Account.
Branch Profit & Loss Account: This account is prepared to ascertain the
net profit or net loss made at the branch. As stated earlier, the gross profit
or gross loss ascertained by the Branch Adjustment Account is transferred to
this account. It is debited with branch expenses as per the Branch Expenses
Account and the loss on account of shortage being the cost of such shortage.
In case the Branch Stock Account reveals some surplus, the amount equal to
the cost of such surplus will be shown on the credit side of the Branch Profit
& Loss Account. The balance of the Branch Profit & Loss Account represents
the net profit or net loss made at the branch which is transferred to the General
Profit & Loss account.
The following journal entries are passed in the Head Office books for opening
the above accounts relating to the various branch transactions:
1) When goods are sent to the branch (at invoice price)
Branch Stock Ale Dr.
To Goods Sent to Branch A/c
2) When goods are returned by the branch to the H.O. (at invoice
price)
Goods Sent to Branch A/c Dr.
To Branch Stock A/c
3) When sales are made by the branch
i) For Cash Sales
Cash A/c Dr.
To Branch Stock A/c
ii) For Credit Sales
Branch Debtors A/c Dr.
To Branch Stock A/c
4) When cash is received from debtors
Cash A/c Dr.
To Branch Debtors A/c

82
5) For sales returns Branch Accounts-I
Branch Stock A/c Dr.
To Branch Debtors A/c
6) For discount allowed, bad debts, etc.
Branch Expenses A/c Dr.
To Branch Debtors A/c
7) For shortage of stock
Branch Adjustment A/c Dr.
(with amount of loading)
Branch P & L A/c Dr.
(with cost of shortage)
To Branch Stock A/c
For surplus at branch, the reverse entry will be passed.
8) For Branch expenses paid in Cash
Branch Expenses A/c Dr.
To Cash A/c
9) For closing branch expenses account
Branch P & L A/c Dr.
To Branch Expenses A/c
10) For adjustment of loading on the opening stock
Stock Reserve A/c Dr.
To Branch Adjustment A/c
11) For adjustment of loading on the closing stock
Branch Adjustment A/c Dr.
To Stock Reserve A/c
12) For adjustment of loading on net goods sent to branch
Goods Sent to Branch A/c Dr.
To Branch Adjustment A/c
13) For transfer of gross profit
Branch Adjustment A/c Dr.
To Branch P & L A/c
14) For transfer of net profit to General Profit & Loss Account
Branch Adjustment A/c Dr
To General P & L A/c
The entry will be reversed if there is net loss.
15) For closing the Goods Sent to Branch Account
Goods Sent to Branch A/c Dr.
To Trading A/c
Look at illustration 6 and see how the accounts for various branch transactions
are prepared under Stock and Debtors System.

83
Hire Purchase and Inland
Branches
Illustration 6
Indiana Traders, Jaipur opened a branch at Jodhpur on 1-7-2017. The goods were sent by the Head
Office to the branch invoiced at selling price of the branch which was 125% of the cost price of
the head office.
The following are the particulars relating to the transactions of Jodhpur Branch
Rs. Rs.
Goods sent to branch 2,80,000 Cash sent to branch for:
(at cost to head office) Wages 3,000
Sales—Cash 1,24,000 Freight 11,000
Sales—Credit 1,75,000 Other expenses including
godown rent 6,000 20,000
Cash collected from debtors 1,56,000
Discount allowed 4,000 Stock on June 30, 2018 55,500
Spoiled cloth in bales 500 (at invoice price)
written off at invoice price
Ascertain the profit or loss for the Jodhpur Branch for the year ended June 30, 2018 by preparing
accounts under the Stock and Debtors System.
Solution
Branch Stock Account
Dr. Cr.

Rs. Rs.
To Goods Sent to Branch A/c 3,50,000 By Cash A/c (cash sales) 1,24,000
To Branch Debtors A/c 5,000 By Branch Debtors A/c 1,75,000
(sales returns being (credit sales)
balancing figure) By Branch Adjustment A/c
(spoilage-loading) 100
By Branch P & L A/
(spoilage-cost) 400
By Balance c/d 55,500
3,55,000 3,55,000

Note: Total of the credit side of Branch Stock A/c exceeds the debit side by Rs. 5,000. It is assumed
to be on account of returns by customers.
Goods Sent to Branch Account
Dr. Cr.

Rs. Rs.
To Branch Adjustment A/c (loading) 70,000 By Branch Stock A/c 3,50,000
To Trading A/c 2,80,000
3,50,000 3,50,000
84
 Branch Debtors Account Branch Accounts-I

Dr. Cr.

Rs. Rs.
To Branch Stock A/c 1,75,000 By Cash A/c 1,56,000
By Branch Stock A/c (returns) 5,000
By Branch Expenses A/c (discount allowed) 4,000
By Balance c/d 10,000
1,75,000 1,75,000

Branch Expenses Account

Dr. Cr.

Rs. Rs.
To Cash A/c
Wages 3,000 By Branch Profit & Loss A/c 24,000
Freight 11,000
Other Expenses 6,000
To Branch Debtors A/c
(discount) 4,000
24,000 24,000

Branch Adjustment Account

Dr. Cr.

Rs. Rs.
To Branch Stock A/c 100 By Goods Sent to Branch A/c 70,000
(loading on spoilage) (loading)
To Stock Reserve A/c 11,100
(loading on closing stock)
To Branch Profit & Loss A/c 58,800
70,000 70,000

Branch Profit & Loss Account

Dr. Cr.

Rs. Rs.
To Branch Expenses A/c 24,000 By Branch Adjustment A/c 58,800
To Branch Stock A/c
(spoilage-cost) 400
To Net Profit transferred
to General P & L A/c 34,400
58,800 58,800

85
Hire Purchase and Inland It should be noted that if there is any theft or spoilage of goods at the branch,
Branches
or some goods are lost in transit, these are to be treated in accounts in the
same way as the shortage of goods. If, however, some amount is received from
the insurance company for such abnormal losses of stock, the same will be
credited to the Branch Profit and Loss Account.
Check Your Progress B
1. How is the Branch Account prepared under the Debtors System different
from the Branch Account prepared under the Final Accounts System.
.................................................................................................................
.................................................................................................................
.................................................................................................................
2. Fill in the blanks :
i) The closing balance of Branch Account under the Final Accounts
System represents ……….at the branch.
ii) Branch Expenses Account under the Stock and Debtors System is
closed by transfer to ……….Account.
iii) Under Stock and Debtors System, all figures in Branch Stock Account
are recorded at ……….price.
iv) Under Stock and Debtors System,…………….. Account is credited
when the branch returns goods to the Head Office.
v) Under the Stock and Debtors System, Bad Debts are credited to
Branch Debtors Account and debited to …………..................……..
Account.
vi) If the balance shown by Branch Stock Account is different from actual
stock with the branch, the difference reflects……………………

13.8 LET US SUM UP

From accounting point of view, each branch is treated as a separate profit-
centre.
Hence, accounting for branch transaction is designed in such a way that profit
or loss made at each branch can be correctly worked out and proper control
can be exercised over their financial activities. For this purpose, the branches
are divided into three categories: (i) branches not keeping full system of
accounting (dependent branches), (ii) branches keeping full system of accounting
(independent branches), and (iii) foreign branches.
Where branches do not keep full system of accounting, the Head Office has
to maintain proper record of branch transactions. There are three methods that
can be followed for this purpose: (i) Debtors System, (ii) Final Accounts System,
and (iii) Stock and Debtors System.
Debtors System is usually adopted for small branches which merely act as sales
depots. Under this system, the head office simply opens a Branch Account for
each branch in which it records all related transactions. The Branch Account
86
is maintained like a Consignment Account which also helps in ascertaining the Branch Accounts-I
profit or loss made by the branch.
Under the Final Accounts System of maintaining branch accounts, the Head
Office prepares a Memorandum Trading and Profit & Loss Account for each
branch from the data ‘provided by the branch and ascertains its profit or loss
for the accounting period.
Then it also maintains a Branch Account for recording mutual transactions
between the Head Office and the branch which finally reveals the amount due
to, or due from, the branch. Its balance will be equal to the net assets with
the branch.
Stock and Debtors System is followed where the goods are invoiced to the
branch at selling price. Under this system, no Branch Account is opened. The
Head Office maintains (i) Branch Stock Account, (ii) Branch Expenses Account,
(iii) Goods Sent to Branch Account, and (iv) Branch Fixed Assets Account.
At the end of the accounting period, it prepares Branch Adjustment Account
and Branch Profit and Loss Account for ascertaining the branch gross profit/
gross loss and the net profit/net loss respectively. This system also enables the
Head Office to exercise effective control on branch stock.

13.9 KEY WORDS

Branch Adjustment Account: An Account prepared under Stock and Debtors
System for ascertaining the gross profit or gross loss made by a branch.
Debtors System: A system of accounting for transactions of a branch by
opening Branch Account which also helps to ascertain branch profit or loss.
Dependent Branch: A small branch which does not keep full system of
accounting.
Final Accounts System: A system of accounting for transactions of a branch
under which branch profit or loss is ascertained by preparing Memorandum
Branch Trading and Profit & Loss A/c.
General Profit & Loss Account: Profit and Loss Account of the Head Office
which shows the profit or loss of the business unit as a whole.
Independent Branch: Branch keeping full system of accounting.
Loading: Difference between the cost price and the price at which goods are
invoiced to the branch.
Stock and Debtors System: A System of accounting for transactions of a
branch without opening a Branch Account. Under the system, branch profit or
loss is ascertained through Branch Adjustment Account.

13.10 ANSWERS TO CHECK YOUR PROGRESS

A 2) i) debited ii) Trading iii) 125 iv) difference
v) Memorandum Branch Stock, invoice price
B 2) i) net assets ii) Branch Adjustment iii) invoice iv) Branch
Stock v) Branch Expenses vi) Shortage or surplus 87
Hire Purchase and Inland
Branches 13.11 TERMINAL QUESTIONS/EXERCISES
Questions
1) What are the objectives of keeping, branch accounts?
2) Name the three systems of maintaining the accounts of a dependent branch,
and describe how profit is ascertained under each system.
3) Explain how Branch Stock Account helps in keeping effective control over
the branch stock.
Exercises
1) Kabir & Co. of Moradabad have their branch at Kanpur. The following
are the transactions relating to the branch for the year ending December
31, 2018:
Rs.
Opening Stock on January 1, 2018 20,000
Goods supplied to Branch 50,000
Cash sent to Branch for
Rent 200
Other Expenses 100 300
Cash received from Branch during the year 60,000
Closing Stock on December 31, 2018 15,000
Closing balance of Petty Cash on December 31, 2018 10
From the above information, pass the necessary journal entries and prepare
Kanpur Branch Account and other necessary accounts in the books of the Head
Office.
(Answer: Branch Net Profit Rs. 4,710)
2) A Meerut Company has a retail branch in Kota which is supplied with
all goods from Meerut. The branch keeps its own Sales Ledger, receives
cash against the ledger accounts and remits the whole of the cash received
daily to the Head Office. All wages and branch expenses are drawn by
cheque weekly from the Head Office upon the imprest system. From the
under mentioned particulars supplied by the Branch Manager, show how
the Branch Account would appear in the Head Office books as on
December 31, 2018.

Rs. Rs.
Six months credit sales 2,387 Stock on December 31, 2018 1,121
Return inwards 20 Debtors July 1, 2018 1,227
Cash received on 2,384 Goods received from
Ledger accounts Head Office 2,178
Cash Sales 1,214 Rent, Taxes etc. paid 375
Stock on July 1,2018 720 Sundry Expenses 396
Bad Debts 100

88 (Answer : Net Profit Rs 933; Missing Figure; Closing Debtors Rs. 1,110)
3) Royal Store of Kanpur opened a selling branch at Madras on July 1, 2018. Branch Accounts-I
Goods are sent to branch from the head office at cost plus 25%. The
branch is advised to deposit cash every day in the bank in head office
account. From the following particulars, prepare Branch Account in the
books of head office for the period ending December 31, 2018. Petty
Cash at branch is maintained on imprest system.
Rs. Rs.
Cash sent to branch for meeting 1,500 Cash sales by the branch 80,000
petty expenses
Furniture purchased for the branch 12,000 Credit sales during 6 months 30,000
Goods sent to branch at 1,60,000 Cash received from debtors 22,000
invoice price Discount allowed to the debtors 400
Expenses paid by Head Office: Goods returned by debtors
(at invoice price) 800
Rent 2,200 Bad debts written off 100
Advertisement 800 Petty expenses paid by the branch 1,000
Salaries 4,600
Insurance 400 Stock at invoice price on December 31
(up to June 30, 2019) (excluding stock received from debtors) 40,000
Provide depreciation on furniture at 10% p.a.
(Answer: Profit Rs. 3,940; Debtors at the end Rs. 6,700)
4) X Ltd. of Bombay has a branch in Delhi. The head office sends goods to the branch at cost
plus 50%. From the following data, prepare the necessary accounts in the books of head office
under Stock and Debtors System.
Rs. Rs.
Goods sent from Head Office 50,000 Credit Sales 8,000
(at invoice price)
Returned to Head Office 1,000 Opening Stock 10,000
Cash Sales 35,500 Closing Stock 11,000
(Answer: Profit Rs. 11,500; Shortage of Goods Rs. 4,500)
5) Shyam Brothers of Delhi has a branch at Hyderabad. In order to maintain strict control over
stocks, it invoices goods to the branch at selling price including profit of 25% on selling price.
From the following particulars, prepare Branch Stock Account, Branch Debtors Account, Goods
Sent to Branch Account, Branch Adjustment Account, and Branch Profit and Loss Account.

89
Hire Purchase and Inland Rs.
Branches
Stock January 1, 2018 30,000
Debtors on January 1, 2018 22,800
Goods invoiced to Branch at invoice price 1,34,000
Sales at the branch
Cash 62,000
Credit 74,800
Cash received from Debtors 80,000
Bad Debts written off 500
Discount allowed to customers 600
Expenses at the branch 13,400
Stock on December 31, 2018 26,800
(Answer: Gross Profit Rs. 34,200; Net Profit Rs. 19,400)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

90
 Branch Accounts-II
Journal and Ledger
UNIT 14 BRANCH ACCOUNTS-II
Structure
14.0 Objective
14.1 Introduction
14.2 Accounting System of an Independent Branch
14.3 Some Peculiar Items
14.3.1 Goods in Transit
14.3.2 Cash in Transit
14.3.3 Head Office Expenses Chargeable to Branch
14.3.4 Depreciation on Branch Fixed Assets, Accounts Maintained by
Head Office
14.3.5 Inter-branch Transactions

14.4 Incorporation of Branch Trial Balance in the Head Office Books

14.4.1 Detailed Incorporation
14.4.2 Abridged Incorporation

14.5 Closing Entries in Branch Books

14.6 A Comprehensive Illustration
14.7 Let Us Sum Up
14.8 Key Words
14.9 Answers to Check Your Progress
14.10 Terminal Questions/Exercises
14.11 Some Useful Books

14.0 OBJECTIVES
After studying this unit, you should be able to:
 describe the features of the accounting system of an independent branch;
 make adjustment entries in the books of both Head Office and branch
for certain peculiar items relating to independent branches;
 pass necessary journal entries for the incorporation of branch balances in
the books of the Head Office;
 make closing entries in the books of the branch; and
 prepare consolidated balance sheet of the business.

14.1 INTRODUCTION
In Unit 13, you learnt about the systems of accounting for a dependent branch.
Dependent branch is usually a small branch which merely functions as a sales
depot. It does not keep full system of accounting. The main accounting records
for such branches are maintained at the Head Office level. But, when a branch
functions as an independent unit and enjoys certain amount of operational
91
autonomy, it keeps full system of accounts. Such branches are termed as
Hire Purchase and Inland independent branches and maintain complete set of books on double entry
Branches
system. They prepare their own Trial Balance, Profit & Loss Account and
Balance Sheet. At the end of the accounting year, their summarised results and
the assets and liabilities are incorporated in the books of the Head Office. In
this unit, you will learn how does the Head Office incorporate all branch balances
in its books and what sort of records are maintained for mutual transactions
between the branch and the Head Office.

14.2 ACCOUNTING SYSTEM OF AN

INDEPENDENT BRANCH
You know an independent branch enjoys certain amount of operational autonomy.
Besides receiving goods from the Head Office, it may also purchase goods
from the outside parties. It maintains its own bank account and remits money
from time to time to Head Office as per the instructions of the Head Office.
It is treated as a separate accounting entity. The main features of the accounting
system of independent branches are as follows:
1) The branch maintains complete set of books on double entry system.
2) The branch opens a Head Office Account in its books. It is a personal
account wherein, all transactions between the branch and the Head Office
are recorded at the branch level. This account is debited with cash sent
to the Head Office and the goods returned or supplied to the Head Office,
and is credited by goods received from the Head Office and the Head
Office expenses charged to the branch for centralised services.
3) The Head Office also maintains a Branch Account in its books for all
transactions, it makes with a particular branch. It is also a personal account
which shows the same entries as the Head Office Account in branch books,
but on the reverse sides.
4) At the end of the accounting period, the branch prepares its trial balance
and the final accounts, and send their copies to the Head Office.
5) As soon as the Head Office receives the trial balance from a branch, it
compares the balance in Head Office Account as shown in the branch
Trial Balance with the balance in the Branch Account as it appears in the
Head Office books. The difference, if any, is investigated and, after
ascertaining the causes thereof, the necessary adjustment entries are passed.
6) After reconciling the Head Office Account balance with the Branch Account
balance, the Head Office passes the necessary entries for incorporating
various branch balances in its books.

14.3 SOME PECULIAR ITEMS

In respect of independent branches, there are certain items which require special
accounting treatment. These items are:
i) Goods in transit
ii) Cash in transit
iii) Head Office expenses chargeable to branch
92
iv) Depreciation on branch fixed assets, the accounts of which are maintained Branch Accounts-II
at the head office level
v) Inter-branch transactions
Let us discuss these items one by one.
14.3.1 Goods in Transit
The Head Office and the branch send goods to each other quite frequently.
When goods are sent by the Head Office to the branch, the Head Office debits
the Branch Account in its books immediately. But the branch credits the Head
Office Account only when it receives the goods. Similarly, when the branch
sends or returns some goods to the Head Office, it (the branch) debits the
Head Office Account in its books immediately, but the Head Office credits the
Branch Account only when it receives the same. It is quite possible that goods
sent in the later part of the accounting year may not have been received by
the closing date of the accounting year by the Head Office or the branch, as
the case may be. Such goods are called ‘goods in transit’ for which no entry
will appear in the books at the receiving end at the time of the closing the
accounts. Hence, the balance in the Head Office Account in branch books will
not tally with the balance in the Branch Account in the Head Office books.
This will require an adjustment entry which may be passed either in the Head
Office book or in the branch books, but not in both sets of books.
If the Head Office decides to pass the adjustment entry, it will be as follows:
Goods in Transit A/c Dr.
To Branch A/c
If, however, the adjustment is made in branch books, the entry will be:
Goods in Transit A/c Dr.
To Head Office A/c
It should be noted that the adjustment entry for goods in transit shall be passed
only in one set of books, either at the Head Office level or the branch level.
Usually, such entry is made in the books of the Head Office.
14.3.2 Cash in Transit
Like goods, cash is also regularly remitted by the Head Office and the branch
to each other. For this, the entries are made in both sets of books in the same
manner, as they are made for the goods. In this case also, it is possible that
some remittances are in transit at the time of closing the books for the accounting
year. This would again lead to difference in Branch Account balance in the Head
Office books and Head Office Account balance in branch books. Hence, an
adjustment entry will have to be passed to reconcile the same. This may be
done either by the Head Office or by the branch, but not by both.
In case the Head Office decides to pass the adjustment entry, it will be as
follows:
Cash in Transit A/c Dr.
To Branch A/c
93
Hire Purchase and Inland If, however, the adjustment is made in the branch books, the entry will he:
Branches
Cash in Transit A/c Dr.
To Head Office A/c
It should be noted that for cash in transit also, the entry shall be passed in
one set of books, either at the Head Office level or at the branch level. This
entry is also made usually at the Head Office level. The reason for passing
such adjustment entries in Head Office books lies in the fact that all in-transit
items are noticed by the Head Office at the time of receiving the branch Trial
Balance and, at this stage, it is not considered desirable to alter the balances
in the branch books.
Look at illustration 1 and see how are the amounts of goods in transit and
cash in transit ascertained and the adjustment entries passed to reconcile the
difference between the Branch Account balance and the Head Office Account
balance.
Illustration 1
Following are the extracts from the Trial Balances of a Head Office and a branch.
You are required to pass the necessary journal entries for reconciling the balances
of the Head Office Account and the Branch Account.
Trial Balance

Particulars Head Office Branch Office

Dr. Cr. Dr. Cr

Rs. Rs. Rs. Rs.

Current Accounts 1,00,000 90,000
Goods sent/received 1,50,000 1,45 ,000
by Branch

Solution
The current accounts represent the Branch Account in the Head Office books
and the Head Office Account in the branch books. As per the above Trial
Balance, there is a difference of Rs. 10,000 between the two current account
balances. It is observed that there is a difference of Rs. 5,000 in the goods
sent received by branch. This can be attributed to goods in transit. The remaining
difference of Rs. 5,000 may be taken to be on account of the cash in transit.
The required adjustment entry may be passed in the books of Head Office
as follows:
Cash in Transit A/c Dr. 5,000
Goods in Transit A/c Dr. 5,000
To Branch A/c 10,000
(Being cash in transit and goods in transit adjusted)
If, however, this entry is passed in the books of the branch. it will be as follows:
94
 Cash in Transit A/c Dr. 5,000 Branch Accounts-II
Goods in Transit A/c Dr. 5,000
To Head Office A/c 10,000
(Being cash in transit and goods in transit adjusted)

14.3.3 Head Office Expenses Chargeable to Branch

The Head Office may like to allocate a part of its expenses to branches for
the centralised services at the Head Office level. As a matter of fact, quite
a good amount of time of the Head Office staff may be spent in doing the
work of the branches. Hence, it may decide to charge a part of its
expenditure on salaries to the branches. The same thing may be true for certain
other items of expenses. If the Head Office so decides to charge some expenses
to the branch, the journal entry passed in the books of the Head Office is
as follows:
Branch A/c Dr.
To Expenses (Salaries A/c)
(Being Head Office expenses chargeable to branch)
The branch will also pass a corresponding entry in its books as follows:
Head Office Expenses A/c Dr.
To Head Office
(Being Head Office expenses chargeable to branch)
Like all other expenses accounts, the Head Office Expenses Account will be
closed by transferring its balance to the Profit & Loss Account at the end of
the accounting year.

14.3.4 Depreciation on Branch Fixed Assets, Accounts

Maintained by Head Office
Sometimes, the accounts for the fixed assets of independent branches are
maintained at the Head Office level. In such a situation, all entries in respect
of branch fixed assets are made in the Head Office books. For example, when
a fixed asset is purchased for the branch, the Head Office debits the Branch
Fixed Assets Account and credits the Cash Account. No entry for this transaction
is passed by the branch unless the payment is made by the branch for this
purchase. Even if the payment for the purchase of such fixed assets is made
by the branch, it will not debit the Fixed Assets Account. In fact such payment
is treated like a remittance to the Head Office, Therefore, is debited to the
Head Office Account. But when it comes to depreciation on such fixed assets,
the branch has to pass the necessary entry in its books because the assets
were used by the branch and not by the Head Office. Normally an entry for
the depreciation on fixed assets is passed by debiting the Depreciation Account
and crediting the Fixed Asset Account. But in this situation, the branch cannot
credit the Fixed Asset Account because the accounts for its fixed assets are
maintained at the Head Office level. Hence, the entry passed for depreciation
on such fixed assets is different from the normal entry for depreciation. It is
as follows:
Depreciation A/c Dr.
To Head Office A/c
(Being depreciation on fixed assets) 95
Hire Purchase and Inland Since the account for the branch fixed assets is maintained in head office books,
Branches
the Head Office must reduce the balance in Branch Fixed Assets Account by
the amount of depreciation thereon. But, it cannot debit the Depreciation Account
because the loss relates to the branch. Hence, it makes the following journal
entry for depreciation on branch fixed assets when their accounts are maintained
by the Head Office:
Branch A/c Dr.
To Branch Fixed Assets A/c
(Being depreciation on branch fixed assets)
It should be noted that the above entries are passed only for such branch fixed
assets accounts of which are maintained by the Head Office. Any branch fixed
assets for which the branch itself maintains the accounts, the branch will
pass the normal entry for depreciation. The Head Office need not pass
an entery in its books for the amount of depreciation on such fixed assets.
14.3.5 Inter-branch Transactions
When an organisation has more than one branch, it is possible that some
transactions take place between one branch and the other. This usually happens
under instructions from the Head Office. For example, a branch may be asked
to transfer its surplus stock to some other branch which may need the same
(it may be facing shortage). In such a situation, the usual practice for the sending
branch is to regard it as a transaction of returning the goods to the Head Office.
Similarly, the receiving branch shall regard it as a transaction of receiving the
goods from the Head Office. Hence, entries are passed on the same basis in
the books of the branches and the Head Office. These are as follows:
In the books of the Head Office
Receiving Branch A/c Dr.
To Sending Branch A/c
(Being goods transferred from .......... branch to ............ branch)
In the books of the sending branch
Head Office A/c Dr.
To Goods Sent to H.O. A/c
(Being goods sent to ............ branch under instructions from H. O.)
In the books of the receiving branch
Goods from H.O. A/c Dr.
To Head Office A/c
(Being goods received from ............ branch under instruction from H.O.)
Look at illustration 2 and see how the above-mentioned peculiar items are
recorded in the books of the Head Office and the branches.
Illustration 2
Give the journal entries that would be passed in the books of the Head Office
to record the following transactions:
i) Goods amounting to Rs. 1,000 transferred from Madras branch to Bombay
branch under instructions from the Head Office.
96
ii) Depreciation on branch fixed assets accounts maintained by the Head Office: Branch Accounts-II
(Bombay Rs. 4,000 and Madras Rs. 6,000).
iii) A remittance of Rs. 6,000 made by Bombay branch to Head Office on
December 27, 2018 and received by Head Office on January 7, 2019.
iv) Goods worth Rs. 10,000 sent by the Head Office on December 25, 2018
and received by Madras branch latter on January 15, 2019.
v) A sum of Rs. 10,000 is to be charged to the Madras branch for
administrative services rendered by the Head Office.
Solution
Head Office Books
Journal

Rs. Rs
i) Bombay Branch A/c Dr. 1,000
To Madras Branch A/c 1,000
(Being goods transferred from
Madras branch to Bombay branch)
ii) Bombay Branch A/c Dr. 4,000
To Branch Fixed Assets A/c 4,000
(Being depreciation)
iii) Madras Branch A/c Dr. 6,000
To Branch Fixed Assets A/c 6,000
(Being depreciation)
iv) Goods in Transit A/c Dr 6,000
To Bombay Branch A/c 6,000
(Being Goods in transit adjusted)
v) Goods in Transit A/c Dr 10,000
To Madras Branch A/c 10,000
(Being Goods in transit adjusted)
vi) Madras Branch A/c Dr. 10,000
To Gen. P & LA/c 10,000
(Being Administrative expenses
charged to Madras branch)

Check Your Progress A

1. What do you mean by Cash in Transit?
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
................................................................................................................
97
Hire Purchase and Inland 2. Why does Head Office charge a part of its expenses to branches?
Branches
................................................................................................................
................................................................................................................
................................................................................................................

3. Put tick ( ) mark against the correct answer:

i) An independent branch
a) receives the goods from the Head Office.
b) purchases the goods from outside parties.
c) receives the goods from both (a) and (b) sources.
ii) The Head Office Account in the books of branch is debited with
a) cash sent to the Head Office and goods returned to the Head
Office.
b) cash and goods received from Head Office, and Head Office
expenses allocated to branch by Head Office.
c) none of the above.
iii) The adjustment entry for goods in transit is passed in the books of
a) either the branch or the Head Office.
b) branch as well as the Head Office.
c) none of them.
iv) For depreciation on fixed assets. whose accounts are maintained by
the Head Office, the Head Office
a) debits Fixed Assets A/c and credits Branch A/c.
b) debits Branch A/c and credits its Fixed Assets A/c
c) none of the above.
v) In case of inter-branch transactions, each branch
a) opens separate accounts for other branches.
b) passes no entry.
c) may treat such transactions as the transactions with the Head
Office.
vi) The Head Office Account maintained by the branch is of the nature
of
a) Real Account.
b) Personal Account.

98 c) Nominal Account.
 Branch Accounts-II
14.4 INCORPORATION OF BRANCH TRIAL
BALANCE IN THE HEAD OFFICE BOOKS
Just because an independent branch keeps full system of accounting and prepares
its own final accounts does not mean that its year-end results will not form
part of the final accounts of the Head Office. In fact, as in case of dependent
branches, the profit or loss made by an independent branch shall also be included
in the General Profit and Loss Account which shows the profit or loss of the
company as a whole. Similarly, its assets and liabilities shall also be shown as
part of the assets and liabilities of the company. This is done by preparing the
combined (consolidated) Balance Sheet of the Head Office and its branches.
Thus, it becomes necessary for the Head Office to incorporate the branch
balances in the Head Office books by means of suitable journal entries at the
end of the accounting period.
The incorporation of branch balances involves the following two steps:
i) incorporation of branch profit or loss, and
ii) incorporation of branch assets and liabilities.
For incorporation of the branch profit or loss, the Head Office may either pass
various entries to include all revenue items and prepare a proper Branch Trading
and Profit & Loss Account or simply pass one entry for profit or loss made
by the branch after working it out with the help of a Memorandum Branch
Trading and Profit & Loss Account. The first method is called ‘detailed
incorporation’ and the second method is called ‘abridged incorporation’ (or
simply short cut method). Whatever the method for incorporating branch profit
or loss, the entries for incorporating branch assets and liabilities remain the same.
14.4.1 Detailed Incorporation
As stated earlier, under this method, the Head Office prepares a proper Branch
Trading and Profit & Loss Account and makes entries for all revenue items
before incorporating the branch assets and liabilities in its books. The entries
passed under this method are as follows:
1) For items on the debit side of the Trading Account
Branch Trading A/c Dr.
To Branch A/c
(This entry is passed for the total amount of items like opening stock, net
purchases, wages, goods received from HO., carriage inwards, etc.)
2) For items on the credit side of the Trading Account
Branch A/c Dr.
To Branch Trading A/c
(This entry is passed for the total amount of items like net sales, closing
stock, etc.)
3) For branch gross profit
Branch Trading A/c Dr
To Branch Profit & Loss A/c
(In case of gross loss, the above entry will be reserved)
99
Hire Purchase and Inland 4) For items on the debit side of the Profit and Loss Account
Branches
Branch Profit & Loss A/c Dr.
To Branch A/c
(This entry is passed for the total amount of items like salaries, rent, bad
debts, repairs, depreciation, etc.).
5) For items on the credit side of the Profit & Loss Account
Branch A/c Dr
To Branch Profit & Loss A/c
(This entry is passed for total amount of items like interest received, discount
received, commission received, etc.)
6) For branch net profit
Branch Profit & Loss A/c Dr.
To General Profit & Loss A/c
(If there is net loss, the above entry will be reversed)
7) For branch assets
Branch Assets A/c Dr.
To Branch A/c
(Each asset should be debited individually)
8) For Branch liabilities
Branch A/c Dr.
To Branch Liabilities A/c
(Each liability credited individually. This should not include H.O. A/c
balance)
As a result of the last two entries (7 and 8), the Branch Account in the Head
Office books will stand closed because the net assets (assets minus liabilities)
of the branch are equal to the balance in the Branch Account after branch net
profit or net loss has been incorporated in Head Office books. In order to
open the Branch Account in the next year’s books of the Head Office and
show the amount due from the branch, the entries for branch assets and branch
liabilities (7 and 8 above) shall be reversed at the beginning of the next year.
Look at illustration 3 and see how branch balances are incorporated in the
Head Office books when detailed incorporation method is followed.
Illustration 3
On December 31, 2018, the Trial Balance of the Kanpur branch stood as
follows:
Dr. Cr.
Rs. Rs.
Stock on January 1, 2018 12,000
Furniture 4,800
Debtors 11,200
Goods received from H.O. 32,000
Salaries, rent and expenses 4,400
Cash in hand 3,600
Head Office Account 22,000
Sales 45,600
Sundry creditors 400
100 68,000 68,000
Stock on December 31, 2018 was Rs. 9,200. Branch Accounts-II

Pass the necessary journal entries to incorporate Kanpur branch balances in

the Head Office books, and prepare the Kanpur Branch Account in the books
of the Head Office.
Solution
Head Office Books
JOURNAL

Rs. Rs
2018
Dec.31 Kanpur Branch Trading A/c Dr 44,000
To Kanpur Branch A/c 44,000
(Being incorporation of opening stock and
goods received from HO.)
“ 31 Kanpur Branch A/c Dr. 54,800
To Kanpur Branch Trading A/c 54,800
(Being incorporation of branch sales and
closing stock)
“ 31 Kanpur Branch Trading A/c Dr. 10,800
To Kanpur Branch P&L A/c 10,800
(Being gross profit transferred to
Branch P & L A/c)
“ 31 Kanpur Branch P & LA/c Dr. 4,400
To Kanpur Branch A/c 4,400
(Being incorporation of branch expenses)
“ 31 Kanpur Branch P & LA/c Dr. 6,400
To General Profit & Loss A/c 6,400
(Being incorporation of branch expenses)
“ 31 Branch Closing Stock A/c Dr. 9,200
Branch Furniture A/c Dr. 4,800
Branch Debtors A/c Dr 11,200
Branch Cash A/c Dr. 3,600
To Kanpur Branch A/c 28,800
(Being incorporation of branch assets)
“ 31 Kanpur Branch A/c Dr. 400
To Branch Creditors A/c 400
(Being incorporation of branch liabilities)

Kanpur Branch Account

Dr. Cr.

Rs. Rs.
To Balance b/d 22,000 By Branch Trading A/c 44,000
To Branch Trading A/c 54,800 By Branch P & L A/c 4.400 101
Hire Purchase and Inland To Creditors 400 By Closing Stock 9,200
Branches
By Furniture 4,800
By Debtors 11,200
By Cash 3,600
77,200 77,200

14.4.2 Abridged Incorporation

Incorporation of branch balances in the Head Office books can also be effected
with the help of a short cut method known as the ‘abridged incorporation’.
Under this method, we prepare a Memorandum Branch Trading and Profit &
Loss Account and pass a journal entry only for the net profit or net loss. Thus,
the six entries passed under the detailed incorporation method are replaced by
just one entry which is as follows:
Branch Account Dr.
To General Profit & Loss A/c
Being branch net profit incorporated)
In case of net loss, the above entry shall be reversed.
Look at illustration 4 and see how branch balances are incorporated in the
Head Office books with the help of the short cut method.
Illustration 4
From the particulars given in illustration 3, prepare Memorandum Branch Trading
and Profit & Loss Account, pass the necessary journal entries to incorporate
the Kanpur branch balances, and prepare Kanpur Branch Account in the books
of the head office.
Solution :

Books of Head Office

Memorandum Kanpur Branch Trading and Profit & Loss Account

for the year ended December 31, 2018

Dr. Cr.

Rs. Rs.
To Opening Stock 12,000 By Sales 45,600
To Goods Received from H.O. 32,000 By Closing Stock 9,200
To Gross Profit c/d 10,800
54,800 54,800
To Salaries, Rent and Expenses 4,400 By Gross Profit b/d 10,800
To Net Profit 6,400
10,800 10,800

102
Solution Branch Accounts-II
Journal
Rs. Rs.
2018
Dec. 31 Kanpur Branch A/c Dr. 6,400
To General Profit & Loss A/c 6,400
(Being branch net profit incorporated)
“ 31 Kanpur Branch Closing Stock A/c Dr. 9,200
Kanpur Branch Furniture A/c Dr. 4,800
Kanpur Branch Debtors A/c Dr. 11,200
Kanpur Branch Cash A/c Dr. 3,600
To Kanpur Branch A/c 28,800
(Being branch assets incorporated)
“ 31 Kanpur Branch A/c Dr. 400
To Kanpur Branch Creditors A/c 400
(Being branch liabilities incorporated)

Kanpur Branch Account

Dr. Cr.
Rs. Rs.

To Balance b/d 22,000 By Closing Stock 9,200

To General Profit & 6,400 By Furniture 4,800
Loss A/c By Debtors 11,200
To Creditors 400 By Cash 3,600
28,800 28,800

14.5 CLOSING ENTRIES IN BRANCH BOOKS

At the end of the accounting period, the branch books have also to be closed.
For this purpose, the branch can pass the usual closing entries for transferring
all revenue items to its Trading and Profit & Loss Account and ascertaining
its net profit or net loss. The amount of net profit or net loss should be transferred
to the Head Office Account by passing the following journal entry.
In case of net profit
Profit and Loss A/c Dr.
To Head Office A/c
In case of net loss
Head Office A/c Dr.
To Profit and Loss A/c
After the above entry for transferring net profit or net loss to the Head Office
Account has been passed, the balance in the Head Office Account will be equal
to the branch net assets (assets minus liabilities). The branch can then prepare
its Balance Sheet by showing the Head Office Account balance on the liabilities
side as this account would normally show a credit balance. If, the Head Office
Account shows a debit balance, the same will appear on the assets side of
the Balance Sheet. 103
Hire Purchase and Inland The accounts pertaining to assets and liabilities can also be closed, if required,
Branches
by transferring their balances to the Head Office Account. For this purpose,
the following two journal entries will be passed in the branch books.
1) For transfers of assets
Head Office A/c Dr.
To Assets A/c
The assets should be credited individually
2) For transfer of liabilities
Liabilities A/c Dr.
To Head Office A/c
(The liabilities should be debited individually)
As a result of the above entries, the Head Office Account shall also be closed
as it will not show any balance.
Look at illustration 5 and see how does a branch close its books.
Illustration 5
A Delhi trader has independent branch at Patna. Its Trial Balance for the year
ending December 31, 2018 is given below. Pass journal entries to close the
books of Patna branch and prepare its Head Office Account.
Trial Balance
Dr. Cr.

Rs. Rs.
Purchases 25,600 Creditors 5,400
Stock on 1.1.18 16,400 Sales 69,900
Wages 13,100 Head Office 28,000
Factory Expenses 6,800 Discount 300
Salaries 8,000 Purchase Returns 600
Rent 3,400
Sundry Expenses 4,000
Goods Received from HO. 14,400
Debtors 11,000
Cash 1,500
1,04,200 1,04,200

Additional information
1) The accounts of the branch fixed assets were maintained in the Head Office
which show machinery of Rs. 50,000 and furniture of Rs. 2,000
2) Depreciation is to be charged @ 10% on Machinery and 15% on Furniture.
3) Rs. 300 are due for salaries.
4) A remittance of Rs. 8,000 made by branch on December 29, 2018, was
received by head office on January, 3, 2019
5. Clossing stock at branch was Rs. 28,700
104
Solution Branch Accounts-II

Books of Patna Branch

Journal

2017 Rs. Rs.

Dec.31 Depreciation A/c Dr. 5,300
To Head Office A/c 5,300
(Being depreciation on fixed assets accounts maintained by
Head Office)
“ 31 Cash in Transit A/c Dr. 8,000
To Head Office A/c 8,000
(Being outstanding salaries)
“ 31 Salaries A/c Dr. 300
To Salaries Outstanding A/c 300
( Being outstanding salaries)
“ 31 Profit & Loss A/c Dr. 2,200
To Head Office A/c 2,200
(Being net profit transferred)
“ 31 Head Office A/c Dr. 49,200
To Debtors
To Cash A/c 11,000
To Cash in Transit A/c 1,500
To Closing Stock A/c 8,000
(Being assets account balance transferred) 28,700
“ 31 Creditors A/c Dr. 5,400
Salaries Outstanding A/c Dr. 300
To Head Office A/c 5,700
(Being liabilities account balances transferred)

Head Office Account

Dr. Cr.
Rs. Rs.
To Balance c/d 43,500 By Balance b/d 28,000
By Depreciation A/c 5,300
By Cash in Transit A/c 8,000
By Profit & Loss A/c 2,200
43,500 43,500
To Debtors 11,000 By Balance b/d 43,500
To Cash A/c 1,500 By Creditors 5,400
To Cash in Transit A/c 8,000 By Salaries outstanding A/c 300
To Closing Stock A/c 28,700 A/c
49,200 49,200

105
Hire Purchase and Inland
Branches

Working Notes
Trading and Profit & Loss Account
Dr. Cr.
Rs. Rs.
To Opening Stock A/c 16,400 By Sales 69,900
To Purchases 25,600 By Closing Stock 28,700
Less Return 600 25,000
To Goods from H.O. 14,400
To Wages 13,100
To Factory Expense 6,800
sTo Gross Profit c/d 22,900
98,600 98,600
To Salaries 8,000 By Gross Profit b/d 22,900
Add O/s 300 8,300 By Discount 300
To Rent 3,400
To Depreciation 5,300
To Sundry Expenses 4,000
To Net Profit 2,200
23,200 23,200

Notes: 1) The closing entries for transfer of revenue items have been omitted.
2) The balance in Head Office Account after adjustment entries and
transfer of net profit is Rs. 43,500. This is equal to the net assets
at Patna as given below:
Rs. Rs.
Assets
Debtors 11,000
Cash 1,500
Cash in Transit 8,000
Closing Stock 28,700
Liabilities: 49,200
Creditors 5,400
Salaries O/s 300 5,700
Net Assets 43,500
3) After the assets and liabilities are transferred to Head Office
Account, it stands closed.
Check Your Progress B
1. Why is the incorporation of branch balances necessary in the books of
the Head Office?
...............................................................................................................

106 ...............................................................................................................
2/ Name the two methods of incorporating branch balances in the books of Branch Accounts-II
the Head Office?
...............................................................................................................
...............................................................................................................
...............................................................................................................
3. Fill in the blanks:
i) The short cut method of incorporating the branch balances is called
………….
ii) The branch net profit can be incorporated in the Head Office books
by debiting the …………..Account and crediting the ……………
Account.
iii) The net assets of the branch are equal to the …………… of the
Branch Account after the entry of branch net profit or net loss has
been passed in Head Office books.
iv) The balance in the Head Office Account in branch books represents
the branch………………. after the net profit or not loss has been
transferred to this account.

14.6 A COMPREHENSIVE ILLUSTRATION

As stated earlier, any organisation having branches has to present the final
accounts of the organisation as a whole and not separately for the Head Office
and for the branches. Hence, it prepares General Profit and Loss Account which
includes the profit or loss made by the branches and draws a consolidated
Balance Sheet to show the assets and liabilities of both the Head Office and
the branch office. Illustration 6 below will help you to understand the preparation
of a consolidated Balance Sheet.
Illustration 6
Following are the Trial Balances of the Head Office and its branch as on
December 31, 2018.

Particulars Head Office Branch Office

Dr. Cr. Dr. Cr

Rs. Rs. Rs. Rs.

Capital 1,50,000
Fixed Assets 86,000 26,000
Stock 34,700 20,700
Debtors and Creditors 17,820 13,900 14,800 23,000
Cash 10,740 1,500
Profit & Loss 14,720 13,100
Branch Office 29,360
Head Office A/c 26,900
1,78,620 1,78,620 63,000 63,000
107
Hire Purchase and Inland Prepare the Balance Sheet of the business as on December 31, 2018 and pass
Branches
the necessary journal entries in both sets of books to record the adjustments
dealing with the following.
a) On December 28, the branch had sent a cheque for Rs. 1,600 to the
Head Office but not yet received by them.
b) Goods valued at Rs. 560 had been forwarded by the Head Office to the
branch and invoiced on December 30, but were not yet received by the
branch.
c) It was agreed that the branch should be charged with Rs. 400 for
administration services rendered by the Head Office during the year.
d) Rs. 1,250 for depreciation on branch assets, the accounts of which are
maintained by the Head Office, is to be provided for.
e) The balance of profit shown by the branch is to be transferred to the Head
Office books.
Solution
Head Office Journal
2018 Rs. Rs.
1 Cash in Transit A/c Dr. 1,600
To Branch A/c 1,600
(Being cash sent by branch but not received by H.O.
till December31)
2 Goods in Transit A/c Dr. 460
To Branch A/c 460
(Being goods invoiced on December 31 not yet received
by the branch)
3 Branch A/c Dr. 400
To Gen. Profit & Loss A/c 400
(Being administrative expenses charged by H.O. to
the Branch)
4 Branch A/c Dr. 1,250
To Branch Fixed Assets A/c 1,250
(Being depreciation on branch fixed assets accounts
provided by H.O.)
5 Branch A/c Dr. 11,450
To General P & L A/c 11,450
(Being profit of branch transferred to General P & L A/c)

Branch Journal

2018 Rs. Rs.

1 Profit & Loss A/c Dr 400
To Head Office A/c 400
(Being administrative expenses charged by H.O.)

108
 Branch Accounts-II
2 Depreciation A/c Dr. 1,250
To Head Office A/c 1,250
(Being depreciation on Branch fixed assets accounts
which are maintained by H.O.)
3 Profit & Loss A/c Dr. 11,450
To Head Office A/c 11,450
(Being transfer of profit credited to Head Office A/c)

Balance Sheet as on December 31, 2018

Liabilities Rs. Assets Rs.
Capital 1,50,000 Fixed Assets
Creditors H.O. 86,000
H.O. 13,900 Branch 26,000
Branch 23,000 36,900 Less Dep. 1,250 24,750 1,10,750
Profit & Loss A/c Stock
H.O. 15,120 H.O. 34,700
Branch 11,450 26,570 Branch 20,700
Goods in Transit 460 55,860
Debtors
H.O. 17,820
Branch 14,800 32,620
Cash
H.O. 10,740
Branch 1,500
Cash in Transit 1,600
Cash for Exp. 400 14,240
2,13,470 2,13,470

Working Notes
1) The profits at branch and Head Office have been ascertained by preparing Profit and Loss
A/c of the Head Office as well as that of branch.
Branch Profit and Loss Account
Dr. Cr.

Rs. Rs.
To Head Office Exp. 400 By Profit (as given) 13,100
To Depreciation 1,250
To Profit taken to General P & L A/c 11,450
13,100 13,100

109
Hire Purchase and Inland General (H.O.) Profit and Loss Account
Branches
Dr. Cr.

Rs. Rs.
To Profit c/d 15,120 By Profit (as given) 14,720
By Branch A/c 400
15,120 15,120
To Net Profit
(taken to Balance Sheet) 26,570 By Profit b/d 15,120
By Branch A/c 11,450
(profit made by branch)
26,570 26,570
2) The Head Office A/c in the books of branch and Branch A/c in the books of Head Office will
appear as follows:
Branch Books
Head Office Account
Dr. Cr.

Rs. Rs.
To Balance c/d 40,000 By Balance b/d 29,900
By H.O. Exp. A/c 400
By Depreciation 1,250
By P & L A/c 11,450
40,000 40,000
Head Office Books
Branch Account
Dr. Cr.

Rs. Rs.
To Balance b/d 29,360 By Goods in Transit 460
To Branch Assets A/c 1,250 By Cash in Transit 1,600
To General P & L A/c 11,450 By Balance c/d 40,000
42,060 42,060

3) The balance in the Branch Account in Head Office books and the balance
in Head Office Account in branch books show the same amount. i.e..
Rs. 40,000. But, the Branch Account balance is a debit balance while
the Head Office Account balance is a credit balance. Having merged branch
accounts with the Head Office accounts, these two balance cancel each
other and so they do not appear in the consolidated Balance Sheet.

14.7 LET US SUM UP

Independent Branches are those branches which keep full system of accounting
110 and enjoy certain amount of autonomy in functioning. They maintain complete
records on double entry system and prepare their own trial balances. The Head Branch Accounts-II
Office simply maintains a personal account for each branch which shows all
transactions that take place between the branch and the Head Office. Similarly,
each branch maintains a Head Office Account to show the corresponding entries.

There are certain transactions which require special treatment both in Head Office
and branch books. These are: (i) goods in transit, (ii) cash on transit, (iii) Head
Office expenses chargeable to branch, (iv) depreciation on branch fixed assets
the accounts of which are maintained at the Head Office level, and (v) inter-
branch transactions.

At the end of the accounting year, the branch sends its Trial Balance to the
Head Office. This enables the Head Office to incorporate all branch balances
in its books so as to include them in the final accounts of the organisation.
The incorporation entries can be passed for all items given in branch Trial Balance
(called detailed incorporation), or simply for branch profit/loss (based on
Memorandum Branch Profit and Loss Account) and for branch assets and
liabilities (called abridged incorporation or short cut method). After the
incorporation entries have been passed, the Branch Account stands closed. At
the beginning of the next year, the opening entries are passed for branch assets
and liabilities which restores the balance in the Branch Account. The branch
closes its books by transferring its profit or loss to Head Office Account which
then shows a credit balance equal to the net assets with the branch.

14.8 KEY WORDS

Abridged Incorporation: A short cut method of incorporating the branch
balances in Head Office books.

Cash-in-transit: Cash remitted by branch to Head Office, but not received

by Head Office by the end of the accounting year,or vice versa.

Consolidated Balance Sheet: Combined Balance Sheet showing both Head

Office and branch assets and liabilities.

Goods-in-transit: Goods sent by Head Office to branch but not received by

branch by the end of the accounting year, or vice versa.

Inter-branch transactions: The transactions between two or more branches

under the same Head Office.

14.9 ANSWERS TO CHECK YOUR PROGRESS

A 3. i) c

ii) a

iii) a

iv) b

v) c

vi) b 111
Hire Purchase and Inland B 3. i) Abridged Incorporation
Branches
ii) Branch Account, General Profit & Loss Account
iii) balance
iv) net assets

14.10 TERMINAL QUESTIONS/EXERCISES

Questions
1) How are branch balances incorporated in Head Office books at the end
of the accounting year?
2) Write short notes including accounting treatment on the following:
a) Cash in Transit
b) Goods in Transit
c) Head Office Expenses Chargeable to Branch
d) Inter-branch Transactions
3) How do you deal with purchase and depreciation of branch fixed assets
whose accounts are maintained at the Head Office level?
Exercises
1) Show what entries would be passed by the Head Office to record the
following transactions in their books.
a) Goods amounting to Rs. 1,000 transferred from Varanasi branch to
Allahabad branch under intimation from H.O.
b) Depreciation amounting to Rs. 2,000 on branch fixed assets when
such assets’ accounts are opened in the Head Office books.
c) A remittance of Rs. 3,000 made by the Calcutta branch to Head Office
on December 25, 2018 and received by Head Office on January 4,
2019.
d) Goods of Rs. 10,000 sent by the Head Office on December 27, 2018
and received by Calcutta branch on January 10, 2019.
e) The Allahabad branch collected Rs. 4,000 from Allahabad customers
of Head Office.
f) The Varanasi branch paid Rs. 25,000 for machinery purchased by
the Head Office at Varanasi.
2) Show the journal entries that will be passed by Surat branch to record
the following transactions in its books.
a) Goods amounting to Rs. 6,000 transferred from Surat branch to
Lucknow branch under instructions from Calcutta Head Office
assuming that Head Office keeps a control on inter-branch transactions.
b) Depreciation on Lucknow Branch Machinery Rs. 4,000 and Surat
Branch Machinery Rs. 3,000, when the Branch Machinery Account
is maintained in Head Office books.
c) A remittance of Rs.10,000 made by Surat branch to Head
Office on December 28, 2018 but received by the Head Office on
112 January 4, 2019.
 d) Goods worth Rs. 15,000 sent by Head Office to Surat branch on Branch Accounts-II
December 26, 2018 but received by the latter on January 2, 2019.
3) On December 31, 2018, the Trial Balance of Varanasi branch stood as
follows:

Debit Credit
Particulars Rs. Rs.

Stock on January 1, 2018 12,000

Furniture 4,800
Debtors 11,200
Goods Received from Delhi HO. 32,000
Salaries, Rent and Expenses 4,400
Cash in Hand 3,600
Delhi Office Account 22,000
Sales 45,600
Sundry Creditors 400
Total Rs. 68,000 68,000

Stock on December 31, 2018 was Rs. 9,200. Prepare (1) Trading and
Profit & Loss Account, Balance Sheet and Head Office Account in Varanasi
branch books (2) Prepare journal entries necessary to incorporate the
Varanasi Branch Trial Balance and show the Varanasi Branch Account in
the Head Office books.
(Answer: Branch Profit Rs. 6,400; Balance Sheet Total Rs. 28,800; Head
Office A/c Balance Rs. 28,400 and Total of Varanasi Branch A/c Rs,
77,200)
4) The Kanpur branch of Wahi Bros. sent the following Trial Balance to Head
Office, as on December 31, 2018:

Rs. Rs.
Sundry Debtors 12,000 Sundry Creditor 8,600
Cash in hand 6,250 Goods returned to H.O. 2,250
Furniture 1,900 Sales 1,12,500
Stock on 1-1-88 2,250 Head Office A/c 10,250
Goods from H.O. 34,000
Purchases 66,450
Wages & Salaries 5,500
Trade Expenses 5,250
1,33,600 1,33,600

The stock on December 31, 2018 was Rs. 5,200. Pass the necessary
journal entries to incorporate the above figures and show Branch A/c in
Head Office books, and Trading and Profit & Loss A/c and Balance Sheet
in the branch books.
(Answer: Branch profit Rs. 6,500; Balance Sheet Total Rs. 25,350; Total
of Branch A/c Rs. 1,38,800.)
5) Following is the Trial Balance of Kanpur Branch of Varanasi Head Office.
Prepare Trading and Profit & Loss A/c and Balance Sheet in the books
of branch. Also show Head Office A/c in the books of branch: 113
Hire Purchase and Inland
Branches Rs. Rs.
Furniture & Fixtures 1,500 Cash in Bank 3,000
Purchases 20,000 Carriage etc. 150
Goods from H.O. 40,000 Bad Debts 100
Sales 80,000 Allowances to Customers 200
Sundry Debtor 10,000 Bills Receivable 4,000
Sundry Creditors 12,000 Stock on 1-1-2018 10,000
Head Office A/c Salaries 6,400 Returns Inwards 1,000
General Exp. 600 Returns to H.O. 400
Rent & Taxes 600

Closing Stock on December 31, 2018 Rs. 9,000

(Answer: Branch Net Profit Rs. 10,350; Balance Sheet Total Rs. 27,500;
H.O. A/c Balance including net profit Rs. 15,500.)
6) From the following balances, prepare the Branch Current Account in the
books of head office and Head Office Current A/c in the books of branch.

Head Office Branch

Particulars
Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.

Branch Current A/c 5,000 - - -

Goods sent to Branch - 7,800 - -
Goods received from H,O. - - 7,000 -
Head Office Current A/c - - - 1,400

(Answer: Goods in Transit Rs. 800: Cash in Transit Rs. 2,800.)

7) A limited company with its Head Office in Delhi has a branch at Kota
which obtains goods from the Head Office as well as from outside suppliers.
The branch keeps a separate set of books on June 30, 2019. The trial
balances of the Head Office and its branch were as follows:

Head Office Branch

Particulars Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.
Share Capital  30,000  
P & L Account balance on 1-7-18  4,000  
Fixed Assets 16,000   

Opening Stock 14,000   

Debtors and Creditors 17,000 10,000 1,500 2,050
Cash 3,000   
Purchases and Sales 1,20,000 1,40,000 6,750 20,500
Sundry Expenses 15,000   
Goods from HO. to Branch    
Current Accounts on 30-6-19 11,000   
1,96,000 1,96,000 32,900 32,900

114
 The difference between the balances of Head Office and the Branch Current Branch Accounts-II
Accounts is due to goods and cash being in transit at the close of the
year. Fixed assets are to be depreciated at 10 per cent. Stocks on June
30, 2019 were: Head Office Rs. 10,000 and Branch Rs. 2,100.
Prepare consolidated Balance Sheet of the company. Also show journal
entries for the adjustments and the incorporation of Branch Trial Balance.
(Answer: Balance Sheet Total Rs. 56,850.)
Hints: Goods in Transit Rs. 500; Cash in Transit Rs. 150; Branch Net
Loss Rs. 600; H.O. Net Profit (excluding branch net loss) Rs. 11,400.

14.11 SOME USEFUL BOOKS

Maheshwari. S.N., 1998: Introduction to Accounting Vikas Publishing House,
New Delhi. (Chapters 4 & 5, Section II).
Gupta R L. and M. Radbaswamy, 1998.Advanced Accounting Sultan Chand
& Sons, New Delhi (Chapters 19 & 20).
Shukla.M.C..Grewal T.S. & S.C. Gupta, 1998 Advanced Accounts S. Chand
& Co. Ltd., New Delhi, Chapter 11.
MongaJ.R..Ahuja G.C. & Ashok Sehgal, 1998 :Advanced Accounting National
Publishing House Sew Delhi.

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

115
 BCOC-131
Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

5
CONSIGNMENTS AND JOINT VENTURES
UNIT 15
Consignment Accounts - I 5

UNIT 16
Consignment Accounts - II 50

UNIT 17
Joint Venture Accounts 70
 PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.) Prof. Nawal Kishor
MD University, Rohtak Department of Commerce
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Department of Commerce
Dr. Subodh Kesharwani
Rani Chennamma University
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Faculty Members
Director, SOMS, IGNOU SOMS, IGNOU
Prof. N. V. Narasimham
Prof. A.A. Ansari Prof. Nawal Kishor
Jamia Millia Islamia, New Delhi Prof. M.S.S. Raju
Dr. Sunil Kumar
Ms. Surbhi Gupta Dr. Subodh Kesharwani
Vivekananda College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P. Sarkar
Dr. Anupriya Pandey

COURSE PREPARATION TEAM

Accountancy-I: ECO-02 Prof. N V Narasimham, Editor
Prof. M.S.S. Raju
(Unit-10, 11, 12 and 13 Revised by Dr. Sunil Kumar) (Course Coordinator & Editor)
Shri Vinod Prakash, Moti Lal Nehru College Dr. Sunil Kumar
University of Delhi, Delhi (Course Coordinator & Editor)

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
2 Printed by :
BLOCK 5 CONSIGNMENTS AND JOINT
VENTURES
It is a common practice in business to send goods on consignment basis to some
firms who undertake to sell it on behalf of the consignor. The consignor would like
to ascertain the profit or loss of each consignment separately. This involves certain
peculiarities in accounting. Sometimes two or more persons agree to carry out a
specific project or a job jointly. This is termed as a joint venture. In that case,
the parties to the joint venture called co-venturers want to ascertain their share
of profit or loss from the joint venture business separately. For this purpose, they
may prepare a separate set of books for the joint venture business or record the
joint venture transactions in their own books only. This block consisting of three
units covers the accounting procedure usually followed for recording various
transactions related to the consignments and the joint ventures.
Unit 15 discusses various concepts related to consignment and describes the
basic framework of accounting for recording the consignment transactions. It also
deals with accounting treatment of normal and abnormal losses which may take
place in transit or in the godown of the consignee.
Unit 16 explains how Consignment Account is prepared when goods are invoiced
to the consignee at a price which is higher than its cost. It also describes the
adjustments to be made at the time of working out the profit on consignment
when goods are consigned at invoice price.
Unit 17 discusses various methods of accounting for the joint venture transactions.
Consignments and Joint
Ventures

4
 Consignment
JournalAccounts –I
and Ledger
UNIT 15 CONSIGNMENT ACCOUNTS-I
Structure
15.0 Objectives
15.1 Introduction
15.2 Concepts of Consignment
15.2.1 What is Consignment?
15.2.2 Parties to Consignment
15.2.3 Features of Consignment
15.2.4 Distinction between Sale and Consignment
15.2.5 Important Terms in Consignment

15.3 Accounting Treatment

15.3.1 Books of the Consignor
15.3.2 Books of the Consignee

15.4 Direct Recording in the Ledger

15.5 Unsold Stock
15.5.1 Valuation of Unsold Stock
15.5.2 Accounting Treatment of Unsold Stock

15.6 Loss of Goods

15.6.1 Normal Loss
15.6.2 Abnormal Loss
15.6.3 Where Normal and Abnormal Losses Occur Simultaneously

15.7 Let Us Sum Up

15.8 Key Words
15.9 Some Useful Books
15.10 Answers to Check Your Progress
15.11 Terminal Questions/Exercises

15.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the meaning of consignment;
 distinguish it from sale;
 identify the parties involved in consignment and describe their relationship;
 explain the basic framework of accounting for consignment transactions in
the books of the consignor and the consignee;
 record consignment transactions directly in the ledger accounts of the consignor
and the consignee;
 compute the value of unsold stock;
5
Consignments and Joint
Ventures  explain the nature of normal and abnormal losses;
 compute the value of unsold goods in case of normal loss; and
 explain the treatment of normal and abnormal losses of goods and their
impact on profit.

15.1 INTRODUCTION
The producers often make use of the services of selling agents and distributors
in their channel of distribution. This is particularly true of the agricultural goods.
The selling agents/distributors act in various ways. One of the methods used is to
receive the goods on consignment basis. Under this system, the agent receives the
goods and undertakes to sell it on behalf of the consignor. He often settles the
account of the consignor after all the goods received from him have been sold.
This involves certain peculiarities in accounting. In this unit, you will learn about
various concepts relating to consignment and the basic framework of accounting
for consignment transactions in the books of the consignor and the consignee.
You know the method of working out the profit on each consignment when all
goods are sold out. In practice, you will find that at the time of submitting the
Account Sales, some goods may remain unsold. Then, there is also a possibility
of loss while the goods are in tranit or while they are lying in the godown of the
consignee. Such loss may occur due to normal or abnormal causes. In this unit,
you will learn how the value of unsold goods is worked out and recorded in
books of account. You will also learn about the treatment of normal and abnormal
losses which may take place in transit or in the godown of the consignee and their
impact on valuation of stock and the profit on consignment.

15.2 CONCEPTS OF CONSIGNMENT

You know that goods are often sent by the producer on consignment basis to
the selling agents or distributors. Let us now understand what exactly we mean
by consignment, how does it differ from sale and what kind of relationship exists
between the consignor and the consignee.

15.2.1 What is Consignment?

When goods are sent by a manufacturer or a trader to an agent to be sold by
him on commission basis and at the risk and account of the former, they are said
to be sent on consignment. In other words a producer/trader forwards his products
to his selling agents, appointed at different places, to sell them on his behalf for
an agreed commission. The process of sending goods on this basis by one firm
to another for sale is known as ‘Consignment’ and this transaction is called a
‘Consignment Transaction’. The consignment is ‘Outward Consignment’ for the
person who sends the goods and an ‘Inward Consignment’ for the person who
receives the goods for sale.

15.2.2 Parties to Consignment

You know that in consignment, the goods are sent by one person to another for
sale by the latter on behalf of the former. Therefore, there are two parties involved:
(i) the person who sends the goods and, (ii) the person to whom the goods are
sent. The person who sends the goods to the agent is called the ‘consignor’ and
6 the person to whom the goods are sent for sale is called the ‘consignee’.
If ‘X’ sends goods to ‘Y’ for sale, ‘X’ is known as consignor and ‘Y’ consignee. Consignment Accounts – I
The Consignor is the ‘principal’ and the consignee is the ‘agent’. Their mutual
relations are governed by the Law of Agency and, of course, by the terms of the
contract between themselves. The consignee is a special kind of agent who is in
possession of the goods. He passes the title of the goods to those who buy from
him even if he sells the goods in contravention to the principal’s instructions.
Suppose, the consignor instructs the consignee not to sell the goods below a
certain price. If the consignee sells the goods below the stipulated price, the buyer
will have good title to goods. The consignor may, of course, ask the consignee
to pay damages for breaking the terms of the contract with him. Like all agents,
the consignee must render true accounts to the consignor, be faithful to him, and
act according to his instructions. He is entitled to remuneration and reimbursement
of expenses incurred by him on behalf of the consignor.

15.2.3 Features of Consignment

 Goods are forwarded by the consignor to the consignee with an objective
of sale at a profit.

 Under the consignment, goods are to be treated as the property of the

consignor and to be sold at his risk entirely. The consignee does not buy
the goods, he merely undertakes to sell them on behalf of the consignor. He
is not responsible for any loss or even for any destructions or damages to
the goods. But the consignee should not show any negligence.

 The consignor does not sell the goods to the consignee. Therefore, he can
not ask the consignee to pay the price of the goods unless they are sold and
the sale proceeds are actually realised.

 The consignee agrees to sell the goods for an agreed rate of commission and
is allowed to deduct his commission due from the sale proceeds.

 The agent enters into the picture only when he sells the goods and realises
the amount. He becomes indebted for amounts realised on behalf of the
principal. The relationship between the consignor and the consignee is that
of a principal and an agent.

 As it is not a sale, whatever the consignee does is on behalf of the consignor

and, therefore, all legitimate expenses incurred by the consignee for receiving
and selling the goods should be reimbursed.

 Any stock remaining unsold with the consignee belongs to the consignor.

 As the consignee acts on behalf of the consignor, the profit or loss on sale
of goods sent on consignment belongs to the consignor.

15.2.4 Distinction between Sale and Consignment

Although the possession of goods is transferred from one person to the other,
both in case of sale and in case of consignment, they differ from each other in
various ways. The difference between an outright sale and the goods sent on
consignment has been explained as follows:
7
Consignments and Joint No. and Item Sale Consignment
Ventures
1. Parties Seller and Buyer Consignor and Consignee

2. Ownership and title Ownership and title of The legal ownership and
of goods goods is transferred from title of goods is not
seller to the buyer of the transferred to the
goods. consignee. It remains with
the consignor till they are
sold.

3. Relationship The relationship between The relationship between

the seller and the buyer of the consignor and the
the goods is that of a consignee is that of a
creditor and debtor. principal and an agent. The
consignee is to sell goods
on behalf of the consignor.
4. Expenses Expenses incurred after sale Expenses incurred by the
of goods are borne by the consignee in connection
buyer. with the goods consigned
to him are borne by the
consignor.
5. Risk Risk attached to the goods Risk attached to the goods
sold is transferred to the consigned lies with the
buyer of goods as soon as consignor till the goods
goods are sold. In case, the consigned are sold. In
goods are destroyed after case, the goods are
sale, the loss is suffered by destroyed, the loss is
the buyer. borne by the consignor.
6. Return of Goods Return of goods is not Goods can be returned if
possible as goods once they are not sold by the
sold are not returnable. consignee.
7. Account Sales No Account sale is Account sale has to be
required to be submitted by submitted by the consignee
the buyer to the seller. to the consignor from time
to time.
8. Unsold Goods
The seller has nothing to do Unsold goods with the
with the goods which could consignee will be treated
not be resold. as stock of the consignor.

The distinction between sale and consignment given above also amply clarifies the
difference between the rights and duties of the buyer and the consignee.
Check Your Progress A
1. Read the following carefully and tick mark the correct answer.
a) The relationship between the consignor and the consignee is that of
i) Buyer and Seller
8
 ii) Principal and Agent Consignment Accounts – I

iii) Debtor and Creditor

b) The term used for consignee’s remuneration is
i) Commission
ii) Brokerage
iii) Discount
c) The party responsible for the risk attached to the goods in
consignment is
i) Consignee
ii) Consignor
iii) Both
d) The legal ownership of the goods is not transferred till the goods are
sold in case of
i) Sale
ii) Consignment
iii) Both
2. State whether the following statements are True or False.
i) Despatch of goods on consignment amounts to sale
of goods by the consignor. (T/F)
ii) All the legitimate expenses incurred by the
consignee relating to consignment are borne by
the consignor. (T/F)
iii) For the consignor the consignment is an outward
consignment and the same becomes an inward
consignment for the consignee. (T/F)
iv) Goods are treated as sales under consignment
when they are consigned. (T/F)
v) The consignee does not become the debtor of the
consignor on receipt of goods. (T/F)

15.2.5 Important Terms in Consignment

There are a few terms relating to consignment which are commonly used. These
are proforma invoice, account sales, non-recurring and recurring expenses,
commission, advance, etc. These are explained as follows:
ProformaInvoice :Since the goods sent on consignment cannot be treated as
sales, the consignor does not prepare proper Invoice. He simply prepares a
Proforma Invoice and sends it to the consignee along with the goods despatched.
This is prepared with a view to inform the consignee about price of goods,
expenses incurred, mode of transportation and the minimum sale price at which
the goods are to be sold. A specimen of proforma invoice is given in figure 15.1 9
Consignments and Joint Fig. 15.1
Ventures
Specimen of Proforma Invoice.
BABAR TRADERS
Proforma Invoice 222, Mount Road
Chennai
For Goods Sent on consignment basis to: Oct. 10, 2018
M/s Hari Kishan Enterprises, Hauz Khas, New Delhi.

Serial No. Particulars Amount

Rs. Rs.
Rs. 500 Bush Radio sets at 3,00,000
Rs. 600 each
Charges
Packing and Cartage 4,000
Freight 3,000
Insurance 6,000 13,000
Total 3,13,000
Goods despatched vide R.R.NO.
Smt. G.834866, Dated 10/10/18
Freight to pay.

E. & O. E. For Babbar Traders

(D. BABBAR)
Partner
Note: E.&.O.E. stands for Errors and Omissions Excepted. Which mean that
invoice is subject to the errors of omission and commission.
In the above invoice, Babbar Traders is the consignor and Hari Kishan Enterprises
is the consignee. Goods worth Rs. 3,00,000 have been consigned on which a
sum of Rs. 13,000 has been incurred on various expenses.
Account Sales : As the consignee is an agent and is selling the goods on behalf
of the consignor, he has to furnish the details of sale proceeds, expenses,
commission, etc. to the consignor. He furnishes all these details by means of a
statement called ‘Account Sales’. This shows the quantity and description of
goods sold, sale proceeds realised, the expenses incurred by the consignee,
commission due to him, and the balance amount payable by him to the consignor.
While preparing an Account Sales, the consignee will deduct all expenses incurred
by him in relation to the consignment and the commission due to him. The
remittances made in advance, if any, are also to be deducted from the balance
so obtained. The consignee will send a bank draft or his acceptance for the
balance due to the consignor. Illustration I will give you a clear understanding as
to how an Account Sales is prepared.
Illustration 1
On January 1, 2018 Babbar Traders of Mumbai consigned 500 Bush Radio sets
to Hari Kishan Enterprises, Chennai. The cost of each set was Rs. 750. On
receiving the consignment, Hari Kishan Enterprises sent a bank draft for Rs.
10
25,000 as an advance to Babbar Traders. Hari Kishan Enterprises paid Rs. Consignment Accounts – I
1,500 for freight, Rs. 2,000 for octroi, Rs. 2,500 for godown rent and other
selling expenses. Hari Kishan enterprises submitted an Account Sale on March,
1, 2018 showing that all the sets had been sold at Rs. 850 each. They were
entitled to 10% commission on sales. Prepare the Account Sales.
Solution
ACCOUNT SALES
of 500 Bush Radio Sets Received from Babbar Traders, Mumbai
S.No. Particulars Amount
Sale Proceeds: 500
Bush Radio Sets sold at Rs. 850 each 4,25,000
Less:
Freight 1,500
Octroi 2,000
Godown rent & selling expenses 2,500 6,000
4,19,000
Less: Commission Rs. 4,25,000 × 10% 42,500
3,76,500
Less: Advance (Bank Draft) 25,000
Balance due to Babbar Traders
remitted as per draft enclosed 3,51,500

E. & O. B. For Hari Kishan Enterprises

HARIKISHAN
Dated 01/03/18 Managing Partner
Commission : It is the remuneration paid to the consignee by the consignor in
consideration of the services rendered by the former in selling the goods consigned.
This commission can be divided into two types (a) Ordinary Commission, and (b)
Special Commission.
a) Ordinary Commission: It is a commission usually paid as a fixed percentage
on gross sale proceeds. The terms commission normally denotes ordinary
commission, unless specified otherwise. The consignee is not responsible for
any bad debts and he does not guarantee the payment from all those who
buy on credit so long as he is getting ordinary commission only.
b) Special Commission: This is the commission which the consignee gets over
and above the ordinary commission. It can be sub-divided into two categories
viz., (i) Over-riding Commission and (ii) Del Credre Commission.
i) Over-riding Commission:This is an extra commission allowed over
and above the normal commission and is generally offered when the
agent is required to put in hard work either in introducing a new product
in the market or where he is entrusted with the work of supervising the
performance of other agents in a particular area. This commission is
also given for sales at prices higher than the price fixed by the consignor.
ii) Del Credre Commission: Usually, all the losses are borne by the
consignor. Sometimes the consignor expects that the consignee should 11
Consignments and Joint also be responsible for recovering the debts and bear the loss on
Ventures
account of bad debts, if any. In order to compensate him for this
additional responsibility, he is given some extra commission called ‘Del
Credre Commission’. Such commission is calculated on the total sales
unless there is a special agreement to the effect that it is to be paid only
on the amount of credit sales. Payment of this commission imposes
extra liability on the consignee and induces him to deal in a prudent and
cautious manner.
In illustration 2, we have given you the details regarding the computation of
commission. It would certainly give you an idea about the calculation of normal
commission and special commission.
Illustration 2
Rajadhani Cycles Ltd, sent 2,000 dynamos costing Rs. 50 each for sale on
consignment basis to Banerjee & Co. Calcutta. Normal selling price per dynamos
is Rs. 60. Consignee is entitled to commission at i) 5% on normal selling price;
ii) 10% additional commission on excess sales and iii) 1 ½ % Del credre commission
on total sales for guaranteeing collection of credit sales. Banerjee & Co. reported
sales of 500 dynamos at Rs. 60 each and 200 dynamos at Rs. 75 each on cash
basis, 400 dynamos at Rs. 75 each and another 400 at Rs. 80 each on credit
basis. Compute consignee’s commission.
Solution:
Total Sales:
500 units Rs 60 each 30,000
200 Units @ Rs 75 each 15,000
400 units @ Rs 75 each 30,000
400 Units @ Rs 80 each 32,000

1,07,000
i) Normal Commission
5% on normal price of goods sold.
Number of Units sold are: 1,500 (500 + 200 + 400 + 400)
Normal selling price per unit Rs. 60

Normal Sale: 1500 60 = Rs. 90,000

3
Normal Commission: 5  90,000 = Rs. 4,500
100

ii) Additional Commission : 10% on amount realized in excess of the normal

price Rs.
Total Sales Value: 1,07,000
Normal Sales Value: 90,000
Excess Sales Value: 17,000
10
3
Additional Commission:  17,000 = Rs. 1,700
100
12
iii) Del Credre Commission Consignment Accounts – I

1
1 % on Total Sales
2

3
 1,07,000 = Rs. 1,605
100
Total Commission (i) + (ii) + (iii) Rs.4,500+ Rs. 1,700 + Rs. 1,605 =Rs.7,805
Expenses: Expenses relating to consignment of goods are divided into two
categories viz., (i) Non-recurring Expenses, and (ii) Recurring Expenses.
i) Non-recurring Expenses: All the expenses which are incurred for bringing
goods to the godown of the consignee are non-recurring in nature. Such
expenses are generally incurred on the consignment as a whole. The non-
recurring expenses will be incurred partly by the consignor and partly by the
consignee.
The consignor usually incurs expenses on sending the goods to the consignee
such as packing, cartage, loading charges, insurance, freight. etc. The
consignee usually incurs expenses on receiving the goods from the consignor
such as dock dues, customs duty, clearing charges, octroi, etc.
ii) Recurring Expenses: These expenses are incurred after the goods have
reached the consignee’s place or godown. They are recurring in nature
because they may be incurred repeatedly by the consignor and the consignee.
The examples of recuing expenses incurred by the consignor are: advertising,
discount on bills, commission on collection of cheques, travelling, expenses
of salesmen, bad debts etc. The examples of recurring expenses incurred by
the consignee are godown rent, godown insurance, sales promotion, etc.
Advance: It is a common trade practice for the consignor to demand some
advance from the consignee as a security for the goods despatched to him. It may
be in the form of cash or bank draft or in the form of a bill of exchange. The
consignee will send some amount as an advance before or after he receives the
goods from the consignor. The advance received from the consignee should not
be credited to consignment account as it is not a part of the sale proceeds. The
advance will be adjusted against the amount due from the consignee when the
accounts are finally settled. In some cases, a bill may be drawn on the consignee
if he is not in a position to pay advance money. The consignor can discount the
bill with his bankers. In such a case, the value of the bill (as advance) so accepted
will be deducted from the sale proceeds. The discount paid to the bank can be
straight away charged to the Profit &Loss Account as it represent cost of raising
finance.
Check Your Progress B
1. Distinguish between Account Sales and Sales Account?
.................................................................................................................
.................................................................................................................
.................................................................................................................
................................................................................................................. 13
Consignments and Joint 2. Under what circumstances can the consignee get a special commission?
Ventures
.................................................................................................................
.................................................................................................................
.................................................................................................................
3 Fill in the blanks:
i) E. & O.E. stands for ………..
ii) Consignor allows ……….Commission to the consignee to bear the
bad debts.
iii) ……….expenses are those expenses which are incurred after the goods
reach the consignee’s godown.
iv) The consignee gives advance to the consignor as a……… for goods
despatched.
v) Unloading charges paid by the consignee are ………….expenses.

15.3 ACCOUNTING TREATMENT

The transactions relating to each consignment are recorded in such a way that the
profit or loss of each consignment can be worked out separately. For this purpose,
the consignor prepares a Consignment Account relating to each consignment to
which all concerned expenses including the cost of goods consigned are debited
and the sales proceeds and the closing stock are credited. In addition, he also
maintain a consignee’s account in order to compute the amount due from him. The
consignee, on the other hand, simply maintains consignor’s account in his books
to which he debits the amounts remitted to the consignor the expenses incurred
by him in relation to the consignment and the commission due to him. Consignor’s
Account is credited mainly by the amount of sale proceeds. Now let us study how
various transactions related to consignment are recorded in the books of the
consignor and the consignee.

15.3.1 Books of the Consignor

You know each transaction is recorded first in a subsidiary book and then posted
to the respective accounts in the ledger. All transactions related to consignment
therefore, are first recorded in the Journal. The entries passed in respect of
various transaction are as follows:
1. Goods despatched to the consignee: As you know the consignment of
goods cannot be treated as a sale of goods. Therefore, Sales Account will
not be credited. In its place, an account called ‘Goods Sent on Consignment
Account will be credited and the Consignment Account is debited with the
cost of the goods consigned’. Thus the journa1entry will be as follows:
Consignment A/c Dr.
To Goods Sent on Consignment A/c
(Being the value of the consignment)
If consignments have been sent to more than one consignee, the consignment
accounts may be distinguished by adding the names of the places to the
14
 Consignment Account. (For example Consignment to Calcutta Account, Consignment Accounts – I
Consignment to Gonda Account, etc.
2. Expenses incurred by the consignor: All expenses incurred by the consignor
on consignment of goods are debited to the Consignment Account and are
thus added to cost of goods consigned. The entry would be:
Consignment A/c Dr.
To Cash/Bank A/c
(Being the expenses incurred on the consignment)
3. Advance made by the consignee: The amount of advance received from
the consignee cannot be treated as sale proceeds, and so should not be
credited to the Consignment Account. It is treated as follows.
Cash/Bank/Bills Receivable A/c Dr.
To Consignee’s A/c
(Being an advance from the consignee)
4. Bill received from the consignee discounted with the bank: If the
consignor gets the bills receivable discounted from his bankers, the entry will
be
Bank A/c Dr.
Discount A/c Dr.
To Bills Receivable A/c
(Being bill discounted with the bank)
5. Receipt of account sales from the consignee: When the goods are sold
out, the consignee will send an Account Sales to the consignor intimating him
the total sales and the amount of his expenses and commission. The following
three entries will be recorded in this connection.
a) For sales made by the consignee:
Consignee’s A/c Dr.
To Consignment A/c
(Being gross proceeds of sales)
b) For consignee’s expenses:
Consignment A/c Dr.
To Consignee’s A/c
(Being expenses incurred by the consignee in dealing with consignment)
c) For consignee’s commission:
Consignment A/c Dr.
To Consignee’s A/c
(Being commission payable on sale proceeds)
6. Goods returned by the consignee: Sometimes defective or obsolete goods
are returned by the consignee to the consignor. When such goods are
received, the journal entry will be :
Goods Sent on Consignment A/c Dr.
To Consignment A/c
(Being goods returned by the consignee)
15
Consignments and Joint 7 Bad debts incurred: When the consignee is entitled to delcredre commission,
Ventures
no entry for bad debts is to be passed as such loss is to be borne by the
consignee himself. But when delcredre commission is not paid, the loss on
account of bad debts is to be borne by the consignor, the entry will be:
Consignment A/c Dr.
To Consignee’s A/c
(Being value of bad debts)
8. Remittance by the consignee in full settlement: The balance amount will
have to be remitted by the consignee to the consignor on settlement of the
account. The following entry will be recorded, when the consignee remits to
the consignor:
Cash/Bank/Bills Receivable A/c Dr.
To Consignee’s A/c
(Being balance due from the consignee received).
9. Profit or loss on consignment: When you balance the Consignment
Account, it reveals profit or loss. If the total of credit side is more than the
total of debit side, it is a profit and if the total of debit side is more than that
of the credit side, it is a loss. The profit or loss is transferred to the Profit
& Loss Account and thus the Consignment Account is closed.
The following entries will be recorded:
a) If there is a profit:
Consignment A/c Dr.
To Profit & Loss A/c
(Being profit on consignment)
b) If there is loss:
Profit & Loss A/c Dr.
To Consignment A/c
(Being loss on consignment)
10. Closing entry for goods sent on consignment : Goods Sent on
Consignment Account is closed by transfer to the Trading Account. The
entry passed is as follows:
Goods Sent on Consignment A/c Dr.
To Trading A/c
(Being goods sent on consignment account closed)
11. Unsold stock with the consignee: It is quite possible that all the goods
sent on consignment are not sold by the consignee up to the date on which
final accounts are prepared. Some goods may remain unsold known as the
‘Consignment Stock’. This should be properly valued and credited to the
Consignment Account. You will learn about the valuation of unsold stock in
section 15.5 in this unit. However, the entry for consignment stock will be:
Consignment Stock A/c Dr.
To Consignment A/c
(Being unsold goods with the consignee)

16
You have learnt how to record consignment transactions in the Journal of the Consignment Accounts – I
consignor.
Now let us see how these accounts are shown in the ledger and how profit or
loss on consignment is worked out. The consignor usually maintains the following
three accounts:
1. Consignment Account: It is prepared by the consignor showing all
transactions relating to a particular consignment. The objective of this account
is to ascertain net profit/loss aising from each consignment. Once goods are
consigned by the consignor, its cost is debited to the Consignment Account
alongwith various expenses incurred by the consignor and the consignee in
dealing with that particular consignment. The commission due to the consignee
is also debited to the Consignment Account. When Del Credre Commission
is not paid, the bad debts, if any, are also to be debited to this account.
Once the goods reach the consignee, some of these will be unsold and the
rest sold either on cash or on credit. irrespective of the type of sale, the
entire sale proceeds will he shown on the credit side of the Consignment
Account. The unsold goods are treated as consignment stock and credited
to this Account. If some goods are found unsuitable for sale, the consignee
will send them back to the consignor and the same will appear on its credit
side. After all these items are recorded, the Consignment Account is balanced.
The difference between the debit and credit totals of Consignment Account
is regarded as profit or loss which is transferred to the Profit and Loss
Account and the Consignment Account stands closed. It is infact a nominal
account and is just like a Trading and Profit and Loss Account about which
you have studied earlier in final accounts. Therefore, the principles applied
to Trading and Profit & Loss Account hold good for this account also. Like
Trading and Profit & Loss Account, all expenses and purchases are debited
to this account and all sales and incomes are credited. The proforma of the
consignment account is given in Figure 15.2.
Fig. 15.2
Consignment to Patna Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

To Goods Sent on By Consignee’s A/c xxx

Consignment A/c xxx (Cash and Credit sales)
To Cash A/c xxx By Goods Sent on
(Consignor’s Expenses) Consignment A/c xxx
(Goods returned by the Consignee)
To Consignee’s A/c By Consignment Stock A/c
(Consignee’s Expenses) xxx (Unsold Stock) xxx
To Consignee’s A/c By Profit and Loss A/c
(Commission) xxx (Loss transferred) xxx
To Consignee’s A/c
(Bad Debts if any) xxx
To Profit and Loss A/c
(Profit transferred) xxx
xxx xxx
17
Consignments and Joint 2. Goods Sent on Consignment Account: This is a real account. It deals with
Ventures
the goods transferred from the consignor to the consignee and goods returned
by the consignee to the consignor. All the goods consigned by the consignor
will be credited to this account and the goods returned by the consignee are
debited to this account. The balance represents the cost of goods with
consignee for sale, and is transferred to the Trading Account. The proforma
of the Goods Sent on Consignment Account is depicted in Figure 15.3
Fig. 15.3
Goods Sent to Consignment Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
To Consignment A/c xxx By Consignment A/c xxx
(Goods returted) (Goods consigned)
To Trading A/c xxx
(Balance transferred)

xxx xxx

3. Consignee’s Account: It is a personal account of the consignee. It is prepared

for ascertaining the amount due from the consignee. The consignee’s account
is debited with all cash and credit sales effected by the consignee. The
various expenses incurred by the consignee, the commission charged by him
as well as the advance remitted by him are credited to this account. This
account usually shows a debit balance indicating the amount due from the
consignee. At time it may show credit balance, if the advance given by the
consignee is more than the sale affected by him. The balance revealed by this
account is shown in the balance sheet of the consignor, debit balance on the
assets side, and credit balance on the liabilities side, unless the account is
settled by the required remittance. Figure 15.4 shows the proforma of
Consignee’s Account.
Fig. 15.4
Consignee’s Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
To Consignment A/c xxx By Cash/Bank/Bills Receivable A/c xxx
(Cash and Credit Sales) (Advance)
By Consignment A/c xxx
(Consignee’s Expenses)
By Consignment A/c xxx
(Consignee’s Commission)
By Banks A/c or xxx
Balance c/d

xxx xxx
18
Look at illustration 3 and see how various transactions relating to consignment are Consignment Accounts – I
recorded in the books of the consignor.
Illustration 3
Bush Radio & Co., Delhi sent on consignment to Chadda& Co., Calcutta 100
radio sets, invoiced at Rs. 100 each on January 6, 2018. Bush Radio & Co. paid
Rs. 1,000 on the same day for despatching goods to the consignee. Consignee
remitted Rs. 5,000 as an advance by bank draft on January 14. The Consignee
is entitled to a commission of 10% on the sale proceeds. On receipt of goods,
the consignee paid Rs. 1,000 for freight and Rs. 500 for godown charges.
On January 28, Chadda & Co. sent an Account Sales showing that the radio sets
have realisedRs. 200 each. He remits the amount due to Bush Radio & Co. Pass
Journal entries and prepare ledger accounts in the books of the consignor.
Books of Bush Radio & Co., Delhi
JOURNAL
Date Particulars L.F. Dr. Cr.
Amount Amount

2018 Rs Rs.
Jan. 6 Consignment to Calcutta A/c Dr. 10,000
To Goods Sent on Consignment A/c 10,000
(Being cost of consignment sent to Chadda & Co.)
“ 6 Consignment to Calcutta A/c Dr. 1,000
To Bank A/c 1,000
(Being expenditure incurred on despatching of goods)
“ 14 Bank A/c Dr. 5,000
To Chadda & Co. 5,000
(Being receipt of an advance payment from the consignee)
“ 28 Consignment to Calcutta A/c Dr. 1500
To Chadda & Co. 1500
(Being expenses paid by the consignee)
“ 28 Chadda & Co. Dr. 20,000
To Consignment to Calcutta A/c 20,000
(Being the gross proceeds of sales made by the consignee)
“ 28 Consignment to Calcutta A/c Dr. 2,000
To Chadda & Co. 2,000
(Being commission payable on sale proceeds)
Jan. 31 Bank A/c Dr. 11,500
To Chadda & Co. 11,500
(Being balance payment received from the consignee)
“ 31 Consignment to Calcutta A/c Dr. 5,500
To Profit & Loss A/c 5,500
(Being Profit on consignment transferred to
Profit & Loss Account)
“ 31 Goods Sent on Consignment A/c Dr. 10,000
To Trading A/c 10,000
(Being goods sent on consignment transferred to
Trading Account)
19
Consignments and Joint LEDGER
Ventures
Consignment to Calcutta Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. Jan Rs.

To Goods sent To Chadha & Co 20,000

on Consignment A/c 10,000
To Bank A/c
(Consignor’s Expenses) 1,000
To Chadha & Co. 1,500
(Consignee’s Expenses)
To Chadha & Co.
(Consignee’s Commission) 2,000
To Profit & Loss A/c 5,500
(Profit transferred)
20,000 20,000

Goods Sent on Consignment Account

Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 2018
Jan 30 To Trading A/c 10,000 Jan 6 By Consignment to Calcutta A/c 10,000

Chadha& Co. Account

Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan 28 To Consignment to 20,000 Jan 14 By Bank A/c 5,000
Calcutta A/c (Advance)
(Sale Proceeds) By Consignment to Calcutta A/c 1,500
(Expenses)
By Consignment to Calcutta A/c 2,000
(Commission)
By Bank A/c 11,500
(Balance received)
20,000 20,000

20
15.3.2 Books of the Consignee Consignment Accounts – I

The Consignee mainly prepares a consignor’s account in his books to find out
what is finally due to the consignor. He records all transactions relating to the
consignment first in the Journal and then posts them to the relevant accounts
(including Consignor’s Account) in the ledger. The journal entries passed by the
consignee are:
1. Receipt of goods from the consignor: No entry is passed by the consignee
when he receives goods from the consignor because receipt of goods on
consignment does not amount to purchases of goods by him. He keeps them
in his godown on behalf of the consignor for which he usually maintains an
Inwards Consignment Book.
2. Expenses incurred by the consignor: No entry is passed by the consignee.
3. Advance made by the consignee
Consignor’s A/c Dr.
To Bank/Bills Payable A/c
(Being advance made by the consignee)
4. Bill discounted by the consignor with the bank: No entry is passed by
consignee.
5. Sale of goods by the consignee
Cash A/c (cash sales) Dr.
Consignment Debtors A/c (Credit sales) Dr.
To Consignor’s A/c
(Being goods sold)
6. Expenses incurred by the Consignee: Being an agent of the consignor,
all legitimate expenses incurred by the consignee related to the consignment
are to be reimbursed by the consignor, the entry will be:
Consignor’s A/c Dr.
To Cash/Bank A/c
(Being expenses incurred on consignment)
7. Commission due to the consignee: This should include all types of
commissions due to the consignee: The entry will be
Consignor’s A/c Dr.
To Commission A/c
(Being commission due on sales)
8. Return of goods to the consignor: No entry will be passed in the books
of the consignee as no entry was passed at the time of receipt of the goods.
9. Payment received from debtors
Cash/Bank A/c Dr.
To Consignment Debtors A/c
(Being amount collected from debtors)
10. Bad debts incurred
a) If consignee does not get delcredre commission, all bad debts have to
be borne by the consignor himself. The entry will be. 21
Consignments and Joint Consignor’s A/c Dr.
Ventures
To Consignment Debtors A/c
(Being bad debts on consignment)

b) If delcredre commission is paid to the consignee, the bad debts are to

be borne by him. The entry will be:
Bad Debts A/c Dr.
To Consignment Debtors A/c
(Being bad debts incurred on consignment)

11. When the bills payable accepted in favour of consignor is met on the due
date:
Bills Payable A/c Dr.
To Bank A/c
(Being bills payable honoured)

12. Remittance in final settlement

Consignor’s A/c Dr.
To Cash/Bank Account
To Bills Receivable Account
(Being payment of the balance due to the consignor)
13. Unsold stock in possession of the consignee : No entry will be passed
for unsold goods in the books of consignee as no entry was passed when
he received goods from the consignor.
14. Profit or Loss on consignment: No entry is passed for profit or loss on
consignment as the consignee is not concerned with it.
The Consignee also prepares ledger accounts after passing all the journal entries.
The Consignor’s Account and Commission Account are the two important accounts
prepared by the Consignee in his books. Of course, he will also do the postings
to the other accounts such as Consignment Debtor’s Account, Consignment
Expenses Account and Bills Payable Account. etc. But these are of less importance,
hence not discussed here.
1. Consignor’s Personal Account: This is the main account in Consignee’s
ledger which is prepared for working out the amount due to the consignor.
Whatever amount he receives from sales of goods is credited to this account.
All expenses incurred by the consignee in relation to consignment, the
commission due to him, and the advance given by him to the consignor will
be debited to this account. Further, if the consignee does not get delcredre
commission, the bad debts on account of credit sales are also debited to the
Consignor’s Account. The balance of this account indicates the amount payable
to the consignor. This account is just the opposite of the Consignee’s Account
in the books of the consignor. The proforma of the Consignor’s Account is
given in Figure 15.5
22
 Fig. 15.5 Consignment Accounts – I
Consignor’s Personal Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
To Bank/Cash A/c By Bank A/c
(Consignee’s Expenses) xxx (Cash Sales) xxx
To Bank/Bills Payable A/c By Consignment A/c
(Advance) xxx (Credit Sales) xxx
To Commission A/c By Bank A/c
(Consignee’s Commission) xxx (Balance remitted) xxx
xxx xxx

2 Commission Account: This is nominal account. It shows the income earned

by the consignee for the services rendered by him, All types of commission
whether, ordinary or special, due to the consignee is credited to this account.
The Commission Account will be debited with bad debts if the consignee is
to bear such loss because of delcredre commission. The proforma of the
Commission Account is given in Figure 15.6

Fig. 15.6
Commission Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
To Bad debts A/c xxx By Consignor’s A/c xxx
To Profit & Loss A/c (Consignee’s Commission)
(balance) xxx
xxx xxx

Taking the data of illustration 3 let us see how transactions related to consignment
will be recorded in the books of the consignee.
Books of Chadha & Co.
JOURNAL

Date Particulars L.F. Dr. Cr.

Amount Amount

2018 Rs Rs.
Jan. 14 Bush & Co. Dr. 5,000
To Bank A/c 5,000
(Being advance paid by the consignee)
“ 15 Bush & Co. Dr. 1,500
To Cash/Bank A/c 1,500
(Being expenses incurred on consignment)
23
Consignments and Joint
Ventures
“ 28 Bank A/c Dr. 20,000
To Bush & Co. 20,000
(Being cash sales on consignment)
“ 28 Bush & Co. Dr. 2,000
To Commission A/c 2,000
` (Being commission due on goods sold)
“ 31 Bush & Co. Dr. 11,500
To Bank A/c 11,500
(Being balance payment made)

LEDGERS
Bush & Co’s Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan. 14 To Bank A/c 1,500 Jan. 31 By Bank A/c (Sales) 20,000
Jan. 14 To Bank A/c (Advance) 5,000
Jan. 14 To Commission A/c 2,000
Jan. 14 To Bank A/c (Balance) 11,500
20,000 20,000

Commission Account

2018 Rs. 2018 Rs.

Jan. 31 To Profit & Loss A/c 2,000 Jan. 28 By Bush & Co. 2,000

Check Your Progress C

1. Fill in the blanks.
i) All expenses incurred by the consignee are………… to Consignment
Account.
ii) When the defective goods are returned by the consignee, the consignor
debits it to ………….Account.
iii) When there is no del-credre commission, bad debts are borne by
the …..............…….
iv) Consignment Account is similar to……………Account.
v) Consignee passes …………..entry for closing stock.
vi) Commission Account is a …………Account.
2. Explain why the consignee does not pass any entry for
a) Goods sent on consignment
24
 b) Profit or loss on consignment, and Consignment Accounts – I

c) Closing stock.

.........................................................................................................

.........................................................................................................

.........................................................................................................

.........................................................................................................

15.4 DIRECT RECORDING IN THE LEDGER

You know for each consignment, the Consignor prepares the Consignment Account,
the Goods Sent on Consignment Account and the Consignee’s Account in his
books, whereas the consignee prepares the Consignor’s Account and the
Commission Account in his books. Sometimes, you may be asked to prepare the
ledger accounts directly i.e., without passing any journal entries, You should therefore
learn how to prepare these accounts directly.

You should debit the Consignment Account with the cost of goods consigned,
expenses incurred by the consignor, expenses incurred by the consignee and the
Consignee’s commission; and credit it with sales (both cash and credit) and the
goods returned by the Consignee. The Consignee’s Account will be debited with
the sales made by him and credited with his expenses, commission and the
remittances made to the Consignor.

The Consignor’s Account in the books of Consignee is just the reverse of

Consignee’s Account in Consignor’s books. It is debited with the expenses incurred
by the Consignee, the commission due to him and the remittances made to the
Consignor on account; and credited with the total amount of sales.

Look at illustration 4 and see how the consignment transactions are recorded
directly in the ledger accounts.

Illustration 4

On January 1, 2018, Gursharan & Co. of Delhi consigned 50 cases of glassware

costing Rs. 40,000 to Singh & Co. of Calcutta for sale on commission @ 5%
on gross sale proceeds. Gursharan & Co. paid Rs. 500 for freight and carriage
and Rs. 600 for packing. Singh & Co. took the delivery of goods on January
5, 2018 and paid Rs. 300 for clearing charges, Rs. 200 for carriage, Rs. 50 for
miscellaneous expenses, and Rs. 100 for godown rent.

They sold 15 cases @ Rs. 1,000 each, 25 cases @ Rs. 1,200 each and 10 cases
@ Rs. 1,100 each.

On April 5, 2018 Singh & Co. sent a bank draft for Rs. 15,000 to Gursharan
& Co. on account. On April 10, 2018 Singh & Co. forwarded an Account Sales
together with a bill of exchange for the balance due.

Prepare the necessary ledger accounts in the books of both the parties. 25
Consignments and Joint
Ventures

Solution :
Books of Gursharan & Co.
Consignment to Singh &Co’s Account
Dr. Cr.

Date Particulars Amount Date Particulars Amoun

2018 Rs. 2018 Rs.

Jan. 1 To Goods Sent on 40,000 Apr. 10 By Singh & Co. (Sales) 56,000
Consignment A/c
“ 1 To Bank A/c
Freight and Carriage 500
Packing 600 1,100
Apr.10 To Singh & Co. (Expenses)
Clearing charges 300
Carriage 200
Misc. Expenses 50
Godown Rent 100 650
“ 10 To Singh & Co. (Commission) 2,800
“ 10 To Profit & Loss A/c
(Profit transferred) 11,450
56,000 56,000

Goods Sent on Consignment Account

2018 Rs. 2018 Rs.

Apr.10 To Trading A/c 40,000 Jan. 1 By Consignment to
Singh & Co. A/c 40,000

Singh & Co’s Account

2018 Rs. 2018 Rs.

Apr. 10 To Consignment to 56,000 Apr. 5" By Bank A/c 15,000
Apr. 10" By Consignment to Singh 650
& Co. A/c (Expenses)
Apr. 10" By Consignment to Singh 2,800
& Co. A/c to (Commission)
Apr. 10 By Bills Receivable A/c
(Balance) 37,550
56,000 56,000

26
 Books of Singh & Co. Consignment Accounts – I
Gursharan& Co. Account

2018 Rs. 2018 Rs.

Apr. 5" To Bank A/c 15,000 Apr. 10 By Bank A/c (Sales) 56,000
10" To Cash A/c (Expenses) 650
10" To Commission A/c 2,800
10 To Bills Payable A/c 37,550
56,000 56,000

Commission Account

2018 Rs. 2018 Rs.

Apr. 10 To Profit & Loss A/c 2,800 Apr. 10 By Gursharan & Co. A/c 2,800
2,800 2,800

15.5 UNSOLD STOCK

In illustration 4, you saw that Singh & Co. sold all the goods consigned to them.
But, in practice, you will find that at the time of submitting the Account Sale, a
part of goods consigned will still be unsold and will be lying with the consignee.
In order to calculate the true profit or loss on consignment, the unsold stock
should be valued and accounted for. Let us therefore, learn first how the unsold
stock is valued.
15.5.1 Valuation of Unsold Stock
You know that valuation of unsold stock is usually done at cost. In case of
consignment, cost of stock would include the cost at which the goods are consigned
plus the proportionate non-recurring expenses i.e., all those expenses incurred till
the goods reach the godown of the consignee. You should note that all non-
recurring expenses, whether incurred by the consignor or by the consignees, are
to be taken into account. In the absence of details of expenditure incurred by the
consignee, all expenses incurred by him are to be taken as recurring expenses and
thus are not to be considered in the calculation of closing stock. In other words,
while valuing the closing stock we add such proportionate expenses to the cost
price that have been incurred upto the time the goods are brought to the place
of the consignee. Any other expenses paid by the consignor or the consignee after
this point will not be considered, as these expenses do not add to the value of
the goods. Such expenses are godown rent, selling expenses, carriage outwards,
godown insurance, discount etc.
Following expenses are usually added for calculation of closing stock:
Carriage and Freight
Loading Charges
Customs Duty
Clearing Charges
Dock Dues 27
Consignments and Joint Carriage paid upto the Godown
Ventures
Unloading Charges
Following are the expenses which are not considered for calculation of
closing stock:
Godown Rent
Discount
Bad Debts
Insurance of the Goods in the Godown
Selling and Distribution Expenses.
You will notice that all expenses incurred by the Consignor are considered for
valuation of the closing stock. The problem arises only in case of Consignee’s
expenses. The Consignee’s expenses which are to be included in the value of
closing stock are those expenses which are incurred till the goods reach the
godown of the Consignee. Any other expenses incurred thereafter are ignored for
purposes of closing stock valuation.
Look at illustration 5 and see how the unsold stock is valued.
Illustration 5
A sent goods worth Rs. 10,000 to B and paid Rs. 1,200 for packing and Rs.
800 for insurance. B took the delivery of the goods and paid Rs. 2,000 for
freight, Rs. 400 for cartage and unloading, Rs. 600 for godown rent, Rs. 400 as
selling expenses and Rs. 800 for insurance. B sold three fourth of the goods for
Rs. 1,800. Calculate the value of closing stock.
Solution
1 Cost of Unsold Stock: Rs. 2,500 (1/4 of 10,000)
2 Non-recurring Expenses:
Incurred by Consignor Rs. 2,000 (1,200 + 800)
Incurred by Consignee Rs. 2,400 (2,000 + 400)
Rs. 4,400
3 Value of Closing Stock

Cost of Unsold Stock

Cost of Unsold Stock  (Non  recurnng Expenses  )
Cost of Goods Consigned

= Rs. 2,500 +( 4,400  2,500/10,000)

= Rs.2,500+ 1,100
= Rs. 3,600
Note : The godown rent, selling expenses and insurance being recurring expenses
have not been included in the value of closing stock

15.5.2 Accounting Treatment of Unsold Stock

Since the value of unsold stock affects the profit or loss on any consignment, its
valuation and recording in the books of Consignor is very important. It is shown
on the credit side of Consignment Account for which the following journal entry
28 will be passed.
 Consignment Stock A/c Dr. Consignment Accounts – I
To Consignment A/c
(Being the value of closing stock)
The Consignee, however, will not pass any entry for the closing stock. It is
because he is not the owner of the goods and does not pass any entry even when
he receives or returns the goods.
Look at ilustration 6 and see how the closing stock is valued and treated in the
books of account.
Illustration 6
On January 1, 2018 Universal Sports, Delhi consigned 180 cases of sports goods
costing Rs. 360 each to Gemini Sports, Mumbai. They paid Rs 360 for insurance
and Rs. 1,800 for freight. Gemini Sports are entitled to a commission of 10% on
gross sales. Gemini Sports received the consignment on January 15 and sent a
60 days bill for Rs 10,000 to Universal Sport. The Bill was discounted for Rs.
9,000 .
On opening the cases, the Consignee found 10 cases of wrong description and
returned them, paying return freight of Rs. 400. Gemini Sports sold 120 cases @
Rs 600 each for cash and 20 cases @ Rs. 700 each on credit. Gemini Sports
spent Rs. 720 on clearing charges and Rs. 600 on carriage outwards. They
incurred bad debts amounting to Rs 400. The accounts were settled on June 30,
and the balance remitted by cheque. Show necessary ledger accounts in the
books of both the parties.
Solution :
Books of Universal Sports
Consignment Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan. 1 To Goods Sent on 64,800 Jan. 15 By Goods Sent on 3,600
Consignment A/c Consignment A/c (Returns)
“ 1 To Bank A/c (Expenses) Jan. 30 By Gemini Sports
Insurance 360 Cash Sales 72,000
Freight 1,800 2,160 Credit Sale 14,000 86,000
“ 15 To Gemini Sports 400 “ 30 By Consignment Stock A/c 11,280
(Freight on goods returned)
Jun 30 To Gemini Sports (Expenses)
Clearing Charge 720
Carriage Outward 600 1,320
“ 30 To Gemini Sports
(Bad Debts) 400
“ 30 To Gemini Sports
(Commission) 8,600
“ 30 To Profit & Loss A/c
(Profit transferred) 23,200
1,00,880 1,00,880
29
Consignments and Joint Gemini Sport Account
Ventures

2018 Rs. 2018 Rs.

June 30 To Consignment A/c 86,000 Jan.15 By Bills Receivable A/c (Advance) 10,000
(Sales) 15 By Consignment A/c 400
(Freight on returns)
30 June By Consignment A/c 1,320
(Expenses)
30" By Consignment A/c 400
(Bad Debts)
30" By Consignment A/c 8,600
(Commission)
30" By Bank A/c 65,280
86,000 86,000

Goods Sent on Consignment Account

2018 Rs. 2018 Rs.

Jan. 15 To Consignment A/c 3,600 Jan. 1 By Consignment A/c .64,800
June 30 To Trading A/c 61,200
64,800 64,800

Books of Gemini Sports

Universal Sports Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan. 15 To Bills Payable A/c 10,000 June 30 By Cash A/c (Cash Sales) 72,000
“ 15 To Cash A/c 400 June 30 By Debtors A/c 14,000
(Freight on returns) (Credit Sales)
June30 To Cash A/c 1,320
(expenses)
“ 30 To Debtors A/c 400
(Bad Debts)
“ 30 To Commission A/c 8,600
“ 30 To Bank A/c 65,280
86,000 86,000

Commission Account
2018 Rs. 2018 Rs.
June 30 To Profit & Loss A/c 8,600 June 30 By Universal Sports 8,600

Working Notes:
1. Closing Stock Valuation:
Closing Stock Units
 Cost price
No. of Closing UnitsNumber of Closing + (Non-recurring
Units
per Unit (Non  recurring 
Expenses
Expenses
No. of Units Consigned
30
 = 30 x 360 + (2,880 x 30/180) Consignment Accounts – I

= 10,800 + 480
= Rs. 11,280.
(Non-recurring Expenses include all the expenses of Consignor and clearing
charges paid by the Consignee)
2. Goods Returned to the Consignor : The goods returned are to be valued
at Cost Price only. They should not include any other expenses. However,
all the expenses incurred by the Consignee to return the goods should be
considered as the expenses on that consignment. So the Consignment Account
is debited and the Consignee’s Account is credited with the amount of
expenses incurred on returns.
Check Your Progress D
1. Tick the correct alternative
a) The cost of consignment stock is the cost at which the goods are
consigned plus
i) the non-recurring expenses
ii) proportionate non-recurring expenses
iii) all the recurring expenses
b) Non-recurring expenses are the expenses incurred
i) after the goods reach the godown of the consignee
ii) in transportation
iii) till the goods reach the godown of the consignee
c) Consignment stock is shown on’
i) credit side of Consignee’s Account
ii) credit side of Consignment Account
iii) debit side of Consignor’s Account
d) Goods returned by the Consignee should be charged to the Consignment
Account at
i) cost price
ii) market price
iii) cost or market price whichever is lower
e) Expenses incurred in forwarding the defective goods should be debited to
i) Profit and Loss Account
ii) Consignment Account
iii) Goods Sent on Consignment Account 31
Consignments and Joint
Ventures 15.6 LOSS OF GOODS
Under Consignment arrangement, when goods are transferred from one place to
another, there is a possibility of loss in transit. The loss can also take place in the
godown of the Consignee. The loss may occur due to factors like evaporation,
leakage, mishandling etc., or due to some accident or theft. Such losses can be
broadly divided into two types :
a) Normal Loss
b) Abnormal Loss.
Let us discuss the exact nature of these losses and their accounting treatment.

15.6.1 Normal Loss

It is a loss which is due to the inherent nature of the goods consigned. It may arise
in the process of loading and unloading of goods, breaking of bulk pieces into
smaller ones, weighing, due to evaporation, processing, etc. For example, while
loading or unloading or weighing coal, some part is bound to fall down in powdered
form. Similarly, the petroleum products are bound to loose weight due to
evaporation or leakage. This type of loss is unavoidable. It can be reduced to
some extent but cannot be eliminated altogether. Since this loss occurs in the
ordinary course of business and is on account of inherent characteristics of the
goods, it is called a normal loss. Normal loss is not shown separately in the
books of accounts. The cost of normal loss is spread over the remaining units,
thereby increasing the cost per unit of the goods. For example 10,000 tons of
coal is sent on consignment costing Rs. 100 each. The normal wastage is i.e., 200
tons. Let us see how normal loss leads to an inflated cost price per unit.
Total Cost of 10,000 = Rs. 10,00,000 (10,000  100)
Total units = 10,000 tons
Normal Loss = 200 tons
Remaining units = 9,800 tons
Rs. 10,00,000 will now be the cost of 9,800 tons as the cost of normal loss is
borne by the remaining units. The cost per unit will therefore be 10,00,000/9,800
= Rs. 102.04 approximately.
As stated earlier, no separate entry is passed for the normal loss. The effect of
this is reflected in the valuation of closing stock only.
If the consignee is able to sell all the goods so that there is no stock left unsold,
the question of normal loss becomes irrelevant. The problem arises only when
some goods are left unsold with the consignee. In that case, we shall first calculate
the inflated cost per unit as explained above, and then the closing stock shall be
valued by multiplying the number of units in stock with the inflated cost per unit.
The value of closing stock can also be computed directly (without calculating the
inflated cost per unit) with the help of the following formula.

Unsold Units
Total Cost of Goods Consigned 
Remaining Units
Look at illustration 7 and see how the closing stock is valued when there is
normal loss.
32
Illustration 7 Consignment Accounts – I

Ram consigned 2,000 tons of coal at Rs. 50 per ton to Shyam of Delhi. He paid
Rs. 20,000 as freight. Due to normal wastage 1,950 tons only were received by
Shyam. He paid Rs. 5,000 as unloading charges. Goods sold were 1,300 tons.
You are required to calculate the value of closing stock.
Solution :
Rs.
Cost of 2,000 tons of coal at Rs. 50 per ton 1,00,000
Add:
Freight paid by the Consignor 20,000
Unloading charges paid by the consignee 5,000
Total Cost of Goods 1,25,000
Unsold units: Tons.
Total Units 2,000
Units Lost 50
Remaining Units 1,950
Units Sold 1,300
Units Unsold 650
Value of Closing Stock: Rs.
Cost of 2,000 tons = = 1,25,000
Cost of 1,950 (2,000 —50) tons = 1,25,000
Inflated Cost per ton = 1,25,000 Rs.64.10
1950 tons
Value of Closing Stock = Number of unsold unitsInflated cost per unit
= 650 tons  64.10
Rs. 41,665
Alternatively
Value of clossing Stock =

Unsold Units
Total Cost of Goods Consigned 
Remaining Units
650
 Rs.1, 25, 000 
1, 950
= Rs. 41,667

15.6.2 Abnormal Loss

The loss which occurs due to negligence, inefficiency or some accident is treated
as abnormal loss. For example, loss of goods due to fire, floods, earth quakes,
riots, war, theft etc. Such a loss does not occur on account of inherent nature of
the product, but on account of the operation of certain external forces. 33
Consignments and Joint Abnormal loss is calculated in the same manner as the value of closing
Ventures
stock. Inother words, in order to calculate the 33 abnormal loss, all the
proportionate non-recurring expenses incurred upto the point of loss are also
added to the cost of abnormal loss units. The formula for calculation of abnormal
loss is as follows:
Cost of Abnormal Loss Units =
No. of Abnormal Loss Units  Cost Per Unit +
No. of Abnormal Loss Units
Non-recurring Expenses upto the Point of Loss 
No. of Units Consigned

Since the abnormal loss is not incidental to the consignment, it should be shown
separately in the books of accounts. The total abnormal loss is credited to the
Consignment Account. The following entry is passed in the books of the Consignor:
Abnormal Loss A/c Dr.
To Consignment A/c
(Being loss on account of ...)
Such an abnormal loss may be
i) Uninsured
ii) Partially Insured
iii) Fully Insured
i) When the abnormal loss is Uninsured: In case the abnormal loss is not
insured with an insurance company, the total amount of the loss is transferred
to Profit & Loss Account by passing the following entry.
Profit & Loss A/c Dr.
To Abnormal Loss A/c
(Being Abnormal Loss transferred to P & LA/c)
ii) When the abnormal loss is partially insurred : In case the abnormal loss
is insurred and the claim is admitted for a part of the loss, then the following
entry is passed
Insurance Company’s A/c Dr.
Profit & Loss A/c Dr.
To Abnormal Loss A/c
(Being partial claim admitted)
Insurance Company will be debited with the amount of claim admitted and
only the balance amount (total loss minus the claim) is transferred to Profit
& Loss Account.
iii) When the abnormal loss is fully insured: In case the loss is fully insured
and the total ‘claim’ is admitted by the insurance company, the following
entry will be passed.
Insurance Company’s A/c Dr.
To Abnormal Loss A/c
(Being claim fully admitted)
Nothing is transferred to the Profit & Loss Account as the claim for the whole
amount of loss had been admitted by the insurance company. No loss is to be
borne by the Consignor. Look at illustration 8 and see how abnormal loss is
34 calculated and treated in the books of accounts.
Illustration 8 Consignment Accounts – I

Philips Radio Company consigned 100 transistors to their agent Paul Radios,
Delhi. The cost price of each transistor is Rs. 75. The Consignor paid Rs. 200
for freight, Rs. 50 for cartage and Rs. 400 for insurance. Five transistors were
totally destroyed in transit. The insurance claim of Rs. 300 was admitted by the
insurance company. The Consignee took the delivery of 95 radios and spent Rs.
190 for clearing charges, Rs. 95 for cartage, Rs. 250 on godown rent and Rs.
150 as selling expenses. They sold all the units at Rs 100 each. Paul Radios are
entitled to 5% commission on total sales. The balance due was remitted by way
of a bank draft. Calculate the abnormal loss and prepare necessary ledger accounts
in the books of both the parties.
Solution
Abnormal Loss = Number of Abnormal Loss Units Cost Price Per Unit +

Abnormal Loss Units

(Non-recurring expenses before loss  )
Total Units
= 5  75 + (650  5/100)
= 375 + 32.50
= Rs. 407.50 say Rs. 408

Books of Philips Radio Company

Consignment Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs
To Goods Sent on Consignment A/c 7,500 By Abnormal Loss A/c 408
To Bank A/c (Expenses) 650 By Paul Radios (Sales) 9,500
To Paul Radios (Expenses) 685
To Paul Radios (Commission) 475
To Profit & Loss A/c 598
(Profit transferred)
9,908 9,908

Paul Radio’s Account

Rs. Rs
To Commission A/c 9,500 By Consignment A/c 685
(Sales) (Expenses)
By Consignment A/c 475
(Commission)
By Bank A/c 8,340
9,500 9,500
35
Consignments and Joint Goods Sent on Consignment A/c
Ventures
Rs. Rs.
To Trading A/c 7,500 By Consignment A/c 7,500
7,500 7,500

Abnormal Loss Account

Rs. Rs.
To Consignment A/c 408 By Insurance Company A/c 300
By Profit & Loss A/c 108
408 408

Books of Paul Radio

Dr. Philips Radio’s Account Cr.
Rs. Rs
To Bank A/c (Expenses) 685 By Bank A/c (Sales) 9,500
To Commission A/c 475
To Bank A/c 8,340
9,500 9,500

Commission Account

Rs. Rs.
To Profit & Loss A/c 475 By Philips Radio A/c 475
475 475

Effect of abnormal loss on valuation of closing stock: The value of closing

stock is also effected in case of abnormal loss. Abnormal loss may occur either
in the godown of the Consignee or in transit. Let us see the effect of abnormal
loss on the closing stock under both situations. When the abnormal loss occurs
in the godown of the Consignee, the valuation of closing stock is not effected
because the expenses incurred after reaching the godown of the Consignee are
not to be taken into account for the purpose. Hence, the normal formula will be
followed for the valuation of closing stock. Look at illustration 9 and see how
the abnormal loss and the value of closing stock is calculated when the abnormal
loss occurs in the godown of the Consignee.
Illustration 9
Vanaspati Ltd. consigned 5,000 kg. of vanaspati ghee to Ashoka Dealers,
Chandigarh. Each kg.of ghee costs Rs. 8. Vanaspati Ltd. paid Rs 50 for carriage,
Rs. 250 for packing and Rs. 200 for insurance in transit.
After three months from the date of the consignment of goods, Ashoka Dealers
reported that 3,500 kg. of ghee was sold @ Rs. 9.50 per kg. and expenses were
Rs. 500 on godown rent and Rs. 750 on salesmen salary. Ashoka Dealers are
entitled to a commission of 5% on sales. 500 kg. of ghee was accidentally
destroyed in the godown. Insurance claim of Rs. 3,500 was admitted. Prepare
36 the necessary ledger accounts in the books of both the parties.
Solution: Consignment Accounts – I

Books of Vanaspati Ltd.

Consignment Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
To Goods Sent on Consignment A/c 40,000 By Abnormal Loss A/c 4,050
By Ashoka Dealers (Sales) 33,250
To Bank A/c (Expenses) 500 By Consignment Stock A/c 8,100
To Ashoka Dealers (Expenses) 1,250
To Ashoka Dealers (Commission) 1,662
To Profit & Loss A/c 1,988
45,400 45,400

Ashoka Dealer’s Account

Rs. Rs.
To Consignment A/c 33,250 By Consignment Stock A/c 1,250
(Expense)
By Consignment Stock A/c 1,662
(Commission)
By Balance c/d 30,338
33,250 33,250

Good Sent on Consignment Account

Rs. Rs.
To Trading A/c 40,000 By Consignment A/c 40,000

Abnormal Loss Account

Rs. Rs.
To Consignment A/c 4,050 By Insurance Company’s A/c 3,500
By Profit & Loss A/c 550
4,050 4,050

37
Consignments and Joint
Ventures Note:Abnormal loss has been worked out as follows:
Cost of 500 units = Rs. 4,000 (500  8)
Add : proportionate non-recurring expenses Rs. 50 (500/5,000 500)
Abnormal Loss = Rs. 4050
Books of Ashoka Dealers
Vanaspati Ltd’/s Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs
To Bank A/c (expenses) 1,250 By Bank A/c (Sales) 33,250
To Commission A/c 1,662
To Balance c/d 30,338
33,250 33,250

Commission Account

Rs. Rs
To Profit & Loss A/c Rs.1,662 By Vanaspati Ltd Rs.1,662

You have learnt that when abnormal loss occurs in the godown of the Consignee,
the closing stock valuation is not affected. But it is not so when the abnormal loss
occurs in transit. The closing stock valuation is also affected due to abnormal loss
in transit because some non recurring expenses may be incurred after the loss has
taken place. Hence, when such loss occurs in transit, you will have to distinguish
between the non-recurring expenses incurred before the loss and the non-recurring
expenses incurred after the loss. The non-recurring expenses incurred before the
loss relate to the total units consigned whereas the non-recurring expenses incurred
after the loss relate to the remaining units (total units minus abnormal loss units)
only. So the expenses before the loss will be proportionately divided amongst the
total units, whereas the expenses incurred after the loss will be proportionately
divided amongst the remaining units. Look at illustration 10 and see how closing
stock and abnormal loss are calculated and treated when such a loss occurs in
transit.
Illustration 10
On June 10, 2018, Modi & Co., Patiala consigned 500 cases of goods costing
Rs. 150 each to Sethi & Co., Calcutta. On the same date, the Consignor paid
Rs. 2,500 for freight and carriage, Rs. 1,000 as loading charges, and Rs. 1,200
for insurance. On July 1, 2018 the Consignee paid Rs. 1,800 for clearing
charges, Rs. 1,750 for warehousing and storage charges, and Rs. 900 for packing
and selling expenses. He also remitted a bank draft for Rs. 15,000 as an advance
against the consignment. On July 5, 2018 they sold 275 cases at Rs. 200 each.
Sethi & Co. are entitled to 5% commission on the gross proceeds of sales. It is
found that 50 cases have been lost in transit. Sethi & Co submitted an Account
Sale on July 10, 2018. Prepare the necessary ledger accounts in the books of the
38 Consignor.
Solution Consignment Accounts – I

Books of Modi & Co.

Consignment Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs

June10 To Goods Sent on Consignment A/c 75,000 July,10 By Sethi & Co. 55,000
(500 cases) (Sales of 275 cases)
“ 10 To Bank A/c 4,700 “ 10 By Abnormal loss A/c
(Consignor’s Expenses) (Loss in transit 50 cases) 7,970
July,10 To Sethi & Co. 4,450 “ 10 By Consignment 28,595
(Consignee’s Expenses) Stock A/c
“ 10 To Sethi & Co. 2,750
(Commission)
“ 10 To Profit & Loss A/c 4,665
(transfer of profit)
91,565 91,565

Sethi & Co. Account (Consignee)

2018 Rs. 2018 Rs

July,10 To Consignment A/c 55,000 July, 1" By Bank A/c 15,000
(Sale proceeds) (Advance)
10" By Consignment A/c 4,450
(Consignment expenses)
10" By Consignment A/c 2,750
(Commission)
10 By Balance c/d 32,800
55,000 55,000

Good Sent on Consignment Account

2018 Rs. 2018 Rs

July 10 To Trading A/c 75,000 July 10 By Consignment A/c 75,000

Notes:
1. All expenses incurred by the Consignor and the clearing charges incurred by
the Consignee are non-recurring expenses.
2. Abnormal Loss:
Number of Abnormal Loss Units  Cost Price Per Unit

(
+ Non-recurnng Expenses up to the point of loss 
Abnormal Loss Units
Total Units Consigned ) 39
Consignments and Joint 50
Ventures = (50  150) + (4,700  )
500
= 7,500 + 470 = Rs. 7,970
3 Valuation of Closing Stock:
Number of Closing Units = 175
Cost Price Per Unit = Rs. 150
Cost of Unsold stock = 175  150 = Rs. 26,250
Non-recurring expenses before loss = Rs. 4,700 (2,500 + 1,000 + 1,200)
Since these expenses are incurred on total consignment i.e., 500 units, the
proportionate amount of expenses for consignment stock will be
175
4,700  = Rs. 1,645
500
Non-recurring expenses after loss of Rs. 1,800 i.e., clearing charges of the
consignee, as they are incurred after the consignment reaches the consignee. They
would relate to 450 units (500—50). Hence, the proportionate amount of these
expenses for consignment stock will be 1,800  175/450 = Rs. 700
Now the value of closing stock will be as follows:
Cost of unsold stock (1751150) = Rs. 26,250
Add proportionate Expenses
i) Before loss = Rs. 1,645
ii) After loss = Rs. 700
Value of Unsold stock = Rs. 28,595
The above method of valuation of closing stock can be put in the form of a
formula which is as follows:
Number of Unsold Units  Cost price per unit
Unsold Units
+ Non-recurring expenses before loss 
Total Units

Unsold Units
+ Non-recurring expenses before loss 
Total Units — Abnormal Loss Units

15.6.3 Where Normal and Abnormal Losses Occur

Simultaneously
In the illustration done earlier you had either the normal loss or the abnormal loss
on the consignment. But it is quite possible that both normal and abnormal losses
occur simultaneously in connection with the same consignment. In such a situation,
the abnormal loss will be calculated in the same manner as discussed in sub-
section 15.6.2. But, the valuation of closing stock needs special attention as the
normal loss is also involved. In order to calculate the value of closing stock, the
following procedure will be followed:
40
i) Take the total cost of goods consigned and add all the non-recurring expenses Consignment Accounts – I
incurred by the Consignor as well as the Consignee.
ii) Deduct the quantity and cost of abnormal loss from the total number of
goods consigned and the cost as obtained in (i) above respectively.
iii) Deduct the quantity of normal loss from the quantity worked out in (ii) above
without making any adjustment in cost.
iv) How you will be left with the cost of goods of the good units with the
Consignee. Calculate cost per unit of these units by dividing the cost (remaining
after deducting the cost of abnormal loss) by the number of good units.
v) Multiply the number of unsold units with the cost per unit obtained in (iv)
above to arrive at the value of unsold stock.
Look at iIllustration 11 and see how cost of abnormal loss and the value of unsold
stock are calculated when the normal and abnormal losses occur simultaneously.
Illustration 11
Deepak Oil Mills, Cochin consigned 2,500 kg. of castor oil to Madhu & Co.
Varanasi on April 1, 2018. The cost of oil was Rs. 18 per kg. The consignor
paid Rs. 900 towards carriage, freight and insurance in transit. During transit 250
kg. oil was accidentally destroyed for which the insurance company paid Rs.
2,200 in full settlement of the claim directly to the Consignor.
Madhu & Co. took delivery of the consignment on April 10 and accepted a bill
drawn on them by Deepak oil Mills of Rs. 5,000 for 2 months, On June 30,
2018, Madhu & Co. reported that 1,750 kg. were sold at Rs. 25 per kg. The
expenses of the consignee were Rs. 1,850 towards godown rent, advertisement
and salaries of salesmen. Madhu & Co. charged a commission of 3% plus 2%
delcredre commission. Madhu & Co. further reported a loss of 20 kg. due to
leakage. Prepare the necessary ledger accounts in the books of the Consignor.
Books of Deepak Oil Mills
Consignment Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Goods Sent on Consignment A/c By Madhu & Co. (Sale proceeds of
(2,500 kg) 45,000 1,750 kg) 43,750
To Bank A/c By Abnormal Loss A/c
(Consignor’s expenses) 900 (250 kg) 4,590
To Madhu & Co.
(Consignee’s expenses) 1,850 By Consignment Stock A/c 8,892
To Madhu & Co.
Commission 3% = 1,313
Del credre 2% = 875 2,188
To Profit & Loss A/c (Balance) 7,294
57,232 57,232
41
Consignments and Joint Abnormal Loss Account
Ventures

Rs. Rs.
To Consignment A/c 4,590 By Bank A/c (amount from Insurance Co.) 2,200
(Sales)
By Profit and Loss A/c (Balance) 2,390
4,590 4,590

Madhu& Co. Account

Rs. Rs.
To Consignment A/c 43,750 By Consignment A/c (Expenses) 1,850
By Consignment A/c (Commission) 2,188
By Bank A/c (Advance) 5,000
By Balance 34,712
43,750 43,750

Goods Sent on Consignment Account

Rs. Rs.
To Trading A/c 45,000 By Consignee A/c 45,000

Working Notes:
i) Abnormal Loss

Number of Abnormal Loss Units Cost Price Per Unit

Abnormal Loss Units
(Non recurring
 expenses before loss 
Total Units
250
 ( 250 1 8)  ( 900 )  4,500 90 Rs.4,590
2,500
ii) Value of Closing Stock
Number of units Cost
Total Quantity and Cost of Oil 2,500 45,000
Add : Non-recurring Expenses — 900
Total 2,500 45,900
Less : Abnormal Loss 250 4,590
2,250 41,310
Less Normal Loss 20 —
Good Units 2,230 41,310
No. of Units sold 1,750

42 Number of unsold units (2,230-1750) = 480 units

 Consignment Accounts – I
Now value of closing stock (480 units) will be

= 41,310  480/2,230

= Rs. 8,892

Check Your Progress E

1 Fill in the blanks

i) Losses occur either due to inherent nature of the product or due to

operation of ………….

ii) Loss of weight due to evaporation is a …………….loss.

iii) Normal loss affects the valuation of …………………..

iv) Abnormal loss is ………………to Consignment Account.

v) Insurance claim is ………………to Abnormal Loss Account.

vi) The amount of loss not accepted by the insurance company is transferred
to ………………Account

2. How will you treat abnormal loss if

a) loss is fully insured: ……………………..

b) loss is uninsured: ……………………..

c) loss is partly insured:……………………..

15.7 LET US SUM UP

Consignment is a kind of arrangement where the manufacturer or a trader sends
goods to his agents for sale. The agents sell goods on behalf of the manufacturer
or the trader. The person who sends the goods is called the Consignor and the
person to whom the goods are sent is called the Consignee. The relationship
between the Consignor and the Consignee is that of a Principal and an Agent.
While sending goods to the Consignee, the Consignor sends a proforma invoice
which gives full details about the goods Consigned. After the goods have been
sold, the Consignee prepares an Account Sales, giving full details about the
number of units sold, the price at which they have been sold, and the expenses
and commission due to him. The Consignee is entitled to commission for the
services rendered to the Consignor. The commission can be ordinary or special
commission.
In order to work out the profit or loss on each consignment and the amount due
from each Consignee, the Consignor prepares Consignment Account, Goods
Sent on Consignment Account and Consignee’s Personal Account in his ledger for
each consignment. The Consignee on the other hand, mainly prepares two accounts
in his books viz., Commission Account and Consignor’s Personal Account. This 43
Consignments and Joint helps him to know the amount due to the Consignor and his income from
Ventures
commissions.
Sometimes the Consignee is not able to sell all goods consigned to him. He is left
with some unsold stock, the cost of which must be shown on the credit side of
the Consignment Account before calculating the profit on consignment. The cost
of the unsold stock shall include the proportionate amount of non-recurring
expenses.
When goods are consigned, it is possible that some goods are lost in transit or
destroyed while it is lying in the Consignee’s godown. Such losses may occur
either due to the inherent nature of goods or due to some accident. The first is
called normal loss and the second is called abnormal loss.
The normal loss is not shown anywhere in the books of account. It simply inflates
the cost per unit of the goods consigned and, therefore, affects the revaluation of
closing stock and the profit. But the abnormal loss requires special treatment in
the books of account of the Consignor. The cost of such loss is worked out in
the same manner as the cost of unsold stock and credited to the Consignment
Account. Any amount received from the insurance company must be subtracted
from the abnormal loss before it is transferred to the Profit and Loss Account.

15.8 KEY WORDS

Account Sales: A statement submitted by the Consignee to the Consignor giving
account of the sale proceeds, details of various expenses incurred, and the
commission due to him.
Consignee: A person to whom the goods are sent on consignment basis.
Consignment: Goods sent by a producer or a trader to his agents for sale on
their behalf and at their risk.
Consignor: A person who sends the goods to his agents on consignment basis.
Del Credre Commission: Commission paid by the Consignor to the Consignee
for bearing the risk of bad debts arising out of credit sales made by him on behalf
of the Consignor.
Over-riding Commission: The commission over and above the normal commission
paid to the Consignee for extra services provided by him or excess price realized
by him.
Proforma Invoice: A statement prepared by the Consignor and sent to the
Consignee giving details of goods consigned.
Normal Loss: Loss caused in the ordinary course of things due to evaporation,
leakage, brakeing the bulk into pieces etc.
Abnormal Loss: Loss caused on account of storm, fire, accident theft etc.

15.9 SOME USEFUL BOOKS

Maheshwari, S.N. 2018. Introduction to Accounting.Vikas Publishing House: New
44 Delhi.
Patil, V.A. and J.S. Korlahalli. 2012. Principles and Practice of Accounting, R. Consignment Accounts – I
Chand & Co. : New Delhi.
William Pickles. 1992. Accountancy, R.L.B.S. and Pitman: London.
Gupta, R.L. and M. Radhaswamy. 2018. Advanced Accountancy, Sultan Chand
& Sons; New Delhi

15.10 ANSWERS TO CHECK YOUR PROGRESS

A 1. a) ii b) i c) ii d) ii
2. i) False ii) True iii) True iv) False v) True
B 3. i) Errors and Omissions Excepted.
ii) Del Credre Commission iii) Recurring iv) security v) Non-
recurring
C 1. i) debited ii) Goods Sent on Consignment iii) Consignor
iv) Trading and Profit & Loss Account. v) no vi) nominal
D 1. a) ii b) iii c) ii d) i e) ii
E 1. i) external forces ii) normal iii) closing stock
iv) credited v) credited vi) Profit & Loss

15.11 TERMINAL QUESTIONS/EXERCISES

Questions
1. “Consignment is the same thing as sale”. Discuss.
2 What is an ‘Account Sales’? How do you prepare it? State how it is useful
to the Consignor?
3 Distinguish between
a) Non-recurring and Recurring Expenses
b) Ordinary Commission and Del Credre Commission
c) Account Sales and Invoice
4. List the expenses taken into account while valuing the unsold stock.
5. What is the difference between normal loss and abnormal loss? Give
examples.
6. What procedure is followed for valuation of closing stock when the abnormal
and normal losses occur simultaneously.
Exercises:
1. ‘X’ & Co. Bombay consigned 250 Weston T.V. sets to ‘Y’ & Co. Banglore.
Each T.V. set costs Rs. 7,500. Y & Co. received the consignment and sold
the sets as follows:
45
Consignments and Joint 160 T.V. sets at Rs. 9,000 each on cash basis and 90 T.V. sets at Rs.
Ventures
10,500 each on credit basis.
The Consignor is allowed 5% normal commission and 2.5% del credre
commission to the Consignee on the sales effected by him.
Compute total commission due to Y & Co.
(Answer: Normal Commission Rs. 1,19,250; Del Credre Commission Rs.
59,625)
2. Harish & Co. Lucknow, consigned goods valued at Rs. 1,25,000 to Dinesh
Enterprises, Ahmedabad. Harish paid Rs. 1,800 towards freight, insurance
and crriage. Dinesh received the consignment and accepted a bill for Rs.
50,000. He paid Rs. 1,500 for freight, Rs. 2,200 for carriage and godown
rent, and Rs. 2,500 as salesmans salaries. The Consignee is allowed to take
7% commission on the total sales. Consignee sold all goods for Rs. 1,68,000.
Balance owed by Dinesh was remitted by a bank draft. Prepare an Account
Sales.
(Answer: Balance due from the consignee: Rs. 1,00,040)
3. On January 1, 2018Gopal Enterprises, Hyderabad sent 50 radio sets to
Rakesh & Co., Bombay invoiced at Rs. 1,200 per set and incurred the
following expenses in relation to the consignment: dock dues Rs.2,000; customs
duty Rs. 1,000 and frieght Rs. 2,300. Rakesh & Co. remitted Rs. 20,000
by bank draft on January 5, 2018. It sold all the sets at Rs 1,500 each by
January 31, 2018 and incurred Rs. 2,500 as godown rent. Commission is
allowed at 5% on sales. The Consignee sent the Account Sale and enclosed
a bank draft for the balance.
Journalise the above transactions in the books of the Consignor and the
Consignee. Also prepare necessary ledger accounts and calculate the profit
on consignment.
(Answer: Profit on consignment Rs. 3,450; Balance due from the Consignee
Rs 48,750)
4. Krishna of Bombay consigned goods costing Rs. 2,50,000 to Kajriwal of
Jodhpur.
Krishna paid Rs. 1,500 for carriage and Rs. 5,250 for freight and insurance.
Kajriwalis entitled to a commission of 5% on all sales in addition to 2% del
credre commission. Krishna draws on Kajriwal a bill for Rs. 80,000, payable
two months after date, which later accepts. The bill is discounted with the
bank for Rs. 79,000. An Account sale received from Kajriwal stating that
the goods had been sold for Rs. 3,10,000 (Rs.1,60,000 on credit and Rs.
1,50,000 for cash), while expenses incurred by him were: unloading Rs.
1,250; godown rent Rs. 2,500 and insurance Rs. 500. A bank draft was
enclosed for the balance due. Kajriwal could not recover Rs. 2,500 from a
customer to whom goods were sold on credit.
Pass Journal entries in the books of the Consignor and the Consignee and
prepare ledger accounts.
46
 Hints : i) Discount will not be debited to Consignment Account Consignment Accounts – I

ii) Bad Debts will be borne by the Consignee and debited to his
commission account.
iii) Del Credre commission is computed on total sales.
(Answer: Profit on consignment Rs. 27,300; Amount due from Consignee
Rs. 2,04,050.)

5 Kabir of Jhansi consigned to Moses of Cochin 400 chairs on April 10,

2018. The Cost of each chair was Rs. 250. The Consignor paid Rs. 2,000
for cartage, freight etc., on April 12, 2018, and drew a bill on the Consignee
as an advance against the consignment at 3 months for Rs. 60,000. Later,
it was discounted at their bank at 5%. The Consignee sold all the goods on
July 1, 2018 and submitted an Account Sales showing that the goods
realisedRs. 1,20,000. He incurred Rs. 1,000 on carriage inwards and Rs.
550 on selling and other expenses. He was allowed to take 5% commission
on the total sales. You are required to show ledger accounts for the above
transactions in the books of the Consignor and the Consignee.

(Answer : Profit Rs. 10,450)

6. ‘X’ of Bangalore consigned 100 bags of cement for sale to his agent ‘Y’.
Cost price of each bag is Rs. 120. ‘X’ immediately drew a 4 months bill for
Rs. 5,000 on the latter and discounted it with bank at 6% per annum. ‘X’
paid Rs. 800 on packing and Rs. 250 for carriage. ‘Y’ spent Rs. 300 as
selling expenses. The Consignee returned 5 bags. He realised 20 bags at Rs.
130 per bag and 50 bags on credit at Rs. 140 per bag and took the balance
in his own stock at Rs. 135 per bag.

Consignee is entitled to get commission of 3% and 2% delcredre commission

on credit sales. ‘Y’ recovered all money from debtors except Rs. 500.
Prepare the necessary ledger accounts in the books of both parties.

(Answer : Loss Rs. 204)

7. Grover Enterprises, Delhi sent 100 bicycles to Khan Enterprises, Patna.

Cost of each cycle was Rs. 640. Grover incurred Rs. 1,500 for freight and
Rs. 1,100 for insurance in transit. Khan paid Rs. 650 for cartage and 2,000
towards godown rent and selling expenses. 20 bicycles remained unsold at
the end. The remaining bicycles realisedRs. 800 per cycle. Calculate the
value of unsold stock.

(Answer: Cost of unsold stock Rs. 13,450)

8. Kiran Bros. on January 1, 2018 consigned sports materials costing Rs.

10,000 to their agent Kabir Agency. Kiran Bros. paid Rs. 200 for freight
and Rs. 100 for insurance and other charges. Consignee received the
delivery by paying Rs. 150 for non-recurring expenses on January 15, 2018.
He sent an account sale on February 20, 2018 showing that 20% of
the stock realised Rs. 3,200 and 30% of the stock was sold on credit for
Rs. 3,600. 47
Consignments and Joint One customer from whom Rs. 500 was due became insolvent and only 25%
Ventures
of the debt could be recovered. Consignee is entitled to a commission of
5% on sales. Pass journal entries and prepare the necessary ledger accounts.
(Answer: Profit Rs. 860: Stock Rs. 5,225)
9. Srikanth consigned 2.500 kg. of coconut oil costing Rs. 50,000. Expenses
incurred were Rs. 1,400. Consignee spent Rs. 2,000 on unloading and
cartage. 100 kg. of oil was lost due to natural deterioration and 1,500 kg.
were sold. Calculate the cost of stock at the end?
(Answer : Cost of Stock Rs. 20,025)
10. Kapur of Lucknow consigned 200 bags of rice, each costing Rs. 300 to Jam
Traders of Bombay on April 1, 2018. The Consignor paid Rs. 2,000
towards freight and insurance. 30 bags were damaged in transit. The
Consignee received on May 31, 2018 Rs. 2,000 on account of the damaged
bags from the Insurance Company. On May 31, 2018 the Consignee reported
that 140 bags were sold at Rs. 375 per bag. The Consignee incurred Rs.
2,000 for godown rent and selling expenses. The Consignee is allowed 10%
commission on the sale proceeds. You are required to prepare the ledger
accounts in the books of Mr. Kapur assuming that Jam Traders remit the
balance by bank draft on May 31, 2018.
(Answer : Profit Rs. 1,850 : Accidental Loss Rs. 9,300)
11. Dinesh of Delhi consigned 200 sewing machines costing Rs. 150 each to
Chander of Calcutta. He paid Rs. 2,800 on insurance and received an
advance of Rs 20,000 from Chander. 30 machines were damaged in transit.
Chander took the delivery of the remaining goods and paid Rs. 1,700 for
unloading the consignment. He sold 50 machines @ Rs. 270 each for cash
and 100 machines @ Rs, 300 each on credit. Chander could not realise Rs.
2,000 from his debtors. Chander recovered Rs. 1, 500 from the insurance
company. He sold damaged machines for Rs. 2,300. Chander is entitled to
an ordinary commission @ 5% and 3% delcredre commission. The accounts
were settled and balance remitted by bank draft. Show the necessary ledger
accounts in the books of Dinesh.
Hint: i) Sale of damaged stock as well as the amount recovered from
insurance company will he credited to Abnormal Loss Account
and debited to Chander’s Account.
ii) Commission on sale proceeds of damaged goods @ 5% will be
debited to Abnormal Loss Account and credited to Chander’s
Account.
(Answer :Abnormal Loss Rs. 4,920; Value of Unsold Stock Rs, 3,480;
Profit Rs. 13,920; Balance due from ChanderRs. 22,005)
12. SohnaVanaspati, Faridabad consigned 10,000 kg. of ghee to Krishna Dealers
of Delhi at Rs. 16 per kg. The Consignor paid Rs. 950 as carriage, Rs.
250 as freight and Rs. 400 as insurance. In transit, 1,000 kg. of ghee was
accidentally destroyed for which an amount of Rs. 8,000 was recovered
from the insurance company in full settlement.
48
Krishna Dealers reported that 8,000 kg. of ghee was sold @ Rs. 20 pe kg. Consignment Accounts – I
They spent Rs. 500 on salesmen salary and Rs. 200 on godown rent, The
Consignee is entitled to a commission of 5% on sales. Krishna dealers
reported a shortage of 40 kg. due to leakage. Prepare necessary ledger
accounts in the books of both the parties.
(Answer: Profit Rs. 22,443; Abnormal Loss Rs. 16,160; Closing stock Rs.
15,583)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

49
Consignments and Joint
Ventures UNIT 16 CONSIGNMENT ACCOUNTS-II
Structure
16.0 Objectives
16.1 Introduction
16.2 Concepts of Invoice Price
16.3 Calculation of Cost Price and Invoice Price
16.4 Loading
16.4.1 What is Loading
16.4.2 Items which Involve Loading
16.4.3 Adjustment of Loading

16.5 Accounting for Goods Sent at Invoice Price

16.6 Let Us Sum Up
16.7 Key Words
16.8 Some Useful Books
16.9 Answers to Check Your Progress
16.10 Terminal Questions/Exercises

16.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the meaning of invoice price and the reasons for consigning goods
at invoice price,;
 compute cost price and invoice price in different situations,
 explain the meaning of loading and pass necessary entries for its adjustment
in consignment account; and
 prepare books of the consignor and the consignee based on invoice price.

16.1 INTRODUCTION
In Unit 15, you have learnt about the recording of tranactions relating to
consignments in books of both the Consignor and the Consignee. You know
that the goods sent on consignment are recorded in Consignment Account at
cost price. Sometimes, the Consignor does not want to reveal the cost of goods
to the Consignee and, therefore, invoices the goods at a price which is higher
than the cost price. Such price is known as ‘invoice price’ and the difference
between the invoice price and the cost price is called ‘loading’. In such a
situation, the entry for goods sent on consignment is also recorded at the invoice
price which would need an adjustment for loading at the time of computing
the profit on consignment. In this unit, you will learn how Consignment Account
is prepared when the goods are consigned at invoice price and how the necessary
adjustments are made at the time of working out the profit on consignment.
50
 Consignment Accounts-II
You will also learn how the invoice price is calculated when the loading is given
in the form of a percentage at the cost price or the invoice price.

16.2 CONCEPTS OF INVOICE PRICE

In Unit 15, you learnt that when the Consignor sends goods on consignment
to the Consignee, he records it in his books at cost and the same is reflected
in the proforma invoice.
Sometimes, the consignor does not want the Consignee to know the actual cost
of goods sent to him. Therefore, consigne the goods at a price other than the
cost price. Such price would generally be higher than the cost. It is called the
invoice price. In other words, the invoice price is equal to the cost price plus
a certain amount of profit.
Apart from the intention of not revealing the cost of goods to the Consignee
there are a number of other reasons why the Consignor Consignees the goods
at invoice price. These are:
i) The Consignee will not able to assess the profit earned on consignment
and therefore may not demand a higher commission.
ii) If the Consignee know about the actual cost of goods, he may resort to
some dishonest practices such as buying goods for himself at a lower price
and then selling them at a higher price in the market.
iii) It would give a fair idea to the Consignee of the minimum price at which
he is to sell the goods.
You should note that invoice price is not the same thing as selling price. The
invoice price is the price at which the Consignor sends the goods to the
Consignee, whereas the selling price is the price at which the Consignee sells
the goods to the customers. Let us take an example in order to clearly understand
the difference between the three prices i.e., the cost price, the invoice price
and the selling price. Suppose, Gopal consigns goods worth Rs. 15,000 to his
agent Ashok at an invoice price of Rs. 18,000. Ashok sells the goods at Rs.
20,000. In this example, the cost price (CP) of the goods is Rs. 15,000, the
invoice price (IP) of the goods is Rs. 18,000, and the selling price (SP) of
the goods Rs, 20,000.
You will observe that the IP is higher than CP whereas SP is higher than the
CP as well as the IP, and that the SP and the IP are not the same. If, however,
the Consignor directs the Consignee to sell the goods at invoice price itself,
then the SP and the IP will be the same.

16.3 CALCULATION OF COST PRICE AND

INVOICE PRICE
You know the relationship between the invoice price (IP), the cost price (CP)
and the profit. This can be expressed in the form of an equation as follows.
IP = CP + Profit
With the help of the above equation, you can find out the missing figure i.e.,
if any two figures are given, the third one can be worked out. For example,
51
Consignments and Joint if the CP is given as Rs. 150 and the profit as Rs. 50, the invoice price will
Ventures
be
IP = CP + Profit
= 150 + 50
= Rs. 200
Similarly, if invoice price and profit are given as Rs. 200 and Rs. 50 respectively,
the cost price will be
IP = CP + Profit
200 = CP + 50
CP = 200 - 50
= Rs. 150
In the above examples, the profit is given as an absolute Figure. But, in many
cases the profit may be given in the form of a percentage either on cost price
or on invoice price. In that case, the calculation of missing price may become
difficult. Of course, if the percentage of profit is based on the price, the figure
of which is given, you may not face much problem. But if the percentage of
profit is based on the price, the figure of which is not given, you may find
it difficult to work out the profit and so also the missing price. Let us take
different situations where the profit is given in the form of a percentage and
we have to work out the missing price. These situations are:
1. CP is given and Profit is given as a percentage of CP, you have to work
out IP
2. CP is given and Profit is given as a percentage of IP, you have to work
out IP
3. IP is given and Profit is given as a percentage of IP, you have to work
out CP
4. IP is given and Profit is given as a percentage of CP, you have to work
out CP
Let us take them one by one and find out the missing figure with the help
of examples.
1. CP is given and the profit is given as a percentage on CP
Suppose the CP of a product is Rs. 200 which is invoiced at 20% profit
on cost. The IP will be calculated as follows:
IP = CP + Profit

20
IP  200  (  200)
100
IP = 200 + 40
IP = Rs. 240

52
2. CP is given and the profit is given as percentage on IP Consignment Accounts-II

Suppose CP of a product is Rs. 200 which is invoiced at 20% profit

on IP. Now IP will be calculated as follows:
Let us assume that the IP is X
IP = CP + Profit

20
X  200  (  X)
100

20
X  200  X
100

20
X X  200
100

100X  20X
 200
100

80
X  200
100

200  100
X  Rs.250
80

So the IP is Rs. 250 and the Profit is Rs. 50. Now you can verify that
the profit is 20% on invoice Price.

20
Profit =  IP
100

20
Profit =  250
100
Profit = Rs. 50
3. IP is given and the profit is given as percentage of IP: Suppose the
IP of a product is Rs. 500 and Profit is 25% on IP. The missing figure
i.e., the CP is worked out as follows :
IP = CP + Profit
500 = CP + 25  500
100
500 = CP + 125
CP = 500—125
CP = Rs. 375
4. IP is given and the profit is given as a percentage of CP: Suppose
the IP is Rs. 600 and Profit is 20% on CP then CP will be calculated
as follows:
53
Consignments and Joint Let us assume CP to be X
Ventures
IP = CP + Profit

20
600  X  X
100
100X  20X
600 
100
120
600  X
100
600 100
X
120
X = Rs.500
So the CP is Rs. 500 and Profit is Rs. 100. Now you can verify that
the profit is 20% on cost.

20
Pr ofit   CP
100

20
  500
100
= Rs. 100

16.4 LOADING
16.4.1 What is Loading?
You know that the invoice price is obtained by adding a certain amount of
profit to the cost price. The amount of profit which is added to the cost in
order to arrive at the invoice price is called loading. In other words, loading
is the difference between the invoice price and the cosi price.
Loading = IP  CP
For example, if the invoice price is Rs. 10,000 and the cost price is Rs. 7,500,
the amount of loading will be :
Loading = IP - CP or Number of units  (IP per unit  CP per unit)
= 10,000  7,500
= Rs. 2,500.
If the invoice price or the cost price is given and the proft (loading) is given
in the form of a percentage, either on IP or CP, the loading can be worked
out directly in the same manner as we worked out the IP or CP in the examples
under Ssection 16.3 earlier.

16.4.2 Items which Involve Loading

Loading is usually involved in all such items which are recorded at the invoice
54 price in the Consignment Account. These items are:
1 Opening Stock Consignment Accounts-II

2 Goods Sent on Consignment

3 Goods Returned by the Consignee
4 Closing Stock.
You have to compute the loading in respect of all the above items and make
necessary adjustments in books of the Consignor.

16.4.3 Adjustment of Loading

You know the profit is the difference between selling price and cost price. In
Consignment Account prepared earlier, the goods sent on consignment and the
other related items, were shown at cost. Hence you had no problem in computing
the profit. But, when the goods sent on consignment and other related items
are shown in the Consignment Account at invoice price, it becomes necessary
to adjust the loading in the Consignment Account so as to bring down the invoice
price to the level of cost. If such adjustment is not done, the profit figure will
be incorrect. There is also a possibility that the Consignment Account shows
loss because the difference between the selling price and the invoice price is
generally small which cannot cover all expenses. Look at figure 16.1 and see
the difference between the actual profit and the profit without adjustment. The
profit thus calculated will be the difference between sales and invoice price.
Fig. 16.1

Rs.
Cost price 15,000
Invoice Price 18,000 Rs. 3,000 Loading
Sale Price 20,000 Rs. 2,000 Profit without
adjustment Rs. 5,000 Actual Profit
From Figure 16.1 it is clear that if no adjustment is made, the profit will be
Rs. 2,000 whereas the actual profit is Rs. 5,000. Therefore, in order to calculate
the actual profit earned on any consignment, all the items shown at invoice price
are to be brought down to the level of cost by adjusting the amount of loading
on each of them. Let us now take the items involving loading one by one and
see how the necessary adjustments are made.
1. Opening Stock : Opening stock is always shown on the debit side of
Consignment Account. In case the stock is shown at invoice price, the
difference between the invoice price and the cost price of the stock will
be shown on the credit side of the Consignnt Account by passing the
following journal entry.
Stock Reserve A/c Dr.
To Consignment A/c
(Being unloading on opening stock)
2. Goods Sent on Consignment : Goods sent on Consignment are shown
on the debit side of Consignment Account. In order to nullify the effect
of invoice price, the difference between the invoice price and the cost price 55
Consignments and Joint in respect of goods sent on consignment will be shown on the credit side
Ventures
of the Consignment Account by passing the following journal entry.
Goods Sent on Consignment A/c Dr.
To Consignment A/c
(Being unloading on goods sent on consignment)
3. Goods Returned by the Consignee : As the return of goods is shown
on the credit side of Consignment Account, the adjustment for the loading
will be made on the debit side of Consignment Account with the help of
the following journal entry:
Consignment A/c Dr.
To Goods Sent on Consignment A/c
(Being loading on goods returned)
4. Closing Stock: Since closing stock is shown on the credit side of
Consignment Account, the adjustment for the loading will be made on
the debit side with the help of the following journal entry.
Consignment A/c Dr.
To Stock Reserve A/c
(Being unloading on closing stock)

Thus you will observe that the adjustment entry for loading in the
Consignment Account is made on the opposite side of the original entry.
For example, the closing stock is shown on the credit side of the
Consignment Account, whereas its adjustment is shown on the debit side
of the Consignment Account. This is how the effect of loading in
Consignment Account is neutralised and the invoice price is brought down
to the cost level. You should remember that the adjustment for loading
is to be made in the books of the Consignor only. The Consignee does
not record any entries for the items involving loading. Therefore no
adjustment is needed in consignee’s books.

Check Your Progress A

1. State whether the following statements are True or False.

i) Consignor always consigns goods at invoice price .

ii) Sending goods at invoice price shall result in less profit in the
Consignment Account, if no adjustment is made for the loading.

iii) Invoice price is always equal to selling price.

iv) Consignor consigns the goods at invoice price to conceal the actual
profit earned on consignment.

v) Loading on closing stock will be nullified by debiting Stock Reserve

Account and crediting Closing Stock Account

vi) All the entries of adjustment for loading are recorded in the books
of Consignee.
56
2. What is Loading? Consignment Accounts-II

.................................................................................................................

.................................................................................................................

.................................................................................................................

3. Name the items that involve loading.

.................................................................................................................

.................................................................................................................

.................................................................................................................

4. Work out the following problems:

i) Cost price of a fan is Rs. 500 and loading is Rs. 100. What is the
invoice price.

ii) Cost price of a watch is Rs. 150. It is consigned at 33.33% above

cost. Find out the invoice price.

iii) Cost price of a bicycle is Rs. 500. It is invoiced at a profit of 20%

on invoice price. What is the invoice price?

iv) A ceiling fan is consigned at an invoice price of Rs. 250. Invoice

price is cost plus a profit of 10% on the invoice price. What is the
cost price.

v) Invoice price of a chair is Rs. 300, which is 20% above cost. Find
out its cost price.

5. Find out the loading in the following cases:

i) Goods costing Rs. 1,800 are invoiced at Rs. 2,200.

ii) Cost price Rs. 600 invoiced at a profit of 20% above cost.

iii) Cost price is Rs. 600 invoiced at a profit of 20% on invoice price.

iv) Invoice price is Rs. 600 involving profit of 20% on invoice price.

v) Invoice price is Rs. 600 involving profit of 20% above cost.

16.5 ACCOUNTING FOR GOODS SENT AT

INVOICE PRICE
You have learnt about the concept of invoice price, the calculation of loading
involved and the adjustment entries to be passed in respect of all items involving
loading. As for the recording of transactions for goods consigned at invoice
price, the treatment in books of the Consignee is not affected at all. Even in
the books of the Consignor all entries remain the same. But, the amounts with
which the four items involving loading (opening stock, goods sent on consignment,
57
Consignments and Joint goods returned by the Consignee, and closing stock) will reflect the invoice
Ventures
price. Then, at the time of working out the profit on consignment, you will have
to pass the necessary adjustment entries for the loading involved in respect of
all the four item as stated earlier. Look at Illustrations 1 to 4 and see how
various consignment transactions have been recorded when goods are invoiced
at the invoice price.
Illustration 1
Ages Cycle Co., Delhi sent 100 bicycles on January 1, 2018 to Murugan
Enterprises, Madras. The cost of each bicycle was Rs. 500 and it was invoiced
at Rs. 600. Ages Cycle Co. incurred Rs. 2,000 on freight and insurance and
received Rs. 30,000 as advance from Murugan Enterprises. Murugan Enterprises
paid Rs. 1,000 as octroi and carriage, Rs. 800 as rent and Rs. 600 as insurance.
By June 30, 2018 they had sold 100 bicycles for Rs. 62,500. Murugan
Enterprises are entitled to a commission @ 10% on the proforma invoice price
and 20% of any surplus realised over and above the invoice price. Murugan
Enterprises remitted the amount due from them by a bank draft.
You are required to prepare ledger accounts in the books of both parties
Solution:
Books of Ages Cycle Co.
Consignment to Madras Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

Rs. Rs.
2018 2018
Jan. 1 To Goods Sent on 60,000 Jan.30 By Murugan Enterprises 62,500
Consignment A/c (IP) (Sales)
“ 1 To Bank A/c (Expenses) 2,000 “ 30 By Goods Send on
Consignment A/c
(Loading) 10,000
“ 30 To Murugan Enterprises 2,400
(Consignee’s expenses)
“ 30 To Murugan Enterprises 6,500
(Commission)
“ 30 To Profit & Loss A/c 1,600
(Profit transferred)
72,500 72,500

58
 Consignment Accounts-II
Murugan Enterprise’s Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan 30 To Consignment 62,500 Jan. 1 By Bank A/c (advance) 30,000
to Madras A/c
(sales) Jan. 30 By Consignment to
Madras (expenses) 2,400
Jan. 30 By Consignment to 6,500
Madras (expenses)
Jan. 30 By Bank A/c (Balance) 23,600
62,500 62,500

Goods Sent on Consignment Account

2018 Rs. 2018 Rs.

Jun 30 To Consignment to 10,000 Jan. 1 By Consignment to 60,000
Madras A/c (loading) Madras A/c (IP)
Jun 30 To Trading A/c 50,000
60,000 60,000

Books of Murugan Enterprise

Ages Cycle Co. Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jan 1 To Bank A/c (advance) 30,000 Jan. 30 By Bank A/c (sales) 62,500
“ 1 To Bank A/c (expenses) 2,400
Jun 30 To Commission A/c 6,500
Jun 30 To Bank A/c (Balance) 23,600
62,500 62,500

Commission Account
Dr. Cr.

Date Particulars Amount Date Particulars Amount

2018 Rs. 2018 Rs.

Jun 30 To Profit and Loss A/c 6,500 Jun 30 By Ages Cycle Co. 6,500 59
Consignments and Joint Working Notes
Ventures
1. Loading on Goods Sent on Consignment Rs.
Total cost of 100 bicycles (500  100) 50,000
Total Invoice price of 100 bicycles (600  100) 60,000
Loading involved (IP-CP) 10,000
2. Commission Rs.
10% on Proforma Invoice Price of Rs. 60,000 6,000
20% on Surplus realised (Rs. 62,500-60,000=2,500) 500
6,500
3. Since there are no opening and closing stocks and the goods returned by
the Consignee, the adjustment for loading has been made only in respect
of the goods sent on consignment.
Illustration 2
Raj Traders of Ludhiana consigned 100 computers costing Rs. 20,000 each
to Bahadur of Gauhati at 10% above cost. Raj Traders incurred Rs. 500 for
packing and other charges on each computer. The Consignee received the
consignment by paying Rs. 1,500 for railway charges, Rs. 1,300 for insurance
and Rs. 200 for carriage. He submitted an Account Sales as follows:
20 Computers sold at Rs. 25,000 each for cash
50 Computers sold on credit at Rs. 30,000 each
10 taken for his own stock at Rs. 25,000 each
Consignee remitted the balance after deducting his commission at 10% on sales.
Assuming that original entries are made at invoice price and consignment stock
is valued at invoice price, write necessary accounts in the books of RajTraders.
Solution:
Books of Raj Traders
Consignment to Gauhati Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Goods Sent on 22,00,000 By Bahadur (Sales) 22,50,000
Consignment A/c (IP)
To Bank A/c 50,000 By Consignment Stock A/c 4,50,600
(Consignor’s expenses)
To Bahadur 3,000 By Goods Sent on
(Consignee’s expenses) Consignment A/c
(Loading on goods sent) 2,00,000
To Bahadur (Commission) 2,25,000
To Stock Reserve A/c
(Loading on closing stock) 40,000
To Profit & Loss A/c
(Profit transferred) 3,82,600
29,00,600 29,00,600
60
 Goods Sent on Consignment Account Consignment Accounts-II

Rs. Rs.
To Consignment A/c (loading) 2,00,000 By Consignment A/c (IP) 22,00,000
To Trading A/c 20,00,000
22,00,000 22,00,000

Bahadur of Gauhati Account

Rs. Rs.
To Consignment A/c 22,50,000 By Consignment A/c (Expenses) 3,000
(Sale proceeds) By Consignment A/c(Commission) 2,25,000
By Balance c/d 20,22,000
22,50,000 22,50,000

Stock Reserve Account

Rs. Rs.
To Balance c/d 40,000 By Consignment A/c 40,000
(Loading)

Working Notes
1. Calculation of Invoice Price per computer
Cost price of each computer Rs. 20,000
Invoice price 10% above the cost price
Invoice price = Cost price + 10% of cost price

 20, 000 + 10  20, 000

100
= 20,000 + 2000
= Rs. 22,000
2. Calculation of closing stock: While calculating closing stock, proportionate
non-recurring expenses are added, as you learnt in the previous unit.
Rs.
Total invoice price of 20 computers (Rs. 22,000  20) 4,40,000
Add: proportionate non-recurring expenses by the
Consignor 50,000
Consignee 3,000
Total 53,000
Proportionate Expenses (Rs. 53,000  20/100) 10,600
Closing Stock 4,50,600
61
Consignments and Joint 3. Calculation of loading:
Ventures
Invoice price per computer 22,000
Cost price per computer 20,000
Loading (IP- CP) per computer 2,000
Total loading on goods sent on consignment 2,00,000
Total loading on closing stock of 20 computers (200  20) 40,000
Illustration 3
Ram Das of Hyderabad consigned goods costing Rs. 72,000 to Prakash of
Cochin at a pro-. forma invoice price which is cost plus a profit of 1/6th on
invoice price. The Consignor paid Rs. 1,800 as insurance and other charges.
Prakash received the goods and paid Rs. 3,000 for freight and other charges.
He was allowed 3% commission on gross sales. Three fourths of the goods
1
were sold at 33 % profit on cost, half of which were credit sales. Half of
3
the balance was stolen, but the stock being insured, a claim was lodged for
Rs. 8,000 and was settled for Rs. 7,000. Balance of stock was valued at
proforma invoice price. Write up the Consignment and the Abnormal Loss
Accounts.

Solution:
Consignment to Cochin Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Goods Sent on 86,400 Prakash (Sales) 72,000
Consignment A/c
To Bank A/c 1,800 By Abnormal Loss A/c 9,600
(Consignor’s expenses)
To Prakash 3,000 By Consignment Stock A/c 11,400
(Freight and other charges) (Unsold stock)
To Prakash 2,160 Goods Sent on Consignment A/c 14,100
(Commission on Sales) (Loading)

To Stock Reserve A/c 1,800

(Loading on closing stock)
To Profit & Loss A/c 12,240
(Profit transferred)
1,07,400 1,07,400

62
 Abnormal Loss Account Consignment Accounts-II

Rs. Rs.
To Consignment to Cochin A/c 9,600 By Bank A/c (Insurance) 7,000
By Profit & Loss A/c
(Balance transferred) 2,600
9,600 9,600

Working Note:
1. Invoice Price of the Goods Sent:
Cost price (CP) of the Goods = Rs 72,000
Let IP be X
IP = CP + Profit
1
X  72, 000  X
6
1
X  X  72, 000
6
6X  X
 72, 000
6
5X
 72, 000
6
6
X  72, 000   Rs. 86,4000
5
Therefore IP = Rs. 86,400
2. Sale of price of 3/4 of the goods: (3/4th of the goods sold at a profit
of 33.3% on cost) CP of 3/4th goods (72,000 × 3/4) = Rs. 54,000

1 100
Add 33 % of cost as profit = (54, 000  ) = Rs. 18000
3 300
Sales = Cost Price + Price + Profit
= Rs. 54,000 + 18,000 = Rs. 72,000
3. Value of closing stock:
Invoice Prince of Goods Consigned Rs. 86,400
IP of stock left unsold (86,400  1/4) Rs.21,600
Less: 1/2 of the unsold stock lost in transit Rs, 10,800
(21,600  1/2)
IP of stock with the consignee after the loss Rs. 10,800
(21,600-10,800)
63
Consignments and Joint Add proportionate expenses 600
Ventures (1/8  4,800)
Value of closing stock 11,400
4. Cost of Goods Lost (Abnormal Loss)
Goods lost is half of the goods unsold i.e.,
1/2  1/4 = 1/8th of goods consigned
CP of abnormal loss (1/8  72,000) 9,000
Add proportionate non-recurring expenses (1/8  4,800) 600
Cost of Abnormal Loss 9,600
5. Loading on Closing Stock: Rs.
IP (1/8 of 86,400) 10,800
CP (1/8 of 72,000) 9,000
Loading 1,800
Illustration 4
Verma Bros. of Bombay consigned goods at the invoice price of Rs. 1,00,000
which is 25% above cost price, to their agent Kabir Agency, Ahmedabad. The
consignor incurred Rs. 5,000 for carriage and freight and Rs. 3,500 for
insurance. Verma Bros. received Rs. 25,000 as advance against the consignment.
The Consignee is allowed 3% commission on all sales. Any goods taken by
the Consignee himself or lost through Consignee’s negligence shall be valued
at cost plus 25% and no commission would be allowed on them. The Consignee
sold 4/5th of the goods consigned for Rs. 1,40,000. Goods of the invoice price
of Rs. 10,000 were taken by the Consignee and the remaining goods were
lost through his negligence. The Consignee paid Rs. 2,500 for advertisement
and selling expenses. Prepare necessary accounts in the books of the Consignor.
Solution:
Consignment to Ahmedabad Account
Consignment to Cochin Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Goods Sent on Consignment A/c 1,00,000 By Kabir Agency (Sales) 1,40,000
To Bank A/c (expenses) 8,500 By Kabir Agency
(CP of goods taken) 9,000
To Kabir Agency (Consignee’s expenses) 2,500 By Kabir Agency (Stock lost) 9,000
To Kabir Agency (Commission) 4,200 By Goods Sent on
Consignment A/c(Loading) 20,000
To Profit & Loss A/c (Profit transferred) 62,800
1,78,000 1,78,000
64
 Kabir’s Account Consignment Accounts-II

Rs. Rs.
To Consignment to Ahmedabad A/c 1,40,000 By Bank A/c (Advance) 2,5000
(sales)
To Consignment to Ahmedabad A/c 9,000 By Consignment to Ahmedabad A/c
(Expenses) 2,500
To Consignment to Ahmadabad A/c 9,000 By Consignment to Ahmedabad A/c 4,200
(Balance) (Commission)
By Balance c/d 1,26,300
1,58,000 1,58,000

Working Notes
1. Calculation of CP of Goods Consigned
IP of the Goods Sent is Rs. 1,00,000 which is 25% above cost.
The CP shall be calculated as follows.
IP = CP + P (25% on CP)
Let CP be X

25
1,00,000 = X + X
100

1
1,00,000 = X + X
4

4X  X
1,00,000 =
4
5X
1,00,000 =
4

1, 00, 000  4
X
5

X = 80,000
CP= Rs. 80,000

2. Value of goods taken by the Consignee

IP of goods taken = Rs. 10,000
CP of goods taken

4
(10000  ) = Rs. 8,000
5
65
Consignments and Joint 12.5
Ventures = 8.000 +
8000
These are to be valued at the cost plus 12.5% on cost. Hence, its value
will be = 8,000 + 1000 = Rs. 9,000
3. Value of goods lost due to Consignee’s negligence It will be worked
in the same manner as the value of goods taken by the consignee.

16.6 LET US SUM UP

In order to conceal the actual profit earned on consignment, sometimes the
Consignor invoices the goods to the Consignee at a price which is higher than
the cost, This is called invoice price (IP). The difference between the invoice
price (IP) and the cost price (CP) is called loading. This affects four items shown
in the Consignment Account viz (i) goods sent on Consignment; (ii) goods
returned by the Consignee; (iii) opening consignment stock, and (iv) closing
consignment stock. In order to work out the actual profit, the effect of loading
on all these has to be nullified, otherwise the Consignment Account will show
profit which is less than the profit actually earned.
Loading can be found out by subtracting CP from IP. The calculation of loading
is simple when both CP and IP are given. But it needs special attention when
the loading is given as a percentage of CP or IP and only the figure of IP or
CP is given. In such a situation, the formula will be IP = CP+P is used for the
calculation of loading or the cost price, or the invoice price, whichever is not
given. For the adjustment of loading involved in different items, we have to pass
the necessary journal entries in the books of the Consignor. However, the books
of the Consignee are not affected by this because his books do not include
an entry in respect of the four items involved.

16.7 KEY WORDS

Invoice Price : The price at which the Consignor invoices the goods to the
Consignee. It is usually higher than cost price.
Loading : Difference between the Invoice Price and the Cost Price.

16.8 SOME USEFUL BOOKS

Maheswari, S .N. 2018. Introduction to Accounting, Vikas publishing House,
New Delhi.
Patil, V.A. and J.S. Korlahalli, 2018, Principles and Practice of Accouiiring, R.
Chand & Co. New Delhi.
William Pickles. 2018 Accountancy, E.L. B.S. and Pitman: London.
Gupta R.L. and M. Radhaswamy. 2018. Advanced Accountancy. Sultan Chand
& Sons: New Delhi.

16.9 ANSWERS TO CHECK YOUR PROGRESS

1. i) False ii) True iii) False iv) True v) False vi) False
66
2. Difference between IP and CP Consignment Accounts-II

3. i) goods sent on consignment ii) goods returned by the Consignee

iii) opening consignment stock iv) closing consignment stock
4. i) Rs. 600 ii) Rs. 200 iii) Rs. 625
iv) Rs. 225 v) Rs. 250
5. i) Rs.400 ii) Rs. 120 iii) Rs. 150
iv) Rs. 120 v) Rs. 100

16.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. What do you understand by invoice price? Give reasons for consigning
the goods at the invoice price.
2. What is loading? How do you compute it? Give examples.
3. Name items which are recorded at the invoice price in the Consignment
Account. Give journal entries passed for the adjustment of loading in respect
of each item.
Exercises
1. Vijay & Co. of Kolhapur consigned 2,000 bicycles on July 18, 2018 to
Chaudhari of Madras for sale on the following conditions.
a) Cycles may be sold at invoice price or above

1
b) Chaudhari is entitled to a commission of 7 % on invoice price of
2
goods sold and 20% on an excess over the invoice price.
The cost of each cycle was Rs. 300 and it was invoiced at cost
1
plus 33 % at cost. Vijay & Co. incurred Rs. 20,000 on freight and
3
insurance. Chaudhari received the consignment on July 14, and accepted
a 3 months bill drawn on him by Vijay & Co. for Rs. 2,00,000. Chaudhari
paid Rs. 8,000 as custom duty and Rs. 5,000 as insurance and rent for
the godown. They sold 1,600 cycles at Rs. 500 each. Give ledger accounts
as they would appear in the books of Vijay & Co. and Chaudhari.

(Answer: Profit Rs. 2,12,600; Stock at invoice price Rs. 1,65,600; Amount
due from Shri Chaudhary Rs. 5,07,000)

2. On June 10, 2018, Raj & Co. of Bombay consigned 100 cases of Red
Wine to Singham Bros. of Ceylon. The cost of the consignment amounted
to Rs. 7,500 but the goods were charged at invoice price so as to show
a profit of 25% on invoice price. On the same date, the Consignor paid
Rs. 600 for freight and insuranèe. On July 1, the Consignee paid Rs. 1,000
for import duty, Rs. 200 for dock dues, and remitted a bank draft for
Rs. 4,000 as an advance against the consignment. On July 15, they sold
67
Consignments and Joint 80 cases for Rs. 10,500. Singham Bros. are entitled to a commission of
Ventures
5% on gross proceeds of sales as their remuneration. Show the entries
in the books of the Consignor and the Consignee, assuming that the
Consignee has remitted the balance due from them by draft.

(Answer : Profit Rs. 2,535; Value of stock Rs. 2,360)

3. Modi Textiles, Delhi consigned to Vinod Enterprises, Calcutta 100 cotton
bales. The invoice price of each bale was Rs. 1,500 which includes 20%
profit on invoice price. The Consignor paid Rs. 2,500 for insurance and
Rs. 4,000 for carriage and freight. The Consignee received cotton bales
and sold 75 bales for cash and realised Rs. 1,12,500. He incurred Rs.
1,800 on godown rent and was allowed 10% conmission on sales. 5 cotton
bales were spoiled in godôwn and they are to be valued at 50%
depreciation. Show Consignment Account in the books of Modi Textiles.
Hint: The damaged goods are also to be included in stock and they will
be valued at 50% of the invoice price and the proportionate
expenses.
(Answers: Profit Rs. 1,412; Value of stock Rs. 35,212 (including Rs. 3,912
for damaged goods); Amount due from the Consignee Rs. 99,450)
4. On January 1, 2018 the Consignment to Ceylon A/c in the books of Unique
Clock Makers showed a debit balance of Rs. 3,750. This is represented
by the invoice value of 50 clocks which is 25% above cost.
On January 7, they sent another consignment of 2,500 clocks at the invoice
price of Rs. 75 each which was 25% above cost. They paid Rs. 1,000
for packing, Rs. 500 for insurance and Rs. 3,000 for carriage and freight.
Rama watch Co. the Consignee, received the clocks on January 21 and
paid Rs. 3,000 for custom duty, clearing, etc. They also sent a bank draft
for 50% of the invoice price of the goods received. On June 15, they
returned 50 clocks which were found defective.
By December 31, 2018 they sold the opening stock of 50 clocks at Rs.
85 each on credit and 2,400 clocks of the new Consignment at Rs. 90
each. Their expenses were: advertising Rs. 2,000, salaries Rs. 2,000, and
service charges Rs. 250.
The Consignee is entitled to a commission of 8% on sales. The Consignee
could not recover Rs. 250 on account of credit sales. Show the necessary
ledger accounts in the books of both the parties.
(Answer: Profit Rs. 43,780; Value of closing stock Rs. 3,900; Amount
due from Consignees Rs. 1,01,630)
5. ‘A’ of Agra consigned 100 units of a commodity to ‘D’ of Delhi. The
goods were invoiced at Rs. 150 per unit so as to yield a profit of 50%
on cost. A incurred Rs. 1.000 on freight and insurance, while D incurred
Rs. 500 on freight and Rs. 800 on rent. Before December 31. 2018 he
sold 50 units for cash at Rs. 160 per unit and 20 units on credit for Rs.
175 per unit. He retained his commissions at 5% and 1% del credre on
all sales and remitted the balance on December 31, 2018. D noticed that
10 units were damaged on account of bad packing and could sell them
68
 only for Rs. 80 per unit. A debtor for Rs. 1,000 to whom goods were Consignment Accounts-II
sold on credit became insolvent and only 50 paise in a rupee could be
recovered. Prepare necessary ledger accounts in the books of ‘A’ and
‘D’. 
(Answer: Profit Rs. 1,960; Abnormal Loss Rs. 398; Value of stock
Rs. 3,300)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

69
Consignments and Joint
Ventures UNIT 17 JOINT VENTURE ACCOUNTS
Structure
17.0 Objectives
17.1 Introduction
17.2 What is a Joint Venture?
17.3 Joint Venture and Consignment
17.4 Joint Venture and Partnership
17.5 Accounting Treatment
17.5.1 Recording in the Books of one Co-venturer
17.5.2 Recording in the Books of all Co-venturers
17.5.3 Memorandum Joint Venture Account Method
17.5.4 Separate Set of Books

17.6 Let Us Sum Up

17.7 Key Words
17.8 Some Useful Books
17.9 Answers to Check Your Progress
17.10 Terminal Questions/Exercises

17.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the meaning and importance of a joint venture;
 distinguish joint venture from partnership and consignment;
 record joint venture transactions in the books of one venture;
 record joint venture transactions in the books of all venturers;
 prepare Memorandum Joint Venture Account; and
 prepare separate set of books for the joint venture business.

17.1 INTRODUCTION
In Units 15 and 16 you have studied how various transactions related to the
consignments are recorded in the books of the concerned parties. The basic
objective of preparing the Consignment Account is to ascertain the profit or
loss on each consignment. Similarly, when some persons join hands to carry
out a specific job or a project (called joint venture), each person (called co-
venturer) would like to ascertain his share of profit or loss from the joint venture
business. For this purpose, they record the transactions related to the joint
venture business in their own books or prepare a separate set of books
altogether. In this unit, you will learn how various transactions related to the
joint venture business are recorded whenseparate set of books are prepared
70
and when the co-venturers decide to record them in their own books without Joint Venture Accounts
preparing a separate set.

17.2 WHAT ISA JOINT VENTURE ?

When two or more persons join together to carry out a specific business venture
and share  the profits on an agreed basis, it is called a ‘joint venture’. Each
one of them who join as a party to the joint venture is called ‘Co-venturer’.
No firm name is normally used for the joint venture business because its duration
is limited to a short period. During this period, the - co-venturers are free to
carry on their own business as usual, unless agreed otherwise. The
Business relationship amongst the co-venturers comes to an end as soon as
the venture is completed. Thus a joint venture is some kind of a temporary
partnership between two or more persons who have agreed to jointly carry
out a specific venture. The joint ventures are quite common in construction
business, consignment, sale and purchase of property, underwriting of shares and
debentures, etc. For example, A and B agreed to construct a college building
for which they pooled their resources and skill. A provided Rs. 6 lakh and B
Rs. 4 lakh as capital. They completed the building and shared the profits in
the ratio of their contributions to capital. In this example, joining hands by A
and B to construct a building is a joint venture. A and B are co-venturers. They
will share the profits in the ratio of 6 and 4 (same as the ratio of their capitals).
This venture will be closed once the construction of the college bulding is
completed.
From the above discussion, the essential features of a joint venture can be listed
as follows:
1. It is formed by two or more persons.
2. The purpose is to execute a particular venture or project.
3. No specific firm name is used for the joint venture business.
4. It is of a temporary nature. Hence, the agreement regarding the venture
automatically stands terminated as soon as the venture is completed.
5. The co-venturers share profit and loss in the agreed ratio. However, in
the absence of any other agreement between the co-venturers, the profits
and losses are to be shared equally.
6. During the tenure of joint venture, the co-venturers are free to continue
with their own business unless agreed otherwise.
The main advantages of a joint venture are:
1. Sufficient Resources: Since two or more persons pool their resources,
there is sufficient capital available.
2. Ability and Experience:In joint venture the different venturers may be
having different skills and experience. The benefit of their common wisdom
will be available to the venture.
3. Spreading of Risk: The co-venturers agree to share the profits and
losses in a particular ratio. This implies that the risk is also borne by them
in that ratio. 71
Consignments and Joint
Ventures 17.3 JOINT VENTURE AND CONSIGNMENT
Even though both consignment and joint venture are in the nature of an agreement
between different parties, there are many points of difference between the two.
The main points of difference are as follows:
Consignment Joint Venture
1 Normally two persons are Number of co-venturers is usually two,
involved, the Consignor and but it may also be more than two.
the Consignee.
2 The relationship between the The relationship between co-venturers
Consignor and the Consignee is that that of partnership.
is of Principal and Agent.
3 The arrangement may continue The relationship comes to an end as
for a long time, soon as the venture is completed.
4 The funds are provided by All the co-venturers contribute to
the Consignor. a common pool.
5 The consignee acts merely as The co-venturers have equal authority
an agent and he has to follow to take decisions.
instructions of the Consignor.
6 Consignment is generally Joint Venture may be for sale of goods
concerned with the sale of or for carrying on any other activity
movable goods. like construction of building, investment
in shares, etc.
7 The profit belongs to the The profit is shares by all the co
Consignor only. The Consignee ventures.
is entitled only to his
commission.
8 The Consignor owns the goods. There is joint ownership.
9 There is only one method of There are four methods of maintaining
maintaining the accounts for accounts for the joint venture.
consignment transactions.

17.4 JOINT VENTURE AND PARTNERSHIP

Though joint venture is in the nature of a temporary partnership but in the strict
legal sense it is not a partnership. Both in joint venture and partnership some
business is carried on by two or more persons and the profits are shared by
all of them. But, there are some basic differences between the two. They are
as follows:

Partnership Joint Venture

1 A partnership firm always There is no need for firm name.
has a name.
2 It is of a continuous nature. It comes to an end as soon as the
72 work is completed.
 3 Separate set of books have There is no need for a separate set Joint Venture Accounts
to be maintained. of books, the accounts can be
maintained even in one of the co-
venturer’s books only.
4 No partner can carry on The co-venturers are free to carry on
a similar business. the business of a similar nature.
5 Though the registration of There is no need for registration at all.
partnership is not compulsory
but it is considered desirable.
6 A minor can also be admitted A minor cannot be a co-venturer as
to thebenefits of the firm. he is incompetent to enter into a
contract.
Check Your Progress A
1. A & B enter into a joint venture for the construction of a building. They
contributed Rs. 2,00,000 and Rs. 3,00,000 respectively. They agreed to
share the profits or losses in the ratio of their contribution to capital. The
profit for the joint venture is Rs. 45,000. State (i) the names of the co-
venturers, and (ii) each co-venturer’s share of profit. 
i) ..............................................................................................................
ii) .............................................................................................................
2. State whether each of the following statements is True or False.
i) A joint venture is a partnership formed under the Indian Partnership
Act
ii) A joint venture has a definite life.
iii) Joint venture is the same thing as consignment.
iv) Joint venture agreement must be registered .
v) Co-venturers share the profits in the agreed ratio.

17.5 ACCOUNTING TREATMENT

Broadly speaking, accounts of a joint venture business can be kept in any one
of the following four ways:
1. In the Books of One Co-venturer: In case the business is not very large,
only one of the venturers may be entrusted with the task of recording
the transactions in his books. In that case, all other co-ventures will send
their contribution to such venturer and he will open a Joint Venture Account
and the personal accounts ofother co-venturers in his books.
2. In the Books of All the Co-venturers: When all Co-venturers are
working actively, each one of them shall open a Joint Venture Account and
the personal accounts of other Co-venturers in his books. In such a situation,
each Co-venturer informs others about the transactions undertaken by him
so that they can incorporate them in their books.
73
Consignments and Joint 3. Memorandum Joint Venture Account: Sometimes each Co-venturer
Ventures
records only such transactions as are directly concerned with him. In that
case, he cannot work out the profit or loss because his books do not include
all transactions of the joint venture. Hence, for calculating the profit or loss
of the joint venture, a Memorandum Joint Venture Account has to be
prepared by incorporating all transactions related to the joint venture.
Thereafter the Joint Venture Account is completed and closed.
4. Separate Set of Books: Sometimes, for the sake of convenience, a
separate set of books are maintained for the joint venture. Under this system,
a Joint Bank Account, a Joint Venture Account and the personal accounts
of all the co-venturers are to be opened in the independent set of books
of account.
Let us now study these methods one by one in detail.

17.5.1 Recording in the Books of One Co-venturer

If the joint venture business is not very large, the task of recording transactions
can very well be entrusted to one of the Co-venturers. He will prepare a Joint
Venture Account and the personal accounts of other Co-venturers. The Joint
Venture Account is prepared for ascertaining the profit or loss of the joint venture.
The personal account of other co— venturers are prepared to find out the amount
due from them. As stated earliest, each co-venturer is also entitled to carry on
his own business and these transactions will be in addition to what he records
in respect of his own business. The following journal entries are passed in his
books before preparing the necessary accounts of the joint venture.
1. When the co-venturers send their contribution:
Cash/Bank A/c Dr.
To Co-venturer’s Personal A/c 
2. When the goods are purchased for the joint venture:
Joint Venture A/c Dr.
To Cash/Bank A/c
3. When the goods are supplied from his own stock by the Co-venturer
who is recording the transactions:
Joint Venture A/c Dr.
To Purchases A/c
Here we are crediting Purchases Account because he is supplying the goods
from his own stock at cost. But if the goods are supplied by him at a
price other than the cost price, we shall credit the Sales Account instead
of the Purchases Account.
4. When the goods are supplied by other Co-venturers:
Joint Venture A/c Dr.
To Co-venturer’s Personal A/c 
5. When some expenditure is incurred on account of the joint venture:
Joint Venture A/c Dr.
To Cash/Bank A/c
But, if expenses are paid by a Co-venturer other than the one who is
recording the transactions, then the entry will be:
74
 Joint Venture A/c Dr. Joint Venture Accounts
To Co-venturer’s Personal A/c
Here we have debited the Joint Venture Account because it is an expenditure
on account of the joint venture business.
6. When the Co-venturer recording the transactions sells the goods:
a) For cash sales:
Cash/Bank A/c Dr.
To Joint Venture A/c
b) For credit sales:
Debtor’s Personal A/c Dr.
To Joint Venture A/c
7. When cash is received from debtors:
Cash/Bank A/c Dr.
To Debtor’s Personal A/c 
8. When some cash discount is allowed to the debtor making payment,
or some bad debts are incurred:
Joint Venture A/c Dr.
To Debtor’s Personal A/c 
9. When sales are made by other Co-venturers:
Co-venturer’s Personal A/c Dr.
To Joint Venture A/c
10. When some cash or bills receivable are received from other co-
venturers on account of sales made by them:
Cash/Bank/Bills Receivable A/c Dr.
To Co-venturer’s Personal A/c 
11. When the Co-venturers recording the transactions is entitled to some
commission or salary:
Joint Venture A/c Dr.
To Commission/Salary A/c
Joint Venture Account is debited as it is an expenditure related to the joint
venture business.
12. When the unsold stock ofjoint venture is taken over by the co-
venturer recording the transactions:
Purchases A/c Dr.
To Joint Venture A/c
If the unsold stock is taken over by some other Co-venturer, the journal
entry will be:
Co-venturer’s Personal A/c Dr.
To Joint Venture A/c
After passing the above entries, the Joint Venture Account is prepared. The
balance of this account will show either profit or loss which is to be shared
by all the Co-venturers in their profit sharing ratio. This will require the following
further entries: 75
Consignments and Joint a) If it shows profit:
Ventures
Joint Venture A/c Dr.
To Profit & Loss A/c
(his own share)
To Co-venturers’ Personal A/cs 
(individually for their shares)
b) If it results in loss:
Profit & Loss A/c Dr.
(his own share of loss)
Co-venturers’ Personal A/c Dr.
(individually for their shares)
To Joint Venture A/c
After closing the Joint Venture Account, we have to find out the amount due
to other Co-venturers. When this amount is sent to them, we record the following
entry.
Co-venturers’ Personal A/c Dr.
To Cash/Bank A/c
Look at illustration 1, it shows the journal entries as well as the different accounts
in the ledger of the Co-venturer who is recording the transactions relating to
the joint venture business in his books.
Illustration 1
Rajesh and Suresh entered into a contract to construct a building for Rs.
4,00,000. Rajesh and Suresh contributed Rs. 2,00,000 and Rs. 1,50.000
respectively. They agreed to share profits and losses in the ratio of 4:3. It was
decided that the work will be looked after by Rajesh who will be paid 5%
commission on contract price in addition to his share of profits. Rajesh purchases
the necessary materials for Rs. 3,20,000 and paid Rs. 9,000 for expenses.
Rajesh also contributed building materials worth Rs. 20,000 from his own stock.
Rs. 5,000 remained to be paid for wages.
Suresh took over the stock of materials for an agreed valuation of Rs. 16,000.
The building was completed and the contract money was duly received.
Record the above transactions in the books of Rajesh and show the Joint Venture
Account and Suresh’s Account assuming that the outstanding wages were paid
by Rajesh.
In the Books of Rajesh
Journal Entries
Date Particulars L.F. Dr. Cr.
Amount Amount
Cash A/c Dr. 1,50,000
To Suresh (Being cash received 1,50,000
from Suresh)
Joint Venture A/c Dr. 3,20,000
To Cash A/c
(Being materials purchased) 3,20,000
76
 Joint Venture A/c Dr. 9,000 Joint Venture Accounts
To Cash A/c 9,000
(Being expenses paid)
Joint Venture A/c Dr. 20,000
To Purchases A/c 20,000
Being material supplied from
personal stock)
Joint Venture A/c Dr. 5,000
To Outstanding Wages A/c 5,000
(Being outstanding wages)
Joint Venture A/c Dr. 20,000
To Commission A/c 20,000
(Being Commission @ 5%)
Cash Account Dr. 4,00,000
To Joint Venture 4,00,000
(Being the contract price received)
Suresh Dr. 16,000
To Joint Venture A/c 16,000
(Being goods taken over by Suresh)
Joint Venture A/c Dr. 42,000
To Profit & Loss A/c 24,000
To Suresh (Being the profit shared) 18,000
Outstanding Wages A/c Dr. 5,000
To Cash A/c 5,000
(Being wages paid by Rajesh)
Suresh Dr. 1,52,000
To Cash A/c 1,52,000
(Being the amount due paid)
Joint Venture Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Cash A/c (Purchases) 3,20,000 By Cash A/c 4,00,000
To Cash A/c (Expenses) 9,000 By Suresh 16,000
To Purchase A/c 20,000
(Material supplied)
To Outstanding Wages A/c 5,000
To Commission A/c 20,000
To Profit transferred to :
Profit & Loss A/c 24,000
Suresh 18,000 42,000
4,16,000 4,16,000
77
Consignments and Joint Suresh’s Account
Ventures

Rs. Rs.
To Joint Venture A/c 16,000 By Cash A/c 1,50,000
To Cash A/c 1,52,000 By Joint Venture A/c 18,000
1,68,000 1,68,000

Illustration 2
Anand and Prakash entered into a joint venture agreement to share the profits
and losses in the ratio of 2:1. Anand supplied goods worth Rs. 60,000 to
Prakash and incurred expenses amounting to Rs. 2,000 for freight and insurance.
During transit, the goods costing Rs. 5,000 were damaged and a sum of Rs.
3,000 was received from the insurance company. Prakash reported that 90%
of the remaining goods were sold at a profit of 30% of their original cost.
Towards the end of the venture, a fire damaged the balance stock lying unsold
with Prakash. The goods were not insured and Prakash agreed to compensate
Anand by paying in cash 80% of the aggregate of the original cost of such
goods, plus proportionate expenses incurred by Anand. Apart from the joint
venture share of profit, Prakash was also entitled to a commission @ 5% on
net profits of the joint venture after charging such commission. Selling expenses
incurred by Prakash amounting Rs. 1,000. Prakash had earlier remitted an
advance of Rs. 10,000. Prakash paid the balance due to Anand by a bank
draft. You are required to prepare the Joint Venture Account, and Prakash’s
Account in Anand’s books. 
Solution:
In the Ledger of Anand
Joint Venture Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Purchase A/c 60,000 By Bank A/c 3,000
(Goods Supplied) (Insurance)
To Bank A/c (expenses) 2,000 By Prakash (Sales) 64,350
To Prakash (expenses) 1,000 By Prakash (agreed 4,546
value of damaged goods)
To Prakash (Commission- 424
5/105 of Rs. 8,896)
To Profit transferred to
Profit & Loss A/c 5,648
Prakash 2,824 8,472
71,896 71,896

78
 Prakash’/s Account Joint Venture Accounts

Rs. Rs.
To Joint Venture A/c (Sales) 64,350 By Bank A/c (Advance) 10,000
To Joint Venture A/c 4,546 By Joint Venture A/c 1,000
(Claim for damaged goods) (Expenses)
By Joint Venture A/c 424
(Commission)
By Joint Venture A/c 2,824
(Profit)
By Bank A/c 54,648
(Balance received by draft)
68,896 68,896

Working Notes: Rs.

1. Calculation of Sales:
Cost of goods sent 60,000
Less Damage in transit 5,000
Cost of remaining goods 55,000
Cost of goods sold (90% of Rs. 55,000) 49,500
Add Profit 30% of Rs. 49,500
14,850
Sales 64,350
2. Loss by fire borne by Prakash: Rs.
Cost of goods in stock (10% of 55,000) 5,500

Add Proportionate Expenses = 183

Total Loss 5,683

80% of this loss (5683  80/100) 4,546
3. Abnormal loss on account of damage in transit relates to the joint venture.
Hence no calculation is needed.

17.5.2 Recording in the Books of all Co-venturers

Under the second method, all transactions relating to the joint venture are
recorded in the books of all the Co-venturers. In order to complete the Joint
Venture Account in the books of all Co-venturers, each Co-venturer sends the
necessary information about his dealings to the other Co-venturers. There is
not much of a difference in the recording of transactions between the first and
the second method. We will be having similar entries in the joint venture accounts
79
Consignments and Joint in each Co-venturer’s books, who shall all open the personal accounts of other
Ventures
Co-venturers. Look at illustration 3 to clearly understand the recording of
transactions under the second method.
Illustration 3
Arvind and Babloo entered into a joint venture agreeing to share profits and
losses equally.
The following transactions took place during the course of venture:
Rs.
Arvind bought goods for cash 2,550
Babloo bought goods for cash 7,000
Arvind paid storage charges 500
Babloo paid freight and insurance 800
Babloo sold goods for cash 7,000
Babloo received 3% commission on sales 210
Sales made by Arvind 5,000
Commission payable to Arvind 150
Babloo took over the unsold stock 560
Prepare the necessary ledger accounts in the books of Arvind and Babloo
assuming that the accounts are finally settled between them.
Solution:
Ledger of Arivind
Joint Venture Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Cash A/c 2,500 By Babloo (sales) 7000
(goods purchased)
To Babloo (goods purchased) 7,000 By Cash (sales) 5,000
To Cash A/c (expenses) 500 By Babloo 560
(stock taken over)
To Babloo (expenses) 800
To Babloo (commission) 210
To Commission A/c 150
To Profit transferred to:
Babloo 700
Profit & Loss A/c 700 1,400
12,560 12,560
80
 Babloo’s Account Joint Venture Accounts

Rs. Rs.
To Joint Venture A/c (sales) 7,000 By Joint Venture A/c 7,000
(goods purchased)
To Joint Venture A/c 560 By Joint Venture A/c 800
(stock taken over) (expenses)
To Cash A/c 1,150 By Joint Venture A/c 210
(balance due paid) (commission)
By Joint Venture A/c 700
(share of profit)
8,710 8,710

Ledger of Babloo
Joint Venture Account
Dr. Cr.
Rs. Rs.
To Arvind (Goods purchased) 2,500 By Cash A/c (Sales) 7,000
To Cash A/c (Good) 7,000 By Arvind (Sales) 5,000
To Arvind (Expenses) 500 By Purchases A/c 560
(Stock taken over)
To Cash A/c (Expenses) 800
To Commission A/c 210
To Arvind (Commission) 150
To Profit transferred to:
Arvind 700
Profit & Loss A/c 700 1,400
12,560 12,560

Arvind’s Account
Rs. Rs.
To Joint Venture A/c (sales) 5,000 By Joint Venture A/c 2,500
(goods purchased)
By Joint Venture A/c 500
(expenses)
By Joint Venture A/c 150
(commission)
By Joint Venture A/c 700
(share of profit)
By Cash A/c 1,150
(Balance due received)
5,000 5,000
81
Consignments and Joint 17.5.3 Memorandum Joint Venture Account Method
Ventures
In the method discussed above, each Co-venturer records all transactions
relating to the joint venture in the Joint Venture Account opened in his books.
But, under the Memorandum Joint Venture Account Method, each Co-
venturer will record only those transactions relating to the joint venture which
are directly concerned with him, and not those of others. Under this method,
each Co-venturer opens a Joint Venture Account including the name of the
other Co-venturer. For example, if ‘A’ and ‘B’ are partners in a joint venture,
then in the books of ‘A’ it will be termed as ‘Joint Venture with ‘B’ Account’
and in the books of ‘B’ it will be termed as ‘Joint Venture with ‘A’, Account’.
Each Co-venturer will record only such transactions which are actually effected
by him. For example, if goods are purchased by ‘A’ for the joint venture, it
will be recorded only by A and not by other Co-venturers. Similarly, if goods
are sold by  ‘B’, it will be recorded in the books of ‘B’ only. This account
is in the nature of a personal account and, therefore, will not disclose the profit
or loss of the venture. For that purpose we prepare an additional account called,
‘Memorandum Joint Venture Account’. This is like Profit and Loss A/c. 
Let us say ‘A’ and ‘B’ enter into a joint venture and certain transactions have
taken place for which the following entries will be passed in each Co-venturer’s
books.
1. A purchases goods for cash:
This transaction shall be recorded in the books of A only. The entry will
be:
Joint Venture with B A/c Dr.
To Cash A/c
2. A incurs some expenditure on account of the joint venture:
It shall be recorded in A’s books only. The entry will be: 
Joint Venture with B A/c Dr.
To Cash A/c
3. B sells goods for cash:
No entry will be made in A’s books. But the following entry will be made
in B’s books: 
Cash Account Dr.
To Joint Venture with A A/c
4. B sends money to A:
a) It shall be recorded in B’s books as follows: 
Joint Venture with A A/c Dr.
To Cash/Bank A/c
b) It shall be recorded in A’s books as follows:
Cash/Bank A/c Dr.
To Joint Venture with B A/c
82
As stated earlier, for ascertaining the profit or loss on the joint venture, we Joint Venture Accounts
prepare a Memorandum Joint Venture Account. This account is prepared exactly
on the pattern of Profit & Loss Account. Since this account does not form
part ofthe double entry system, the word ‘Memorandum’ is prefixed. 
The method of preparing this account is very simple. It is prepared on the basis
of information supplied by all the Co-venturers. The debit entries appearing in
the personal accounts of all Co-venturers are written on the debit side of the
Memorandum Account and the entries appearing on the credit side of those
accounts are shown on the credit side of the Memorandum Joint Venture
Account. However, you should remember that the transactions which do not relate
to an item of expense or income are to be excluded from this Memorandum
Account. The difference in the totals of the debit side and the credit side
represents profit or loss. The profit or loss thus calculated is then shared by
the Co-venturers in the agreed profit sharing ratio.
Each Co-venturer will record only his share of profit or loss. In the event
of profit, the entries shall be:
In the books of A
Joint Venture with B A/c Dr.
To Profit & Loss A/c
In the books of B
Joint Venture with A A/c Dr.
To Profit & Loss A/c
In the event of Loss the entries shall be reversed as follows :
In the books of A
Profit and Loss A/c Dr.
To Joint Venture with B A/c
In the books of B
Profit and Loss A/c Dr.
To Joint Venture with A A/c
In the end, each venturer balances the ‘Joint Venture with .....Account’ in his
books and settles the account by paying or receiving cash. Look at illustration
4 carefully to understand the preparation of Memorandum Joint Venture Account.
Illustration 4
Prem of Delhi and Satish of Calcutta entered into a joint venture for the purchase
and sale of goods. The profits and losses are to be shared in the ratio of 2:1.
Prem purchased goods for Rs. 40,000 and sent them to Satish paying Rs. 3,000
for freight and insurance. Prem also incurred sundry expenses amounting to Rs.
400. Satish sold goods for Rs. 55,000 and incurred Rs. 6,000 as expenses.
Unsold stock valued at Rs. 7,000 was taken over by Satish. Satish remitted
the balance due to Prem by a bank draft.
Each party’s ledger contains a record of his own transactions in the Joint Venture
Account. Prepare (a) Memorandum Joint Venture Account, (b) Joint Venture
with Satish’s Account in Prem’s ledger, and (c) Joint Venture with Prem’s Account
in Satish’s ledger. 
83
Consignments and Joint Solution:
Ventures
Ledger of Prem
Joint Venture with Satish Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Bank A/c (purchases) 40,000 By Bank A/c 51,800
(In final settlement)
To Bank A/c (freight & ins.) 3,000
To Bank A/c (Sundry Exp.) 400
To Profit & Loss A/c 8,400
(share of profit)
51,800 51,800

Ledger of Satish
Joint Venture with Prem Account
Dr. Cr.

Rs. Rs.
To Bank A/c (expenses) 6,000 By Bank A/c (sales) 55,000
To Profit & Loss A/c 4,200 By Purchases A/c 7,000
(stock taken over)
To Bank A/c (final settlement) 51,800
62,000 62,000

Memorandum Joint Venture Account

Rs. Rs.
To Prem: By Satish
Goods 40,000 Sale Proceeds 55,000
Freight insurance 3,000 Stock taken over 7,000 62,000
Sundry Expenses 400 43,400
To Satish (expenses) 6,000
To Profit transferred to
Prem 8,400
Satish 4,200 12,600
62,000 62,000

Interest in Joint Venture Transactions : When the Co-ventures invest money

in joint venture business and received back the amounts on different dates, it
is quite usual for them to agree to calculate interest at a certain rate. Each
Co-venturer is entitled to received interest on the amounts invested by him
84
and pay interest on the amounts received by him. You should remember that Joint Venture Accounts
only the net interest receivable from or payable to the Co-venturer is recorded
in the Joint Venture Account. Thus, the net amount of interest is also taken
into account before ascertaining the profit or loss on joint venture. For clarification
look at illustration 5.
Illustration 5
Anand and Bimal enter into a joint venture sharing profits and losses equally.
Anand purchased goods for Rs. 5,000 for cash and Bimal spent Rs. 1,000
on freight, etc., on January 1, 2018. On the same day, Bimal bought goods
for Rs. 10,000 on credit. Further expenses were incurred as follows:
On 1-2-2018
On 1-3-2018 Rs 500 by Anand
Sales were made by each one of them as follows:
15-1-2018 Rs. 3,000 by Anand
31-1-2018 Rs. 6,000 by Bimal
15-2-2018 Rs. 3,000 by Anand
1-3- 2018 Rs. 4,000 by Bimal
Creditors for goods were paid as follows:
1-2-2018 Rs. 5,000 by Anand
1-3-2018 Rs. 5,000 by Bimal
On March 31, 2018 the balance of stock was taken over by Bimal at Rs.
9,000. The accounts between the Co-venturers were settled by cash payment
on this date. The Co-venturers are entitled to interest at 12% per annum. Prepare
necessary ledger accounts in the books of venturers as per Memorandum Joint
Venture Account Method.
Solution:
Memorandum Joint Venture Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Anand (Cost of goods) 5,000 By Anand (Sales) 6,000
To Bimal (Cost of goods) 10,000 By Bimal (Sales) 10,000
To Bimal (Freight etc.) 1,000 By Bimal (Interest) 50
To Anand (expenses) 500 By Bimal (Stock taken) 9,000
To Bimal (expenses) 1,500
To Anand (interest) 135
Anand 3,457
Bimal 3,458 6,915
25,050 25,050

85
Consignments and Joint Anand’s Ledger
Ventures
Jont Venture with Bimal Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2018 Rs. 2018 Rs.
Jan. 1 To Bank A/c (Purchases) 5,000 Jan. 15 By Bank A/c (sales) 3,000
Feb. 1 To Bank A/c (creditors) 5,000 Feb. 15 By Bank A/c (sales) 3,000
Mar. 1 To Bank A/c (expenses) 5,00 Mar. 15 By Bank (Final settlement) 8,092
Mar. 31 To Interest A/c 135
Mar. 31 To Profit & Loss A/c 3,457
14,092 14,092

Bimal’s Ledger
Jont Venture with Anand Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2018 Rs. 2018 Rs.
Jan. 1 To Bank A/c (freight) 1,000 Jan. 31 By Bank (sales) 6,000
Feb. 1 To Bank A/c (expenses) 1,500 Mar. 31 By Bank (sales) 4,000
Mar. 1 To Bank A/c (creditors) 5,000 Mar. 31 By Goods (stock taken over) 9,000
Mar. 31 To Profit & Loss A/c 3,458 Mar. 31 By Interest 50
Mar. 31 To Bank A/c (Amount 8,092
in final settlement)
19,050 19,050

Calculation of Interest
Payments by Anand
Date Amount Months Product

1-1-18 Rs.5,000 3 15,000 (5,000 3)

1-3-18 Rs. 500 1 500 (500 1)

1-2-18 Rs. 5,000 2 10,000 (5,000 2)

25,500
12 1
Interest = 25,500    Rs. 255
100 12
86
Receipts by Anand Joint Venture Accounts

1 1
15-1-18 Rs. 3,000 2 7,500 (3,000  2 )
2 2

1 1
15-2-18 Rs. 3,000 1 4,500 (3,000  1 )
2 2
12,000

12 1
Interest  12,000    Rs.120
100 12
Net Interest due to Anand = 255 — 120 = Rs. 135 
Payments by Bimal
1-1-18 Rs. 1,000 3 3,000 (1000  3)
1-2-18 Rs. 1,500 2 3,000 (1,500  2)
1-3-18 Rs. 5,000 1 5,000 (5,000  1)
11,000

12 1
Interest  11,000    Rs.110
100 12
Receipts by Bimal
31-1-18 Rs. 6,000 2 12,000 (6,000 2)
1-3-18 Rs. 4,000 1 4,000 (4,000 1)
16,000

12 1
Interest  16,000    Rs.160
100 12

Net Interest Due from Bimal

= 160—110 = Rs.50 

Check Your Progress-B

1. Put a tick 3 ( ) against the right answer.

a) The goods supplied from his stock at cost by the Co-venturer

maintaining the accounts, are debited to

i) Sales Account

ii) Purchases Account

iii) Stock Account

b) In Memorandum Joint Venture Account Method, the co-venturer

records 87
Consignments and Joint i) His transactions only
Ventures
ii) Other Co-venturers’ transactions only 
iii) All the transactions of the Joint Venture
c) Memorandum Joint Venture Account is prepared to find out
i) Amount due from the Co-venturers
ii) Profit or 1oss on the joint venture
iii) None of the above
d) The share of profit of the Co-venturer maintaining the records is
credited to
i) Profit and Loss Account
ii) His personal account
iii) None of the above
e) Any bad debts incurred on account of joint venture are debited to
i) Bad Debts Account
ii) Debtor’s Personal Account
iii) Joint Venture Account

17.5.4 Separate Set of Books

So far, you have studied the methods of recording joint venture transactions
where no separate set of books were maintained. Now we shall study another
method where Co-venturers agree to keep separate set of books for recording
the joint venture transactions. When separate set of books are maintained, the
joint venture transactions are recorded as a separate accounting entity on the
basis of double entry principles. Under this method, the following accounts are
opened:
1. Joint Bank Account
2. Joint Venture Account
3. Personal accounts of each Co-venturer
Joint Bank Account is a real account like the ordinary Bank Account. All the
Co-venturers pay or deposit their contribution in this account. The Joint
Venture Account is like a profit and loss account which shows all the
expenses and incomes of the joint venture.Thepersonal accounts of the Co-
venturers simply show their contributions in theform of goods, cash or expenses
and the amounts received by them.
Let us now see the various journal entries which are normally recorded under
this method.
1. When co-venturers contribute their share of capital:
Joint Bank A/c Dr.
To Co-venturers Personal A/c
88
2. When a Co-venturer contributed in the form of goods: Joint Venture Accounts
Joint Venture A/c Dr.
To Co-venturers Personal A/c
3. When purchases are made for joint venture: .
a) If on cash:
Joint Venture A/c Dr.
To Joint Bank A/c
b) If on credit:
Joint Venture A/c Dr.
To Creditor’s Personal A/c 
Note that when goods are purchased for the joint venture business, you
will debit the joint venture account not the Purchases Account.
4. When expenses are incurred on account of joint venture:
a) If paid out of Joint Bank Account
Joint Venture A/c Dr.
To Joint Bank A/c
b) If paid by a co-venturer
Joint Venture A/c Dr.
To Co-venturer’s Personal A/c  
5. When goods are sold:
a) For cash sales:
Joint Bank A/c Dr.
To Joint Venture A/c
b) For or credit sales:
Debtor’s Personal A/c Dr.
To Joint Venture A/c
6. When creditors are paid:
Creditors’ Personal A/c Dr.
To Joint Bank Account
7. When amounts are received from debtors:
Joint Bank A/c Dr.
To Debtor’s Personal A/c 
8. Any commission, interest, etc. payable to a Co-venturer:
Joint Venture A/c Dr.
To Co-venturer’s Personal A/c 
9. Unsold stock taken over by a Co-venturer:
Co-venturer’s Personal A/c Dr.
To Joint Venture A/c
10. Now if we balance the Joint Venture Account, it will disclose the amount
of profit or loss made on the joint venture which is to be shared by the
Co-venturers in their profit sharing ratio. The entries for the distribution
of profit and loss will be as follows:

89
Consignments and Joint a) In case of profit:
Ventures
Joint Venture A/c Dr.
To Co-venturers’ Personal A/cs 
b) In case of loss:
Co-venturers’ Personal A/c Dr.
To Joint Venture A/c
11. This closes the Joint Venture Account. After transferring the amount of profit
or loss to the Co-venturer’s personal accounts, you can find out the amount
payable to each one of them. When the payment is made, the journal entry
will be as follows:
Co-venturers’ Personal A/cs Dr.
To Joint Bank A/c
You will notice that the balance in the Joint Bank Account will be sufficient
to pay-off all the Co-venturers, and when the above entries are passed
all the accounts will be closed.
12. Treatment of cash discount When : some cash discount is llowed by the
creditors, it will be an item of gain for the joint venture. Hence it is credited
to the Joint Venture Account. The journal entry will be:
Creditor’s Personal A/c Dr.
To Joint Venture A/c
Similarly, when some cash discount is allowed to the debtors, it will be
an item of loss for the joint venture and, therefore, is debited to the Joint
Venture Account. The journal entry will be:
Joint Venture A/c Dr.
To Debtor’s Personal A/c
The same entry is passed in case of bad debts. Look at illustration 6
and see how the concerned accounts are prepared when separate set of books
are maintained for the joint venture business.
Illustration 6
Vikas and Salil entered into a joint venture to construct a building for a joint
stock company. The contract price was settled at Rs. 25 lakh, payable Rs.
20 lakh in cash and the balance in the form of fully paid equity shares of the
company. They opened a Joint Bank Account wherein Vikas deposited Rs. 6
lakh and Salil paid in Rs. 3 lakh. They agreed to share the profits and losses
in the ratio of 2:1
They purchased materials for Rs. 3 lakh for cash and Rs. 10 lakh worth on
credit from Anil. They paid Rs. 4,50,000 for wages. etc., and Rs. 70,000 for
other expenses.Vikas and Salil supplied materials worth Rs. 2,00,000 and Rs.
80,000 respectively. Architect’s fees of Rs. 10,000 was paid by Vikas. The
contract was duly completed and the price received as stipulated. Anil was paid
Rs. 9,80,000 in full settlement. Vikas agreed to take up the shares of the
company at a valuation of Rs. 4,40,000. Salil took over the remaining material
at an agreed value of Rs. 70,000.
Separate books are maintained for joint venture business. Prepare the necessary
90 ledger accounts.
Solution : Joint Venture Accounts
Joint Venture Account
Dr. Cr.

Particulars Amount Particulars Amount

Rs. Rs.
To Joint Bank A/c (Material) 3,00,000 By Joint Bank A/c 20,00,000
To Anil (Credit purchases) 10,00,000 By Equity Shares A/c 5,00,000
To Joint Bank A/c (Wages) 4,50,000 By Anil (Discount) 20,000
To Joint Bank A/c (Expenses) 70,000 By Salil (Material 70,000
taken over)
To Vikas (Material) 2,00,000
To Salil (Material) 80,000
To Vikas (Architects fee) 10,000
To Equity Shares A/c (Loss) 60,000
To Profit transferred to:
Vikas 2,80,000
Salil 1,40,000 4,20,000
25,90,000 25,90,000

Joint Bank Account

Rs. Rs.
To Vikas 6,00,000 By Joint Venture A/c (Material) 3,00,000
To Salil 3,00,000 By Joint Venture A/c (Wages) 4,50,000
To Joint Venture A/c 20,00,000 By Joint Venture A/c (Expenses) 70,000
By Anil (creditor paid) 9,80,000
By Vikas 6,50,000
By Salil 4,50,000
29,00,000 29,00,000

Vikas’s Account

Rs. Rs.
To Equity Shares A/c 4,40,000 By Joint Bank A/c 6,00,000
To Joint Bank A/c 6,50,000 By Joint Venture (Material) 2,00,000
By Joint Venture(Architect fees) 10,000
By Joint Venture (Profit) 2,80,000
10,90,000 10,90,000

91
Consignments and Joint Salil’s Account
Ventures
Rs. Rs.
To Joint Venture (Material) 70,000 By Joint Bank A/c 3,00,000
To Joint Bank A/c 4,50,000 By Joint Venture A/c (Material) 80,000
By Joint Venture A/c (Profit) 1,40,000
5,20,000 5,20,000

Equity Shares Account

Rs. Rs.
To Joint Venture 5,00,000 By Vikas 4,40,000
By Joint Venture A/c 60,000
(Loss transferred)
5,00,000 5,00,000

Anil’s Account

Rs. Rs.
To Joint Bank A/c 9,80,000 By Joint Venture A/c 10,00,000
(Materials)
To Joint Venture A/c (Discount) 20,000
10,00,000 10,00,000

Underwriting of Shares: Let us now take an illustration where the Co-venturers

agreed to underwrite the shares or debentures of a limited company.Underwriting
means agreeing to buy shares that are not subscribed by the public. For this
service, they receive some commission which may be paid partly in the form
of shares of the company and partly in cash. The shares thus received are sold
to the public or taken over by the Co-venturers at an agreed price. Look at
illustration 7 and see how accounts are prepared for the jointventure of
underwriting the shares when separate set of books are maintained.
Illustration 7
A and B enter into a joint venture to guarantee the subscription at par of 1,00,000
shares of Rs. 10 each of a limited company, and sharing profits and losses
in the ratio of 4.5. The terms with the company are : 4.5% commission payable
in cash and 6,000 fully paid shares of the company. They agreed to pay expenses
in connection with the issue of shares. The expenses incurred are advertisement
Rs. 5,000; printing and stationery Rs. 2,000 and postage Rs. 600. All expenses
are paid by A. The public subscribed to 88,000 shares only. The remaining
shares under the agreement were duly taken up by A and B who provided
the necessary cash equally. The commission is received in cash and is shared
by the Co-venturers in the ratio 4:5. The entire holding of the joint venture
is then sold in the market through brokers as follows: 25% at a price of Rs. 9
per share; 50% ata price of Rs. 8.75 per share, 15% at a price of Rs. 8.50 per
92 share, and the remaining 10% is taken over by A and B equally at an agreed
price of Rs. 8 per share. Prepare the Joint Venture Account, Joint Bank Account, Joint Venture Accounts
Shares Account, and the accounts of A and B showing the final settlement.
Solution
Joint Venture Account
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To A By Joint Bank A/c (commission) 45,000
Advertisement 5,000 By Shares A/c (commission)
Printing 2,000
Postage 600 7,600
To Shares A/c (loss on sale) 23,400
To Profit transferred to :
A 29,600
B 44,400 74,000
1,05,000 1,05,000

Joint Bank Account

Rs. Rs.
To A (contribution) 60,000 By Shares A/c 1,20,000
To B (contribution) 60,000 By A (commission) 20,000
To Joint Venture A/c (commission) 45,000 By B (commission) 25,000
To Shares A/c (sale for cash) By A (final settlement) 70,000
25% 40,500 By B (final settlement) 72,200
50% 78,750
10% 22,950 1,42,200
3,07,200 3,07,200

Shares Account
Particulars Amount Particulars Amount
Rs. Rs.
To Joint Bank A/c 1,20,000 By Joint Bank A/c (Sale of shares) 40,500
To Joint Venture (Commission) 60,000 By Joint Bank A/c (Sale of shares) 78,750
By Joint Bank A/c (Sale of shares) 22,950
By A (shares taken over) 7,200
By A (shares taken over) 7,200
By Joint venture A/c (Loss) 23,400
1,80,000 1,80,000

93
Consignments and Joint
Ventures A’s Account
Particulars Amount Particulars Amount
Rs. Rs.
To Joint Bank A/c (Commission) 20,000 By Joint Venture A/c (Expenses) 7,600
To Shares A/c 7,200 By Joint Venture A/c (Contribution) 60,000
To Joint Bank A/c (Final settlement) 70,000 By Joint Venture A/c (Profit) 29,600
97.200 97.200

B’s Account
Particulars Amount Particulars Amount
Rs. Rs.
To Joint Bank A/c (Commission) 25,000 By Joint Bank A/c (Contribution) 60,000
To Shares A/c 7,200
To Joint Bank A/c (Final settlement) 72,200 By Joint Venture A/c (Profit) 44,400
1,04,400 1,04,400

Working Notes
1.. Distribution of commission received in cash
4 ½ % of 10,00,000 = Rs. 45,000
A’s share 4/9  45,000 = Rs. 20,000
B’s share 5/9   45,000 = Rs. 25,000
2. Treatment of shares received:
Shares received by way of commission 6,000
Shares not subscribed by public 12,000
Total no. of shares received 18,000
a) Sold for Cash Rs.
25% of 18,000 i.e... 4,500 shares sold @ Rs. 9 per share 40,500
50% of 18,0o0 i.e.. 9,000shares sold @ Rs. 8.75per share 78,750
15% of 18,000 i.e.. 2,700 shares sold @ Rs. 8.50
per share 22,950
b) Divided amongst A and B
10% of the remaining shares i.e. 1,800 shares are taken over equally by
A & B at an agreed price of Rs. 8 per share.
A: 900 shares @ Rs. 8 per share Rs. 7,200
B: 900 shares @ Rs. 8 per share Rs. 7,200

94
Check Your Progress C Joint Venture Accounts

1. What is the need for maintaining separate set of books for the joint venture?
................................................................................................................
................................................................................................................
................................................................................................................
2. Fill in the blanks
i) Joint Bank Account is like a …………………… Account.
ii) When Co-venturers’contribution is in the form of goods …………..
Account is debited.
iii) All the amounts paid out of joint bank are credited to
……………..Account. 
iv) Co-Venturers’ contribution in cash is debited to Joint Bank Account
and credited to …………………………Account. 
v) In underwriting of shares, the ....................shares are taken over by
the underwriters.

17.6 LET US SUM UP

Joint Venture is a temporary partnership between two or more persons who
have agreed to undertake jointly a specific project or a job. On the completion
of the project or the job, the joint venture will automatically come to an end.
The joint venture differs from consignment and partnership in many ways.
The accounts for the joint venture business can be kept in four ways: (i) all
recording be done in the books of one co-venturer only, (ii) the accounting
records be maintained by each one of them in their own books, (iii) each Co-
venturer records his own transactions relating to the joint yenture and on the
completion of the project a Memorandum Joint Venture Account is prepared
to find out the profit or loss, and (iv) separate set of books of accounts may
be maintained for the joint business and a joint account be opened in the bank.
Under the first method, only one Co-venturer records the joint venture
transactions who opens a Joint Venture Account and the personal accounts of
other co-venturers. Under the second method, each Co-venturer opens a Joint
Venture Account and the personal accounts of other Co-venturers. The Joint
Venture Account serves the purpose of Profit and Loss Account. Under the
third method, no Joint Venture Account is maintained. Each Co-venturer simply
opens the personal accounts of other Co-venturers and for ascertaining the profit
or loss of the venture, a Memorandum Joint Venture Account is prepared.
When any of the above three methods is followed, no separate books are
maintained for the Joint Venture business. All transactions are recorded in the
books of the Co-venturers themselves. Under the fourth method, a separate
set of books are prepared for the joint venture business treating it as a separate
accounting entity, and all transactions are recorded strictly according to the
double entry system. The main accounts prepared under this method are (i)
Joint Venture Account, (ii) Joint Bank Account, and (iii) the personal accounts
95
Consignments and Joint of the Co-venturers. In this case also, the Joint Venture Account serves the
Ventures
purpose of a Profit and Loss Account.

17.7 KEY WORDS

Co-venturer: Persons who are parties to the agreement for carrying out the
joint venture business.
Joint Venture: A temporary partnership between two or more persons who
agree to carry out a specific job or a project.
Memorandum Joint Venture Account: An account prepared for ascertaining
the profit or loss of a joint venture where no Joint Venture Account is prepared
by Co-venturers.
Underwriting: An undertaking to take up the shares which are not subscribed
by the public.

17.8 SOME USEFUL BOOKS

Maheshwari.S.N. 2018. Introduction to Accounting,Vikas Publishing House: New
Delhi. 72.
Patil V. A. and J. S.Korlahalli, 2018 Principles and Practice of Accounting
R. Chand & Co., New Delhi.
William Pickles. 1992. Accountancy, E.L.B.S. and Pitman, London.
Gupta, R.L. and M. Radhaswamy. 2018. Advanced Accountancy Sultan Chand
& Sons. New Delhi

17.9 ANSWERS TO CHECK YOUR PROGRESS

A 1. i) A and B ii) A’s share Rs. 18,000 and B’s share Rs. 27,000
2. i) False ii) True iii) False v) False v) True
B 1. a) ii b) i c) ii d) i e) iii
C 2. i) Bank ii) Joint Venture iii) Joint Bank iv) Co-venturers’
Personal Accounts v) unsubscribed

17.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. State the salient features of joint venture. Distinguish it from consignment.
2. “Joint Venture is a temporary partnership”. Comment and explain how does
it differs from the partnership?
3. Explain briefly various methods of recording the joint venture transactions
without maintaining separate set of books.
4. Explain the separate set of books method for maintaining joint venture
accounts.

96
Exercises Joint Venture Accounts

1. Mohan and Sohan were partners in a joint venture sharing profits and losses
in the ratio of 3:2. Mohan supplied goods of the value of Rs. 6,000 and
incurred an expenditure of Rs. 200. Sohan supplied goods of the value
of Rs. 5,000 and his expenses were Rs. 300. Sohan sold all the goods
for a sum of Rs. 18,000. Sohan is entitled to a commission of 4% on
sales and he settled his account by sending a bank draft to Mohan.
Pass necessary journal entries in the books of both the parties.
(Answer :Profit on Joint VentureRs. 5,780 Commission Rs. 720)
2. ‘A’ of Banglore enters into a joint venture with ‘B’ of Bombay to ship
cotton bales to ‘C’ in Japan. A sends cotton of the value Rs. 30,000,
pays railway freight etc. Rs. 1,500 and sundry expenses R. 1,575. B sends
goods valued at Rs. 20,750 and pays freight and insurance Rs. 1200,
dock dues Rs. 200, customer charges Rs. 500, and other sundry expenses
Rs. 500. A advances to B Rs. 6,000 on account of the venture. B receives
Account sale and remittance of net proceeds from C for the whole of
the goods amounting to Rs. 80,000.
Show the Joint Venture Account and the personal accounts of the Co-
ventures in the books of A and B
(Answer: Profit on joint venture Rs. 23,775; Balance due to A Rs. 50,962.
50)
3. Sundar, Bindia and Gora entered into a contract with Mohindra Ltd. for
the construction of a building at a cost of Rs. 5,00,000 payable Rs.
4,00,000 in cash and Rs. 1,00,000 in debentures. They share profits and
losses equally.
Sunder, Bindia and Gora contributed Rs. 60,000. Rs. 75,000 and Rs.
40,000 respectively. All these amounts were deposited in a Joint Bank
Account. Sundar paid Rs. 7,000 to the architect. Bindia purchased
concrete mixture for Rs. 25,000 and Gora brought a motor truck for Rs.
20,000 for joint venture work. They purchased plant for Rs. 24,000, materials
for Rs. 2,40,000 in cash and paid Rs. 1,95,000 as wages. After construction
of the building, Sundar took over the remaining material for Rs. 14,000
and Bindia took over mixture for Rs. 12,000. Gora took over the motor
truck for Rs. 8,000. The plant was sold for Rs. 6,000. When full price
was received form the contractee, Sundar took over the debentures for
Rs. 80,000. Prepare Joint Venture Account, Joint Bank Account and the
Co-venturer’s personal accounts. 
(Answer: Profit Rs. 9,000. Sundar will bring in Rs. 24,000 and Bindia
will get Rs. 91,000 and Gora Rs. 55,000. Joint bank total Rs. 605,000)
4. Ajay and Banwari doing business separately as building contractors
undertake jointly to construct a building for a newly setup company with
Rs. 1,00,000 payable, Rs,80,000 in cash and Rs. 20,000 in fully paid
shares of the company. A Joint Bank Account is opened in their names,
Ajay paying in Rs. 25,000 and Banwari Rs. 15,000. They are to share
profits and losses in the proportion of 2:1. Their transactions were as
follows : 97
Consignments and Joint Rs.
Ventures
Paid wages 30,000
Bought material 70,000
Materials supplied by Ajay 5,000
Materials supplied by Banwari 4,000
Architect’s fee paid by Ajay 2,000
The contract was completed and the price (cash and shares) duly received.
The joint venture was closed by Ajay taking up all the shares of the company
at an agreed value of Rs. 16,000 and Banwari taking up the stock of
materials at an agreed value of Rs. 3,000. Show the necessary ledger
accounts.
(Answer: Loss Rs. 12,000; Payments to Ajay Rs. 8,000 and Banwari
Rs. 12,000)
5. A, B and C enter into a Joint Venture for the construction of a building
for a joint stock company. The contract price is Rs. 2,00,000. Incidental
expenses paid by the co-venturers will be reimbursed to the extent of actual
expenditure or Rs. 10,000 whichever is less. A spends Rs. 8,000, B Rs.
10,000 and C Rs. 12,000. The profits and losses are to be shared equally,
but C, being a technical person, is entitled to a commission of 10% on
the profit of the venture after charging such commission. Joint Bank Account
is opened wherein A deposits Rs. 40,000, B Rs. 30,000 and C Rs. 30,000.
B gives his own plant to the venture for Rs. 16,000. Materials worth Rs.
40,000 and wages of Rs. 60,000 are paid out of the Joint Bank Account.
On completion of the contract, the company paid the agreed contract price
(keeping Rs. 20,000 as retention money). The contract price was paid
Rs. 60,000 in cash and the balance in equity shares of the company of
Rs. 10 each at an agreed value of Rs. 12 per share. The shares were
subsequently sold in the market @ Rs. 13 per share. A took over the
unused materials at Rs. 2,000. B took over the plant at an agreed value
of Rs. 4,000 and the retention money was taken over by C at Rs. 14,000.
Show necessary ledger accounts in the books of the joint venture.
Hint: Contract price received is Rs. 1,80,000, out of which Rs. 60,000
in Cash and Rs. 1,20,000 worth of shares @ Rs. 12 per share. So, the
number of shares received is Rs. 1,20,0000 12 = 10,000 shares.
(Answer: Profit Rs. 60,000; Final settlement A Rs. 66,000, B Rs. 72,000;
and C Rs. 52,000)
6. Devendra and Ravindra entered into a joint venture involving the buying
and selling of old railway materials, the profit or loss to be shared equally.
The cost of the goods purchased was Rs. 42,500 which was paid by
Devendra who drew a bill on Ravindra at two months for Rs. 30,000.
The bill was discounted by Devendra at a cost of Rs. 240.
The transactions relating to the joint venture were (a) Devendra paid Rs.
300 for carriage, Rs. 500 for commission on sales and Rs. 200 travelling
expenses, (b) Ravindra paid Rs. 100 for travelling expenses and Rs. 150
for sundry expenses, (c) sales made by Devendra amounted to Rs. 20,000,
and (d) sales made by Ravindra were Rs. 30,000.
98
 Goods costing Rs 1,000 and Rs. 1,500 (being unsold stock) were retained Joint Venture Accounts
by Devendra and Ravindra respectively, and these were charged to them
at prices so as to show the same gross profits as made on the total sales.
Devendra was credited with a sum of Rs. 400 to cover the cost of
warehousing and insurance. The expenses in connection with the bills were
to be treated as a charge against the joint venture.
Show the necessary accounts in the books of each party and prepare the
Memorandum Joint Venture Account
(Answer: Profit on Joint Venture Rs. 8,735; Payment by Devendra to
RavindraRs. 2,742.50; Rate of Gross profit 25%; Stock taken over by
Devendra valued at Rs. 1,250 and Ravindra at Rs. 1,875)
7. Akash and Vijay enter into a joint venture on January 1, 2018. Akash bought
goods costing Rs. 4,000 and on the same day he received a cheque from
Vijay for Rs. 1,500. Akash and Vijay incurred expenses as follows:
Akash Vijay
February 1 300
April 1 300
March 1 400
May 31 1400
Vijay sold the goods, in two months, namely, on April 1 Rs. 4,800 and
on June 30 Rs. 2400. They share profits and losses equally and interest
was to beallowed at5% per annum. On June 1, Vijay gives Akash a three
months bill for Rs. 2,500 and on June 30, the venture was completed and
the accounts settled by cheque between the parties. Calculate interest in
months and show the necessary accounts.
(Answer: Profit: Akash Rs. 368.70 and Vijay Rs. 368.70; Akash will charge
Rs. 100 as interest and Vijay will pay Rs. 47.50 as interest)

Note : These questions will help you to understand the unit better. Try to
write answers for them. But, do not submit your answers to the
University for assessment. These are for your own practice only.

99
 BCOC-131
Financial Accounting
Indira Gandhi
National Open University
School of Management Studies

Block

6
COMPUTERISED ACCOUNTING
UNIT 18
Introduction to Computerised Accounting
and Creation of Company 5

UNIT 19
Creating Masters 34

UNIT 20
Voucher Entries and Invoicing 57

UNIT 21
Preparation of Reports 86
 PROGRAMME DESIGN COMMITTEE B.COM (CBCS)
Prof. Madhu Tyagi Prof. D.P.S. Verma (Retd.) Faculty Members
Director, SOMS, IGNOU Department of Commerce
University of Delhi, Delhi SOMS, IGNOU
Prof. R.P. Hooda Prof. N V Narasimham
Former Vice-Chancellor Prof. K.V. Bhanumurthy (Retd.)
Department of Commerce
Prof. Nawal Kishor
MD University, Rohtak
University of Delhi, Delhi Prof. M.S.S. Raju
Prof. B. R. Ananthan Dr. Sunil Kumar
Former Vice-Chancellor Prof. Kavita Sharma
Rani Chennamma University Department of Commerce Dr. Subodh Kesharwani
Belgaon, Karnataka University of Delhi, Delhi Dr. Rashmi Bansal
Dr. Madhulika P Sarkar
Prof. I. V. Trivedi Prof. Khurshid Ahmad Batt
Former Vice-Chancellor Dean, Faculty of Commerce & Dr. Anupriya Pandey
M. L. Sukhadia University Management
Udaipur University of Kashmir, Srinagar

Prof. Purushotham Rao (Retd.) Prof. Debabrata Mitra

Department of Commerce Department of Commerce
Osmania University, Hyderabad University of North Bengal
Darjeeling
Prof. R. K. Grover (Retd.)
School of Management Studies
IGNOU

COURSE DESIGN COMMITTEE

Prof. Madhu Tyagi Faculty Members
Director, SOMS, IGNOU SOMS, IGNOU
Prof. N. V. Narasimham
Prof. A.A. Ansari Prof. Nawal Kishor
Jamia Millia Islamia, New Delhi Prof. M.S.S. Raju
Dr. Sunil Kumar
Ms. Surbhi Gupta Dr. Subodh Kesharwani
Vivekananda College Dr. Rashmi Bansal
University of Delhi, Delhi Dr. Madhulika P. Sarkar
Dr. Anupriya Pandey

COURSE PREPARATION TEAM

Ms. Surbhi Gupta (Unit-18, 19, 20 and 21) Prof. N V Narasimham, Editor
Prof. M.S.S. Raju
(Course Coordinator & Editor)
Dr. Sunil Kumar
(Course Coordinator & Editor)

Print Production
Sh. Y. N. Sharma Sh. Sudhir Kumar
Assistant Registrar (Pub.) Section Officer (Pub.)
MPDD, IGNOU MPDD, IGNOU

June, 2019
Indira Gandhi National Open University, 2019
ISBN-978-93-89200-
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any
other means, without permission in writing from the Indira Gandhi National Open University.
Further information on the Indira Gandhi National Open University courses may be obtained from
the University’s Office at Maidan Garhi, New Delhi-l10068 or website of INGOU www.ignou.ac.in
Printed and published on behalf of the Indira Gandhi National Open University, New Delhi by
Registrar, MPDD, IGNOU, New Delhi.
Laser Typeset by : Rajshree Computers, V-166A, Bhagwati Vihar, (Near Sec. 2, Dwarka), Uttam
Nagar, New Delhi-110059
2 Printed by :
BLOCK 6 COMPUTERISED ACCOUNTING
Computerised Accounting is the need of present business environment. In this
era of technological advancement where humans are moving towards automation,
preparing financial statements through use of computers is essential as it provides
accuracy, reliability, security from disasters as well as speed required in
maintaining data for growing business operations. Many accounting softwares
have been developed like Tally ERP 9, Marg, Profit wave and others to provide
support to accounting professionals in maintaining and preparing records digitally.
This block on computerised accounting has been divided into four units which
cover introduction to computerised accouinting, creation of company, creating
masters, vouching entries & invoicing and preparation of reports.
Unit 18 explains what computerised accounting system is and how does it differs
from the manual accounting procedure. It also highlights the advantages and
disadvantages of computerised accounting system. It describes the procedure
of creation of company in Tally ERP.9. It also explains how can a company
be altered, deleted or shut down in Tally software. It also discusses the
configuration and features of the software.
Unit 19 describes how ledgers and groups account are created in computerised
form and how data related to stock/inventory can be maintained in Tally software.
It also highlights the way to delete or alter or display any ledger or group or
inventory masters.
Unit 20 explains the procedure of creation of different vouchers and recording
journal entries therein. It also discusses the method of creating invoices, deletion
and alteration of vouchers and invoices.
Unit 21 discusses the preparation of various reports like Balance Sheet, Profit
and Loss Account, Trading Account, Stock Summary, Day Book and other
reports which Tally software creates automatically.

3
Computerised Accounting

4
 Journal and Ledger
UNIT 18 INTRODUCTION TO
COMPUTERISED
ACCOUNTING AND
CREATION OF COMPANY
Structure
18.0 Objectives
18.1 Introduction to Computerised Accounting
18.2 Difference between Manual and Computerised Accounting System
18.3 Advantages and Disadvantages of Computerised Accounting System
18.4 Consideration while Choosing Accounting Software
18.5 Accounting Software in India
18.6 Introduction to Tally ERP.9
18.6.1 About Tally Software
18.6.2 How to Start Tally ERP.9
18.6.3 Components of Tally

18.7 Creation of a Company

18.7.1 Procedures of Creating a Company
18.7.2 Selecting a Company
18.7.3 Alteration of Details of a Company
18.7.4 Deletion of a Company
18.7.5 Shutting of a Company

18.8 Features and Configurations

18.8.1 Features
18.8.1.1 Accounting Features
18.8.1.2 Inventory Features
18.8.1.3 Statutory and Taxation Features
18.8.2 Configurations

18.9 Shutting Tally ERP.9

18.10 Keyboard Conventions
18.11 Let Us Sum Up
18.12 Key Words
18.13 Answers to Check Your Progress
18.14 Terminal Questions/Exercises

18.0 OBJECTIVES
After studying this unit, you will be able to:
 define computerised accounting system
 distinguish between manual and computerised accounting system;
 highlight advantages and disadvantages of computerised accounting system; 5
Computerised Accounting  describe Tally ERP.9 system;
 identify various components of Tally ERP.9;
 set, alter, delete and shut a company under Tally ERP.9; and
 understand the features and configuration option in Tally ERP.9

18.1 INTRODUCTION
An accounting system is a collection of processes, procedures and controls
designed to collect, record, classify and summarize financial data for interpretation
and management decision-making. Whether the accounting system is simple or
complex, it must meet certain objectives to keep the business running smoothly.
It is difficult to make informed business decisions without accurate accounting
information that helps the managers to see where the business is, where it has
been and (based upon trends) foresee where it is headed. Thus, an accounting
system should be devised as an effective tool that provides information which
is easy to understand.
While some firms still do their book-keeping by hand, most firms generally have
too many transactions to sustain a manual accounting system. The more
complicated the financial activities of a business are, the more likely it will need
a computerized accounting system to ensure effective financial
reporting. Computerized accounting systems involve making use of computers
and accounting software to record, store and analyze financial data. These are
software programs that are stored on a company’s computer, a network server,
or remotely accessible via Internet.
Computerized Accounting represents a technological advancement in the field
of business accounting which allows the user(s) to set up income and expense
accounts, such as rental or sales income, salaries, advertising expenses, and
material costs. They also can be used to manage bank accounts, to pay bills,
and prepare budgets. Also, depending upon the program, some accounting
systems also allow users to prepare tax documents, handle payroll, and manage
project costing.

18.2 DIFFERENCE BETWEEN MANUAL AND

COMPUTERISED ACCOUNTING SYSTEM
Owners and other stakeholders of any business, whether large or small, want
to know whether the business is making a profit or not. Many small businesses
do their accounting manually and they are happy with this setup. Others may
be considering using a computerized system, since accounting software is also
affordable these days. Manual and computerized accounting systems perform
basically the same processes; the accounting principles and concepts are the
same with differences lying in the mechanics of the process. Let us now see
the difference between these two:
Speed
The main difference between manual and computerized systems is speed.
Accounting software processes data and creates reports much faster than manual
6 systems. Calculations are done automatically in software programs, minimizing
errors and increasing efficiency. Once data is fed into the system, one can create Introduction to Computerised
Accounting and Creation of
reports literally by pressing a button in a computerized system. Company
Cost

Another difference between manual and computerized systems is cost. Manual

accounting with paper and pencil is much cheaper than a computerized system,
which requires a machine and software. Other expenses associated with
accounting software include training and program maintenance. Expenses can
add up fast with costs for printers, paper, ink and other supplies. However,
manual accounting requires more staff. Threfore, more expenditure on salaries/
wages in case of manual accounting.

Backup

A third difference between manual and computerized systems is the ease of

backup of a computerized system. All transactions can be saved and backed
up, in case of fire or other mishap. You cannot do this with paper records,
unless you make copies of all pages a long and inefficient process.

The following table makes a further attempt to explain the difference between
the manual and computerized accounting systems:

BASIS MANUAL COMPUTERIZED

ACCOUNTING ACCOUNTING

1. Definition Manual accounting is the In this system of accounting, we

system in which we keep make use of a computer and
physical register of journal different accounting software for
and ledger for keeping maintaining a digital record of
` the records of each every transaction.
transaction.

2. Ledger We check the journal and Computerized Accounting

Accounts then we transfer figures to System will automatically
related accounts debit or process the system and will
credit side by manually make all the accounts’ ledgers
posting it. since the voucher entries under
its respective ledger account have
already been passed.

3. Trial We collect the information The computerized accounting

Balance of all the balances of all system will automatically
accounts in our ledger, and produce the Trial Balance.
on this basis we manually
prepare the trial balance.

4. Adjustment Both, the adjustment Only adjustment entries will be

Entries journal entries and its passed in the computerized
Record posting in the ledger accounting software, these will
accounts will be done then be automatically posted to
manually, one after another. respective ledger accounts.
7
Computerised Accounting
18.3 ADVANTAGES AND DISADVANTAGES
OF COMPUTERISED ACCOUNTING
SYSTEM
Advantages of Computerized Accounting
There are many advantages of computerized Accounting System. Let us discuss
few of them in detail.
1. Automation: As all the calculations are handled by the software, computerized
accounting eliminates many of the mundane and time-consuming processes
associated with manual accounting. For example, once issued, invoices are
processed automatically thus saving time.
2. Accuracy: This accounting system is designed to be accurate to the minutest
detail. Once the data is entered into the system, all the calculations, including
additions and subtractions, are done automatically by software.
3. Data Access: Using accounting software, it becomes much easier for
different individuals to access accounting data outside the office, securely.
This is particularly true if an online accounting solution is being used.
4. Easy representation of data in various formats: Viewing the accounts
using a computer allows the users to take advantage of the option to view
the data in different formats i.e. one can view data in tables and using
different types of charts.
5. Reliability: Since the calculations are very accurate, the financial statements
prepared by computers are highly reliable.
6. Scalable: When a company grows, the number of transactions entered into
the system increases, as a result of which the need for accounting not only
increases but also becomes more complex. With computerized accounting,
everything is kept straight forward because shifting data using software is
easier than sifting through a bunch of papers.
7. Speed: Using accounting software, the entire process of preparing accounts
becomes faster. Furthermore, statements and reports can be generated
instantly at the click of a button. Managers do not have to wait for hours,
even days, to lay their hands on an important report.
8. Security: The latest data can be saved and stored in offsite locations so
it is safe from natural and man-made disasters like earthquakes, fires, floods
and terrorist attacks. In case of disasters, the system can be quickly restored
on other computers. This level of precaution is taken by Computerized
Accounting.
9. Cost-effective: Since using computerized accounting is more efficient than
paper-based accounting, than naturally, work will be done faster and time
will be saved.
Disadvantages of Computerized Accounting
Computerized Accounting suffers from many limitations. Let us discuss those
limitations one by one.
8
Cost of Software: In case of computerized accounting, you must buy the Introduction to Computerised
Accounting and Creation of
software. Some software requires you to purchase upgrades or updates for Company
additional features. You must also ensure your computer is capable of running
the software. If not, you’ll need to upgrade your computer as well.
Most accounting software requires you to have additional software in order to
view reports. For instance, some programs allow you to export data as a PDF
file or an Excel spreadsheet. This allows users without the accounting program
to view the data. However, the viewing software may pose an additional expense
to the user.
2. Reliance on Computers: If your computer crashes or data is corrupted
by a virus, you won’t be able to use your accounting software until the
problem is fixed. This also means you won’t have access to any entered
data until the computer is running again. Your data can also be corrupted.
It means you will have to re-enter information unless you’ve backed up
your files. In addition, if there’s a power failure, your software will be
unusable unless you’re on a battery-powered laptop.
3. Fraud: Accounting software data requires extra levels of security to prevent
fraud and embezzlement. Software makes it easier for users to alter data,
making fraud easier to accomplish. As a result, there is an increased need
for internal auditors to check for any data inaccuracies. Security measures
must also be taken to limit the amount of control users have over any
accounting software’s features.
4. Human Error: While it is easy to write down numbers incorrectly, it is
even easier to mistype a number. Entering data into accounting software
too quickly may result in serious errors. With the program performing
calculations, it can be more difficult to trace the cause of the problem.
Spreadsheets, digital ledgers or written ledgers make tracking simpler and
faster.
5. Training: Accounting software requires you to take the time to learn how
to use it. While you may be an experienced accountant, you’ll still need
to learn what each button and menu command does in order to use
accounting software effectively. This learning curve can result in costly affairs.
In some cases, paid training may be necessary to learn how to perform
certain tasks. If you’re not tech savvy, the process could be even more
difficult.
6. Time: Many accountants find that it takes more time to enter data into
accounting software than it does to write it or type it into a spreadsheet.
Due to step-by-step screens, the process often takes longer, especially for
those who don’t use the software often or are still new to using the program.
If the software requires numerous steps to enter basic data, the time
requirements may outweigh the benefits of automatic calculations.

18.4 CONSIDERATION WHILE CHOOSING

ACCOUNTING SOFTWARE
When it comes to selecting accounting software, there are a number of options
available in the market and it can be overwhelming to choose the best one.
The following is a list of factors to be considered while choosing accounting
software: 9
Computerised Accounting 1. The Size of the Business Organization: The size of the organization
and the volume of the business transactions entered into influence the choice
of software. While a large organization will require software that meets
the multi-user requirements because it is geographically scattered and
connected through complex networks, a smaller organization may opt for
simple, single user operated software.
2. Ease of Use: The interface and navigation should be simple and self-
explanatory. There should also be an option for data back-up. Preference
can be given to vendors that offer help at no additional cost, have reasonable
service plans or offer tutorial training that walks the clients through the most
popular business tasks and transactions.
3. Features: What particular software offers is an important consideration.
A list of the primary things that the business needs to track and account
for should be carefully prepared. The business must know how much each
service or product costs and be able to track the cost of goods sold
(COGS). Features like invoicing, online payments, payroll, auto payments,
reporting, bank balances will help to stay up to date on sources of business
income, expenses and where it may need to make adjustments.
4. Protects Classified Data: When financial data is stored in the cloud, there
is no longer the possibility of vital information being lost in the event of
a hard drive crash, power surge, or coffee spill. The data is backed up
on external servers. However, with cloud-based software comes, the threat
of classified data falling victim to malicious activity. Online banking has set
a standard for security, so it becomes necessary to ensure that the chosen
software either meets or exceeds this standard. This means Secure Socket
Layer (SSL) encryption, multi-layered firewall server protection, and routine
external audits and inspection.
5. Compatibility: If there are other financial tools that are used in the
business – for example, an e-commerce system, then business would want
to look into the compatibility of the financial software with any other essential
software to run the online or storefront portion of the business. In an ideal
world, it may want a solution that provides most of what it requires in
a single program. However, if it must have multiple software packages,
it will have to ensure that the data can automatically be linked for real-
time updates or transferred daily with the upload of an Excel or CSV file.
6. Price: While price is a necessary factor to be considered, it shouldn’t
necessarily be the deciding one. The ability to manage money is far more
important if it’s the difference of saving just a few rupees. What one should
be aware of is the different pricing models that are used by software product
providers.
Having suitable software in place, will allow a business to stay on top of cash
flow and focus on what it does best (i.e. allow the business to focus on its
core competence). It also helps keep the records clean.

18.5 ACCOUNTING SOFTWARE IN INDIA

Only a few years ago, accounting applications lived on the desktop of the small
business owner or an accountant’s computer. The books were not accessible
10
from another location and only one person could view them at a time. Then Introduction to Computerised
Accounting and Creation of
cloud computing took off and business accounting software providers caught Company
on.

In a computerized accounting system, the framework of storage and processing

of data is called operating environment that consists of hardware as well as
software in which the accounting system works. The type of accounting system
used determines the operating environment.

Some of the most prevalent business accounting software systems are:

1. Tally ERP.9: Tally ERP.9 is a business accounting software for the

purposes of accounting, inventory and payroll. Tally has been one of the
dominating accounting software for almost two decades. The software has
been developed by Tally Solutions Pvt Ltd. It is the most user-friendly for
accounting software and thus, employers prefer Tally for easy availability
of trained professionals for this specific software. Almost all accounting
activities like inventory, purchase, sales, cost, payroll and statutory year end
processes can be easily handled by Tally.

2. Profitbooks: This is an Online accounting software developed for small

enterprises. It can only be operated on the internet as it is cloud based.
The data can be securely placed in a cloud and can be accessed anywhere.

3. Marg: Accounting Software is developed by Marg Compusoft Pvt Ltd

and is well accepted in small and medium enterprises of India. The software
is marketed for the last two decades in the Indian market.

4. Wave: Wave’s accounting tools are 100% free, secure, and very popular
in accounting community. It is one of the best web based accounting
software solution available at present.

5. Xero: Developed by Xero, it is an award winning web based accounting

software for small business owners and accountants. The user interface is
nicely designed and is easy to use for online bookkeeping.

6. Reach: Reach Accounting Software is developed by Reach Accountant.

It is an online Accounting Software aimed at Small & Medium Businesses.
The significant part of Reach is that all the business operations are bundled
in single software and it ensures that the business owner is able to track
every aspect of the business.

18.6 INTRODUCTION TO TALLY ERP.9

18.6.1 About Tally Software
Tally ERP.9, developed by Tally Solutions Ltd., is one of the most popular
and widely used business management software available in India and other
countries. It can be used by small to large business organization. It is available
with two types of licensing system:

1. Silver Edition Mode (Single user): It is for single use PC. It can be
activated online or offline. It can be accessed from the system on which
it is installed by only a single user. 11
Computerised Accounting 2. Gold Edition Mode (Unlimited Multi user): It is for unlimited number
of user PCs. It is installed on LAN (local area network) and supports
a maximum of ten users.
18.6.2 How to Start Tally ERP.9
Go to start button, click ‘all programs’. With in ‘All Program’, go to Tally ERP.9
or installation of Tally icon on the desktop. If you double click on Tally icon,
Tally will open and you can start working on it.
18.6.3 Components of Tally
The gateway of Tally displays menus, screens, reports and options that you
select. The components of Tally ERP.9 are:
 Top Horizontal Button Bar: This is a collection of buttons that are fixed
and provide quick interaction
 Close Button: This helps in moving out of Tally application.
 Screen Name: It shows the name of the current screen.
 Right Pane: In right pane menus are displayed. The red letter in each
menu represents short cut and by pressing that alphabet from keyboard
one can open the menu.
 Left Pane: It shows current period, current date and name of companies
with last date of voucher entry done in each company.
 Vertical Panel Bar: It is used for quick interaction.
 Calculator: It can be used for calculation work and figures can be
computed. (Ctrl + N)
 Information Panel: This displays details of product, version, license and
configurations.
 Task Bar: It shows the complete navigation path of the current menu or
screen selected.

12 Fig. 18.1
Check Your Progress A Introduction to Computerised
Accounting and Creation of
1. Choose the correct answer: Company

i) The disadvantages of Computerised Accounting System is/are:

(a) Speed (b) Efficiency (c) Breach of Security (d) All of the above
ii) Tally Software is developed by
(a) Apple (b) Adobe (c) Microsoft (d) Tally Solutions
iii) The screen of Gateway of Tally consists of following components:
(a) Task Bar (b) Information Panel (c) Vertical Button Pane (d) All of
the above
iv) Which of the following is not an accounting software?
(a) Tally.ERP.9 (b) Wave (c) SPSS (d) Marg

18.7 CREATION OF A COMPANY

Creating company is the first step towards starting working with Tally ERP.9.
A company is an organization for which financial records are to be maintained
and therefore, it can be called as a central repository from where any financial
statement or report can be extracted at any time. A company can be Partnership
Firm or a Sole Proprietor or a Limited Liability Partnership or Non-Governmental
Organization or a Company registered under Companies Act, 2013.
18.7.1 Procedure of Creating a Company
To create a company, click on the ‘create company’ in ‘Company Info’.
Alternatively, one can press ALT+ F3 and the company info screen will appear
as appeared in Fig. 18.2.

Fig. 18.2 13
Computerised Accounting Once, you click ‘create company’, the following screen will appear as appeared
in Fig. 18.3 in front of you.

Fig. 18.3

The various fields appearing in company creation in Fig. 18.3 are explained
below:
 Directory: It will display the path where your company data is stored.
By default, it would automatically be stored in Tally ERP.9 data folder,
but you can change its path and can specify any location where you want
to store the data relating to the company by pressing backspace key
 Name: It means providing a name to the company. Example: Surbhi Ltd.
 Primary Mailing Details:
Mailing Name: You can specify any other name if you want for mailing
purpose. By default, it will always show the name which you have entered
in the Name field earlier
Address: Provide the address of the company in this field
Statutory Compliance: Choose the country in which the company is located.
For example, we have selected India.
State: Choose the state in which the company is located. For example,
we have selected Delhi.
Pin-code: Provide the Pin code for the company where it is located.
 Contact Details
 Provide telephone number, mobile number and Fax number (if any) of the
company. Also, provide the official email address of the company which
14 would be further used for emailing of reports and statements.
 Auto-Back up: Putting ‘Yes’ to enable auto backup will result in Introduction to Computerised
Accounting and Creation of
automatically creating backup of the data of the company in the company Company
data folder.
 Company Details:
Currency Symbol: Once country is selected, Tally will automatically choose
the currency of the country. In this example, we have selected India, so
currency symbol would be of ‘Rupee’.
Maintain: If company maintains inventory with them, select accounts with
inventory otherwise accounts only. Selecting accounts with inventory would
combine both financial accounts and inventory books.
Financial Year: Financial year is a period of 12 months starting from 1st
April. The accounting period in this example, will begin from 1st April, 2017.
Books beginning from: Provide a date at which you started maintaining
your books. It can be a date later than 1st April, 2017. By default, it would
automatically take date mentioned in previous field.
 Security Control:
Tally Vault Password: Entering this password will require, opening the
company with password each time. The name of the company having tally
vault password will be shown with asterisk ‘*’ mark.
Repeat Password: Password entered in various field has to re-enter for
confirmation.
Use Security Control: Enabling this field as ‘Yes’ will allow to define access
administrator user name and password. Every time you open a company,
it would ask for name of administrator and password.
 Base Currency Information:
Base Currency Symbol: The selection of country will define base currency
symbol. In this example, we have selected India, so currency symbol would
be of ‘Rupee’
Formal Name: The formal name of the currency like INR (Indian Rupee)
will be displayed.
Suffix Symbol to amount: This will allow putting symbol of currency after
the amount.
Add space between amount and symbol: This will allow space between amount
and symbol.
Show amounts in millions: This will allow the values of amount to be expressed
in millions i.e. international system of numeration.
Number of Decimal Places: By default, it will be set to 2 places only and Indian
currency has 2 decimal places whereas some currency has 3 decimal places.
It can go upto 4 decimal places.
Words representing amount after decimal: By default, it will be automatically
set according to currency.
15
Computerised Accounting Number of Decimal places for amounts in words: Provide the number of decimal
places for which printing is required. It can be equal to or less than number
of decimal places field but can’t be more than that.
After filling all the requisite details, the company creation screen will appear
as follows shown in Fig. 18.4

Fig. 18.4
Once the details are filled and you press enter again, screen will displays a
box saying accept Yes or No? If all the details are correctly filled, then proceed
to select ‘yes’ otherwise select ‘No’ as shown in Fig. 18.5.

Fig. 18.5
16
Once you select ‘Yes’, the company creation is complete and the following Introduction to Computerised
Accounting and Creation of
screen will appear as sown in Fig. 18.6. Company

Fig. 18.6

The Gateway of Tally will appear as above with current period and current
date on left side pane of tally screen. Below that it will display the name of
the company which is open. Since it is a new company created, therefore in
date of last entry it is written no vouchers entered. In the right pane, you can
see masters where ledger and group creation along with inventory are created.
In transactions, vouchers are created related to accounting and inventory. Utilities
consist of importing of data from outside and other banking related operations
like cheque printing, deposit slip etc. Finally reports include all financial statements
like balance sheet and profit and loss, stock summary and ratio analysis. Display
includes trial balance, day book, cash/fund flow etc. and in the end finally quit
where you will be able to close the tally programme if selected ‘Yes’.

18.7.2 Selecting a Company

By using ‘select company’ field you can open another company from list of
companies already existing in tally. Click Alt+F3 and company info will open
as shown in Fig. 18.7. Click select company field or press S.

Fig. 18.7
17
Computerised Accounting Once you click select company, the following screen will appear as shown in
Fig. 18.8:

Fig. 18.8

You can select the company which you want by using arrow key and then
pressing enter or by clicking the company through mouse.

18.7.3 Alteration of Details of a Company

Once company is created, you might need to update details related to company
already created before. Again go to gateway of tally, click company info or
Press F3, the following screen will appear as shown in Fig. 18.9.

Fig. 18.9

18 Once you click ‘alter’, the following screen shall appear as shown in Fig. 18.10.
 Introduction to Computerised
Accounting and Creation of
Company

Fig. 18.10

Select the company for which you wish to alter details and after selecting, the
following screen will appear and you can alter any details you want as shown
in Fig. 18.11.

Fig. 18.11

After altering the same, once again a box will appear saying Accept ‘Yes’ or
‘No’? Click ‘yes’ if alteration is done and click ‘no’ if you further wish to
alter the details of the company. 19
Computerised Accounting 18.7.4 Deletion of a Company
For deletion of a company, you have to go to gateway of tally and then company
info and then alter (same like alteration of details of a company). Once you
click alter and select the company, the company details screen will appear as
follows as shown in Fig. 18.12:

Fig. 18.12

Now, Press Alt+ D and it will ask you to delete the company i.e. yes or No.
If you wish to delete the company press ‘Yes’ or otherwise ‘No’. Once you
press Y or select ‘Yes’ through mouse click, company will be deleted and the
data will not be available as shown in Fig. 18.13:

20 Fig. 18.13
18.7.5 Shutting of a Company Introduction to Computerised
Accounting and Creation of
Company
Once company is created, if you want to shut the company which is already
open, again go to gateway of tally, click company info or Press F3, the following
screen will appear as shown in Fig. 18.14:

Fig. 18.14

Press shut company field or Press H or Alt+ F1 or click F1: Shut Company
on the right pane.

18.8 FEATURES AND CONFIGURATIONS

Once you have created a company, it is now time to set features and
configurations as per requirement. Features will affect only the company in which
they are enabled as ‘Yes’ or ‘No’ where as configurations will have an effect
on all companies in the directory data.
18.8.1 Features
Features are set of capabilities which are provided as options, which will enable
you to set and maintain your records of financial statements as per your need.
It can be found by Clicking FEATURES on vertical button bar on right pane.
Alternatively you can press F11 and features screen will appear as follows as
shown in Fig. 18.15:

Fig. 18.15 21
Computerised Accounting

Fig. 18.16

You can now see various features like accounting, inventory, statutory and
taxation and add on features as shown in Fig. 18.16. You can open say
accounting feature by clicking it or pressing ‘A’ or pressing F1 or by clicking
F1: Accounts on the vertical button bar on right pane. Once you do so, the
following screen will appear as shown in Fig. 18.17:

Fig. 18.17
There are three categories of features viz; (i) Accounting Features; (2) Inventory
features, and (3) Taxation and statutory features.
22
18.8.1.1 Accounting Features Introduction to Computerised
Accounting and Creation of
The accounting features consists of general, outstanding management, cost/ Company
profit centres management, invoicing, budgeting and scenario management,
banking features and other features as shown in Fig. 18.17:
 General: If you have chosen accounts with inventory while creating
company, maintain accounts only option will be set as ‘No’ and integrate
accounts with inventory option as ‘Yes’. If you have chosen accounts only
while creating company, maintain accounts only option will be set as ‘Yes’
and integrate accounts with inventory option will not be highlighted and
will be grey in color. If you wish to have income and expenditure account
in place of Profit and loss account (Like for NPO) you can enable this
as ‘Yes’.
 Outstanding Management: This will help maintain bill wise details and also,
calculate interest on outstanding.
 Cost/Profit Centres Management: It helps in maintaining payroll and cost
centres.
 Invoicing: To enable recording purchase in invoice mode, type ‘Yes’. To
record sales and purchase return, debit and credit note is used. Set Debit
and credit note as ‘Yes’
 Budgeting and scenario management: To maintain budget, enable the option
as “Yes’.
 Banking Features: To enable cheque printing, enable cheque option as ‘Yes’.
 Other Features: To enable zero valued transactions while recording
transactions, enable this option as ‘Yes’.
After carrying out all requisite changes in accounting features, Accept ‘yes’ or
‘No’. The tally screen will appear as follows as shown in Fig. 18.18:

Fig. 18.18 23
Computerised Accounting 18.8.1.2 Inventory Features
The inventory features consists of general, storage and classification, order
processing, invoicing, purchase and sales management and other features. You
can open inventory feature by clicking it or pressing ‘I’ or pressing F2 or by
clicking F2: inventory on the vertical button bar on right pane. Once you do
so, the following screen will appear as shown in Fig. 18.19:

Fig. 18.19

In general, integrate accounts and inventory will be set as ‘Yes’ if you have
selected accounts with inventory while creating company. If you want to enable
zero valued transactions, set this option as ‘Yes’.
In storage and classification, if you want to maintain stock according to location
or warehouse, enable maintain multiple godowns/locations as ‘Yes’. To maintain
stock category wise, enable maintain stock categories as ‘Yes’.
Set invoicing as ‘Yes’ and use debit and credit notes in invoice mode as ‘Yes’.
To record discount in invoice in separate column, enable this option as ‘Yes’.
After all settings, the screen will appear as follows as shown in Fig. 18.20:
and accept ‘Yes’ to proceed further:

24 Fig. 18.20
18.8.1.3 Statutory and Taxation Features Introduction to Computerised
Accounting and Creation of
Next feature is Statutory and taxation. You can open inventory feature by Company
clicking it or pressing ‘S’ or pressing ‘F3’ or by clicking ‘F3’: statutory on
the vertical button bar on right pane. Once you do so, the following screen
will appear as shown in Fig. 18.21:

Fig. 18.21

Please note statutory compliance is country specific. Since we have selected

India as option in statutory compliance for, therefore the displayed statutory
and taxation features are those that are relevant to India. One can set these
according to business specific requirement. To enable GST, VAT, Service Tax,
TDS & TCS enable option as ‘Yes’ along with set/alter details option. Suppose,
GST is relevant to our business, then setting GST as ‘Yes’ will appear like
above as shown in Fig. 18.22:

Fig. 18.22 25
Computerised Accounting In tax information, put PAN number and Corporate Identity Number if available.
After all settings, the screen will show accept ‘Yes’ or ‘No’. If all the settings
have been done, accept as ‘Yes’ otherwise ‘No’ and do the required settings.
Sometimes, there are specific problems which relates to specific organization
or company or business. The solution provider i.e. Tally partners provide a new
feature as solution which is specific to that organization or company or business
only. It is known as customized solution and it gets placed as add on feature.
One can see add on feature by clicking it or pressing ‘O’ or pressing ‘F6’
or by clicking ‘F6’: Add-Ons on the vertical button bar on right pane as shown
in Fig. 18.23:.

Fig. 18.23

To return to the main screen, either click quit or Ctrl +M.

18.8.2 Configurations
Configurations are options that help you modify the way a feature works.
Configuration can be located on vertical button bar in the last. You can also
press F12 or click F12: Configure.

26 Fig. 18.24
Once you press F12 or open F12: Configure, the following screen will appear Introduction to Computerised
Accounting and Creation of
as shown in Fig. 18.24: Company

Fig. 18.25

This gateway of tally screen of configuration will allow different configuration

like general configuration, numeric symbols, accounts/inventory info, voucher
entry, order entry, payroll and banking configuration etc. as shown in Fig. 18.25:

Fig. 18.26
In the above screen as shown in Fig. 18.26, you can see general configurations
where you can select country from India/SAARC or international, different styles
of displaying names of reports and stock items, different styles of writing dates,
formatting of numbers (character to use for decimal, separator to use for 27
Computerised Accounting thousands etc) and other options like monthly reports in form or graph. If you
enable use separate menu for final account statement as ‘Yes’, then on main
screen of gateway of tally, balance sheet and profit and loss will come under
Final Accounts field as below as shown in Fig. 18.27:

Fig. 18.27

To configure the numeric symbols, select the option ‘Numeric Symbols’ and
the following screen will appear as shown in Fig. 18.28:

Fig. 18.28

It includes symbols to be used for negative and positive numbers and debit
and credit amounts.
The screen below as shown in Fig. 18.29 shows master configurations related
to accounts and inventory.
28
 Introduction to Computerised
Accounting and Creation of
Company

Fig. 18.29

Next is voucher entry related configurations pertaining to both accounting and

inventory info. On opening voucher entry, the following screen will appear as
shown in Fig. 18.30.

Fig. 18.30
If you wish to skip date for faster entry, enable this option as ‘Yes’. It will
jump to next field automatically.
Set use single entry mode for Pymt/Rcpt/Contra and Use payment/Receipt as
contra as ‘NO’ and use Cr/Dr instead of To/By during entry as ‘Yes’.
Set warn on negative cash balance as ‘Yes’ so that whenever cash balance
goes negative, it will show warning as shown in Fig. 18.31.
29
Computerised Accounting

Fig. 18.31

Invoice /Order Entry will let you configure additional things like export details,
shipping details etc.
Payroll configuration is used to configure additional details for the employees.
Banking configuration will let you configure banking details.
Printing configuration helps to configure the printing screens for the reports and
transactions.
E-mailing will help you configure email related details.
Data configuration will enable configuration of data i.e. location of tally files,
export files etc.
Product and features will tell you about the details of current product installed
in your system.
Licensing will help you update, surrender, reset license and also configure existing
license.
Quit will enable you to return to the main screen of gateway of tally.

18.9 SHUTTING TALLY ERP.9

To exit out of Tally application, close all the screens. Once all the screens are
closed, you can see gateway of tally, now press ‘EscÆ key from keyboard
and when promoted to quit, press yes. Otherwise you can also click Ctrl +M
on the extreme right corner and when promoted to quit, press yes.
You can also click Ctrl+Q to exit without confirmation.
30
 Introduction to Computerised
18.10 KEYBOARD CONVENTIONS Accounting and Creation of
Company

ACTIONS PARTICULARS

Fn (F11: FEATURES) Press the Key

Fn (K: KEYBOARD) Press Alt+ Key

Fn (K: CONTROL CENTRE) Press Ctrl+ Key

Check Your Progress B

1. The option used in Tally to close an open company is:
(a) Alter Company (b) Close Company (c) Shut Company (d) Exit
Company
2. In features option, F2 option contains:
(a) Accounting Features (b) Inventory Features (c) Statutory Features (d)
Tally NET Features
3. For creating a company we use the following shortcut:
(a) Alt+ F1 (b) Alt +F2 (c) Alt +F3 (d) Esc Key
4. One can modify an existing Company:
(a) Company Info > Alter (b) Company Info > Alter Company (c) Gateway
of Tally > Modify Company (d) None of the above
5. To change date from gateway of Tally, Press
(a) F1 (b) F2 (c) F3 (d) F4
6. The shortcut to use calculator
(a) Ctrl +N (b) Ctrl + M (c) Ctrl +P (d) Ctrl + L

18.11 LET US SUM UP

With the advancement of technology, maintaining records of financial transactions
has also changed from manual to electronic form. Computerised Accounting
system has been adopted by most business organizations because of its
comparative advantages like speed, ease, security, reliability to name a few. But
these advantages come at a cost. There are chances of data being corrupt,
electricity issues, theft of data and too much reliance on computer. Still its
advantages outperform in relation to disadvantages.
Business organization should keep in mind various factors while choosing
accounting softwares as varied softwares are available in market. The main
difference between computerized accounting and manual accounting is that
ledgers are created first and then journal entries are done through vouchers
instead of journal entries being followed by ledger posting as done in manual
accounting system.

31
Computerised Accounting First step in computerized accounting system is creation of company where all
the basic details like name, address, email, mobile number, maintaining accounts
with or without inventory, financial year are filled in the software. The company
details can be altered at any stage if needed. The company can also be deleted
if required. The features and configurations help the business organization to
maintain financial record as per requirement of business. Features are applicable
to only company where as configurations are for overall Tally Software. The
next step after company creation is creating masters.

18.12 KEY WORDS

Accounting Features: The accounting features consists of general, outstanding
management, cost/profit centres, management, invoicing, budgeting and scenario
management, banking features and other features.

Alteration of Details of a Company: A process of making changes in the

details of company or any data which is misspelt or wrongly taken while putting
information during company creation process.

Computerised Accounting System: A process of digitally collecting, recording,

classifying and summarising financial data using accounting software for managerial
decision making.

Configuration: Configurations are options that help you modify the way a feature
works. Configuration can be located on vertical button bar in the last. You can
also press F12 or click F12: Configure.

Features: Features are set of capabilities which are provided as options, which
will enable you to set and maintain your records of financial statements as per
your need.

Gateway of Tally: The gateway of Tally displays menus, screens, reports and
options that you select.

Inventory Features: The inventory features consists of general, storage and

classification, order processing, invoicing, purchase and sales management and
other features.

Manual Accounting System: A process of physically maintaining books of

accounts.

Statutory and Taxation Features: You can open statutory and taxation feature
by clicking it or pressing ‘S’ or pressing F3 or by clicking F3: statutory on
the vertical button bar on right pane.

Shutting a Company: Once company is created, if you want to shut the

company which is already open, go to gateway of tally, click company info
or Press F3, a screen will appear, press shut company field or Press H or
Alt+ F1 or click F1: Shut Cmp on the right pane.

Tally ERP.9: A business accounting software for purposes of accounting,

32 inventory and payroll.
 Introduction to Computerised
18.13 ANSWERS TO CHECK YOUR PROGRESS Accounting and Creation of
Company
A 1. i) (c) 2. ii) (d) 3. iv) (d) 4. v) (c)
B 1. (c) 2. (b) 3. (c) 4. (a) 5. (b) 6. (a)

18.14 TERMINAL QUESTIONS/EXERCISES

Questions
1. Define a computerised accounting system. Distinguish between manual and
computerised accounting system.
2. Explain the considerations which are required to be kept in mind while
choosing accounting software.
3. Explain the components of Tally.
4. Distinguish between features and configurations.
Exercises
Create a company with following details in Tally ERP.9:
Name of Company S Bose Beverages Ltd. Bhartiya Book Trading
Company
Address 147/A, Jheel Industrial 4044/A/F, Rajpura Road,
Area, Delhi – 110051 Mumbai – 400007
Country India India
State Delhi Maharashtra
Contact No. 011-22590475 022-22224477
Email-id sbose@gmail.com contactinfo@btrading.com
Mobile No. 9911000012 9899477701
Books Beginning 01-04-2017 01-04-2017
From
Financial Year 01-04-2017 01-04-2017
Beginning From
Maintain Accounting with inventory Accounting with inventory
Maintain Accounting with inventory Accounting with inventory

33
Computerised Accounting
UNIT 19 CREATING MASTERS
Structure
19.0 Objectives
19.1 Introduction
19.2 Ledgers and Groups
19.3 Ledger Creation
19.3.1 Single Ledger Creation
19.3.2 Multiple Ledger Creation
19.3.3 Altering and Displaying Ledger
19.3.4 Deleting Ledger

19.4 Group Creation

19.5 Inventory Masters Creation
19.5.1 Creating Stock Group
19.5.2 Creating Stock Category
19.5.3 Creating Unit of Measure
19.5.4 Creating Godowns
19.5.5 Creating Stock Items

19.6 Altering, Display and Deleting Inventory Masters

19.7 Let Us Sum Up
19.8 Key Words
19.9 Answers to Check Your Progress
19.10 Terminal Questions/Exercises

19.0 OBJECTIVES
After studying this unit, you will be able to:
 create ledger accounts and groups in tally;
 create inventory masters for stock;
 kearn the process of deleting and altering Legder and Groups; and
 display various ledgers and inventory items.

19.1 INTRODUCTION
A chart of accounts is a list that depicts the accounts that a business use to
store and record transactions in its books of accounts. Tally ERP.9 divides chart
of accounts into two: Ledgers and Groups. In manual accounting process, Ledger
creating is next step after recording journal entries. But in computerized
accounting, ledger creation is done before journal entries because you need
ledgers to debit and credit while doing journal entries. In this unit, you will
34
learn how ledgers and groups account are created, how data related to stock/ Creating Masters
inventors can be maintained, and the way to delete or alter an display any ledger,
group and inventory masters.

19.2 LEDGERS AND GROUPS

LEDGER

Ledger is a T- shape account head. For example, Purchase account head will
be called as ‘Purchase Ledger’. To record specific transactions, you can create
ledgers as per transaction.

By default, Tally has two pre defined ledgers viz. (1) cash, and (2) Profit &
loss Account as shown in Fig. 19.1.

Fig. 19.1

To view already predefined ledgers: Go to Gateway of Tally  Accounts Info.

Ledgers  Multiple Ledgers  Display and the screen will appear as follows
as shows in Fig. 19.2.

35
Computerised Accounting

Fig. 19.2

GROUP

A group is the accounting group which consists of ledger accounts of similar

nature. For example, Bank account group will have all bank accounts classified
under it.

Tally has 198 predefined groups out of which 15 are main or primary groups
and remaining 13 are sub-groups.

Out of 15 primary groups, 9 are related to balance sheet items and remaining
6 are Profit and loss related items.

You can see in Fig. 19.3, all 28 predefined groups by going to Gateway of
Tally  Accounts Info.  Groups  Multiple Groups  Display

Fig. 19.3

36
 Creating Masters
19.3 LEDGER CREATION
19.3.1 Single Ledger Creation
Let us create ledgers for company created in Unit 18: Surbhi Ltd.
Ledger: Surbhi Capital Account
Group: Capital Account
Amount: Rs. 5,00,000
Ledger: Building
Group: Fixed Assets
Amount: Rs. 19,00,000
Creating Surbhi Capital A/c (Fig. 19.4)
 Go to Accounts Info in masters in Gateway of Tally
 Click Ledgers
 Now click single ledger - create
 Type Surbhi Capital Account in Name
 Select Under - Capital Account
 Enter 5,00,000 in opening balance on 1-Apr-19017

Fig. 19.4

Once you put opening balance, press enter and a box will appear asking you to
accept. Click ‘Yes’ and your ledger will be created. The screen in Fig. 19.5
shows that the ledger has been created:
37
Computerised Accounting

Fig. 19.5

Creating Building A/c (Fig. 19.6)

 Go to Accounts Info in masters in Gateway of Tally
 Click Ledgers
 Now click single ledger - create
 Type Building Account in Name
 Select Under- Fixed Asset Account

 Enter 2,00,000 in opening balance on 1-Apr-2017

Fig. 19.6
Once you put opening balance, press enter and a box will appear asking you
to accept as shown in Fig. 19.6. Click ‘Yes’ and your ledger will be created.
38 The screen shows the ledger has been created as shown in Fig. 19.7.
 Creating Masters

Fig. 19.7

19.3.2 Multiple Ledger Creation

Multiple Ledger creation will enable to create same class of ledgers quickly
as creating single ledger takes time.
Let us create ledger account of Furniture and Plant & Machinery.
Ledger: Furniture A/c
Group: Fixed Assets
Amount: Rs. 50,000
Ledger: Plant & Machinery A/c
Group: Fixed Assets
Amount: Rs. 1,00,000
Creating Both Ledgers (See Fig. 19.8)
 Go to Accounts Info in masters in Gateway of Tally
 Click Ledgers
 Now click multiple ledger – create
 Select Under- Fixed Asset Account
 Type Furniture Account in Name of Ledger, Press Enter (Fixed Asset
group will come automatically) as shown in Fig. 19.8.
 Enter 50,000 in opening balance on 1-Apr-19017 and press enter
 Type Plant & Machinery in Name of Ledger, Press Enter (Fixed Asset
group will come automatically).
 Enter 1,00,000 in opening balance on 1-Apr-19017
 Press Enter and again press enter
 Now, a box will appear asking you to Accept ‘Yes’ as show in
Fig. 19.8

39
Computerised Accounting

Fig. 19.8
Once you accept, both the ledgers will be created, as shown in Fig. 19.9.

Fig. 19.9

19.3.3 Altering and Displaying Ledger

Alteration of ledger is the process by which you can alter any ledger say for
spelling mistake, wrong selection of group, altering balance of ledger etc.
40
Example: To change Building A/c ledger name as ‘Land & Building’ Creating Masters

 Go to Accounts Info in masters in Gateway of Tally

 Click Ledgers
 Now click single ledger - alter
 Select Building A/c from List of Ledgers
 Change Building A/c to Land & Building A/c
 Press Y or Accept Yes
Please note: Even if ledgers are created in multiple, but alteration will always
be done in single mode only.
Display will enable to view the ledger accounts.
 Go to Accounts Info in masters in Gateway of Tally
 Click Ledgers
 Now click single ledger - Display
 Select Building A/c from List of Ledgers
 Press Y or Accept Yes

Fig. 19.10

Once you click single ledger display, the screen in Fig. 19.10 will appear and
after selecting the ledger account, the ledger display will open. You can only
view the ledger as appeared in Fig. 19.11 but no change can be done in the
ledger account.

41
Computerised Accounting

Fig. 19.11

19.3.4 Deleting Ledger

To delete a ledger:
 Go to Accounts Info in masters in Gateway of Tally
 Click Ledgers
 Now click single ledger - alter
 Select Building A/c from List of Ledgers
 Press Alt + D
 Press Y or Accept Yes
Ledger will be deleted as appeared in Fig. 19.12

42 Fig. 19.12
To delete a ledger once accounting entry has already been entered in journal, Creating Masters
you will need to delete journal entry first and then only you will be able to
delete the ledger.

19.4 GROUP CREATION

Although Tally has pre defined groups but if you wish to create new group
to meet your specific business requirement, then you can create new group as
well.
Example: Suppose you have raw material requirement which are met by
suppliers in different parts of country and therefore, you need to categorize your
creditors say as Creditors  West or East.
Group - Creditors - East
Under - Sundry Creditors
To create group (Fig. 19.13):
 Go to Accounts Info in masters in Gateway of Tally
 Click Group
 Now click single group - create
 Type Creditors- East in Name
 Select Under- Sundry Creditors
 Enter No to all other fields
 Press Enter and Accept or Press Y
Group has been created as shown in Fig. 19.14

Fig. 19.13

Once created, this will appear among list of groups as shown in Fig. 19.14:
43
Computerised Accounting

Fig. 19.14

Once group is created, you can alter, display and delete a group in the same
way as used for ledger alteration, display and deletion.
Check Your Progress A
1. Create the following ledgers for Surbhi Ltd. –
a) Profit & Loss A/c with opening balance ` 75,000
b) Sundry Creditors:
i) Vardhaman Furniture Ltd ` 10,000
ii) Jatin Electricals Ltd. ` 15,000
c) Cash ` 1,00,000
d) Punjab National Bank ` 1,00,000
e) S u n d r y D e b t o r s :

i ) S u r e s h E l e c t r i c a l s ` 7,000
ii) Vedant Hardware Store ` 11,000
2. Fill in the blanks:
a) There are _________ predefined ledgers in Tally ERP.
b) The predefined ledgers in Tally are ___________.
c) The predefined groups in Tally ERP 9 are ___________.
d) Out of 15 primary groups, ________ groups are related to Profit
& Loss A/c.
e) Discount Received Account is defined under _________ group.
44
 Creating Masters
19.5 INVENTORY MASTERS CREATION
The inventory system is same as accounting system. In accounting system, we
have ledgers, in inventory we have Stock items. Similarly, Stock group and
category replaces accounting group in inventory masters.
Stock Item: It is that goods in which a business trades in. For example, Surbhi
Ltd. trades in Bulbs - LED, CFL and Tube lights: Coloured and white
Stock Group: Stock items of similar nature or brand can be classified under
stock group. For example, CFL bulb and LED Bulb can be classified under
Bulbs.
Stock Category: It is parallel classification of a stock item. They can be classified
based on behaviour. For example, CFL Bulbs can be categorized as 6 watts
or 8 watts Bulb.
Unit of Measure: Quantity is measured in terms of units. For example, Bulbs
and tube lights can be measured in numbers (Nos.)
Godowns/Location: Stock items are stored in warehouses or godowns. For
example, CFL bulb of 6 watts is stored in Delhi West Godown.
To begin with inventory creation, let us start with the following information shown
in Table 19.1
Table 19.1
S. Stock Stock Item Price Quantity Godown
No. Group (Rs.) (Nos.)

1. Bulbs CFL (6 watts) 90 30 Delhi West

CFL (8 watts) 1190 195 Delhi East
LED (6 watts) 1190 50 Delhi East
LED (8 watts) 150 40 Delhi West

2. Tube Lights White 100 50 Delhi East

Coloured 150 60 Delhi West

19.5.1 Creating Stock Group

In the above information (Table 19.1), we can see two main stock groups:
Bulbs and Tube lights.
Create Group: Bulb
 Go to Inventory Info in masters in Gateway of Tally
 Click Stock Group
 Now click single stock group - create
 Type Bulbs in Name
 Select Under- Primary(Already Displayed)
45
Computerised Accounting  Enter Yes to ‘Should quantities of items be added’
 Press Enter and Press Y or Accept ‘Yes’
The screen shown in Fig. 19.15 will appear for stock group bulbs.

Fig. 19.15

Create Group: Tubelights

 Go to Inventory Info in masters in Gateway of Tally
 Click Stock Group
 Now click single stock group - create
 Type Tubelights in Name
 Select Under- Primary(Already Displayed)
 Enter Yes to ‘Should quantities of items be added’
 Press Enter and Press Y or Accept ‘Yes’
The screen shown in Fig. 19.16 will appear for stock group Tubelights.

Fig. 19.16

19.5.2 Creating Stock Category

Before creating stock category, we have to enable stock category. Go to F11:
Features then go to Inventory Features and set Maintain Stock Category as
‘Yes’ (see Fig. 19.17).

46
 Creating Masters

Fig. 19.17
Press Enter till you are asked to Accept ‘Yes’ or ‘No’. Now accept Yes or
Press Y.
Now creating stock category will include creation of two stock categories: 6
watts and 8 watts
Create 6 watts Stock Category:
 Go to Inventory Info in masters in Gateway of Tally
 Click Stock Category
 Now click single stock category - create
 Type 6 watts in Name
 Select Under- Primary( It will display list of categories, select primary)
 Press Enter and Press Y or Accept ‘Yes’
The screen shows in Fig. 19.18 will appear:

Fig. 19.18 47
Computerised Accounting Create 8 watts Stock Category:
 Go to Inventory Info in masters in Gateway of Tally
 Click Stock Category
 Now click single stock category - create
 Type 8 watts in Name
 Select Under- Primary (It will display list of categories. Select Primary)
 Press Enter and Press Y or Accept ‘Yes’
The screen shown in Fig. 19.19

Fig. 19.19

19.5.3 Creating Unit of Measure

 Go to Inventory Info in masters in Gateway of Tally
 Click Units of Measure
 Type will be simple, Symbol : Nos., Formal Name: Numbers and
No. of Decimal Places: 0 (If unit is Kg, then Decimal places can
be put as 1 or 2)
 Press Enter and Press Y or Accept ‘Yes’ (Fig. 19.20)

Fig. 19.20
48
Once accepted as ‘Yes’, the unit of measure will be created. Creating Masters

Units can be complex as well like a carton of 25 units. Here, If one has
2 cartons, then it would signify 50 units (195 x 19).

19.5.4 Creating Godowns

Before creating godowns, we have to enable Godowns. Go to F11: Features,
then go to Inventory Features and set Maintain Multiple Godowns as ‘Yes’
as showns in Fig. 19.21. Press Enter till you are asked to Accept ‘Yes’ or
‘No’. Now accept Yes or Press Y.

Fig. 19.21
Creating Delhi East Godown:
 Go to Inventory Info in masters in Gateway of Tally
 Click Godowns
 Now click single godown - create
 Type Delhi -East in Name
 Select Under- Primary or You can select Main Location if that Godown
is business main godown.
 Press Enter and Press Y or Accept ‘Yes’ (Fig. 19.22)
Please note one Godown with name: Main Location already exists in Godown.

Fig. 19.22 49
Computerised Accounting Similarly Delhi- West can be created and screen will appear like Fig. 19.23

Fig. 19.23

19.5.5 Creating Stock Items

To create stock item: CFL (6 watts) stored in Delhi-West; No. of Units: 30
with Price of Rs. 90 each:
 Go to Inventory Info in masters in Gateway of Tally
 Click Stock Items
 Now click single stock items - create
 Type CFL (6 Watts) in Name
 Select Under- Bulb (Stock Group)
 Select Category- 6 Watts and Units – Nos.
 Now Enter Quantity as 30
The screen will appear as showns in Fig. 19.24

50 Fig. 19.24
Once you click enter, the screen shown in Fig. 19.25 will appear: Creating Masters

Fig. 19.25

 Select Godown as Delhi west

 Type Rate as Rs. 90 and Press enter. Amount will automatically appear
on screen as shown in Fig. 19.26.

Fig. 19.26

 Press Enter and the screen will return to original stock item screen and
Accept Yes or Press Y (see Fig. 19.27)

51
Computerised Accounting

Fig. 19.27

19.6 ALTERING , DISPLAYING AND DELETING

INVENTORY MASTERS
To display any Inventory master like stock group, go to Inventory Info in Masters
in Gateway of Tally  Stock Group  Single Stock Group  Display 
Select stock Group from list of Stock group  Stock Group will be displayed.
You can only view stock group. To alter a stock group, go to single stock
group  Alter  Select stock Group from list of Stock group  Stock group
will be displayed and you can alter it as per need. If you wish to delete it,
Press Alt +D, when promoted to delete Yes or No, Press Y or Select Yes
with cursor.
Similarly Stock category, stock item, godown and Unit of measure can be
displayed and altered. But please note to delete stock group, stock category,
unit of measure or Godown, you need to delete stock item first as transaction
(Stock Item) has already been recorded by using stock group, category, unit
and godown.

To be precise, to delete the first step, the following steps need to be deleted
first and then only the first step could be deleted.

Check Your Progress B

1. Create the rest stock items which are mentioned earlier in Table 19.1
inventory master.

2. State True or False:

i) Godown is a place where stock items are stored.

ii) Accuracy is measured in units.

52
 iii) Sakshi Ltd. deals in trousers. Pieces can be created as unit of measure Creating Masters
for trousers.

iv) Main location is the pre-defined godown in Tally.

v) For deleting stock item, stock group should be deleted first and
thereafter stock item can be deleted.

19.7 LET US SUM UP

The second step after company creation is creating masters. It includes
accounting and inventory system. Accounting system consists of creating
ledger and groups. While maintaining inventory, records forms part of
inventory system. In accounting system, we have ledgers, whereas in inventory,
we have Stock items. Similarly, Stock group and category replaces accounting
group in inventory masters.

There are already two ledger accounts pre defined in tally namely, Cash Account
and Profit & Loss Account. It also consists of 28 pre-defined groups out of
which 15 are main or primary groups and 13 is sub-groups. Out of 15 primary
groups, 9 are related to balance sheet items and rest are Profit and Loss related
items. Inventory records are maintained by creating stock group, category, unit
and Godown. After this, stock items are created in inventory info.

19.8 KEY WORDS

Ledger: A permanent summary of all accounts which list individual transactions
by date.

Group: A combination of ledgers for the purpose of applying the functions. There
are 198 pre-defined groups in Tally ERP 9, out of which 15 are primary groups
and 13 are sub-groups.

Alteration of Ledger: The details of any Ledger or the group of a ledger account
may be changed at any stage in Tally.

Display of Ledger: Ledger accounts can be displayed by selecting ‘Display’ option

under gateway of Tally.

Stock Item: Stock items are the goods we manufactured, purchased and sold.
To raise item invoice, we must create stock item in Tally.

Stock Group: It is the classification or grouping of similar nature of products which

helps in managing products.

Stock Category: It offers a parallel classification of stock items. Like stock groups,
classification is done based on similarity in behavior.

Unit of Measure: Goods are measured using units.

Godown: A place where stock items are stored.

53
Computerised Accounting
19.9 ANSWERS TO CHECK YOUR PROGRESS
A 2 a) two b) Cash & Profit and Loss Account c) 198
d) 6 e) indirect Income
B 2 a) True b) False c) True d) True e) False

19.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. Define Ledger & Group. How Ledger is different from Group?
2. Differentiate between stock item, stock group and stock category.
Exercises
3. Create following ledgers and stock entries for S Bose Beverages Ltd. as
on 1st April, 19017:

LEDGER BALANCE (Rs.)

Capital 20,00,000
Profit & Loss 8,00,000
Secured Loan 10,00,000
Provision for tax 3,50,000
Sundry Creditors:
1) Rajat 40,000
2) Shriram 50,000 2,00,000
3) Renu Coffee Ltd. 70,000
4) S K Beverages Ltd. 40,000
Salaries outstanding 35,000
Rent outstanding 60,000
Land & Building 15,00,000
Plant & Machinery 8,00,000
Furniture 19,00,000
Investment 3,00,000
Stock 8,00,000
Sundry Debtors:
1) Sujeet Thandai Ltd. 8,000
2) Vedanta cold drinks 75,000 3,00,000
3) Rekha & Sanjay Ltd. 1,45,000

54 Cash in Hand 65,000

Standard Chartered Bank 4,80,000
Stock details of the company are: Creating Masters

Group Item Category (Nos.) Rate Total

Qty Rs. Rs.
Cold Drinks Orange 300 ml 350 40 14,000
600 ml 350 75 26,250
Cola 300 ml 4,257 25 10,625
600 ml 250 48 12,000
Coffee 100ml 350 1190 42,000
Instant
100ml 325 135 43,875
Brewed
Tea Darjeeling 200 600 1,20,000
Assam 250 850 2,12,500
Nilgiri 150 675 1,01,250
Thandai Badam 290 300 87,000
Kesar 230 350 80,500
Rose 250 200 50,000
4. Create following ledgers and stock entries for Bhartiya Book Trading
Company as on 1st April, 19017:
LEDGER NAME OPENING BALANCE (Rs)
Capital 15,00,000
Loan from SBI Bank 5,00,000
Provision for Depreciation 2,50,000
O/S Rent 6,000
O/S Salaries 8,000
Sundry Creditors 2,36,000
Building 6,50,000
Investment in Shares 1,60,000
Furniture 48,000
Computers 80,000
Cash in Bank 2,30,000
Cash in Hand 75,000
Stock 4,87,000
Sahakari Bank 1,25,000
Machinery 4,00,000
Debtors 2,45,000
55
Computerised Accounting Debtors (Rs.)
Kamal Book Store 45,000
Janta Stationery Store 82,000
Jetha Student Corner 1,18,000
Sundry Creditors
R V Group Ltd 47,500
Helima Book Center 85,000
Pascal Reader Store 47,500
Sabnis Book Corner 56,000

Group Category Stock item Purchase Qty Godown

price

Pre-School English Nursery Rhyme 80 750 Linking Road

Creative Writing 75 900
Maths Introduction to 65 1100
Numbers
Elementary Maths 55 1210
Operations

High School Science Physics 85 1000 P D Mello Road

Botany 88 1000

Maths Calculus 45 460 Andheri (East)

Algebra 37 750

56
UNIT 20 VOUCHER ENTRIES AND
INVOICING
Structure
20.0 Objectives
20.1 Introduction to Vouchers
20.2 Creation of Voucher and Recording Entries
20.2.1 Contra Voucher (F4)
20.2.2 Payment Voucher (F5)
20.2.3 Receipt Voucher (F6)
20.2.4 Journal Voucher (F7)
20.2.5 Sales Voucher / Invoice
20.2.6 Credit Note Voucher (Ctrl + F8)
20.2.7 Purchase Voucher / Invoice (F9)
20.2.8 Debit Note Voucher (Ctrl + F9)
20.2.9 Reversing Journal Voucher (F10)
20.2.10 Memo Voucher (Ctrl + F10)
20.2.11 Post-Dated Voucher

20.3 Altering, Deleting and Displaying Voucher Entry

20.4 Creating Voucher Type

20.5 Creating Invoices

20.5.1 Creating Account Invoice
20.5.2 Creating Item Invoice

20.6 Let Us Sum Up

20.7 Key Words
20.8 Answers to Check Your Progress
20.9 Terminal Questions/Exercises

20.0 OBJECTIVES
After studying this unit, you will be able to:
 create voucher and record journal entries;
 create invoices;
 deleting and alter voucher; and
 display after creation of voucher.

20.1 INTRODUCTION
Voucher is a document which is proof of transaction. Example: sales receipt,
purchase cash memo, bank interest statement etc. Voucher is used to enter the
57
Computerised Accounting transactions of the business so that financial statements can be prepared to
determine financial position of the business.
SCREEN OF VOUCHER ENTRY

Voucher Number Voucher Name Date & Day

Balance after Debit & Credit Amount

recording entry
Journal Entry-
Dr /Cr
Vertical Bar- Displaying
different types of Voucher

Narration for Entry

Fig. 20.1

By default you will get ‘By’ and ‘To’ instead of ‘Dr’ and ‘Cr’. If you wish
to use ‘Dr’ and ‘Cr’ for entering journal entries, Go to configuration: F12, then
Voucher Entry and then set Use Cr/Dr instead of To/By during entry as ‘Yes’.
Also, Set Warn on negative cash balance and show ledger current balances
and show balances as on Voucher date as Yes.
If you wish to skip date for faster entry, enable it as Yes as shown in Fig. 20.2.

58 Fig. 20.2
Also, Tally automatically selects the Dr or Cr for first which you cannot change, Voucher Entries and
Invoicing
and you can change thereafter Dr or Cr as per transaction. It also displays
a list of Accounts which can be debited or credited automatically in the specific
voucher. Example: Cash or Bank will be displayed in Payment or Receipt voucher
or Purchase or Sales voucher, but it cannot be shown in Journal Voucher.
Similarly, in payment voucher, Cash or Bank will only be shown while crediting.
Balance of both debit and credit should be same, otherwise transactions will
not be recorded as Tally voucher will prompt to debit or credit another account.
TYPES OF VOUCHERS
Tally has pre-defined 10 vouchers to record various types of transactions. They
are:
 Contra Voucher (F4)
 Payment Voucher (F5)
 Receipt Voucher (F6)
 Journal Voucher (F7)
 Sales Voucher / Invoice (F8)
 Purchase Voucher / Invoice (F9)
 Credit Note Voucher (Ctrl + F8)
 Debit Note Voucher (Ctrl +F9)
 Reversing Journals (F10)
 Memorandum Voucher (Ctrl + F 10)

20.2 CREATION OF VOUCHER AND

RECORDING ENTRIES
Let us record transactions for Surbhi Ltd. and understand how to create different
vouchers.
20.2.1 Contra Voucher (F4)
Contra Voucher is used to record transactions of funds transfer from bank to
cash account, cash to bank account and bank account to bank account.
Example: Surbhi Ltd. deposited cash Rs 10,000 into PNB bank.
Journal Entry: PNB Bank A/c Dr. 10000
(Bank Account)
To Cash A/c 10000
(Cash in Hand)
Create Contra Voucher as shown in Fig, 20.3:
 Go to Accounting Voucher in transactions in Gateway of Tally
 On the Vertical bar click F4: Contra or Press F4
 Contra Voucher will open with serial Number 1
 Put the Date of Transaction
 Now Cr will be on display already. Select Cash A/c from the list of ledger
account. 59
Computerised Accounting  Enter 10,000 in amount and enter
 Similarly, Dr will be on display. Select PNB A/C and enter amount 10,000
and Press enter.
 Enter Narration, if needed and again press enter
 You can now see Contra Voucher No 2. It shows that entry has been
recorded.

Fig. 20.3

Once you enter the account to be debited as PNB A/c along with amount
Rs. 10,000, the screen shown in Fig. 20.4 will appear.
This screen will display the transaction type as cash since cash has been the
deposited amount and Bank name can also be specified as PNB and press
enter. Next you are required to put details of cash deposited i.e. Denominations
of money. In our case, we have deposited 5 notes of Rs. 2000 amounting
to Rs. 10,000. Once these details have been put, you will be taken to original
screen of Contra Voucher and prompted to Accept ‘Yes’ or ‘No’. It is not
mandatory to put denominations of currency deposited, one can skip the same.

60 Fig. 20.4
 Voucher Entries and
Invoicing

Fig. 20.5

20.2.2 Payment Voucher (F5)

Payment Voucher is used to record transactions of all payments made through
bank or by cash.
For example, Surbhi Ltd. paid Rs 2,000 by cheque to Vardhaman Furniture
Ltd.
Journal Entry: Vardhaman Furniture Ltd.
(Sundry Creditors) Dr 2000
To PNB A/C (Bank A/c) 2000
Create Payment Voucher as shown in Fig. 20.6:
 Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F5: Payment or Press F5
 Payment Voucher will open with serial Number 1
 Put the Date of Transaction
 Now Dr will be on display already. Select Vardhaman Furniture Ltd. from
the list of ledger account.
 Enter Rs. 2,000 in amount and enter
 Similarly, Cr will be on display. Select PNB A/C and enter amount Rs
2000 and Press enter. You may be promoted to enter transaction type
(cheque) and cheque range
 Enter Narration, if needed and again press enter
 You can now see Payment Voucher No 2. It shows that entry has been
recorded.
61
Computerised Accounting

Fig. 20.6

Tally also shows warning on negative cash balances, as shown in Fig. 20.7.
If balance goes negative i.e. you are making more payment than cash held by
you, then screen will appear as follows:

Fig. 20.7

20.2.3 Receipt Voucher (F6)

Receipt Voucher is used to record transactions of all receipts of cash or receipt
through bank.
For example, Surbhi Ltd. received Rs 5,000 by cheque from Suresh Electrical
Fittings Ltd.
Journal Entry: PNB A/C (Bank A/c) Dr 5,000
To Suresh Electrical Fittings Ltd. 5,000
(Sundry Debtors)
Create Receipt Voucher (see Fig. 20.8):

62  Go to Accounting Voucher in transactions in Gateway of Tally

 On the Vertical bar click F6: Receipt or Press F6 Voucher Entries and
Invoicing
 Receipt Voucher will open with serial Number 1
 Put the Date of Transaction
 Now Cr will be on display already. Select Suresh Electrical Fittings Ltd.
from the list of ledger account.
 Enter Rs. 5000 in amount and enter
 Similarly, Dr will be on display. Select PNB A/C and enter amount Rs
5000 and Press enter. You may be promoted to enter transaction type
(cheque) and cheque range, which you may skip.
 Enter Narration, if needed and again press enter
 You can now see Receipt Voucher No 2. It shows that entry has been
recorded.

Fig. 20.8

20.2.4 Journal Voucher (F7)

Journal Voucher is used to record transactions which does not fit in any other
voucher i.e. receipt or payment or purchase or sales or it can be used to pass
adjustment entries which do not involve cash or bank.
For example, Surbhi Ltd. incurred an expenditure on printing and stationery
amounting to Rs 1,000, as office cost and not recording it as separate ledger
transaction.
It is a two step procedure: (1) creating purchase voucher for printing and
stationery and (2) recording it as office cost in journal voucher.
(Before starting, prepare Printing & Stationery A/c & Office Costs A/c in account
info (ledgers). Both comes under indirect expenses
63
Computerised Accounting Step 1: Creating Purchase Voucher
Journal Entry: Printing and Stationery A/c Dr 1000
(Indirect Expense A/c)
To Cash (Cash in Hand) 1000
Create Purchase Voucher (see Fig. 20.9):
 Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F9: Purchase or Press F9
 Purchase Voucher will open with serial Number 1
 Click F12: Configure and a box with Purchase Standard Configuration will
open.
 Again press F12 and it will display more options
 Set Allow expenses/fixed assets in purchase voucher as Yes
 Press enter till you return to voucher screen
 Put the Date of Transaction
 Now Cr will be on display already. Select Cash A/c from the list of ledger
account.
 Enter Rs. 1,000 in amount and enter
 Similarly, Dr will be on display. Select Printing and Stationery and enter
amount Rs. 1,000 and Press enter.
 Enter Narration, if needed and again press enter
 You can now see Purchase Voucher No 2. It shows that entry has been
recorded.

64 Fig. 20.9
 Voucher Entries and
Step 2: Creating Journal Voucher Invoicing

Journal Entry: Office Cost A/c Dr 1000

(Indirect Expense A/c)
To Printing and Stationery A/c 1000
(Indirect Expense A/c)

Create Journal Voucher (see Fig. 20.10):

 Go to Accounting Voucher in transactions in Gateway of tally

 On the Vertical bar click F7: Journal or Press F7

 Purchase Voucher will open with serial Number 1

 Put the Date of Transaction

 Now Dr will be on display already. Select Office Cost A/c from the list
of ledger account.

 Enter Rs. 1000 in amount and enter

 Similarly, Cr will be on display. Select Printing and Stationery and enter

amount Rs. 1000 and Press enter.

 Enter Narration, if needed and again press enter

 You can now see Journal Voucher No 2. It shows that entry has been
recorded.

Fig. 20.10
65
Computerised Accounting Check Your Progress A
1. Where do we record all types of adjustment entries in Tally?
a) Payment b) Receipt c) Journal d) Contra
2. Which voucher is used to transfer amount from one bank to another?
a) Contra b) Receipt c) Journal d) Payment
3. Which submenu is used to create voucher in Tally?
a) Account Info b) Accounting Voucher c) Inventory Info
d) Inventory Voucher
4. To create a receipt voucher in Tally, we have to press?
a) F5 b) F6 c) F8 d) F9
5. Which voucher is created by use of F4 Key?
a) Contra b) Receipt c) Journal d) Payment
20.2.5 Sales Voucher /Invoice
Sales voucher is used to record transactions of goods sold on cash (cheque)
or credit basis.
For example, Surbhi Ltd. sold 10 white Tubelights @ 110/- and 8 LED
6 watts @150/- to Suresh Electrical Fittings Ltd.
Journal Entry: Suresh Electrical Fittings Ltd. Dr 2300
(Sundry Debtors)
To Sales A/c (Sales A/c) 2300
Create Sales Voucher (see Fig. 20.11):
 Prepare Sales A/c under account info (ledgers) under Sales a/c group and
put inventory values to be effected as ‘Yes’.
 Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F8: Sales or Press F8. Please ensure that sales
voucher is opened in ‘As Voucher’ mode. On vertical button panel on
right side, you can find as voucher or as invoice above post dated voucher
option. The written mode on right panel is the one not in use. Set that
as voucher mode. Or you can press V.
 Sales Voucher will open with serial Number 1
 Put the Date of Transaction and Reference No, if available
 Now Dr will be on display already. Select Suresh Electrical Fittings Ltd.
A/c from the list of ledger account. It will ask buyers details, enter details
if available otherwise press enter and method of adjustment as new
reference.
 Enter Rs. 2,300 in amount and enter
 Similarly, Cr will be on display. Select Sales A/c and Press enter

66
 Voucher Entries and
Invoicing

Fig. 20.11

 Now, Inventory allocation box will open.

 Type name of item as White and list of stock item will display towards
your right. Select white (see Fig. 20.12).

Fig. 20.12

 Now inventory allocation for white tube light will open.

 Enter godown name where it is stored and quantity and rate. Amount will
be displayed automatically as shown in Fig. 20.13.

Fig. 20.13 67
Computerised Accounting  Similarly enter details for LED 6 watts bulb (see Fig. 20.14).

Fig. 20.14

Next, the screen shown in Fig. 20.15 will appear:

68 Fig. 20.15
 Voucher Entries and
Invoicing

Fig. 20.16

 Press enter till you return to original screen of sales voucher

 Enter Narration, if needed and again press enter
 You can now see sales Voucher No 2. It shows that entry has been recorded
(Fig. 20.17).

Fig. 20.17

20.2.6 Credit Note Voucher (Ctrl + F8)

Credit Note voucher is used to record transaction of sold goods returned back
by buyer. 69
Computerised Accounting Example: Suresh Electrical Fittings Ltd. returned 2 white Tubelights being
defective goods.
Journal Entry: Sales A/c Dr 160
To Suresh Electrical Fittings Ltd.
(Sundry Debtors) 160
Create Credit Note Voucher:
 Before, recording transactions go to F11: inventory Features and Set Use
debit note and credit note as Yes.
 Now, Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F8: Credit Note Voucher or Press Ctrl + F8
 Credit Note Voucher will open with serial Number 1
 Put the Date of Transaction and original invoice No, if available
 Now Cr will be on display already. Select Suresh Electrical Fittings Ltd.
A/c from the list of ledger account. It will ask buyers details, enter details
if available otherwise press enter. Also, it will ask method of adjustmen :
select against reference no 1 and amount Rs. 220
 Similarly, Dr will be on display. Select Sales A/c and Press enter and enter
details of goods returned
 Once it is filled, the screen shown in Fig. 20.18 will appear:

Fig. 20.18

 Enter Narration, if needed and again press enter

 You can now see credit note Voucher No 2. It shows that entry has been
recorded

70
20.2.7 Purchase Voucher/Invoice (F9) Voucher Entries and
Invoicing
Purchase voucher is used to record transaction of goods bought on cash (cheque)
or credit basis.
For example, Surbhi Ltd. bought 15 white Tubelights @ 100/- and
5 CFL 8 watts @120/- from Jatin Electrical Ltd.
Journal Entry: Purchase Account Dr 2100
(Purchase Account)
To Jatin Electrical Ltd. (Sundry Creditors) 2100

Create Purchase Voucher:

 Purchase A/c under account info (ledgers) under purchase A/c group has
been already made while recording entry for Printing and Stationery and
please note to put inventory values to be effected as ‘Yes’.
 Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F9: Purchase or Press F9. Please ensure that
purchase voucher is opened in ‘As Voucher’ mode. On vertical button panel
on right side, you can find as voucher or as invoice above post dated
voucher option. The written mode on right panel is the one not in use.
Set that as voucher mode. Or you can press V.
 Purchase Voucher will open with serial Number 2
 Put the Date of Transaction and Reference No, if available
 Now Cr will be on display already. Select Jatin Electrical Ltd. A/c from
the list of ledger account. It will ask buyers details, enter details if available
otherwise press enter and method of adjustment as new reference
 Enter Rs. 2100 in amount and enter
 Similarly, Dr will be on display. Select Purchase A/c and Press enter and
enter details of goods purchased
 Once it is filled, the screen shown in Fig. 20.19 will appear as below:
 Enter Narration, if needed and again press enter

Fig. 20.19 71
Computerised Accounting  You can now see Fig. 20.20 Purchase Voucher No 2. It shows that entry
has been recorded.

Fig. 20.20

20.2.8 Debit Note Voucher (Ctrl +F9)

Debit Note voucher is used to record transactions of purchased goods returned
back to seller or to record price consideration changes.

For example: Jatin Electrical Ltd. sent 2 CFL 8 watts @ Rs 120/- and
1 white Tubelight defective which was returned by Surbhi Ltd.

Journal Entry: Jatin Electrical Ltd. Dr 340

(Sundry Creditors)
To Purchase Account 340
Create Debit Note Voucher:
 Before, recording transactions go to F11: inventory Features and Set
Use debit note and credit note as Yes.
 Now, Go to Accounting Voucher in transactions in Gateway of tally
 On the Vertical bar click F9: Debit Note Voucher or Press Ctrl + F9
 Debit Note Voucher will open with serial Number 1
 Put the Date of Transaction and original invoice No, if available
 Now Cr will be on display already. Select Suresh Electrical Fittings Ltd.
A/c from the list of ledger account. It will ask buyers details, enter details
if available otherwise press enter. Also, it will ask method of adjustment :
select against reference no. 1 and amount 220
 Similarly, Dr will be on display. Select Sales A/c and Press enter and enter
72 details of goods returned
 Once it is filled, the screen in Fig. 20.21 will appear: Voucher Entries and
Invoicing

Fig. 20.21

 Enter Narration, if needed and again press enter

 You can now see the screen in Fig. 20.22 Purchase Voucher No 2. It
shows that entry has been recorded

Fig. 20.22

20.2.9 Reversing Journal Voucher (F10)

They are special journals that are reversed after the specified date by the user.
They are effective only till that date and are effective only when they are included
in reports. 73
Computerised Accounting To enable this voucher, go to accounting features: F11 and Set Use reversing
Journals and optional vouchers as Yes.
For example: For Pay Projections of employees
20.2.10 Memo Voucher (Ctrl + F10)
It is a non accounting voucher which does not affect books of account. These
entries are stored in a separate Memo Register. Later on, you can convert this
into regular voucher.
To enable this voucher go to accounting features: F11 and Set Use reversing
Journals and optional vouchers as Yes.
For example, Making suspense payments
20.2.11 Post–Dated Voucher
It is used for entering such transactions which occur frequently on a regular
basis.
Example: Instalments payment for vehicle on hire-purchase

20.3 ALTERING, DELETING AND DISPLAYING

VOUCHER ENTRY
To view voucher entry done for transactions, Go to gateway of Tally and then
‘Display’ and then click ‘Day Book’ (see Fig. 20.23).

Fig. 20.23

On the vertical bar on top, Press F1: Detailed or Alt +F1 to get more details
of journal entry.
To Alter any journal entry recorded in voucher, Press the specific entry and
the voucher screen will appear as shown in Fig. 20.24. Now, you can alter
the amount, voucher type by clicking the voucher which you wish to convert
to or change any account ledger wrongly credited or debited.
74
 Voucher Entries and
Invoicing

Fig. 20.24

To delete any journal entry recorded in voucher, Press the specific entry and
now again, the voucher screen will appear and you can delete by pressing Alt+D.
When prompted accept Yes or Press Y as seen in Fig. 20.25.

Fig. 20.25

20.4 CREATING VOUCHER TYPE

Surbhi Ltd. wishes to record petty cash transactions in petty cash voucher instead
of pre- defined Payment voucher.
Create New Voucher Type (see Fig. 20.26):
 Go to Accounts Info in masters in Gateway of Tally
 Click Voucher Types
 Now click Create
 Type Name- Petty Voucher class 75
Computerised Accounting  Select type of voucher- Payment and under abbreviation – Pymt will come
automatically
 Select method of vouching numbering as automatic
 Set allow narration in voucher as Yes and set rest as No
 Skip Print voucher after saving a No
 Skip Name of class
 Press Y or Accept Yes

Fig. 20.26

 New Voucher class under payment is created

 Now go to accounting voucher in Gateway of Tally and click payment
voucher or F5 (see Fig. 20.27).

Fig. 20.27

 Select Voucher Type: Petty Cash Voucher

 Now you can record the entry as required
76
 To display, alter and delete, go to Accounts Info in masters in Gateway Voucher Entries and
Invoicing
of Tally
 Click Voucher Types
 Now click display and List of all vouchers type will be displayed and select
type of voucher as required
 To alter, click alter and select voucher type then changes can be done
as required
 To delete, click alter and select voucher type then press Alt +D and when
promoted select Yes or Press Y

20.5 CREATING INVOICES

Tally allows creating and recording transactions as invoices as well. Example:
You can record sales and purchase transactions in form of invoice. It allows
recording transactions as invoice in two forms: (1) Account Invoice (to raise
invoices for service rendered) and (2) Item Invoice (to raise invoice with
item details).
To enable invoicing, go to F11: features and Set Allow Invoicing and record
purchases in invoice mode as Yes in both accounting and inventory Feature.
Also, make sure in both sales and purchase ledger, ‘Inventory values are affected’
are set as ‘Yes’.
20.5.1 Creating Account Invoice
For example, Surbhi Ltd. provided advisory to Ramesh Infotech Ltd. for
electrical fittings for Rs 2000.
 Go to Accounting Voucher in Gateway of Tally
 Go to F8: Sales
 Click Accounting Invoice and the screen will appear as shown in
Fig. 20.28.

Fig. 20.28
 Select the date and enter Party name: Ramesh Infotech Ltd. (Create ledger
by pressing Alt + C) 77
Computerised Accounting  Create Advisory Fees ledger (Alt+ C)
 Select Advisory Fees in Particulars
 Enter Rs. 2,000 as Amount
The screen shown in Fig. 20.29 will appear

Fig. 20.29
 Enter Narration, if needed and again press enter and entry will be recorded

20.5.2 Creating Item Invoice

For example: Surbhi Ltd. sold 5 White Tubelights to Garg Electricals and Fittings
Ltd. on 1st May, 2017
 Go to Accounting Voucher in Gateway of Tally
 Go to F8: Sales
 Press F12: configure and Set Use common ledger A/c for item allocation
as ‘Yes’
 Click Item Invoice and the screen will appear as shown in Fig. 20.30.

78 Fig. 20.30
 Enter Party name as Garg Electricals and Fittings Ltd. (Create ledger using Voucher Entries and
Invoicing
Alt + C)
 Enter Sales A/c as Sales Ledger
 Enter item name, godown and quantity
 Rate and amount will be automatically displayed.
 Enter Narration, if needed and again press enter and entry will be recorded
The screen will appear as shown in Fig. 20.31

Fig. 20.31

Please Note:
Recording Discounts Transactions
Discount may be classified into two types: (1) Trade Discount which is offered
at the time of purchase, for example, when goods are purchased in bulk or
to retain loyal customers. (2) Cash Discount which are offered to customers
as an incentive for timely payment of their liabilities in respect of credit purchases.
In books of account, trade discount is not separately shown but transactions
are recorded at net value i.e. List price – Trade discount.
In tally, to record trade discount in invoices, go to inventory features and set
‘Use separate discount column in invoices as ‘Yes’.
And then while preparing invoice, trade discount can be recorded and final entry
will be reflected at net amount only.
Suppose Surbhi Ltd. purchased 24 CFL (8 watts) bulbs @ Rs. 120/- each
from Jatin Electricals Ltd. at 5% trade discount. The screen will appear like
Fig. 20.32:
79
Computerised Accounting

Fig. 20.32

To record cash discount, normal journal entry will be recorded in voucher. Two
ledgers i.e. Discount received (Indirect Income) and Discount Allowed (Indirect
Expense) will be created and then transaction will be recorded accordingly.
Check Your Progress B
1. Record the following journal entries in the books of Surbhi Ltd.
a) Purchased Plant & Machinery for Rs. 15,000 from Rita & Sons Pvt.
Ltd.
b) Received Rs. 10,500 in final settlement from Vedant Hardware Store.
c) Salaries paid to staff by cheque Rs. 11,000.
d) Paid electricity bill Rs. 1,000; Municipal tax Rs. 200 in cash;
Entertainment expenses Rs. 450.
e) Withdrew Rs. 5,000 for personal use.
f) Paid Jatin Electricals Rs. 1,500 for goods purchased.
2. Multiple Choice Questions:
i) Which key is used to post entry in Debit note in Tally?
a) F7 b) F8 c) Ctrl+F9 d) Ctrl+F8
ii) Where do we record Credit purchase of furniture in Tally?
a) Purchaseb) Payment c) Journal d) Receipt
iii) Sales can be entered in which format?
a) Invoice b) Voucher c) Both of them d) None of them
iv) Which one of the invoice is/are used for service rendered?
a) Accounting Invoice b) Item Invoice c) Both of them

80 d) None of them
 Voucher Entries and
20.6 LET US SUM UP Invoicing

The third step after creation of company and ledgers is recording entries
through vouchers. Voucher is a document that records financial transaction and
serves as the proof that the transaction has been carried out. Tally helps in
recording financial transactions with the help of 8 main vouchers and others
like reversing journal, memorandum and post dated vouchers. The recorded
transaction can be viewed in day book. In day book, one can alter or delete
any voucher entry. Tally allows creating and recording transactions as invoices
as well. It allows recording transactions as invoice in two forms: Account Invoice
(to raise invoices for service rendered) and Item Invoice (to raise invoice with
item details).

20.7 KEY WORDS

Voucher: A voucher is the primary online document for recording transactions

Contra Voucher: A voucher used to record transactions of funds transfer from

bank to cash account, cash to bank account and bank account to bank account

Payment Voucher: A voucher which is used to record transactions of all

payments made through bank or by cash

Receipt Voucher: A voucher which is used to record transactions of all receipt

of cash or receipt through bank

Journal Voucher: A voucher which is used to record transactions which does

not fit in any other voucher i.e. receipt or payment or purchase or sales or
it can be used to pass adjustment entries which do not involve cash or bank

Sales Voucher: A voucher which is used to record transaction of goods sold

on cash (cheque) or credit basis

Credit Note Voucher: A voucher which is used to record transactions of sold

goods returned back by buyer

Purchase Voucher: A voucher which is used to record transactions of goods

bought on cash (cheque) or credit basis

Debit Note Voucher: A voucher which is used to record transaction of purchase

goods returned back to seller.

Accounting Invoice: An invoice created to record transactions for services

rendered

Item Invoice: An invoice created to record item details

20.8 ANSWERS TO CHECK YOUR PROGRESS

A 1. (c) 2. (a) 3. (b) 4. (b) 5. (a)

B 2 (i) (c) (ii) (c) (iii) (c) (iv) (a)

81
Computerised Accounting
20.9 TERMINAL QUESTIONS / EXERCISES
Exercises

Transaction Item Qty Amount

Purchase from Renu Coffee Ltd. Coffee 100 13,500

Brewed
Sale to Sujeet Thandai Ltd. in cash Thandai 125 25,000
Rose
Sujeet Thandai returned goods not being 20
upto mark
Paid money to Renu in full settlement for
the transaction at Sr. No. 1 above 12,800
Received from Vedanta Cold drinks in
full settlement 74,500
Purchase from Sangeeta Beverages & Tea 50 42,500
sons Assam
Sale to Suruchi Cold drinks (Trade Cold 150 units List Price
discount 10% on list price) Drink Rs. 30/- each
300 ml
Orange

Purchased machinery 25,000

Paid insurance premium 4,000

Depreciation on furniture @ 20% and

Machinery @ 10%
Sold all the investment 5,00,000
Paid 1. Outstanding Salaries 20,000
2. Electricity 10,000
3. Telephone 5,000
4. Current Salaries 50,000
5. Rent (including outstanding) 70,000
6. Tax of last year 2,30,000

Outstanding
1. Total Salaries 50,000
2. Total Provision for Tax 2,40,000
3. Total Rent outstanding 90,000

Questions
1. Define voucher and Discuss different types of vouchers.
2. Explain how a new voucher type is created and its use?

82 3. What are post-dated vouchers? Explain its use.

Exercises Voucher Entries and
Invoicing
2. Record the following transactions in the books of Bhartiya Book Trading
Company that took place during the period:
a) Goods are purchased from these parties
Party name Stock item Godown Qty
Sabnis Corner Nursery Rhyme Linking Road 100
Helima Book Center Maths- Calculus Andheri (East) 200
Saraswati Store Botany P D Mello Road 150
b) Goods are sold to these parties
Party name Stock item Godown Qty Selling
price

Janta Stationery Elementary Maths Linking 550 75

Store Operations Road

Omtex Store Botany P D Mello 250 105

Road

Kamal Book Calculus Andheri 475 55

Store (East)

Janta Stationery Physics P D Mello 670 100

Store Road
c) Withdrew Rs. 50000 from Sahakari bank for business purpose.
d) Incurred the following expenses and earned the following incomes during
the period:

EXPENSES AMOUNT MODE

(RS.)
Printing & Stationery 200 Cheque
Electricity charges 6000 Cheque
Miscellaneous expenses 820 Cash
Advertisement 1960 Cheque
Office expenses 2000 Cheque
Interest on loan 35000 Cheque
Refreshment expenses 340 Cheque
Administrative expenses 3400 Cheque
Commission received A/c 5000 Cheque

83
Computerised Accounting e) Charge Depreciation @ 10% on furniture, 20% on computer, and 12.5%
on Machinery and 7.5% on Building
f) Received from Janta Stationery Store Rs. 1,45,000 in total for full settlement.
3. Create a Company as “Tech Comp & Sons” in Tally with Inventory
Management. (Assume rest details hypothetically). Pass the following entries:

a) Sujeet started “Tech Comp & Sons” by bringing Capital Rs.10,50,000/

- Cash on 1st April, 2017.

b) He deposited Rs. 5,90,000/- cash at HDFC bank and purchased

building for Rs. 2,50,000 and Furniture for Rs. 50,000.

c) He purchased the following items from Computer Lab Ltd. on credit:

Computer – 5 Nos. @ 25000/- each

Mouse – 20 Nos.@ 245/- each

Sound Card – 10 Nos.@ 2000/- each

64 GB RAM – 12 Nos.@ 2700/- each

Speakers – 5 Set@ 8000/- each

LCD Monitors – 10 Nos.@ 8000/- each

Keyboard – 18 Nos.@ 450/- each

d) He made the following payments to Computer Lab Ltd. in full

settlement:

Bank for Rs. 4,50,000

Cash for Rs. 1,50,000

e) He sold the following items to Somnath Traders in Cash:

Computer – 3 Nos. @ 32,500/- each

64 GB RAM – 5 Nos. @ 3,200/- each

Mouse –2 Nos. @ 300/- each

f) He sold the 2 set of speakers & 10 Nos. of LCD Monitors worth

Rs. 24,200/- & Rs. 85,000/- to Crack My PC.

g) He received Rs. 36,000/- as commission from Seva Kendra Hub by

cash for consultancy services.

h) He paid House Rent for Rs. 5,000/- by cash.

84
i) He withdrew Rs. 25,000/- cash from Bank for personal use. Voucher Entries and
Invoicing
j) He purchased furniture for Rs. 25,000/- by cash for office use.

k) He paid electricity bill, salaries and miscellaneous expenses for Rs.

1,200/-, Rs. 10,000/- and Rs 860/- respectively by cash.

85
Computerised Accounting
UNIT 21 PREPARATION OF
REPORTS
Structure
21.0 Objectives
21.1 Introduction
21.2 Financial Statements
21.2.1 Balance Sheet
21.2.2 Profit and Loss Account
21.2.3 Trial Balance
21.2.4 Ratio Analysis

21.3 Books and Registers

21.3.1 Day Book
21.3.2 Purchase and Sales Register
21.3.3 Cash/Bank Books

21.4 Statements of Accounts

21.5 Statistics
21.6 Restore and Backup of Data
21.7 Let Us Sum Up
21.8 Key Words
21.9 Answers to Check Your Progress
21.10 Terminal Questions/Exercises
21.11 Appendixshort-cut Keys in Tally

21.0 OBJECTIVES
After studying this unit, you will be able to:
 display financial statements and inventory reports in Tally; and
 customize and analyse reports.

21.1 INTRODUCTION
After recording transactions, Tally helps user to view different reports to assess
the financial health and performance of the firm. As soon as the transactions
are entered into the tally, the preparation of reports is done by Tally automatically
The tally software creates automatically all crucial and important financial
statements like balance sheet, profit and loss account, stock summary, trial
balance, day book etc. The user can reach to the transaction level from report
by pressing enter key on the required item. The reports can be customized
86 as well as per user needs.
 Preparation of Reports
21.2 FINANCIAL STATEMENTS
Financial Statements shows the financial health of the business. It summarizes
the business transactions for use by the various stakeholders. Financial statements
include:

a) Balance Sheet b) Profit and Loss Account c) Cash Flow Statement

21.2.1 Balance Sheet

It is a financial statement that reports the financial position of the business as
on a specific data. It shows a balance between assets and liabilities signifying
Assets = Liabilities + Capital

You can view balance sheet on Gateway of Tally under Reports. Alternatively,
if you have set ‘Use separate menu for Final Accounts Statements as ‘yes’
in General Configurations, then you can find balance sheet under ‘Final
Accounts’.

The balance Sheet of Surbhi Ltd. will appear as seen in Fig. 21.1.

Fig. 21.1

You can view detailed balance Sheet by using F1: Detailed or in condensed
form.

Also you can see the balance sheet on different dates like on 1st April, 2017
and 1st May, 2017 and the same will show effect on stock valuation on
different dates.

The balance sheet gets updated automatically after each transaction once
recorded.
87
Computerised Accounting 21.2.2 Profit and Loss Account
Profit and Loss Account or Income and Expenditure Statement is a financial
statement which shows the revenues, cost and expenses for a specified period.
It gets updated automatically after each transaction and displays information
based on primary groups.

You can view Profit and Loss Account on Gateway of Tally under Reports.
Alternatively, if you have set ‘Use separate menu for Final Accounts Statements
as ‘yes’ in General Configurations, then you can find Profit and Loss Account
under ‘Final Accounts’. You can view detailed Profit and Loss Account by
using F1: Detailed or in condensed form.

The Profit and Loss Account of Surbhi Ltd. will appear as shown in Fig. 21.2.

Fig. 21.2

Also you can see the Profit and Loss Account on different dates like on 1st
April, 2017 and 1st May, 2017 and the same will show effect of stock and
expenses and income on different dates.

21.2.3 Trial Balance

A trial balance is a book-keeping worksheet in which the balances of all ledgers
are compiled into debit and credit columns. The objective is to ensure arithmetical
accuracy. The total of debit and credit should be equal. A trial balance is usually
prepared at the end of reporting period.

You can view Trial Balance on Gateway of Tally under Reports and by using
F1: Detailed or in condensed form.

The Trial Balance of Surbhi Ltd. will appear as in Fig. 21.3.

88
 Preparation of Reports

Fig. 21.3

21.2.4 Ratio Analysis

Ratio Analysis is a form of financial statement analysis that is used to obtain
a quick indication of a firm’s financial performance in several key areas. It
evaluates the firms or business on various aspects like liquidity, efficiency,
profitability and solvency. The ratios are categorized as Short-term Solvency
Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios,
and Market Value Ratios.
You can view Ratio Analysis on Gateway of Tally under Reports. Alternatively,
if you have set ‘Use separate menu for Final Accounts Statements as ‘yes’
in General Configurations, then you can find Ratio Analysis under ‘Final
Accounts’.
The Ratio Analysis of Surbhi Ltd. will appear as shown in Fig. 21.4.

Fig. 21.4
89
Computerised Accounting
21.3 BOOKS AND REGISTERS
Tally updates all books, ledgers and registers as soon as the transactions are
entered.

21.3.1 Day Book

It displays all the transactions recorded through vouchers i.e. journal entries.
It displays the last date transactions that are recorded for the business. So you
can view entries of specific date by changing the date. You can see F2: Date
on vertical button panel or press F2 from Keyboard.

You can view Day Book under Display on Gateway of Tally. The Day book
of Surbhi Ltd. will appear as in Fig. 21.5 and 21.6 for two periods (April
& May). Please note that the entries are shown on 1st April, 2017 as author
is working on educational mode.

Fig. 21.5

90 Fig. 21.6
21.3.2 Purchase and Sales Register Preparation of Reports

Purchase and sales register shows the details about the purchases made and
goods sold by the firm or business and also help in tracking movement of goods
to godowns. It can also display the purchases made in graphical form if you
set the ‘Show graphs in monthly reports’ under General Configurations as ‘Yes’.
You can view Purchase and sales register under Accounts Book under Display
on Gateway of Tally. The Purchase and Sales Register of Surbhi Ltd. will appear
as in Fig. 21.7 and 21.8.

Fig. 21.7

Fig. 21.8
91
Computerised Accounting 21.3.3 Cash /Bank Books
It displays balances as and when transactions that affect cash and bank balances
are recorded. You can view Cash/ Bank Books under Accounts Book under
Display on Gateway of Tally. If you press enter on cash, you can view monthly
ledger summary as well. The Cash/ Bank Books of Surbhi Ltd. will appear
as shown in Fig. 21.9 and 21.10.

Fig. 21.9

Fig. 21.10
92
 Preparation of Reports
21.4 STATEMENT OF ACCOUNTS
It displays receivables and payables of the business or firm. They form important
part of working capital. They help in knowing about the financial health as well
as short term liquidity position of the firm or business. To view Outstandings,
go to gateway of tally, then display and then statement of accounts. Within
Outstandings, you can find receivables and payables and Ledger and group as
shown in Fig 21.11.

Fig. 21.11

Bills Receivables (see Fig. 21.12) and Payables (see Fig. 21.13) display the
sundry debtors’ and creditors’ bill wise till date. To view bill wise details, set
this option as ‘yes’ under accounting features.

93
Computerised Accounting

Fig. 21.12

Fig. 21.13

Similarly, you can view ledgers and group wise Outstandings as well.

21.5 STATISTICS
Statistics help in knowing the total masters and vouchers created for business
transactions. To view Statistics, go to gateway of tally, then display and then
statement of accounts (Fig. 21.14).
94
 Preparation of Reports

Fig. 21.14

You can also view stock summary by clicking ‘Stock Summary’ on gateway
of tally under reports (Fig. 21.15).

Fig. 21.15

Receipts and Payment account can be viewed under display menu (Fig. 21.16).

95
Computerised Accounting

Fig. 21.16

21.6 RESTORE AND BACKUP OF DATA

Backup

Backup is a process of creating a copy to protect data at different location

from threat of data loss and data corruption. It can be taken daily or weekly
or monthly depending upon business need. Tally allows you to do backup of
data manually and automatically. To automatically back up data set ‘Enable auto
back’ as ‘Yes’ in Company Info under alter.

The data can be manually backup by going to Gateway of Tally, then Company
Info and then, backup.

The ‘backup companies on Disk’ appears and by default, the source folder
is set to current location where data files are stored. In destination, enter where
data backup need to be store and press enter. Then select the company or
companies from list of Companies you want to create backup for and then,
End of List.

Restoring Data from Backup File

It allows you to restore the data backup taken earlier. It can be done manually
or auto back also. To restore it, go to company info and then restore.

The restore companies on Disk appear into two sections: Backup and Auto
Back. In destination field, specify where data has to be restored and in source
field, where data backup is stored. Then select the company or companies you
wish to restore.
96
Check Your Progress A Preparation of Reports

1. Fill in the blanks –

a) Daybook displays the transaction belonging to ........................... date.

b) Ledger outstanding statement displays ........................... bills and

settled invoices.

c) For detailed view of any report ........................... key is used.

d) Bills receivables details can be viewed under ........................... under

statements of accounts.

e) The status report displays ........................... for company.

21.7 LET US SUM UP

The preparation of reports is the last step in Tally ERP.9. The user need not
to prepare reports, but it automatically gets prepared as each transaction is
entered in Tally ERP.9. The reports which are critical for determining financial
health & performance of business are reflected on main pane on gateway of
Tally under ‘Reports’. These include Balance Sheet, P&L A/c, Stock Summary
and Trial Balance. Others like Day Book, Receivables, Payables, Cash/Bank
Book can be found under Display under Reports.

21.8 KEY WORDS

Balance Sheet: It is a financial statement that reports a business financial
position as on a specific data. It shows a balance between assets and liabilities.
Day Book: It displays all the transactions recorded through vouchers i.e. journal
entries. It displays the last date transactions that are recorded for the business.
Financial Statement: Financial Statements shows the financial health of the
business. It summarizes the business transactions for use by the various
stakeholders.
Outstandings: It displays receivables and payables of the business or firm.
They help in knowing about the financial health as well as short term liquidity
position of the firm or business.
Payables: Bills Payables display the sundry creditors’ bill wise till date.
Profit & Loss Account: A financial statement which shows the revenues, cost
and expenses for a specified period.
Purchase Register: Purchase register shows the details about the purchases
made by the firm or business and also help in tracking movement of goods
to godowns.
Receivables: Bills Receivables display the sundry debtors’ bill wise till date.
Sales Register: Sales register shows the details about the goods sold by the
firm or business and also help in tracking movement of goods from godowns.
97
Computerised Accounting
21.9 ANSWERS TO CHECK YOUR PROGRESS
1. a) Last voucher entry
b) History or pending
c) Alt+F1
d) Outstandings
e) Both the masters & vouchers created

21.10 TERMINAL QUESTIONS/EXERCISES

Questions
1. Write short note on ‘Preparation of Reports’?
2. What books and registers or financial statements can be viewed in Tally
ERP.9? Name them.
3. Display the following reports in the books of :
i) S Bose Beverages Ltd.
ii) Bhartiya Book Trading Company
iii) Tech Comp & Sons
Balance Sheet Trial Balance
P&L A/c Purchase & Sales Register
Day Book Outstandings

98
21.11 APPENDIXSHORT-OUT KEYS IN TALLY

Window Functionality Availability

Key
Fl To select a company At all Master Menu screen
To select the Accounts At Accounting/Inventory Voucher
Button and Inventory Creation and alteration screen.
Buttons
F2 To change the menu At almost all screens in Tally
period
F3 To select the company At almost all screens in Tally
F4 To select the Contra At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F5 To select the Payment At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F6 To select the Receipt At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F7 To select the Journal At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F8 To select the Sales At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F8 To select the Credit Note At Accounting/Inventory Voucher
(Ctrl +F8) Voucher Creation and alteration screen
F9 To select the Purchase At Accounting/Inventory Voucher
Voucher Creation and alteration screen
F9 To select the Debit Note At Accounting/Inventory Voucher
(Ctrl +F9) Voucher Creation and alteration screen
F10 To select the At Accounting/Inventory Voucher
Memorandum Voucher Creation and alteration screen
F11 To select the Functions At almost all screens in Tally
and Features screen
FI2 To select the Configure At almost all screens in Tally
Alt + 2 To Duplicate a voucher At list of Vouchers - creates a
voucher similar to the one where
you positioned the cursor and used
this key combination
Alt + A To Add a voucher At list of Voucher - adds a voucher
after the one where you positioned
the cursor and used this key
combination

99
Computerised Accounting
Alt + C To create a master at a At voucher entry and alteration
voucher screen (if it has screens, at a field where you have
not been already assigned to select a master from a list. If the
a different function, as in necessary account has not been
reports like Balance Sheet, created already, use this key
where it adds a new combination to create the master
column to the report) without quitting from the master
screen
Alt + D To Delete a voucher At Voucher and Master (Single)
To delete a master alterations screens. Master can be
(if it has not been already deleted subject to conditions, as
assigned a different explained in the content before
function)
Alt + E To export the report in At all reports screen in Tally
ASCII, SDF, HTML or
SML format
Alt + I To inselt a voucher At list of Vouchers - inserts a
voucher before the one where you
positioned the cursor and used this
key combination
Alt + P To print the report At all reports screen in Tally
Alt + X To cancel a voucher in At all reports screen in Tally
Day Book/List of
Vouchers
Alt + R To Register Tally At Licensing Menu in Tally
Ctrl + G To select the Group At Groups/Ledgers/Cost
Centres/B ud gets/Scenarios/
Voucher Types/Currencies
(Accounts Info)
creation and alteration screen
Ctrl + 1 To select the Units At Stock Group/Stock
Categories/Stock Items/Reorder
Levels/Godowns/Voucher Types/
Units of Measure (Inventory Info)
creation and alteration screen
Ctrl + O To select the Godown At Stock Group/Stock
Categories/Stock Items/Reorder
Levels/Godowns/Voucher Types/
Units of Measure (Inventory Info)
creation and alteration screen
Ctrl+Alt+R Rewrite data for a From Gateway of Tally screen
company
Ctrl+S Allow you to alter At Stock Voucher and Godown
Stock from master Voucher Report
100
 Ctrl+U To select the Units At Stock Group/Stock
Categories/Stock Items/Reorder
Levels/GodownsN oucher Types/
Units of Measure (Inventory Info)
creation and alteration screen
Ctrl+V At Groups/Ledgers/Cost
Centres/B udgets/Scenarios/
Voucher Types/Currencies
(Accounts Info) creation and
alteration screen

Window Combination Used for Navigation

Windows Key Functionality Availability

PgUp Display previous voucher At voucher entry and
during voucher entry/alter alteration screen
PgDn Display next voucher At voucher entry and
during voucher entry/alter alteration screens
Enter To accept anything you You have to use this key
type into a field at most area in Tally
Esc To remove what you At almost all screens in
typed in a field Tally
To come out of a screen
To indicate you do not
want to accept a voucher
or master

101
Computerised Accounting
ACKNOWLEDGEMENT
All the pictures have been taken as screenshot from Tally ERP.9 software. Special
thanks to Tally ERP.9 software developers and the company.

102