ACCOUNTANTANCY WITH CA

FIRST YEAR

NOTES WITH ILLUSTRATIONS

PREPARED BY

VINOD E B

O L L HS S ,UZHAVOOR,KOTTAYAM

MOB: 9544 389 770

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CHAPTER 1

Introduction to Accounting
Meaning of Accounting

The American Institute of Certified Public Accountants (AICPA) had

defined accounting as “the art of recording, classifying, and
summarising in a significant manner and in terms of money,
transactions and events which are, in part at least, of financial
character, and interpreting the results thereof”.
Objectives of Accounting
1. Maintenance of records of business transactions
2. Calculation of Profit and Loss
3. Depiction of Financial Position
4.Providing Accounting Information to its users

Branches of Accounting
1. Financial Accounting
2. Cost Accounting
3. Management Accounting

1.Financial Accounting
Financial accounting assists keeping a systematic record of financial
transactions, the preparation and presentation of financial reports in
order to measure organisational success and financial soundness.

2.Cost Accounting
Cost accounting assists in analysing the expenditure for ascertaining
the cost of various products manufactured or services rendered by the
firm and fixation of prices thereof. It also helps in controlling the costs.

3.Management Accounting
Management accounting deals with the provision of necessary
accounting information to people within the organisation to enable
them in decision-making, planning and controlling business
operations.
Users of Accounting Information
1.Internal Users
a) Investors
Information on the risks and return on investment.

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b) Management
They need timely information on cost of sales, profitability, etc. for
planning, controlling and decision-making.
2.External Users
a) Employee groups
Information on the stability, profitability of the business
b) Lenders and financial institutions
Information on the creditworthiness of the company and its ability to
repay loans and pay interest in time.
c) Suppliers and creditors
Information on whether amounts owed will be repaid when due, and on
the continued existence of the business.
d) Customers
Information on the continued existence of the business and thus the
probability of a continued supply of products, parts and after sales
services
e) Competitors
Information on the relative strengths and weaknesses of their
competitors
f) Government and other regulators
Need information to ensure whether the business is paying various
taxes correctly and they are complying with the various Laws of the
country.
Functions of Accounting
1.Recording
The basic function of accounting is recording of business transactions.
It is done in a book called journal
2. Classifying
It is the process of bringing together items of similar nature at one
place. It is done in the book called ledger.
3.Summarising
It is the presentation of classified data in a way that is understandable
by the users. It includes the preparation of Trial Balance, Profit&Loss
Account and Balance Sheet.
4.Analysis and interpretation
The financial data is analysed by the users to get information about the
result of business and its financial position.
5. Communicates
It is with the help of accounting that an organisation communicates
with the interested parties.
Qualitative Characteristics of Accounting Information.
1.Reliability

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Reliability means the users must be able to depend on accounting
information. Reliable information should be free from error and
verifiable with the help of evidences such as bills,receipts etc
2.Relevance
To be relevant, information must be available in time. Therefore,
accounting information is relevant if it can provide helpful information
about past events and help in predicting future events.
3.Understandability
Accounting information should be recorded, presented and interpreted
in such a way that it should be easily understood by its users.
4.Comparability
Comparability means that the users should be able to compare the
accounting information of an enterprise of the period either with that of
other periods or with the accounting information of other enterprises .
Basic Terms in Accounting
1. Entity
Business entity means a specifically identifiable business enterprise
like Wipro, Reliance Industries Ltd, ITC Limited, Kalyan Silks etc.
2. Transaction
The term Business transaction means a financial transaction or
economic event involving some value between two or more entities.
Eg: purchase of goods, receipt of money, payment of salary
etc.Business transaction may be a cash transaction or a credit
transaction.
3. Assets
Assets are items of value used by the business in its operations. Eg:
Land, Building, Furniture, Goods, Cash etc
Assets can be of the following types:
a) Fixed assets
Assets which are held for continued use in the business for the
purpose of producing goods or services and are not meant for sale.
Eg: Land,Machinery etc
b) Current assets
Current assets are those assets which are meant for sale or which can
be converted into cash within a year. Eg: Goods, Cash etc
c) Tangible assets
Assets which can be seen and touched . Eg: Building, Furniture, Car
etc
d) Intangible assets
Assets which can not be seen and touched. Eg: Trademark, Copyright
etc
4. Liabilities

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Liabilities are obligations or debts that an enterprise has to pay at
some time in the future. Eg; Bank loan,Salary outstanding etc
Liabilities are of two types
a) Current liabilities (Short-term liabilities)
Liabilities that are to be paid within one year.Eg: outstanding expenses,
short term loans etc
b) Non-current liabilities(Long-term liabilities)
Liabilities which are to be paid after a period of one year. Eg: Long-
term loans from banks
5. Capital
Money or money’s worth invested by the owner in his business.
6. Drawings
Money or money’s worth withdrawn by the owner from his business for
his personal use.
7. Sales
Sales are total revenues from goods sold or services provided to
customers. Sales may be cash sales or credit sales.
8.Revenues
These are the amounts of the business earned by selling its products
or providing services to customers, called sales revenue. Other items
of revenue common to many businesses are: commission, interest,
dividends, rent received, etc.
9.Expenses
Costs incurred by a business in the process of earning revenue are
known as expenses. Eg: wages, salary,rent etc.
10. Expenditure
Spending money or incurring a liability for some benefit, service or
property received is called expenditure.
Expenditure can be of two types:
a) Capital expenditure
If the benefit of an expenditure lasts for more than a year, it is called
capital expenditure such as purchase of machinery, furniture, etc.
b) Revenue expenditure
If the benefit of expenditure is exhausted within a year, it is called
revenue expenditure. Eg: Rent,salary,electricity charges etc
11. Profit
The excess of revenues of a period over its related expenses is termed
as profit.
12.Loss
The excess of expenses of a period over its related revenues is termed
as loss.
13.Goods

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It refers to the products in which the business unit is dealing. For
example, for a furniture dealer purchase of chairs and tables is termed
as goods, while for others it is furniture and is treated as an asset
14. Purchases
Purchases are total amount of goods procured by a business on credit
and on cash, for use or sale.
15.Stock
The goods lying with a business for sale on any given date are called
stock. The value of goods remaining unsold in the beginning of an
accounting period is known as opening stock. The value of goods
remaining unsold at the end of an accounting period is known as
closing stock.
16. Debtor
Persons who owe to pay an amount to business for buying goods or
service on credit.
17. Creditor
Persons to whom business owes to pay an amount for buying goods or
service on credit.
18. Voucher
The documentary evidence in support of a transaction is known as
voucher. Eg: Bill,receipt etc.

CHAPTER 2
THEORY BASE OF ACCOUNTING
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) refers to the rules or
guidelines adopted for recording and reporting of business
transactions, in order to bring uniformity in the preparation and the
presentation of financial statements. These principles are also referred
as concepts and conventions

Basic Accounting Concepts

Business entity Revenue recognition (Realisation)

Money measurement Matching
Going concern Full disclosure
Accounting period Consistency
Cost Conservatism (Prudence)
Dual aspect (or Duality) Materiality
Objectivity
1. Business Entity Concept
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This concept assumes that the entity of business is different from its
owners. For accounting purpose, the business is treated as a unit or
entity separate from the person who controls it. The personal affairs of
the owner should not be mixed with the affairs of the business.
2. Money Measurement Concept
The concept of money measurement states that only those
transactions and happenings in an organisation which can be
expressed in terms of money are to be recorded in the book of
accounts. Those transactions which cannot be expressed in terms of
money are not recorded in the book of accounts.
3.Going Concern Concept
This concept states that, a business firm will continue to carry on its
activities for an indefinite period of time. There is no intention to
liquidate the business in the near future.
4. Accounting Period Concept
The period of interval for which accounts are prepared to know the
profit or loss and what exactly the financial position of the business is
called accounting period. It may be One year, Six months etc
5. Dual aspect Concept (Duality/Accounting Equation Concept)
This is the basic principle of accounting. According to this concept
every transaction has two aspects; they are receiving aspect and
giving aspect. The receiving aspect is called debit aspect and giving
aspect is called credit aspect. Thus for every debit there is a
corresponding credit. The system of recording transactions with dual
aspect concept is called double entry system of accounting.
6. Cost Concept (Historical cost)
According to this concept, an asset is to be recorded in the books of
accounts at their acquisition cost. It includes purchase price,
transportation cost and installation cost. This cost becomes the basis
of all subsequent accounting for the asset. Subsequent increase or
decrease in the market value of the asset would not be recorded in the
books of accounts.
7. Revenue Recognition (Realisation) Concept
This concept deals with the point of time at which the revenue is
earned and period in which the revenue is to be recorded. Revenue is
deemed to be realized when the title or ownership of the goods has

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been transferred to the purchaser and when he has legally becomes
liable to pay the amount.
8. Matching Concept
It states that expenses incurred in an accounting period should be
matched with revenues during that period.The matching concept, thus,
implies that all revenues earned during an accounting year, whether
received during that year, or not and all costs incurred, whether paid
during the year, or not should be taken into account while ascertaining
profit or loss for that year. (Profit = Revenue – Expenses).
9. Full Disclosure Concept
The principle of full disclosure requires that all material and relevant
facts concerning financial performance of an enterprise must be fully
disclosed in the financial statements This is to enable the users to
make correct decision about the profitability and financial soundness
of the enterprise and help them to take informed decisions.
10. Consistency concept
Consistency means continuity or steadiness.This concept states that
accounting principles and methods should remain consistent from one
year to another. These should not be changed from year to year, in
order to enable the management to compare the Profit and Loss
account and Balance Sheet of the different periods and draw important
conclusions about the working of the enterprise.
11. Conservatism Concept or Principle of Prudence
According to this concept all anticipated losses should be recorded in
the books of accounts, but all anticipated or unrealized gains should
be ignored. It is the policy of playing safe. This concept requires that
profit should not be recorded until realized but all losses, even those
which may have a remote possibility, are to be provided for in the
books of accounts. Eg: Inventory is valued at ‘cost or market price,
whichever is lower’; creating provision for doubtful debt.
12. Materiality Concept
This concept requires that accounting should focus only on material
facts.The materiality of a fact depends on its nature and the amount
involved. For example, stock of paper,pencils,pen,scales etc. are not
shown as assets, whatever amount of stationery is bought in an
accounting period is treated as the expense of that period.
13. Objectivity Concept (Verifiable Objective Concept)

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This principle states that the accounting data provided in the books of
accounts should be verifiable and dependable. The figures shown in
the financial statements should have supportive evidence such as bills,
vouchers etc., which constitute the source documents.
Systems of Accounting
1. Double Entry System of accounting
Double entry system of accounting is based on the principle of Dual
Aspect ,which states that every transaction has two aspects debit
aspect and credit aspect or receiving aspect and giving aspect. Thus
one account is debited and the other account is credited. Double entry
system is a complete system of accounting. This system is accurate
and more reliable as the possibilities of frauds are minimized.
2. Single Entry System of Accounting
Single entry system is not a complete system of accounting. It never
records two aspects of each and every transaction. For some
transactions, only one aspect is recorded, for others both the aspects
are recorded. Instead of maintaining all accounts, only personal
accounts and cash book are maintained under single system.
Basis of Accounting
1.Cash Basis
Under cash basis, entries in the books of accounts are made when
cash is received or paid and not when the receipt or payment becomes
actually due. For example rent for the month of December 2019 is paid
in Jan 2020,it would be recorded in the books of accounts only in Jan
2020.
2. Accrual Basis
In this method, costs and revenues are recognized in the period in
which they occur rather than they are paid or received. This is more
appropriate for the ascertainment of profit or loss as expanses are
matched against revenue.
Accounting Standards
The uniform, definite and universally accepted accounting rules
developed by International Accounting Standard Committee (IASC) are
known as Accounting Standard. Acconting Standard ensures
uniformity in the preparation and presentation of financial statements
by removing the effect of diverse accounting practices.
Benefits of Accounting Standards

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1. It helps to eliminate variations in accounting treatment at the time of
preparing financial statements.
2. It facilitates comparability between financial statements of various
companies.
Applicability of Accounting Standards
Accounting Standard is applicable in all types of business
organizations like sole trading concern, partnership, HUF, Cooperative
societies, companies etc.
International Financial Reporting Standards (IFRS)
IFRSs are globally accepted accounting standards developed by
International Accounting Standard Board (IASB). It is a set of
accounting standards for reporting different types of business
transactions and events in the financial statements.
Goods and Service Tax (GST)
Government of India introduced Goods and Service Tax (GST) from
July 1 st 2017. GST ensures ‘One Nation and One Tax’ GST is a
destination based tax on consumption of goods and services.It is
proposed to be levied at all stages from manufacture to final
consumption with credit of taxes paid at previous stages available as
set off. That means only value addition will be taxed and burden of tax
is to be borne by the final consumer.
The GST has replaced 17 indirect taxes (8 Central tax + 9 State Level
Tax) and 23 cesses of the Centre and State Governments.
Main components of GST
CGST, SGST and IGST.
CGST
CGST means Central Goods and Services Tax. Taxes collected under
CGST will constitute the revenues of the Central Government.
SGST
SGST means State Good and Services Tax. SGST is the revenue of
State Government.
IGST
IGST means Integrated Goods and Services Tax. Revenue collected
under IGST is divided between Central and State Government as per
the rates specified by the Government. IGST is charged on transfer of
goods and services from one state to another. Import of goods and
services are also covered under IGST
Features of GST

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1. GST is applied all over India including Jammu and Kashmir,i.e,‘One
Nation and One Tax’.
2.Under the GST administration, the final tax would be paid by the
consumer for the goods and services purchased.
3. CGST, SGST and IGST are levied at rates mutually agreed upon by
the Centre and States.
4. There are four tax slabs namely 5 %, 12 %, 18% and 28% for goods
and services.
Eg: Arun Traders,Cochin purchased goods from AB Ltd,Delhi for
Rs.10,000.After a few days, Arun Ltd sold that goods to Vimal
Traders,Kannur for Rs.12,000. GST rate of CGST @ 9%, SGST @9%,
IGST @ 18%.

At the time of goods purchased(interstate transaction) Arun Ltd paid

Rs.11,800[Purchase price Rs.10,000 +18% Input IGST (Rs.1800) ].When
Arun Ltd sold goods (Intrastate transaction) to Vimal Traders ,Arun
Traders received Rs.14,160.[ Sale price Rs.12,000+9%
Output CGST(Rs.1080)+9% Output SGST(Rs.1080)]
Net GST payable in case of Arun Traders :
Out put CGST payable Rs.1080 + Out put SGST payable Rs.1080.Total
amount payable 1080+1080=2160.But Arun Ltd can claim input IGST tax
credit (Rs.1800) to set off Output CGST and Output SGST Liability.2160-
1800=Rs.360.Actually Arun traders required to pay only for the value
addition[12000-10000 =2000].(2000 x 9% CGSTRs.180 and 2000 x 9%
SGST Rs.180,Total Rs.360)]

CHAPTER 3
Recording of Transactions-I
Business Transactions and Source Document
Business Transactions
Business transactions are exchanges of economic consideration
between parties and have two-fold effects that are recorded in at least
two accounts.
Source Document
A document which provides evidence of the transactions is called the
Source document or a Voucher.Eg: Cash memo, Invoice, Sales bill,
Pay-in-slip, Cheque, Salary slip
Accounting Equation

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Accounting equation signifies that the assets of a business are always
equal to the total of its liabilities and capital (owner’s equity).
A=L+C
Where,
A = Assets
L= Liabilities
C = Capital
The above equation can also be presented in the following forms
A-L = C
A-C = L
Types of transactions
Transactions are of Two types
1. Cash transaction
2. Credit transaction
Cash transaction
Transaction which results in the immediate receipt or payment of cash
is called a cash transaction.
Eg: Paid salary, Received commission, Sold goods for cash etc
Credit transaction
It is a transaction where the receipt or payment of cash is postponed to
a future date
Eg: Sold goods to Ramu, Purchased goods from Arun, Bought
Furniture from Shaju etc

Rules for debit and credit

Item Debit Credit
Assets Increase Decrease
Liability Decrease Increase
Capital Decrease Increase
Expense and Loss Increase Decrease
Income and Gain Decrease Increase

There is another rule for debit and credit

1.Real account- Accounts of assets.
Rule – Debit what comes in and credit what goes out.
2.Personal account- Accounts relating to names of persons or firms.
Rule : Debit the receiver and credit the giver.
3. Nominal account- Accounts of expenses&losses and
incomes&gains.

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 Rule : Debit all expenses & losses and credit all incomes & gains.

Illustration : 1 From the following transactions prove that both sides of

accounting equation are equal
1.Started business with cash Rs. 50,000
2. Bought furniture for Rs. 15,000
3. Purchased goods from Manu Rs. 10,000
4. Sold goods for cash Rs. 20,000
5. Paid rent Rs. 5,000

Transaction A =L + C
1.Started business with cash 50000 =0 + 50000
Rs. 50,000
2. Bought furniture for Rs. + 15000
15,000 - 15000 =0 + 0
New Equation 50000 =0 + 50000

3. Purchased goods from 10000 = 10000 + 0

Manu Rs. 10,000
New Equation 60000 = 10000 + 50000
4. Sold goods for cash Rs.
20,000 +20000
-20000 = 0 + 0
New Equation 60000 = 10000 + 50000

5. Paid rent Rs. 5,000 - 5000 = 0 - 5000

New Equation 55000 = 10000 + 45000
NB: This is a shortcut method

Journal
Journal is the book in which a transaction is recorded for the first time.
It is also called the book of prime entry or original entry. The process of
recording transactions in the journal is called journalising.
Narration
Narration is the short description of a transaction

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 Format of Journal
Date Particulars L/F Amount Amount
(Dr) (Cr)

Illustration 2 . Write journal entries of the following transactions

2020 Jan 1 Started business with cash Rs. 80,000
,, 3 Deposited cash into SBI Rs. 25,000
,, 5 Bought furniture for Rs. 10,000
,, 8 Purchased goods from Manohar Rs. 15,000
,, 12 Sold goods for Rs 20,000
,, 15 Cash taken from bank for business use Rs. 5,000
,, 20 Paid rent Rs. 3000
,, 25 Received interest Rs. 2000
,, 30 Paid salary Rs. 5,000

Solution
Date Particulars L/F Amount (Dr) Amount (Cr)

2020 Cash A/c Dr 80,000

Jan 1 To Capital a/c 80,000
[Started business with
cash]
Jan 3 SBI a/c Dr 25,000
To Cash a/c 25,000
[Deposited cash into
SBI]
Jan 5 Furniture a/c Dr 10,000
To Cash a/c 10,000
[Bought furniture]
Jan 8 Purchase a/c Dr 15,000
To Manohar a/c 15,000
[Purchased goods from
Manohar]
Jan 12 Cash a/c Dr 20,000
To Sales a/c 20,000
[Sold goods]
Jan 15 Cash a/c Dr 5,000
To SBI a/c 5,000

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 [Cash taken from SBI]
Jan 20 Rent Dr 3,000
To Cash a/c 3,000
[Paid rent]
Jan 25 Cash a/c Dr 2,000
To Interest a/c 2,000
[Received interest]
Jan 30 Salary a/c Dr 5,000
To Cash a/c 5,000
[Paid salary]

Ledger
Ledger is the book in which various accounts are kept.It is also called
the book of secondary entry or final entry.The process of transferring
entries from journal to ledger is called posting.
Differences between journal and ledger
1.The Journal is the book of first entry (original entry); the ledger is the
book of second entry.
2.Narration is required in journal
No Narration is required in ledger
3.Process of recording in the Journal is called Journalising;
the process of recording in the ledger is known as Posting.
4. Journal is not balanced ; Ledger accounts are balanced.
Format of ledger
Dr Cr
Date Particulars J/F Amount Date Particulars J/F Amount

Illustration : 3 Post the following journal entries to the respective

ledger accounts

Date Particulars L/F Amount (Dr) Amount (Cr)

2020 Cash A/c Dr 80,000

Jan 1 To Capital a/c 80,000
[Started business with
cash]
Jan 3 SBI a/c Dr 25,000
To Cash a/c 25,000
[Deposited cash into

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 SBI]
Jan 5 Furniture a/c Dr 10,000
To Cash a/c 10,000
[Bought furniture]
Jan 8 Purchases a/c Dr 15,000
To Manohar a/c 15,000
[Purchased goods from
Manohar]
Jan 12 Cash a/c Dr 20,000
To Sales a/c 20,000
[Sold goods]
Jan 15 Cash a/c Dr 5,000
To SBI a/c 5,000
[Cash taken from SBI]
Jan 20 Rent Dr 3,000
To Cash a/c 3,000
[Paid rent]
Jan 25 Cash a/c Dr 2,000
To Interest a/c 2,000
[Received interest]
Jan 30 Salary a/c Dr 5,000
To Cash a/c 5,000
[Paid salary]

Dr Cash a/c Cr

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

2020 2020
Jan 1 To Capital 80,000 Jan 3 By SBI 25,000
,, 12 ,, Sales 20,000 ,, 5 ,, Furniture 10,000
,, 15 ,, SBI 5,000 ,, 20 ,, Rent 3,000
,, 25 ,, Interest 2,000 ,, 30 ,, Salary 5,000
,, 31 ,, balance c/d 64,000

1,07,000 1,07,000
2020
Feb 1 To Balance b/ 64,000
d

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 Dr Capital a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan 1 By Cash 80,000

Dr SBI a/c Cr
Date Particular J/F Amount Date Particulars J/F Amount
s
2020 2020
Jan 3 To Cash 25,000 Jan 15 By Cash 5,000

,, 31 ,, balance 20000
25000 c/d 25000
2020
Feb 1 ToBalance 20000
b/d

Dr Furniture a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan 5 To Cash 10,000

Dr Purchases Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan 8 To Manohar 15,000

Dr Manohar Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan 8 By Purchases 15,000

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Dr Sales a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan12 By Cash 20,000

Dr Rent a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan To cash 3,000
20

Dr Interest a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan 25 By Cash 2,000

Dr Salary a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2020
Jan To cash 5,000
30

Balancing of accounts
Balancing of an account means that the two sides are totalled and the
difference between them is shown on the side, which is shorter in
order to make their totals equal. The words ‘balance c/d’ are written
against the amount of the difference between the two sides. The
amount of balance is brought (b/d) down in the next accounting period.
In case the debit side exceeds the credit side, the difference is written
on the credit side and is called debit balance . If the credit side exceeds
the debit side, the difference between the two appears on the debit side
and is called credit balance .
( See Cash account and SBI Account in the above illustration)
Nature of balances
All assets will show debit balance

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Liabilities and capital will show credit balance.
Accounts of expenses & losses and incomes & gains are not balanced.
Instead they are totalled and the total is transferred to Trading and
Profit and Loss Account.

Illustration : 4
Record necessary Journal entries in the books of Suman of Bihar
assuming CGST @ 9% and SGST @ 9% :
a. Bought goods Rs. 3,50,000 from Jharkhand.
b. Sold goods for Rs. 2,00,000 in Uttar Pradesh.
c. Sold goods for Rs. 4,00,000 locally.
d. Paid Insurance premium Rs. 30,000.
e. Bought furniture for office Rs. 50,000.

Date Particulars L/ Amount (Dr) Amount

F (Cr)
1 Purchases A/c Dr 3,50,000
Input IGST A/c Dr 63,000
To Bank A/c 4,13,000
(Goods bought from Jharkhand )

2 Bank A/c Dr. 2,36,000

To Sales A/c 2,00,000
To Output IGST A/c 36,000
( Goods sold outside the state)

3 Bank A/c Dr. 4,72,000

To Sales A/c 4,00,000
To Output CGST A/c 36,000
To Output SGST A/c 36,000
( Goods sold locally)

4 Insurance Premium A/c Dr. 30,000

Input CGST A/c Dr. 2,700
Input SGST A/c Dr 2,700
To Bank A/c 35,400
(Insurance premium paid)

5 Furniture A/c Dr 50,000

Input CGST A/c Dr 4,500
Input SGST A/c Dr 4,500
To Bank A/c 59,000
( Furniture bought)

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 6 Output IGST A/c Dr 36,000
To Input IGST A/c 36,000
(Set off against SGST output
made)

7 Output SGST A/c Dr 7,200

To Input SGST A/c
( Set off against SGST output 7,200
made)

8 Output CGST A/c Dr 34,200

To Input CGST A/c 7,200
To Input IGST A/c 27,000
( Set off against CGST ouput
made)

9 Output CGST A/c Dr 1,800

Output SGST A/c Dr 28,800
To Electronic Cash Ledger A/c 30,600
(Final payment made)

Notes
1. Input IGST = 3,50,000 x 18/100 = 63,000
2. Output IGST = 2,00,000 x 18/100 = 36,000
3. Output CGST = 4,00,000 x 9/100 = 36,000
Output SGST = 4,00,000 x 9/100 = 36,000
4. Input CGST = 30,000 x 9/100 = 2,700
Input SGST = 30,000 x 9/100 = 2,700
5. Input CGST = 50,000 x 9/100 = 4,500
Input SGST = 50,000 x 9/100 = 4,500
6. Out of Rs. 63,000 Input IGST the trader can set off Rs. 36,000 Output
IGST
The balance Input IGST (63,000- 36,000)Rs.27,000 can be used to set
off Output CGST
7. Out of total Output SGST of Rs 36,000,t he trader can set off Rs
7,200 Input SGST ( 4,500 + 2,700)
8. Out of total Output CGST of Rs 36,000,t he trader can set off Rs 7,200
Input CGST ( 4,500 + 2,700) and the balance in Input IGST a/c Rs.
27,000. So the total amount which can be set off is 7,200 + 27,000 =
34,200
9. Balance tax to be paid

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 IGST = 36,000- 36,000 = 0 ( The whole Output IGST set off . See
note 6)
CGST = 36,000- 34,200 = 1,800( See note 8)
SGST = 36,000 – 7,200 = 28,800 ( See note 7)

CHAPTER 4
Recording of Transactions-II
For quick, efficient and accurate recording of business transactions,
Journal is sub-divided into special journals. Many of the business
transactions are repetitive in nature. They can be easily recorded in
special journals, each meant for recording all the transactions of a
similar nature. These special journals are also called daybooks or
subsidiary books.

Types of special journals

• Cash Book
• Purchases Book
• Purchases Return (Return Outwards) Book
• Sales Book
• Sales Return (Return Inwards) Book
• Bills Receivable Book
• Bills Payable Book
• Journal Proper
Journal proper
Transactions that cannot be recorded in any other special journals are
recorded in journal called the Journal Proper.

Cash Book
Cash book is a book in which all transactions relating to cash receipts
and cash payments are recorded. It starts with the cash or bank
balances at the beginning of the period. It serves the purpose of both
journal as well as the ledger (cash) account.
It is called a journal because all cash transactions are recorded first in
this book. It is called a ledger because it is ruled like an account.
Single Column Cash Book or Simple Cash Book
It is a cash book having only one amount column on each side. The
debit side is called receipt side and records all cash receipts. The
credit side is called payment side and records all cash payments.

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If there is opening balance of cash , it is written on its receipt side as “
To balance b/d”

Illustration 1
2017 Rs
Nov. 01 Cash in hand 30,000
Nov. 04 Cash received from Gurmeet 12,000
Nov. 08 Insurance paid 6,000
Nov. 13 Purchased furniture 13,800
Nov. 16 Sold goods for cash 28,000
Nov. 17 Purchased goods from Mudit in cash 17,400
Nov. 20 Purchase stationery 1,110
Nov. 24 Cash paid to Rukmani 12,500
Nov. 27 Sold goods to Kamal for cash 18,200
Nov. 30 Paid monthly rent 2,500
Nov. 30 Paid salary 3,500
Nov. 30 Deposited in bank 8,000
Prepare a Single Column Cash Book using the above information
Single Column Cash Book
Date Particulars J/F Amount Date Particulars J/F Amount
2020 2020
Nov 1 To Balance b/d 30,000 Nov 8 By Insurance 6,000
,, 4 ,, Gurmeet 12,000 ,, 13 ,, Furniture 13,800
,, 16 ,, Sales 28,000 ,, 17 ,, Purchases 17,400
,, 27 ,, Sales 18,200 ,, 20 ,, Stationery 1,100
,, 24 ,, Rukmani 12,500
,, 30 ,, Rent 2,500
,, 30 ,, Salary 3,500
,, 30 ,, Bank 8,000
,, 30 ,, Balance c/d 23,400
88,200 88,200
2020
Dec 1 To Balance b/d 23,400

Double Column Cash Book

A cash book having Two amount columns on each side is called a
double column cash book. There will be one cash column and one
bank column in this cash book. Cash column is used for recording
cash transactions and bank column is used for recording bank
transactions.
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Contra entry
If one aspect of an entry is cash and the other aspect is bank , it is
called contra entry.
Examples of contra entry
1. Cash is deposited into bank
Bank a/c Dr
To Cash a/c
2. Cash is withdrawn from bank for office use
Cash a/c Dr
To Bank a/c
In the double column cash book, the letter “C” should be written
against contra entry in the L/F column.
Points to be noted
1.If a cheque is received from a person and it is deposited to the bank
on the same day, it is recorded in the receipts side and the amount in
the bank column.
2. If a cheque is received from a person and it is deposited to the bank
on another day,then
a) On receipt of cheque, it is recorded in the receipt side and the
amount in the cash column.
b) When that cheque is deposited into bank, it is treated as deposit of
cash into bank and consider it as a contra entry
3. When cheque received from a customer is dishonoured
a) Write the amount of cheque in the bank column in the payment side
b) Write the name of the customer in particulars column in the payment
side
4. When bank credits the firm’s account for some items, enter them in
the bank column in receipts side
5. When bank debits the firm’s account for some items, enter them in
the bank column in payment side
Illustration 2 Prepare a double column cash book from the following
2020
Rs
Sept. 01 Bank balance 42,000
Sept. 01 Cash balance 15,000
Sept. 04 Purchased goods by cheque 12,000
Sept. 08 Sales of goods for cash 6,000
Sept. 13 Purchased machinery by cheque 5,500
Sept. 16 Sold goods and received cheque (deposited same day 4,500
Sept. 17 Purchase goods from Murali in cash 17,400
Sept 18 Cash deposited into bank 5,000
Sept. 24 Cheque given to Rohith 1,500
Sept 25 Cheque given by Suman deposited into bank dishonour1,000

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Sept. 27 Cash withdrawn from bank for office use 10,000
Sept. 30 Rent paid by cheque 2,500
Sept. 30 Paid salary 3,500
Sept 30 Bank credited interest 500

Dr Double Column Cash Book Cr

Date Particulars L/F Cash Bank Date Particulars L/ Cash Bank
F
2020 Balance b/d 2020
Sep Bank 42,000 Sep4 Purchases 12,000
1 Cash 15,000 13 Machinery 5,500
6,000 17 Purchases 17,400
,, 8 Sales 4,500 18 Bank C 5,000
,, 16 Sales 24 Rohit 1,500
,, 18 Cash C 5,000 25 Suman 1,000
,, 27 Bank C 10,000 27 Cash C 10,000
,, 30 Interest 500 30 Rent 2,500
30 Salary 3,500
30 Balance c/ 5,100 19,500
d
31,000 52,000 31,000 52,000

2020
Oct 1 Balance b/d 5,100 19,500

Petty Cash Book

It is a cash book used for recording small(petty) expenses. The person
who is in charge of petty cash book is called petty cashier.
Imprest System
The petty cashier works on the Imprest system. Under this system, a
definite sum, say Rs. 2,000 is given to the petty cashier at the
beginning of a certain period. This amount is called imprest amount.
The petty cashier goes on making all small payments out of this
imprest amount and when he has spent the substantial portion of the
imprest amount say Rs.1,800, he gets reimbursement of the amount
spent from the head cashier. Thus, he again has the full imprest
amount in the beginning of the next period
Advantages of Maintaining Petty Cash Book
1. Saving of Time and efforts of chief cashier
2. Effective control over cash disbursements
3. Convenient recording

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Illustration 3 From the following prepare a petty cash book .The
imprest amount is Rs. 1,500
2020
Jan 1 Bus fare 100
3 Paper, pen, pencil 50
5 Postage stamp 30
8 Repair of computer 200
12 Taxi fare 120
15 Refreshment 40
18 Courier charges 60
21 Repair of furniture 200
25 Stapler, pins, eraser etc 70
28 Cleaning charges 150

Recei Date Particulars Amo Conv Postag Repair Station Misc.

pt unt eyanc e s ery Expen
e ses
1,500 2020 Cash
Jan1 Received

,, 1 Bus fare 100 100

,,3 Paper,pen
etc 50 50
,,5 Postage
stamp 30 30
,, 8 Repair of
Computer 200 200
,,12 Taxi fare 120 120
,,15 Refreshment 40 40
,, 18 Courier 60 60
,, 21 Repair of
furniture 200 200
,, 25 Stapler,pins 70 70
,, 28 Cleaning
charges 150 150
1020 220 90 400 120 190
480
1,500 ,, 31 Balance c/d 1,500

480 2020
Feb Balance b/d
1020 1 Cash
received

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PURCHASES DAY BOOK (PURCHASES JOURNAL)
It is used to record all credit purchases of goods.The source document
for recording entries in the book are invoices or bills received by the
firm from the suppliers of the goods.
Illustration 4 Enter the following transactions in Purchases day book
2019
Aug 1 Purchased from M/s Neema Electronics (invoice no. 3250): 20
Mini-size T.V. @ Rs.2,000 per piece, 10 Tape recorders @ Rs. 1,500
per piece. Trade discount on all items @ 20%.
Aug 8 Bought from M/s Pawan Electronics (invoice no. 8260): 10 Video
cassettes @Rs. 150 per piece, 20 Tape recorders @ Rs. 1,600
per piece. Trade discount@ 10% on purchases.

PURCHASES DAY BOOK

Date Invoice Name of Supplier L/F Amount Amount
No
2019
Aug 1 3250 M/S Neema Electronics
20 Mini-size T.V.@
Rs.2,000 per piece 40,000
10 Tape recorders @ Rs.
1,500 per piece 15,000

55,000
Less: Trade discount
@20% 11,000 44,000

Aug 8 8260 M/S Pawan Electronics

10 Video cassettes @ Rs.
150 per piece 1,500
20 Tape recorders @ Rs.
1,600 per piece 32,000
33,500
Less: Trade discount
@10% 3,350
30,150

Total credit purchases 74,150

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Dr Purchases a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2019 To Sundries as
Aug per Purchase 74,150
31 Journal

Dr M/S Neema Electronics Cr

Date Particulars J/F Amount Date Particulars J/F Amount
2019
Aug By Purchases 44,000
1

Dr M/S Pawan Electronics Cr

Date Particulars J/F Amount Date Particulars J/F Amount
2019
Aug By Purchases 30,150
8

PURCHASES RETURNS DAY BOOK OR PURCHASES RETURNS

JOURNAL
It is used to record return of goods to the supplier purchased on
credit.The source document for recording entries in the purchases
return journal is generally a debit note.A debit note will contain the
name of the party (to whom the goods have been returned), details of
the goods returned and the reason for returning the goods.
Illustration 5 Prepare a purchases return (journal) book from the
following transactions for April 2017.
2017
April 5 Returned goods to M/s Kartik Traders Rs 2,000
15 Goods returned to Sahil Pvt. Ltd. Rs. 2,500
27 Goods returned to M/s Kohinoor Traders for list price Rs.2,000
less 10% trade discount
PURCHASES RETURNS DAY BOOK
Date Debit Name of Supplier L/F Amount Amount
Note No
2017
April 5 M/S Kartik Traders 2,000
,, 15 Sahil Pvt Ltd 2,500
,, 27 M/s Kohinoor Traders 2,000
Less: Trade discount
@10% 200 1,800

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 Total Purchases returns 6,300

SALES DAY BOOK OR SALES JOURNAL

It is used to record all credit sales of goods to customers.The source
document for recording entries in the sales journal are sales invoice or
bill issued by the firm to the customers.

Illustration 6 Prepare a Sales Journal from the following

2019
April 7 Sold to M/s Raman Traders (Invoice no. 178) Two water
purifiers @ Rs. 2,100 each and five buckets @ Rs 130 each .
April 28 Sold to M/s Nutan enterprises (Invoice no 180) Five road side
containers @ Rs 4,200 each ,trade discount 10%

Date Invoice Name of Customer L/F Amount Amount

No
2019
Apr 7 178 M/S Raman Traders
Two water purifiers @ Rs.
2,100 each 4,200
Five buckets @ Rs 130
each 650 4,850

Apr 28 180 M/S Nutan enterprises

Five road side containers
@ Rs 4,200 each 21,000
Less: Trade discount
@10% 2,100 18,900

Total Credit Sales 23,750

Dr Sales a/c Cr
Date Particulars J/F Amount Date Particulars J/F Amount
2019 By Sundries
April as per sales
30 Journal 23,750

Dr M/S Raman Traders Cr

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

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2019
Apr 7 To sales 4,850

Dr M/s Nutan enterprises Cr

Date Particulars J/F Amount Date Particulars J/F Amount
2019 To sales 18,900
Apr 28

SALES RETURNS BOOK OR SALES RETURNS JOURNAL

It is used to record the goods returned by customers sold to them on
credit. The source document for recording in this journal is credit
note.It contains details relating to the name of the customer, details of
the goods received back and the amount.
Illustration 7 Prepare Return Inward Journal (Book) from the following
transactions
2019
March 4 M/s Gupta Traders returned the goods Rs. 1,500
18 Goods returned from M/s Harish Traders Rs. 800
26 M/s Rahul Traders returned the goods not as per specifications
Rs. 1,700

SALES RETURNS BOOK

Date Credit Note No Name of Customer L/F Amount
2019
Mar 4 M/S Gupta Traders 1,500

,, 18 M/S Harish Traders 800

,, 26 M/s Rahul Traders 1,700

Total sales Returns 4,000

CHAPTER 5
Bank Reconciliation Statement
Cash Book Prepared by business
Pass Book Prepared by bank

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Bank reconciliation statement is a statement prepared by business or
the customer of the bank to reconcile the cash book balance with the
pass book balance as on a specific date.In other words, it is a
statement showing the causes of difference between cash book
balance and pass book balance as on a certain date.
Nature of balances
When there is deposit in bank
Cash Book Debit balance
Pass book Credit balance

When there is overdraft with bank

Cash book Credit balance
Pass book Debit balance

Reasons for difference

1.Cheques issued , but not yet presented for payment
Cash book – Will show decreased balance
Pass book – Will show increased balance
2.Cheques paid or deposited into the bank but not yet collected and
credited by bank
Cash book - Will show increased balance
Pass book - Will show decreased balance
3.Direct payment made by a customer into bank
Cash book - Will show decreased balance
Pass book - Will show increased balance
4. Direct payments made by the bank on behalf of the customers
Pass book - Will show decreased balance
Cash book - Will show increased balance
5. Interest and dividends collected by the bank
Pass book - Will show increased balance
Cash book - Will show decreased balance
6.Bank charges etc. debited by bank
Pass book - Will show decreased balance
Cash book - Will show increased balance
7.Cheques deposited/bills discounted dishonoured
Cash book - Will show increased balance
Pass book - Will show decreased balance

Short cuts
When there is deposit in bank

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a) If due to the given reason ,the balance of the book to be calculated
shows increased balance , then add the item
b) If due to the given reason ,the balance of the book to be calculated
shows decreased balance , then deduct the item

When there is overdraft with bank

a) If due to the given reason ,the balance of the book to be calculated
shows increased balance , then deduct the item
b) If due to the given reason ,the balance of the book to be calculated
shows decreased balance , then add the item

Illustration 1
From the following particulars of Mr. Amal, prepare bank reconciliation
statement as on March 31, 2017.
1. Bank balance as per cash book Rs. 50,000.
2. Cheques issued but not presented for payment Rs. 6,000.
3. The bank had directly collected dividend of Rs. 8,000 and credited to
bank account but was not entered in the cash book.
4. Bank charges of Rs. 400 were not entered in the cash book.
5. A cheques for Rs. 6,000 was deposited but not collected by the bank.

Bank Reconciliation Statement as on March 31, 2017

Sl No Particulars Rs + Rs -
1 Bank balance as per cash book 50,000
2 Cheques issued but not presented for
3 payment 6,000
4 Dividend directly collected by bank 8,000
5 Bank charges not entered in the cash book 400
Cheques deposited but not collected by the
bank 6,000
Balance as per pass book 57,600

64,000 64,000
Illustration 2
The bank passbook of M/s. Boss & Co. showed a balance of Rs. 45,000
on May 31, 2017.
1. Cheques issued before May 31, 2017, amounting to Rs. 25,940 had
not been presented for encashment.
2. Two cheques of Rs. 3,900 and Rs. 2,350 were deposited into the bank
on May 31 but the bank gave credit for the same in June, 2017.
3. There was also a debit in the passbook of Rs. 2,500 in respect of a
cheque dishonoured on 31.5.2017.

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Prepare a bank reconciliation statement as on May 31, 2017.

Bank Reconciliation Statement as on March 31, 2017

Sl No Particulars Rs + Rs -
Balance as per pass book 45,000
1 Cheque issued but not presented for
payment 25,940
2 Cheque deposited but not credited by
bank 6,250
3 Cheque dishonoured debited in pass
book 2,500
Balance as per cash book 27,810

53,750 53,750

Illustration 3
On March 31, 2017, Rakesh had on overdraft of Rs. 8,000 as shown by
his cash book.
a) Cheques amounting to Rs. 2,000 had been paid in by him but were
not collected by the bank.
b) Issued cheques of Rs. 800 which were not presented to the bank for
payment.
c) There was a debit in his passbook of Rs. 60 for interest and Rs. 100
for bank charges.
Prepare bank reconciliation statement.
Bank Reconciliation Statement as on March 31, 2017
Sl No Particulars Rs + Rs -
Overdraft as per cash book 8,000
a Cheque paid into bank but not
collected by bank 2,000
b Cheque issued but not presented for
payment 800
c Interest and dividend debited in pass
book 160

Overdraft as per pass book 9,360

10,160 10,160

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Illustration 4
From the following particulars of Asha & Co. prepare a bank
reconciliation statement on December 31, 2017.
Overdraft as per passbook Rs. 20,000
Interest on overdraft Rs. 2,000
Insurance Premium paid by the bank Rs. 200
Cheque issued but not presented for payment Rs. 6,500
Cheque deposited but not yet cleared Rs. 6,000
Wrongly debited by the bank Rs. 500

Bank Reconciliation Statement as on March 31, 2017

Sl No Particulars Rs + Rs -
Overdraft as per passbook 20,000
Interest on overdraft 2,000
Insurance Premium paid by the bank 200
Cheque issued but not presented for payment 6,500
Cheque deposited but not yet cleared 6,000
Wrongly debited by the bank 500

Overdraft as per Cash book 17,800

26,500 26,500

CHAPTER 6
Trial Balance and Rectification of Errors

Meaning of Trial Balance

A trial balance is a statement showing the balances, or total of debits
and credits, of all the accounts in the ledger with a view to verify the
arithmetical accuracy of posting into the ledger accounts
Objectives of Preparing the Trial Balance
1. To ascertain the arithmetical accuracy of the ledger accounts.
2. To help in locating errors.
3. To help in the preparation of the financial statements. (Profit & Loss
account and Balance Sheet).
Methods of preparing trial balance

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Totals method
Under this method, total of each side in the ledger (debit and credit) is
ascertained separately and shown in the trial balance in the respective
columns. The total of debit column of trial balance should agree with
the total of credit column in the trial balance
Balances Method
This is the most widely used method in practice. Under this method
trial balance is prepared by showing the balances of all ledger
accounts and then totalling up the debit and credit columns of the trial
balance to assure their correctness
Illustration 1
Prepare a Trial Balance from the following information
Cash 15,000
Debtors 20,000
Stock 15,000
Bank Loan 20,000
Capital 5,00,000
Rent paid 10,000
Sales 2,00,000
Purchases 1,60,000
Commission received 10,000
Land 3,00,000
Building 2,00,000
Salary paid 10,000

Trial Balance as on …………….

Name of Account Amount (Dr) Amount (Cr)
Cash 15,000
Debtors 20,000
Stock 15,000
Bank Loan 20,000
Capital 5,00,000
Rent 10,000
Sales 2,00,000
Purchases 1,60,000
Commission received 10,000
Land 3,00,000
Building 2,00,000
Salary paid 10,000

Total 7,30,000 7,30,000

Classification of Errors
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All the errors can be classified into the following four categories:
• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating Errors
Errors of Commission
These are the errors which are committed due to wrong posting of
transactions, wrong totalling or wrong balancing of the accounts,
wrong casting of the subsidiary books, or wrong recording of amount
in the books of original entry, etc.
Eg: Credit sales to Mohan Rs. 10,000 were recorded as Rs. 12,000
Errors of Omission
The errors of omission may be committed at the time of recording the
transaction in the books of original entry or while posting to the ledger.
These can be of two types:
(i) error of complete omission
(ii) error of partial omission
When a transaction is completely omitted from recording in the books ,
it is an error of complete omission.
For example, credit sales to Mohan Rs. 10,000, not entered in the book.
When the recording of transaction is partly omitted from the books, it
is an error of partial omission.
For example, credit sales to Mohan had been duly recorded in the sales
book but the posting from sales book to Mohan’s account has not been
made
Errors of Principle
Accounting entries are recorded as per the generally accepted
accounting principles. If any of these principles are violated or ignored,
errors resulting from such violation are known as errors of principle.
Eg: Wages paid for installation of Machinery Rs. 600 was posted to
wages account

Compensating Errors
If an error in one account is rectified by one or more errors in other
accounts, it is called compensating error
For Eg: Purchase account is overcast by Rs. 2,000 and at the same
time Machinery account is undercast by Rs. 2,000
Illustration 2
Give rectification entries for the following transactions :
(a) Salary paid to Ramu Rs. 5,000 was debited to his personal account.
(b) Credit sales to Sajan Rs. 10,000 was recorded as Rs. 1,000 in sales
book.

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(c) Credit purchase from Zakariya Rs. 20,000 were not recorded.
(d) Cash received from Sakeer Rs. 4,000 was wrongly posted to
Shaheer’s account.
Date Particulars L/F Amount Amount
a) Salary a/c Dr 5,000
To Ramu 5,000
(Salary paid to Ramu wrongly
debited to his personal
account rectified)
b) Sajan a/c Dr 9,000
To Sales 9,000
(Wrong amount recorded in
sales book rectified)
c) Purchases a/c Dr 20,000
To Zakariya 20,000
(Omission to record credit
purchases from Zakariya now
recorded)
d) Shaheer’s a/c Dr 4,000
To Sakeer’s a/c 4,000
(Cash received from Sakeer
wrongly posted to Shaheer’s
account now posted correctly)

Suspense Account
Suspense accounts are used when your trial balance is out of balance .
The suspense account is a general ledger account that acts as a
holding account until the error is discovered . If the credits in the trial
balance are larger than debits, record the difference as a debit. If the
debits are larger than credits, record the difference as a credit
Illustration 3
Trial balance of Anand did not agree. It showed an excess debit of Rs.
3,500. He put the difference to suspense account. Subsequently the
following errors were located.
1. Credit sales of furniture for Rs. 4,000 was recorded in sales account
2.Credit purchase of goods for Rs. 8,000 from Gopal was recorded in
Gopi’s account
3. Wages paid for the construction of a new building was debited to
wages account Rs.12,000
4. Sales account was overcast by Rs. 1,000
5. Goods withdrawn for personal use Rs. 500 were not recorded in the
books.

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6.Cash received from Govil Rs. 5,000 was posted to his account as Rs.
500
Write rectification entries for the above errors and also prepare
Suspense account.

Date Particulars L/F Amount Amount

1 Sales a/c Dr 4,000
To Furniture a/c 4,000
(Furniture sold recorded in sales
account rectified)
2 Gopi’s a/c Dr 8,000
To Gopal’s a/c 8,000
(Credit purchase of goods from Gopal
recorded in Gopi’s account rectified)
3 Buildings a/c Dr 12,000
To Wages a/c 12,000
(Wages paid for the construction
building debited to wages account
corrected)
4 Sales a/c Dr 1,000
To Suspense a/c 1,000
(Overcasting of sales account
rectified)
5 Drawings a/c Dr 500
To Purchases a/c 500
(Omission to record goods withdrawn
for personal use now recorded)
6 Suspense A/c Dr. 4,500
To Govil’s a/c 4,500
(Wrong amount posted in Govil’s
account rectified)
Suspense Account
Date Particulars L/F Amount Date Particulars L/F Amount
To Govil’s a/c 4,500 By
Difference
in Trial 3,500
Balance
By Sales a/c 1,000

4,500 4,500

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 CHAPTER 7
Depreciation, Provisions and Reserves
Meaning
“Depreciation” means decline in the value of a fixed assets due to use,
passage of time etc
Examples of depreciable assets are machines, plants, furnitures,
buildings, computers, trucks, vans, equipments, etc.
Features of Depreciation
1. It is decline in the book value of fixed assets.
2. It includes loss of value due to effluxion of time, usage or
obsolescence.
3. It is a continuing process.
4. It is a non-cash expense. It does not involve any cash outflow
Depreciation and other Similar Terms
1 Depletion
The term depletion is used in the context of extraction of natural
resources like mines, quarries, etc. that reduces the availability of the
quantity of the material or asset. For example, if a business enterprise
is into mining business and purchases a coal mine for Rs. 10,00,000.
Then the value of coal mine declines with the extraction of coal out of
the mine.
2 Amortisation
Amortisation refers to writing-off the cost of intangible assets like
patents, copyright, trade marks, franchises, goodwill which have utility
for a specified period of time.For example, if a business firm buys a
patent for Rs. 10,00,000 and estimates that its useful life will be 10
years then the business firm must write- off Rs. 10,00,000 over 10 years
Causes of Depreciation
1 Wear and Tear due to Use or Passage of Time
Wear and tear means deterioration, and the consequent diminution in
an asset’s value, arising from its use in business operations. An asset
deteriorates simply with the passage of time, even though they are not
being put to any use
2 Expiration of Legal Rights
Certain categories of assets lose their value after the agreement
governing their use in business comes to an end after the expiry of
pre-determined period.Eg: Machine taken on lease
3 Obsolescence
Obsolescence implies to an existing asset becoming out-of-date on
account of the availability of better type of asset.
It arises from such factors as:
• Technological changes;

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• Improvements in production methods;
• Change in market demand for the product
4 Abnormal Factors
Decline in the usefulness of the asset may be caused by abnormal
factors such as accidents due to fire, earthquake, floods, etc.
Need for Depreciation
1.For ascertaining the true profit or loss.
2.For showing the true and fair view of the financial position.
3.To ascertain the accurate cost of production.
4.To provide funds for replacement of assets.
5.To Reduce Tax Liability
6.Compliance with Law
Factors Affecting the Amount of Depreciation
1 Cost of Asset
Cost (also known as original cost or historical cost) of an asset
includes invoice price and other costs, which are necessary to put the
asset in use or working condition.Besides the purchase price, it
includes freight and transportation cost, transit insurance, installation
cost, registration cost, commission paid on purchase of asset add
items such as software, etc.
2 Estimated Net Residual Value
Net Residual value (also known as scrap value or salvage value f) is the
estimated net realisable value (or sale value) of the asset at the end of
its useful life.
3 Depreciable Cost
Depreciable cost of an asset is equal to its cost less net residual value
4 Estimated Useful Life
Useful life of an asset is normally the “period over which it is expected
to be used by the enterprise”.
Methods of Calculating Depreciation Amount
1 Straight Line Method
According to this method, a fixed and an equal amount is charged as
depreciation in every accounting period during the lifetime of an asset.
In this method the original cost of the asset is rduced to its scrap
value or zero, at the end of its useful life.It is also called fixed
instalment method or original cost method.
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Depreciation = Cost of asset - Estimated net residential
value Estimated useful life of the asset
Advantages of Straight Line Method
1.It is very simple, easy to understand and apply.
2.Every year, same amount is charged as depreciation in profit and
loss account. This makes comparison of profits for different years easy
Limitations of Straight Line Method
1.This method is based on the faulty assumption of same amount of
the utility of an asset in different accounting years
2. Difficulty in the determination of scrap value
2 Written Down Value Method
Under this method, depreciation is charged on the book value of the
asset. In this method a fixed percentage of the book value of the asset
at the beginning of every accounting period, is written off as
depreciation. The amount of depreciation reduces year after year.
Advantages of Written Down Value Method
1.This method is simple to understand and easy to operate.
2.The amount of annual depreciation reduces with the reducing
balance of the asset
3.This method is recognised by tax authorities and other legal bodies.
Limitations of Written Down Value Method
1. Under this method the book value of an asset cannot be reduced to
zero
2. It is difficult to ascertain a suitable rate of depreciation
Straight Line Method and Written Down Method: A
Comparative Analysis
Basis of Difference Straight Line Method Written Down Value
Method
Basis of charging Original cost Book Value (i.e.
depreciation original cost less
depreciation charged
till date)
Annual depreciation Fixed (Constant) year Declines year after
charge year

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Recognition by Not recognised Recognised
income tax law
Illustration 1
M/s Singhania and Bros. purchased a Plant for Rs. 5,00,000 on January
01, 2020 and spent Rs. 50,000 for its installation. The salvage value of
the plant after its useful life of 10 years is estimated to be Rs. 10,000.
Draw up Plant Account for first three years given that the depreciation
is charged using straight line method and the books of accounts are
closed on December 31 every year;
Notes
Depreciation = Cost of asset -Salvage Value
Estimated Life

= 5,00,000 + 50,000 – 10,000 = 5,40,000

10 10
= 54,000
PLANT Account 5,50,000
Date Particulars J/F Amount Date Particulars J/F Amount
2020 2020
Jan 1 To Cash 5,50,000 Dec 31 ByDepreciation 54,000
,, 31 ,, Balance c/d 4,96,000
5,50,000 5,50,000

2021 2021
Jan 1 To Balance 4,96,000 Dec 31 By Depreciation 54,000
b/d ,, Balance c/d 4,42,000

4,96,000 4,96,000
2022 2022
Jan 1 To Balance Dec 31 By Depreciation
b/d 4,42,000 54,000
,, Balance c/d 3,88,000

4,42,000 4,42,000
2023 To Balance
Jan 1 b/d 3,88,000

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Illustration 2M/s.
Dalmia Textile Mills purchased machinery on April 01, 2020 for Rs.
2,00,000 and spent Rs. 10,000 for its installation. Depreciation is
provided @10% p.a. on written down value basis.
Prepare Machinery Account for the first three years. Books are closed
on March 31, every year.

MACHINERY ACCOUNT
Date Particulars J/ Amount Date Particulars J/ Amount
F F
2020 2021
Apr 1 To Cash 2,10,000 Mar 31 ByDepreciation 21,000
,, 31 ,, Balance c/d 1,89,000
2,10,000 2,10,000

2021 2022
Apr 1 To Balance b/d 1,89,000 Mar 31 By Depreciation 18,900
,, 31 ,, Balance c/d 1,70,100
1,89,000 1,89,000
2022 2023
Apr 1 To Balance b/d 1,70,100 Mar 31 By Depreciation 17,010
,, Balance c/d 1,53,090

1,70,100 1,70,100
2023
Apr 1 To Balance b/d 1,53,090
Illustration 3
X Co. Ltd. purchased a machine on 1st Jan, 2016 for Rs 1,60,000. On
July 1, 2017 another machine was purchased for Rs 1,40,000. On July
1, 2018 the first machine was sold for Rs 1,30,000. On the same date,
another machine was purchased for Rs 1,00,000. Prepare Machine
Account under Straight Line Method for the years ending 31st March
2016, 2017, and 2018 assuming that the Life of Machineries is 10 years.

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 MACHINERY ACCOUNT
Date Particulars J/F Amount Date Particulars J/ Amount
F
2016 2016
Jan 1 To Bank 1,60,000 Dec 31 ByDepreciation 16,000
(1)
,, 31 ,, Balance c/d 1,44,000

1,60,000 1,60,000
2017 2017 ByDepreciation
Jan 1 To Balance Dec 31 (2) 23,000
b/d 1,44,000
July 1 ,, Bank 1,40,000 ,, Balance c/d 2,61,000

2,84,000 2,84,000

2018 ByDepreciation
2018 To Balance 2,61,000 July 1 (3) 8,000
Jan 1 b/d ,, 1 ,, Bank 1,30,000
July 1 ,, Profit
and Loss Dec 31 ByDepreciation 19,000
a/c (4) 10,000 (5)
July 1 ,, Bank 1,00,000 ,, ,, Balance c/d 2,14,000

3,71,000 3,71,000

Notes
1. Depreciation = 1,60,000 = 16,000
10
2.Depreciation on First Machinery = 16,000
Depreciation on Second Machinery = 1,40,000 = 14,000
10
As the Second Machinery was purchased on July 1 , depreciation is
charged for 6 months ,ie 14,000 x 6/12 = 7,000
Total depreciation = 16,000 + 7,000 = 23,000
3. Depreciation on machinery sold , ie, from Jan 2018 to June 2018 =
16,000 x 6/12 = 8,000
4. Profit on Sale of Machinery = Sales price – Book value of machinery

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 Book value of machinery = Cost of Machinery - Depreciation till date
Depreciation till date = 2016 – 16,000, 2017 – 16,000 and 2018 – 8000
= 16,000 +16,000+ 8,000 = 40,000
Book value of machinery = 1,60,000 – 40,000 = 1,20,000
Profit on Sale of Machinery = 1,30,000 – 1,20,000 = 10,000
5. Depreciation on second Machinery = 14,000
Depreciation on Machinery purchased this year
from July 2018 to Dec 2018 = 1,00,000 x 6/12 = 5,000
10
Total depreciation = 14,000 + 5,000 = 19,000
Illustration 4
Using the details given in the above Illustration , calculate depreciation
under written down value method assuming that the rate of
depreciation is 10%

MACHINERY ACCOUNT
Date Particulars J/ Amount Date Particulars J/ Amount
F F
2016 2016
Jan 1 To Bank 1,60,000 Dec ByDepreciation
31 (1) 16,000
,, Balance c/d 1,44,000

1,60,000 ,, 31 1,60,000
2017
Jan 1 To Balance b/d 1,44,000 ByDepreciation
July 1 ,, Bank 1,40,000 2017 (2) 21,400
Dec
31 ,, Balance c/d 2,62,600

2,84,000 2,84,000
2018
Jan 1 To Balance b/d 2,62,600 2018 ByDepreciation
July 1 ,,ProfitandLos July (3) 6,480
s a/c (4) 6,880 1 ,, Bank 1,30,000

July 1 ,, Bank 1,00,000 ByDepreciation

,, 1 (5) 18,300

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 Dec ,, Balance c/d 2,14,700
31
3,69,480 3,69,480

,,

Notes
1. Depreciation for 2016 = 1,60,000 x 10/100 = 16,000
2. Depreciation for 2017 :
1,44,000 x 10/100 = 14,400
1,40,000 x 10/100 x 6/12 = 7,000
21,400
3.Depreciation on machinery sold
Written down value of Machinery sold = 1,60,000-16,000-14,400 =
1,29,600
Depreciation from Jan to July = 1,29,600 x 10/100 x 6/12 = 6,480
4. Profit on Sale of Machinery = Sales price – Book value of machinery
Book value of machinery = Cost of Machinery - Depreciation till date
Depreciation till date = 2016 – 16,000, 2017 – 14,400 and 2018 – 6,480
= 16,000 +14,400+ 6,480 = 36,880
Book value of machinery = 1,60,000 – 36,880 = 1,23,120
Profit on Sale of Machinery = 1,30,000 – 1,23,120 = 6,880
5. Depreciation on second Machinery = 1,40,000 – 7,000 = 1,33,000 x
10/100 = 13,300
Depreciation on Machinery purchased this year
From July 2018 to Dec 2018 = 1,00,000 x 10/100 x 6/12 = 5,000
Total depreciation = 13,300 + 5,000 = 18,300
Provisions and Reserve
Provisions
There are certain expenses/losses which are related to the current
accounting period but amount of which is not known with certainty
because they are not yet incurred. It is necessary to make provision for
such items for ascertaining true net profit.
Examples of provisions are

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• Provision for depreciation
• Provision for bad and doubtful debts
• Provision for taxation
• Provision for discount on debtors and
• Provision for repairs and renewals.
Provisions are created by debiting the profit and loss account. In the
balance sheet, the amount of provision may be shown either:
• By way of deduction from the concerned asset on the assets side
• On the liabilities side of the balance sheet along with current
liabilities
Reserves
A part of the profit may be set aside and retained in the business to
provide for certain future needs like growth and expansion or to meet
future contingencies such as workmen compensation.
Examples of reserves are:
• General reserve;
• Workmen compensation fund;
• Investment fluctuation fund;
• Capital reserve;

Distinction between reserves and provisions

Basis Provision Reserve
1. Basic nature Charge against profit. Appropriation of profit.
2. Purpose It is created for a It is made for
known liability or strengthening the
expense the amount of financial position of the
which is not certain. business
3. Effect on taxable It reduces taxable It has no effect on
profits. profits. taxable profit.
4. Element of Creation of provision is Creation of a Reserve is
compulsion necessary not compulsory
5. Use for the It can not be used for It can be used for divided
payment of dividend distribution. distribution.
dividend

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Types of Reserves
1. General reserve
When the purpose for which reserve is created is not specified, it is
called General Reserve. It is also termed as free reserve because the
management can freely utilise it for any purpose.
2.Specific reserve
Specific reserve is the reserve, which is created for some specific
purpose and can be utilised only for that purpose.
Examples of specific reserves are :-
Workmen compensation fund
Dividend equalisation reserve
Reserves are also classified as revenue and capital reserves
according to the nature of the profit out of which they are created
Revenue reserves
Revenue reserves are created from revenue profits which arise out of
the normal operating activities of the business
Examples of revenue reserves are:
• General reserve;
•Workmen compensation fund;
•Investment fluctuation fund;
•Dividend equalisation reserve;
Capital reserves
Capital reserves are created out of capital profits which do not arise
from the normal operating activities.
Examples of capital profits
•Premium on issue of shares or debenture. •Profit on sale of fixed
assets.
•Profit on redemption of debentures. •Profit on revaluation of
fixed asset & liabilities.

CHAPTER 8
BILL OF EXCHANGE

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Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a bill of exchange is
defined as “an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of a certain person or to the bearer of the
instrument”.
Features
1.A bill of exchange must be in writing.
2.It is an order to make payment.
3.The order to make payment is unconditional.
4.The maker of the bill of exchange must sign it.
5.The payment to be made must be certain.
6.The date on which payment is made must also be certain.
7.The bill of exchange must be payable to a certain person.
8.The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
9.It must be stamped as per the requirement of law
A bill of exchange is generally drawn by the creditor upon his debtor. It
has to be accepted by the debtor . It is just a draft till its acceptance is
made.
Parties to a Bill of Exchange
There are three parties to a bill of exchange
1. Drawer – The person who draws the bill. He is the seller/creditor
2. Drawee – The person on whom the bill is drawn . He is the
buyer/Debtor
3. Payee – The person who receives the amount of bill.
Drawer and Payee can be the same person

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 Promissory Note
According to the Negotiable Instruments Act 1881, a promissory note
is defined as an instrument in writing (not being a bank note or a
currency note), containing an unconditional undertaking signed by the
maker, to pay a certain sum of money only to or to the order of a
certain person, or to the bearer of the instrument.
Features of a promissory note
1.It must be in writing
2.It must contain an unconditional promise to pay.
3.The sum payable must be certain.
4.It must be signed by the maker.
5.The maker must sign it.
6.It must be payable to a certain person.
7.It should be properly stamped.

Parties to a Promissory Note

There are two parties to a promissory note.
1.Maker or Drawer – He is the person who makes or draws the
promissory note
2.Drawee or Payee – He is the person in whose favour the promissory
note isdrawn. He is called the promisee.
Distinction between a Bill of Exchange and
Promissory Note
Basis Bill of Exchange Promissory Note
1.Drawer It is drawn by the creditor It is drawn by the debtor
2. Order or It contains an order to make It contains a promise to

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Promise payment make payment
3.Parties There can be three parties to There are only two parties
it, viz. the drawer, the to it, viz. the drawer and
drawee and the payee. the payee.
4.Acceptance It requires acceptance by It does not require any
the drawee acceptance.
5.Payee Drawer and payee can be Drawer cannot be the
the same party. payee of it.
Maturity of Bill
The term maturity refers the date on which a bill of exchange or a
promissory note becomes due for payment. In arriving at the maturity
date three days, known as days of grace, must be added to the date on
which instrument is payable.
If a bill dated March 05 is payable 30 days after date, its maturity date
is April 07
If it were payable one month after date, the maturity date would be April
08
However, where the date of maturity is a public holiday, the instrument
will become due on the preceding business day
But when an emergent holiday is declared by the Government of India
which may happen to be the date of maturity of a bill of exchange, then
the date of maturity will be the next working day immediately after the
holiday.
Discounting of Bill
If the holder of the bill needs funds, he can approach the bank for
encashment of the bill before the due date. The bank shall makes the
payment of the bill after deducting some interest (called discount in
this case). This process of encashing the bill with the bank is called
discounting the bill. The bank gets the amount from the drawee on the
due date.
Endorsement of Bill
The holder of a bill can transfer it to his credtor.The act of signing and
transferring the bill is called endorsement. The bill can be initially
endorsed by the drawer by putting his signatures at the back of the bill
along with the name of the party to whom it is being transferred.
Accounting Treatment
For the person who draws the bill of exchange and gets it back after its
due acceptance, it is a bill receivable. For the person who accepts the
bill, it is a bills payable.
In the Books of Drawer
A bill receivable can be treated in the following four ways by the drawer
1. He can retain it till the date of maturity, and

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(a) get it collected on date of maturity directly, or
(b) get it collected through the banker.
2. He can get the bill discounted from the bank.
3. He can endorse the bill in favour of his Creditor.

1.When the drawer retains the bill with him till the date of its maturity
and
gets the same collected directly
Transaction In the books of Drawer In the books of Drawee
Sale/Purchase of Drawee a/c Dr Purchases a/c Dr
goods To sales a/c To Drawer a/c
Receiving/Accepting Bills Receivable a/c Dr Drawer a/c Dr
the bill To Drawee a/c To Bills Payable a/c
Collection of the bill Cash a/c Dr Bills Payable a/c Dr
To Bills Receivable a/c To Cash a/c
Illustration 1: Amit sold goods for Rs.20,000 to Sumit on credit on Jan
01, 2020. Amit drew a bill of exchange upon Sumit for the same amount
for three months. Sumit accepted the bill and returned it to Amit. Sumit
met his acceptance on maturity. Record the necessary journal entries if
Amit retained the bill till the date of its maturity and collected directly

Book of Amit
Journal
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
(Bill received from Sumit)
April 4 Cash a/c Dr 20,000
To Bills Receivable a/c 20,000
[Received cash on maturity]
Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

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,, 1 Amit a/c Dr 20,000
To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Cash a/c 20,000
[Cash paid on maturity]

2.When the bill is retained by the drawer with him and sent to bank for
collection a few days before maturity

Transaction In the books of Drawer In the books of

Drawee
Sale/Purchase of Drawee a/c Dr Purchases a/c Dr
goods To sales a/c To Drawer a/c
Receiving/Accepting Bills Receivable a/c Dr Drawer a/c Dr
the bill To Drawee a/c To Bills Payable
a/c
Sending the bill for Bills sent for No entry
collection collection A/c Dr.
To Bill Receivable A/c
On Receiving from the Bank A/c Dr. Bills Payable a/c Dr
bank advice that the To Bill Sent for To Cash a/c
bill has been collected Collection A/c
Illustration 2 : Amit sold goods for Rs.20,000 to Sumit on credit on Jan
01, 2020. Amit drew a bill of exchange upon Sumit for the same amount
for three months. Sumit accepted the bill and returned it to Amit. Sumit
met his acceptance on maturity. Record the necessary journal entries if
Amit retained the bill and on March 31, 2020 Amit sent the bill for
collection to his bank. On April 05, 2020 bank advice was received.
Book of Amit
Journal
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
( Bill received from Sumit)
Mar 31 Bills sent for collection A/c Dr 20,000

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 To Bills Receivable a/c 20,000
[Bill sent to bank for collection]
Apr 4 Bank a/c Dr 20,000
To Bills sent for collection A/c 20,000
[Bill collected by bank]

Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

,, 1 Amit a/c Dr 20,000

To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Cash a/c 20,000
[Cash paid on maturity]

3.When the drawer gets the bill discounted from the bank
Transaction In the books of Drawer In the books of Drawee
Sale/Purchase of Drawee a/c Dr Purchases a/c Dr
goods To sales a/c To Drawer a/c
Receiving/Accepting Bills Receivable a/c Dr Drawer a/c Dr
the bill To Drawee a/c To Bills Payable a/c
Discounting the bill Bank a/c Dr. No entry
Discount a/c Dr
To Bill Receivable A/
c
On maturity of the bill No entry Bills Payable a/c Dr
To Cash a/c
Illustration 3
Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2020. Amit
drew a bill of exchange upon Sumit for the same amount for three
months. Sumit accepted the bill and returned it to Amit. Sumit met his
acceptance on maturity. Record the necessary journal entries if Amit
discounted the bill @ 12% p.a from his bank

Book of Amit

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 Journal
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

,,1 Bank a/c Dr. 19,400

Discount a/c Dr 600
(20,000 X 12/100X 3/12)
To Bill Receivable A/c 20,000
[Discounted the bill with bank
@12 %]

Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

,, 1 Amit a/c Dr 20,000

To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Cash a/c 20,000
[Cash paid on maturity]

4.When the bill is endorsed by the drawer in favour of his creditor

Transaction In the books of Drawer In the books of
Drawee
Sale/Purchase of Drawee a/c Dr Purchases a/c Dr
goods To sales a/c To Drawer a/c
Receiving/Accepting Bills Receivable a/c Dr Drawer a/c Dr
the bill To Drawee a/c To Bills Payable a/c
Endorsing the bill Creditors a/c Dr No entry

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 To Bill Receivable A/c
On maturity of the bill No entry Bills Payable a/c Dr
To Cash a/c
Illustration 4
Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2020. Amit
drew a bill of exchange upon Sumit for the same amount for three
months. Sumit accepted the bill and returned it to Amit. Sumit met his
acceptance on maturity. Record the
necessary journal entries if Amit endorsed the bill to his creditor Ankit

Book of Amit
Journal
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

,,1 Ankit’s A/c Dr 20,000

To Bills Receivable a/c
[Bill endorsed to Ankit] 20,000

Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

,, 1 Amit a/c Dr 20,000

To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Cash a/c 20,000
[Cash paid on maturity]

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Dishonour of a Bill
A bill is said to have been dishonoured when the drawee fails to make
the payment on the date of maturity. In this situation, liability of the
acceptor is restored.
Journal entries
In the books of drawer
1.When the bill kept by Drawer till its maturity
Drawee a/c Dr
To Bills Receivable
2. When bill sent for collection is dishonoured
Drawee a/c Dr.
To Bill sent for collection a/c
3. When bill discounted with bank is dishonoured
Drawee a/c Dr.
To Bank a/c
4. When endorsed bill is dishonoured
Drawee a/c Dr.
To Creditors a/c
In the books of drawee
Bills Payable a/c Dr
To Drawer a/c
Illustration 5
Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2020. Amit
drew a bill of exchange upon Sumit for the same amount for three
months. Sumit accepted the bill and returned it to Amit. Sumit
dishonoured the bill on maturity. Record the necessary journal entries
if Amit retained the bill till the date of its maturity
Book of Amit
Journal
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

April 4 Sumit a/c Dr 20,000

To Bills Receivable a/c
[Sumit dishonoured the bill] 20,000

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 Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

,, 1 Amit a/c Dr 20,000

To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Amit a/c 20,000
[Bill dishonoured]
Illustration 6
Amit sold goods for Rs.20,000 to Sumit on credit on Jan 01, 2020. Amit
drew a bill of exchange upon Sumit for the same amount for three
months. Sumit accepted the bill and returned it to Amit. Sumit
dishonoured the bill on maturity. Record the necessary journal entries
if
a) Amit sent the bill to bank for collection
b) Amit discounted the bill with bank for Rs. 500
c) Amit endorsed the bill to his creditor Ankit

Book of Amit
Journal
a) Amit sent the bill to bank for collection

Date Particulars L/F Amount Amount

2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

,, 1 Bill sent for collection a/c Dr 20,000

To Bills Receivable a/c
[Sumit dishonoured the bill] 20,000

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Apr 4 Sumit a/c Dr 20,000
To Bill sent for collection a/c 20,000
[Sumit dishonoured the bill]

Book of Amit
Journal
b) Amit discounted the bill with bank for Rs. 500
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

,, 1 Bank a/c Dr 19,500

Discount a/c Dr 500
To Bill Receivable A/c 20,000
[Discounted the bill with bank ]
Apr 4 Sumit a/c Dr 20,000
To Bank a/c 20,000
[Bill dishonoured on maturity]

Book of Amit
Journal
c) Amit endorsed the bill to his creditor Ankit
Date Particulars L/F Amount Amount
2020 Sumit a/c Dr 20,000
Jan 1 To Sales a/c 20,000
[Sold goods to Sumit on credit]

,, 1 Bills Receivable a/c Dr 20,000

To Sumit a/c 20,000
[Received bill from Sumit]

Mar 31 Ankit’s A/c Dr 20,000

To Bill Receivable A/c 20,000
[Bill endorsed to Ankit]

Apr 4 Sumit a/c Dr 20,000

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 To Ankit’s A/c 20,000
[Bill dishonoured by Sumit]

Book of Sumit
Journal
Date Particulars L/F Amount Amount
2020 Purchases a/c Dr 20,000
Jan 1 To Amit a/c 20,000
[Purchased goods from Amit]

,, 1 Amit a/c Dr 20,000

To Bills Payable a/c 20,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 20,000

To Amit a/c 20,000
[Bill dishonoured]

Noting Charges
A bill of exchange should be duly presented for payment on the date of
its maturity. Proper presentation of the bill means that it should be
presented on the date of maturity to the acceptor during business
working hours. To establish that the bill was dishonoured it may
preferably to be got noted by Notary Public. Noting authenticates the
fact of dishonour. For providing this service, a fees is charged by the
Notary Public which is called Noting Charges.
The following facts are generally noted by the Notary:
1.Date, fact and reasons of dishonour;
2.The amount of noting charges.
The entries recorded for noting charges in the drawers book are as
follows:
When Drawer himself pays
Drawee’s A/c Dr
To Cash A/c
Where endorsee pays
Drawee’s A/c Dr
To Endorsee A/c
When the bank pays on discounted bill
Drawee’s A/c Dr
To Bank A/c

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When the bank pays in the event of sending the bill for collection to the
bank
Drawee’s A/c Dr.
To Bank A/c

In the books of Drawee

Noting charges A/c Dr
To Drawer’s a/c
Illustration 7
Azad sold goods for Rs. 15,000 to Bunty and immediately drew a bill
upon him on Jan. 01, 2020 payable after 3 months. On maturity the bill
was dishonoured and Rs. 50 were paid by the holder of the bill as
noting charges.Pass journal entries under the following
circumstances:
(a) When the bill was kept by Azad till maturity.
(b) When the bill was discounted by Azad with his bank immediately for
Rs. 500
Books of Azad
Journal
(a) When the bill was kept by Azad till maturity.

Date Particulars L/F Amount Amount

2020 Bunty’s a/c Dr 15,000
Jan 1 To Sales a/c 15,000
[Sold goods to Bunty on credit]

,, 1 Bills Receivable a/c Dr 15,000

To Bunty’s a/c 15,000
[Received bill from Sumit]

Apr 4 Bunty’s a/c Dr 20,050

To Bills Receivable A/c 20,000
,, Cash 50
[Bill dishonoured by Bunty and
paid noting charges]

(b) When the bill was discounted by Azad with his bank immediately for
Rs. 500
Date Particulars L/F Amount Amount
2020 Bunty’s a/c Dr 15,000
Jan 1 To Sales a/c 15,000

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 [Sold goods to Bunty on credit]

,, 1 Bills Receivable a/c Dr 15,000

To Bunty’s a/c 15,000
[Received bill from Sumit]

,, 1 Bank A/c Dr 14,500

Discount A/c Dr 500
To Bills Receivable A/c 15,000
(Discounted the bill with bank)

Apr 4 Bunty’s a/c Dr 15,050

To Bank 15,050
[Bill dishonoured by Bunty
and th bank paid noting
charges]

Book of Bunty
Journal

Date Particulars L/F Amount Amount

2020 Purchases a/c Dr 15,000
Jan 1 To Azad a/c 15,000
[Purchased goods from Amit]

,, 1 Azad a/c Dr 15,000

To Bills Payable a/c 15,000
[Accepted bill drawn by Amit]

April 4 Bills Payable a/c Dr 15,000

Noting Charges a/c Dr 50
To Azad a/c 15,050
[Bill dishonoured]

Renewal of the Bill

If the drawee finds it difficult to pay the bill on maturity and he may
approach the drawer with the request for extension of time for
payment. If it is so, the old bill is cancelled and the fresh bill with new
terms of payment is drawn and duly accepted and delivered. This is
called renewal of the bill. The drawee may have to pay interest to the

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drawer for the extended period of credit. The interest is paid in cash or
may be included in the amount of the new bill

Transaction Books of Drawer Books of Drawee

Cancellation of old Drawee’s A/c Dr. Bills Payable A/c Dr.
bill To Bills Receivable To Drawer’s A/c
A/c
Interest Drawee’s A/c Dr Interest A/c Dr.
To Interest A/c To Drawer’s A/c
New bill Bill Receivable A/c Dr. Drawer’s A/c Dr.
To Drawee’s A/c To Bills Payable A/c
Illustration 8
On January 01, 2020 Ravi sold goods to Mohan for Rs.15,000 on credit
and drew a three months bill upon him . On the date of maturity of the
bill Mohan requested Ravi to cancel the old bill and a new bill upon him
for a period of 2 months. He further agreed to pay interest in cash to
Ravi @ 12% p.a. Ravi agreed to Mohan’s request and cancelled the old
bill and drew a new bill. The new bill was met on maturity by Mohan.
Pass journal entries in the books of Ravi and Mohan

Books of Ravi
Journal
Date Particulars L/F Amount Amount
2020 Mohan a/c Dr 15,000
Jan 1 To Sales a/c 15,000
[Sold goods to Mohan on
credit]
,, 1
Bills Receivable a/c Dr 15,000
To Mohan a/c 15,000
[Received bill from Sumit]
Apr 4
Mohan a/c Dr 15,000
To Bills Receivable A/c 15,000
[Cancelled the old bill]
Apr 4
Mohan a/c Dr 250
To Interest 250
(Interest on renewal of bill)
,, 4
Bills Receivable a/c Dr 15,000

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 Cash a/c Dr 250
To Mohan a/c 15,250
( Renewed the bill and received
Interest)
June 7 Cash a/c Dr 15,000
To Bills Receivable 15,000
( Cash received on maturity)

Books of Mohan
Journal

Date Particulars L/F Amount Amount

2020 Purchases a/c Dr 15,000
Jan 1 To Ravi a/c 15,000
[Purchased goods from Ravi]

,, 1 Ravi a/c Dr 15,000

To Bills Payable a/c 15,000
[Accepted bill drawn by Ravi]

April 4 Bills Payable a/c Dr 15,000

To Ravi a/c
[Old bill cancelled] 15,000

Apr 4 Interest a/c Dr 250

To Ravi a/c 250
( Interest on bill renewal)

,, 4 Ravi a/c Dr 15,250

To Bills Payable a/c 15,000
,, Cash 250
( New bill accepted and interest
paid)

June 7 Bill Payable A/c Dr 15,000

To Cash 15,000
( Cash paid on maturity)

Retiring of the Bill

If the drawee makes payment of the bill before maturity, it is called
retiring of bill.To encourage the retirement of the bill, the holder allows
some discount called Rebate on bills for the period between date of
retirement and maturity.

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Journal entries
In the books of the holder
Cash A/c Dr.
Rebate on bills A/c Dr.
To Bills Receivables A/c
In the books of the drawee
Bills Payable A/c Dr.
To Cash A/c
To Rebate on Bills A/c
Illustration 9
Amit sold goods Rs. 10,000 to Babli on Jan. 01, 2020 and immediately
drew a bill on Babli for three month for the same amount, Babli
accepted the bill and returned it to Amit. On March 04, 2020 Babli
retired her acceptance under rebate of 6% per annum. Pass journal
entries.
In the books of Amit
Journal

Date Particulars L/F Amount Amount

2020 Babli a/c Dr 10,000
Jan 1 To Sales a/c 10,000
[Sold goods to Babli on credit]

,, 1 Bills Receivable a/c Dr 10,000

To Babli a/c 10,000
[Received bill from Babli]

Mar 4 Cash a/c Dr 9,950

Rebate on bills A/c Dr 50
(10,000 x 6/100 x 1/12) 10,000
To Bills Receivable a/c
(Babli retired the bill and
allowed her rebate)

Book of Babli
Journal

Date Particulars L/F Amount Amount

2020 Purchases a/c Dr 10,000
Jan 1 To Amit a/c 10,000
(Purchased goods from Amit)

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,, 1 Amit a/c Dr 10,000
To Bills Payable a/c 10,000
( Accepted the bill)

Mar 4 Bills Payable a/c Dr 10,000

To Cash a/c 9,950
,, Rebate on bills A/c 50
(Bill retired and received
rebate)

CHAPTER 9
Financial Statements – I
Meaning
Financial statements are reports prepared by a business firm to
calculate the operating result and financial position of the business.
Objectives
1- To present a true and fair view of the operating of the business
2- To present a true and fair view of the financial position of the
business.

Financial statements are

1- Trading and Profit and loss account / Income statement
2- Balance sheet / Position statement
Income statement
Income statement is prepared to ascertain the profit or loss of a
business during a period of time.The income statement is divided into
two sections. The first section is called trading account and the second
section is called profit and loss account.
Trading account
Trading account is an income statement prepared to ascertain trading
result i.e., gross profit or gross loss.
Gross profit / Gross loss
The profit arising out of trading alone is called gross profit and if there
is a loss it is called gross loss.
Gross profit = Net sales - Cost of goods sold.
Net sales = Sales - Sales returns.
Cost of goods sold = Opening stock + Net purchases + Direct expense
- Closing stock.
Net purchase = Purchases - Purchase returns.
Gross loss = Cost of goods sold – Net sales
Direct expense

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All expenses directly associated with the purchase or production are
called direct expenses
Eg: Wages, Carriage or Carriage inwards , Freight, all factory expenses
etc.
Illustration 1
From the following find out the Gross Profit or Gross Loss
Sales 5,30,000
Opening stock 20,000
Closing stock 30,000
Purchases 3,20,000
Sales returns 30,000
Purchases returns 20,000
Wages 15,000
Carriage 5,000
Gross profit = Net sales - Cost of goods sold.
Net sales = Sales - Sales return.
Net sales = 5,30,000 – 30,000 = 5,00,000
Cost of goods sold = Opening stock + Net purchase + Direct expense -
closing stock.
Net purchase = Purchases - Purchases returns.
= 3,20,000 – 20,000 = 3,00,000
Cost of goods sold = 20,000 + 3,00,000+15,000 + 5,000 – 30,000
= 3,10,000
Gross profit = 5,00,000 – 3,10,000 = 1,90,000
Profit and loss account
It is prepared to find out the net result of business. It may be Net profit
or Net Loss
The net profit or net loss is transferred to the capital account shown in
the balance sheet

Format of Trading and Profit and Loss Account

Particulars Amount Particulars Amount
Opening stock XXXX Sales XXXX
Purchases XXXX Less:Sales
Less Purchase returns XXX XXXX
returns XXX XXXX Closing Stock XXXX
Direct expenses XXXX
Gross profit c/d XXXXX
XXXX XXXX
Salary XXXX Gross profit b/d XXXX
Rent XXXX Interest received XXX
Advertisement XXXX Rent received XXX

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General expense XXXX Discount Received XXX
Travelling expense XXXX
Net profit transferred to
capital account XXXX
XXXX XXXX
Illustration 2
Prepare a trading account of M/s Anjali from the following information
related to March 31, 2020.
Opening stock 60,000
Purchases 3, 00,000
Sales 7, 50,000
Purchases return 18,000
Sales return 30,000
Carriage on purchases 12,000
Factory rent 18,000
Coal, Gas and Water 10,000
Closing Stock 50,000

Trading Account for the year ended March 31, 2020

Particulars Amount Particulars Amount
Opening stock 60,000 Sales 7,50,000
Purchases 3, 00,000 Less:Sales
Less Purchase returns 30,000 7,20,000
returns 18,000 2,82,000 Closing Stock 50,000
Carriage 12,000
Factory rent 18,000
Coal, Gas and Water 10,000
Gross profit c/d 3,88,000

7,70,000 7,70,000

Illustration 3
From the following information, prepare a profit and loss account for
the year ending March 31, 2021.
Gross profit 60,000
Rent 5,000
Salary 15,000
Commission paid 7,000
Interest paid on loan 5,000
Advertising 4,000

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Discount received 3,000
Printing and stationery 2,000
Legal charges 5,000
Bad debts 1,000
Interest received 4,000

Profit and LossAccount for the year ended March 31, 2020
Particulars Amount Particulars Amount
Rent 5,000 Gross profit b/d 60,000
Salary 15,000 Discount received 3,000
Commission paid 7,000 Interest received 4,000
Interest on loan 5,000
Advertising 4,000
Printing and stationery 2,000
Legal charges 5,000
Bad debts 1,000
Net Profit transferred to
capital account 23,000
67,000 67,000

Operating Profit (EBIT)

It is the profit earned through the normal operations and activities of
the business.While calculating operating profit, the incomes and
expenses of a purely financial nature are not taken into account. Thus,
operating profit is profit before interest and tax (EBIT). Similarly,
abnormal items such as loss by fire, etc. are also not taken into
account.
Operating profit = Net Profit + Non Operating Expenses – Non
Operating Incomes

Balance Sheet
A balance sheet is prepared to ascertain the financial position of a
business as on a certain date. It has two sides ; left hand side is
liabilities side and right hand side is assets side. All liabilities and
capital are shown in the liabilities side and all assets are shown in the
assets side.

Format of Balance Sheet

Balance Sheet as on ..................................

Liabilities Amount Assets Amount
Creditors Cash in hand

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Bills payable Cash at bank
Bank overdraft Debtors
Bank loans Bills receivable
Capital Closing stock
Add: Net profit Furniture
Or Plant& Machinery
Less Net Loss Land& Building

Marshalling of Assets and Liabilities

Arrangement of assets and liabilities in a particular order is known as
Marshalling.
Assets and liabilities can be arranged in to two ways.
1- In the order of liquidity
2- In the order of permanence
In the order of liquidity
In this method the assets which can be easily converted in to cash are
stated first followed by other assets which cannot be so easily
converted in to cash and liabilities are arranged in the order they are to
be discharged.

Assets Liabilities
Cash in hand Creditors
Cash at bank Bills Payable
Debtors Bank Overdraft
Bills Receivable Other loans
Closing stock Capital
Furniture
Plant & Machinery
Land & Buildings
In the order of permanence
In this method assets which are to be used for long term in the
business and are not meant for sale are presented first. Liabilities
which have to be discharged last are shown first and those which have
to be discharged first are shown last.

Assets Liabilities
Land & Buildings Capital
Plant & Machinery Other loans
Furniture Bank Overdraft
Closing stock Bills Payable
Bills Receivable Creditors
Debtors

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 Cash at bank
Cash in hand
Grouping of Assets and Liabilities
The term grouping means putting together items of similar nature
under a common heading. For example, the balance of accounts of
cash, bank, debtors, etc. can be grouped and shown under the heading
of ‘current assets’.

Opening Entry
A journal entry by means of which the balances of various assets,
liabilities, and capital appearing in the balance sheet of the previous
accounting period are brought forward in the books of a current
accounting period is known as an opening entry.
Eg: Furniture A/c Dr. 15,000
Debtors A/c Dr. 15,500
Bank A/c Dr. 5,000
Cash A/c Dr. 1,000
To Capital A/c 16,500
To Loan A/c 5,000
To Creditors A/c 15,000
Closing Entries
A closing entry is to transfer all revenue and expense account totals at
the end of an accounting period to income statements.
1.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.
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
2.The purchases returns or return outwards are closed by transferring
its balance to the purchases account.
Purchases returns A/c Dr.
To Purchases A/c
3.The sales returns or returns inwards account is closed by
transferring its balance to the sales account
Sales A/c Dr.
To Sales return A/c
4. The sales account is closed by transferring its balance to the credit
side of the trading accounting
Sales A/c Dr.

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 To Trading a/c
5.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
6.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

Simple Final Acconts

Illustration 4
From the following Trial Balance prepare a Trading and Profit and Loss
Account for the year ended 31-12-2020 and a Balance sheet as on that
date
Trial Balance as on 31-12-2020
Name of account Debit Credit
Capital 5,00,000
Land 3,00,000
Machinery 2,00,000
Cash 20,000
Opening stock 40,000
Purchases 3,15,000
Sales 4,25,000
Sales returns 25,000
Purchases returns 15,000
Wages 20,000
Rent 10,000
Salary 20,000
Commission 30,000
General expenses 10,000
Debtors 40,000
Creditors 10,00,000 30,000
10,00,000 10,00,000
Closing stock as on 31-12-2020 is valued at Rs. 50,000
Trading and Profit and Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Opening stock 40,000 Sales 4,25,000
Purchases 3,15,000 Less: Sales
Less: Purchases returns 25,000 4,00,000

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returns 15,000 3,00,000 Closing stock 50,000
Wages 20,000
Gross profit c/d 90,000

4,50,000 4,50,000

Rent 10,000 Gross profit b/d 90,000

Salary 20,000 Commission 30,000
General expenses 10,000
Net Profit transferred to
capital account 80,000

1,20,000 1,20,000

Balance Sheet as on 31-12-2020

Liabilities Amount Assets Amount
Creditors 30,000 Cash 20,000
Capital 5,00,000 Debtors 40,000
Add:NetProfit 80,000 5,80,000 Closing stock 50,000
Land 3,00,000
Machinery 2,00,000

6,10,000 6,10,000

CHAPTER 10
Financial Statements – II
Adjustments
1. Closing stock
a) It is credited to Trading account
b) It is shown on the assets side of the Balance Sheet
Adjusting entry
Closing stock A/c Dr
To Trading A/c
2. Outstanding expense or expense due but not paid
When expenses of an accounting period remain unpaid at the end of an
accounting period, they are termed as outstanding expenses
a) It is added with the concerned expense on the debit side of Trading
or Profit and Loss Account
b) It is shown on the liabilities side of the Balance sheet
Adjusting entry
Concerned expense A/c Dr.

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 To Outstanding expense A/c
3. Pre-paid expense or expense paid in advance
Prepaid expenses are future expenses that are paid in advance.These
expenses are to be carried forward to the next accounting year
a) It is deducted from the concerned expense on the debit side of
Profit and Loss Account
b) It is shown on the Assets side of the Balance Sheet
Adjusting entry
Prepaid expense A/c Dr.
To Concerned expense A/c
4. Accrued income or outstanding income
Income which are earned during the current accounting year but have
not been actually received by the end of the same year is called
accrued income.
a) It is added with the concerned income on the credit side of Profit
and Loss Account
b) It is shown on the Assets side of the Balance Sheet
Adjusting entry
Accrued income A/c Dr.
To Concerned income A/c
5. Income received in advance
A certain income is received but the whole amount of it does not
belong to the current period. The portion of the income which belongs
to the next accounting period is termed as income received in advance
a) It is deducted from the concerned income on the credit side of
Profit and Loss Account
b) It is shown on the liabilities side of the Balance sheet
Adjusting entry
Concerned income A/c Dr.
To Income received in advance A/c
6. Depreciation
Depreciation is the decline in the value of assets on account of wear
and tear and passage of time
a) It is debited to Profit and Loss Account
b) It is deducted from the concerned asset on the assets side of
the Balance Sheet
Adjusting entry
Depreciation A/c Dr.
To Concerned asset A/c
7. Bad Debts
Bad debts refer to the amount that the firm has not been able to realise
from its debtors.
a) It is debited to Profit and Loss Accountant

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 b) It is deducted from the sundry debtors on the assets side of the
Balance Sheet
Adjusting entry
Bad debts A/c Dr
To Debtors A/c
8. Provision for Bad and Doubtful Debts
It is the provision created by the firm for the amount of likely bad debts
at the end of the accounting year.
a) It is debited to Profit and Loss Accountant
b) It is deducted from the sundry debtors on the assets side of the
Balance Sheet
Adjusting entry
Profit and Loss A/c Dr.
To Provision for doubtful debts A/c
NB: If Provision for doubtful debts is given both in Trial Balance and
in adjustments, the provision given in Trial balance is old provision
and that in adjustment is new provision.
Always deduct new provision from debtors on the assets side of the
Balance Sheet
Eg; An extract from a trial balance on March 31, 2014 is given below :
Sundry debtors 32,000
Bad debts 2,000
Provision for doubtful debts 3,500
Additional Information :
Write-off further bad debts Rs. 1,000 and create a provision for doubtful
debts @ 5% on debtors.
Profit and Loss Account
for the year ended March 31, 2014
Particulars Amount Particulars Amount
Bad debts 2,000
Further bad debts 1,000
New provision 1,550
4,550
Less Old
provision 3,500 1,050

Note : New Provisions

Debtors 32,000
Less: Further bad debts 1,000
31,000
New provision = 31,000 x 5/100 =1,550

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 Balance Sheet
Liabilities Amount Assets Amount
Debtors 32,000
Less Further
bad debts 1,000
31,000

Less New
provision 1,550 29,450

9.Provision for Discount on Debtors

Discount likely to be allowed to customers in an accounting year can
be estimated and provided for by creating a provision for discount on
debtors.
Provision for discount is made on good debtors which are arrived at by
deducting further bad debts and the provision for doubtful debts.
a) It is debited to Profit and Loss Accountant
b) It is deducted from the sundry debtors on the assets side of the
Balance Sheet
Adjusting entry
Profit and loss A/c Dr.
To Provision for discount on debtors A/c
10. Manager’s Commission
The manager of the business is sometimes given the commission on
the net profit of the company. The percentage of the commission is
applied on the profit either before charging such commission or after
charging such commission.
a) It is debited to Profit and Loss account
b) It is also shown on the liabilities side of the Balance Sheet.
Adjusting entry
Profit and loss A/c Dr
To Manager’s commission A/c
Formula for finding out Manager’s Commission
Before charging such commission
Commission = Net Profit before Commission x Rate of Commission
100
After charging such commission
Commission = Net Profit before Commission x Rate of Commission
100 + Rate
11. Interest on Capital
It is allowed at an agreed rate on the capital invested by the owner.

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 a) It is debited to Profit and Loss account
b) It is added with the capital on the liabilities side of the Balance
Sheet
Adjusting entry
Interest on capital A/c Dr.
To Capital A/c
Illustration 5
Trial Balance as on 31-12-2020
Name of Account Amount (Dr) Amount(Cr)
Opening stock 24,000
Purchases 1,38,000
Sales 2,68,000
Wages 24,300
Salary 65,000
Debtors 26,000
Creditors 24,000
Land 1,80,000
Interest 600
Rent 8,000
Furniture 15,000
Insurance 400
Commission 2,400
Capital 2,05,000
Cash 19,300

5,00,000 5,00,000

Prepare a Trading and Profit and Loss Account for the year ended 31-
12-2020 and a Balance Sheet as on that date considering the following
adjustments.
Adjustments
1. Closing stock is valued at Rs. 40,000
2. Wages outstanding Rs. 2,000
3. Salaries pre-paid Rs. 5,000
4. Depreciate furniture by 10%
5. Interest accrued Rs. 200
6. Commission received in advance Rs. 400

Trading and Profit and Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Opening stock 24,000 Sales 2,68,000
Purchases 1,38,000 Closing stock 40,000

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Wages 24,300
Add:outstanding 2,000 26,300
Gross profit c/d 1,19,700
3,08,000 3,08,000
Salary 65,000 Gross profit b/d 1,19,700
Less:Pre-paid 5,000 60,000 Interest 600
Rent 8,000 Add:Accrued 200 800
Insurance 400 Commission 2,400
Depreciation on furniture 1,500 Less: Received in
Net Profit transferred to advance 400 2,000
capital account 52,600

1,22,500 1,22,500

Balance Sheet as on 31-12-2020

Liabilities Amount Assets Amount
Creditors 24,000 Cash 19,300
Wages outstanding 2,000 Debtors 26,000
Commission received Closing stock 40,000
in advance 400 Salaries pre-paid 5,000
Capital 2,05,000 Interest accrued 200
Add:NetProfit 52,600 2,57,600 Furniture 15,000
Less:Depreciation 1,500 13,500
Land 1,80,000
2,84,000 2,84,000
Illustration 6
The following is the trial balance of Ammu Associates for the Year
ending 31't December, 2020 and other information relating are given to
You. Find the working result of business and also show the financial
Position of them for the year
Trial Balance of Ammu Associates on 31-12-2020
Name of Account Amount Amount
Cash in hand 20,000
Purchases 65,000
Sales 1,30,000
Returns outwards 1,000
Bad debts 500
Carriage outwards 600
Wages 6,500
Furniture 60,000

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Capital 73,000
Provision for bad debts 100
Discount 500
Salaries 5,000
Commission 5,500
Advertising 1,300
Debtors 60,000
Creditors 19,800
Opening stock 10,000

2,29,400 2,29,400
Additional information :
a)Closing stock is valued at Rs. 25,000.
b)Salary of an employee is not paid Rs. 500.
c)Further bad debt incurred Rs. 500.
d)Provision for bad debt is created at 2% on debtors.
e) Provision for discount on debtors 2%
f) Provide interest on capital @ 5%
g) Manager is entitled to a commission of 5% on net profit before
charging such commission

Trading and Profit and Loss Account for the year ended 31-12-2020
Particulars Amount Particulars Amount
Opening stock 10,000 Sales 1,30,000
Purchases 65,000 Closing stock 25,000
Less;Returns 1,000 64,000
Wages 6,500
Gross profit c/d 74,500
1,55,000 1,55,000
Salary 5,000
Add:Outstanding 500 5,500 Gross profit b/d 74,500
Carriage 600 Commission 5,500
Discount 500
Advertising 1,300
Bad debts 500
Add: Further
bad debts 500
Add:Newprovision 1,190
2,190
Less:Old provision 100 2,090
Provision for discount on
debtors 1,166

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Interest on capital 3,650
Manager’s commission 3,260

Net Profit transferred to

capital account 61,934

80,000 80,000
Balance Sheet as on 31-12-2020
Liabilities Amount Assets Amount
Creditors 19,800 Cash in hand 20,000
Salary outstanding 500 Debtors 60,000
Manager’s Commission 3,260 Less:Bad debts 500
Capital 73,000 59,500
Add: Interest on Less:Provision 1,190
capital 3,650 58,310
Add: Net Profit 61,934 1,38,584 Less:Provision
fordiscount 1,166 57,144
Closing stock 25,000
Furniture 60,000

1,62,144 1,62,144

CHAPTER 11
Accounts from Incomplete Records
Meaning of Incomplete Records
Accounting records, which are not strictly kept according to double
entry system are known as incomplete records.Under this system
records of cash and personal accounts of debtors and creditors are
properly maintained, while the information relating to assets, liabilities,
expenses and revenues is partially recorded.
Features of Incomplete Records
(a) It is an unsystematic method of recording transactions.

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(b) Generally, records for cash transactions and personal accounts are
properly maintained and there is no information regarding revenue
and/ or gains, expenses and/or losses, assets and liabilities.
(c) Personal transactions of owners may also be recorded in the cash
book.
(d) The profit or loss for the year cannot be ascertained under this
system with high degree of accuracy
Reasons of Incompleteness and its Limitations
(a) This system can be adopted by people who do not have the proper
knowledge of accounting principles
b) It is an inexpensive mode of maintaining records.
(c) Time consumed in maintaining records is less as only a few books
are maintained
Limitations
(a) As double entry system is not followed, a trial balance cannot be
prepared and accuracy of accounts cannot be ensured.
(b) Correct ascertainment and evaluation of financial result of business
operations can not be made.
(c) It becomes difficult to convince the income tax authorities about the
reliability of the computed income.
Ascertainment of Profit or Loss
There are two methods to find out profit or loss under this systematic
1. Statement of Affairs method
2. Conversion method
1. Statement of Affairs method
Under this method, statements of assets and liabilities as at the
beginning and at the end of the relevant accounting period are
prepared to ascertain the amount of change in the capital during the
period. Such a statement is known as statement of affairs.It shows
assets on one side and the liabilities on the other just as in case of a
balance sheet. The difference between the totals of the two sides
(balancing figure) is the capital

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 Format of Statement of affairs
Statement of affairs as on …………………………...
Liabilities Amount Assets Amount
Creditors XXXX Cash in hand XXXX
Bills Payable XXXX Debtors XXXX
Loans XXXX Closing stock XXXX
Capital (Balancing Furniture XXXX
figure)) XXXX Land XXXX
Machinery XXXX

XXXXX XXXXX

Format of Statement of Profit or Loss

Statement of Profit or Loss for the year ended………………...
Particulars Amount
Capital as at the end of year XXXX
Add Drawings during the year XXXX
XXXX
Less Additional capital introduced during the year XXXX

Adjusted capital XXXX

Less Capital as at the beginning of year XXXX
Profit or Loss made during the year XXXX

Illustration 1
Mr. Mehta started his readymade garments business on April 1, 2013
with a capital of Rs. 50,000. He did not maintain his books according to
double entry system. During the year he introduced fresh capital of Rs.
15,000. He withdrew Rs. 10,000 for personal use.
On March 31, 2014, his assets and liabilities were as follows :
Total creditors Rs. 90,000 ; Total debtors Rs. 1,25,600 ; Stock Rs. 24,750
; Cash at bank Rs. 24,980.
Calculate profit or loss made by Mr. Mehta during the first year of his
business using the statement of affairs method.

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Statement of Affairs as on March 31, 2014
Liabilities Amount Assets Amount
Creditors 90,000 Cash at bank 24,980
Capital 85,330 Debtors 1,25,600
(balancing figure) Stock 24,750
1,75,330 1,75,330

Statement of Profit or Loss for the year ended March 31, 2014
Particulars Amount
Capital as on March 31,2014 85,330
Add Drawings during the year 10,000
95,330
Less Additional capital introduced during the year 15,000

Adjusted capital 80,330

Less Capital as at the beginning of year 50,000
Profit or Loss made during the year 30,330

Difference between Statement of Affairs and Balance Sheet

Basis Statement of Affairs Balance Sheet
Reliability It is less reliable as it It is more reliable as it
is prepared from is prepared from
incomplete records. double entry records.
Objective The objective of The objective of
preparing state- preparing balance
ment of affairs is to sheet is to show the
estimate the true financial position
balance in capital of an entity on a
account on a particular date.
particular date.
Omission Omission of assets or Omissions of assets
liabilities or liabilities
cannot be discovered can be discovered
easily easily

Preparing Trading and Profit and Loss Account and the Balance
Sheet ( Conversion Method)
In case of incomplete records, details of some items like creditors,
cash purchases, debtors, cash sales, other cash payments and such
receipts are easily available, but there are a number of items the details
of which will have to be ascertained in an indirect manner by using the

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logic of double entry. The most common items that are missing and
have to be worked out as such are :
Opening capital
• Credit purchases
• Credit sales
• Bills payable accepted
• Bills receivable received
• Payments to creditors
• Payments to debtors
• Any other cash/bank related items.
Ascertaining Credit Purchases
Credit Purchases are ascertained by preparing Total Creditors account
Total Creditors Account
Date Particulars JF Amoun Date Particulars JF Amount
t
Cash paid XXXX Balance b/d XXXX
Bank XXXX Bank (cheques XXXX
(cheques dishonoured)
issued) Bills payable
Bills payable XXXX (bills XXXX
(bills accepted) dishonoured)
Discount Credit
received XXXX purchases XXXX
Purchases
return XXXX
Balance c/d XXXX
XXXXX XXXXX
Illustration 2
Prepare total creditors account from the following information
Opening balance of creditors 40,000
Closing balance of creditors 50,000
Payment made in cash 85,000
Discount received 2,000
Total Creditors Account
Date Particulars JF Amount Date Particulars JF Amount
Cash paid 85,000 Balance b/d 40,000
Discount
received 2,000 Credit
Balance c/d 50,000 purchases
(Bal.Fig) 97,000
1,37,000 1,37,000

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 Ascertainment of Credit Sales
Credit Sales are ascertained by preparing Total Debtors account
Total Debtors Account
Date Particulars JF Amount Date Particulars JF Amount
Balance b/d XXXX Cash XXXX
Bills receivable (cash received)
(bills XXXX Bank (cheque
dishonoured) received) XXXX
Bank (cheque Discount
dishonoured) XXXX allowed XXXX
Credit sales Bad debts XXXX
(balancing XXXX Sales return XXXX
figure) Bills receivable
(bills received) XXXX
Balance c/d XXXX
XXXXX XXXXX
Illustration 3
Prepare total debtors account from the following information
Debtors on April 01, 2013 50,000
Debtors on March 31, 2014 70,000
Cash received from debtors 60,000
Discount allowed 1,000
Bills receivable received 30,000
Bad debts 3,000

Total Debtors Account

Date Particulars JF Amount Date Particulars JF Amount
Balance b/d 50,000 Cash 60,000
Credit sales (cash received)
(balancing 1,14,000 Discount 1,000
figure) allowed
Bad debts 3,000
Bills receivable
(bills received) 30,000

Balance c/d 70,000

1,64,000 1,64,000

Ascertainment of Bills Receivable received

The bills received during a period is ascertained by preparing Total
Bills Receivable Account.

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 Total Bills Receivable Account.
Date Particulars JF Amount Date Particulars JF Amount
Balance b/d XXX Bank
Sundry debtors XXX (bills
(bills received) honoured) XXX
Sundry
debtors
(bills
dishonoured) XXX
Balance c/d XXX
XXX XXX

Ascertainment of Bills Payable

The bills accepted during a period is ascertained by preparing Total
Bills Payable Account.
Total Bills Payable Account.
Date Particulars JF Amount Date Particulars JF Amount
Bank Balance b/d XXX
(bills matured) XXX Sundry
Sundry creditors
creditors (bills accepted) XXX
(bills XXX
dishonoured)
Balance c/d XXX
XXXX XXXX
Illustration 4
From the following information prepare Total Bills Receivable Account
and Total Bills Payable Account.
Opening bills receivable 5,000
Opening bills payable 37,500
Bills receivable dishonoured 2,000
Bills payable dishonoured 66,750
Closing bills payable 52,500
Bills collected during the year 12,000
Closing bills receivable 4,000

Total Bills Receivable Account.

Date Particulars JF Amount Date Particulars JF Amount
Balance b/d 5,000 Bank

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 Sundry debtors (bills 12,000
(bills received) 13,000 honoured)
Sundry 2,000
debtors
(bills
dishonoured)
Balance c/d 4,000

18,000 18,000
Total Bills Payable Account.
Date Particulars JF Amount Date Particulars JF Amount
Sundry Balance b/d 37,500
creditors Sundry
(bills 66,750 creditors
dishonoured) (bills accepted) 81,750
Balance c/d 52,500

1,19,250 1,19,250
Ascertainment of Missing Information
Missing Information can be located in the following way
1 Closing assets (except stock) and Closing list
liabilities
2 Opening assets (including opening Opening list
Opening stock) and liabilities
3 Purchases Credit purchases from total
creditors account and cash
purchases from summary
of cash
4 Sales Credit sales from total
debtors account and cash
sales from summary of
cash
5 Opening capital Opening statement of
affairs
6 Expenses and Revenues As per cash summary of
cash plus subsidiary
information
7 Bills receivable received Total bills receivable
account

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8 Bills payable accepted Total bills payable account
9 Cash/Bank balance Summary of cash
Illustration 5
Mr. Om Prakash did not keep his books of accounts under double entry
system. From the following information available from his records,
prepare profit and loss account for the year ending on March 31, 2014
and a balance sheet as at that date, depreciating the washing
equipment @ 10%.

Summary of Cash
Receipts Amount Payments Amount
Balance b/d 8,000 Cash purchases 14,000
Cash sales 40,000 Paid to creditors 20,000
Received from debtors 30,000 Sundry expenses 6,000
Cartage 2,000
Drawings 8,000
Balance c/d 28,000
78,000 78,000

Other information :
March31,201 March31,
3 2014
Rs. Rs.
Debtors 9,000 12,000
Creditors 14,400 6,800
Stock of materials 10,000 16,000
Washing equipment 40,000 40,000
Furniture 3,000 3,000
Discount allowed during the year 1,400
Discount received during the year 1,700

Trading and Profit and Loss Account

for the year ended on March 31, 2014
Particulars Amount Particulars Amount
Opening stock 10,000 Sales 74,400
Purchases 28,100 Closing stock 16,000
Cartage 2,000
Gross profit c/d 50,300
90,400 90,400
Sundry expenses 6,000 Gross profit b/d 50,300
Discount allowed 1,400 Discount received 1,700

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Depreciation 4,000
Net profit (transfered to
capital account) 40,600
52,000 52,000

Balance Sheet as at March 31, 2014

Liabilities Amount Assets Amount
Capital 55,600 Washing
Add:Profit 40,600 equipment 40,000
96,200 Less:Depreciation 4,000 36,000
Less:Drawings8,000 88,200 Furniture 3,000
Creditors 6,800 Stock of materials 16,000
Debtors 12,000
Cash 28,000
95,000 95,000
Notes:
Total Debtors Account
Date Particulars JF Amount Date Particulars JF Amount
Balance b/d 9,000 Cash 30,000
Sales (credit) Discount
(balancing 34,400 allowed 1,400
figure) Balance c/d 12,000
43,400 43,400
Total Creditors Account
Date Particulars JF Amount Date Particulars JF Amount
Cash 20,000 Balance b/d 14,400
Discount Purchases
received 1,700 (credit) 14,100
(balancing
Balance c/d 6,800 figure)
28,500 28,500

Total sales = Cash sales + credit sales = 40,000 + 34,400 = 74,400

Total purchases = Cash purchases + credit purchases =14,000+ 14,100
= 28,100

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 Statement of Affairs as at March 31,2014
Liabilities Amount Assets Amount
Creditors 14,400 Washing equipment 40,000
Capital 55,600 Furniture 3,000
(balancing figure) Stock of material 10,000
Debtors 9,000
Cash 8,000
70,000 70,000

CHAPTER 12
Applications of Computers in Accounting

Meaning
A computer is an electronic device , which is capable of performing a
variety of operations as directed by a set of instructions.
Elements of computers
1 Hardware
Hardware of computer consists of physical components such as
keyboard, mouse, monitor and processor.
2 Software
A set(s) of programmes, which is used to work with such hardware is
called its software.There are six types of softwares as follows:
(a) Operating System
An integrated set of specialised programmes that are meant to manage
the resources of a computer and also facilitate its operation is called
operating system.
(b) Utility Programmes
These are a set of computer programmes,which are designed to
perform certain supporting operations such as format a disk, duplicate
a disk etc
c) Application softwares
Programmes designed for performing certain specified tasks such as
payroll accounting, financial accounting etc
d)Language Processors
These are the softwares which translate the computer language to
machine language.
e) System Software
These are programmes which control the internal functions of
computer such as reading data from input devices etc.
f) Connectivity Software

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These programmes create and control a connection between a
computer and server.
3. People
People working with computers are also called live-ware.
a)System analysts – design data processing systems
b) Programmers – develop computer programmes
c) Operators – persons operating the computers
4. Procedures
A series of operations in a certain order to achieve desired results are
called procedures.
5. Data
These are facts and consist of numbers, text etc.
6. Connectivity
The manner in which a computer system is connected to others say
through telephone lines is the element of connectivity .
Capabilities (Adavantages) of computer system
1. Speed
Computers require far less time than human beings in performing a
task.
2. Accuracy
Computers rarely commit errors and perform all types of complex
operations accurately.
3.Reliability
They are immune to tiredness, boredom or fatigue. Therefore, they are
more reliable than human beings.
4.Versatility
Versatility in computer means it is capable of performing almost any
task ie, simple or complex
5.Storage
Computers have huge capacity to store huge volume of data in a very
small space
Limitations of computer system
1. Lack of common sense
Computers donot have any common sense.
2. Zero IQ
Computer systems do not have the ability to think and understand.
3.Lack of decision making
Computers cannot take decisions on their own because they do not
possess all the essentials of decision-making.
Components of Computer
The functional components of computer system consist of Input Unit,
Central Processing System and Output Unit.

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1.Input Unit
The devices which are used to supply the data to the computer are
called Input Devices. Examples of input devices are Keyboard, Mouse,
Joystick, Trackball, Digital Camera,Scanner,Magnetic Ink Character
Reader (MICR),Light Pen,Microphone,Touch Screen,Optical Character
Recognition( OCR)
2.Central Processing Unit (CPU)
This is the main part of computer hardware that actually processes
data, according to the instructions it receives.It has three main units as
described below
(a) Arithmetic and Logic Unit (ALU)
It is responsible for performing all the arithmetic computations such
as addition, subtraction, division, multiplication etc
b) Memory Unit
It is used to store data, instructions and information.
c) Control Unit
It controls and co-ordinates the activities of all other units of the
computer system.
3. Output unit
The devices which are used to take the output given by the
computer are called as Output Devices. Example: Monitors also called
Visual Display Unit(VDU) , Printers, Plotters, Speakers,Projector etc
Transaction Processing System
The purpose of a typical TPS is to record, process, validate and store
transactions that occur in the various functional areas of a business
for subsequent retrieval and usage.
Steps in TPS
1.Data entry
Data is entered into the system using an input device.
2.Data validation

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It ensures the accuracy and reliability of input data.
3. Processing and revalidation
After the data is validated ,it is processed.
4.Storage
The valid transactions are stored in the database.
5.Information
The stored data is processed to produce desired information.
6.Reporting
Reports can be prepared on the basis of the required information.
Management Information System and Accounting Information
System.
A Management Information System is a system that provides the
information necessary to take decisions and manage an organisation
effectively.
Accounting Information System identifies, collects,proceses and
communicates economic information about an organisation to a wide
variety of users.

Designing of accounting reports

Data when processed becomes information.When the related
information is summarised to meet a particular need , it is called a
report.
Every report must fulfill the following criterion
1. Relevence
2. Timeliness

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3. Accuracy
4. Completeness
5.Summarisation
Types of reports
a) Summary Reports
Summarises all activities of the organisation and present in the form of
summary report. Eg: Profit and Loss account and Balance Sheet
b) Demand Reports
This report will be prepared only when the management requests
them, e.g. Bad Debts Report for a given product, Stock Valuation
Report.
(c) Customer/Supplier Reports
According to the specifications of the management it will be prepared.
For example, Top 10 Customers report, Interest on Customer Account
d) Exception reports
According to the conditions this report is prepared.Eg: Overstocked
status
Steps involved in designing accounting reports
1. Defining the objectives
The objectives of the report should be clearly specified
2. Structure of the reporting
The information to be included in the report and the style of
presentation.
3. Querying with the database
The accounting information queries must be clearly defined
4. Finalising the reporting

CHAPTER 13
Computerised Accounting System
Computerised accounting system is an accounting information system
which processes the transactions and events of an organization
electronically as per the GAAP (Generally Accepted Accounting
Principles) to generate reports and statements to meet the
requirements of users.
Basic requirements of Computerised Accounting System
1. Front-end interface
It is an interactive link between the user and the data base oriented
software through which the user communicates to the back -end
interface.
2.Back-end interface

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It is the data storage system that is hidden from the user and responds
to the requirement of the user.
3. Data processing
It is a sequence of actions that are taken to transform the data into
information.
4.Reporting system
It consists of reports like Profit&Loss account, balance Sheet etc.
Comparison between Manual and Computerised Accounting
Basis Manual Accounting Computerised Accounting
Meaning Manual Accounting is a Computerized Accounting is
system of accounting an accounting system that
that uses physical uses an accounting
registers and account software, for recording
books, for keeping financial transactions
financial records electronically
Recording Recording is possible Data content is recorded
through customized database
book of original entry.
Calculation All the calculation is Calculations are performed
performed by computer system.
manually.
Speed Slow Comparatively faster.
Trial Balance Prepared when Instant trial balance is
necessary. provided on daily basis.
Backup Not possible Entries of transactions can
be saved and backed up

Advantages of computerised accounting system

1- Speed
Computers make calculations and process data at a very high speed
2. Reliability
Computers are free from tiredness, boredom or fatigue. As a result
computers are highly reliable than human beings
3. Accuracy
The possibility of error is less in computerised accounting system
4. Automated document procedure
Accounting reports are generated automatically.
5.Legibility
The data displayed on computer monitor is legible
6. Easy to make alterations
Alterations of entries can be made easily in computerized accounting.

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Limitations of Computerised accounting system
(1) High Cost of Training
Huge money is required to get the trained specialised staff to ensure
efficient and effective use of computerised systems.
(2) Staff Opposition
Whenever the Accounting System is computerised, there is a
significant degree of resistance from the existing staff because of the
fear that they shall be less important to the organisation.
(3) Disruption
The accounting process suffer a significant loss of work and time when
an organisation switches over to this system. The accounting staff
takes lot of time to adapt to new system and procedures.
4) Health Issues:
Excessive use of computers leads to health issues to employees .
5.Breaches of Security
Viruses and Malware can be entered into the system by hackers that
cause danger to data.
6.High Cost of Installation
The cost of the Computer and its accessories are costly.
Accounting packages
The accounting packages are classified into the following categories :
(a) Ready to use (b) Customised (c) Tailored
Ready-to-Use
Ready-to-Use accounting software is suited to organisations running
small business where the frequency or volume of accounting
transactions is very low. This is because the cost of installation is
generally low and number of users is limited.
Customised
Accounting software may be customised to meet the special
requirement of the user. Standardised accounting software available in
the market may not suit or fulfil the user requirements. Customised
software is suited to large and medium businesses . The cost of
installation and maintenance is relatively high because high cost is to
be paid to the vendor for customisation.
Tailored
The accounting software is generally tailored in large business
organisations with multi users and geographically scattered locations.
These software requires specialised training to the users. The tailored
software is designed to meet the specific requirements of the users

Differences between Ready-to-Use ,Customised and Tailored

accounting packages
Basis Ready-to-Use Customised Tailored

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Nature of Small busines Large, medium Large business
business business

Cost of Low Relatively high High

installation and
maintenance
Expected Level Low Relatively high Relatively high
of secrecy
(Software and
Data)
Number of users Limited As per Unlimited
specifications
Linkage to other Restricted Yes Yes
information
system
Training Low Medium High
requirements

Generic Considerations before Sourcing an Accounting Software

1.Flexibility
An accounting software should offer some flexibility between the users
of the software, the switch over between the accountants (users),
operating systems and the hardware.
2.Cost of Installation and Maintenance
The choice of the software requires consideration of organisation
ability to afford the hardware and software.
3.Size of Organisation
The size of organisation and the volume of business transactions do
affect the software choices. Small organisations, may opt for a simple,
single user operated software. While, a large organisation may require
sophisticated software to meet the multi-user requirements
4.Ease of Adaptation and Training needs
Some accounting software is user friendly requiring a simple training
to the users. However, some other complex software packages linked
to other information systems require intensive training on a continuous
basis. The software must be capable of attracting users and should be
able to motivate its potential users.
5.Expected Level of Secrecy (Software and Data)
Another consideration before buying accounting software is the
security features, which prevent unauthorised personnel from
accessing and/or manipulating data in the accounting system.
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