Meaning

⚫ Accounting is a means of communicating the results of business operations to various

parties interested in or connected with the business viz., the owners, creditors, investors,
banks and financial institutions, Government and other agencies. Hence, it is rightly
called as the language of business.
Definition
⚫ The American Institute of Certified Public Accountants has defined 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 financial character, and
interpreting the results there of.”

Objectives of accounting
⚫ The main objectives of accounting are
i. To maintain accounting records.
ii. to calculate the result of operations.
iii. To as certain the financial position.
iv. To communicate the information to users.

Process

The process of accounting as per the above definition is given below:

In order to accomplish its main objective of communicating information to the users, accounting
embraces the following functions.
i. Identifying: Identifying the business transactions from the source documents.

ii. Recording: The next function of accounting is to keep a systematic record of all business transactions,
which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books.

iii. Classifying: This is concerned with the classification of the recorded business transactions so
as to group the transactions of similar type at one place. i.e., in ledger accounts. In order to verify
the arithmetical accuracy of the accounts, trial balance is prepared.

iv. Summarising: The classified information available from the trial balance are used to prepare
profit and loss account and balance sheet in a manner useful to the users of accounting
information.

v. Analysing: It establishes the relationship between the items of the profit and loss account and
the balance sheet. The purpose of analysing is to identify the financial strength and weakness of
the business. It provides the basis for interpretation.

vi. Interpreting: It is concerned with explaining the meaning and significance of the relationship
so established by the analysis. Interpretation should be useful to the users, so as to enable them
to take correct decisions.

vii. Communicating: The results obtained from the summarised, analysed and interpreted
information are communicated to the interested parties.
Users of Accounting Information
The basic objective of accounting is to provide information which is useful for persons and
groups inside and outside the organization.

I. Internal users: Internal users are those individuals or groups who are within the organisation
like owners, management, employees and trade unions.
 Owners: To know the profitability and financial soundness of the business.
 Management: To take prompt decisions to manage the business efficiently.
 Employees and Trade unions: To form judgement about the earning capacity of the
business since their remuneration and bonus depend on it.

II. External users: External users are those individuals or groups who are outside the
organisation like creditors, investors, banks and other lending institutions, present and potential
investors, Government, tax authorities, regulatory agencies and researchers.
 Creditors, banks and other: To determine whether the principal and lending institutions
in the interest there of will be paid in when due
 Present investors: To know the position, progress and prosperity of the business in order
to ensure the safety of their investment.
 Potential investors: To decide whether to invest in the business or not.
 Governmentand Tax: To know the earnings in order to assess authorities the tax
liabilities of the business.
 Regulatory agencies: To evaluate the business operation under the regulatory legislation.
 Researchers: To use in their research work .
Branches of Accounting

The economic development and technological advancements have resulted in an increase in the
scale of operations and the advent of the company form of business organisation. This has made
the management function more and more complex and increased the importance of accounting
information. This gave rise to special branches of accounting. These are briefly explained below:
1. Financial accounting : The purpose of this branch of accounting is to keep a record of all
financial transactions so that:
(a) The profit earned or loss sustained by the business during an accounting period can be
worked out,
(b) The financial position of the business as at the end of the accounting period can be as
certained, and
(c) the financial information required by the management and other interested parties can be
provided.
2. Cost Accounting : The purpose of cost accounting is to analyse the expenditure so as to
ascertain the cost of various products manufactured by the firm and fix the prices. It also
helps in controlling the costs and providing necessary costing information to management
for decision-making.
3. Management Accounting: The purpose of management accounting is to assist the
management in taking rational policy decisions and to evaluate the impact of its decisions
and actions.

4
CONCEPTUAL FRAMEWORK OF ACCOUNTING

I. Basic Assumptions
The basic assumptions of accounting are like the foundation pillars on which the structure of
accounting is based. The four basic assumptions are as follows:
i. Accounting Entity Assumption
According to this assumption, business is treated as a unit or entity apart from its owners, creditors
and others. In other words, the proprietor of a business concernisal ways considered to be
separate and distinct from the business which he controls. All the business transactions are
recorded in the books of accounts from the viewpoint of the business. Even the proprietor is
treated as a creditor to the extent of his capital.
ii. Money Measurement Assumption
In accounting, only those business transactions and events which are of financial nature are
recorded. For example, when Sales Manager is not on good terms with Production Manager, the
business is bound to suffer. This fact will not be recorded, because it cannot be measured in
terms of money.
iii. Accounting Period Assumption
The users of financial statements need periodical reports to know the operational result and the
financial position of the business concern. Hence it becomes necessary to close the accounts at
regular intervals. Usually a period of 365 days or 52 weeks or 1 year is considered as he
accounting period.

iv. Going Concern Assumption

As per this assumption, the business will exist for along period and transactions are recorded from
this point of view. There is neither the intention nor the necessity to wind up the business in the
fore see able future.

5
II. Basic Concepts of Accounting
These concepts guide how business transactions are reported. On the basis of the above four
assumptions the following concepts (principles) of accounting have been developed.
i. Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping. All business
transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For
example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of
benefit).
ii. Revenue Realisation Concept
According to this concept, revenue is considered as the income earned on the date when it is
realised. Unearned or unrealized revenue should not be taken into account. The realization
concept is vital for determining income pertaining to an accounting period. It avoids the
possibility of inflating incomes and profits.
iii. Historical Cost Concept
Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis
for all subsequent accounting for the asset. For example, if a piece of land is purchased for
Rs.5,00,000 and its market value is Rs.8,00,000 at the time of preparing final accounts the land
value is recorded only for Rs.5,00,000. Thus, the balance sheet does not indicate the price at
which the asset could be sold for.
iv. Matching Concept
Matching the revenues earned during an accounting period with the cost associated with the
period to as certain the result of the business concern is called the matching concept. It is the
basis for finding accurate profit for a period which can be safely distributed to the owners.
v. Full Disclosure Concept
Accounting statements should disclose fully and completely all the significant information.
Based on this, decisions can be taken by various interested parties. It involves proper
classification and explanations of accounting information which are published in the financial
statements.

6
 vi. Verifiable and Objective Evidence Concept
This principle requires that each recorded business transactions in the books of accounts should
have an adequate evidence to support it. For example, cash receipt for payments made. The
documentary evidence of transactions should be free from any bias. As accounting records are
based on documentary evidence which are capable of verification, it is universally acceptable.

III. Modifying Principles

To make the accounting information useful to various interested parties, the basic assumptions
and concepts discussed earlier have been modified. These modifying principles are as under.
i. Cost Benefit Principle
This modifying principle states that the cost of applying a principle should not be more than the
benefit derived from it. If the cost is more than the benefit then that principle should be modified.
ii. Materiality Principle
The materiality principle requires all relatively relevant information should be disclosed in the
financial statements. Unimportant and immaterial information are either left out or merged with
other items.
iii. Consistency Principle
The aim of consistency principle is to preserve the comparability of financial statements. The
rules, practices, concepts and principles used in accounting should be continuously observed and
applied year after year. Comparisons of financial results of the business among different
accounting period can be significant and meaningful only when consistent practices were
followed in ascertaining them. For example, depreciation of assets can be provided under
different methods, whichever method is followed, it should be followed regularly.
iv. Prudence (Conservatism) Principle
Prudence principle takes into considerational prospective losses but leaves all prospective profits.
The essence of this principle is “anticipate no profit and provide for all possible losses”. For
example, while valuing stock in trade, market price or cost price whichever is less is considered.

7
Double Entry System
There are numerous transactions in a business concern. Each transaction, when closely analysed,
reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or
“expenses/loss aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving
aspect” or “out going aspect” or “income/gain aspect”. This is termed as the “Credit aspect”.
These two aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry
System. The double entry system is so named since it records both the aspects of a transaction. In
short, the basic principle of this system is, for every debit, there must be a corresponding credit of
equal amount and for every credit, there must be a corresponding debit of equal amount.
Definition of Double Entry System
According to J.R. Batliboi “Every business transaction has a two-fold effect and that it
affects two accounts in opposite directions and if a complete record were to be made of each
such transaction, it would be necessary to debit one account and credit another account. It is this
recording of the two fold effect of every transaction that has given rise to the term Double Entry
System”.
Features of Double Entry System
i. Every business transaction affects two accounts.
ii. Each transaction has two aspects, i.e., debit and credit.
iii. It is based upon accounting assumptions concepts and principles.
iv. Helps in preparing trial balance which is a test of arithmetical accuracy in accounting.
v. Preparation of final accounts with the help of trial balance.
Approaches of Recording
There are two approaches for recording a transaction.
I. Accounting Equation Approach
II. Traditional Approach

8
I. Accounting Equation Approach
This approach is also called as the American Approach. Under this method transactions are
recorded based on the accounting equation,
i.e.,
Assets=Liabilities+ Capital
This will be discussed in detail in the next chapter.
II. Traditional Approach
This approach is also called as the British Approach. Recording of business transactions under
this method are formed on the basis of the existence of two aspects (debit and credit) in each of
the transactions. All the business transactions are recorded in the books of accounts under the
‘Double Entry System’.

Accounting Rules
⚫ Personal Accounts (Natural person or Company)
◦ Debit the receiver
◦ Credit the giver
⚫ Real Accounts (cash, property or asset)
◦ Debit what comes in
◦ Credit what goes out
⚫ Nominal Accounts (Business expenses or losses and income or gains)
◦ Debit all expenses and losses
◦ Credit all in come and gains

9
Journal
A journal may be defined as the book or original or prime entry containing
achronological record of the transactions from which posting is done to the ledger. The
transactions are recorded first in the journal in the order in which they occur.

Explanation:
1. Date : In the first column, the date of the transaction is entered. The year and the month is
written only once, till they change. The sequence of the dates and months should be strictly
maintained.
2. Particulars: Each transaction affects two accounts, out of which one account is debited and
the other account is credited. The name of the account to be debited is written first, very near to
the line of particulars column and the word Dr. is also written at the end of the particulars
column. In the second line, the name of the account to be credited is written, starts with the word
‘To’, a few space away from the margin in the particulars column to the make it distinct from the

Debit account.

10
3. Narration : After each entry, a brief explanation of the transaction together with necessary
details is given in the particulars column with in brackets called narration. The words ‘For’ or
‘Being’ are used before starting to write down narration. Now, it is not necessary
To use the word ‘For’ or ‘Being’.
4. Ledger Folio (L.F): All entries from the journal are later posted into the ledger accounts. The
page number or folio number of the Ledger, where the posting has been made from the Journal
is recorded in the L.F column of the Journal. Till such time, this column remains blank.
5. Debit Amount: In this column, the amount of the account being debited is written.
6. Credit Amount: In this column, the amount of the account being credited is written.
Steps in Journalising
The process of analysing the business transactions under the heads of debit and credit and
recording them in the Journal is called Journalising. An entry made in the journal is called a
‘Journal Entry’.
Step 1 Determine the two accounts which are involved in the transaction.
Step2 Classify the above two accounts under Personal, Real or Nominal.
Step 3 Find out the rules of debit and credit for the above two accounts.
Step4 Identify which account is to be debited and which account is to be credited.
Step5 Record the date of transaction in the date column. The year and month is written once, till
they change. The sequence of the dates and months should be strictly maintained.
Step6 Enter the name of the account to be debited in the particulars column very close to the left
hand side of the particulars column 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.
Step7 Write the name of the account to be credited in the second line starts 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.
Step8 Write the narration with in brackets in the next line in the particulars column.
Step 9 Draw a line across the entire particulars column to separate one journal entry from the
other.

11
Example1:
January1,2004– Saravanan started business with Rs.1,00,000
Step1 Determine the two accounts Cash Account Capital Account
involved in the transaction.
Step2 Classify the accounts under Real Account Personal Account
personal, real or nominal.
Step3 Find out the rules of debit and 2(a)Debit what 1(b)Credit the giver
credit. comes in.
Step4 Identify which account is to be CashA/c is to be Capital A/c is to be
Debited and credited. debited credited

Solution:
Journal

Example2
⚫ On 1st June 2016 goods sold for Rs. 2000
⚫ On 2nd June 2016 goods purchase from XYZ ltd for Rs.5000

12
Example3
⚫ Journalise the following transactions in the books of Amar and post them in the Journal
:- 2004
⚫ March 1 Bought goods for cash Rs.25,000
⚫ 2 Sold goods for cash Rs.50,000
⚫ 3 Bought goods for credit from Gopi Rs.19,000
⚫ 5 Sold goods on credit to Robert Rs.8,000
⚫ 7 Received from Robert Rs.6,000
⚫ 9 Paid to Gopi Rs.5,000
⚫ 20 Bought furniture for cashRs.7,000

Example4

Mr. Nirmal has the following transactions in the month of April. Write Journal Entries for the
transactions.

10thApril : Commenced business with a capital of 1,00,000

11thApril : Purchased goods from Veeru for 20,000
13thApril : Purchased Goods for Cash 15,000
14thApril : Purchased Goods from Abhiram for cash
9,000

13
16thApril : Bought Goods from Shyam on credit12,000
17thApril : Sold goods worth15,000 to Tarun
19thApril : Sold goods for cash 20,000
20thApril : Sold goods to Utsav for cash 6,000
21st April : Sold goods to Pranav on credit 17,000
22nd April : Returned goods to Veeru 3,000
23rdApril : Goods returned from Tarun 1,000
25thApril : Goods taken by the proprietor for personal use 1,000
26thApril : Bought Land for 50,000
27thApril : Purchased machinery for cash 45,000
28thApril : Bought computer from Intel Computers for 25,000
28thApril : Cash sales 15,000
29thApril : Cash purchases 22,000
30thApril : Bought furniture for proprietor's residence and paid cash10,000

Journal in the books of Mr. Nirmal for the period from1st to 30thApril

V/R Amount Amount

ate Particulars L/F
No. (Dr) (Cr)

April – Cash a/c Dr – 1,00,000

10th To Capital a/c – 1,00,000

[Being the amount received from Mr. Nirmal in cash,

The proprietor as his capital contribution vide receipt
no: dated:]

11th – Goods/Stock a/c Dr – 20,000

To Veeru a/c – 20,000

[Being the value of stock purchased from Mr. Veeru

On credit vide bill no: dated:]

13th – Goods/Stock a/c Dr – 15,000

ToCash a/c – 15,000

14
 V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

[Being the value of stock purchased for cash from

M/s vide bill no: dated:]

14th – Goods/Stock a/c Dr – 9,000

To Cash a/c – 9,000

[Being the value of stock purchased for cash from

Mr. Abhiram vide bill no: dated:]

16th – Goods/Stock a/c Dr – 12,000

To Shyam a/c – 12,000

[Being the value of stock purchased from Mr. Shyam

on credit vide bill no: dated:]

17th – Tarun a/c Dr – 15,000

To Goods/Stock a/c – 15,000

[Being the value of stock sold on credit to Mr.

Tarun vide invoice no: dated:]

19th – Cash a/c Dr – 20,000

To Goods/Stock a/c – 20,000

[Being the value of goods sold for cash vide

receipt no: dated:]

20th – Cash a/c Dr – 6,000

To Goods/Stock a/c – 6,000

[Being the value of stock sold to Mr. Utsav for

cash vide receipt no: dated:]

21st – Pranav a/c Dr – 17,000

To Goods/Stock a/c – 17,000

[Being the value of stock sold to Mr. Pranav on

credit vide bill no: dated:]

15
 V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

22nd – Veeru a/c Dr – 3,000

To Goods/Stock a/c – 3,000

[Being the value of goods returned to Mr. Veeru

vide returns bill no: dated:]

23rd – Goods/Stock a/c Dr – 1,000

To Tarun a/c – 1,000

[Being the value of stock returned by Mr. Tarun

vide returns bill no: dated:]

25rd – Drawings a/c Dr – 1,000

To Goods/Stock a/c – 1,000

[Being the value of stock taken by the proprietor

vide bill no: dated:]

26th – Land a/c Dr – 50,000cmd

To Cash – 50,000
a/c
[Being the amount paid for land purchased on:]

27th – Machinery Dr – 45,000

a/c To Cash – 45,000
a/c
[Being the amount paid for the purchase
of machinery vide bill no: dated:]

28th – Computers a/c Dr – 25,000

To Intel Computers a/c – 25,000

[Being the value of a computer purchased from

M/S Intel Computers on credit vide bill no: dated:]

29th – Cash a/c Dr – 15,000

To Goods/Stock a/c – 15,000

16
 V/R Amount Amount
ate Particulars L/F
No. (Dr) (Cr)

[Being the value of stock sold for cash vide receipt

no: dated:]

29th – Goods/Stock a/c Dr – 22,000

To Cash a/c – 22,000

[Being the value of stock purchased for cash vide

bill no: dated:]

30th – Drawings Dr – 10,000

a/c To Cash – 10,000
a/c
[Being the amount of cash paid for furniture
purchased for proprietor's residence vide bill no:
dated:]

Example 5

Journalise the following transactions in the books of Rama & Sons

3rdMay : Cash deposited into bank 60,000

4thMay : Loan given to Bhuvan 20,000
4thMay : Paid cash to Veeru 20,000
5thMay : Paid to Veeru by cheque15,000
5thMay : Cash received from Tarun 12,000
5thMay : Took loan from Anush 15,000
6thMay : Cheque received from Pranav 15,000
6thMay : Paid to Intel Computers by cheque 17,000
6thMay : Withdrew from bank 5,000
7thMay : Withdrew from bank for office use 8,000
7thMay : Cash received from Bhuvan on loan account 10,000
8thMay : With drew from bank for personal use 1,000
8thMay : Cash taken by proprietor for personal use 3,000

17
18
9thMay : Bought furniture and paid by cheque 15,000
9thMay : Paid to Anush by cheque on loan account 5,000
9thMay : Brought additional capital of 25,000

Journal in the books of M/s Rama & Sons

for the period from 1st May to 10th May
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
May – Bank a/c To Dr – 60,000
3rd Cash a/c – 60,000
[Being the amount of cash deposited into bank vide
voucher no: dated:]
4th – Loan to Bhuvan a/c Dr – 20,000
To Cash a/c – 20,000
[Being the amount of cash given as loan to Bhuvan vide
voucher no: dated:]
4th – Veeru a/c Dr – 20,000
To Cash a/c – 20,000
[Being the amount of cash paid to Veeru vide voucher
no: dated:]
5th – Veeru a/c Dr – 15,000
To Bank a/c – 15,000
[Being the amount paid to veeru on account by cheque
no. dated ]
5th – Cash a/c Dr – 12,000
To Tarun a/c – 12,000
[Being the amount of cash received from Tarun vide
cash receipt no: dated:]
5th – Cash a/c Dr – 15,000
To Loan from Anush a/c – 15,000
[Being the amount of loan taken from Anush on:]
6th – Bank a/c Dr – 15,000
To Pranav a/c – 15,000
[Being the amount received by cheque no. date
From Pranav]

19
 Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
6th Intel Computers a/c To Bank a/c – 17,000
[Being the amount paid by cheque no. date to –
Intel Computers] 17,000

6th – Cash a/c Dr – 5,000

To Bank a/c – 5,000
[Being the amount of cash with drawn from bank]
7th – Cash a/c Dr – 8,000
To Bank a/c – 8,000
[Being the amount of cash with drawn from bank
vide bill no: dated:]
7th – Casha/c Dr – 10,000
To Loan to Bhuvan a/c – 10,000
[Being the amount of cash received from Bhuvanas
loan vide cash receipt no: dated:]
8th – Drawings a/c Dr – 1,000
To Bank a/c – 1,000
[Being the amount of with drawn from bank for
personal use vide cheque no: dated:]
8th – Drawings a/c Dr – 3,000
To Cash a/c – 3,000
[Being the amount of cash taken by the proprietor for
personal purposes vide voucher no: dated:]
9th – Furniture a/c Dr – 15,000
To Bank a/c – 15,000
[Being the amount paid by cheque no date
towards the purchase of furniture vide bill no:
dated:]
9th – Loan from Anush a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid by cheque no date
towards repayment of loan from Anush vide voucher
no: dated:]

20
 Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)
Journal in the books of M/s Chikky & Bros.
for the period from 1st June to 30th June - 25,000
9 th Cash a/c Dr
V/R To Capital a/c - Amount Amount
Date Particulars L/F 25,000
No. (Dr) (Cr)
[Being the amount received from proprietor as capital
June – Wages a/creceipt no:
vide cash dated:] Dr – 12,000
10 th To Cash a/c – 12,000
[Being the amount of cash paid towards wages vide
voucher no: dated:]
11th – Rent paid a/c Dr – 10,000
To Bank a/c – 10,000
[Being the amount paid by cheque no. date
towards rent vide voucher no: dated:]

Example 6

Write journal entries in the books of Chikky & Bros.

10th June : Paid wages 12,000

11th June : Paid rent by cheque 10,000
13th June : Paid salary to Mr. Charan 12,000
14th June : Purchased stationery from Kagaz & Co. and paid by cheque 5,000
15th June : Received interest 14,000
17th June : Received commission by cheque 6,000
18th June : Rent received from Mr. Mody 8,000
19th June : Interest received from Mr. Bijju by cheque 10,000
20th June : Carriage paid on purchase of goods 3,000
22ndJune : Carriage paid on sale of goods 2,000

21
13th - Salaries a/c Dr - 12,000
- 12,000
To cash a/c
[Being the amount of cash paid towards Salary to Mr.
Charan vide voucher no: dated:]
14th – Stationery a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid by cheque no. date
towards stationery purchased from Kagaz & co. vide
voucher no: dated:]
15th – Cash a/c Dr – 14,000
To Interest Received a/c – 14,000
[Being the amount of cash received towards interest
vide receipt no: dated:]
17th – Bank a/c Dr – 6,000
To Commission Received a/c – 6,000
[Being the amount received by cheque no.
date
towards commission vide receipt no:
dated:]
18th – Casha/c Dr – 8,000
To Rent Received a/c – 8,000
[Being the amount of cash received towards rent from
Mr. Mody vide receipt no: dated:]
19th – Banka/c Dr – 10,000
To Interest Received a/c – 10,000
[Being the amount received by cheque no. date
towards interest from Bijju vide receipt no:
dated:]
20th – Carriage Outwards a/c Dr – 3,000
To Cash a/c – 3,000
[Being the amount of cash paid towards carriage on
goods purchased vide voucher no: dated:]

22
22nd – Carriage Inwards a/c Dr – 2,000
To Cash a/c – 2,000
[Being the amount of cash paid towards carriage on
goods sold vide voucher no: dated:]

23
Compound Journal Entry
⚫ When two or more transactions of similar nature take place on the same date ,such
Transaction scan be entered in the journal by means of a combined journal entry is called
Compound Journal Entry.
⚫ The only precaution is that the total debits should be equal to total credits.

On March 2017, Farhan Rahim, starts whole saling business. Following transactions as follows:
1. He started business with capital of Rs.15,000 and Land worth Rs.10,000.
8. Bought goods from Bilal and Friends Rs.1,000 and by cash from XYZCo. Rs2,000.
13. Sold goods to Rehman&sonsRs.1,500 and salebycashRs.5,000.
17. Gave away charity of cash Rs.50 and merchandising worth Rs.30.
21.Paid Bilal and Friends cash Rs. 975 discount received Rs. 25.
28. Received cash from Rehman & Sons Rs.1,450; allowed him discount of Rs.50.

24
 LEDGER
Collection of an entire group of similar accounts in double-entry book keeping. Also called book
A Ledger is a book which contains all the accounts whether personal, real or nominal, which are
first entered in journal or special purpose subsidiary books.
According to L.C. Cropper, ‘the book which contains a classified and permanent record of all
the transactions of a business is called the Ledger’.
Format
Name of the Account

Explanation:
i. Each ledger account is divided in to two parts. The left hand side is known as the debit side
and the right hand side is known as the credit side. The words ‘Dr.’ and ‘Cr.’ are used to de note
Debit and Credit.
ii. The name of the account is mentioned in the top (middle) of the account.
iii. The date of the transaction is recorded in the date column.
iv. The word ‘To’ is used before the accounts which appear on the debit side of an account in the
particulars column. Similarly, the word ‘By’ is used before the accounts which appear on the
credit side of an account in the particulars column.
v. The name of the other account which is affected by the transaction is written either in the debit
side or credit side in the particulars column.
vi. The page number of the Journal or Subsidiary Book from where that particular entry is
transferred, is entered in the Journal Folio (J.F) column.
vii. The amount per taining to this account is entered in the amount column.

25
Example1
Mr. Ram started business with cash Rs. 5,00,000 on 1stJune2003. The
transaction will appear in Journal and Ledger as under.

Example 2

Journalise the following transactions in the books of Moon and post them into the ledger for the
month of August

Mooncommencedbusinesswithacapitalof1,50,000
Cash deposited into bank 50,000
Bought equipment for15,000

26
 13th: Bought goods worth 20,000 from Star and payment made
by cheque
14th: Sold goods to Sun for 15,000 and payment received through
cheque
16th: Paid rent by cheque 5,000
17th: Took loan from Mr. Storm 25,000
18th: Received commission from Mr. Air by cheque5,000
19th: Wages paid 15,000
20th: With drew from bank for personal use 3000
21st: Withdrew from bank for office use 10,000
22nd: Bought goods for 25,000
23rd: Cash paid into bank 30,000
24th: Interest paid through cheque2,000
25th: Gave loan to Mr. Wind 10,000
26th: Amount paid to Mr. Storm on loan account 15000
27th: Salary paid to Manager Mr. Liquid 5,000
28th: Postage paid 1,000
29th: Received cheque from Mr. Windon loan account 3,000
30th: Sold part of the equipment for 2,000

Journal in the books of M/s Rama & Sons

For the period from August 10th, _5 to August 30th,_5
V/R Amount Amount
Date Particulars L/F
No. (Dr) (Cr)
August – Casha/c Dr – 1,50,000
10th To Capital a/c – 1,50,000
[Being the amount received from Mr. Moon, the
Proprietor as his capital contribution vide receipt
no: dated:]

11th – Bank a/c Dr – 50,000

To Cash a/c – 50,000
[Being the amount of cash deposited into bank
Vide bill no: dated:]

27
12th - Equipment a/c Dr – 15,000
To Cash a/c – 15,000
[Being the value of equipment purchased from
M/s for cash vide bill no: dated:]
13th – Goods/stock Dr – 20,000
a/c To Bank a/c – 20,000
[Being the payment made for stock purchased
vide Cheque no: dated:]
14th – Bank a/c Dr – 15,000
To Goods/stock a/c – 15,000
[Being the amount received for stock sold to
Mr. Sun vide Cheque no: dated:]
16th – Rent a/c Dr – 5,000
To Bank a/c – 5,000
[Being the amount paid for rent vide
voucher no: dated:]
17th – Cash a/c Dr – 25,000
To Loan from Storm a/c – 25,000
[Being the cash received from Mr. Storm as
loan vide receipt no: dated:]
18th – Bank a/c Dr – 5,000
To Commission a/c – 5,000
[Being the amount received for commission
vide cheque no: dated:]
19th – Wages a/c Dr – 15,000
To Cash a/c – 15,000
[Being the amount paid for wages vide
voucher no: dated:]
20th – Drawings Dr – 3,000
a/c To Bank – 3,000
a/c
[Being the amount with drawn from bank r
of personal use vide cheque no: dated:]
21st – Cash a/c Dr – 10,000
To Bank a/c – 10,000
[Being the amount with drawn from bank for
office purpose vide cheque no: dated:]
22nd – Goods/stock Dr – 25,000
a/c To Cash a/c – 25,000

28
 [Being the amount of cash paid for stock
purchases vide voucher no: dated:]
23rd – Bank a/c Dr – 30,000
To Cash – 30,000
a/c
[Being the amount deposited into
bank vide voucher no:
dated:]
24th – Interest a/c Dr – 2,000
To Bank a/c – 2,000
[Being the amount of interest paid vide
cheque no: dated:]
25th – Loan to Mr. Wind a/c Dr – 10,000
To Cash a/c – 10,000
[Being the amount of cash given to Mr. Wind
as loan vide voucher no: dated:]
26th – Loan from Stroma/c Dr – 15,000
To Cash a/c – 15,000
[Being the amount paid to Mr. Storm for
repayment of loan vide voucher no: dated:]
27th – Salary a/c Dr – 5,000
To Cash – 5,000
a/c
[Being the amount paid for salary to Mr.
Liquid vide voucher no: dated:]
28th – Postage a/c Dr – 1,000
To Cash a/c – 1,000
[Being the amount paid for purchase of postage
vide voucher no: dated:]
29th – Banka/c Dr – 3,000
To Loan to Mr. wind a/c – 3,000
[Being the Cheque no: date received from
Mr. Wind for repayment of loan]
30th – Casha/c Dr – 2,000
To Equipment a/c – 2,000
[Being the amount received on sale of
equipment vide receipt no: dated:]

29
30
 General Ledger
[Books of M/s Rama&Sons]
Casha/c Dr Cr

Date Particulars J/ Amount Date Particulars J/F Amount

F
10/10/_5 To Capital a/c – 1,50,000 11/10/_5 By Bank a/c – 50,000
17/10/_5 To Loan from Storm – 25,000 12/10/_5 By Equipment a/c – 15,000
a/c 19/10/_5 By Wages a/c – 15,000
21/10/_5 To Bank a/c – 10,000 22/10/_5 By Goods/stock a/c – 25,000
30/10/_5 To Equipment a/c – 2,000 23/10/_5 By Bank a/c – 30,000
25/10/_5 By Loan to Mr.
Wind a/c – 10,000
26/10/_5 By Loan from Strom
a/c – 15,000
27/10/_5 By Salary a/c – 5,000
28/10/_5 By Postage a/c – 1,000
31/08/_5 By Balance c/d – 21,000

tl 1,87,000 tl 1,87,000

01/09/_5 To Balance b/d – 21,000

Capital A/c

Dr Cr

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

31/08/_5 To Balance c/d – 1,50,000 10/10/_5 By Cash a/c – 1,50,000

tl 1,50,000 tl 1,50,000

01/09/_5 By Balance b/d – 1,50,000

31
 Bank a/c
Dr
Cr
Date Particulars J/F Amount Date Particulars J/F Amount

11/10/_5 To Cash a/c – 50,000 13/10/_5 By Goods/stock

14/10/_5 To Goods/stock a/c – 15,000 a/c – 20,000
18/10/_5 To Commission 16/10/_5 By Rent a/c – 5,000
a/c – 5,000 20/10/_5 By Drawings a/c – 3,000
23/10/_5 To Cash a/c – 30,000 21/10/_5 By Cash a/c – 10,000
29/10/_5 To Loan to Mr. 24/10/_5 By Interest a/c – 2,000
wind a/c – 3,000 31/08/_5 By Balance c/d – 63,000

tl 1,03,000 tl 1,03,000

01/09/_5 To Balance b/d – 63,000

Equipment a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

12/10/_5 To Cash a/c – 15,000 30/10/_5 By Cash a/c – 2,000

31/08/_5 By Balance – 13,000
c/d
tl 15,000 tl 15,000

01/09/_5 To Balance b/d – 13,000

Goods/stock a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

13/10/_5 To Bank a/c – 20,000 14/10/_5 By Bank a/c – 15,000

22/10/_5 To Cash a/c – 25,000 31/08/_5 By Balance c/d – 30,000

tl 45,000 tl 45,000

01/09/_5 To Balance b/d – 30,000

32
 Rent a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

16/10/_5 To Bank a/c – 5,000 31/08/_5 By Balance c/d – 5,000

tl 5,000 tl 5,000

01/09/_5 To Balance b/d – 5,000

Loan from Storm a/c

Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 25,000 17/10/_5 By Cash a/c – 25,000

tl 25,000 tl 25,000

01/09/_5 By Balance b/d – 25,000

Commission a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 5,000 18/10/_5 By Bank a/c – 5,000

tl 5,000 tl 5,000

01/09/_5 By Balance b/d – 5,000

Wages a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

19/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance – 15,000

c/d
tl 15,000 tl 15,000

01/09/_5 To Balance b/d – 15,000

33
 Drawings a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

20/10/_5 To Banka/c – 3,000 31/08/_5 By Balance c/d – 3,000

tl 3,000 tl 3,000

01/09/_5 To Balance b/d – 3,000

Interest a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

24/10/_5 To Banka/c – 2,000 31/08/_5 By Balance c/d – 2,000

tl 2,000 tl 2,000

01/09/_5 To Balance b/d – 2,000

Loan to Mr. Wind a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

25/10/_5 To Cash a/c – 10,000 31/08/_5 By Balance c/d – 10,000

tl 10,000 tl 10,000

01/09/_5 To Balance b/d – 10,000

Loan from Strom a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

26/10/_5 To Cash a/c – 15,000 31/08/_5 By Balance c/d – 15,000

Tl 15,000 Tl 15,000

01/09/_5 To Balance b/d – 15,000

Salary a/c

34
 Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

27/10/_5 To Cash a/c – 5,000 31/08/_5 By Balance c/d – 5,000

Tl 5,000 Tl 5,000

01/09/_5 To Balance b/d – 5,000

Postage a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

28/10/_5 To Cash a/c – 1,000 31/08/_5 By Balance c/d – 1,000

tl 1,000 tl 1,000

01/09/_5 To Balance b/d – 1,000

Loan to Mr. wind a/c
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

31/08/_5 To Balance c/d – 3,000 29/10/_5 By Bank a/c – 3,000

tl 3,000 tl 3,000

01/09/_5 By Balance b/d – 3,000

35
TRIAL BALANCE

⚫ Trial balance is a statement which shows debit balances and credit balance so fall accounts
in the ledger. The total of the debit balances and credit balances should tally(agree).
⚫ In case, there is a difference, one has to check the correctness of the balances brought
forward from the respective accounts.
⚫ Trial balance can be prepared in any date provided accounts are balanced.

Definition
⚫ “Trial balance is a statement, prepared with the debit and credit balances of ledger
accounts to test the arithmetical accuracy of the books” – J.R. Batliboi.
Objectives
i. To check the arithmetical accuracy of the ledger accounts.
ii. To locate the errors.
iii. To facilitate the preparation of final accounts.
Methods
A trial balance can be prepared in the following methods.
i. The Total Method : According to this method, the total amount of the debit side of
the ledger accounts and the total amount of the credit side of the ledger accounts are
recorded.
ii. The Balance Method: In this method, only the balances of an account either debit or
credit, as the case may be, are recorded against their respective accounts.
The balance method is more widely used, as it supplies ready figures for preparing the final
accounts.

36
Format

Format of Trail Balance

i) A debit balance is either an asset or loss or expense ; and

ii) A credit balance is either a liability or income or gain

iii)

37
 Example1

Prepare a Trial Balance with the following information:

Balance Balance
Sr. No Name of Account Sr.No Name of Account
(₹) (₹)
(i) Capital 2,00,000 (ii) Stock 70,000
(iii) Cash 1,80,000 (iv) Debtors 3,00,000
(v) Creditors 1,00,000 (vi) Bank Loan 1,50,000
(vii) Sales 3,00,000 (viii) Purchases 2,00,000

Solution1
Trial Balance
Debit Credit
S.No. Account Title Balance Balance
(Rs) (Rs)
(i) Capital 2,00,000
(ii) Stock 70,000
(iii) Cash 1,80,000
(iv) Debtors 3,00,000
(v) Creditors 1,00,000
(vi) Bank Loan 1,50,000
(vii) Sales 3,00,000
(viii) Purchases 2,00,000
7,50,000 7,50,000

38
Example2

Journalise the following transactions, post the min to Ledger and prepare a Trial Balance:

(₹) (₹)
2018 2018
Apr. Mohan commenced 1,00,000 Apr.20 Received cash from 3,950
1 Business with cash Gopal
Apr. Bought goods 5,000 Discount Allowed 50
3
Apr. Sold goods to Gopal 4,000 Apr.25 Paid Wages 700
4
Apr. Bought goods from Ram 8,000 Apr.27 Paid to Ram in full 7,700
10 settlement
Apr. Paid trade expenses 2,000 Apr.30 Paid rent 1,500
15

Solution2
Books of Mohan
Journal
Debit Credit
Date Particular L.F. Amount Amount
(Rs) (Rs)
2018
April01 CashA/c Dr. 1,00,000
To Capital A/c 1,00,000
(Commenced business with Cash)

April03 Purchases A/c Dr. 5,000

ToCash A/c 5,000
(Bought goods)

April04 Gopal Dr. 4,000

To Sales A/c 4,000
(Goods Sold to Gopal)

April10 Purchases A/c Dr. 8,000

To Ram 8,000
(Bought goods from Ram)

April15 Trade Expenses A/c Dr. 2,000

To Cash A/c 2,000
(Paid trade expenses)

April20 Cash A/c Dr. 3,950

39
 Discount Allowed A/c Dr. 50
To Gopal 4,000
(Cash received from Gopal and discount allowed)

April25 Wages A/c Dr. 700

To Cash 700
(Paid Wages)

April27 Ram Dr. 8,000

ToCash A/c 7,700
To Discount Received A/c 300
(Paid to Ram and discount received from him)

April30 Rent A/c Dr. 1,500

ToCash A/c 1,500
(Paid Rent)
Cash Account
Dr. Cr.
Amount Amount
Date Particulars J.F. (Rs) Date Particulars J.F. (Rs)
2018 2018
April Capital 1,00,000 April Purchases 5,000
01 03
April Gopal 3,950 April Trade Expenses 2,000
20 15
April Wages 700
25
April Ram 7,700
27
April Rent 1,500
30
Balance c/d 87,050
1,03,950 1,03,950

Capital Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Balance c/d 1,00,000 April Cash 1,00,000
30 01
1,00,000 1,00,000

40
 Purchases Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 5,000 April Balance c/d 13,000
03 30
April Ram 8,000
10
13,000 13,000

Sales Account
Dr. Cr.
Amount Amount
Date Particulars J.F. (Rs) Date Particulars J.F. (Rs)
2018 2018
April Balance c/d 4,000 April Gopal 4,000
30 04
4,000

Gopal’s Account
Dr. Cr.
Amount Amount
Date Particulars J.F. (Rs) Date Particulars J.F. (Rs)
2018 2018
April Sales 4,000 April Cash 3,950
04 20
April Discount 50
20 Allowed
4,000 4,000

Ram’s Account
Dr. Cr.
Amount Amount
Date Particulars J.F. (Rs) Date Particulars J.F. (Rs)
2018 2018
April Cash 7,700 April Purchases 8,000
27 10
Discount 300
Received
8,000 8,000

41
 Trade Expenses Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 2,000 April Balance c/d 2,000
15 30
2,000 2,000

Discount Received Account

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F
(Rs) (Rs)
2018 2018
April20 Balance c/d 300 April Ram 300
20
300 300

Wages Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 700 April Balance c/d 700
25 30
700 700

Discount Allowed Account

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Gopal 50 April Balance c/d 50
27 01
50 50

Rent Account
Dr. Cr.
42
 Amount Amount
Date Particulars J.F Date Particulars J.F.
(Rs) (Rs)
2018 2018
April Cash 1,500 April Balance c/d 1,500
30 30
1,500 1,500

TrialBalance
Debit Credit
S.No. Account Title L.F. Balance Balance
(Rs) (Rs)
(i) Cash 87,050
(ii) Capital 1,00,000
(iii) Sales 4,000
(iv) Trade Expenses 2,000
(v) Discount Received 300
(vi) Wages 700
(vii) Discount Allowed 50
(viii) Rent 1,500
(ix) Purchases 13,000
1,04,300 1,04,300

Example3

Prepare the Trial Balance of Ankit a son 31st March, 2018. He has omitted to open a Capital
43
Account:

₹ ₹
Bank Overdraft 85,000 Purchases 4,45,000
Sales 8,10,000 Cash in Hand 8,500
Purchases Return 22,500 Creditors 2,15,000
Debtors 4,00,500 Sales Return 15,750
Wages 96,000 Equipment 25,000
Capital ? Opening Stock 3,00,500

Trial Balance
A son March31,2018

SOLUTION3
S.No. List of Items Debit Balances Credit
Balances
1 Bank Overdraft 85,000
2 Sales 8,10,000

3 Purchases Return 22,500

4 Debtors 4,00,500
5 Wages 96,000
6 Capital 1,58,750
7 Purchases 4,45,000
8 Cash in hand 8,500
9 Creditors 2,15,000
10 Sales Return 15,750
11 Equipment 25,000
12 Opening Stock 3,00,500
Total 12,91,250 12,91,250

Example4
Prepare a Trial Balance from the following items:
44
 ₹ ₹
Capital 24,000 Building 12,000
Opening Stock 8,500 Returns Inward 1,900
Furniture 2,600 Returns Outward 350
Purchases 8,950 Trade Expenses 1,000
Cash 7,300 Discount Received 970
Carriage 300 Salary 3,000
Sales 22,500 Office Rent 2,270

SOLUTION:4

Trial Balance
A son March31,2018

S.No. List of Items Debit Balances Credit

Balances
1 Capital 24,000
2 Opening Stock 8,500
3 Furniture 2,600
4 Purchases 8,950
5 Cash 7,300
6 Carriage 300
7 Sales 22,500
8 Building 12,000
9 Returns Inward 1,900
10 Returns Outwards 350
11 Trade Expenses 1,000
12 Discount Received 970
13 Salary 3,000
14 Office Rent 2,270
Total 47,820 47,820

45
CASHBOOK
A cashbook is a special journal which is used to record all cash receipts and cash payments. The cash book is a
book of original entry or prime entry since transactions are recorded for the first time from the source documents.
The cash book is a ledger in the sense that it is designed in the form of a cash account

Advantages
1. Saves time and labour : When cash transactions are recorded in the journal a lot of time and
labour will be involved. To avoid this all cash transactions are straight away recorded in the cash
book which is in the form of a ledger.
2. To know cash and bank balance: It helps the proprietor to know the cash and bank balance
at any point of time.
3. Mistakes and frauds can be prevented: Regular balancing of cash book reveals the balance
of cash in hand. In case the cash book is maintained by business concern, it can avoid frauds.
Discrepancies if any, can be identified and rectified.

Effective cash management: Cash book provides all information regarding total receipts and
payments of the business concern at a particular period. So that, effective policy of cash
management can be formulated. And records cash receipts on the debit side and cash payments
on the credit side.

Types of Cash Book:

46
1. Single Column Cash Book: A single column Cash Book contains one column of amount
on both sides, i.e., one in the debit side and other in the credit side. In the single column
Cash Book, only cash transactions are recorded. In the debit side of the Cash Book, all
cash

2. Double Column Cash Book: A double column Cash Book contains two columns of
amount, namely cash column and bank column on both sides. In the cash column of Cash
Book, all cash receipts and payments are recorded, according to the rule of Real
Accounts. All deposits either in cash or through cheques into the bank account of the
business are debited in the bank column and all with draw also cash and payments
through cheques are credited in the bank column.

3. Triple Column Cash Book: In a triple column Cash Book, there are three columns of
amount namely, cash, bank and discount. Discount allowed and discount received are
recorded in the discount column. While in the debit side, discount allowed is recorded
along with the receipts, either in cash or through cheque; whereas, in the credit side,
discount received is recorded, along with the payments made either in cash or by issuing
cheques.

4. Petty Cash Book: This book is used for recording payment of petty expenses, which are
of smaller denominations like, postage, stationery, conveyance, refreshment, etc. is
known as Petty Cash Book. receipts are recorded, while in the credit side all cash
payments are recorded.

Following is the format of the single column cashbook:

47
Explanation:

i. Date: This column appears in both the debit and credit side. It records the date of receiving
cash at debit side and paying cash at credit side.

ii. Particulars : This column is used at both debit and credit side. It records the names of parties
(personal account), heads (nominal account) and items (real account) from whom payment has
been received and to whom payment has been made.

iii. Receipt Number (R.N): This refers to the serial number of the cash receipt.

iv. Voucher Number (V.N) : This refers to the serial number of the voucher for which payment
is made.

v. Ledger Folio (L.F): This column is used in both the debit and credit side of cash book. The
ledger page (folio) of every account in the cash book is recorded against it.

vi. Amount: This column appears in both sides of the cashbook. The actual amount of cash
receipt is recorded on the debit side. The actual payments are entered on the credit side.

vii. Balancing : The cashbook is balanced like any other account. The total of the receipt (debit side)
column will always be greater than the total of the payment column (credit side). The difference will be
written on the credit side as “By Balance c/d”. In the beginning of then ext period, to show the cash
balance in hand, the balance amount is recorded in the debit side as “To balance b/d”.

48
Example:1
Write the following transactions in the simple cashbook and post into the ledger:
1991
Cash in hand 15,000
"6 Purchased goods for cash 2,000
"16 Received from Akbar 3,000
"18 Paid to Babar 1,000
"20 Cash sales 4,000
"25 Paid for stationary 60
"30 Paid for salaries 1,000
"31 Purchased office furniture 2,000
Solution:1
Cash Book
Particulars L.F. Amount Date Particulars L.F. Amount
1991
Jan.1 To Balance b/d To 15,000 Jan.6 By Purchases a/c By 2,000
Akbar 3,000 18 Babar 1,000
To sales a/c 4,000 25 By stationary By 60
30 Salaries a/c By 1,000
31 Furniture a/c
By Balance c/d 2,000
15,940

22,000 22,000

15,940
To Balance b/d

49
Example:2
Enter the following transactions in a simple cashbook for December 2016:

Rs
01 Cash in hand 12,000
05 Cash received from Bhanu 4,000
07 Rent Paid 2,000
10 Purchased goods Murari for cash 6,000
15 Sold goods for cash 9,000
18 Purchase stationery 300
22 Cash paid to Rahul on account 2,000
28 Paid salary 1,000
30 Paid rent 500

Solution;2

Cash Book
Dr. Cr.
Amount Amount
Date Particulars L.F. Rs Date Particulars L.F. Rs
2016 2016
Dec.01 Balance b/d 12,000 Dec.07 Rent 2,000
Dec.05 Bhanu 4,000 Dec.10 Purchases 6,000
Dec.15 Sales 9,000 Dec.18 Stationery 300
Dec.22 Rahul 2,000
Dec.28 Salaries 1,000
Dec.30 Rent 500
Dec.31 Balance c/d 13,200

25,000 25,000

50
Example3
Record the following transaction in simple cashbook for November 2016:

Rs
01 Cash In Hand 12,500
04 Cash paid to Hari 600
07 Purchased goods 800
12 Cash received from Amit 1,960
16 Sold goods for cash 800
20 Paid to Manish 590
25 Paid cartage 100
31 Paid salary 1,000

Solution:
Cash Book
Dr. Cr.
Amount Amount
Date Particulars L.F. Rs Date Particulars L.F. Rs
2016 2016
Nov.01 Balance b/d 12,500 Nov.04 Hari 600
Nov.12 Amit 1,960 Nov.07 Purchases 800
Nov.16 Sales 800 Nov.20 Manish 590
Nov.25 Cartage 100
Nov.30* Salaries 1,000
Nov.30* Balance c/d 12,170

15,260 15,260

Note: There is a misprint in the question as there is a transaction on November31, which is

not possible as there are only 30 days in the month of November.

51
Format of the Double Column Cash Book:

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.

Debit Side Credit Side

Date Particulars V.N. L.F. Discount Cash Date Particulars V.N. L.F. Discount Cash

52
Example5

From the following transactions write up a two column cashbook and post into ledger:

1991
Jan.1 Cash in hand $2,000
"7 Received from Riaz &Co. $200; discount allowed$10
"12 Cash sales $1,000
"15 Paid Zahoor Sons $500; discount received$15
"20 Purchased goods for cash $300
"25 Received from Salman $500; discount allowed $15
"27 Paid Hussan & Sons $300.
"28 Bought furniture for cash $100
"31 Paid rent $100
Solution:5
Cash Book
Debit Side Credit Side

Date Particulars V. L.F. Discount Cash Date Particulars V.N. L.F. Discount Cash
N.
1991 1991
Jan.1 To Jan.5 By Zahoor & 15 500
"7 Balance "20 Sons
"12 b/d 2,000 "27 By
"25 To Riaz & "28 purchase a/c 300
Co. 10 200 "31 By Hussan &
To Sales Sons 300
a/c 1,000 By Furniture
To Salman 15 500 a/c 100
1991 By Rent a/c 100
Feb1 By Balance 2,400
c/d

25 3,700 15 3,700
To
Balance 2,400
b/d

53
Three column Cash Book:
Opening Balance:
Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the cash
book and bank columns. If the opening balance is credit balance (overdraft) then it will be put in
the credit side of the cash book in the bank column.
Cheque/Check or Cash Received:
If a cheque is received from any person and is paid into the bank on the same date it will appear
on the debit side of the cashbook as "To a Person". The amount will be shown in the bank
column. If the cheque received is not deposited into the bank on the same date then the amount
will appear in the cash column. Cash received will be recorded in the usual manner in the cash
column.
Payment By Cheque/Check or Cash:
When we make payment by cheque, this will appear on the credit side "By a person" and the
amount in the bank column. If the payment is made in cash it will be recorded in usual manner in
the cash column.
Contra Entries:
If an amount is entered on the debit side of the cash book, and the exact amount is again entered
on the credit side of the same account, it is called "contra entry". Similarly an amount entered on
the credit side of an account also may have a contra entry on the debit side of the same account.
Contra entries are passed when:
1. Cash is deposited into bank by office: It is payment from cash and receipt in bank.
Therefore, enter on credit side, cash column "By Bank" and on debit side bank column
"To Cash". The reason for making two entries is to comply with the principle of double
entry which in such transactions is completed and therefore, no posting of these items is
necessary. Such entries are marked in the cashbook with the letter "C" in the folio column
2. Cheque/Check is drawn for office use: It is payment by bank and receipt in cash.
Therefore, enter on the debit side, cash column "To Bank" and on credit side, bank
column "By Cash".

54
Bank Charges and Bank Interest Allowed: Bank charges appear on the credit side, bank
column "Bank Charges." Bank interest allowed appear on the debit side, bank column "To
Interest".

Posting:
The method of posting three column cashbook into the ledger is as follows:

1. The opening balance of cash in hand and cash at bank are not posted.
2. Contra Entries marked with "C" are not posted.
3. All other items on the debit side will be posted to the credit of respective accounts in the
ledger and all other items on the credit side will be posted to the debit of the respective
accounts.
4. As regards discounts the total of the discount allowed will be posted to the debit of the
discount account in the ledger and total of the discount received to the credit side of the
discount account.

Format of the Three Column Cash Book:

Debit Side Credit Side

Date Particulars V.N. L.F. Dis- Cash Bank Date Particulars V.N. L.F. Dis- Cash Bank
count count

55
Example:6

On January1,1991 Noorani Stores cashbook showed debit balance of cash $1,550 and bank
$ 13,575. During the month of January following business was transacted.
1991
Jan.1 Purchased office typewriter for cash $750; cash sales $315
"3 Deposited cash $500
"4 Received from A. Hussan a cheque for $2,550 in part payment of his account
"6 Paid by cheque for merchandise purchased worth $1,005
"8 Deposited into bank the cheque received from A. Hussan.
"10 Received from Hayat Khana cheque for $775 in full settlement of his account and
allowed him discount $15.
"12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited
In the bank.
"16 Paid Salman $915 by cheque, discount received $5
"27 Paid to Gulzar Ahmad by cheque $650
"30 Paid salaries by cheque $1,750
"31 Deposited into bank the cheque of Hayat Khan.
"31 Drew from bank for office use $250.

56
You are required to enter the above transactions in three column cashbook and balance it.
Noorani Stores
Cash Book

Debit Side Credit Side

Date Particulars V.N. L.F. Dis- Cash Date Particulars V.N. L.F. Dis- Cash
count count
1991 1991
Jan.1 To 1,550 13,575 Jan.1 By Office 750
"1 Balance 1,315 "3 Equip. C 500
"3 b/d C 500 "6 By Bank 1,005
"4 To Sales 2,550 "8 By C 2,550
"8 a/c C 2,550 "16 Purchases 5 915
"10 "27
To Cash 15 775 a/c 650
"12 "30
"31 a/c 1,500 "31 By Bank 1,750
"31 To A C 775 "31 By C 775
Hussan C 250 Salman C 250
To Cash By 1,865 14,330
To Hayat Gulzar By
Khan 15 6,440 18,900 Salaries 5 6,44018,900
To Sales a/c
a/c By Bank
ToCash 1,865 14,330 By Cash
To Bank By
1991 Balanced
Feb.1
c/d
To
Balance
b/d

57
PETTY CASH BOOK
Petty means ‘small’. The petty cash book is a book where small recurring payments like carriage,
cartage, postage and telegram, printing and stationery etc., are recorded by the petty cashier, a
person other than the main cashier.

Imprest System

Imprest means ‘money advanced on loan’. Under this system the amount required to meet out
various petty expenses is estimated and given to the petty cashier at the beginning of the
specified period, usually a month. All the payments are supported by vouchers. At the end of the
given period or earlier, when the petty cashier has spent the petty cash amount, he closes the
petty cash book for the period and balances it. Then he submits the accounts to the cashier. He
verifies the petty cashbook with the vouchers. After satisfying himself as to the correctness and
genuineness of the payments an amount equal to the cash spent is given to the petty cashier. This
amount together with the unspent amount will bring up the cash in hand to the amount with
which he originally started i.e., the imprest amount. Thus the system of reimbursing the amount
spent by the petty cashier at fixed period, is known as the imprest system of petty cash.
For example, On June 1, 2002, Rs.1,000 was given to the petty cashier. He had spent Rs.940
during the month. He will be paid Rs.940 on 30thJune by the cashier so that he may again have
Rs.1,000 for the next month i.e., July

58
Analytical Petty Cash Book
As in the case of any other cash book, petty cashbook also has the debit side and the credit side.
The debit side is smaller and has very in frequent entries because cash receipt by the petty
cashier is mainly from the cashier at the beginning or close of a specified period. The credit side
is bigger and thus has many columns. For each important petty expenses there is a separate
column, and therefore columnar cash book is another name for this petty cash book .These
analytical columns helps to know the actual amount spent on each and every type of petty
expenses for the specified period. Each petty payment is first entered in the total payments
column, and then recorded in the respective analytical column, so that :
i. the total amount spent on each expenses for a particular period can be easily
ascertained by adding up the respective column.
ii. Only the periodical total of each column is posted to the ledger.
iii. the total petty payment for any period can be easily ascertained from the total
payments column.
The analytical petty cashbook may be designed according to the requirements of the business.
Format of Petty Cash Book

59
Example:7
Prepare petty cashbook from the following transactions. The imprest amount is Rs2,000.
January Rs
2017
01 Paid cartage 50
02 STD charges 40
02 Bus fare 20
03 Postage 30
04 Refreshment for employees 80
06 Courier charges 30
08 Refreshment of customer 50
10 Cartage 35
15 Taxi fare to manager 70
18 Stationery 65
20 Bus fare 10
22 Fax charges 30
25 Telegrams charges 35
27 Postage stamps 200
29 Repair on furniture 105
30 Laundry expenses 115
31 Miscellaneous expenses 100

Petty Cash Book

Amo Analysis of Payments
Dat Amoun
unt Vouc
e t
Recei Particulars her Telephone Post Convey Refresh Cart Miscella
201 Paid
ved No. Telegram age ance ment age neous
7 Rs
Rs
2,00 Jan.
0 01 Cash
Jan.
01 Cartage 50 50
Jan.
02 STD charges 40 40
Jan.
02 Bus Fare 20 20
Jan.
03 Postage 30 30
Jan. Refreshment for
04 Employees 80 80
Jan.
06 Courier charges 30 30
Jan. Refreshment of
08 customer 50 50
Jan.
10 Cartage 35 35

60
 Jan. Taxi Fare to
15 Manager 70 70
Jan.
18 Stationery 65 65
Jan.
20 Bus Fare 10 10
Jan.
22 Fax Charges 30 30
Jan. Telegram
25 Charges 35 35
Jan.
27 Postage stamps 200 200
Jan. Repair to
29 Furniture 105 105
Jan. Laundry
30 Expense 115 115
Jan. Miscellaneous
31 Expenses 100 100
1,065 105 260 100 130 85 385
Jan.
31 Balance c/d 935
2,00
0 2,000
Feb.
935 01 Balance b/d
1,06 Feb.
5 01 Cash

61
 FINAL ACCOUNT
Financial accounting is a well-defined sequential activity which begins with Journal
(Journalising), Ledger (Posting), and preparation of Trial Balance (Balancing and
Summarisation at the first stage). The next step is the preparation of financial statement.
Financial Statements:- It has been emphasised that various users have diverse
informational requirements. Instead of generating particular information useful for specific
users, the business prepares a set of financial statements, which in general satisfies the
informational needs of the users.
The basic objectives of preparing financial statements are:
(i). To present a true and fair view of the financial performance of the business;
(ii). To present a true and fair view of the financial position of the business;

For this purpose, the firm usually prepares the following financial statements:
 Trading and Profit and Loss Account
 Balance Sheet

Trading and Profit and Loss account, also known as Income statement, shows the
financial performance in the form of profit earned or loss sustained by the business. Balance
Sheet shows financial position in the form of assets, liabilities and capital. These are prepared
on the basis of trial balance and additional information, if any.
Meaning of Final Accounts:
• Final accounts gives an idea about the profitability and financial position of a
business to its management, owners, and other interested parties The term "final
accounts"
Includes the trading account, the profit and loss account, and the balance sheet.
Objectives of Final Accounts:
• The following are the main objectives of final accounts:-To determine gross profit and
net profit of the business during the year. To present true financial position of the
business on a given date. To make effective control on financial activities of the
business.
• Financial managers make final accounts as well as corporate balance sheets in order to
get a clear and summarizing picture of the current financial condition of the company.
Final accounts, as well as balance sheets, assist shareholders to recognize an
organization's financial viability

62
ITEMS TO KNOW BEFORE PREPARATION OF FINANCIAL STATEMENT:

i) Expenditures: Whenever payment and / or incurrence of an outlay are made for a

purpose other than the settlement of an existing liability, it is called expenditure. The
expenditures are incurred with a viewpoint they would give benefits to the business.
The benefit of an expenditure may extend up to one accounting year or more than one
year. If the benefit of expenditure extends up to one accounting period, it is termed as
revenue expenditure. If the benefit of expenditure extends more than one accounting
period, it is termed as capital expenditure.
ii) Receipts: The similar treatment is given to the receipts of the business. If the receipts
imply an obligation to return the money, these are capital receipts. If a receipt does
not incur an obligation to return the money or is not in the form of a sale of fixed
asset, it is termed as revenue receipt.
iii) Usually Trading and Profit and Loss account includes revenue incomes and
expenditures and Balance sheet includes capital incomes and expenditures.
iv) Closing Entries: The preparation of trading and profit and loss account requires that
the balances of accounts of all concerned items are transferred to it for its compilation.

 Opening stock account, Purchases account, Wages account, Carriage inwards account
and direct expenses account are closed by transferring to the debit side of the trading
and profit and loss account. This is done by recording the following entry:

Trading A/c Dr.

To Opening stock A/c

To Purchases A/c

To Wages A/c

To Carriage inwards A/c

To All other direct expenses A/c

63
 The purchases returns or return outwards are closed by transferring its balance to the
purchases account. The following entry is recorded for this purpose:

Purchases return A/c Dr.

To Purchases A/c
 The sales returns or returns inwards account is closed by transferring its balance to the
sales account as:

Sales A/c Dr.

To Sales return A/c

 The sales account is closed by transferring its balance to the credit side of the trading
and profit and loss account by recording the following entry:

Sales A/c Dr.

To Trading A/c

 Items of expenses, losses, etc. are closed by recording the following

entries: Profit and Loss A/c Dr.

To Expenses (individually) A/c To

Losses (individually) A/c

 Items of incomes, gains, etc. are closed by recording the following

entry: Incomes (individually) A/c Dr.

Gains (individually) A/c Dr.

To Profit and Loss A/c

64
TRADINGANDPROFITANDLOSS ACCOUNT

Trading accounting is an account prepared to as certain the trading results of a

business i.e., the gross profit earned or gross loss incurred from buying and selling of goods
during a particular period. The excess of net sales [total sales less returns] over cost of goods
sold is termed as gross profit.

Trading and Profit and Loss account is prepared to determine the profit earned or loss
sustained by the business enterprise during the accounting period. It is basically a summary of
revenues and expenses of the business and calculates the net figure termed as profit or loss.
The trading and profit and loss can be seen as combination of two accounts, viz. Trading
account and Profit and Loss account. The trading account or the first part ascertains the gross
profit and Profit and loss account or the second part ascertains net profit.

1) Trading Account :- The trading account ascertains the result from basic operational
activities of the business. The basic operational activity involves the manufacturing,
purchasing and selling of goods. It is prepared to as certain whether the selling of
goods and/or rendering of services to customers have proved profitable for the
business or not. Purchases is one of the main constituents of expenses in business
organization . Besides purchases, the remaining expenses are divided into two categories,
viz. direct expenses and indirect expenses. Direct expenses means all expenses directly
connected with the manufacture, purchase of goods and bringing them to the point of sale.
Direct expenses include carriage in wards, freight in wards, wages, factory lighting, coal,
water and fuel, royalty on production, etc. Similarly, sales constitute the main item of revenue
for the business. The excess of sales over purchase sand direct expenses is called Gross
Profit. If the amount of purchases including direct expenses is more than the sales revenue,
the resultant figure is Gross Loss. The computation of gross profit can be shown in the form
of equation as:

Gross Profit = Sales – (Purchases + Direct Expenses)

65
2) Profit and Loss account:-
Accounting to Prof. Carter “Profit and loss account is an account into which all gains and
losses are calculated in order to as certain the excess of gains over the losses or vice
versa”.

Profit and loss account is an account which prepared to calculate the final profit or loss of the
business. All operating expenses and other non-operating income and expenditures and losses
are charged to profit and loss account to find out the net profit.
The gross profit or the gross loss is transferred to profit and loss account. The indirect
expenses are transferred to the debit side of the second part, viz. profit and loss
account. All revenue/gains other than sales are transferred to the credit side of the
profit and loss account. If the total of the credit side of the profit and loss account is
more than the total of the debit side, the difference is the Net Profit for the period of
which it is being prepared. On the other hand, if the total of the debit side is more than
the total of the credit side, the difference is the Net Loss incurred by the business
firm.

Objectives of P/L Accounts

 To know the trading result
 To Identify Net Profit or Loss
 To know the relation between profits and turnover
 To Know components of Income & Expenditure
 To determining efficiency
 To Control over expenses
 To prepare future profit planning

66
Items on the debit side

Debit Side
I. Operating expense
• Office & Admn. Expense
• Selling, distb. Expense
• Financial expense
• Maintenance Expense
II. Non Operating expense
• Losses
• Written off of fictitious assets
Credit Side
I. Operating Income
• Interest, commission, discount
II. Non operating income
• Profit sale of assets
• Refund tax
• Rent received
In an equation form, it is shown as follows:

Net Profit =Gross Profit +Other Incomes–Indirect Expenses

Net profit or net loss so computed is transferred to the capital account in the balance sheet
by way of the following entry:

i) For transfer of net profit

Profit and Loss A/c Dr.

To Capital A/c

ii) For transfer of net loss

Capital A/c Dr.

To Profit and Loss A/c

67
 Relevant Items in Trading and Profit and Loss Account

The different items appearing in the trading and profit and loss account are explained
hereunder:

(i). Opening stock: It is the stock of goods in hand at the beginning of the accounting
year. This is the stock of goods which has been carried forward from the previous
year and remains unchanged during the year and appears in the trial balance. In the
trading account it appears on the debit side because it forms the part of cost of goods
sold for the current accounting year.
(ii). Purchases less returns: Goods, which have been bought for resale appears as
purchases on the debit side of the trading account. They include both cash as well as
credit purchases. Goods which are returned to suppliers are termed as purchases
return. It is shown by way of deduction from purchases and the computed amount is
known as Net purchases.
(iii). Wages: Wages refer to remuneration paid to workers who are directly engaged in
factory for loading, unloading and production of goods and are debited to trading
account.
(iv). Carriage inwards/Freight inwards: These expenses are the items of transport
expenses, which are incurred on bringing materials/goods purchased to the place of
business. These items are paid in respect of purchases made during the year and are
debited to the trading account.
(v). Fuel/Water/Power/Gas: These items are used in the production process and hence
are part of expenses.
(vi). Packaging material and Packing charges: Cost of packaging material used in the
product are direct expenses as it refers to small containers which form part of goods
sold. However, the packing refers to the big containers that are used for transporting
the goods and is regarded as an indirect expense debited to profit and loss account.
(vii). Salaries: These include salaries paid to the administration, god own and warehouse
staff for the services rendered by them for running the business. If salaries are paid in
kind by providing certain facilities (called perks) to the employees such as rent free
accommodation, meals, uniform, medical facilities should also be regarded as salaries
and debited to the profit and loss account.

68
 (viii). Rent paid: These include office and go down rent, municipal rates and taxes, factory
rent, rates and taxes. The amount of rent paid is shown on the debit side of the profit
and loss account.
(ix). Interest paid: Interest paid on loans, bank overdraft, renewal of bills of exchange,
etc. is an expense and is debited to profit and loss account.
(x). Commission paid: Commission paid or payable on business transactions undertaken
through the agents is an item of expense and is debited to profit and loss account.
(xi). Repairs: Repairs and small renewals/ replacements relating to plant and machinery,
furniture, fixtures, fittings, etc. for keeping them in working condition are included
under this head. Such expenditure is debited to profit and loss account.
(xii). Miscellaneous expenses: Though expenses are classified and booked under different
heads, but certain expenses being of small amount clubbed together and are called
miscellaneous expenses. In normal usage these expenses are called Sundry expenses
or Trade expenses.

Items on the credit side

(i). Sales less returns: Sales account in trial balance shows gross total sales (cash as well
as credit) made during the year. It is shown on the credit side of the trading account.
Goods returned by customers are called return inwards and are shown as deduction
from total sales and the computed amount is known as net sales.
(ii). Other incomes: Besides salaries and other gains and incomes are also recorded in the
profit and loss account. Examples of such in comes are rent received, dividend
received, interest received, discount received, commission received, etc.
(iii). Closing stock: It may be noted that closing stock does not normally form part of trial
balance and is brought into books with the help of the following journal entry:

Closing stock A/c Dr.

To Trading A/c
This entry opens a new account of asset, which is transferred to the balance sheet. The
closing stock shall be an opening stock for the next year and shall be sold during the
year.

69
BALANCE SHEET

The balance sheet is a statement prepared for showing the financial position of the
business summarising its assets and liabilities at a given date. The assets reflect debit
balances and liabilities (including capital) reflect credit balances. It is prepared at the end of
the accounting period after the trading and profit and loss account have been prepared. It is
called balance sheet because it is a statement of balances of ledger accounts that have not
been transferred to trading and profit and loss account and are to be carried forward to the
next year with the help of an opening entry made in the journal at the beginning of the next
year.
According to Howard, a Balance sheet maybe defined as –‘a statement which reports
the values owned by the enterprise and the claims of the creditors and owners against these
properties’.
It is showing the financial position of the concern as on the last day of the accounting
year .It comprises of a list of assets, liabilities and capital.
Balance Sheet Equation:
• Assets=Liabilities+ Capital
• Capital=Assets –Liabilities
Objectives and Functions of Balance Sheet
 To identify the financial position of a company
 To know the liquidity picture of the concern
 To know the solvency position of the concern
 To identify nature and value of assets
 To get Nature and extent of liabilities and actual capital

Preparing Balance Sheet

All the account of assets, liabilities and capital are shown in the balance sheet.
Accounts of capital and liabilities are shown on the left hand side, known as Liabilities.
Assets and other debit balances are shown on the right hand side, known as Assets. There is
no prescribed form of Balance sheet, for a proprietary and partnership firms. (However,
Schedule VI Part I of the Companies Act 1956 prescribes the format and the order in which
the assets and liabilities of a company should be shown). The horizontal format in which the
balance sheet is prepared is shown below.

70
Relevant Items in the Balance Sheet

Items which are generally included in a balance sheet are explained below:

1) Current Assets: Current assets are those which are either in the form of cash or a can
be converted into cash with in a year. The examples of such assets are cash in
hand/bank, bills receivable, stock of raw materials, semi-finished goods and finished
goods, sundry debtors, short term investments, prepaid expenses, etc.
2) Current Liabilities: Current liabilities are those liabilities which are expected to be
paid within a year and which are usually to be paid out of current assets. The
examples of such liabilities are bank overdraft, bills payable, sundry creditors, short-
term loans, outstanding expenses, etc.
3) Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in the
business. Such assets are not acquired for the purpose of resale, e.g. land, building,
plant and machinery, furniture and fixtures, etc. Sometimes the term ‘Fixed Block’ or
‘Block Capital’ is also used for them.
4) Intangible Assets: These are such assets which cannot be seen or touched. Goodwill,
Patents, Trademarks are some of the examples of intangible assets.
5) Investments: Investments represent the funds invested in government securities,
shares of a company, etc. They are shown at cost price. If, on the date of preparation
the balance sheet, the market price of investments is lower than the cost price, a
footnote to that effect may be appended to the balance sheet.
6) Long-term Liabilities: All liabilities other than the current liabilities are known as
long-term liabilities. Such liabilities are usually payable after one year of the date of
the balance sheet. The important items of long term liabilities are long-term loans
from bank and other financial institutions.
7) Capital: It is the excess of assets over liabilities due to outsiders. It represents the
amount originally contributed by the proprietor/ partners as increased by profits and
interest on capital and decreased by losses drawings and interest on drawings.
8) Drawings: Amount withdrawn by the proprietor is termed as drawings and has the
effect of reducing the balance on his capital account. Therefore, the drawings account
is closed by transferring its balance to his capital account. However it is shown by
way of deduction from capital in the balance sheet.

71
OPENING ENTRY

The balances of various accounts in balance sheet are carried forward from one
accounting period to an other accounting period. In fact, the balance sheet of an accounting

period becomes the opening trial balance of the next accounting period. Next year anopening
entry is made which opens these accounts contained in the balance sheet. The opening entry
with various assets and liabilities will be recorded as follows:
Fixed assets A/c Dr.
Current assets A/c Dr.
Fictitious assets A/c Dr.
Investments A/c Dr.
To Capital A/c
To Long-term liabilities A/c
To Current liabilities A/c

72
FINAL ACCOUNT FORMAT

Dr. Trading account for the year ended... Cr.

Particulars Amount Amount Particulars Amount Amount
To Opening stock xxx By Sales xxx
Less:
To Purchases xxx Sales returns xxx Xxx

Less: By Closing stock xxx

Purchases returns xxx xxx

To Direct expenses: By Gross loss c/d* xxx

Carriage/ xxx
Freight inwards xxx

Wages xxx
Dock charges xxx
Octroi xxx
Royalty xxx
Import duty xxx
To Gross profit c/d* xxx

xxx xxx

73
 Profit and loss account for the year ended…….
Dr. Cr.
Particulars Amount Particulars Amount
To Gross loss b/d xxx By Gross profit b/d xxx
To Office and administrative By Indirect incomes:
expenses:
Salaries xxx Rent earned xxx
Rent, rates and taxes xxx Discount received xxx
Printing and stationery xxx Commission earned xxx
Postage xxx Interest on investments xxx
Legal charges xxx Dividend on shares xxx
Audit fees xxx Bad debts recovered xxx
Establishment expenses xxx Profit on sale of fixed xxx
assets
Trade expenses xxx Apprenticeship xxx
premium
Generaltravellingexpenses xxx Miscellaneous receipts xxx
Lighting xxx By Net loss* xxx
Insurance premium xxx (transferred to capital
account)
To Selling and distribution
expenses:
Carriage outwards xxx
Advertisement xxx
Commission xxx
Brokerage xxx
Bad debts or provision for bad xxx
debts
Export duty xxx
Packing charges xxx
To Other expenses and losses:
Repairs xxx
Depreciation xxx
Interest charges xxx
Discount allowed xxx
Provision for discount on debtors xxx
Bank charges xxx
Interest on capital xxx
Donation and charity xxx
Loss on sale of fixed assets xxx
Abnormal loss due to fire, theft xxx
etc. not covered by insurance xxx
To Net profit* xxx
(transferred to capital account)
xxx xxx

74
 Balance sheet of...as on...
Liabilities Amount Assets Amount Amount
Fixed assets:
Capital xxx i)Intangible
assets:
Add: Net profit/Less: Net xxx Goodwill xxx
loss
xxx Patent rights xxx
Less: Drawings xxx Copyrights xxx
xxx Trademarks xxx
Reserves xxx Computer software xxx
Longterm loans xxx ii)Tangible assets:
Current liabilities: Land xxx
Bank overdraft, Cash credit xxx Buildings xxx
Outstanding expenses xxx Less: Depreciation xxx xxx
Unearned income xxx Plant and xxx
machinery
Short term loans from banks xxx Less: Depreciation xxx xxx
Sundry creditors xxx Vehicles xxx
Bills payable xxx Less: Depreciation xxx xxx
Provisions: Furniture xxx
and Fittings
Provision for employee xxx Less: Depreciation xxx xxx
benefits
Provision for tax xxx Investments xxx
xxx Current assets:
Stock xxx
Advances given xxx
Sundry debtors xxx
Bills receivable xxx
Prepaid expenses xxx
Accrued income xxx
Cash at bank xxx
Cash in hand xxx
Fictitious assets:
Preliminary xxx
expenses
Miscellaneous xxx
expenses
xxx xxx

75
Example1

Following are the balances extracted from the books of Manish Gupta on 31st March,2018:

₹ ₹
Capital 1,90,000 Cash at Bank 26,000
Drawing 7,000 Salaries 8,000
Plant and 1,20,000 Repairs 1,900
Machinery
Delivery 26,000 Stockon1stApril,2017 16,000
Vehicle
Sundry 36,000 Rent 4,500
Debtors
Sundry 26,000 Manufacturing Expenses 1,500
Creditors
Purchases 20,000 Bills Payable 23,500
Sales 42,000 Bad Debts 5,000
Wages 8,000 Carriage 1,600

Prepare Trading and Profit and Loss Account and balance Sheet as at 31st March, 2018
after following adjustments are made:
(i) Closing Stock was ₹16,000.
(ii) Depreciate Plant and Machinery @10% and Delivery Vehicle @15%.
(iii) Unpaid Rent amounted to ₹500.
Solution 1

Trading Account
For the year ended March31,2018
Dr. Cr.
Amount Amount
Particulars (Rs) Particulars (Rs)
Opening stock 16,000 Sales 42,000
Purchases 20,000 Closing Stock 16,000
Wages 8,000
Manufacturing Expenses 1,500
Carriage 1,600
Gross Profit (Balance Figure) 10,900
58,000 58,000

76
 Profit and Loss Account
For the year ended March 31,2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Salaries 8,000 Gross Profit 10,900
Repairs 1,900 Net Loss (Balancing 24,900
Figure)
Rent 4,500
Add: Unpaid Rent 500 5,000
Bad Debts 5,000
Depreciation on:
Plant and machinery 12,000
Delivery Vehicle 3,900 15,900

35,800 35,800

Balance Sheet
As on March31,2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,90,000 Fixed Assets
Less: Drawings (7,000) Plant and Machinery 1,20,000
Less: Net Loss (24,900) Less:10% (12,000) 1,08,000
Deprecation
1,58,100 Delivery Vehicle 26,000
Less:15% (3,900) 22,100
Depreciation
Current Liabilities
Sundry Creditors 26,000 Current Assets
Bills Payable 23,500 Closing Stock 16,000
Unpaid Rent 500 Sundry Debtors 36,000
Cash at Bank 26,000
2,08,100 2,08,100

Example 2
77
Prepare Trading and Profit and Loss Account and Balance Sheet from the following balances
relating to the year ended 31st March, 2018:

₹ ₹
Capital 1,00,000 Wages 50,000
Creditors 12,000 Bank 10,000
Returns 5,000 Repairs 500
Outward
Sales 1,64,000 Stockon1stApril,2017 20,000
Bills Payable 5,000 Rent 4,000
Plant and 40,000 Manufacturing Expenses 8,000
Machinery
Sundry 24,000 Trade Expenses 7,000
Debtors
Drawing 10,000 Bad Debts 2,000
Purchases 1,05,000 Carriage 1,500
Returns 3,000 Fuel and Power 1,000
Inward

Additional Information:

(i) Closing Stock was valued at ₹14,500.

(ii) Depreciate Plant and Machinery by ₹4,000.

(iii) Write off Bad Debts ₹5,000.

(iv) A sum of ₹400 is due for repairs.

Solution 2
Trading Account
For the year endedMarch31,2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening stock 20,000 Sales 1,64,000
Purchases 1,05,000 Less: Return Inwards (3,000) 1,61,000
Less: Return outwards (5,000) 1,00,000 Closing Stock 14,500
Wages 50,000 Gross Loss (Balancing Figure) 5,000
Manufacturing Expenses 8,000
Carriage 1,500
Fuel and Power 1,000
1,80,500 1,80,500

78
 Profit and Loss Account
For the year ended March31,2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Gross Loss 5,000
Repairs 500
Add: outstanding 400 900
Rent 4,000
Miscellaneous Expenses 7,000
Balance Bad Debts 2,000 Net Loss(Balancing Figure) 27,900 Sheet
As on Add: Additional bad debts 5,000 7,000 March
31,2018 Depreciation on Plant and 4,000
Machinery
27,900 27,900

Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,00,000 Fixed Assets
Less: Drawings (10,000) Plant and Machinery 40,000
Less: Net Loss (27,900) 62,100 Less: Depreciation (4,000) 36,000
Current Liabilities Current Assets
Creditors 12,000 Closing Stock 14,500
Bills Payable 5,000 Sundry Debtors 24,000
Outstanding Repairs 400 Less: Further Bad Debts (5,000) 19,000
Bank 10,000
79,500 79,500

79
 WHAT IS AN ON PROFIT ORGANIZATION ?

These are those organisations which are established for a charitable or social purpose and not
with a view to earn profit. These also render services to their members and to the society on
voluntary basis. These non-profit seeking entities exist with a primary motive of providing
service. Such as, a club provides sports and recreational facilities; a hospital renders medical
services.
Characteristics/Features
SERVICE :- Such organizations are setup to provide service to a specific group or the public at
large such as education, health care, sports, entertainment etc. The main aim of these
organisations is to provide service either free of cost or at nominal rates and not to earn profit.
• FORM:- Since the basic objective of NPO is to render services such as social, religious,
educational, charitable, etc. so they take the form of clubs, schools, colleges, societies, trusts or
charitable bodies.
• SEPARATE LEGAL ENTITY:- As every organisation has distinct entity from its members,
so has the NPO. Its name and entity is different from the people who have contributed towards
its capital fund. It takes birth by law and winds up in the same way.
• MANAGEMENT BY ELECTED PERSONS :- Management of NPO is done by the people
who have been elected by its members called managing/ executive committee.
• NO PROFIT MOTIVE:-These institutions do not operate with a view to earn profit rather their
aim is to promote education, sports, charity, religion, culture, etc.
• ACCOUNTS:- They prepare financial statements at the end of their accounting period in the
form of RECEIPTS AND PAYMENT ACCOUNT, INCOME AND EXPENDITURE
ACCOUNT and BALANCE SHEET.
• MAJOR SOURCES OF INCOME (FUNDING):- These organisations collect subscriptions
from their members, grants from government, donations, income frominvestmentsetc.to meet
the operating cost and cost of projects undertaken.
• SURPLUS NOT DISTRIBUTED AMONG ITS MEMBERS:- Current year’s surplus in the
form of excess of income over expenditure is not distributed among its members. It is added to
Capital Fund.

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NPO prepares annual or final accounts reflecting the financial transactions of the
organisation.
Final accounts of NPO includes:
1 .RECEIPTS & PAYMENT A/C
2 .INCOME & EXPENDITUREA/C
3.BALANCE SHEET
Preparation of Receipts and Payments Accounts:
Receipts:
Summaries all receipts appearing on the receipts side of the cashbook and the bank book.
These are added up separately for each head of account and shown on the receipts side of the
Receipts and Payments Account.
Payments:
Similarly, all payments appearing on the payments side of the cashbook and the bank book are
summarized. These also are added up separately for each head of account and shown on the
payments side of the Receipts and Payments Account.
Concept of Receipts And Payments Account:
Receipt and payment account is a summary of cash receipts and payments during the
accounting period. It records all cash receipts and cash payments including capital receipts and
revenue revenue receipts irrespective of accounting period.
All cash receipts are recorded on debit side or receipts side and all cash payments are recorded
on credit or payments side of receipts and payments account.

81
Features of Receipts And Payments Account:
The essential features of receipts and payments account areas follows:
1. Summary Of Cash Transactions:
All cash receipts and payments made by the concern during the accounting period are recorded in
this book. Therefore, receipts and payments account can be taken as a summary of cash
transactions.
2. Cash And Bank Items In One Column:
All receipts either cash or bank are recorded in receipts column of receipts side where all cash
and bank payments are recorded in one column of payment column of receipts and payments
account. The cash and bank transactions are merged to avoid contra entries of cash and bank
transactions.
3. No Distinction Between Capital And Revenue:
All cash receipts and cash payments irrespective of capital and revenue nature are recorded in
receipts and payments account. No distinct is made for capital receipts , revenue receipts, capital
expenditures and revenue expenditures.
4. Opening and Closing Balance of Cash:
Receipts and payments account starts from opening balance of cash and bank ends with the
closing balance of cash and bank.
5. Recording of Cash Receipts And Payments:
All cash and cheque receipts are recorded on debit side where as all cash and cheque payments
are recorded on credit side of receipts and payments account.
6. Ignores Non-cash Transactions:
Receipts and payments account does not record non-cash transactions.

82
Limitations Of Receipts And Payments Account

1. Receipts and payments account does not differentiate capital and revenue expenses and
incomes.
2. Receipts and payments account fails to show expenses and incomes on accrual basis.
3. Receipts and payments account fails to show surplus and deficiency.
4. Receipts and payments account fails to show non-cash transactions such as depreciation of
fixed assets, pilferage.

Income and Expenditure Account and Balance Sheet:

Income and expenditure account is prepared in non profit organisation whose aim is not to earn
money for personal benefits but they distribute the profit for welfare activities. So, for showing
the organisation different from for-profit organisation, they prepare income and expenditure
account. It is prepared just like preparing of profit and loss account. In the debit side, we show
all the expenses whether they has been paid or not. In the credit side, we show all the incomes
whether they have been received or not. One thing, we should remember that we will show only
the expenses and incomes which are not the capital nature.

Income and Expenditure Account:

All transactions relating to non-profit-seeking concerns like Club, Library etc. are recorded in the
books of account strictly according to Double Entry System. At the year-end result is determined
through Final Accounts.

Final Accounts consist of two stages:

 Income and Expenditure Account

 Balance Sheet

83
Characteristics:

The following are the characteristics of Income and Expenditure Account:

1. It is in fact like a Profit and Loss Account of a profit-seeking concern.
2. All expenses are recorded on Debit side and all revenues on Credit side.
3. Only revenue transactions are included in it. No capital items is taken into account.
4. All the items of income/ revenue concerning current year—whether received in cash
or not—and all items of expense —whether paid in cash or not—are taken into account.
But no item of income or expense concerning last year or next year is included in it.
5. Surplus or deficit of a concern is ascertained through this account. Credit balance
"indicates surplus, while debit balance indicates deficit.
6. Its balance is transferred to Capital Fund Account.
7. It is prepared on the last day of an accounting year.
8. It does not start with any opening balance.
Difference between Receipt and Payment Account and Income and
Expenditure Account-
S. Particulars Receipts and Payments Income and Expenditure Account
No. Account
1. Cash and Non Only cash transactions are It is not confined to, cash
cash transaction recorded here. transactions only, i.e. non-cash
Transactions a real so included in it.
2. Shows an items Receipts are shown on the debit All revenue incomes appear on the
Side and payments on the credit Credit side and expenditure on the
side. debit side.
3. Capital and It includes both capital and It includes only income and
revenue items Revenue receipts & payment Expenditure of revenue nature
4. Balance sheet It includes both capital and It includes only revenue items, so it
revenue items, so it need not must be accompanied by a balance
necessarily be accompanied by sheet, the balance sheet contains
A Balance Sheet. the Remaining balances.
5. Type of Account It is a Real Account It is a Nominal Account
6. Transfer of Its balance is carried over to Its balance is transferred to Capital
Closing Balance Receipts & Payments Account Fund.
of the next year.
7. Opening This account shows opening It has no opening balance.
Balance Balance except in the first year.
8. Transactions Transactions relating to past, Transactions relating to current year
present and futures are only are recorded.
recorded.
9. Adjustment Adjustments are not Adjustments are considered
considered, because it is necessary because it is prepared on
prepared on cash basis of accrual basis of accounting.
accounting.

84
10. Use of Double The double entry book keeping Double entry book keeping system
Entry System System is not followed while its is followed strictly while its
preparation. preparation.
11. Compulsory Its preparation is not It is compulsory. It must be
compulsory. prepared in order to as certain the
true result Of a concern.
12. Closing Balance Closing balance of this Closing balance of this account
account represents the closing indicates either excess of income
cash in hand and at bank or over expenditure or excess of
over draft at bank. Expenditure over income.

Format Receipt and Payment Account

85
Format Income and Expenditure Account

Format of Balance Sheet

Example1
86
Calculate the amount of stationery to be posted to Income and Expenditure Account of Indian
Cultural Society for the year ending 31st March, 2018 from the following information :
Particulars 1.4.2017(Rs.) 31.3.2018 (Rs.)

Stock of stationery 21,000 18,000

Creditors for stationery 11,000 23,000

Stationery purchased during the year ended31stMarch2018wasRs.75,000. Also, present the
Relevant items in the Balance Sheet of the society as at 31stMarch 2018.

Solution 1
Stationery Account

Dr. Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 21,000 By Income & Expenditure A/c 78,000

To Bank 75,000 (Balancing figure)

By Balance c/d 18,000

96,000 96,000

Balance sheet a son 31.03.2018

Liabilities Rs. Assets Rs.

Creditors for stationery 23,000 Stationery’s Stock 18,000

Example 2

From the following Reciepts and Payments Accounts of Cricket Club and the additional
information given, prepare the Income and Expenditure Account for the Year ending31-12-2018
and Balance sheet as on that date:

RECEIPTS AND PAYMENTS ACCOUNT

For the year ending 31-12-2018
Tobal b/d Rs. Rs.

87
 -Cash 3520 By Maintenance 6820

-Bank 27380 By Crockery Purchased 2650

-Fixed Deposit @6% 30000 By Match Expenses 13240

To Subscription (includingRs.6000for 2017)

40000 By Salaries 11000

To Entrance fees 2750 By Conveyance 820

To Donation 5010 By Up keep of Lawns 4240

To Interest on Fixed Deposits 900 By postage stamps 1050

By Purchase Of cricket
To Tournament Fund 20000 9720
goods

To Sale of Crockery (bookvalueRs.1200) 2000 By Sundry expenses 2000

By Investments 5700

By Tournament Expenses 18800

By balance c/d:

-Cash 2200

-Bank 23320

Fixed Deposits 30000

131560 131560

Solution 2
Cricket Club Income and Expenditure account
For the year ended 31-12-
2018
Expenditure Rs. Income Rs.

To Maintenance 6820 By Subscription 40000

ToConveyance 820 Less: Rec. for last year 6000

88
 Add: outstanding for
To Up keep of Lawns 4240 8000 42000
current year

To Match Expenses 13240 By Entrance Fees 2750

To Salaries 11000 By Donations 5010

By Interest on Fixed
Add: Outstanding 1000 12000 900
Deposits

To postage Stamps: Add: Outstanding 900 1800

By Profit on Sale of Crockery

Opening balance 750 800
(2000-1200)

Add: Purchases 1050

Less: Closing Stock (900) 900

To Cricket Goods:

Opening balance 3210

Add: Purchases 9720

Less: Closing Stock (2800) 10130

To sundry Expenses 2000

To Excess of Income over

2210
Expenditure (balance fig.)

52360 52360

Balance sheet
As on 31-12-2018

Liabilities Rs. Assets Rs.

Tournament Fund 20000 Cash 2200

Less: Tournament Expenses 18800 1200 Bank 23320

Salary Outstanding 1000 Fixed Deposit 30000

Capital (Balancing Fig.) 72660 Investment 5700

89
Add: surplus 2210 74870 Crockery 2650

Accrued Interest on Fixed Deposit 900

Subscription Due:

2017(6600-6000) 600

2018 8000 8600

Stock of Postage and stationery 900

Stock of Cricket goods 2800

77070 77070

90
 BANK RECONCILIATION STATEMENT
The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash
Book and the Pass Book is prepared by the Bank (here by cashbook we mean three column
cash Book). But as both the books are related to one person and same transactions are recorded
in both the books so the balance of both the books should match i.e. the balance as per Pass
Book should match to balance at bank as per cashbook. But many a times these two balances
do not agree then, it becomes necessary to reconcile them by preparing a statement which is
called Bank Reconciliation Statement. ABANKRECONCILIATIONSTATEMENT maybe
defined as a statement showing the items of differences between the cash Brook balance and
the pass book balance, prepared on any day for reconciling the two balances.

CAUSES FOR DIFFERENCES

A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass
Book but sometimes it happens that a bank transaction is recorded only in one book and not
recorded simultaneously in other book this causes difference in the two balances. The causes
for difference may be illustrated in detail as follows:

Causes Cash Book Pass Book

Entry is made No entry is made till the
Cheques is sued
cheques are presented
1. but not yet
for payment.
presented for
Balance=Decreased Balance=Same as before
payment
Cheques paid into Entry is made No entry is made till the
2. The bank but not Cheques are cleared
yet cleared. Balance= Increased Balance= same
No entry is made till Entry is made
Interest allowed the Pass Book is
3.
by the Bank checked
Balance=Same Balance= Increased
Interest and Entry is made
Expenses Charged No entry is made Balance=Decreased
4.
by the Bank till the Pass Book
is Checked
Balance= Same
 No entry is made till Entry is made
Interest and
the Pass Book is
5. dividends
checked
collected by Bank
Balance=Same Balance= Increased
No entry is made till Entry is made Balance=
decreased
Direct payments by the Pass Book is
6.
the bank checked
Balance=Same
No entry is made till Entry is made
Direct payments
the Pass Book is
7. into the bank by a
checked
customer
Balance=Same Balance= Increased
No entry is made till Entry is made
Dishonor of a bill
the pass Book is
8. discounted with
checked
the bank
Balance=Same Balance= decreased
No entry is made till Entry is made
Bills collected by
the Pass Book is
9. the bank on behalf
checked
of the customer
Balance=Same Balance= Increased
Errors committed
10 either in Cash Back
Or Pass Book

NEED AND IMPORTANCE OF BANK RECONCILIATION STATEMENT

The need and importance of the bank reconciliation statement may be given as follows:

1. There conciliation process helps in bringing out the errors committed either in Cash
Book or Pass Book.

2. Bank reconciliation statement may also show any undue delay in the clearance of
cheques.
 3. Sometimes the cashier may have the tendency of cheating like he may made entries in
the Cash Book only but never deposit the cash into bank. These types of frauds by the
entrepreneur’s staff or bank staff may be detected only through bank reconciliation
statement. So this way bank reconciliation statement acts as a control technique too.

PROCEDUREFORPREPARATIONOFBANKRECONCILIATION STATEMENT

A. bank reconciliation statement is prepared to reconcile the two balances of Cash Book and
Pass Book. So, when you will prepare a bank reconciliation statement you will start it with one
balance make adjustments and then you will reach to the other balance. This way both the
balances will agree. The way the adjustments should be made may be illustrated as follows:

Note: If you start the question with balance as per pass book all the adjustments will be reversed.
Example:

From the following prepare a bank reconciliation statement on 31st March 2005.

1. Balance as per Cash Book 1,80,000

2. Cheques paid into Bank March 2005 but credited by the7,900 bank in April 2005

3. Cheques issued in March 2005 but cashed in April 2005 11,000

4. Cheques entered in the Cash Book in March 2005 but 1,000

paid into bank in April 2005

5 Interest allowed by the bank 2500

6 Interest charged by the bank 500

Solution

Bank Reconciliation Statement

As on March 31, 2005

Particulars

Balance as per Cash Book 1,80,000

Add.1. Cheques issued but not cashed 11,000
2. Int. allowed by bank 2500 +13,500
1,93,500
Less:1. Cheques paid into bank but not yet cleared 7,900
2.Cheques entered into Cash Book 1,000
3.Interest charged by Bank 500
Balance as per Pass Book