ACCOUNTING FOR MANAGER - I

Introduction

Accounting is the analysis and interpretation of book-keeping records. It includes not

only the maintenance of accounting records but also the preparation of financial and economic
information which involves the measurement of transactions and other events relating to the
entity.

Meaning of book keeping

The book keeping is the art and science of recording, classifying and summarizing
business transactions in money worth accurately and systematically. The book keeper is mainly
clerical in nature. Book keeping is thus the recording business transactions in a systematic
manner. It may do manually or through the use of mechanical and electronic device.

Definition of book keeping

“Book- keeping is the art of recording business transactions in a systematic manner”.

A.H.Rosenkamph.

“Book- keeping is the science and art of correctly recording in books of account all
those business transactions that result in the transfer of money or money’s worth”. R.N.Carter

Accounting

Accounting, as an information system is the process of identifying, measuring and

communicating the economic information of an organization to its users who need the
information for decision making. It identifies transactions and events of a specific entity. A
transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase
of raw material). An event (whether internal or external) is a happening of consequence to an
entity (e.g. use of raw material for production). An entity means an economic unit that
performs economic activities.

Definition of Accounting

American Institute of Certified Public Accountants (AICPA) which defines accounting

as “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 a financial character and
interpreting the results thereof”

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.

Objectives of Accounting

1. Permanent record of all business transaction

2. To give trade results
 3. To know financial position of business
4. To facilitates the performance evaluation by comparing of one year to another year.
5. To determine the amount of tax
6. To use as evidence in case of disputes
7. To provide information for decision making
8. To control over the assets
9. To know the solvency position

Advantages of Accounting
1. Provides financial information about the business
2. Provides assistance to management
3. Helps in comparison of financial results
4. Comparison of its own results of different years
5. Comparison of financial results with other firms in the industry
6. Helps in decision making
7. Accounting information can be used as an evidence in legal matters
8. Helps in valuation of the business

Disadvantages of Accounting
1. Accounting ignores non monetary transactions
2. Accounting information is sometimes based on estimates which may be unrealistic
3. Window dressing may lead to faulty results
4. Accounting information can be manipulated and thus cannot be considered as the true
test of performance

Functions of Accounting

i) Record Keeping Function: The primary function of accounting relates to

recording, classification and summary of financial transactions-journalisation, posting, and
preparation of final statements. These facilitate to know operating results and financial
positions.

ii) Managerial Function: Decision making programme is greatly assisted by accounting. The
managerial function and decision making programmes, without accounting, may mislead. The
day-to-day operations are compared with some predetermined standard. The variations of
actual operations with pre-determined standards and their analysis is possible only with the
help of accounting.

iii) Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing
is not possible without accounting. Thus accounting becomes compulsory to comply with legal
requirements.

iv) Language of Business: Accounting is the language of business. Various transactions are
communicated through accounting. There are many parties-owners, creditors, government,
employees etc., who are interested in knowing the results of the firm and this can be
communicated only through accounting.

Differences between accounting and book keeping

Sl. No Book keeping Accounting

It is the recording stage of an accounting It is the summarising stage of an accounting
1 system system.
It is the basis for business language
2 It is the basis of accounting
Book keepers are responsible for this
3 work. Accountants are responsible for this work.
It does not require any special skill or
4 It requires special skill and knowledge
knowledge
A personal judgement of the book A personal judgments of the accountant is
5 Keeper in not required essential
Financial statements are not prepared Financial statements are prepared from
6
from book keeping. accounting records.
It gives the complete picture of the financial
It will not give the complete picture of
7 condition of the business unit
the business unit.
The nature of book keeping work is The nature of accounting work is not
8 mechanical and repetitive in nature. mechanical and no repetitive in nature.
It does not help in complying with legal Legal formalities can be complied with the
9
formalities help of accounting
It does not provide any information for It provides information for taking managerial
10 taking managerial decisions decisions
It has several branches, e.g., financial
accounting, cost accounting, management
11 It has no branches
accounting etc.

Basis of Accounting

Cash basis

Under cash basis of accounting entries are made in the account books only in respect of
transactions involving actual receipt of cash and actual payment of cash. Credit transactions
area not recorded until they result in receipt or payment of cash.

Under this method, accrued income, outstanding expenses and prepaid expenses are
ignored. Income is recognized only when cash is received for it. Similarly, the expenditure is
recognised only when cash is paid for it. The cash basis accounting is very popular in the case
of non profit organization such as a charitable institutions, colleges, schools and clubs etc., It is
favour with professionals like doctors, lawyer, and chartered accountant.

Accrual basis or Mercantile basis

The method of recording transactions by which revenues, costs, assets and liabilities are
reflected in the accounts in; the period in which they accrue. This is also known as mercantile
basis of accounting. Under this method, all transactions of business, during a particular period,
are automatically recorded in the books of account regardless of whether cash is received in
respect of any of them or cash is paid out.

Mixed basis or Hybrid basis

Under this method, both cash basis and accrual basis are followed. Incomes are
recorded on cash basis whereas expenses are taken on accrual basis and net income is
ascertained by matching expenses in accrual basis with incomes on cash basis. Professional
people like doctors, lawyers and chartered accountants follow this method.

Systems of Accounting

1. Single Entry System 2. Double Entry System

Single Entry System

Under this system, normally, the cash book and the personal accounts of the debtors
and creditors are maintained. Other accounts are ignored. Since the two fold effect is not
recorded, arithmetic accuracy of the accounts cannot be checked by preparing the trial balance.
Single entry system does not mean that only one aspect is entered for each transaction always.
It is incomplete and not reliable. It is not a scientific system of recording.

Double entry system

Double entry system owes its origin to an Italian merchant named luco pacioli who
wrote the first book entitled ‘De Computis et scripturis” on double entry accounting in the
year 1494. The accounting system based on the duality concept, are known as the double entry
system, means that every transaction has two aspects that is the receiving aspect and giving
aspect. Every transaction has two accounts, one giving the benefit and other receiving benefit.
For example, when we purchase goods for cash, we receive goods and give cash in return.
Based on this system, the accounting equation can be derived, that is, Capital +Liabilities=
Assets

Meaning of Debit and Credit

The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from
‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit. Recording of
transactions require a thorough understanding of the rules of debit and credit relating to
accounts. Both debit and credit may represent either increase or decrease, depending upon the
nature of account.

Advantages or Merits of double entry system

1. A complete record of the financial transactions is maintained because it records

both the aspects of every financial transaction.
2. It gives accurate information of amount due to and due by the business unit at any
time because a complete record of amount due from various debtors and amount
 due to various creditors is kept by maintaining personal accounts of debt ors and
creditors.
3. Arithmetical accuracy of the amount books can be tested by preparing a trial
balance by taking balances of all ledger accounts.
4. It is helpful in preventing frauds and errors. In case of disagreement of the trial
balance, efforts are made to locate the errors so that books may be set right. It can
work well with the help of internal check system.
5. It is helpful in ascertaining profit or loss of a particular period by preparing the
profit and loss account. Profit or loss of the current year can be compared with
profit or loss of the previous year which enables the business unit to take action to
increase the profit.
6. Financial position of the business entity can be ascertained by preparing the balance
sheet because it provides full particulars of various assets and liabilities by
maintaining their accounts in the ledger.
7. It makes available readymade information to be sent ot income tax and sales tax
authorities.
8. It is helpful in filling accurate claim for loss of stock as result of fire to the
insurance company because a complete record of material or goods is kept in
material lor goods account.

Disadvantages or Limitations of the double entry System:

1. Not Suitable for Small businessman

In, Double entry system businessman has to need to keep many books which is not
suitable for small businessman. A small businessman can make simple lists of his assets,
liabilities, bank balance and debtors and creditors on note book under single entry system.

2. Costly
Double entry system can be activating by manual or computerized method but both are
costly. So, this system has become costly after increasing the cost of purchasing new
accounting software.

3. No accuracy before making of trial balance

Under double entry system, we cannot check accuracy of journal before making of trial
balance, after making trial balance, we find that both side of trial balance are equal, and then
we can say that day book is mathematically correct.

Difference between Single entry system and Double entry system

Basis for
Double Entry System Single Entry System
comparison
For some transactions both debit and
Recording of Debit and Credit aspects of all credit aspects are recorded. For some
transaction transactions are recorded. transactions only one aspect is
recorded.
 Various subsidiary books are
Subsidiary books Only cash book is maintained.
maintained
Personal, Real and nominal Some personal accounts are
Ledger accounts
accounts are maintained maintained
Preparation of trial balance is
Trial Balance Trial balance cannot be prepared.
possible.
Trading and profit & loss can be
Real profit or loss It is not possible.
prepared to check the real profit.
Balance sheet can be prepared to
Financial position know the true financial position Balance sheet cannot be prepared.
of the business concern.
Method It is a scientific method. It is not a scientific method.
Legal authorities accept this
Legal acceptance They do not accept it.
method

Account
It is a statement of the various dealings which occur between a customer and the firm. It
can also be expressed as a clear and concise record of the transaction relating to a person or a
firm or a property (or assets) or a liability or an expense or an income.

Classification of accounts

Accounts are classified into three categories

I. Personal account

(i) Natural persons account

(ii) Artificial persons account

(iii) Representative persons accounts

II. Real Account

(i) Tangible account

(ii) Intangible real account

III. Nominal account

Accounts

Impersonal Account

Personal Account

Real Account Nominal Account

Yuvraj’s A/c Furniture Salaries

K Co. Ltd. A/c Buildings Wages
Machinery Interest
Capital
Vehicles Rent
Cash Commission
PERSONAL ACCOUNT

It is an account relating to persons. The person may be natural, artificial or representative.

Natural persons account: An account recording transactions with an individual human being
is known as natural person’s personal account. Example. Manoj account.

Artificial person’s personal account: An account recording financial transaction with an

artificial person created by law or otherwise is called an artificial persons personal account.
Example Karim & Bros account, Bank account. Radha Ltd.,

Representative person’s personal account: An account indirectly representing a person or

persons is known as a representative personal account. Example: prepaid insurance account,
outstanding account.

IMPERSONAL ACCOUNT

It is an account, which is not a personal account, is called impersonal account. It can be

classified as

1. Real account 2.Nominal Account

1. Real Account

It is an account of things or properties. It is otherwise called property account. It may be

classified as follows

Tangible real account: such type of account relates to an asset which can be touched, felt,
seen and measured. Example: machinery account, cash account, furniture account

Intangible real account: such type of account related to an asset which cannot be touched
physically but can be measured in value. Example: good will account, patents account and
trademarks account etc.

2. Nominal account

Accounting 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.,
Examples of various accounts
Personal A/c Real A/c Nominal A/c
Yuvraj’s A/c Sales Salary
K Co. Ltd. A/c Sales Returns Printing and Stationery
Capital Purchases Postage
Drawings Purchase Returns Loss on sale of fixed
Bank Cash Assets
Bank overdraft Machinery Profit on sale of fixed Assets
Bills Receivable Furniture Wages
Bills Payable Buildings Discount
Outstanding expenses Motor Vehicle Stock Commission
Prepaid expenses Good will Carriage
Income received in Advance Copy rights, Patent Rights Freight, Advertisement
Income Accrued but not received Trade marks Interest

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

ACCOUNTING CONCEPTS

1. The business entity concept

This concept recognizes a business unit as a separate and distinct entity from the owner
capital is used for business operations. Each business unit, regardless of its constitution as a
separate accounting unit, is treated as distinct entity, and the accountant treats the owners as
outsiders in the accounting records of the business

2. The going concern concept

It s also known as the concepts of continuity.. to continue its operations in future
indefinitely and not to wind up its affairs.

3. Money measurement concept

The accounting records should reflect only those events or facts which are capable of
being measured in terms of money and financial statements should communicate only those
facts which are capable of expression in money.

4. The cost concept

Under this concept, all assets acquired by a concern are shown in the accounting
records at cost. If an asset does not cost anything it is not shown in the books of account. If
assets are acquired for consideration, the measure of consideration is the cash equivalent of the
value of consideration, or the fair value, whichever is more clearly evident.

5. The Duality Concept

It otherwise known as accounting equivalence concept. According to this concept,
every financial transaction involves a twofold aspect i.e., yielding and the giving of the benefit.

6. Accounting period concept

 The measurement of profit and loss of business entity. A business intended to continue
indefinitely for a long period. The result of a business operation can be ascertained only after
the liquidation of the business. It is not possible; accountants choose a convenient period of
time for measuring the net income for the period; the one year accounting period is recognized
by law. It is compulsory according to the company’s act and taxation law. The accounting
period may be calendar year or accounting year.

7. Realization concept
This concept determine the point of time when revenue is earned. Income being the
difference between realized revenue and related expenses during the accounting period.
Revenue earned during the accounting period is not the same as cash received. Therefore, it is
necessary to consider only such of those items of revenue as are actually earned during the
period regardless of whether cash is received or not.

8. Accrual concept
According to this concept, expenses are recognized in the accounting period in which
they help in earning the revenue whether cash is paid or not. To ascertain correct profit or loss
for an accounting period and to show the true and fair financial position of the business at the
end of the accounting period.

9. Matching concept
This concept is based on the accounting period concept. The most important objective
of running a business is to ascertain profit periodically. The determination of profit of a
particular accounting period is essentially a process of matching the revenue recognized during
the period and the cost to be allocated to the period to obtain the revenue.

10. Objective evidence concept

Under this concept, all business transactions should be supported by documentary
evidences such as invoices, bill receipts etc., and no transaction should be recorded in the
books of account without the supporting documents.

ACCOUNTING CONVENTION

1. Conventions of conservatism
Conservatism means taking the dark view of a situation. It is a policy of caution and
had its origin as a safeguard against possible losses in world of uncertainty. It compels the
business man to wear a risk proof jacket for the working rule is anticipate no profits, but
provide for all possible losses.

2. Convention of consistency
According rules, practices and conventions should be con tenuously observed and
applied; these should not change from one year to another. The results of different years will
be comparable only when accounting rules are continuously adhered to from year to year.
Consistency to eliminate personal bias because the accountant will have to follow consistent
rules, practices and conventions year after year.
3. Convention of full disclosure
All accounting statements should be honestly prepared and to that end full disclosure of
all significant information should be made. The financial statements are essentially meant for
external user. It is on the basis of information conveyed by the statements that the users are
enabled to know as much about the business. This convention has been given legal recognition
by the company’s act which the form of balance sheet to be presented to share holders.

4. Convention of materiality
The convention focuses on the cost of preparing and presenting financial statements the
benefit of accounting data generated. In the case of large business in particular, the recording
of every minute detail of operations, whether significant or not, would only increase the cost of
accounting and make it uneconomic in relation to benefits.

Accountancy

Accountancy is the process of communicating financial information about a business

entity to users such as shareholder and mangers (Elliot, Barry & Elliot, Jamie: Financial
accounting and reporting).

USERS OF ACCOUNTING INFORMATION

Accounting information helps users to make better financial decision. Users of financial
information may be both internal and external to the organisation.

Internal users (primary users) of accounting information include the following

Management: for analysing the organisation’s performance and position and taking
appropriate measures to improve the company results.

Employees: for assessing company’s profitability and its consequence on their future
remuneration and job security.

Owners: for analysing the viability and profitability of their investment and determining any
future course of action.

Accounting information is presented to internal users usually in the form of management

accounts, budgets, forecasts and financial statements.

External users (secondary users) of accounting information include the following

Creditors: for determining the credit worthiness of the organisation. Terms of credit are set by
creditors according to the assessment of their customer’s financial health. Creditors include
suppliers as well as lender of finance such as banks.

Tax Authorities: for determining the credibility of the tax returns filed on behalf of the
company.
Investors: for analysing the feasibility of investing in the company. Investors want to make
sure they can earn a reasonable return on their investment before they commit any financial
resources to the company.

Customers: for assessing the financial position of its suppliers which is necessary for them to
maintain a stable source of supply in the long term.

Regulatory Authorities: for ensuring that the company’s disclosure of accounting information
is in accordance with the rules and regulations set in order to protect the interests of the
stakeholders who rely on such information in forming their decision.

BOOK OF PRIME ENTRY

Books of prime entry are the books in which transactions are first recorded. These are
not accounts; they are simply books that records the details of transactions, almost like a diary.
The firm will have a separate book for each kind of transaction. The type of the transaction will
affect which book it, is entered into. Sales will be entered in one book, purchases in another
book, cash in another book, and so on.

Books of prime entry are also known as books of original entry or subsidiary books.
Books of prime entry are also known as either ‘journals’ or ‘daybooks’. The term ‘day book’
is, perhaps, more commonly used, as it more clearly indicates the nature of these books of
prime entry – entries are made to them every day.

Accounting Equation

Every business transaction has two aspects. One aspect is debited other aspect is
credited. Both the aspects have to be recorded in accounts appropriately. American
Accountants have derived the rules of debit and credit through a ‘novel’ medium, i.e.,
accounting equation. The equation is as follows:

Assets = Equities

The equation is based on the principle that accounting deals with property and rights to
property and the sum of the properties owned is equal to the sum of the rights to the properties.
The properties owned by a business are called assets and the rights to properties are known as
liabilities or equities of the business. Equities can be subdivided into equity of the owners
which is known as capital and equity of creditors who represent the debts of the business know
as liabilities. These equities may also be called internal equity and external equity. Internal
equity represents the owner’s equity in the assets and external represents the outsider’s interest
in the asset. Based on the bifurcation of equity, the accounting equation can be restated as
follows:

Assets = Liabilities + Capital

(Or)
Capital = Assets – Liabilities
(Or)
Liabilities = Assets – Capital
 The equation is fundamental in the sense that it gives a foundation to the double entry
book-keeping system. This equation holds good for all transaction and events and at all periods
of time since every transaction and events has two aspects.

Journal

Journal is a record of daily transactions. It is derived from the French word jour which
means a day, journal is one of the books of original entry or prime entry in which transactions
are first recorded. For every transaction. Journal entry is passed. At the end of the entry,
narration, that is, details of the transactions is given.

Specimen of a journal

Debit Credit
Date Particulars L.F
(Rs) (Rs)

Name of the account ( to be debited )Dr

To name of the account ( to be credited

narration)

Journalizing means recording a transaction in the journal and the form in which it is
recorded is known as a journal entry.

If two or more transactions of the same nature occur on the same day and either; the
debit account or credit account is common, such transactions can be conveniently entered in
the journal in the form of a combined journal entry instead of making a separate entry for each
transaction. Such type of entry is known as a compound journal entry.

In a going concern, the balances of the previous year appearing in various accounts are
brought forward at the beginning of the new accounting year by means of journal entry known
as opening entry to incorporate the previous balances in a new set of accounts. All the assets
account are debited and liabilities accounts are credited. The difference between the assets and
liabilities is credited to capital account.

Advantages of Journal

1. Journal provides records of all business transactions in one place on the time and date
basis.
2. All transactions are recorded on the basis of receipts or bill, so we can check
authenticity of each journal entries with their bills.
3. There is minimum chance to avoid any particular transaction because in journal
transactions are recorded date basis.
4. Accountant writes every journal entry’s narration bellow of that journal entry, so other
auditor can know what the reason of that journal entry is.
 5. In journal, every transaction is recorded after deep analysis of two accounts on the basis
of double entry system, so there is minimum chance of mistake in journal.
6. Journal is the basis of posting in ledger accounts. With making of journal, accountant
cannot make ledger accounts.
7. If there is mistake in ledger, we can rectify it with the help of journal or rectify journal
entry in journal.
8. All opening journal entries, closing journal entries and all other transactions which is
not recorded in any other subsidiary books , will be recorded in journal.

Steps or rules in journalizing

Step – 1: Determine the accounts which are involved in the transaction.

Step – 2: Classify the above accounts under personal, real or nominal.

Step – 3: Apply the rules of debit and credit for the above accounts.

Step – 4: Identify which accounts are to be debited and which accounts are to be credited.

Step – 5: Record the date of the transaction in the date column.

Step – 6: Enter the name of the account to be debited in the particulars column on the left hand
side followed by the abbreviation Dr in the same line. Against this the amount to be debited is
written in the debit amount column in the same line.

Step - 7: Write the name of the account to be credited in the next line starting with the word to
a few space away from the margin in the particulars column. Against this, the amount to be
credited is written in the credit amount column in the same line.

Step – 8: Write the narration within brackets in the next line in the particular column.

Example 1. Ravi started a business on 1.4.2013 with a capital of 20,000

Determine the accounts

Step 1 Cash account Capital accounts
involved
Classification of Personal account
Step 2 Real account
accounts
Credit the giver
Debit what comes in (cash
Step 3 Rules of debit and credit ( Ravi gives money)
comes in)
Identification of account Ravi capital A/c is to
Step 4 to be debited and Cash A/c is to be debited be credited
credited

Journal

Date Particulars L.F Dr.(Rs.) Cr.(Rs.)

1.4.2013 Cash A/C Dr 20,000

To Ravi’s Capital A/c 20,000

(Being capital introduced )

Problems:
1: Journalise the following transactions
2013 Rs.
Jan 1 Rajesh Started business with cash 40,000
2 Cash purchase made by him 25,000
5 He buys goods from Arjun on credit 8,000
7 Furniture is purchased for cash 5,000
8 Cash Sales made 7,000
10 Goods sold on credit to Sathis 4,000
12 Payment made to Arjun 6,000
23 Purchase of Stationery for cash 5,400
25 Salary paid to Abdul 2,500
29 Rent for the month paid by cheque 1,500
31 Cash received from sathis 2,000
Solution: Journal entries
Date Particulars L.F. Debit Credit

1.1.2013 Cash A/c Dr 40,000

To Rajesh’s Capital A/c 40,000
(Being capital introduced in business)
2.1.2013 Purchase A/c Dr 25,000
To Cash A/c 25,000
(Being cash purchase made by him)
5.1.2013 Purchase A/c Dr 8,000
To Arjun A/c 8,000
(Being Credit purchase made from Arjun)
7.1.2013 Furniture A/c Dr 5,000
To Cash A/c 5,000
(Being Furniture purchased for cash)
8.1.2013 Cash A/c Dr 7,000
To Sales A/c 7,000
(Being Cash sales made)
10.1.2013 Sathis A/c Dr 4,000
To Sales A/c 4,000
(Being Credit Sales made to sathis)
12.1.2013 Arun A/c Dr 6,000
To Cash A/c 6,000
(Being amount paid to Arjun)
23.1.2013 Stationery A/c Dr 5,400
To Cash A/c 5,400
(Being stationery purchased for cash)
25.1.2013 Salary A/c Dr 2,500
To Cash A/c 2,500
(Being Salary paid to Abdul)
29.1.2013 Rent A/c Dr 1,500
To Bank A/c 1,500
(Being Rent paid through cheque)
31.1.2013 Cash A/c Dr 2,000
To Sathis A/c 2,000
(Being cash received from sathis)

2: Give Journal Entries for the following transactions 2012 June

1 Dinesh Started business with cash Rs. 10,000
2 Paid Salary for the Staff Rs. 1,000
3 Paid Rent Rs. 1,200
4 Sold goods to Prabhu for cash Rs.3,000
10 Purchases from Cinnasamy Rs. 4,300
15 Cheque received from Anpu Rs. 5,000
18 Deposited the above cheque in to bank
20 Received cheque from kumar and deposited into bank on the same day Rs.6,000
22 Paid Seeni by cheque Rs.2,300
25 Purchase of land Rs. 15,000
28 Rent received amounted to Rs.2,700
Solution: Journal entries
 Date Particulars L.F. Debit Credit
1.6.2012 Cash A/c Dr 10,000
To Dinesh’s Capital A/c 10,000
(Being capital introduced in business)
2.6.2012 Salary A/c Dr 1,000
To Cash A/c 1,000
(Being salary paid to staff)
3.6.2012 Rent A/c Dr 1,200
To Cash A/c 1,200
(Being rent paid)
4.6.2012 Cash A/c Dr 3,000
To Sales A/c 3,000
(Being cash sales made to prabhu)
10.6.2012 Purchase A/c Dr 4,300
To Cinnasamy A/c 4,300
(Being credit purchase made)
15.6.2012 Cash A/c Dr 5,000
To Anpu A/c 5,000
(Being Cheque received from Anpu)
18.6.2012 Bank A/c Dr 5,000
To Cash A/c 5,000
(Being Cheque deposited)
20.6.2012 Bank A/c Dr 6,000
To Kumar A/c 6,000
(Being cheque received and deposited on the
same day)
22.6.2012 Seeni A/c Dr 2,300
To Bank A/c 2,300
(Being Seeni paid by cheque)
25.6.2012 Land A/c Dr 15,000
To Cash A/c 15,000
(Being Land purchased for cash)
28.6.2012 Cash A/c Dr 2,700
To Rent A/c 2,700
(Being Rent received)
3: Journalise the following transactions
2010 April 1 Sanjay brings cash of Rs.50,000. Goods worth Rs.20,000
and Buildings to Rs. 30,000 as his capital
4 Paid Salaries Rs. 3,000
5 Purchased furniture for Rs.10,000 and land for Rs.50,000
and paid by cheque
8 Deposited into Bank Rs.3,500
10 Purchased goods from Rahim for Rs.25,000
15 Paid to Rahim Rs.24,000 in full settlement of his account
25 Drew goods for personal use Rs.1,000
Solution: Journal entries
Date Particulars L.F. Debit Credit
1.4.2010 Cash A/c Dr 50,000
Stock A/c Dr 20,000
Buildings A/c Dr 30,000
To Sanjay’s Capital A/c 1,00,000
(Being Capital introduced )
4.4.2010 Salaries A/c Dr 3,000
To Cash A/c 3,000
(Being salaries paid)
5.4.2010 Furniture A/c Dr 10,000
Land A/c Dr 50,000
To Bank A/c 60,000
(Being furniture and land bought by
cheque)
8.4.2010 Bank A/c Dr 3,500
To Cash A/c 3,500
(Being cash deposited into bank)
10.4.2010 Purchase A/c Dr
To Rahim A/c 25,000
(Being credit purchases made) 25,000
15.4.2010 Rahim A/c Dr
To Cash A/c 25,000
To Discount A/c 24,000
(Being Rs.24,000 paid in full settlement 1,000
of Rs.25,000)
25.4.2010 Drawing A/c Dr
To Purchases A/c 1,000
(Being goods withdrawn for personal 1,000
use)
4: Journalise the following transactions
2011 Jan 1 Goods worth Rs.7,000 given as charity
5 Received Rs.19,500 from Krishnan in full settlement of his
account for Rs.20,000
7 Cash purchases made from X Rs. 5,000
8 Credit purchases made from Y 20,000
10 Goods returned to X and cash received Rs.1,000
15 Goods returned to Y Rs.4,000
20 Received first and final dividend of 80 paise in the rupee from
the official receiver of Mr.Mani, who owed Rs.10,000
27 Sold to Siva goods worth Rs.10,000 less 3% cash discount and
received Rs.9,700
28 The installation charges of machinery amounted to Rs.2,400
30 Goods distributed as free samples worth Rs.15,000
Solution: Journal entries
Date Particulars L.F Debit Credit
.
1.1.2011 Donation A/c Dr 7,000
To Purchases A/c 7,000
(Being donation of goods made)
5.1.2011 Cash A/c Dr 19,500
Discount A/c Dr 500
To Krishnan A/c 20,000
(Being cash received in full settlement)
7.1.2011 Purchase A/c Dr 5,000
To Cash A/c 5,000
(Being cash purchases made from X)
8.1.2011 Purchases A/c Dr 20,000
To Y’sA/c 20,000
(Being credit purchases from Y)
10.1.2012 Cash A/c Dr 1,000
To Purchase returns A/c 1,000
(Being goods returned & cash Received)
15.1.2011 Y’ s A/c Dr 4,000
To Purchase returns A/c 4,000
(Being goods returned to Y)
20.1.2011 Cash A/c Dr 8,000
Bad debts Dr 2,000
To Mani A/c 10,000
(Being final settlement made)
27.1.2011 Cash A/c Dr 9,700
Discount A/c Dr 300
To Sales A/c 10,000
(Being cash sales made)
28.1.2011 Machinery A/c Dr 2,400
To Cash A/c 2,400
(Being Machinery erection charged paid)
30.1.2011 Advertisement A/c Dr
 To Purchases A/c 15,000
(Being goods distributed as free samples) 15,000

5: Give Journal Entries for the following transactions

2012 Jan 1 Cash Sales made to Amir for Rs.5,000

3 Credit sales made to Bala for Rs. 8,000

5 Goods returned by Amir and cash paid to him Rs. 2,000
4 Goods returned by Bala forRs.2,500
10 Discount received Rs.1,770
15 Goods purchased from Dhoni by giving cheque for
Rs. 7,000
18 Withdrawn from bank for office use Rs. 4,300
20 Withdrawn from bank for personal use of the proprietor
Rs.5,150
25 Machinery bought by giving a cheque for Rs.10,000

Solution: Journal entries

Date Particulars L.F. Debit Credit

1.2012 Cash A/c Dr 5,000

To Sales A/c 5,000
(Being cash sales made)
3.1.2012 Bala A/c Dr 8,000
To Sales A/c 8,000
(Being credit sales made to Bala)
5.1.2012 Sales return A/c Dr 2,000
To Cash A/c 2,000
(Being goods returned for which cash paid)
4.1.2012 Sales return A/c Dr 2,500
To Bala A/c 2,500
(Being goods returned by Bala)
10.1.2012 Cash A/c Dr 1,770
To Discount A/c 1,770
(Being discount received)
15.6.2012 Purchase A/c Dr 7,000
To Bank A/c 7,000
(Being goods purchased for which cheque is given)
18.1.2012 Cash A/c Dr 4,300
To Bank A/c 4,300
 (Being cash withdrawn from bank for office use)
20.1.2012 Drawings A/c Dr 5,150
To Bank A/c 5,150
(Being cash withdrawn from bank for personal use by
proprietor)
25.1.2012 Machinery A/c Dr 10,000
To Bank A/c 10,000
(Being Machinery purchased by paying cheque)

SUBSIDIARY BOOKS

All transactions are first entered in the journal in the order in which they occur and
from the journal they are posted to the respective accounts in the ledger. But this should
involve a tremendous amount of work because each transaction requires a separate debit to the
receiving account and a credit to the giving account to bring into record the two fold aspect of
each transaction. A considerable saving of clerical work can be brought about if transactions of
similar nature are recorded in separate journals so as to permit the sub divisions of the journal
but it would also make easier the job of posting in the ledger, as the postings can then be sub
divisions of the journal into various books recording transactions of the similar nature are
called subsidiary books.

Objectives of subsidiary books

a. Easy and quick recording of transactions

b. To supply necessary information to the business
c. To have the division of work
d. To avoid unnecessary clerical work in an organisation
e. To be efficiency and time keeping

Advantages of Subsidiary Books

a) Economy in Labour
If the transactions are recorded in the book of accounting directly it will consume less time
than if the transactions are recorded in the journal and then posted to the ledger.
b) More accuracy
There will more accuracy in the books of accounts as entries are made in total only and that too
once in a month.
c) Classification of transactions becomes automatic
As there is a separate book for each type of transaction, the transaction of same nature are
automatically brought at one place. For ex. all credit purchase of goods are recorded in the
purchase book.
d) Reference becomes easy
If any reference is required, it can be traced easily by referring to the appropriate subsidiary
book.
e) Statistical records
Additional information can be collected while maintaining a subsidiary book. For example,
Sales book can collect the information relating to the sales of different areas or of different
sales men.
f) Facilitates division of work
The division of journal into various subsidiary books facilitates division of work among may
person. This, in turn, facilitates prompt recording of transaction and saves a lot of time.
g) Maintenance of accounts
If specialized books are kept it maybe possible to avoid maintenance of some accounts books.
For example the date of payment, cheque number etc. can be noted in the purchases book
which will obviate the need of maintaining the creditors account.
h) Facilitates checking
When the trail balance does not agree, the location of errors will be relatively easy.

Subdivision of journal

1. Cash book to record cash receipts and payments

2. Purchase book or bought book or invoice book for recording credit purchases of
goods.
3. Sales book or day book for recording all goods sold on credit.
4. Purchases returns book or retunes outwards book for recording all purchases
returned to creditors.
5. Sales returns book or returns inwards book for recording all sales returned by
customers.
6. Bills receivablebook to keep a record of bills received from customers.
7. Bills payable book to keep record of bills payable to creditors.
8. Journal proper to keep a record of those transactions for which there is no separate
book.

CASH BOOK
A financial journal that contains all cash receipts and payments, including bank
deposits and withdrawals. Entries in the cash book are then posted into the general ledger. The
cash book is periodically reconciled with the bank statements as an internal method of
auditing.
Single Column or Simple cash Book
It has only cash column in it. It records the cash transactions related to a period.
Whenever cash is received on account of some transaction, it is recorded on the debit (right or
receipts) side of the cash book. When cash is paid, it is recorded on the credit (left or payment)
side of the cash book. At the end of the period, both sides are balanced.
Double Column cash Book (cash and discount columns)
A double column cash book or two column cash book is one which consists of two
separate columns on the debit side as well as credit side for recording cash and discount. In
many concerns it is customary for the trader to allow or to receive small allowance off or
against the dues. These allowances are made for prompt settlement of accounts. In certain
business almost all receipts or payments are accompanied by such discounts and in order to
avoid unnecessary postings separate columns in the cash book are introduced to record the
discounts received or allowed. These discount columns are memorandum columns only. They
do not form the discount account. The discount column on the debit side of the cash book will
record discounts allowed and that on the credit side discounts received.

Three column cash book (cash, bank and discount columns)

A three column or treble cash book is used in recording a business's daily cash
transactions. This accounting tool has three columns on the debit and credit side. One column
is used to record cash transactions, one is for bank transactions and the third is for any
discounts received and paid.
BASIC DOCUMENT FOR SUBSIDIARY BOOKS
Inward Invoice
This is the document sent by the suppliers of goods giving details of goods sent, price,
value, discount etc. It is the basis for entries in purchases book.
Outward Invoice
This is a document sent by the firm to the customers, showing the details of goods
supplied, their price and value, discounts etc., it is the basis for writing sales book.

Debit Note
It is a simple statement sent by a person to another person showing the amount debited
to the account of the latter along with a brief explanation. The debit notes are issued by a trader
relating to purchase returns in order to put up his claim for abatement of his dues to the other
party. Debit notes are serially numbered and are similar to invoices although they are usually
printed in red ink.

Credit Note
It is nothing but a statement sent by one person to another person showing the amount
credited to the account of the latter along with a brief explanation. The credit notes are used for
sales return in order to intimate related abatement and are similar to invoice although they are
usually printed in red ink.

Cash Receipts and Vouchers

These are the vouchers and receipts for cash received and paid. Entries in cash book are
made on the strength of the vouchers and receipts. They are also useful for auditing purpose.

Contra Entry
When an entry affects both cash and bank accounts, it is called a contra entry, that is,
both the debit and credit aspects of a transactions are recorded in the cash book itself. Ex. Cash
paid into bank, Cash withdrawn from bank for office use and Cheque deposited into
bank.Contra entries are denoted by writing the letter ‘C’ in the LF column, on both sides of the
cash book. They indicate that no posting in respect thereof is necessary in the ledger.
PURCHASES BOOK
This book is kept to record all credit purchases of goods for resale. To be eligible for
being recorded in the purchases book, the goods purchased on credit must be those in which
the firm normally deals. Cash purchases of goods are entered in the cash book, so these are not
recorded in the purchases book. This book is also known as invoice book.
Costing of purchases book
Each suppliers account is individually credited in the ledger with there amount of goods
purchased from him because he is the giver of goods. The periodical total of the purchase
book is posted to the debit of purchases account with the words “ to sundries as purchases
book.”
Specimen of a purchase book
Date Particulars Invoice L.F. Details Amount

In particular column, name of the party and particulars of the goods purchased are written.

Positing from purchases day book to the ledger

After the transactions are recorded in the purchases book, posting them to the ledger
involves two steps.
Step 1: Posting to creditors ledger: at the end of the day, each entry is posted to the credit side
of the respective personal account in the creditors ledger.
Step2 : Posting to general ledger: at the end of the monthly, the aggregate of the purchases is
posted to the general ledger after passing the following entry.

Particulars L.F. Dr.(Rs) Cr.(Rs.)

Purchases A/c Dr xxx xxx

Sales book
Sales book, also known as day book, is used to record all accredit sales of goods in
which the firm normally deals. The sale of any asset is not recorded in it. Similarly, cash sales
are not entered in it because these are entered in the cash book.
Posting of sales book
Each customer’s account is individually debited in the ledger with the amount of goods
sold to him as he is the receiver of goods. The periodical total of the sales book is posted to the
credit of sales account with the words by sundries as per sales book.
Specimen of sales book

Invoice Gross Trade Net Sales Total

Dt Particulars l.f
No Amount Amount Amount Tax Amount

Posting from sales day book to the ledger

After the transactions are recorded in the sales book, posting them into the ledger
involves two steps

Step 1: Posting to debtors ledger: At the end of the day each entry is posted to the debit side of
the respective personal account in the debtors ledger.
Step 2 : Posting to general ledger: At the end of the month, the aggregate of sales is posted to
the general ledger by passing the following entry.
Particulars L.F. Dr.(Rs.) Cr.(Rs.)
xxx
Sundry debtors A/c Dr xxx
To sales A/c xxx
To sales tax payable A/c

PURCHASE RETURNS BOOK

A firm may return the goods purchased back to the supplier for reasons such as poor
quality, damage, excess quantity, etc. when goods are returned, they are entered in the
purchases returns book.

When the firm returns the goods, it prepares a debit note and sends it to the supplier
along with the goods. Debit note is a statement prepared in duplicate by the trader who returns
the goods to the suppler. It contains details such as the description of the goods, quantity
returned and also their value. The supplier, in turn, will prepare a credit note and sends it to the
firm. The firm makes entries in the purchases returns book on the basis of credit note.
Purchase returns book is prepared in the same way as the purchases day book, except
that in the remarks column, a brief description of the reason for the return is mentioned.
Posting of purchases returns book
Each suppliers account is individually debited with the value of goods returned to him
and the periodical total of this book is credited to returns outwards account or purchases returns
account as the goods go out.
Specimen of a purchase returns book
Debit
Date Particulars L.F Amount Remarks
Note No.

Posting from purchases returns book to the ledger

After the transactions are recorded in the purchases returns book, posting them to the ledger
involves two steps.

Step 1: Posting to creditors ledger. At the end of the day, each entry is posted to the debit side
of the respective personal account in the creditors ledger
Step 2 ; posting to general ledger: at the end of the month, the aggregate of the purchases
returns is posted to the general ledger by Passing the following entry.
Particulars L.F Dr.(Rs.) Cr.(Rs.)
xxx
Sundry creditors Dr xxx
To purchases returns A/C

SALES RETURNS BOOK

When goods are returns by the buyer to the business, they are recorded in this book. A
credit note in duplicate is prepared in the name of the buyer when goods are; returned. The
original copy of the credit note is sent to the buyer. Credit note is a statement prepared by a
trader who receives back from his customer the goods sold. It contains details such as the
description of the goods returned by the buyer, quantity returned and also their value.

Posting of Sales Return Books

Each customer’s account is credited with the value of goods returned by him. The
periodical total of the book is debited to Returns inward account or sales returns account as
returned goods enter the business.

Specimen of a Sales Returns book

Date Particulars Credit L.F Amount Remarks

 Note No. (Rs.)

Posting from the sales returns book to the ledger

After the transactions are recorded in the sales returns book, posting them into the
ledger involved two steps.

Step 1: Posting to Debtors Ledger: At the end of the day, each entry is posted
to the debit side of the respective personal account in the Debtors Ledger.

Step 2: Posting to General Ledger: At the end of the month, the aggregate of the sale returns is
posted to the General ledger by passing the following entry.

L.F Dr.(Rs.) Cr.(Rs.)

Particulars
xxx
Sales Returns A/c Dr xxx
To Sundry Debtors A/C

BILLS RECEIVABLE BOOK

In case of bill of exchange, the creditor prepares or draws the bill and it is accepted by
the debtor. In case of creditor, the bill is called as bills receivable and in case of debtor, the bill
is called as bills payable.

Date From Date

Bill L Where Due
When whom Drawer Acceptor of Term Amt
No. F Payable Date
received received Bill

While finding out the due date of the bill, 3 days of grace are added to the term period.

BILLS PAYABLE BOOK (Format of Bills Payable Book)

Date Date
Bill To whom L Where Due
When Payee of Term Amt
No. received F Payable Date
given Bill

JOURNAL PROPER

Transactions, which do not find place in any of the aforesaid subsidiary books, are
recorded in the journal proper. Entries recorded in the journal proper as follows.

1. Credit purchases of assets

2. Credit sale of old assets
 3. Credit purchase of stationery
4. Opening entry
5. Closing entries
6. Transfer entries
7. Adjusting entries and
8. Rectification entries
Trade discount
When a customer buys goods regularly or buys large quantity or buys for a large
amount, the seller is usually inclined to allow a concession in price. He will calculate the total
price according to the list of catalogue. But after the total is arrived at, he will make a
deduction 5% or 10% depending upon his business policy. This deduction is known as Trade
discount.

Cash Discount
An amount which is allowed for the prompt settlement of debt arising out of a sale
within a specified time and calculated on a percentage basis is known as cash discount, i.e., it is
always associated with actual payment.

Difference between Trade Discount and Cash Discount

TRADE DISCOUNT CASH DISCOUNT

It is given by the manufacturer or the

It may be allowed by seller to any debtor.
wholesaler to a retailer and not to others.

It is allowed on a certain quantity being It is allowed on payment being made before a

purchased. certain date.
It is a reduction in the catalogue price of an It is a reduction in the amount due by
article. debtors.
It is not usually account ted for in the books This discount must have to be accounted for
since the net amount (i.e. after deduction in the books since it is deducted from the
discount) is shown. gross selling price.
It is allowed only when there is a sale either It is allowed only when there is cash receipt
cash or credit. or cash payment including cheques.
It varies from customer to customer
It is usually given at the same rate which is
depending on the time and period of
applicable to all customers.
payment.

It is allowed only on condition. The dues

It is allowed or not allowed according to sale should be paid within the stipulated time. If
policy followed by a business concern. not, the debtor is not eligible for cash
discount.

1: Enter the following in a cash book (Single or Simple column)

2013 Jan 1 Started business with a capital of Rs.20,000

5 Bought goods for cash Rs.3,000
8 Cash sales made for Rs. 2,500
10 Travelling expenses paid Rs.350
12 Sold goods for cash Rs.1,500
15 Telephone rent paid Rs.700
18 Loan from Kevin Rs.2,000
20 Postage expenses paid Rs.300
Solution:
CASH BOOK
Dr. Cr.
R L V L
Date Particulars Cash Date Particulars Cash
N F N F

1.1.13 To Capital a/c 20,000 5.1.13 By Purchase a/c 3,000

By Travelling
8.1.13 To Sales a/c 2,500 10.1.13 350
expenses a/c
By Telephone rent
12.1.13 To Sales a/c 1,500 15.1.13 700
a/c
By Postage
18.1.13 To Loan a/c 2,000 20.1.13 300
expenses a/c
31.1.13 By Balance c/d 21,650
26,000 26,000
1.2.13 To Balance b/d 21,650

2: Dhilipan commenced business on 1.4.2010 with Rs. 20,000 as capital. He had the following
transactions in the month of April 2010.
April 1 Cash paid for purchase of machinery Rs.5,000
2 Purchased goods for Rs.500
5 Sold goods for cash Rs.1,000
8 Paid cash to Hari Rs.2,000
He allowed discount Rs.200
10 Received cash from Mohan Rs. 1,000
Allowed discount Rs. 100
14 Paid Mahesh Rs. 500
He allowed discount Rs.50
Prepare the double column cash book (cash and discount column) for the month of April 2010.
Solution:
CASH BOOK
Dr. Cr.
R L Dis V L Dis
Date Particulars N F count Cash Date Particulars N F count Cash
1.4.10 To Capital a/c 20,000 2.4.10 By Machinery a/c 5000
5.4.10 To Sales a/c 1,000 2.4.10 By Purchase a/c 500
10.4.10 To Mohan a/c 100 1,000 8.4.10 By Hari a/c 200 2,000
14.4.10 By Mahesh a/c 50 500
30.4.10 By Balance c/d 14,000
22,000 22,000
To Balance
1.5.10 100 14,000 250
b/d
 3: Prepare a three column cash book from the following transactions and bring out the balances
2011Jan 1 Cash in hand R.2,500
1 Cash at bank Rs.10,000
2 Paid into bank Rs.1,000
5 Bought furniture and issue cheque Rs.2,000
8 Purchased goods for cash Rs.500
12 Received from Mohinder Rs.980
Discount allowed Rs.20
14 Cash Sales Rs.4,000
16 Paid to Amar by cheque Rs.1,450
Discount allowed Rs.50
19 Paid into bank Rs.400
23 Withdraw from bank for private expenses Rs.600
24 Received cheque from Patel Rs.1,430
Allowed him discount Rs.20
26 Deposited Patel’s cheque into bank
28 Withdraw cash from bank for office use Rs.2,000
30 Paid rent by cheque Rs.800
Solution:
CASH BOOK
Dr. Cr.
R L Dis Bank V L Dis Bank
Date Particulars N F count Cash Date Particulars N F count Cash
2011 To Balance 10,00 2011
Jan
b/d 2,500 0 Jan 2 By Bank a/c C 1,000
1

2 To Cash a/c C 1,000 5 By Furniture a/c 2,000

To Mohinder
12 20 980 8 By Purchase a/c 500
a/c
14 To Sales a/c 4,000 16 By Amar 50 1,450

19 To Cash a/c C 400 19 By Bank a/c C 400

24 To Patel a/c 20 1,430 23 By Drawings a/c 600
26 To Cash a/c C 1,430 26 By Bank a/c C 1,430
28 To Bank a/c C 2.000 28 By Cash a/c C 2,000
30 By Rent a/c 800
31 By Balance c/d 7,580 5,980
40 10,910 12,830 50 10,910 12,830
May To Balance
1 b/d 7,580 5,980
4 : Enter the following transactions in proper subsidiary books

2009 Rs.
Jan 1 Purchased goods from Amar 10,000
3 Sold goods to Mani for cash 8,000
8 Returned defective goods to Amar 2,000
10 Naren bought goods from us 9,000
13 Sold goods to Prem 3,000
14 Returns inwards from Prem 500
17 Purchases from Jain 5,000
20 Credit sales to Kamal 2,500
22 Returned to Jain goods worth 800
28 Bought Furniture from K Ltd. On credit 13,000
29 Received goods returned by Kamal 500
30 Sold old machinery for cash 3,000
Solution:
PURCHASE BOOK
Invoice
Date Particulars LF Details (Rs.)
No.

1.1.09 Amar 10,000

17.1.09 Jain 5,000

Total 15,000

SALES BOOK
Invoice
Date Particulars LF Details (Rs.)
No.

10.1.09 Naren 9,000

13.1.09 Prem 3,000

20.1.09 Kamal 2,500

Total 14,500

PURCHASE RETURNS BOOK

Debit
Date Particulars LF (Rs.) (Rs.)
Note No.

8.1.09 Amar 2,000

22.1.09 Jain 800

 Total 2,800

SALES RETURNS BOOK

Credit
Date Particulars LF (Rs.) (Rs.)
Note No.

14.1.09 Prem 500

29.1.09 Kamal 500

Total 1,000

CASH BOOK
Dr. Cr.
Date Particulars Cash (Rs.) Date Particulars Cash (Rs.)

3.1.09 To Sales 8,000

30.1.09 To Machinery 3,000

JOURNAL PROPER

Date Particulars LF Debit Credit

28.1.09 Machinery A/c Dr 13,000

To K Ltd., A/c 13,000
(Being furniture bout on credit from K ltd.,

BILLS RECEIVABLE BOOK

5 : Prepare Bills Receivable book from the following information
1.1.06 Received a bills receivable from Jana due after 2 months
Rs.2,000
15.1.06 Received from Shane her promissory note at 1 month for Rs.1000
26.1.06 Received from Veema, Rosi’s acceptance dated 22.1.06 for 90
days for Rs.2,500
BILLS RECEIVABLE BOOK
From
Bill Date when L Where Date of
whom Drawer Acceptor Term Due Date Amt.
No. received F payable Bill
received

1 1.1.06 Jana Self Jana 1.1.06 2m 4.3.06 2,000

2 15.1.06 Shane Self Shane 15.1.06 1m 18.2.06 1,000

3 26.1.06 Veema Veema Rosi 22.1.06 90 d 25.4.06 2,500

Note: Calculation for 90 days + 3 days

January 9+ February 28+ March 31 + April 25 = 93 days
BILLS PAYABLE BOOK
6 : Enter the following transactions in the bills payable book of Madhan
1.7.06 Accepted kamal’s bill at 60 days sight Rs.200 (Payable at IOB, Chennai)
8.7.06 Accepted Rajini’s bill dated 5.7.06 at 3 months after date for Rs.300 payable to Vijay
15.7.06 Sent to Ajith our acceptance at 30 days for Rs.500 in favour of Vikram. The bill was
drawn on 12.7.06
22.7.06 Received a bill at 2 months for Rs.200 drawn on 15.7.06 by Merry in favour of Sher
and accepted it (payable at Sbi, Trichy)
BILLS PAYABLE BOOK
Bill Date when To whom L Where
Payee Date of Bill Term Due Date Amt.
No. given received F Payable

1 1.7.06 Kamal IOB Chennai 1.7.06 60 d 2.9.06 200

2 8.7.06 Rajini Vijay -- 5.7.06 3m 8.10.06 300

3 15.7.06 Ajith Vikram -- 12.7.06 30 d 14.8.06 500

4 22.7.06 Merry Shero SBI, Trichy 15.7.06 2m 18.9.06 200

Purchase Book /Bought ledger Book

Illustration 7: Nalir co. is trading in textiles. Record the following transactions in purchase
day book
1.1.13 Purchased 100 silk pieces from Fennr & co. at Rs.100 per piece
less trade discount at 10%. Packing charges Rs.1,000
2.1.13 Purchased from Raymonds 100 meters of cotton fabrics at
Rs.10 per meter less trade discount at 10%.
3.1.13 Purchased furniture from Amar & Co., for Rs.20,000
4.1.13 Purchased from Madura coats 100 meters of cotton fabrics at
Rs.4 by paying cash
5.1.13 Purchased stationery from Ravi & Co. on credit for Rs.1,000
Solution: Purchase Book
Invoice
Date Particulars L.F Details Rs.
No.
1.1.13 Fenner & Co.
100sillk pieces at Rs. 100 per piece
Less: Trade discount 10% 10,000
1,000
9,000
Add: packing charges 1,000 10,000
2.1.13 Raymonds
100 sillk pieces at Rs. 10 per piece
Less: Trade discount 10% 1,000
100 900
Total Amount 10,900
Note: Purchase of furniture, purchase of stationery and cash purchases will not be entered in
the purchase book.
Sales Book
8: Enter the following transaction in the sales book
20013Apr 4 Sold to M/s. Ajith Bros:
100 pieces long cloth @ Rs.50
100 pieces shirting @ Rs.40
Packing and delivery Rs.100
8 Sold to M/s. Kholi
20 pieces coat clothing @ Rs.200
20 Sold to M/s. Lee
100 blankets @ Rs.50
100 blankets @ Rs.80
Solution: Sales Book
Invoice
Date Particulars L.F Details Rs.
No.
4.4.13 M/s Ajith & Bros.
100 pieces of long cloth at Rs. 50 per
piece 5,000
100 pieces shirting at Rs.40 4,000
Add: Packaging and delivery charges 100
9,100
8.4.13 M/s Kholi
20pieces of coat clothing at Rs.200
each 4,000
20.4.13 M/s Lee
100 blankets @ Rs.50 5,000
100 blankets @ Rs.80 8,000 13,000
Total Amount 26,100

JOURNAL PROPER - Opening Entries

9: From the Balance Sheet of Vijay & co., as on 31.3.2012 pass the relevant opening entry
Liabilities Rs. Assets Rs.
Capital 50,000 Land 50,000
Sundry Creditors 15,000 Building 10,000
Bank O/D 10,000 Cash at Bank 15,000
75,000 75,000
Solution:
Debit Credit
Date Particulars L.F. (Rs.) (Rs.)
1.4.2012 Land A/c Dr 50,000
Building A/c Dr 10,000
Cash at Bank A/c Dr 15,000
To Capital A/c 50,000
To Sundry Creditors A/c 15,000
 To Bank O/D A/c 10,000
(Being the balances brought forward)
Closing Entries
10: Pass the closing entries for the following ledger balances
Particulars Debit (Rs.) Credit (Rs.)
Capital 2,00,000
Adjusted Purchases 1,00,000
Carriage inwards 10,000
Closing stock 50,000
Buildings 3,00,000
Discount received 5,000
Sales 3,00,000
Advertising 45,000
5,05,000 5,05,000
Solution:
Particulars Debit (Rs.) Credit (Rs.)
Trading A/c Dr 1,10,000
To Adjusted purchases A/c 1,00,000
To Carriage inwards A/c 10,000
(Being Adjusted purchases & carriage inwards
transferred to Trading A/c)
Sales A/c Dr 3,00,000
To Trading A/c 3,00,000
(Being Sales transferred to Trading A/c)
Trading A/c Dr 1,90,000
To P & L A/c 1,90,000
(Being Gross profit transferred )
P & L A/c Dr 45,000
To Advertising A/c 45,000
(Being advertisement expenses transferred to P & L
A/c )
Discount received A/c Dr 5,000
To P & L A/c 5,000
(Being discount received transferred P & L A/c )
P & L A/c Dr 1,50,000
To Capital A/c 1,50,000
(Being Net profit transferred to
capital)1,90,000+5,000-45,000
Adjusting Entries
11: Pass adjusting entries
Charge interest on drawing at 10 % (Drawings Rs.2000)
Write off bad debts Rs.600
Depreciate machinery by Rs.1,500
Outstanding salary Rs.1,300
Solution:
Particulars Debit (Rs.) Credit (Rs.)
Capital A/c Dr 200
To Interest on drawings A/c
200
(Being interest on drawings provided)
Bad debts A/c Dr 600
To Debtors A/c
600
(Being bad debts written off)
Depreciation A/c Dr 1,500
To Machinery A/c 1,500
(Being Depreciation on machinery provided )
Salary A/c Dr 1,300
To Outstanding Salary A/c 1,300
(Being salaries outstanding provided )

BOOKS OF FINAL ENTRY

Books of final entry is also called a ledger. A book that uses the double entry principle
of accounting for separate accounts.

LEDGER

Ledger account is a summary statement of all the transactions relating to a person,

asset, expense or income which have taken place during a given period of time and shown their
net effect. The name of the account is entered as the head of the account. The account is
divided into two parts. The part on the left is the debit and right side is the credit.

A journal is maintained only to facilitate the passing of entries in the ledger, so every
entry recorded in the journal must be posted into the ledger. Ledger is register having a number
of pages which are numbered consecutively. One account is usually assigned ne page in the
ledger. However, if the transactions pertaining to a particular account are more. May be
assigned more than one page in the ledger. An index of various account opened in the ledger is
given at the beginning of the ledger for the purpose of easy reference. It is principal book of
accounts because it helps us in achieving the objectives of accounting.
Example

Journal Journal
Amt Amt
Dt Particulars Folio Dt. Particulars Folio
(Rs.) (Rs.)
No No

Advantages of Ledger

a. Transactions relating to a particular person, item or heading of expenditure or income

are grouped in the concerned account at one place.
b. When each account is periodically balanced it reflects the net position of that account.
c. Ledger is the stepping stone for preparing Trial Balance - which tests the arithmetical
accuracy of the accounting books.
d. Since the entries recorded in the journal are referenced into ledger the possibility of
errors of defalcations are reduced to the minimum.
e. Ledger is the destination of all entries made in journal or sub-journals.
 f. Ledger is the "store-house" of all information which subsequently is used for preparing
final accounts and financial statements.

Differences between journal and ledger

Journal Ledger

It is a book of prime entry It is a book of final entry

Transactions are recorded daily Posting in the ledger is made periodically

Recording in the ledger is a second stage,

Recording in the journal is the first stage
which is done on the basis of journal

It shows both the aspects debit as well as

Each entry in ledger shows only one aspect.
credit

The process of recording in journal is called The process of recording in the ledger is
journalizing called posting

Transaction are recorded in the journal in the Transactions pertaining to a particulars

chronological order account appear alone place in the ledge

For preparing final accounts, journals does For preparing final accounts, ledger balance
not serve as a basis serve as the basis.

Narration is written after each entry No narration is given

Balancing the ledger account

Add up each side of account; note the totals up on a slip of paper, and find the
difference called the balance of the account. Enter the balance on the lesser side of the account
, using the word by balance c/d in case of accredit and to balance c/d in case of debit. The two
sides of the account will now be equal in amount.

An account is said to have a debit balance when the debit side is the greater and to have
credit balance when the credit side is the greater. Repeat the difference or balance of the
amount below he double lines. On the opposite side to that on which it was first entered, using
the words to balance b/d in case of debit or by balance b/d in case of credit.

Ledger posting of journal

Every transaction is first recorded in the journal in the form of a journal entry. From
the journal it is transferred to the concerned accounts in the ledger. This process of transferring
the transactions from the journal to the ledger is known as posting

Example: 2013, April 1, Good purchased for cash Rs. 10,000

Journal entry

Date Particulars L.f. Dr. (Rs.) Cr. (Rs)

Purchase A/c Dr 10,000
1.4.2013 To cash A/c 10,000
(Being goods purchased for cash)

Posting is as follows:

LEDGER

CASH ACCOUNT

Journal Journal
Amt. Amt.
Dt Particulars Folio Dt Particulars Folio
(Rs.) (Rs.)
No No

2013 By purchase 10,000

PURCHASES ACCOUNT

Amt
Journal Journal Amt
Dt Particulars (Rs.) Dt Particulars
Folio no Folio no. (Rs.)

2013 To Cash 10,000

April

From the above we see that while posting from the journal, the Dr. Account is debited
and cr. Account is credited and the entry in each account indicates the account in which the
corresponding entry appears.

TRIAL BALANCE
A bookkeeping worksheet in which the balances of all ledgers are compiled into debit
and credit columns. A company prepares a trial balance periodically, usually at the end of
every reporting period. The general purpose of producing a trial balance is to ensure the entries
in a company's bookkeeping system are mathematically correct. Trial balance means
statement of debit and credit balances of ledger accounts including cash and bank balances.
Definition if trail balance
Spicer and Peglar, “A Trial Balance is a list of all the balances standing on the ledger
accounts and Cash Books of a concern at any given date”.
Preparation of trial balance
Trial balance is a statement which shows the list of balances of accounts on a particular
date. It is prepared in two ways.
1. Total method
Under this method, every ledger account is totalled and that total amount (Both debit
and credit) is transferred to trial balance. This method is not commonly used as it cannot help
in the preparation of the financial statement.
2. Balance method
Under this method trial balance is prepared by taking balances of accounts (debit or
credit) standing in the books on a given date. The debit balances of the accounts are entered in
the debit column and credit balances are entered in the credit column.
The total of debit balances must be equal to the total of credit balances. The agreement of
the totals of the trial balance helps to prove the arithmetical accuracy of the entries recorded in
the books of accounts. As for every debit, there is corresponding credit, the trial balance must
tally.
Objectives of preparing the trial balance
(i) To have balances of all the accounts of the ledger in order to avoid the
necessity of going through the pages of the ledger to find it out
(ii) To have a proof that the double entry of each transaction has been recorded
because of its agreement.
(iii) To have arithmetic accuracy of the books of accounts because of the
agreement of the trial balance
(iv) To have material for preparing the profit and loss account and balance sheet
of the business
Uses of trial balance
a. It helps to check the arithmetic accuracy of the books of account.
b. It acts as a basis for preparing the final accounts, namely, trading and profit and loss
accounts and balance sheet.
c. Instead of going through the pages of the ledger to find out the balances, the users can
go through the trial balance by which they can save their time.
Limitations of trial balance
a. Trial balance can be prepared only in those concerns where double entry system of
accounting is adopted. This systemis very costly and cannot be adopted by the small
concerns.
b. Though trial balance gives arithmetic accuracy of the books of accounts but there
are certain errors which are not disclosed by the trial balance. That is why it is said
that trial balance is not a conclusive proof of the accuracy of the accounts.
c. If trial balance is not prepared correctly then the final aaccounts prepared will not
reflect the true and fair view of the state of affairs of the business. Whatever
conclusions and decisions are made by the various groups of persons will not be
correct and will mislead such persons.
Difference between Trial balance and Balance sheet
Trial Balance Balance Sheet
A Trial Balance is prepared to check the A Balance Sheet is prepared to know the
arithmetical accuracy of the books of financial position of the business enterprise on
accounts. a given date.
A Trial Balance can be prepared frequently. It
A Balance Sheet is generally prepared at the
may be prepared at the end of a month or a
end of the accounting period.
quarter.
The headings of the two sides are “Liabilities”
The heading of the two columns are “Debit
and “Assets”.
Balances” and “Credit Balances”.
In a Balance Sheet, accounts of assets,
All types of accounts find their place in the liabilities, capital and those accounts which
Trial Balance. are remained open after the preparation of
Trading and Profit and Loss account.
Generally, the opening stock appears in the
In a Balance Sheet, only the closing stock
Trial Balance, whereas the closing stock does
appears on the assets side.
not.
In a Trial Balance, it is not possible to have In the Balance Sheet, information about net
information about net profit or net loss. profit earned or net loss incurred is provided.
Balance Sheet cannot be prepared without
A Trial Balance can be prepared without
making adjustments regarding prepaid
making adjustments regarding prepaid
expenses, outstanding expenses, income
expenses, income received in advance,
received in advance or accrued income,
accrued income, etc.
making provisions for possible losses, etc.
Rules for preparing the trial balance
While preparing the trial balance from the given list of ledger balances, the following rules
are to be considered.
(i) The following balances are placed in the debit column of the trial balance
(ii) (a) Asses A/c
(b) Expenses A/c
(c) Losses A/c
(d) Drawings A/c
(ii) The following balance are placed in the credit column of the trial
balance
(a) Liabilities A/c
(b) Income A/c
(c) Profits A/c
(d) Capital A/c
Trial balance can be prepared on a loose sheet having four columns. A specimen is given
as follows:
Trial balance of as on…………
SI. No Name of the account Dr. Balance Cr. Balance
 Format of a trial balance
Particulars Debit (Rs.) Credit (Rs.)
Cash xxx
Bank xxx --
Stock xxx --
Debtors xxx --
Bills Receivable xxx --
Prepaid Expenses xxx --
Accrued incomes xxx --
Investments xxx --
Furniture xxx --
Vehicles xxx --
Machinery xxx --
Land xxx --
Buildings xxx --
Purchases xxx --
Wages xxx --
Carriage xxx --
Sales return xxx --
Office expenses xxx --
Selling expenses xxx --
Sales -- xxx
Income received in advance xxx
Purchase returns xxx
Capital xxx
Loans xxx
Creditors xxx
Bills payable xxx
Outstanding expenses xxx

Total xxxx xxxx

1 : Post the following transaction to ledger account on June 2008

1 Abi started business with cash Rs.10,000
Goods Rs. 5,000
and Building Rs.10,000
2 Sold goods for cash Rs. 2,500
9 Sold goods to Ganesh Rs. 500
10 Cash Purchase Rs. 4,000
13 Credit purchase from Ajay Rs. 3,800
15 Rent paid Rs. 1,000
16 Advertisement expenses Rs. 300
Solution: Journal Entries
Date Particulars L.F. Debit Credit
1.6.2008 Cash A/c Dr 10,000
Stock A/c Dr 5,000
Buildings A/c Dr 10,000
To Abi’s Capital A/c 25,000
(Being Capital introduced)
2.6.2008 Cash A/c Dr 2,500
To Sales A/c 2,500
(Being Cash Sales made)
9.6.2008 Ganesh A/c Dr 500
To Sales A/c 500
(Being Credit Sales made)
10.6.2008 Purchase A/c Dr 4,000
To Cash A/c 4,000
(Being Cash Purchase made)
13.6.2008 Purchase A/c Dr 3,800
To Ajay A/c 3,800
(Being Credit Purchase made)
15.6.2008 Rent A/c Dr 1,000
To Cash A/c 1,000
(Being rent paid)
16.6.2008 Advertisement A/c Dr 300
To Cash A/c 300
(Being advertisement expense paid)

Ledger Accounts
Dr. Cash A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
1.6.08 To Abi’s Capital A/c 10,000 10.6.08 By Purchase A/c 4,000
2.6.08 To Sales A/c 2,500 15.6.08 By Rent A/c 1,000
16.6.08 By Advertisement A/c 300
30.6.08 By Balance c/d 7,200

12,500
12,500
1.7.08 To Balance b/d 7,200

Dr. Stock A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
1.6.08 To Abi’s Capital A/c 5,000 30.6.08 By Balance c/d 5,000

5,000 5,000
1.7.08 To Balance b/d 5,000
Dr. Buildings A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
1.6.08 To Abi’s Capital A/c 10,000 30.6.08 By Balance c/d 10,000

10,000 10,000
1.7.08 To Balance b/d 10,000

Dr. Abi’s Capital A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
30.6.08 To Balance C/d 25,000 1.6.08 By Cash A/c 10,000
1.6.08 By Stock A/c 5,000
1.6.08 By Buildings A/c 10,000

25,000
25,000
1.7.08 By Balance b/d 25,000

Dr. Sales A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
30.6.08 To Balance C/d 3,000 2.6.08 By Cash A/c 2,500
9.6.08 By Ganesh A/c 500

3,000
3,000
1.7.08 By Balance b/d 3,000

Dr. Ganesh A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
9.6.08 To Sales A/c 500 30.6.08 By Balance c/d 500

500
500
1.7.08 To Balance b/d 500

Dr. Purchase A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
10.6.08 To Cash A/c 4,000 30.6.08 By Balance c/d 7,800
13.6.08 To Ajay A/c 3,800

7,800 7,800
1.7.08 To Balance b/d 7,800
Dr. Ajay A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
30.6.08 To Balance C/d 3,800 13.6.08 By Purchase A/c 3,800

3,800
3,800
1.7.08 By Balance b/d 3,800

Dr. Rent A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
15.6.08 To Cash A/c 1,000 30.6.08 By Balance c/d 1,000

1,000 1,000
1.7.08 To Balance b/d 1,000

Dr. Advertisement A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
16.6.08 To Cash A/c 300 30.6.08 By Balance c/d 300

300
300
1.7.08 To Balance b/d 300

2: Journalise the following transactions, post them into ledger and bring out the balances
Post the following transaction to ledger account on Jan 2013

1 Started business with cash Rs.50,000

5 Paid into bank Rs. 10,000
10 Cash Purchases Rs. 20,000
15 Cash paid to Vignesh Rs. 8,000
17 Cash received from Rahul Rs. 15,000
20 Furniture purchased for cash Rs. 10,000
23 Commission received Rs. 400
24 Telephone rent paid Rs. 700
31 Salaries to office Staff Rs. 3,500
Solution: Journal Entries
Date Particulars L.F. Debit Credit
1.1.2013 Cash A/c Dr 50,000
To Capital A/c 50,000
(Being Capital introduced)
5.1.2013 Bank A/c Dr 10,000
To Cash A/c 10,000
(Being Cash paid into bank)
10.1.2013 Purchase A/c Dr 20,000
To Cash A/c 20,000
(Being Cash Purchase made)
15.1.2013 Vignesh A/c Dr 8,000
To Cash A/c 8,000
(Being cash paid to vignesh)
17.1.2013 Cash A/c Dr 15,000
To Rahul A/c 15,000
(Being cash received from Rahul)
20.1.2013 Furniture A/c Dr 10,000
To Cash A/c 10,000
(Being furniture purchased)
23.1.2013 Cash A/c Dr 400
To Commission A/c 400
(Being commission received)
24.1.2013 Telephone Rent A/c Dr 700
To Cash A/c 700
(Being Telephone rent paid)
31.1.2013 Salaries A/c Dr 3,500
To Cash 3,500
(Being Salaries paid to staff)

Ledger Accounts
Dr. Cash A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
1.1.13 To Capital A/c 50,000 5.1.13 By Bank A/c 10,000
17.1.13 To Rahul A/c 15,000 10.1.13 By Purchase A/c 20,000
23.1.13 To Commission A/c 400 15.1.13 By Vignesh A/c 8,000
20.1.13 By Furniture A/c 10,000
24.1.13 By Telephone rent A/c 700
31.1.13 By Salaries A/c 3,500
31.1.13 Balance c/d 13,200
65,400 65,400
13,200
1.2.13 To Balance b/d
Dr. Capital A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
31.1.13 To Balance C/d 50,000 1.1.13 By Cash A/c 50,000

50,000
50,000
1.2.13 By Balance b/d 50,000

Dr. Bank A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
5.1.13 To cash A/c 10,000 31.1.13 By Balance c/d 10,000

10,000 10,000
1.2.13 To Balance b/d 10,000
Dr. Purchase A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
10.1.13 To Cash A/c 20,000 31.1.13 By Balance c/d 20,000

20,000 20,000
1.2.13 To Balance b/d 20,000

Dr. Vignesh A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
15.1.13 To Cash A/c 8,000 31.1.13 By Balance c/d 8,000

8,000 8,000
1.2.13 To Balance b/d 8,000

Dr. Rahul A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
31.1.13 To Balance C/d 15,000 17.1.13 By Cash A/c 15,000

15,000
15,000
1.2.13 By Balance b/d 15,000
Dr. Furniture A/c Cr.
Date Particulars J.F Rs. Date Particulars J.F Rs.
20.1.13 To Cash A/c 10,000 31.1.13 By Balance c/d 10,000

10,000 10,000
1.2.13 To Balance b/d 10,000

Dr. Commission A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
31.1.13 To Balance C/d 400 23.1.13 By Cash A/c 400

400
400
1.2.13 By Balance b/d 400

Dr. Telephone Rent A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
24.1.13 To Cash A/c 700 31.1.13 By Balance c/d 700

700
700
1.2.13 To Balance b/d 700

Dr. Salaries A/c Cr.

Date Particulars J.F Rs. Date Particulars J.F Rs.
31.1.13 To Cash A/c 3,500 31.1.13 By Balance c/d 3,500

3,500 3,500
1.2.13 To Balance b/d 3,500
TRIAL BALANCE
1: Prepare Trial Balance from the following

Particulars Rs.
Capital 40,000
Sales 25,000
Stock (opening) 5,200
Debtors 2,500
Creditors 1,000
Purchases 15,000
Salaries 2,000
Rent 1,500
Cash 2,000
Insurance 300
Drawings 5,000
Plant 28,000
Bank 4,500

Solution:
Trial Balance as on………..

Credit
Particulars Debit (Rs.)
(Rs.)
Capital 40,000
Sales 25,000
Stock (Opening) 5,200
Debtors 2,500
Creditors 1,000
Purchases 15,000
Salaries 2,000
Rent 1,500
Cash 2,000
Insurance 300
Drawings 5,000
Plant 28,000
Bank 4,500
Total 66,000 66,000

2: Prepare Trial Balance from the following

Particulars Rs.
Capital 9,000
Plant &Machinery 12,000
Purchases 8,000
Sales 12,000
Creditors 8,000
Bank loan 22,000
Salaries 2,000
Rent outstanding 1,000
Opening Stock 2,000
Sales returns 4,000
Investments 14,000
Debtors 12,000

Solution:
Trial Balance as on………..

Credit
Particulars Debit (Rs.)
(Rs.)
Capital 9,000
Plant & Machinery 12,000
Purchases 8,000
Sales 12,000
Creditors 8,000
Bank Loan 22,000
Salaries 2,000
Rent outstanding 1,000
Opening Stock 2,000
Sales returns 4,000
Investments 14,000
Debtors 12,000
Suspense a/c 2,000
Total 54,000 54,000

3 : Prepare Trial Balance from the following

Particulars Rs.
Drawings 23,760
Land 20,000
Opening Stock 62,000
Debtors 90,000
Bank 21,000
Capital 34,000
Car 25,240
Rent 9,000
Creditors 35,000
Purchases 4,00,000
Postage 3,000
Sales 6,10,000
Plant 25,000
Solution:

Trial Balance as on………..

Credit
Particulars Debit (Rs.)
(Rs.)
Drawings 23,760
land 20,000
Opening Stock 62,000
Debtors 90,000
Bank 21,000
Capital 34,000
Car 25,240
Rent 9,000
Creditors 35,000
Purchases 4,00,000
Postage 3,000
Sales 6,10,000
Plant 25,000
Total 6,79,000 6,79,000

4: Prepare Trial Balance from the following

Particulars Rs.
Cash in hand 4,800
Capital 4,88,000
Purchases 5,44,000
Opening Stock 1,40,000
Sundry debtors 2,80,000
Sundry creditors 1,76,000
Machinery 3,00,000
Sales 8,00,800
Salaries 1,96,000

Solution:

Trial Balance as on………..

Credit
Particulars Debit (Rs.)
(Rs.)
Cash in hand 4,800
Capital 20,000 4,88,000
Purchases 5,44,000
Opening Stock 1,40,000
Sundry Debtors 2,80,000
Sundry creditors 1,76,000
Machinery 3,00,000
Sales 11,72,800
Salaries 1,96,000
Total 16,60,800 16,60,800
 5. Prepare Trial Balance from the following

Particulars Rs
Cash A/c 3,300
Capital A/c 12,500
Bank A/c 2,500
Purchase A/c 5,000
Vignesh A/c 2,000
Rahul A/c (Cr) 3,750
Furniture A/c 2,500
Commission A/c 100
Telephone Rent A/c 200
Salaries A/c 850
Solution:

Trial Balance as on………..

Debit Credit
Particulars
(Rs,) (Rs.)
Cash A/c 3,300
Capital A/c 12,500
Bank A/c 2,500
Purchase A/c 5,000
Vignesh A/c 2,000
Rahul A/c (Cr) 3,750
Furniture A/c 2,500
Commission A/c 100
Telephone Rent A/c 200
Salaries A/c 850
Total 16,350 16,350

FINAL ACCOUNTS

Meaning of final account

The persons interested to accounting information including the owners will like to
know the direction on which the business unit is functioning, that is whether the business earns
profit or incurs loss during the course of its operation and the financial position of the business.
Hence the accounts are closed for each accounting period and the profitability and financial
position of the business are ascertained by preparing the final accounts.
 Before preparing the final accounts it is necessary to pass journal entries for closing the
nominal accounts representing goods and other adjustments which are not carries out up to the
date of closing the accounts.

Final accounts are prepared to achieve the objectives of accountancy. In order to know
the profit or loss account is prepared. Balance sheet or position statement will portray the
financial condition of the firm on a particular date. These two statements i.e., trading and
profit and loss account and Balance sheet are prepared to give the final result of the business ,
that is why both these are collectively called as final accounts. Thus, final accounts include the
preparation of:

(i) Trading and profit and loss account and

(ii) Balance sheet.

Final accounts are the means of conveying to management, owners and interested
outsiders a concise picture of profitability and financial position of the business. The
preparation of the final accounts in not the first step in the accounting process buy they are the
end products of the accounting process which give brief accounting information of the
accounting period after the accounting period is over. These accounts summarise all the
accounting information recorded in the subsidiary books and the ledger running into hundreds
or thousands of pages.

TRADING ACCOUNT
The Trading account shows the result of producing and or buying and selling of goods.
It gives the gross profit or gross loss resulting from the transactions for a specified financial
period, normally one year. The period is stated at the head of the account.

In effect, it is a summarized goods account. The balance of the opening stock of goods,
purchases of goods less purchase returns and charges incidental to the purchase of the goods
((direct expenses ) are debited to Trading Account. The balances of sales of the goods less
sales charges of incidental to the cost of the goods means, the charges incurred by a trader
while purchasing goods meant for sale which increase the cost of the goods such as

(i) Charges incurred for bringing the goods to the warehouse of the trader like carriage
inwards, insurance in transit, freight, etc.
(ii) Excise and customers duty paid.
(iii) Water, coal ,gas, fuel, etc.,
(iv) Wages incurred of converting the goods in a saleable form.

Specimen of Trading Account

Particulars Amount Amount

Particulars
(Rs.) (Rs.)
To Opening Stock By Sales
To Purchases Less: Sales returns
Less: Purchase returns By Closing Stock
To Direct expenses By Gross Loss c/d
To Carriage inward
To Wages
To Fuel and Power
To Manufacturing Exp.
To Coal, Water and Gas
To Motive Power
To Octrol
To Import Duty
To Custom Duty
To Consumable Stores
To Foreman’s Salary
To Works Manager Salary
To Royalty of Manufactured
Goods
To Gross Profit c/d
Total

DEBIT SIDE ITEMS

Opening stock: Stock in hand at the beginning of the accounting year is shown as opening
stock. When the opening stock and closing stock are adjusted with the purchases, that is, when
the adjusted purchases account is taken in the trading account, opening stock will not be shown
separately.

Adjusted purchases =opening stock+ purchases- closing stock

Closing stock in this case will appear in the trial balance itself.

Opening stock does not appear separately.

The accounting treatment in the above case is as follows

(a) Opening stock will not appear in the trading account

(b) Adjusted purchases will be recorded in the debit side of the trading account.
(c) Closing stock will be recorded only in the balance sheet and it will not be shown in the
credit side of the trading account.

Purchases: Goods bought which are meant for resale are purchases. Both cash and credit
purchases are shown. From the purchases, returns outwards, if any, is subtracted.

Wages: Remuneration paid to workers in the factory for manufacture of goods and
remuneration paid to the workers in the godown / stores is called wages. If wages are paid for
installation of the asset, it should be added to the cost of the asset.
Carriage inwards: transportation charges paid to bring the goods from the place of supplier to
the place of business.

Octroi duty: amount paid to bring the goods within the municipal limits.

Customs duty, clearing charges, import duty: these expenses are paid to te government of
the goods imported.

Other direct expenses: Fuel, power, lighting charges, oil, grease, waste and factory expenses
related to production of the goods are taken to the trading account.

CREDIT SIDE ITEMS

Sales: goods meant for resale, when sold are shown under sales, sales include both cash and
credit sales , sales include both cash and credit sales, from the total sales returns inwards is
subtracted.

Closing stock: goods in stock at thle end of the accounting period are shown as closing stock.
When the opening stock and closing stock are adjusted with the purchases, that is, when the
adjusted purchases account is taken in the trading account closing stock will not be shown
separately.

PROFIT AND LOSS ACCOUNT

Profit and loss account is that part of final account is made for calculating the net
profit or net loss. In the debit side of this account, we show all indirect loss and expenses
(indirect expenses may be selling and distribution expenses, management expenses, financial
expenses, extraordinary losses and expenses to maintain the assets into working order) and in
the credit side of this account, we show all indirect incomes (it may be operating and non
operating incomes). After matching debit and credit side of profit and loss account, we can find
net profit or loss of business. If organisation is company, we transfer this balance to profit and
loss appropriation account; otherwise, we transfer this balance to capital account.

. Specimen of a profit and loss account

Amt Amt
Particulars Particulars
(Rs.) (Rs.)
By Gross Profit b/d
To Gross Profit b/d By Interest received
To Selling and Distribution By Discount
Exp. By Commission received
Advertisement By Rent received
Travelling expenses By Income from Investment
Bad debts By Apprenticeship Premium
Godown rent By Interest on Debenture
Export expenses By Income from any Other
Carriage outwards Sources
Bank charges By Misc. receipts
 Agent commission By Net loss transferred to capital
Up keep of motor a/c
Lorries

To Management expenses
Rent, rates and taxes
Heating and lighting
Office salaries
Printing and stationery
Postage and telegram
Telephone charges
Legal charges
Audit fees

To Depreciation

To Repairs & Maintenance

To Financial expenses
Discount allowed
Interest on capital
Interest on loan
Discount on bills

To Loss by Fire

To Net Profit transferred to

Capital a/c

Total

DEBIT SIDE ITEMS

Office and administration expenses: Expenses incurred for the office and administration such
as office salaries, office rent, office lighting, printing postage, etc.

Repairs and Maintenance expenses: Expenses incurred for repairing and maintaining the
assets.

Financial Expenses: they include interest paid on loan, discount on bills discounted and cash
discount allowed to customer.

Selling and distribution expenses: Expenses incurred for selling, promotion and distribution
of goods. Example: discount allowed transaction expenses, advertising, and commission to
sales man.

Note. If the expenses are given as wages and salaries, it must be shown in the trading account.
If the expense to given as salaries and wages it must be shown in the profit and loss account.

CREDIT SIDE ITEMS

Gross profit is the first item appearing on the credit side of profit and loss account. Other
revenue incomes also appear on the credit side of profit and to account. The other incomes are
classified as operating incomes and non operating incomes.

Operating incomes: These incomes are incidental to business and earned

from usual business carried on by the concern. Examples: discount received,
commission earned, interest received etc.

Non operating incomes: These incomes are not related to the business carried on by the firm.
Examples are profit on sale of fixed assets, refund of tax etc.

BALANCE SHEET

The Balance sheet comprises of lists of assets, liabilities and capital fund on a given
date. It presents the financial position of a concern on a particular day or date. It reflects the
assets owned by the concern and the sources of funds used in the acquisition of those assets.
Balance sheet may be called a ‘statement of equality’ in which equality is established by
representing values of assets on one side and values of liabilities and owners' funds on the
other side.

DEFINITIONS OF BALANCE SHEET

“Balance sheet is a ‘Classified summary’ of the ledger balances remaining after closing all
revenue items into the profit and loss account.” - Cropper.

“Balance sheet is a screen picture of the financial position of a going business

concern at a certain moment” - Francis.

Grouping and marshalling of assets and liabilities

The arrangement of assets and liabilities in certain groups and in a particular order is
called grouping and marshalling of the balance sheet of a business. Assets and liabilities can
be arranged In the balance sheet into two ways.

(i) In order of liquidity

(ii) In order of permanence

In order of liquidity

When assets and liabilities are arranged according to their reliability and payment
preferences, such an order is called liquidity order. Such arrangement is given below
 BALANCE SHEET

Liabilities Rs. Assets Rs.

Current liabilities Liquid Assets

Bills Payable Cash in hand
Sundry creditors Cash at bank
Bank Overdraft
Floating Assets
Long term Liabilities Sundry debtors
Loan from Bank Investments
Loan from wife Bills receivable
Fixed Liabilities Stock in trade
Capital Prepaid expenses

Fixed Assets
Machinery
Building
Furniture
Motorcar

Intangible assets
Goodwill
Patents
Copyright
Licenses

Fictitious assets
Advertisement
Misc. Expenses
Profit & Loss A/c

In order of permanence

When the order is reversed from that what is followed in case of liquidity, it’s called
order of permanence. This order is followed in case of joint stock companies compulsorily but
can be followed in other concerns also. Fixed assets and liabilities are shown first on the
assumption that these will be sold or paid only on the insolvency of a business. This order of
balance sheet is given below.

BALANCE SHEET

Liabilities Rs. Assets Rs.

1. Fixed Liabilities 1. Fictitious assets
2. Long term liabilities 2. Intangible assets
3. Current liabilities 3. Fixed assets
4. Floating assets
5. Liquid assets
 Total Total

CLASSIFICATION OF ASSETS

An asset may be classified into current asset or fixed asset.

Current asset: an asset which is expected to be realized in cash, or sold, or consumed during
the normal operating cycle of the business within an accounting period is called current asset.
Example: cash, stock, bills receivable.

Fixed asset: an asset which is held for the purpose of providing or producing goods or services
and which are not held for resale purpose. A fixed asset may further be classified into tangible
fixed asset and intangible fixed asset.

Tangible fixed asset: It is fixed asset which can be physically examined. Example: buildings,
furniture

Intangible fixed asset: It is a fixed asset which cannot be physically examined. Example:
goodwill , patent rights, copy rights. A tangible fixed asset may be a wasting asset.

Wasting asset: An asset which gets exhausted in theporcess of excavation. Example: mines
and quarries.

Fictitious asset: Expenditures incurred and not written off until the preparation of final
accounts and debit balance of profit and loss account are shown under the head fictitious
assets. Fictitious asset is not an asset in the real sense. Example:; preliminary expenses,
discount on the issue of shares, advertisement expenses etc, to be written off.

CLASSIFICATION OF LIABILITIES

A liability is an amount which a business is legally bound to pay. It is a claim by an

outsider on the assets of a business. Liabilities may be classified into four categories.

Fixed Liabilities: These are those liability which are payable only on the termination of the
business such as capital which is a liability to the owner.

Long term Liabilities: Those liabilities which are not payable within the next accounting
period but will be payable within next five to ten years are called long term liabilities such as
debentures.

Current liabilities: those liabilities which are payable out of current asset within the next
accounting period usually year or already due are called current liabilities sundry creditors,
bills payable, short term bank overdraft are examples of such liabilities.
Contingent liabilities: A contingent liability is one which is not an actual liability but which
will become an actual one on the happening of some event which in uncertain.

Contingent liabilities may be of two types

1) Liability which involves loss;
2) A liability which involves the acquisition of an asset of an equivalent
amount, if such asset is not likely to be equal in value to the contingent
liability there will be a contingent loss.

Following are some of the instances of contingent liabilities

1) Liability on bills discounted outstanding or bills accepted on behalf of
others.
2) Liability under a guarantee given in favour of others.
3) Liability for disputed claims and cases pending decision of the court;
4) Calls on partly paid shares held as investments.
5) Liability for arrears of dividends on cumulative preference shares.
6) Contracts entered into for future delivery of goods when the price of the
goods has increased.
7) A guarantee given by a company in respect of a loan or over-draft ranted
to a managed company.

Meaning of Adjustments

Those transactions which relate to the accounting period for which final accounts are
being prepared, but are not included in the trial balance, because these transactions have not yet
been recorded in the books of accounts are called 'Adjustments'.

In addition to it those transactions which have been recorded in the books of accounts
but they do not relate to the accounting period for which accounts are being prepared are also
called Adjustments. Some of the adjustment entries and their effects are given below:

Outstanding Expenses
Expenses incurred related to the accounting period but not paid during that accounting
period are called outstanding expenses.

Adjustment entry
Respective expenses A/c Dr xxx
To Outstanding expenses A/c xxx

Effect
1. Added with the respective expenses on the debit side of the trading or P&L a/c.
2. Also shown on the liability side of the Balance Sheet

Prepaid expenses or unexpired expenses

 Expenses paid during the accounting period but related to the next accounting period is
called prepaid expenses.
Adjustment entry
Prepaid expenses A/c Dr xxx
To Representative expenses A/c xxx

Effect
1. Subtracted with the respective expenses on the debit side of the trading or P&L a/c.
2. Also shown on the asset side of the Balance Sheet

Closing Stock
The goods unsold lying at the end of the accounting period is called closing stock. It is
valued at cost price or market price whichever is less.

Adjustment entry
Stock A/c Dr xxx
To Trading A/c xxx

Effect
1. Shown on the credit side of the trading a/c.
2. Also shown on the asset side of the Balance Sheet.

Depreciation
It is the reduction in value of the fixed assets due to usage, obsolescence, effluxion of
time, et. It is a loss to the business unit.

Adjustment entry
Depreciation A/c Dr xxx
To Representative Assets A/c xxx

Effect
1. Shown on the debit side of the P&L a/c.
2. Subtracted with the respective asset of the Balance Sheet.

Bad debts
When the sale is made on credit and the money due from the debtor becomes
irrecoverable, it is called bad debts. It should be written off from the debtor’s account as it is a
loss to the business unit.

Adjustment entry
Bad debts A/c Dr xxx
To Debtors A/c xxx

Effect
 1. Shown on the debit side of the P&L a/c.
2. Subtracted from the debtors account on the asset of the Balance Sheet.

Cost of goods sold

An income statement figure which reflects the cost of obtaining raw
materials and producing finished goods that are sold to consumers.

Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise -

Ending Merchandise Inventory (or)
Cost of goods sold = Opening stock + Net Purchase – Closing stock

TRADING ACCOUNT

1: From the following particulars, prepare the Trading Account of Clever Ltd., for the
year ending 31st December 2012.

Particulars Rs. Particulars Rs.

Opening Stock 4,000 Purchase of Goods 16,000

Wages paid 2,000 Goods sold 40,000
Coal, Coke and Water 2,000 Purchase Returns 2,500
Power 1,000 Sales Returns 1,500
Carriage Inwards 2,500 Foreman’s salary 1,600
Factory Rent 1,500 Closing Stock 8,000

TRADING ACCOUNT OF CLEVER LTD., FOR THE YEAR ENDED 31.12.2012

Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 4,000 By Sales 40,000
To Purchases 16,000 Less: Sales returns 1,500 38,500
Less: Purchase returns 2,500 13,500 By Closing Stock 8,000
To Wages paid 2,000
To Coal, Coke and Water 2,000
To Power 1,000
To Factory Rent 1.500
To Foreman’s Salary 1,600
To Gross profit c/d 20,900
46,500 46,500

2: From the following particulars prepare the trading A/c of Prompt Ltd., as on
30.06.2013
Particulars Rs. Particulars Rs.
Opening Stock 49,500 Cash Purchase 70,000
Credit Purchase 45,000 Return outwards 25,000
Carriage Inwards 8,500 Carriage outwards 6,000
Advertising 3,000 Wages paid 2,500
Motive power 3,400 Octroi 2,600
Import Duty 900 Custom Duty 1,000
Consumable stores 1,700 Manufacturing expenses 2,300
Cash Sales 1,00,000 Credit Sales 10,000
Return Inwards 2,000 Closing Stock 15,000
TRADING ACCOUNT OF PROMPT LTD., FOR THE YEAR ENDED 31.06.2013
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 49,500 By Sales
1,00,000
Cash
10,000
Credit
To Purchases
Cash 70,000 1,10,000
Credit 45,000
1,15,000 Less: Sales returns 2,000 1,08,000
Less: Purchase returns 25,000 90,000 By Closing Stock 15,000
To Carriage inwards 8,500 By Gross Loss c/d 39,400
To Wages paid 2,500
To Motive Power 3,400
To Octroi 2,600
To Import duty 900
To Custom duty 1,000
To Consumable Stores 1,700
To Manufacturing
2,300
Exp.
1,62,400 1,62,400
3: From the Following particulars calculate gross profit

Opening Stock 85,000

Direct Expenses 48,000
Closing Stock 90,000
Purchases 3,07,000
Indirect Exp. 52,000
Sales 3,85,000
Solution:
TRADING ACCOUNT
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock 85,000 By Sales 3,85,000

To Purchases 3,07,000 By Closing Stock 90,000

To Direct Expenses 48,000

To Gross profit c/d 35,000

4,75,000 4,75,000

(Or)
Gross Profit = Opening Stock + Purchases + Direct Expenses – Sales – Closing Stock
= 85,000 + 3,07,000 + 48,000 -3,85,000- 90,000
= 35,000
PROFIT & LOSS ACCOUNT
4: From the following balances extracted from the books of Mr. Ajith prepare Profit and
Loss account
Particulars Rs. Particulars Rs.
Gross profit 51,000 Carriage outward 2,500
Salaries 5,500 Rent 4,100
Printing & Stationery 400 Travelling expenses 200
Bad debts 2,100 Commission received 700
Discount (Dr.) 800 Discount received 900
PROFIT AND LOSS ACCOUNT
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Carriage outward 2,500 By Gross profit 51,000
To Salaries 5,500 By Commission received 700
To Rent 4,100 By Discount received 900
To Printing & Stationery 400
To Travelling Expenses 200
To Bad debts 2,100
To Discount 800
To Net profit 37,000
52,600 52,600
5: From the following information, prepare profit and loss account for the year ending
31.3.2013
Gross profit b/d Rs.1,00,000
Advertisement Rs.5,000
Salaries Rs. 20,000
Bad debts Rs. 500
Rent paid Rs.12,000
Commission received Rs.5,000
Postage Rs.5,000
Carriage outwards Rs.3,000

PROFIT AND LOSS ACCOUNT

Dr. Cr.
Particulars Rs. Particulars Rs.
To Advertisement 5,000 By Gross profit 1,00,000
To Salaries 20,000 By Commission received 5,000
To Bad debts 500
To Postage 5,000
To Carriage outwards 3,000
To Rent paid 12,000
To Net profit 54,500
1,05,000 1,05,000

5: From the following balances extracted from the books of Mr. Surya prepare Profit and
Loss account

Particulars Rs. Particulars Rs.

Gross profit 1,50,000 Salaries 30,000
Rent paid 10,000 Postage 3,000
Advertisement 6,000 Telephone charges 200
Bad debts 500 Commission received 2,000
Carriage outwards 3,000
Solution:
PROFIT AND LOSS ACCOUNT
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Salaries 30,000 By Gross profit 1,50,000
To Rent paid 10,000 By Commission received 2000
To Postage 3,000
To Advertisement 6,000
To Telephone charges 200
To Bad debts 500
To Net profit 1,02,300
1,52,000 1,52,000

6 : From the following particulars prepare Trading and Profit Loss A/c for the year
ending 31.3.2012

Debit Credit
Particulars
(Rs.) (Rs.)
Opening Stock 70,000 Capital 50,000
Purchases 25,000 Sales 2,00,000
Machinery 1,50,000 Creditors 50,000
Trade expenses 3,000 Bills payable 58,000
Carriage inwards 6,000 Bad debts provision (opening) 2,000
Carriage outwards 20,000 Purchase returns 5,000
Factory rent 10,000
Discount 5,000
Insurance 20,000
Debtors 10,000
Office rent 5,000
Printing 2,000
Bad debts 5,000
Advertising 2,000
Bills receivable 3,000
Drawings 4,000
Salaries 2,000
Manufacturing expenses 3,000
Furniture 4,000
Cash in hand 8,000
Cash at bank 2,000
Sales returns 6,000
3,65,000 3,65,000

Adjustments
a. Further bad debts amounted to Rs.1,000
b. Closing stock was Rs.5,000
c. Advertisement expenses outstanding on 31.3.2012 was Rs.1,000
d. Factory rent paid includes Rs.6,000 related to next period.

Solution:

TRADING AND PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31.03.2012
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 70,000 By Sales 2,00,000
To Purchases 25,000 Less: Sales returns 6,000 1,94,000
Less: Purchase returns 5,000 20,000 By Closing Stock 50,000
To Carriage inwards 6,000
To Factory Rent 10,000
Less: Prepaid 6,000 4,000
To Mfg. expenses 3,000
To Gross profit c/d 1,41,000
2,44,000 2,44,000
To Trade expenses 3,000 By Gross profit b/d 1,41,000
To carriage outwards 20,000
To Discount 5,000
To Insurance 20,000
To Office rent 5,000
To Printing 2,000
To Bad debts 5,000
Add: further bad debts 1,000
6,000
Less: Provision for
2,000
doubtful debts (opening)
Add: outstanding 1,000 3,000
To Salaries 2,000
To Net profit 77,000
1,41,000 1,41,000
 BALANCE SHEET AS ON 31.03.2012

Liabilities Rs. Rs. Assets Rs. Rs.

Capital 50,000 Machinery 1,50,000
Add: Net profit 77,000 Furniture 4,000
1,27,000 Debtors 10,000
Less: Drawings 4,000 1,23,000 Less: further bad debts 1,000 9,000
Creditors 50,000 Bills receivable 3,000
Bills Payable 58,000 Cash in hand 8,000
Outstanding Cash at bank
1,000 2,000
advertisement expenses
Prepaid factory rent 6,000
Closing stock 50,000
2,32,000 2,32,000

7: From the following particulars, prepare Trading and Profit and Loss a/c for the year
ending 31.3.2012 and Balance Sheet as on 31.3.2012.

Particulars Dr.(Rs.) Particulars Cr.(Rs.)

Buildings 1,00,000 Capital 2,00,000
Salaries 10,000 Sales (Cash) 1,50,000
Debtors 50,000 Sales (Credit) 50,000
Opening stock 40,000 Creditors 60,000
Wages 5,000 Discount received 1,000
Purchases (Cash) 50,000 Purchase returns 1,000
Purchases (Credit) 10,000 Rent received 38,000
Cash in hand 5,000
Commission paid 2,000
Carriage inwards 3,000
Drawings 4,000
Sales returns 6,000
Bad debts 2,000
Carriage outwards 3,000
Advertisement 4,000
Rent paid 46,000
Electricity charges 2,000
Printing expenses 3,000
Interest paid 5,000
Machinery 1,00,000
Furniture 50,000
5,00,000 5,00,000
Solution:

TRADING AND PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31.03.2012
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock By Sales
Cash : 1,50,000
2,00,000
Credit: 50,000
40,000
To Purchases
Cash : 50,000
Credit: 10,000 60,000 Less: Sales returns 6,000 1,94,000
Less: Purchase returns 1,000 59,000
To Carriage inwards 3,000
To Wages 5,000
To Gross profit c/d 87,000
1,94,000 1,94,000
To Salaries 10,000 By Gross profit b/d 87,000
To Carriage outwards 3,000 By Discount Received 1,000
To Commission Paid 2,000 By Rent Received 38,000
To Advertisement 4,000
To Rent Paid 46,000
To Printing Expenses 3,000
To Electricity Charges 2,000
To Interest Paid 5,000
To Bad debts 2,000
To Net profit 49,000
1,26,000 1,26,000

BALANCE SHEET AS ON 31.03.2012

Liabilities Rs. Rs. Assets Rs. Rs.

Capital 2,00,000 Building 1,00,000
Add: Net profit 49,000 Machinery 1,00,000
2,49,000 Furniture 50,000
Less: Drawings 4,000 2,45,000 Cash in hand 5,000
Creditors 60,000 Debtors 50,000

3,05,000 3,05,000