KVS – ZIET BHUBANESWAR – 2023-24

CLASS-XI
MASTER CARD
SUBJECT: ACCOUNTANCY

UNIT-1: THEORETICAL FRAMEWORK

INTRODUCTION TO ACCOUNTANCY

ACCOUNTING: Accounting is the language of business. Accounting It is the art of recording, classifying
and summarizing in a significant manner and in terms of money, transactions and events which are, in part at
least, of financial character, and interpreting the result thereof.
- AICPA

STEPS IN ACCOUNTING PROCESS:

1. Identifying and recording business transactions
2. Classifying the transactions according to nature
3. Summarizing the recoded information
4. Interpreting financial results and communicating to various users

OBJECTIVES OF ACCOUNTING:
▪ Record keeping: it helps to maintain proper records of business transactions.
▪ Financial performance: It helps to ascertain the net profit or loss suffered by business during a
particular period
▪ Financial position: It helps to ascertain the status of business by preparing the Balance Sheet.
▪ Communicating business result: It helps to provide accounting information to various interested
parties like owners, investors, creditors, banks, employees and other stakeholders.
▪ Legal formalities: It helps to maintain proper financial records to comply legal requirements.

ADVANTAGES OF ACCOUNTING:
➢ Maintaining permanent records for all business transactions and provides relevant and reliable
information to various parties.
➢ Providing information about financial efficiency in terms of Profit and loss of a business for every
accounting year.
➢ Facilitating to make comparative study of the various aspects of business by intra-comparison and
inter comparison to make decisions.
➢ Performance evaluation in order to improve the performance of employees, autonomous divisions,
departments, etc.
➢ Accounting records act as an approved evidence for reference in legal matters.

LIMITATIONS OF ACCOUNTING:
✓ It considers only monetary transactions that can be measured in terms of money. Non-monetary
aspects like quality, honesty, skills are ignored in accounting.
✓ Only historical transactions are considered and the figures given in the financial statement do not
consider price level changes.
✓ Accounting reports are influenced by personal judgements and not free from personal bias which
affects its credibility.
✓ Through window dressing accounts are manipulated so that financial statements do not reveal the
actual position.
✓ Financial accounts are not suitable for forecasting because they are only recording of past events.
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DOUBLE ENTRY SYSTEM:
a. The double entry system is based on the Dual Aspect Principle.
b. Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
c. This system of accounting recognizes and records both aspects of the transaction.
BOOK KEEPING AND ACCOUNTING:
Book keeping is an art of recording the transactions in the books of accounts. Only those transactions which
bear a monetary value are recorded. It is the first step of accounting process. But accounting work is
advanced in nature to find business result for analysis and interpretation.

DIFFERENCE BETWEEN BOOK KEEPING & ACCOUNTING:

Basis of Book Keeping Accounting
distinction
i. Scope It is concerned only with recording of It also includes classifying,
monetary transactions. summarizing, analyzing and also
communicating the
results to users.
ii. Nature Routine and clerical work involved in Analytical and interpretation work is
it. involved
iii. Stage It is in primary stage It is in secondary stage.
iv. Objective It helps to maintain systematic records It helps to calculate the net profit or net
of business. loss in the business.
v. Personnel Junior level staff do this work Senior level staff do this work

BRANCHES OF ACCOUNTING:
1. Financial Accounting: The main purpose of this branch is to maintain financial record the business
transactions in a systematic manner, to ascertain profit or loss and to depict the financial position of the
business with the help of a balance sheet.

2. Cost Accounting: The main purpose of cost accounting is to ascertain the total cost and per unit cost of
goods produced and services rendered by business in order to control cost.

3. Management Accounting: The main purpose of this branch is to present the accounting information in
such a way as to assist the management in planning and decision making and controlling the operations of
business.

USERS OF ACCOUNTING INFORMATION:

Users may be categorized into internal users and external users.
(1) INTERNAL USERS:
i. Owners: Owners contribute capital in the business and thus they are exposed to maximum risk. So, they
are always interested in the safety of their capital.

ii. Management: Accounting information is used by management for taking various decisions.

iii. Employees: Employees are interested in the financial statements to assess the ability of the business to
pay higher wages and bonuses.

(2) EXTERNAL USERS:

i. Banks and financial institutions: Banks and Financial Institutions provide loans to business. So, they are
interested in financial information to ensure the safety and recovery of the loan.
ii. Investors: Investors are interested to know the earning capacity of business and safety of the
investment.

iii. Creditors: Creditors provide the goods on credit. So, they need accounting information to ascertain the
financial soundness of the firm.
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iv. Government: The government needs accounting information to assess the tax liability of the business
entity.
v. Researchers: Researchers use accounting information in their research work.
vi. Consumers: They require accounting information for establishing good accounting control, which will
reduce the cost of production.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION:

Accounting information should be prepared and presented in such a manner that it is able to depict a clear
view of business enterprise.
➢ Reliability: It implies that information must be factual and verifiable. And free from errors.
➢ Relevance: Accounting information must be relevant to the objectives of enterprise. To be relevant,
information must help the users of accounting information in making decisions.
➢ Understandability: Accounting information should be presented in such a manner that they are
understood easily by their users such as investors, employees, etc.
➢ Comparability: It is a very useful quality of accounting information. Financial statements should
contain previous year data so that it can be compared with current year so that current
performance be compared with past performance.

ACCOUNTING CYCLE:
It is a chain of repetitive accounting steps which are systematically followed in each accounting year in
every business.
Balance
Sheet

Accountig
Cycle
Trading & Profit Recoding
and loss A/C In journal

Posting to
Ledger

BASIC ACCOUNTING TERMS:

Following are various accounting terms used in business.
▪ Business Entity: An economic unit by which a business enterprise is treated as a separate
entity.
▪ Business transaction: A Business transaction is an economic activity of business that changes
its financial position.
▪ Capital: It refers to the amount invested by the owner in a business. The amount invested
could be in the form of cash, goods, etc.
▪ Drawing: Any cash or goods withdrawn by the owner for personal use made out of business
funds are known as drawings.
▪ Liabilities: Liabilities refer to financial obligations of business. It denotes the amount which a
business owes to others.eg. - Creditors, loan, etc. It is of two types;
▪ Non- current liabilities: It refers to those which fall due for payment in a relatively longer
period. For e.g. long-term loans.
▪ Current liabilities: It refers to those which are to be paid in the near future. For Example-
Creditors, Outstanding expenses etc.
▪ Assets: These are properties or economic resources of an enterprises which can be expressed
in monetary terms it can be divided in two parts: Non-current assets and current assets.
▪ Non-Current Assets: It includes all assets are acquired for a long period.
Fixed Assets: Tangible & Intangible assets acquired to use more than one-year period.
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▪ Tangible Assets: These assets can touch, see and fell. e.g. Land and Building, Plant
and Machinery, Furniture, Office Equipment, Computer, etc.
▪ Intangible Assets: These assets can’t be touched or seen but can be felt. e.g. Goodwill,
Software, Patents, Copyright, Trademarks, etc.
▪ Current assets: These assets acquired for less than one-year period.
Current Assets are: Debtors Bills Receivable
Cash in hand Cash at bank
Cheques in hand Drafts in hand
Stock Prepaid Expenses.
▪ Expenditure: It involves spending cash or incurring a liability for the purpose of
acquiring assets, goods or services. It is of three types: revenue expenditures and capital
expenditures.
▪ Revenue Expenditure: It refers to any expenditure, the full benefit of which is received
during one accounting period. Example- salaries, rent etc.
▪ Capital Expenditure: It refers to expenditure, the benefit of which is received during more
than one year. Example- Machinery.
▪ Deferred Revenue Expenditure: It refers to expenditure which are revenue in nature but
benefit of which is likely to be derived over no of years. Example- Deferred advertisement
expenses.
▪ Revenue: Gross inflow of cash (Received or Receivable), receivables or other consideration
in the normal course of business.
▪ Loss: The excess of expenses over related revenue is known as loss.
Loss=Expenses- Revenue.
▪ Purchases: It refers to the amount of goods bought by business for resale or use in
production. It can be of cash or credit.
▪ Purchase return: When purchased goods are returned to suppliers, it is referred to as
purchase return.
▪ Sales: It means transfer of goods or services for money in the normal course of business.
▪ Sales return: When customers return the goods sold to them it is known as sales returns.
▪ Goods: Goods purchased for resale or for manufacturing product.
▪ Inventories: It includes goods unsold on a particular date. Either at the beginning called
opening stock or at the end called closing stock.
▪ Trade Receivables: Amount receivable against sale of goods and/or services or both.
▪ Debtors: A person or entity to whom goods are sold and / or services are rendered on
credit.
▪ Bills Receivable: Acceptance (Bills of Exchange) received from a debtor.
▪ Trade Payables: Amount payable against purchase of goods and /or services or both.
▪ Creditors: It refers to those persons whose business buys goods on credit and payment has
not been done yet.
▪ Bills Payable: Acceptance (Bill of Exchange) given to a creditor.
▪ Voucher: A voucher is a written document which is created in support of a particular
transaction. It may be in the form of a cash memo, invoice or receipt. Voucher is a necessary
component of auditing.
▪ Discount: It is the rebate given by the seller to the buyer. It is of two types: Cash Discount
and Trade Discount.
▪ Trade Discount: This is a type of discount allowed by the sellers to their customers at a fixed
percentage on the list price of goods and also it is not entered in the books of accounts.
▪ Cash Discount: When discount is allowed to customers for making prompt payment. It is
always recorded in books of accounts.
▪ Rebate: Reduction allowed in the sale value due to (say) poor quality, excess supply, etc.
▪ Bad Debts: It refers to the amount that debtor has not paid even after repeated reminders
and has no intention of paying in the future.
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▪ Credit: Traditionally, right side of an account is credit side.

▪ Debit: Traditionally, left side of an account is debit side.
▪ Depreciation: Decrease in book value of an asset due to its use or efflux of
time or obsolescence.
▪ Insolvent: A person or entity unable to pay his/its debts.
▪ Solvent: A person or entity who is in a position to pay his/its debts.
▪ Proprietor: A person who owns the business.
▪ Financial Statements or Final Accounts: Statements prepared at the end of the
accounting period to determine financial performance and financial position.

ROLE OF ACCOUNTING:
✓ As a language of business
✓ As a historical record of actual data
✓ As an information system
✓ As a commodity (services)

THEORY BASE OF ACCOUNTANCY

ACCOUNTING PRINCIPLES: Accounting statements disclose the profitability and solvency of

business to various parties. It is necessary to prepare such a statement in a standard language
following a standard set of rules and regulations. These rules are known as “Generally Accepted
Accounting Principles” or GAAP. Features of Accounting Principles:
• Accounting principles are man-made.
• Accounting principles are generally accepted.
• Accounting principles are flexible
in nature.
NEED OF ACCOUNTING PRINCIPLES:
it is necessary that financial statements are prepared according to these principles, to make the
accounting information meaningful to both of its external and internal users.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS/CONVENTIONS OR

CONCEPTS/PRINCIPLES:
1. Going Concern concept: As per this concept it is assumed that the business will continue to exist
for a long period in future and the transactions are recorded in the books of business on the
assumption that itis a continuing enterprise.
2. Consistency Assumption: It states that accounting principles and methods should remain consistent
from one year to another. It helps them to compare the profit and loss of different periods and draw
meaningful conclusions.
3. Accrual Assumption: As per this concept revenue is recorded when sales are made and it is
immaterial whether cash received or not and same applies to expenses also. It provides more
appropriate information about business enterprise as compared to cash basis.
4. Accounting Entity or Business Entity concept: As per this concept, business organisations are
treated as separate entities and owners and persons are separate entities.
5. Money Measurement concept: As per the accounting conventions only those transactions are
recorded which can be expressed in monetary terms. e.g. the event of machinery breakdown is not
recorded as it does not have any monetary value.
6. Accounting Period concept: An accounting period is the interval of time, at the end of which the
financial statements are prepared to ascertain the financial performance of business. The accounting
period is normally considered to be a period of 12 months.
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7. Full Disclosure assumption: Accounting statements should disclose fully and completely all the
significant information, based on which, decisions can be taken by various interested parties.
8. Materiality assumption: It requires the disclosure of the significant information, exclusion of
which would influence the decisions. Unimportant information can be merged with other items.
9. Prudence or Conservatism assumption: The essence of this principle is ‘anticipation profit and
provide for all possible losses. This means that all prospective losses are taken into consideration.
10. Cost Concept or Historical Cost Principle: As per this concept, an asset is ordinarily recorded at
the price actually paid or incurred to acquire it.
11. Matching Concept or Matching Principle: Matching the revenues earned during an accounting
period with the cost associated with the period to ascertain the accurate result of business concern
during that period is called matching concept.
12. Dual Aspect or Duality Principle Concept: It is the basis for the double entry system of book
keeping that means all business transactions recorded in accounts have two aspects- debit and
credit. The value of benefit received is equal to benefit given.
13. Revenue Recognition or Realization Concept: As per this concept, revenue should be accounted
for only when it is actually realized or it has become certain that the revenue will be realized.
14. Verifiable Objective Concept: This principle of accounting specifies that the transactions
should be recorded in an objective manner and should be unbiased in nature.

ACCOUNTING STANDARDS:
Accounting standards are those written statements, which are issued from time to time
by the accounting professional body, specifying uniform rules or practices for the
preparation of the financial statements.

NEED FOR ACCOUNTING STANDARDS:

Accounting standards are needed to improve reliability and bring uniformity in accounting
practices and to ensure transparency, consistency and comparability in financial information
between two or same business.

BENEFITS OF ACCOUNTING STANDARDS:

✓ Accounting standards makes the financial statements more reliable.
✓ Accounting standards help in resolving conflict of financial interest among various groups.
✓ Accounting standards ensure the consistency and comparability of financial statements.
✓ Accounting standards significantly reduce the chances of manipulations and frauds.
Note- Accounting standards are applicable everywhere except the purely charitable organization.
LIMITATIONS OF ACCOUNTING STANDARD:
✓ Difficult to apply in every situation
✓ Rigidity makes difficulty to apply in changing situation and not flexibility
✓ Can’t override the statue

SOME IMPORTANT ACCOUNTING STANDARDS:

AS1-Standards regarding disclosure of
accounting policies
AS2- Standards regarding valuation of
Inventories
AS3- Standards regarding Cash Flow Statement
AS4- Standards regarding contingencies in
Balance Sheet
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AS5- Standards regarding ascertainment of net

profit or loss
AS6- Standards regarding Depreciation
Accounting

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS):

The term IFRS refers to financial reporting standards issued by the International Accounting
Standards Board (IASB) in order to make financial statements more consistent and transparent.

NEED FOR IFRS:

The need for IFRS arises from the following reasons-
✓ Easy access to global capital markets.
✓ Easy to make Comparisons.
✓ Uniformity in financial reporting.
✓ True and fair valuation of assets.
✓ Difficult to commit fraud and manipulate the accounts.

BASES OF ACCOUNTING:
Profit earned or loss incurred by the business can be determined either by : Cash Basis of
Accounting and Accrual or Mercantile Basis of Accounting.

CASH BASIS OF ACCOUNTING: Under this method only cash transactions are recorded in
the books of accounts. Entries are made only if cash is received or paid.
ADVANTAGES OF CASH BASIS:
✓ It is simple basis of accounting as adjustment for outstanding expenses, Prepaid Expenses,
accrued income and income received in advance is not made.
✓ This approach is more objective.
✓ This basis of accounting is suitable for those enterprises where most of the transactions
are on cash basis.
DISADVANTAGES OF CASH BASIS:
✓ It does not give a true and fair view of the profit or loss and the financial position of an
enterprise.
✓ It does not follow the Matching Principle of accounting.
✓ This system does not distinguish between capital and revenue items.

ACCRUAL BASIS OF ACCOUNTING:

Under this method all transactions are recorded in the books of accounts (Cash and Non-Cash).
Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded
in the books of accounts.
ADVANTAGESOF ACCRUAL BASIS:
✓ It is more scientific compared to Cash basis of Accounting.
✓ This basis of accounting shows a complete picture of financial transaction of the business.
✓ This basis discloses correct profit or loss for a particular period also exhibits true financial
position of the business on a particular day.
✓ It reflects true profit or loss during the accounting period and therefore has wide
acceptability.
DISADVANTAGESOF ACCRUAL BASIS:
✓ This system is not as simple as Cash Basis of Accounting.
✓ The accounting process is too elaborate.
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✓ A quick appraisal of the profit/loss is not possible because many adjustments are
required to ascertain the true financial position of the business.

DIFFERENCE BETWEEN ACCRUAL BASIS OF ACCOUNTING AND CASH BASIS OF

ACCOUNTING:

Basis of Accrual basis Cash basis

distinction
i. Nature of Both cash and credit transactions are Cash transactions are recorded.
Transactions recorded.
ii. Prepaid/ Prepaid & Outstanding expenses are Prepaid & Outstanding expenses are not
Outstanding accounted in the Profit & loss A/c. adjusted in the Profit & loss A/c.
Expenses
iii. Accrued Accrued Income/ Income received in Accrued Income/ Income received in
income/ Income advance are accounted in the Profit & advance are not adjusted in the Profit &
received in loss A/c. loss A/c.
advance
iv. Profit or Loss Correct profit or loss is ascertained Correct profit or loss is not able to
because it records both cash and ascertained because it records only cash
credit transactions. transactions.
v. Technical The Accrual Basis of Accounting It does not require much of technical
Knowledge require adequate technical knowledge knowledge.
as many adjustments like prepaid,
outstanding, capital and revenue are
required to be made.
vi. Legal Position Accrual basis of Accounting is Cash basis of Accounting is not
recognized by the Companies Act, recognized by the companies Act, 2013.
2013.
vi. Acceptability Accrual basis of Accounting is more Cash basis of accounting is not
acceptable in business as it reveals acceptable in business as it does not
correct income and expenses besides reveal the required information.
assets and liabilities.

GOODS AND SERVICE TAX:

• Goods and Service Tax (GST) is a single tax policy for whole country
• It is an indirect tax charged on customers and collected through suppliers/sellers of
goods or services.
• It is charged on supply of goods & services
• It is applicable on import
• It is based on principle of destination
• There are three types of GST: For purchase- Input CGST- Input Central Goods and Service
Tax,
Input SGST – Input State Goods and
Service Tax
Input IGST – Input Integrated Goods and
Service Tax
• It is not taxed on export of goods
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• It has five tax slabs-0%, 5%, 12%, 18% & 28%

TYPES OF TAX:
❖ Direct Tax: It is the income tax-on individual & business entity
❖ Indirect Tax: Goods and Service Tax which replaces service tax, excise duty, custom duty
and CST which were charging earlier by central Govt and VAT, entry tax, octroi duty and
luxury tax of state Govt.

BENEFITS OF GST:
✓ It abolishes multiple type of tax
✓ It reduces administrative cost
✓ It increases voluntary compliance
✓ It avoids cascading effect of taxation
✓ It ensures economic efficiency

Unit 2 – Recording of Business Transactions

Source Documents
Financial accounting records contain factual financial information and, therefore, all business
transactions should be evidenced by documentary evidence. For example, a cash memo showing cash
sales, an invoice showing sale of goods on credit, the receipt made out by the payee against cash
payment, are all examples of source documents.
Source Documents - A written document which provides evidence of the transactions is called the
Source Documents. Source document is the first evidence of a transaction which takes place such as
Cash Memo, Bill or Invoice, Receipt, Pay-in-slip, cheques, Debit-Note & Credit -Note.
• Cash Memo -It is prepared by the Seller at the time of Sale of goods on Cash. It contains details
such as goods sold, quantity, amount received, date etc.
• Invoice or Bill - Invoice is a document of sale of goods on credit. It has the details of goods sold
and also the name of the buyer.
• Receipt - Receipt is a document issued against receipt of amount. It has the details for date,
amount and the name of the payee of the amount.
• Pay-in-Slip - This is a form made available by the bank to deposit amount into the bank.
• Cheque - Cheque is an order to the bank, in writing, to pay specified amount to the bearer or to
the person named in it.
• Debit Note - Debit Note is issued by a firm to its supplier/creditor for debiting his account say,
for goods returned to supplier or any other reason.
• Credit Note - Credit Note is issued by a firm to its customer for crediting his account say, for
goods returned by the customer or any other reason.
• Accounting Voucher - It is a written document prepared on the basis of Source Document or
Source Voucher showing the account debited or credited.
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• Cash Voucher - Cash Voucher is used for cash transactions.

• Debit Voucher - Debit Voucher is prepared when payment is made.
• Credit Voucher - Credit Voucher is prepared when cash is received.
• Transfer Voucher - Transfer Vouchers are used for recording non-cash transactions like, goods
returned (both returns inward and returns outward) adjustment entries, etc.

Voucher
Meaning The documentary evidence in support of a transaction is known as voucher. For example, if
we buy goods for cash we get cash memo, if we buy goods on credit, we get an invoice, when we
make a payment we get a receipt.

Types of Vouchers:
1. Supporting Vouchers and
2. Accounting Vouchers.
1. Supporting Vouchers: These vouchers are generated following a business transaction. These
vouchers are the documentary evidence of business transactions having taken place.
2. Accounting Vouchers: These are secondary vouchers prepared on the basis of supporting vouchers
by an Accountant and countersigned by an authorised person of the organisation for the purpose of
recording in the books of account.
Accounting Vouchers
(i) Cash Vouchers
(ii) Non-Cash Vouchers or Transfer Vouchers.

Accounting Equation
Accounting equation is referred to as the relationship between assets, liabilities and capital of a
business. The accounting equation is one of the most important equations in accounting and is used
for preparing balance sheet. It can be represented by the following equation:
• Assets = Liabilities + Capital;
or
• Capital = Assets – Liabilities;
or
• Liabilities = Assets – Capital.

1. Assets - Assets are the resources that the business owns. They refer to property or legal rights
owned by the business, which can be measured in terms of money.
2. Liabilities - Liability is a term in accounting that is used to describe any kind of financial
obligation that a business has to pay at the end of an accounting period to a person or a business.
Liabilities are settled by transferring economic benefits such as money, goods or services..
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3. Capital - Amount invested by owner or partners in the business in form of cash or assets having
some monetary value."
Journal
Meaning: A Journal is the book of original entry or prime entry in which transactions are recorded in
the books of accounts from the source documents. The transactions are recorded in a chronological
order, i.e. as and when they take place. Journal is a book of original entry because a transaction is first
entered in the Journal from where it is posted to the Ledger.
Types of journal:
(i) Simple Journal Entry; or
(ii) Compound Journal Entry.
(i) Simple Journal Entry is a Journal entry in which one account is debited and another account
is credited.
(ii) Compound Journal Entry is a Journal entry, which involves more than two accounts. It means
it is an entry in which one or more than one accounts are debited and/or credited.
Rules of Debit and Credit: Accounting equation is referred to as the relationship between assets,
liabilities and capital of a business. The accounting equation is one of the most important equations in
accounting and is used for preparing balance sheet. It can be represented by the following equation:
(A) Traditional Approach
(I) Personal Account: It includes all those accounts which are related to any person i.e. Individuals,
firms, companies, Banks etc. This can further classify into three categories: -
1. Natural Persons: All the accounts of human beings / Persons are included such Ram A/C, Shyam
A/C etc.
2. Artificial Persons: This includes all such accounts which are treated as persons in the eyes of law &
have separate legal entity such as Reliance Ltd., XYZ Ltd.
3. Representative Persons: This includes all such accounts which represents some persons such as
Capital (Represent Owner) Outstanding Salary (Represent Employee)
(II) Impersonal Accounts: It includes all those accounts which are not related to any person this can
be classified as: -
1. Real Accounts: Under this all accounts related to assets are included (except Debtors). These can be
Tangible i.e. Machinery, Furniture, Building, Cash etc. and Intangible I.e. Goodwill, Trade Mark,
Patents Rights etc.
2. Nominal Accounts: this includes all the accounts related to Expenses/Losses & Incomes / Gains e.g.
Salary, Rent, Commission received etc. they are used to record the transaction in the books of accounts.
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Rules of Debit/Credit under Traditional Approach

Classification of Accounts Rules of Dr. / Cr.

Personal Accounts (All Personal

Debit the receiver, Credit the Giver
Accounts)

Real Account Debit what Comes In, Credit what’s Goes Out

Debit all Losses/Expenses, Credit all Income /

Nominal Account
Gains.

(B) Modern Approach

(i) Assets - Assets are the financial resources of an organisation. Assets have a debit balance. An
increase in assets is debited and decrease credited.
(ii) Liabilities - Liabilities are the claim against the financial resources (i.e., assets). Liabilities have
credit balance. An increase in liabilities is credited and decrease debited.
(iii) Capital - An amount or fund introduced in the business by the owner is known as capital.
Capital has a credit balance. An increase in capital is credited and decrease debited.
(iv) Expenses - Expense is a value which has expired during the accounting period. Expenses have
a debit balance. An increase in expenses is debited and decrease credited.
(v) Revenue - Revenue is amount earned on sales of goods, services rendered or for use by others
of enterprise’s resources. Revenue has a credit balance. An increase in revenue is credited and
decrease debited
4. Steps in Journalising
Step 1: Identify the accounts involved in the transaction.
Step 2: Determine the nature of accounts, i.e., Asset, Liability, Capital, Expense or Revenue.
Step 3: Apply the rules for ‘Debit’ and ‘Credit’.
Step 4: Draw ruling of a Journal and record the transaction.

Ledger
1. Ledger - Ledger is the principal book which contains all accounts (Asset Accounts, Liability
Accounts, Capital Accounts, Revenue Accounts and Expense Accounts) to which the transactions
recorded in the books of original entry (Journal) are transferred, i.e., posted.
2. Principal Book - It is the book which has record of the transactions in a summarised manner, i.e.,
Ledger.
3. Posting - The process of transferring the transactions recorded in the books of original entry to the
account in the ledger is called posting.
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4. Balancing of Accounts - It means totalling the two sides of the account and determining the
difference. Difference between the totals of the two sides is written on the side with smaller total. If the
total of debit side is smaller, it means that the account has credit balance. If the total of credit side is
smaller, it means that the account has debit balance.
5. Trial Balance - It is a statement in which the balances of the Ledger Accounts are written. The total
of amounts in the two columns should be same and this is a proof of arithmetical accuracy of
transactions recorded in the books of account.

Special Purpose/ Subsidiary Books

Meaning : Special Purpose Books/ Subsidiary Books - Sub-division of the Journal into various books
recording transactions Books or of similar nature are called Subsidiary Books.

Cash Book -
Cash book shows all the transaction related to cash receipt and payments. Cash book serves two purpose.
First, all the cash transactions are recorded first time in cash book it becomes Book of original entry.
Second, there is no need to prepare Cash a/c in ledger it also play the role of Principal Book.
• Simple Cash Book - It is a cash book in which only cash transactions are recorded. It has
Book only one column on each side of the cash book.
• Double Column Cash Book - It is a cash book which has two columns on each side to
record cash Two-column Cash receipts and payments and Bank transactions. It has two
columns, i.e., Book: Cash Book Cash and Bank on each side. with Bank Column
• Petty Cash Book - It is a cash book in which payments of small amounts are recorded.
• Imprest System of Petty Cash - It is a system whereby an estimate of expenditure is made
and the Petty Cash estimated amount is given to the Petty Cashier. Thereafter, he submits
the statement of expenses at the end of the designated period, which is reimbursed to him
to make the petty cash equal to the original petty cash amount.

Other Subsidiary Books

1. Purchases Book
In this book, only those transactions are recorded which are related to credit purchases of goods in which
the business deals in. Recording is made on the basis of Bills/ Invoices issued by the Suppliers.
• Transactions not recorded in purchases Book
• Purchases of goods for cash.
• Purchases of Assets meant for long term, not for resale.

2. Sale book
In this book, transactions for credit sales of goods are recorded. The source documents for this book is
duplicate copy of invoice/bills issued to the customers.
• Transactions not recorded in Sales Book
• Sales of goods for cash
• Sales of Assets.

3. Purchase return Book.

This book includes only those transactions which are related to returns of goods bought on credit. The
goods may be returned due to various reasons such as goods bought being defective, supply of inferior
 KVS – ZIET BHUBANESWAR – 2023-24

quality goods etc. Entries in this book are made on the basis of Debit Note. A Debit note contains the
name of the supplier to whom good are returned, details of goods returned.
4. Sales Returns Book
This book includes all the returns by customers of credit sales of goods. The Credit Note is used The
Credit Note is used for recording entries in this book. The credit note contains the details of customers
and goods returned.
5.Journal Proper
A Journal Proper is a book of original entry in which only those entries are recorded that cannot be
recorded in the Special Journal. It is also termed as a General Journal. When the Journal is divided into
various subsidiary books, it remains only a residuary book in which only those transactions are recorded
that cannot be recorded in any other subsidiary book. In such a case, the Journal is called Journal Proper.
For example, if machinery is purchased on credit, it can neither be recorded in the Cash Book or the
Purchases Book because the Cash Book only records the cash transactions and the Purchases Book
records the credit purchases of goods and not the purchase of an asset. Thus, this transaction will be
recorded in the Journal Proper.

Trial Balance and Rectification of Errors

Meaning of Trail 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.
Format of Trail Balance
Trial Balance of ......as on March 31, 2014

Account Title L.F. Debit Balance(Rs.) Credit Balance(Rs.)

Total

Objectives of Preparing the Trial Balance

The trial balance is prepared to fulfill the following objectives :
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).
 KVS – ZIET BHUBANESWAR – 2023-24

Trial Balance
Account Title L.F. Debit Balance(Rs.) Credit Balance(Rs.)
• Capital
• Land and Buildings
• Plant and Machinery
• Equipment
• Furniture and Fixtures
• Cash in Hand
• Cash at Bank
• Debtors
• Bills Receivable
• Stock of Raw Materials
• Stock of Finished Goods
• Purchases
• Carriage Inwards
• Carriage Outwards
• Sales
• Sales Return
• Purchases Return
• Interest Paid
• Commission/Discount Received
• Salaries
• Long Term Loan
• Bills Payable
• Creditors
• Advances from Customers
Total
Classification of Errors
Keeping in view the nature of errors, all the errors can be classified into the following four categories:
• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating Errors
 KVS – ZIET BHUBANESWAR – 2023-24

1. 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.
2. Errors of Omission
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 of original record, it is an error
of complete omission. When the recording of transaction is partly omitted from the books, it is an
error of partial omission.
3. 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.
4. Compensating Errors
When two or more errors are committed in such a way that the net effect of these errors on the debits
and credits of accounts is nil, such errors are called compensating errors. Such errors do not affect the
tallying of the trial balance.
Rectification of Errors
From the point of view of rectification, the errors may be classified into the following two categories:
(a) errors which do not affect the trial balance.
(b) errors which affect the trial balance.

Bank Reconciliation Statement

Bank Reconciliation Statement: It is a statement prepared to reconcile the balances of cash book and
pass book.
Need for Reconciliation
• timing differences on recording of the transactions.
• errors made by the business or by the bank.
Timing Differences
a) Cheques issued by the bank but not yet presented for payment b) Cheques paid into the bank but
not yet collected
 KVS – ZIET BHUBANESWAR – 2023-24

c) Direct debits made by the bank on behalf of the customer

d) Amounts directly deposited in the bank account
e) Interest and dividends collected by the bank
f) Direct payments made by the bank on behalf of the customers g) Cheques deposited/bills
discounted dishonoured
Differences Caused by Errors
a) Errors committed in recording transaction by the firm
b) Errors committed in recording transactions by the bank
Proforma of bank reconciliation statement
Bank Reconciliation Statement
Particulars Amount (Rs.)
Balance as per cash book
Add: Cheques issued but not presented
Interest credited by the bank
Less: Cheques deposited but not credited by the bank
Bank charges not recorded in the cash book
Balance as per the passbook

DEPRECIATION, PROVISIONS& RESERVES

Depreciation” means decline in the value of a fixed assets due to use, passage
of time or obsolescence.
Fixed assets are subject to decline in value and this decline is technically referred to as depreciation
According to Institute of Cost and Management Accounting, London (ICMA)
terminology “The depreciation is the diminution in intrinsic value of the asset
due to use and/or lapse of time.”

Features of Depreciation
* decline in the book value fixed assets
*Includes loss of value due to passage of time usage or obsolescence
* it is a continuing process
* it is an expired cost
* it is a non-cash expense

Causes of depreciation.
1. Wear and tear due to use or passage of time
2. Expiration of legal rights
3. Obsolescence
4. Abnormal factors
 KVS – ZIET BHUBANESWAR – 2023-24

Need for Depreciation

1. Matching of cost and revenue
2. consideration of tax
3. True and fair financial position
4. Compliance with law

Methods of calculating Depreciation

Straight Line Method
Depreciation = Cost of asset - Estimated net residential value
Estimated useful life of the asset
Advantages
1. Simple easy to understand and apply
2. comparison is easy as same amount is charged as depreciation every year .
3. Suitable for those assets is useful life can be estimated accurately
Limitations
1.Based on faulty assumption of same amount of utility of asset in different accounting years
2.The total amount charged against profit on account of depreciation and repair taken together will not
be uniform throughout the life of asset
Written Down Value Method
Under this method, a fixed percentage is written off every year on the book value of asset at the
beginning of the year, i.e., original cost less depreciation provided till date.
Advantages
1. More realistic
2. Accepted by income tax act
3. Suitable for fixed assets which last long and require increased repair and maintenance with
passage of time
Methods of Recording Depreciation
1. Charging depreciation to asset account
Or
2. Creating Provision for depreciation/Accumulated depreciation account.

1. Charging depreciation to asset account

a. For purchase of asset
Asset A/c. Dr.
To Bank/Vendor A/c
b. Following two entries are recorded at the end of every year
(a) For deducting depreciation amount from the cost of the asset.
Depreciation A/c. Dr.
To Asset A/c
(b) For charging depreciation to profit and loss account.
Profit & Loss A/c. Dr.
To Depreciation A/c
2. Creating Provision for depreciation/Accumulated depreciation account.
 KVS – ZIET BHUBANESWAR – 2023-24

a.For purchase of asset

Asset A/c. Dr.
To Bank/Vendor A/c
Following two entries are recorded at the end of every year
a.For crediting depreciation amount to provision for depreciation account
Depreciation A/c Dr.
To Provision for depreciation A/c
(b)For charging depreciation to profit and loss account
Profit & Loss A/c. Dr.
To Depreciation A/c
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
*Provision for depreciation;
*Provision for bad and doubtful debts;
*Provision for taxation;*
*Provision for discount on debtors; and
*Provision for repairs and renewals.
Reserves
The 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 is Reserve.
Reserve is not a charge against profit as it is not meant to cover any known
liability or expected loss in future.
Examples of reserves are:
*General reserve;
*Workmen compensation fund;
*Investment fluctuation fund;
*Capital reserve;
*Dividend equalisation reserve;
*Reserve for redemption of debenture.
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 KVS – ZIET BHUBANESWAR – 2023-24

Unit 3 – financial Statements of sole proprietorship

Final Accounts of a Proprietary concern

Meaning of Final Accounts:

The primary aim of accounting is assessment of business performance for the benefit of all
stakeholders (such as owners, employees, suppliers, customers, financiers etc.) which will also
help them to form their opinions on the financial position of their business concerns. For this
purpose, various accounting reports are prepared in the form of Final Accounts at the end of
every financial year. In brief, Final Accounts are financial statements that validate and explain
working results andfinancial status for a specific period of time on a particular date. It is a set of
Trading Account, Profit and Loss Account and Balance Sheet. Balancing figure of Trading
Account is Gross Profit or Gross Loss. In case of Profit and Loss Account the balancing figure
is Net Profit or Net Loss. Whereas Balance Sheet shows financial position of assets and liabilities
at a given period of time.
◼ The basic objectives of Final Accounts is to determine Gross Profit /Gross Loss and Net
Profitor Net Loss of the business during the financial year.
◼ Final Accounts shows the true and correct financial position of business.
◼ It informs the operating results and exact financial position of the business to the stake
holdersto take financial decisions.
◼ It enables to control financial activities of business effectively.
How to Prepare Final accounts? -
Every time a business transaction takes place, the details of it are made in Primary books. These
entries are then posted to the ledger. At the end of a financial year the ledger accounts are balanced
and closing balance of each ledger account is determined. There may be a debit or credit balance.
With the help of all these balances, a Trial Balance is prepared. This in turn helps in preparing
Trading Account, Profit and Loss Account and Balance Sheet, which is known as Final Accounts.
Final accounts include

1) Trading Account
2) Profit and Loss Accounts
3) Balance sheet
4) Trading Account
Trading Account is an account which gives the overall preview of all trading activities.
The expenses and losses relating to trading activities are debited to this account and all outward
movementsof goods and stock of goods at the end of the year are recorded to the credit side of
this account.
Debit side of Trading Account includes activities such as opening stock, purchases and all
directexpenses - e.g. Wages, Freight, Carriage Inward, Coal, Gas, Fuel, Water, Manufacturing
or Direct expenses. Similarly, credit side of trading includes Closing Stock, Sales, less returns
(sales returns) any kind of goods that is used for promotions as Free Samples, goods withdrawn
by proprietor for personal reasons etc. Therefore, it is said Trading Account is prepared to
 KVS – ZIET BHUBANESWAR – 2023-24

ascertain gross profit or loss for a given period of time. When there is credit balance. It is
referred to as Gross Profit and when there is debit balance it referred to a Gross Loss which is
transferred to profit and loss account. Trading Account is a Nominal Account
Important terms of Trading Account:
1) Stock: Goods that are unsold are called
Stock.Stocks are of two types:
(i) Opening stock: It refers to unsold goods at the beginning of the year.
(ii) Closing Stock: The unsold goods on the last day of accounting period is referred to
as Closing Stock. This is always valued at cost or market price, whichever is less.
Closing Stock is credited to the Trading Account. It is also recorded on the asset
side of Balance Sheet.
2) Purchases: This includes the purchases of goods and not purchases of assets. Purchase of
goodsmay be on the basis of cash or credit. Purchase Returns are deducted from total
purchases andthereafter net purchases are recorded on the debit side of Trading Account.
3) Sales: Sales includes the sales of goods and not sale of Assets. Sale of goods may be on the
basis of cash or credit. Sales returns are deducted from total sales and thereafter net sales
are recorded on the credit side of Trading Account.
4) Direct Expenses: Direct expenses are those expenses which are incurred for purchase of
goods, production of goods and purchase expenses. All nominal accounts e.g. Wages,
Manufacturing expenses, Factory lighting, Coal, Gas, Fuel, Water. Dock dues, Carriage
inward etc.
Specimen of Trading Account
Trading Account for the year ended ………
Dr. Cr.

Amount Amount Amount Amount

Particulars Particulars
(`) (`) (`) (`)
To Opening Stock xxxx By Sales xxxx
To Purchases xxxx Less: Sales Return xxxx xxxx
xxxx xxxx
Less: Purchase Return (Return Inward) xxxx
(Return outwards) By Goods distributed as
xxxx
To Direct Expenses free sample xxxx
To Freight & Carriage By Goods taken by
xxxx
Inward proprietor for personal
xxxx use
To Custom Duty xxxx
xxxx By Closing Stock
To Wages xxxx
xxxx By Gross Loss c/d
To Coal, Gas, Fuel etc.
xxxx
To Royalties
xxxx
To Factory expenses
xxxx
To Gross Profit c/d
xxxx xxxx
 KVS – ZIET BHUBANESWAR – 2023-24

Journal Entries for preparing Trading Account

All accounts of Direct expenses are closed and their balances are transferred to Trading A/c. For
this
"closing entries" are passed as under:
A) Transferring of Opening Stock, Purchases, Direct expenses
1) Transfer of Purchase Returns
Purchase Returns A/c ..................Dr. xxxx
To Purchases A/c xxxx
(Being Purchase returns transferred to Purchases A/c)

2) Sales A/c ..................................... Dr. xxxx

To Sales Return A/c xxxx
(Being Sales returns transferred to Sales A/c)
3) Trading A/c ................................. Dr. xxxx
To Opening stock A/c xxxx
To Direct expenses A/c xxxx
To Purchases A/c xxxx
(Being Opening stock and Direct expenses and purchases transferred to Trading A/c)

B) Transferring of Sales

Sales A/c ......................................Dr. xxxx

To Trading A/c xxxx
(Being sales transferred to Trading A/c)

C) Entry of Closing stock

Closing stock, A/c ........................Dr. xxxx

To Trading A/c xxxx
(Being closing stock given in adjustment transferred to Trading A/c)

D) For Gross Profit/Gross Loss

1) Trading A/c..................................Dr. xxxx

To Profit & Loss A/c xxxx
(Being Gross Profit transferred to Profit & Loss A/c)

2) Profit & Loss A/c........................Dr. xxxx

To Trading A/c xxxx
(Being Gross Loss transferred to Profit & Loss A/c)
 KVS – ZIET BHUBANESWAR – 2023-24

9.3 Profit and Loss Account

This account is main Account of final Accounts which gives the final working results of
business. It is prepared on the basis of indirect expenses and indirect incomes of the business
concern. Profit and Loss Account is maintained to ascertain Net Profit or Net Loss. The debit
side of Profit and Loss Account includes all indirect expenses such as office or administrative
expenses, financial expenses,selling or distribution expenses etc. The credit side of profit and
Loss Account includes indirect incomes like commission received, rent received, discount
earned etc. When the credit side of this account is greater than debit side it is called Net Profit
and when debit side of this account is greater than credit side it is called as Net Loss. Net
Profit/Loss is transferred to Capital Account. Profit and Loss Account is a Nominal Account.
journal Entries relating to Profit & Loss A/c
A) For transfer of Expenses and Losses

Profit & Loss A/c.......................... Dr.

To All Indirect
Expenses A/c(e.g. To
Salaries A/c
To Rent A/c
To
Advertisement
A/cTo Insurance
A/c etc… ........ )
(Being Indirect expenses transferred to Profit & Loss A/c)
B) For transfer of Incomes and Gains

All Indirect incomes A/c

.....................................................
Dr. (e,g, Discount, Dividend,
Interest etc.)
To Profit & Loss A/c
(Being Indirect incomes transferred to Profit & Loss A/c)
C) For Transferring Net Profit/Net Loss to Capital A/c
a) For transferring Net Profit
1) Profit & Loss A/c ......................... Dr.
To Capital A/c
(Being Net Profit transferred to Capital A/c)
a) For transferring Net Loss
Capital A/c...................................Dr. xxxx
To Profit & Loss A/c xxxx
 KVS – ZIET BHUBANESWAR – 2023-24

(Being Net Loss transferred to Capital A/c)

9.4 Balance Sheet
Balance Sheet is a statement showing financial position of a business concern.
Balance Sheet has no debit or credit side as it is a statement and not an account. Left hand
side ofBalance sheet is "Liability side “and Right hand side "Asset side". Both sides of Balance
Sheet should be of equal amount. A Balance sheet shows assets & liabilities of the business.
All Debit balances of Personal and Real Accounts are shown on the Asset Side and All
Credit Balances of Personal Accounts are shown on Liability side. No Nominal Account will
appear in the Balance Sheet
In the books of M/s
Balance Sheet as on 31st
March.....
Liabilities Amt Amt Assets Amt Amt
(`) (`) (`) (`)
Capital (opening) xx Cash in hand xx
Add : Net Profit xx Cash at Bank xx
Add : Interest on capital xx Bills Receivable xx
xxx Sundry Debtors xx
Less : Drawings
xx Goodwill xx
Less : Interest on Drawings
xx Furniture xx
Less : Net Loss xx
xx Plant & Machinery xx
Bank Loan xx
Land & Building xx
Bank Overdraft xx
Prepaid expenses xx
Sundry Creditors xx
Outstanding Income xx
Bills Payable xx
Closing Stock xx
Outstanding Expenses xx
Pre-received Income xx

Total xxx Total xxx

Journal Entries of Some important adjustments:
1) Closing Stock:
Closing Stock, A/c ............... Dr.
To Trading A/c
(Being Closing stock transferred to Trading A/c)
2) Depreciation on assets: Depreciation means gradual and continuous decrease or reduction
in the value of assets. This amount of depreciation is charged on fixed assets. It is treated
as loss so it to debited to Profit & Loss account and to be deducted from respective asset.
Entry will beas follows:
 KVS – ZIET BHUBANESWAR – 2023-24

i) Depreciation A/c...................Dr.
To Respective Asset A/c
(Being Depreciation charged on assets)

ii) Profit & Loss A/c ................ Dr.

To Depreciation A/c
(Being Depreciation transferred to Profit & Loss A/c)

3) Outstanding expenses: The expenses which have been incurred but not paid during the year.
are unpaid expenses. Following journal entry is to be passed.

Expenses A/c .............................. Dr.

To Outstanding expenses, A/c
(Being amount of outstanding expenses A/c transferred to expenses A/c)
For Example: Rent, salary etc.
Outstanding expenses are included in respective expenses A/c on Trading account/Profit & Loss
account and to be shown on Liability side of Balance sheet)

4) Prepaid expenses (Unexpired expenses): The expenses paid in advance of the current year
during is known as prepaid expenses and entry is as follows

Prepaid expenses A/c ................. Dr.

To Expenses A/c
(Being amount of Prepaid expenses is debited to expenses A/c)
5) Accrued Income (Outstanding Income): The income which have been earned but not received
during the year are outstanding income.

Outstanding Income A/c ............. Dr.

To Income A/c
(Being Income Outstanding)
6) Income received in advance
(i) The income related to next accounting year but received in current year is known as
income received in advance.
Income A/c ....................... Dr.
To Income received in advance A/c
(Being income received in advance)
7) Bad Debts: The Debts which are irrecoverable is called Bad-debts. The amount of Bad debts is
loss to business. So Bad debts is debited to Profit & Loss A/c and is to be deducted from Sundry
Debtors, for which following Journal entries is to be passed -

i) Bad debts A/c ........................Dr.

To Sundry Debtors A/c
(Being Bad debts written off)
 KVS – ZIET BHUBANESWAR – 2023-24

ii) Profit & Loss A/c ................ Dr.

To Bad debts A/c
(Being Bad debts transferred to Profit & Loss A/c)

8) Reserve or Provision for Doubtful Debts: There are some debtors, of which recovery is
doubtful. It may not be realized. For this purpose, such provision is created which is known as
Reserve for doubtful debts. This provision is created on the experiences of previous year. It is
an anticipated loss therefore provision for doubtful debts is necessary.

i) Profit & Loss A/c ................ Dr.

To Reserve for doubtful debts (R.D.D.) A/c
(Being Provision of doubtful debts created)

9) Provision/Reserve for Discount on Debtors: It is an incentive to debtors for early payment.

Such discount is also treated as loss. This discount is calculated on the number of debtors (After
deducting New Bad debts & New R.D.D.)
Profit & Loss A/c ....................... Dr.
To Provision for discount on Debtors A/c
(Being Provision for discount on Debtors created)

10) Provision/Reserve for Discount on Creditors: It is an incentive to make payment of creditors

at the earliest. So, discount received from creditors is treated as Profit or gain. So it is to be
credited to Profit & Loss A/c and to be deducted from creditors from Balance Sheet. It is the
only exception to the convention of conservatism.
Provision for discount on Creditors A/c. ................ Dr.
To Profit & Loss A/c
(Being Provision for discount on Creditors created)

Note : 1) When only Bad debts are given in Trial Balance it is debited to Profit & Loss A/c as it
is loss.
2) When R.D.D. is given in Trial Balance, it is known as old R.D.D. [Existing R.D.D.]
3) When R.D.D. is given in adjustment, it is called New R.D.D.

11) Goods withdrawn by proprietor for Personal use : It refers to total amount of goods withdrawn
by proprietor for personal use.
i) Drawings A/c ....................... Dr.
To Trading/Purchases A/c
(Being goods withdrawn for personal use)

ii) Proprietor’s Capital A/c ....... Dr.

To Drawings A/c
(Being balance of Drawings A/c transferred to Capital A/c)
 KVS – ZIET BHUBANESWAR – 2023-24

12) Goods distributed as Free sample: Distribution of goods as a free sample is an advertisement.
So, amount of goods distributed as a free sample is to be debited to Profit and Loss account
under the head of Advertisement (if any).
i) Goods distributed as free sample A/c Dr.
To Trading/Purchases A/c
(Being amount of goods distributed as free sample transferred to trading A/c)
ii) Advertisement A/c .............. Dr.
To Goods distributed as a free sample A/c
(Being amount of goods distributed as a free sample transferred to Advertisement A/c)
13) Interest on Capital:
i) Interest on Capital A/c ............................... Dr.
To Capital A/c
(Being interest on capital provided)
ii) Profit and Loss A/c ............. Dr.
To Interest on Capital A/c
(Being interest on capital transferred to capital A/c)

14) Interest on Drawings:

i) Capital A/c ................................................. Dr.
To Interest on Drawings A/c
(Being interest on Drawings charged)
ii) Interest on Drawing A/c ...... Dr.
To Profit and Loss A/c
(Being interest on Drawings transferred to Capital A/c)

Name of Adjustment Journal Entries Two Effects

1) Closing Stock Closing Stock, A/c .......... Dr 1) Credit side of Trading A/c
To Trading A/c 2) Shown on Assets side of Balance
Sheet
2) Depreciation 1) Depreciation A/c ........ Dr 1) Debit side of Profit & Loss A/c
To Asset A/c
2) Deducted from particular Assets on
2) Profit & Loss A/c ........ Dr
assets side of Balance sheet
To Depreciation A/c
3) Outstanding or Expenses A/c ................... Dr 1) Add to particular expenses on
Unpaid Expenses To Outstanding expenses, A/c Trading or Profit and Loss A/c
2) Shown on Liability side of Balance
Sheet.
4) Prepaid Expenses Prepaid Expenses A/c ...... Dr 1) Less from that particular expenses
To Expenses A/c on Trading or Profit & Loss A/c
2) Shown on Assets side of Balance
sheet
 KVS – ZIET BHUBANESWAR – 2023-24
5) Accrued Income/ Accrued Income A/c……Dr 1) Add to particular income on credit
Outstanding Income To Income A/c side of Profit & Loss A/c
2) Shown on Assets side of Balance
sheet.
6) Pre-received Income A/c ....................... Dr 1) Less from particular income on
Income To Pre-received Income /c credit side of Profit & Loss A/c
2) Shown on Liabilities side of
Balance sheet
7) Bad debts 1) Bad debts A/c ............. Dr 1) Debit side of Profit & Loss A/c
To Debtors A/c (New R.D.D + Bad debts)
2) Profit & Loss A/c ........ Dr 2) Deducted from Sundry debtors on
To Bad debts A/c assets side.
8) R.D.D (Reserve for Profit & Loss A/c .............. Dr 1) Debit side of Profit & Loss A/c
doubtful debts) To R.D.D. A/c 2) Deducted from Sundry debtors on
assets side.
9) Provision for Profit & Loss A/c. ............. Dr 1) Debit side of Profit & Loss A/c
Discount on Debtors To Provision for discount 2) Deducted from Sundry debtors on
on debtors A/c Assets Side of Balance Sheet.

10) Provision for Provision for discount on 1) Credit side of Profit & Loss A/c
Discount on creditors A/c. .................... Dr 2) Deducted from Sundry creditors on
Creditors To Profit & Loss A/c liabilities side of Balance sheet

11) Goods taken by 1) Drawings A/c. ............. Dr 1) Credit side of Trading or deducted
proprietor for To Trading A/c or from purchases A/c
personal use Purchases A/c
2) Deducted from capital on ……
2) Proprietor's Capital A/c..Dr. Liability side
To Drawing A/c
l2) Goods distributed as 1) Goods distributed as free 1) Credit side of Trading or deducted
free sample sample A/c. ................. Dr from purchases A/c
To Trading A/c or
Purchases A/c 2) Debited to Profit & Loss A/c
2) Advertisement A/c. Dr.
To Goods distributed as
free sample A/c
(To Purchases A/c)
13) Interest on Capital Profit & Loss A/c. .......... Dr 1) Debit side of Profit & Loss A/c
To Capital A/c 2) Add to Capital, Liability side of
Balance sheet.
14) Interest on Capital A/c. .................... Dr 1) Credit side of Profit & Loss A/c
Drawings To Profit & Loss A/c 2) Add to Drawings/Less from Capital.

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