12.

Trail balance is statement which shows the _____ or the totals of all the accounts. (“balances”)
13. ____ lists the balance and the title of account in the ledger (Trial balance)
14. Closing stock appearing in the trial balance is shown on the ____balance sheet (asset side of)
15. The balance of liabilities account will be shown in the ___ of the trial balance. (credit column)

True or false
1. Ram has assets of ` 20,000/- and liabilities of ` 4,000/- his capital therefore would be ` 16,000/- (TRUE)
2. Depreciation is loss (TRUE)
3. Double accounting system owes its origin to Luca pacioli (TRUE)
4. Profit or loss have no effect on network (FALSE)
5. Capital account is a real account (FALSE)
6. Trial balance is a final accounts (FALSE)
7. Trial balance contains the balances of only personal and real accounts (FALSE)
8. After preparation of ledgers, the next is the preparation of trial balance (TRUE)
9. Journal is the book of final entry (FALSE)
10. Trade discount will be entered in the book of accounts (FALSE)

Match the following

Group –A
1. Salary account e a) Artificial personal account
2. Drawings account c b) Representative personal account
3. Furniture account d c) Personal account
4. Income received in advance b d) Real account
5. Modern Academy a e) Nominal account

Group- B
1. Salary account c a) Real account
2. Capital account d b) Artificial Personal account
3. Goodwill account a c) Nominal account
4. Harish Account e d) Representative personal Account
5. State Bank of India b e) Personal account

SUBSIDIARY BOOKS

Subsidiary Books refers to books meant for specific transactions of similar nature. Subsidiary Books are also known as
Special journals or day books. To overcome shortcoming of the use of the journal only as a book of original entry,
the journal is subdivided into specific journals or subsidiary books.

The sub-division of journal is done as follows:

Transaction Subsidiary Book
All cash and bank transactions Cash Book - has columns for
cash, bank and cash discount
All credit purchase of goods – only those Goods that are purchased for resale Purchase Day Book or Purchase
are covered here. register.
All credit sale of goods Sales Day Book or sales register
All purchase returns – i.e. return of goods back to suppliers due to defects Purchase Return Book or Return
Outward Book
All sales returns – i.e. return of goods back from Customers Sales Return Book or Return
Inward Book

FUNDAMENTALS OF ACCOUNTING 37
 All bill receivables – these are bills accepted by customers to be honoured at Bills Receivable Book
an agreed date.
All bills payable - these are bills accepted by the business to be honoured by Bills Payable Book
paying to suppliers at an agreed date.
For all other transactions not covered in any of the above categories – i.e. Journal Proper
purchase or sale of assets, expense accruals, rectification entries, adjusting
entries, opening entries and closing entries.

RECORDING OF CASH AND BANK TRANSACTIONS

Cash Book

A Cash Book is a special journal which is used for recording all cash receipts and all cash payments. Cash Book is a
book of original entry since transactions are recorded for the first time from the source documents. The Cash Book
is larger in the sense that it is designed in the form of a Cash Account and records cash receipts on the debit side
and cash payments on the credit side. Thus, the Cash Book is both a journal and a ledger.

Illustration 7:

Write up a single column Cash Book of Mr. Y for the month of April 2015, April 2015
1. Balance in hand ` 5,000
4. Sold goods to Mr. Z on credit ` 3,000
6. Sold goods for Cash ` 1,000
8. Purchased goods on credit from Mr. P for ` 3,000
12. Paid to Mr. P for ` 2,000 and Received Discount ` 200
15. Returned goods to Mr. P for ` 800
20. Goods Returned by Mr. Z for ` 300
25. Z settled his account for ` 2,500
26. Paid salary by cheque for ` 1,000
30. Received interest for ` 1,000

Solution:

In the books of Mr. Y

Cash Book (as the only Book of Single Entry)

Date Particulars L/F Amount ` Date Particulars L/F Amount `

2015 2015 To, Mr. P A/c

Apr.1 To Balance b/d 5,000 12 2.000
(paid to Mr. P)
6 Sales A/c 1,000 30 By, Balance c/d 7.500
(Goods sold for cash)

25 To, Z’s A/c 2.500

(Z settled his account)

30 To, Interest A/c 1.000

(Received interest)

9,500 9,500

May 1 To, Balance b/d 7,500

38 FUNDAMENTALS OF ACCOUNTING
Types of Cash Book

There are different types of Cash Book as follows:

(i) Single Column Cash Book- Single Column Cash book has one amount column on each side. All cash receipts
are recorded on the debit side and all cash payments on the payment side, this book is nothing but a Cash
Account and there is no need to open separate cash account in the ledger.
(i) Double Column Cash Book- The Double Column Cash Book having two amounts. Columns on each side as
under:
(a) Cash and discount columns
(b) Cash and bank columns
(c) Bank and discount columns
(iii) Triple Column Cash Book- Triple Column Cash Book has three amount columns, one for cash, one for Bank
and one for discount , on each side. All cash receipts, deposits into book and discount allowed are recorded
on debit side and all cash payments, withdrawals from bank and discount received are recorded on the
credit side. In fact, a triple-column cash book serves the purpose of Cash Account and Bank Account both.
Thus, there is no need to create these two accounts in the ledger.
(iv) The multi-column cash book having multiple columns on both the sides of the cash book.
(v) The petty Cash Book.

Dr. Specimen of Single Column Cash Book Cr.

Receipts Payments
Date Particulars L.F. Cash Date Particulars L.F. Cash

Dr. Specimen of Double Column Cash Book Cr.

Receipts Payments
Date Particulars L.F. Cash Disc. Allowed Date Particulars L.F. Cash Disc. Received

Dr. Specimen of Triple Column Cash Book Cr.

Receipts Payments
Date Particulars L.F. Cash Bank D i s c o u n t Date Particulars L.F. Cash Bank Discount
Allowed Received

Is the Cash Book Journal or Ledger?

 Cash Book is a book of original entry since transactions are recorded for the first time from the source
documents.
 The cash book is ledger in the sense that it is designed in the form of a Cash Account and records cash
receipts on the debit side and cash payments on the credit side.

Thus the cash Book is both a journal and a ledger.

1. Contra Transactions
Transactions which relates to allowing discount or receiving discount in cash after the settlement of the dues are
known as Contra Transactions.

Example:

1. Cash deposited in to Bank

FUNDAMENTALS OF ACCOUNTING 39
Bank A/c Dr.
To, Cash
2. Cash withdrawn from Bank
Cash A/c Dr.
To, Bank A/c
B. Cheque Transactions

When a cheque is received and no any other information at a later date about the same is given, it will be assumed
that the said cheque has already been deposited into bank on the same day when it was received. Then the entry
should be as under:
Bank A/c Dr.
To Debtors/Party A/c
But if it is found that the said cheque has been deposited into the bank at a later date, then the entry will be:
(i) When the cheque is received
Cash A/c Dr.
To Debtors/Party A/c
(ii) When the same was deposited into bank at a later date
Bank A/c Dr.
To Cash A/c
(iii) When the said cheque is dishonoured by the bank
Debtors/Party A/c Dr.
To Bank A/c

Illustration 8.

Let us see an illustration for the following cash and bank transactions in the books of Mr. Abhishek
January 1 Opening cash balance was ` 3,800 and bank balance was ` 27,500
January 4 Wages paid in cash ` 1,500
January 5 received cheque of ` 19,800 from KBK enterprises after allowing discount of ` 200
January 7 Paid to consultancy charges by cheque for ` 7,500
January 10 Cash of ` 2,500 withdrawn from bank
January 12 Received a cheque for ` 4,500 in full settlement of the account of Mr. X at a discount of 10% and
deposited the same into the Bank.
January 15 X’s cheque returned dishonoured by the Bank

Solution:
In the Books of Mr. Abhishek
Dr. Cash Book Cr.
Receipts Payments
Date Particulars L.F Cash Bank Dis Date Particulars L.F Cash Bank Dis
(`) (`) Allowed (`) (`) received
(`) (`)

1- Opening 3,800 27,500 4- Wages paid 1,500

Jan Balance Jan

5- Recd from KBK 19,800 200 7- Consultancy fees 7,500

Jan Jan
10- Cash withdrawn 2,500 10- Cash withdrawn 2,500
Jan Jan
12- Mr. X 4,500 500 15- Mr. X 4,500 500
Jan Jan
Closing balance 4,800 37,300
6,300 51,800 700 6,300 51,800 500

40 FUNDAMENTALS OF ACCOUNTING
Please note that the balance of discount columns is not taken and these are posted directly to the respective
ledger account separately. The balance of cash and bank columns are posted into cash and bank accounts
periodically. The posting into ledger is explained later in this chapter.

PURCHASE DAY BOOK

The purchase day book records the transactions related to credit purchase of goods only. It follows that any cash
purchase or purchase of things other than goods is not recorded in the purchase day book. Periodically, the totals
of Purchase day book are posted to Purchase account in the ledger. The specimen Purchase day book is given
below:

In the Books of .........

Purchase Day Book

Date Name of the Suppliers and details of Goods Purchased Invoice reference L. F. Amount (`) Remarks

The format for Purchase Return is exactly the same; hence separate illustration is not given.
Let us see an illustration for following transactions for a furniture shop:

Illustration 9

1. Bought 20 tables @ ` 500 per table from M.M Appliances on credit @ 12% trade discount as per invoice
number 22,334 on 2nd March.
2. Purchased three dozen chairs @ ` 250 each from Metro chairs as per invoice number 1112 on 4th March.
3. Second hand furniture bought from Golden Furnitures on credit as per invoice number 375 for ` 1200 on 7th
March.
4. Purchased seven book racks from Mayur Furnitures for ` 4,900 paid for in cash on 6th March.
5. Purchased Machinery for ` 30,000 from Kirloskar Ltd on 9th March as per invoice number 37.

Solution:
In the Books of Furniture Shop
Purchase Day Book
Date Name of the Suppliers and Details of goods purchased Invoice L. F. Amount
reference (`)
2nd Mar. M.M Appliances 22334 8,800
20 tables@ 500 and 12% trade discount (20 * 500) = 10000 less 12% discount

4th Mar. Metro Chairs (3 dozen chairs @ 250 per chair) 1112 9,000

7th Mar. Golden Furniture 375 1,200

Total 19,000

Please note that the transaction for purchase of book rack will not be entered in the purchase book as it is not
purchased on credit. (Where will it go then? it will go to the cash book!). Similarly purchase of machinery will not
form part of purchase book. It will be entered in Journal Proper.

SALES DAY BOOK

The sales day book records transaction of credit sale of goods to customers. Sale of other things, even on credit,
will not be entered in the sales day book but will be entered in Journal Proper. If goods are sold for cash, it will be
entered in cash book. Total of sales day book is periodically posted to sales account in the ledger. The specimen
of a sales day book is given below.

FUNDAMENTALS OF ACCOUNTING 41
 In the books of ...........
Sales Day Book
Date Particulars Invoice reference L. F. Amount Remarks

The format of sales return book is exactly the same; hence a separate illustration is not given.
Let us see how will be the following transaction recorded in the books of a Cloth Merchant.

Illustration 10.

1st July Sold Tip Top clothing 50 suits of ` 2,200 each on two months credit on invoice number -2
11th July Sold to New India Woolen 100 sweaters @ ` 250 each on invoice number 55
13th July Received an order from Modern clothing for 100 trousers @ ` 500 at trade discount of 10%
17th July Sold 50 sarees to Lunkad brothers @ ` 750 each
25th July Sold T-shirts at exhibition hall for cash for ` 7,500

Solution:
In the books of Cloth Marchant
Sales Day Book
Date Particulars Invoice reference L. F. Amount
1st July Tip Top Clothing (50 suits @ ` 2,200) 2 1,10,000
11th July New India Woolen (100 sweaters @ ` 250) 55 25,000
17th July Lunkad brother 50 sarees @ ` 750 37,500
Total 1,72,500

Here again, cash sales at exhibition hall are not recorded. Also, merely getting an order for goods is not a transaction
to be entered in sales book.

OTHER SUBSIDIARY BOOKS – RETURNS INWARD, RETURN OUTWARD, BILLS RECEIVABLE, BILLS PAYABLE

(i) Return Inward Book- The transactions relating to goods which are returned by the customers for various reasons,
such as not according to sample, or not up to the mark etc. contain in this book. It is also known as Sales Return
Book.

Generally when a customer returns good to suppliers he issues a Debit Note for the value of the goods returned by
him. Similarly the supplier who receives those goods issues a Credit Note.

Returns Inward Day Book

Date Particulars Outward Invoice L.F. Details Totals Remarks

(ii) Return Outward Book- This book contains the transactions relating to goods that are returned by us to our
creditors e.g. goods broken in transit, not according to the sample etc. It’s also known as Purchase Return Book.

Return Outward Day Book

Date Particulars Debit Note L.F Details Totals Remarks

(iii) Bills Receivable Book- It is such a book where all bills received are recorded and there from posted directly to
the credit of the respective customer’s account. The total amounts of the bills so received during the period (either
at the end of the week or month) is to be posted in one sum to the debit of Bills Receivable A/c.

42 FUNDAMENTALS OF ACCOUNTING
 Bills Receivable Day Book

No. Date of Name Name How

From Name of Date of Due Amount
of Receipt of the of L.F. disposed
whom Acceptor Bill Date of Bill
Bills of Bill Receiver Drawer off

(iv) Bills Payable Book- Here all the particulars relating to bills accepted are recorded and there from posted
directly to the debit of the respective creditor’s account. The total amounts of the bills so accepted during the
period (either at the end of the week or month) is to be posted in one sum to the credit of Bills Payable Account.

Bills Payable Day Book

No. To Name Name Amount of Bill
Date of Where Date of Due
of whom of of the Term L.F. How disposed
Acceptance Payable Bill Date
Bills given Drawer Payee off

JOURNAL PROPER

Credit transactions that cannot be entered in any other subsidiary book are entered in journal proper.
It will cover purchase or sale of assets, expense accruals, rectification entries, adjusting entries, opening entries and
closing entries. The format of journal proper is exactly the same as Journal.

LEDGER ACCOUNTS
The book which contains accounts is known as the ledger. Since finding information pertaining to the financial
position of a business emerges only from the accounts, the ledger is also called the Principal Book. As a result, all the
necessary information relating to any account is available from the ledger. This is the most important book of the
business and hence is rightly called the “King of All Books”. Also Known as Book of Final Entry.

The specimen of a typical ledger account is given below:

Dr Ledger-Account Cr
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)

Ledger Posting
As and when the transaction takes place, it is recorded in the journal in the form of journal entry. This entry is posted
again in the respective ledger accounts under double entry principle from the journal. This is called ledger posting.

The rules for writing up accounts of various types are as follows:

Assets: Increases on the left hand side or the debit side and decreases on the credit side or the
right hand side.
Liabilities: Increases on the credit side and decreases on the debit side.
Capitals: The same as liabilities.
Expenses: Increases on the debit side and decreases on the credit side.
Incomes or gain: Increases on the credit side and decrease on the debit side.

To summarise
Dr. Assets Cr. Dr. Liabilities & Capital Cr.
Increase | Decrease Decrease | Increase

Dr. Expenses or Loses Cr. Dr. Income or Gains Cr.

Increase | Decrease Decrease | Increase

FUNDAMENTALS OF ACCOUNTING 43
The student should clearly understand the nature of debit and credit.

A debit denotes:
(a) In the case of a person that he has received some benefit against which he has already rendered some
service or will render service in future. When a person becomes liable to do something in favour of the firm,
the fact is recorded by debiting that person’s account : (relating to Personal Account)
(b) In case of goods or properties, that the value and the stock of such goods or properties has increased,
(relating to Real Accounts)
(c) In case of other accounts like losses or expenses, that the firm has incurred certain expenses or has lost money.
(relating to Nominal Account)

A credit denotes:
(a) In case of a person, that some benefit has been received from him, entitling him to claim from the firm a
return benefit in the form of cash or goods or service. When a person becomes entitled to money or money’s
worth for any reason. The fact is recorded by crediting him (relating to Personal Account)
(b) In the case of goods or properties, that the stock and value of such goods or properties has decreased.
(relating to Real Accounts)
(c) In case of other accounts like interest or dividend or commission received, or discount received, that the firm
has made a gain (relating to Nominal Account)

At a glance:
Dr. (Debit side) Cr. (Credit side)
DESTINATION Where the economic benefit reaches / is SOURCE of each economic benefits
received.
Receiver Given
What comes in What goes out
All expense and losses All income and gains

Let us now understand the mechanism of posting transaction into the ledger account. Consider the transaction:
Rent paid in cash for ` 10000. The journal entry for this transaction would be:
Jan 15 Rent A/c Dr 10,000
To Cash A/c 10,000

We will open two ledger accounts namely Rent A/c and Cash A/c. Let us see how the posting is made

Dr. Rent Account Cr.

Date
Date Particulars J. F. Amount (`) J. F. Amount (`)
Particulars
Jan15 To Cash A/c 10,000

Dr. Cash Account Cr.

Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)

Jan 15 By Rent A/c 10,000

Please observe the following conventions while posting a transaction into ledger accounts. Note that both the
effects of an entry must be recorded in the ledger accounts simultaneously.
1) The posting in the account which is debited, is done on the debit side by writing the name of the account or
accounts that are credited with the prefix ‘To’.

44 FUNDAMENTALS OF ACCOUNTING
2) The posting in the account which is credited, is done on the credit side by writing the name of the account
or accounts that are debited with the prefix ‘By’.

Illustration 11.
Let us now see how we can create ledger account for the seven journal entries that we passed for Illustration 4.

Folio No. 1
Dr. Cash Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)

1.4.2015 To Vikas’s capital 1 500,000 10.4.2015 By Furniture 1 25,000

1.4.2015 To Vaibhavi’s capital 1 250,000 11.4.2015 By Punjab National Bank 1 1,00,000
30.4.2015 By Balance c/d 6,25,000
750,000 7,50,000
1.5.2015 To Balance b/d 625,000

Folio No. 2
Dr. Mr. Vikas’s Capital Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
30.4.2015 To Balance c/d 5,00,000 1.4.2015 By Cash 1 5,00,000
5,00,000 5,00,000
1.5.2015 By Balance b/d 5,00,000

Folio No. 3
Dr. Mrs. Vaibhavi’s Capital Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
30.4.2015 To Balance c/d 2,50,000 1.4.2015 By Cash 1 2,50,000
2,50,000 2,50,000
1.5.2015 By Balance b/d 2,50,000

Folio No. 4
Dr. Furniture Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
10.04.2015 To Cash 25,000 30.4.2015 By Balance c/d 25,000
25,000 25,000
1.05.2015 To Balance b/d 25,000

Folio No. 5
Dr. Punjab National Bank Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
11.4.2015 To Cash 1 1,00,000 15.4.2015 By Rent 1 15,000
25.4.2015 To Consultancy Fees 1 2,50,000 20.4.2015 By Motor Car 1 50,000
By Balance c/d 2,85,000
3,50,000 3,50,000
1.05.2015 To Balance b/d 2,85,000

FUNDAMENTALS OF ACCOUNTING 45
Folio No. 6
Dr. Rent Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
15.4.2015 To Punjab National Bank 1 15,000

Folio No. 7
Dr. Motor Car Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
20.4.2015 To Punjab National Bank 1 50,000
“ To Loan from HDFC Bank 1 4,00,000

Folio No. 8
Dr. Loan from HDFC Bank Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
20.4.2015 By Motor Car 1 4,00,000

Folio No. 9
Dr. Avon Pharmaceuticals Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
25.4.2015 To Consultancy Fees 1 7,50,000

Folio No. 10
Dr. Consultancy Fees Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
25.4.2015 By Punjab National Bank 1 2,50,000
25.4.2015 By Avon Pharma 1 7,50,000

Folio No. 11
Dr. Salary Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
30.4.2015 To Salary payable 1 15,000

Folio No. 12
Dr. Salary Payable Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
30.4.2015 By Salary 1 15,000

Please carefully observe the posting of journal entries into various ledger accounts. Do you see some further
calculation in the Cash A/c and Mr. Vikas’s Capital A/c? What is done is that after posting all transactions to
these accounts, the difference between the debit and credit sides is calculated. This difference is put on the side
with smaller amount in order to tally grand totals of both sides. The convention is to write “To Balance c/d” or “By
balance c/d” as the case may be. This procedure is normally done at the end of an accounting period. This process
is called as “balancing of ledger accounts’.

46 FUNDAMENTALS OF ACCOUNTING
Once the ledgers are balanced for one accounting period, the balance needs to be carried forward to the next
accounting period as a running balance. This is done by writing “To Balance b/d” or “By balance b/d” as the case
may be after the grand totals. This is also shown in the Cash A/c and Mr.Vikas’s Capital Account.

Could you now attempt to balance the other ledger accounts and carry the balances to the next accounting
period?

Important note: Please remember the balances of personal and real accounts only are carried down to the next
accounting period as they represent resources and obligations of the business which will continue to be used and
settled respectively in future. Balances of nominal accounts (which represent incomes or gains and expenses or
losses) are not carried down to the next period. These balances are taken to the Profit and Loss account (or Income
statement) prepared for the period. The net result of the P & L Account will show either net income or net loss which
will increase or decrease the owner’s equity.

In the above example, please note that the balances of Rent Account, Consultancy Fees Account and Salary
Account will not be carried down to the next period, but to the P & L Account of that period. As illustration, we have
shown it for Rent Account.

Posting to Ledger Accounts from Subsidiary books

In the above section, we explained posting to ledger accounts directly on the basis of journal entries.
In practice, however, we know that use of subsidiary books is in vogue. Let us see how the posting to ledger
accounts is done based on these records.
For each of the subsidiary books, there is a ledger account e.g. for purchase book, there is Purchase Account, for
sales book there’s Sales A/c, for cash book there will be Cash A/c as well as Bank A/c and so on.

Illustration 12.
Let us continue with illustration seen in the section Illustrations 8 9 and 10 above and post the totals into respective
ledger accounts.

Solution:
Dr. Cash Account Cr.
Date Particulars J. F. Amount (`) Date Particulars J. F. Amount(`)
1st Jan To Balance b/d 3,800 By Sundries as per cash 1,500
book
To Miscellaneous 2,500 By Balance c/d 4,800
Receipts
6,300 6,300

Dr. Purchases Account Cr.

Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
To Sundries as per 19,000 By Transfer to P & L A/c 19,000
purchase book

Dr. Sales Account Cr.

Date Particulars J. F. Amount (`) Date Particulars J. F. Amount (`)
To Transfer to P&L 1,72,500 By Sundries as per sales 1,72,500
A/c book

FUNDAMENTALS OF ACCOUNTING 47