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BOOK KEEPING

(Paper-V)

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UUNNIITT--II 1.0 BOOK KEEPING:

� INTRODUCTION AND DEFINITION:

Literally Book Keeping means keeping of the books of account. More precisely, Book

Keeping refers to recording of transactions in various books of account. A systematic record

of daily events involving money or money’s worth of an organisation leading to the

presentation of a complete financial picture is called accounting or in its elementary stage

Book Keeping. The modern tendency is to consider Book Keeping synonymous with

accounting or accountancy.

Earlier, Book Keeping has been defined as the science and art of correctly recording

in the books of account of all those transactions that result in the transfer of money or

money’s worth.

Now, various organisations operate in the social setting and expansion goes on with

ever growing complexities. Book Keeping cannot come to a halt just recording events of

financial nature.

Under the situation, Book Keeping may be defined as the art of recording, classifying,

summarizing and interpreting transactions in a systematic way. Book Keeping cannot be a

science because its rules may change from time to time to cope with the change in the social

set-up or amendment in the Act passed by the State Assembly or Parliament of a country.

The modern system of Book Keeping owes its origin to Double Entry Book Keeping

which was developed by Fra Luca Pacioli (about 1445 to 1520), the multi talented

mathematician cum philosopher of Venice. In India, Chanakya, in his Arthshastra

emphasized the need for proper recording and accounting of events of financial character.

The modern accounting system comprises of:-

(a) analysing transactions viz. deciding which account is to be debited and which

account is to be credited and with what amount, (b) recording the analysed result

and fitting them into ledger, (c) adjusting various accounts for depreciation and

foreseeable losses and (d) Preparing financial statements on the basis of (a) and

(c) .Process (b) is purely mechanical.Remaining processes involve judgement and

strictly speaking pertains to ‘Accounting’. Hence, if we define book keeping in a

narrower sense it is simply a science of recording events of financial nature .But

nowadays no such distinction is drawn and accounting is comprehensively used to

assimilate book keeping , but not vice versa.

1.1: Difference between book keeping and Accounting:

However, if we want to draw a line of demarcation between book keeping and

accounting the following points may be noted.

� Book keeping is the recording phase of accounting

� Persons responsible for book keeping are called book keepers whereas persons

responsible for accounting are called accountants.

� Book Keeper does not require any special skill or knowledge but accountant requires

skill and knowledge.

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� Book Keeping has no branch but Accountancy has many branches.

� Personal Judgement of book keeper may not be required. In Accounting Personal

judgement of the accountant is highly necessary.

� Book keeping is the basis of accounting .The quality of service rendered by

Accounting will depend solely on the proper maintenance of record maintained in

Book Keeping.

1.2. SYSTEMS:

There are two systems:- Single Entry System and Double Entry System at the

recording stage. Single Entry System records only one aspect of a transaction at a time. But a

transaction will have two-fold aspects- one receiver and another giver at one time. In Double

Entry System every transaction will be recorded twice one account receiving and another

giving the benefit or obligation. Double Entry System is always considered to be more

scientific and better than Single Entry System. Government accounts are normally maintained

under Single Entry System and only at the time of presenting technical accounts (Journal,

Ledger and Trial Balance Sheet). Double Entry System is being adopted.

Again, records may be made either under Cash basis/system of Book Keeping or

accrual basis/system of Book Keeping. In the first case, record is made only when Cash is

received or paid. In the 2nd

case, record will be made as and when the receipt or payment is

due. There is still another system of Book Keeping called Hybrid System whereby revenue

and other related assets are accounted on Cash (i.e. receipt) and but expenses and liabilities

on accrual (or occurrence) basis. Most of Government Organisations/Offices use Cash basis

accounting till to-day. A proposal is, however, underway to adopt accrual basis accounting in

the immediate future.

1.3. OBJECTIVES, NEEDS AND IMPORTANCE:

OBJECTIVES:

� To have a permanent record of each and every transaction and to show its financial

effect on the organization and

� To ascertain the combined effect of all transactions made during an accounting

period upon the financial position of the organisation as a whole.

NEEDS AND IMPORTANCE:

� Providing written and comprehensive record of each and every transaction.

� Finding the result of operation in a correct and systematic way.

� Detecting frauds and errors; if any, and taking up corrective steps in time.

� Making proper plan for the future by using the past performance data.

� Furnishing information for legal and tax purposes.

� Exercising control over various assets and liabilities.

� Preparing ground work for ensuring good governance in the private and public

sector as well.

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1.4. MEANING OF CERTAIN TERMS COMMONLY USED IN

BOOK KEEPING:

1.4.(1). ACCOUNT (A/C):

It is a summarized form of transaction (events of financial character). It is either a

division of a page into two-halves or a running balance presentation.

EXAMPLE (1):

Dr Cr

Date Particulars LF/J.F. Amount

(Rs.)

Date Particulars L.F/J.F. Amount

(Rs.)

T – Account Form

EXAMPLE (2):

Date Particulars L.F./J.F Dr

Amount

Cr

Amount

Balance

(Rs.)

Running Balance form of account

The short form of an account is ‘a/c’. Examples of account in the running balance

form are Bank Pass Book (Bank Statement), Stock Register etc. J.F means Journal Folio and

L.F. means Ledger Folio.

Traditionally accounts are classified into:

� Personal a/c

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� Real a/c and

� Nominal a/c

At a later stage it has been classified as:

� Personal a/c

� Real a/c

� Nominal a/c and

� Valuation a/c

But the modern accountants have classified accounts as:

� Assets a/c

� Liabilities a/c

� Expenditure a/c

� Revenue a/c

� Capital a/c and

� Withdrawal a/c

Personal account refers to persons. Persons may be natural human beings (Tomba,

Madhu, Shyam) or artificial persons or A.O.Ps. (any other persons) which include registered

bodies (registered under an Act Passed in the Assembly or Parliament). The later group

consist of State Bank of India, Social Welfare Department, Manipur Co-operative Society,

Sunder & sons and so on.

Real account represents assets, properties such as Land, Building, Cash in hand, Patent

etc. Some of the real accounts are tangible (visible with our own eyes). Some others may be

intangible(not visible) . For example, patent, copyright etc. cannot be seen.

Nominal account refers to income, expense, loss, gain etc. Salary, wages, Interest etc

are good examples of nominal account. Nominal accounts are made personal accounts by

using suffix or prefix. For example salary is nominal account. But if it is salary outstanding or

salary due it has become personal account.

Valuation accounts are nothing but the accounts of provisions for depreciation,

provision (or reserve) for doubtful debt and any other account which has been introduced to

show the actual book value of an asset or liability.

1.4 (2)CAPITAL:

Anything introduced in an organisation for starting it and carrying on its operation

may be called capital. It may be in the form of cash or goods or both. Even the talent of a

person may be called Capital provided that such talent is made measurable in terms of money

or money’s worth and the same is used for starting and operating the organizations. It is a

stock of wealth at an instant of time. Where equity refers to total claim in the organisation.

Capital restricts itself in the claim of the proprietor only. Perhaps this is the reason for

treating capital as Inside Liability or Insiders equity by some accountants.

Capital may be fixed or fluctuating for accounting purpose. If accounting process is to

add subsequent profit etc. and to deduct subsequent losses etc. from the capital we have

fluctuating capital. Otherwise, there is fixed capital.

1.4.(3) REVENUE:

It is the gross inflow of cash, receivables or other consideration arising in the course

of the ordinary activities of an enterprise (organisation). It may arise out of rendering service

or holding of assets or else.

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1.4.(4) EXPENDITURE AND EXPENSES:

Cost is the monetary measure of the value of economic services acquired. It may be

either expired or unexpired. When unexpired it becomes asset value. And expenditure occurs

on acquiring an asset or service by releasing cash or other asset or incurring a liability.

Expense implies sacrifice made or resource consumed. It has the effect of decreasing

proprietors Equity. Expenditure gives benefit to the organisation in producing revenue. But

expense is a loss. Both are, however, outflow of fund. Expenditure may be capital

expenditure or revenue expenditure. Capital expenditure gives benefit for more than one

accounting year but revenue expenditure is consumed within an accounting year and matched

against the revenue of that year. Expense is expired cost. It is that part of cost outlay which is

consumed in one current accounting year.

1.4(5) DEBIT, CREDIT, DEBTOR (Dr) and CREDITOR( Cr )

To debit an account means to record on the Left Hand Side and to Credit an account

means to enter on the Right Hand Side of an account in ,’T’ form. The term debit is derived

from the latin base debere(to owe) and the term credit comes from the word Credere(that

one believes in).In double entry book keeping a transaction is recorded in such a way that the

two aspects are recorded simultaneously. This implies that if there is a receiver there is a

giver too. In this sense, a debtor( abbreviated as DR) is one who gets the benefit and a

creditor (abbreviated as CR) is one who receives the benefit . This definition is nevertheless

found defective. For this reason, we have defined Debtor and Creditor as under:

A Debtor is a person who imposes an obligation to do something whereas a creditor

is one who accepts the obligation so imposed.

Let us examine the following transaction.

A sells a Computer to B on Credit for Rs. 80,000/-. Here, A is the Creditor because as

soon as the transaction is complete he imposes an obligation on B to pay Rs. 80,000 on a

future date for the sacrifice he has made. At the same time, B is the Debtor because with the

receipt of the computer he is obliged to pay Rs. 80,000/- to A in return of the benefit he has

enjoyed. Alternately, A gives the benefit to B by parting with the computer and B gets the

benefit by receiving the computer. Hence, A is a creditor and B is a Debtor.

1.4.(6) ASSETS:

Assets are valuable resources owned by an organisation and acquired at a measurable

money cost. All those expenditure incurred which lead to the acquisition of something

expected to benefit the future operation of the organisation will be termed as asset. They may

be (a) Fixed assets and (b) Current assets. Fixed assets are acquired for the purpose of using

in the organisation more or less permanently. Here. Permanent or permanency means a period

exceeding 12 months.

In Government accounting such fixed assets are recorded in GFR – 40 under Rule

190(2)(i). On the other hand, current asset comprises of stores, consumables, stationery, spare

parts, merchandise etc. These assets have been acquired either for rescale or for use in the

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organisation during a 12 month period. Such assets are recorded in GFR – 41. Examples of

fixed assets are Duplicating Machine used in the office, computer and so on.

Again, for accounting purposes assets may be physical resources (Land, building and

so on) or non-physical resources (account receivable, cheques, securities) or intangible

resources (Franchise, goodwill, trademark) or future benefits (Insurance premium paid in

advance) or nebulous benefits (formation expenses and other preliminary expenses).

1.4.(7) LIABILITIES & EQUITIES:

In a simple language liabilities are the sum owing to creditors,. They arise from the

present obligation of a particular entity to transfer assets or to provide service to other

entities.

Equity means claim or interest in the organisation. The claim may be from an outsider

(creditor) or from an insider (proprietor). The Indian practice is to use equity in a

comprehensive sense so as to cover both the creditors’ and the proprietors’ claim.

1.4.(8) WITHDRAWAL ACCOUNT.

For proper accounting an organisation which is generally a business organisation is to

be separated from its owner . It is to be treated to have a distinct accounting entity. Thus

when the proprietor introduces capital into the organisation the owner’s private cash,

decreases whereas the firm’s cash increases. Hence for Book Keeping purposes whenever

there is withdrawal or drawings in cash or goods or in any other form like Income Tax in a

sole trading concern we have to record and take into account properly.

1.4.(9) TRANSACTIONS

Transaction is a particular type of event of financial character. It brings a change in

the financial position of an organisation. It involves transfer of something of value between

two or more parties/entities.

Transactions may be classified as :

Cash transaction (where there is movement of cash from one Party to another

party)

Credit transaction (where there is no movement of cash but entered into in between a

business entity and second party)

Non-Cash transaction (where there is no movement of cash and no 2nd

party is

involved).

Examples:

(I) Paid salaries for the month of Feb.,2008 Rs. 80,000/-

(Cash transaction)

(II) Purchased machinery on Credit from Mr. X. Rs. 1,00,000/-

(Credit transaction)

(III) Machinery is depreciated @10 % p.a. on Rs. 1,00,000/-

(Non cash transaction)

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A transaction may be reciprocal, non – reciprocal, internal or external. Penalty

imposed by the Government, Payment of Income Tax, Subsidy from the Govt., cancellation

of a liability like ,provision for workmen compensation are examples of non – reciprocal

transaction whereas depreciation of asset is an example of internal transaction.

1.4.(10) Accounting equation ( an approach):

Transaction may be recorded by using an algebraic formula. Such formula is based on

the fact that the resources of an organisation must be equal to the claims of the persons who

have financed the resources. As discussed earlier claims of proprietor are called Capital and

those of outsiders are called liabilities. Thus the equation is:

C + L = A

Where C = Capital

L = Liabilities

and A = Assets

This is called fundamental accounting equation because every transaction that takes

place influences its accounting equation in one way or the other.

Let us suppose that Chaoba starts a business with Rs. 50,000 in cash and Rs. 10,000 in

stock of good. Then,

C + L = A

=> Chaoba’s Capital (Rs. 60,000) + 0

= Cash (Rs. 50,000) + Stock of goods (Rs. 10,000)

This process will be on till the account is closed at the end of an accounting period.

However, this approach is found Cumbersome and Wasteful. The work can, however be,

simplified by using computer.

In this course of State Accounts Training, we adopt Traditional approach and not

Accounting Equation Approach wherein transactions are recorded in journal, posted them

into Ledger and final accounts are prepared at the end of the relevant accounting period.

1.4.(11) Accounting Cycle: In order to achieve the aims and objectives of Book Keeping in this short period of

accounts training we have to follow the accounting cycle of recording classifying and

summarizing transactions. This may be presented as under:

Identification of Transactions Recording of Transactions in the books of

Original entry posting of transactions into ledger Preparation of

Trial Balance Passing of Adjusting entries Preparation of Final

Accounts.

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1.4.(12)Rules of debit and credit: Rules have been formed for universal application of correctly debiting and crediting

the accounts .These rules are known as Golden rules of Book –keeping

They may be presented as under:

A. In Traditional Classification of Accounts:

Rules of Debit and Credit

Types of Account Account to be debited Account to be credited

1.Personal Account Receiver Giver

2. Real Account What comes in What goes out

3. Nominal Account Expense and loss Income and gain

4. Valuation Account When account to be decreased When account to be increased

B. In modern Classifications of Accounts:

Rules of Debit and Credit Sl.No Types of Account Account to be debited Account to be credited

1 Assets Account Increase Decrease

2 Liabilities Account Decrease Increase

3

Capital Account

Decrease

Increase

4 Revenue Account Decrease Increase`

5 Expenditure Account Increase Decrease

6 Withdrawal Account Increase Decrease

In other words, Debit the receiver and credit the giver for personal account; Debit what come

in and credit what goes out for real accounts. Debit all expense and Loss and Credit all

income and gain for nominal accounts.

1.4.(13) JOURNAL; JOURNALISING, TRANSACTIONS.

Journal means record.

Journalising transaction means recording transaction in the journal. In Hindustani,

Journal is called Rozonamcha –

Journal is Sub-divided into:

(a) Journal Proper

(b) Journal Special(under practical system of book keeping /English

system of book keeping)

In Journal Proper transaction are recorded by using the Rules of Debit and Credit. and

Under Journal Special transactions are recorded in a set of books like :

� Cash book – to record cash transaction.

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� Sales Day Book – to record Credit Sales.

� Purchases Day Book – to record credit purchases.

� Petty Cash Book – to record petty cash payments.

� Stock Register-- to record purchase of consumables etc.

� Other Misc. books or Registers as maintained by the office of the

organisation.

These books are also called subsidiary books.

In the case of Journal Proper all types of transaction are recorded by using the Rules

of Debit and Credit. Journal Proper is superior to Journal Special for the reason that the

former can record all types of transactions but the later can record only cash and credit

transactions.

Steps for Journalising transactions in Journal Proper:

Step 1. Select the two most relevant accounts.

Step 2. Classify the accounts so selected.

Step 3. Record the transaction in the Journal in its format by using the Rules of Debit

and Credit.

Step 4. Provide a narration to each and every entry in the Journal.

Illustration:

From the following transactions identify the relevant accounts and classify them by

using (a) Traditional approach and (b) modern approach.

1. Mr A started business with Rs 50,000.

2. Purchased goods for cash Rs 10,000.

3. Sold goods to M for cash Rs 15,000.

4. Sold goods to C for Rs 6,000 on credit.

5. Purchased furniture for Rs 4,000.

Solution:

(a) Identification and classification of accounts under Traditional approach.

Transactions Relevant Accounts involved Classification

1. Mr A started business with

Rs 50,000

Cash

Capital

Real

Personal

2. Purchased goods for cash

Rs 10,000

Purchase/Goods

Cash

Nominal

Real

3. Sold goods to M for cash

Rs 10,000

Cash

Sales/Goods

Real

Nominal

4. Sold goods to C for Rs

6,000 on credit

C

Sales/Goods

Personal

Nominal

5. Purchased Furniture for Rs

4,000 on cash

Furniture

Cash

Real

Real

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(b) Identification and Classification of accounts under Mordern Approach:

Transactions Relevant Accounts involved Classification

1. A started business with Rs

50,000

Cash

Capital

Asset

Liability

2. Purchased goods for cash

Rs 10,000

Purchase/Goods

Cash

Expense

Asset

3. Sold goods to M for cash

Rs 10,000

Cash

Sales/Goods

Asset

Revenue

4. Sold goods to C for Rs

6,000 on credit

C

Sales/Goods

Asset

Revenue

5. Purchased Furniture for Rs

4,000 cash

Furniture

Cash

Asset

Asset

1.4 (14): TYPES OF ENTRY:

A record in the Journal is called Journal entry or simply an entry .Following are the

types of entry found in Journal Proper.

♦ Opening Entry

♦ Closing Entry

♦ Transfer Entry

♦ Adjusting Entry

♦ Rectifying Entry

♦ Proper Entry( General Journal)

The above types of entries are used in different situations. For example rectifying entry

will be used when a mistake has been located in the record but correction is to be made

without any cancellation or otherwise.

FORMAT OF JOURNAL PROPER

Dr Cr

Date Particulars L.F. Dr

(Amount)

Cr

(Amount)

2008

April 1

2

Cash a/c ……. Dr

To Capital a/c

(Being Capital brought in)

Bank a/c Dr

To Cash a/c

(Being Cash deposited into

the bank)

Rs

10,000

8,000

Rs

10,000

8,000

Total 18,000 18,000

It is the first book in which transactions are recorded. A journal entry is an analysis of

the effects of a transaction on the accounts. Usually entries are made in chronological order

i.e. in the order in which they occur.

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1.4 (15) RULING OF JOURNAL ENTRY:

(a.) Date: The year is written at the top of the date of the column of each page of the

journal. In the next line, month and the day will be recorded. The month and the

year need not be repeated until a new page is begun or they have changed.

(b.) Particulars: This column is meant for the title of the account and its description.

Name of the account to be debited is entered in the extreme left of the particulars

column. The symbol ‘Dr’ is to be written at the right end of the particulars column

on the same line of the account debited .The amount involved is also entered in the

left hand money column (Dr Amount).Name of the account to be credited is entered

in the next line with a prefix ‘To’ and is indented to the right money column (Cr

Amount).A short explanation of the transaction called narration will be given

immediately below the account credited (account below).Narration is particularly

important for non routine transactions where their nature is, otherwise, not apparent.

Narrations always appear within Parenthesis and are begun with the word ‘Being’ or

‘For’ or without any such word. Finally a thin line may be drawn through the

particulars column to mark that the entry of a transaction has been completed.

(c.) Ledger Folio (L.F): The Ledger Folio column to the right of the particulars column

is not filled in when transactions are just recorded in the Journal. When the debits

and credits are posted in the ledger accounts, the page number of the ledger in

which these accounts are appearing are shown in this column.

(d.) Amount (Dr): It is to record the debit amount for the account debited.. And the unit

of measurement i.e., Rs. is recorded at the top of this column of each page and this

will not be repeated.

(e.) Amount (Cr): It is to record the credit amount for the accounts credited. And the

unit of measurement i.e., Rs is recorded at the top of this column of each Page and

this will not be repeated.

Finally, close the Journal entry/ entries for the period by finding out the grand totals

of the amount column and see if the two column agree. If the totals do not agree

check the entries again and find the mistake, if any.

PRACTICAL PROBLEMS ON JOURNAL:

Problem 1: Journalise the following transaction in the book of Mr X.

April 2008 1. Started business with the capital of Rs 4,00,000

3. Brought goods from Santosh & Bros Rs 37,500

8. Sold goods to Rama & Co. Rs 41,000

12. Paid Santosh & Bros. on account Rs 23,000

22 Paid Ram Salary Rs 4,500

26 Received interest on Investments Rs 7, 000

28 Purchased goods for cash Rs 1,07,500

30 Brought Furniture from Lalaji Bros.Cash Rs 30,400

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Journal Entries in the books of Mr X Amount Date Particulars L.F

Dr Cr

Cash a/c Dr

To Capital a/c

(Being money brought into the business)

Goods a/c(Purchases a/c) Dr

To Santosh & Bros.

(Being goods purchased from Santosh &

Bros.)

Ram & Co. Dr

To Goods a/c (Sales a/c)

(Being goods sold to Ram & Co.)

Santosh & Bros. Dr

To Cash a/c

( Being cash paid to Santosh & Bros.)

Salaries a/c Dr

To Cash a/c

(Being salaries paid)

Cash a/c Dr

To Interest a/c

(Being Interest received)

Goods a/c(Purchases a/c) Dr

To Cash a/c

(Being Cash Purchases )

2008

April 1

3

8

12

22

2008 April

26

28

30 Furniture a/c Dr

To cash a/c

( For cash purchase of Furniture

Rs

4,00000

37,500

41,000

23,000

4,500

7,000

1,07,500

30,400

Rs

4,00000

37,500

41,000

23,000

4,500

7,000

1,07,500

30,400

Total 6,49,900 6,49,900

Problem 2: Journalise the following transactions:

April 2009,

1. Commenced business with the

capital cf

Rs. 20,000

6. Brought goods for cash Rs 2,750

13. Purchased goods from K. gupta Rs 1,350

14 Sold goods to R.Aggarwal Rs 2,000

25 Paid for salary Rs 400

26 Paid for stationary Rs 300

30 Received Interest on investments Rs 3,000

Solution: Journal Entries in the books of ….. Amount Date Particular L.F

Dr Cr

Cash a/c Dr

To Capital a/c

(Being money brought into the business)

2009

April

1

6

Goods a/c/Purchases a/c Dr

To cash

(Being goods purchased for Cash)

Rs

20,000

2,750

Rs

20,000

2,750

14

Goods a/c /Purchases a/c Dr

To K.Gupta

(Being Purchase from K.Gupta on credit)

R.Aggarwal Dr

To Goods a/c (Sales a/c)

( Being goods sold to R.Aggarwal on

credited)

Salaries a/c Dr

To Cash a/c

(Being salaries paid)

Stationary a/c Dr

To cash a/c

(Being Cash Purchases of Stationary)

13

14

25

26

30 Cash a/c Dr

To Interest a/c

(Being Interest received on its investment )

1,350

2,000

400

300

30,400

1,350

2,000

400

300

30,400

Total 29,800 29,800

Problem 3: On 1st April, 2007 S.K. Gautam commenced business with a capital of Rs

40,000 and his transactions for the month are given below;

April 2007

1. Purchased goods for cash 600

2. Purchased furniture for cash 1,000

Purchased for a typewriter for cash 300

Purchased goods on credit from Satish 600

3. Cash sales 400

4 Sold goods to Brij Bhushan 1,000

5. Purchased from Kallu & Lallu 5,000 & 2,000

6. Sold to Krishna Murari 700

7. Paid to Satish on account 200

8. Returned goods to Kallu 100

9. Brij Bhushan returned goods 50

10 Received from Krishna Murari and 375

Discount Allowed 25

11. Paid to Satish Cash 380

Discount Allowed by him 20

15 Sold goods to Mahabir 300

19 Gave away as Charity –Cash 51

Goods 25

25 Purchased a building 20,000

27 Paid Sundry Expenses 25

28 Received cash from Mahabir 295

And Discount allowed 5

29 Brij Bhushan paid on account 800

30 Rent Paid 150

30 Amount withdrawn by the proprietor for private use 150

30 Received interest on investments 100

Solution: Amount Date Particular L.F

Dr Cr

2007

April

1

Cash a/c Dr

To Capital a/c

(Being Capital brought into the business)

Rs

40,000

Rs

40,000

15

2 Purchases a/c Dr

To cash a/c

(Being the amount of goods purchased for Cash)

600

600

2 Furniture a/c Dr

Typewriter a/c Dr

To Cash a/c

(Being the amount of furniture and Typewriter

purchased for cash)

1,000

3000

4,000

2 Purchase a/c Dr

To Satish a/c

( Being the amount of the goods purchased on

credit)

600

600

3 Cash a/c Dr

To Sales a/c

(being good sold on credit)

400

400

4 Brij Bhushan a/c Dr

To Sales a/c

(Being goods sold on credit)

1000

1000

5 Purchased a/c Dr

To Kallu a/c

To Lallu a/c

(Being credit purchase of goods)

7,000

5,000

2,000

6 Krishna Murari a /c Dr

To Sales a/c

(Being goods sold to Krishna Murari)

700

700

7 Satish a/c Dr

To Cash a/c

(Being Cash paid to Satish)

200

200

8 Kallu a/c Dr

To Return outwards a/c

(Being the goods returned to Kallu)

100

100

9 Return Inward a/c Dr

To Brij Bhushan

(Being goods returned to Brij Bhushan)

50

50

10 Cash a/c Dr

Discount a/c Dr

To Krishna Muarari

(Being cash received And discount allowed)

675

25

700

11 Satish a/c Dr

To Cash a/c

To Discount a/c

( Being cash paid and Discount Received)

400

380

20

15 Mahabir a/c Dr

To Sales a/c

(Being goods sold on credit)

300

300

19 Charity a/c Dr

To Cash a/c

To Purchases a/c

(Being cash and goods given as charity)

76 51

25

25 Building a/c Dr

To Cash a/c

(Being the building purchased)

20,000

20,000

27 Sundry expenses a/c Dr

To cash a/c

(Being the amount of Sundry expenses paid)

25

25

28 Cash a/c Dr

Discount a/c

To Mahabir a/c

295

5

300

16

(Being the amount of the Sundry expenses paid)

29 Cash a/c Dr

To Brij Bhushan a/c

(Being cash received)

800

800

30 Cash a/c Dr

To Brij Bhushan a/c

(Being cash received)

150

150

30 Rent a/c Dr

To cash a/c

(being amount paid for rent)

150

150

30 Drawing a/c Dr

To cash a/c

(Being amount of cash withdrawn by the

proprietor for his personal use)

100

100

Total 1,74,951 1,74,951

Problem 4: From the following transactions of M/s Ram Lal & Sons , write up the Journal in

proper form.

2009

Jan 1. Assets: Cash in hand Rs 200 , Cash at bank Rs 6,800 , Stock of goods Rs

4,000 ,Mchinery Rs 10,000, Furniture Rs 1,000 .M/s Ashoka Bros. owe Rs

1,500 , M/s Raj Pal & Sons owe Rs 2,500

Liabiliies: Loan Rs 5,000 , sum owing to Binni Bros. Ltd 2,000

Jan 2 Sold Goods to Arun Bros.Rs 2,000

Jan 4 Received Rs 1,950 from Arun Bros. in full settlement of account.

Jan 6 Payment made to Binni Bros. Rs 975 by cheque , they allowed discount of

Rs 25

Jan 10 M/s Raj Pal & Sons pay Rs 2,400 by cheque and discount allowed to them

Rs 100 , cheque deposited in bank .

Jan 11 Paid for repairs to Machinery Rs 150

Jan 15 Bank intimates that the cheque of Raj Pal & sons has been returned

unpaid.

Jan 16 Brought goods from Hari Ram & Sons , Rs 1,000 in cash

Jan 19 Goods used personally by the propeiter Rs 50

Jan 20 Brought goods from Chatterjee & Co. Rs 5,000.

Jan 21 Goods worth Rs 100 is given away as charity .

Jan 22 Goods returned to Chatterjee & Co. Rs 500 .(Not being to specification)

Jan 25 Paid rent Rs 100 for the month of Feb.

Jan 26 Received rent for a portion of the shop sublet Rs 25.

Jan 27 Borrowed Rs 10,000 from Modern Investment Co. money deposited with

Bank for the time being.

Jan 28 M/s Ashoka Bros. become insolvent and a dividend of 50 P in the rupee is

received.

Jan 29 An amount which was written off as bad debts in 2008 recovered Rs 150

Jan 31 Salaries due to staff Rs 1,000

17

Solution:

Journal entries in the books of M/s Ram Lal & Sons

Amount Date Particular L.F

Dr Cr

2009 Jan

1

Cash a/c Dr Bank a/c Dr

Stock a/c Dr

Machinery a/c Dr

Furniture Dr

Ashoka Bros. Dr

M/s Ashoka Bros

Raj Pal & Sons a/c

To Loan a/c

To Binni Bros.

To Capital a/c

(Being assets and liabilities brought

forward from last year, capital found by

deducting liabilities from assets i.e

26,000 – 7,000 )

Rs 200

6,800

4,000

10,000

1,000

1,500

2,500

Rs

5,000

2,000

19,000

2 Arun Bros. a/c Dr

To Sales a/c

(Being goods sold to Arun Bros on Credit)

2,000

2,000

4 Cash a/c Dr

Discount a/c Dr

To Arun Bros. a/c (Being cash received and discount

allowed )

1,950

50

2,000

6 Binni Bros. a/c Dr

To Cash a/c

To Discount a/c

( Being cash paid and discount

received)

1,000

975

25

10

Bank a/c Dr

Discount a/c

To Raj Pal & Sons

(Being cheque received and deposited

and allowed discount in full settlement )

2,400

100

2,500

11 Repair a/c Dr

To Cash a/c

(Being repair of Machinery Paid )

150 150

15 Raj Pal & Sons Dr

To Sales a/c

(Being goods sold to Krishna Murari)

2,500

2,400

100

18

16 Purchase a/c Dr

To Cash a/c (Being goods purchased for cash)

1,000

1,000

19 Drawing a/c Dr

To goods a/c (or purchased a/c)

(Being goods taken out by proprietor

for private use )

50

50

20 Purchase a/c Dr

To Chatterjee & Co.

(Being goods purchases on credit)

5,000

5,000

21 Charity a/c Dr

Goods a/c (or Purchase a/c)

(Being goods given as charity)

100

100

22 Chatterjee & Co.a/c Dr

To Purchase Return a/c

(Being goods return not upto

specification)

500

500

25 Prepaid rent a/c Dr

To Rent a/c

(Being rent of Feb . paid in advance)

100

100

26 Cash a/c Dr

To rent a/c

(Being rent received from subtenant)

25

25

27 Bank a/c

To Loan a/c

(Being loan taken and deposited at the

bank)

10,000

10,000

28 Cash a/c Dr

Bad debts a/c Dr

To Ashoka Bros. a/c

(Being 50 P received from Ashoka’s

State on account of insolvency)

750

750

1,500

29 Cash a/c Dr

To Bad debt recovered a/c

(Being Bad debt amount recovered)

150

150

31 Salaries a/c Dr

To Outstanding salaries a/c

(Being Salaries outstanding for Jan

2009)

1,000

1,000

Total 55,575 55,575

19

Problem 5: (An Illustration on opening Entry)

Balance Sheet of AB Ltd. As at 31.12.07

Liabilities(Rs) Assets (Rs)

Capital 1,50,000 Land and Building 80,000

Sundry Creditors 30,000 Plant and Machinery 30,000

Outstanding Salaries 20,000 Furniture 20,000

Stock in trade 20,000

Cash in hand 20,000

Cash at bank 30,000

Pass the opening entry.

Solution:

Journal entries in the books of AB Ltd

Amount Date Particulars L.F

Dr

(Rs)

Cr

(Rs)

2008 Land & Buildings a/c Dr 80,000

Jan 1 Plant & Machinery a/c Dr 30,000

Furniture a/c Dr 20,000

Stock in Trade a/c Dr 20,000

Cash in hand a/c Dr 20,000

Cash at bank a/c Dr 30,000

To Sundry Creditor’s a/c 30,000

To outstanding salaries a/c 20,000

To Capital a/c 1,50,000

(Being last years balance brought forward)

Problem 6: (An Illustration on closing entry)

At the end of his accounting year on December 31, 2008 that books of Mr P showed

the following balances:

Purchases Rs. 10,050, sales Rs. 15,668, Selling Expenses Rs.1644, Return out Rs.

233, Return In Rs. 353, Establishment expenses Rs 878, Discount (Cr) Rs 109, Discounts Rs

87, Office expenses Rs 1448 Closing Stock in the Stock ledger shows a balance of Rs

644.But the actual year end stock on physical verification shows Rs. 499 .Pass the closing

entry.

20

Solution: Journal entry in the books of Mr. P

Amount Date Particulars L.F

Dr

(Rs)

Cr

(Rs)

2008 Trading a/c Dr 10,405

Dec 31 To Purchases a/c 10,050

To Return Inward a/c 355

(Being transfer to Trading a/c to find out Gross profit)

Dec 31 Sales a/c Dr 15,668

Return outward a/c Dr 233

Closing Stock a/c Dr 499

To Trading a/c 16,400

Dec 31 Trading a/c Dr 5,995

To Profit and Loss a/c 5,995

(Being Gross profit transferred to profit and loss a/c)

Dec 31 Profit and Loss a/c Dr 4057

To Selling Expenses a/c 1644

To Establishment Expenses a/c 878

To Discount Allowed a/c 87

To Office Expenses a/c 1448

(Being transfer to profit and Loss a/c for finding out net profit)

Dec 31 Discount Received a/c Dr 109

To Profit & Loss a/c 109

(Being transfer to profit and Loss a/c to determine net profit)

Dec 31 Profit and Loss a/c Dr 2047

To capital a/c 2047

(Being Net profit transferred to capital a/c)

Problem 7: (An Illustration on Transfer Entry) A firm transfers Rs. 20,000 to General Reserve out of Net Profit for the year ended

31st March, 2008. Pass the necessary entry.

Solution: Journal Entry in the books of ……

Amount Date Particulars L.F

Dr

(Rs)

Cr

(Rs)

2008 Profit and Loss a/c Dr 20,000

March 31 To General Reserve a/c 20,000

(Being amount transferred to General Reserve )

Note:

1) Rectification Entry or Rectifying Entry has been discussed in the chapter on

Rectification of errors.

2) Adjusting Entry will be discussed in Unit 5 (Chapter on Final Accounts)

21

UNIT -2 BOOKS OF ORIGINAL ENTRY AND BOOKS OF ACCOUNT

2.0. Books of Account consist of :

(a) Journal (Book of Prime or Original Entry)

(b) Ledger (Book of Final Entry )

If viewed from another angle we find that

Journal is a subsidiary book

And

Ledger is a principal book.

Again, Journal is classified as:

a) General Journal

b) Special Journal

Items unsuited to subsidiary books i.e special journal are recorded in the

general Journal which is then called proper Journal or Journal proper .This is popularly

known as Practical system of Book-keeping

Also, Ledger is sub-divided into:

(i) General Ledger

(ii) Debtors Ledger and

(iii) Creditors Ledger

This is called subdivision of Ledger.

Entry in the Journal is called Journal Entry whereas entry in the ledger is called Ledger Entry.

Ledger is called principal book of account or King of books of account because the figures

from it can be used directly in the final analysis .The figures from the ledger will have to be

used in the Trial Balance which will test the arithmetical accuracy of the books of account

and which is to be drawn up for preparing final accounts. This is not possible for a Journal,

Journal provides chronological record but ledger gives analytical record and as such its

information is comprehensive in Ledger.

Fig: A Diagrammatic representation of Books of Account.

2.1 Special Journals:

General journal and ledger together with the rules for recording them constitute an

accounting system. This system , however, fails to (i) provide information at low cost , (ii)

Books of Account

Ledger Journal

General

Ledger

Debtors

Ledger Creditors

Ledger

Cash

Book

Purchases

Day

Book

Sales

Day

Book

Return

Inward

Book

Return

outward

Book

Journal

proper

22

supply reports promptly, (iii) insure high degree of accuracy , and (iv) minimize the

possibility of fraud or theft. In actual practice, the accounting system is so designed as to

meet all these requirements. Special journals are meant for such specific transactions as are

repeated time and again , e.g. receipts and payment of money, credit sales to customers etc.

These not only frequently occur but also constitute the bulk of transactions of a business.

Recording in journal requires the writing down of the title of each account affected as many

times as the transactions occur. Further, each journal debit and credit need individual posting

and hence entail heavy load of repetitive journalizing and postings labour. Special journal

device minimizes such repetitions and economises time and labour in recording the books of

original and final entries .Here, the procedure is to –

(i) Classify the transactions frequently occurring into classes of similar transactions e.g

credit purchase, credit sales , money received and paid etc.

(ii) Provide separate special journal for each class of transaction s , e.g purchases journal (

or book) for credit trade purchases credit trade sales, cash book for monies received and

paid etc.

(iii) Enter in each of such Journal the individual amount and other related account relevant

to the classified transactions. Thus, if credit purchases of goods are made for Rs1,000

from A , Rs 1,500 from B and Rs 7,000 from C on January 5,15,and 30 respectively, the

transactions record will be recorded in the Purchases Day Book as:

Purchases Day book Date Particulars Inward Invoice

No

L.F Amount Rs

January 5

15

30

A

B

C

1,000

1,500

7,000

Note that only one account (instead of two accounts or lines in general journals) for each

transaction is recorded. The writing load of original entry is thus halved.

(iv) Total of all the individual amounts periodically (say monthly, e.g the total of the

aforesaid purchases book is Rs 9,500..

(v) Post (a) the special account with the total and (b) other accounts individually .Thus,

the total of Rs9,500 will be debited to the Purchases Account , and the respective

individual amounts credited to the Supplier A, B, C separately as below.

Purchases Account A

January 30 To Sundries as January 5 By purchases

Per P.B.9,500 1,000

C B

January 30 By Purchases, 7000 January 15 by Purchases 1,500

Thus, the purchases account is relieved of individual postings and the work load duly

reduced.

Whatsoever be the number of special journals (or subsidiary books), there will always

be some entries unfit for these journals. Accordingly, they will be recorded in the general

journals, also called proper journal or Journal proper.

Advantages of special journal:

1. Load of journalizing and posting are halved.

2. Division of Labour due to varied journals is made possible.

3. Specialisation on the part of both employees and equipment permits economy in

recording transaction.

4. Installation of internal check (feasible by division of labour) is evident.

23

5. Prompt, economical and more accurate supply of accounting information will be

seen .

Ruling and number of special journals employed vary according to the requirements of each

unit/organisation. Format of commonly used special Journals (format of Asset Register,

Stock Register, Day Books etc.) are given below:

A. Format of Purchases Day Book (Register under Journal special):

Date Particulars(Name of the supplier

with the item of goods purchased)

L.F Details Amount

(Rs)

Purchase a/c Dr Total

Note: Purchases Day Book records only credit purchases.

B. Format of Sales Day Book Date Particulars(Name of the customer

with the item of goods sold)

L.F Details Amount

(Rs)

Sales a/c Dr Total

Note: The Sales Day Book records only Credit sales. It is prepared from the original

outwards invoices sent to the credit Purchaser (customer). Total of Sales Day Book is

credited to Sales Account

C. Return Outward Book

(Purchases Return Book)

Date Particulars(Name of the person to whom goods

are returned with the item of goods)

Credit

Note No.

L.F Details Amount

(Rs)

Return Outwards a/c Cr Total

24

Note: If records goods returned to supplier and are compiled from invoices or other

working papers.

D. Format of Return Inwards Book

(Sales Return Book) Date Particulars(Name of the person/ firm from

whom goods are returned with the item of

goods)

Debit

Note No.

L.F Details Amount

(Rs)

Return Inwards a/c Dr Total

Note: It records only goods returned by customers.

E. Stock Register of Consumable

Such as Stationary, Chemical, Spare Parts etc

(in running Balance form) of account

G.F.R -41

Name of the Article Unit of Account Date Particulars Supplier

Invoice No.

& date

Receipt Issue

Voucher No.

Issue Balance Unit price

1 2 3 4 5 6 7 8

Note: User indent in original shall be treated as voucher, Issue voucher number shall be

consecutive order, financial year wise and it should be noted on each indent.

F. Format of Asset Register

(in running Balance Form of Account)

G.F.R -40

Name and Description of Fixed Asset Particulars of Supplier Date Particulars of

Asset Name and Address

Bill No and date

Cost of

Asset

Location

of the

asset

Remarks

1 2 3 4 5 6 7

Note: The item of similar nature but having significant distinctive feature (e.g, study table,

office table, Computer table etc.) should be accounted for separately in Stock.

25

2.2. Ledger:

Ledger is the container of accounts .Earlier, it was defined as a bound book or a set of

loose leaf /page or punched card, each account being placed on a separate page or card.

However with the advent of computers ledger may also be defined as a metallic disc.

containing the accounts. Thus, ledger may consist of a set of impulse on a reel of magnetic

tap.

It provides a continuous record of transactions concerning each account .It

serves as a constant source of information for managerial action. For example , by referring

to the date of debit entry in a customer’s account the organisation may decide whether or not

the customer be asked to pay up.

2.3 Posting of transaction into ledger (Ledger Posting)

The process of transferring of the debits and credits from the Journal to the ledger is

called posting. It may be direct or indirect ledger posting.

STEPS FOR LEDGER POSTING(INDIRECT):

Step 1. Use the Columns for ’Date’ and ‘Amount’ in both side of the account in ‘T-

form’ properly.

Step 2. Use the Column for ‘particulars’ by using a prefix ‘To’ on the L.H.S and ‘By

‘on the R.H.S.

Step 3. While using the columns for ‘particulars’ mention (a) the account credited in

the Journal on the L.H.S and (b) the account debited in the Journal on the

R.H.S. of the Ledger account.

Step 4. Columns for Folio in both side will give the page number in which the account

appears in the Journal.

Repeat the above steps in posting. The indented Journal debits are copied and have

become ledger account debits.

Conversely, Journal credits are copied and have become ledger account credits. From

a Journal each item is posted individually. The number of postings is two in a simple Journal

entry three or more in a Compound Journal entry depending on the number of accounts

involved. Whereas a transaction is journalized as and when it occurs , posting is usually

conducted periodically, say weekly or by weekly as the organisations need. In Government

offices and banking concerns accounts in the ledger are posted daily, if not instantaneously.

In the case of the direct ledger posting transactions are posted to the concerned account in the

ledger instead of passing through Journals.

2.4 Balancing of an account in the ledger.

Balance is an accounting term denoting the difference between two sides of an

account or the total of an account, containing only debits and credits (as in the case of

nominal accounts). A computerized system will usually print the balance of the account after

each transaction, but in manual accounting we have to ascertain the balance.

26

STEPS FOR BALANCING AN ACCOUNT:

Step 1. Compute the difference of the totals of the two sides.

Step 2. If the debit side total is heavier put the difference on the credit side by writing

the words ‘By balance c/d’ or ‘By balance c/fd’. If the credit side total is more, put

the difference on the debit side by writing the words ‘To Balance c/d’ or ‘To

Balance c/fd’.

Step 3. After putting the difference in the appropriate side of the account add both

side of the account. Draw a thin line above and below the total and keep the totals at

the same level.

Step 4. Bring down the debit balance on the debit side by writing in particular column

‘To Balance b/d’ or ‘To balance b/fd’. Likewise, bring down the credit balance on

the credit side by writing the words in the particular column ‘By balance b/d’ or ‘By

balance b/fd’. For this purpose, the date will be the date next to the date on which

the account was balanced and closed, unless otherwise stated to the country.

In the mercantile system of book keeping generally accounts are balanced and closed on

the last working day of a month. But under the Government system of accounting the cash

account called cash book is to be balanced and closed at the end of every working day.

Debit balance means that debit side is more than credit side whereas credit balance means

that credit side is more than the debit side. In favorable situation, a real account will have

debit balance, and a personal account will have credit balance .For nominal accounts no

balancing is necessary.

2.5 Sequence and Numbering of Ledger Accounts:

Ledger accounts are generally arranged in some logical manner such as assets first

followed by liabilities, owner’s equity (capital) revenue and expenses. Again, among the

assets, fixed assets come first followed by current assets. Number of accounts required will

depend upon the size and nature of operation and also policy of management. An

identification number may be assigned to each account in the ledger to facilitate their

location.

Example of Numbering Ledger Account Title of Account Account No.

Fixed Assets (1- 15)

Goodwill

Land

Building

Current Assets (16- 25)

Stock in Trade

Sundry Debtors

B/R

Liabilities (26-36)

Creditors

B/P and

so on

01

02

03

16

17

18

26

27

27

2.6 Trial balance and its preparation:

A trial balance is a statement of debit and credit of totals or balances extracted from

the ledger for testing the arithmetical accuracy of the books of account under Double Entry

System of Book-keeping .It is quite natural that since every amount that is placed on the debit

side of an account has a corresponding entry on the credit side of some other account, the

total of all debit balances should agree with the total of all credit balances. The trial balance

should include cash and bank balances from the cash book.

2.7 Objectives of preparing a Trial Balance:

1. To check the arithmetical accuracy of the accounts.

2. To furnish the required information for preparing Final Accounts.

3. To give the balances of all the accounts in the ledger and

4. To prepare the groundwork for drawing up FINAL ACCOUNTS.

The accountant heaves a sigh of relief when the trial; balance has agreed, because it is

quite a good proof that the ledger has been correctly written and drawn up. However, the

agreement of a Trial balance cannot be a conclusive proof of correctness in the books of

account. This is because of the fact that there are certain errors which can still exist even if

the trial balance has agreed. Following are some of the errors which can be located by a Trial

Balance:

1. Mistake in transferring the balance of an account to the trial balance or omission to

write it.

2. Mistake in balancing of an account.

3. Mistake in posting so far as the amount is wrongly written.

4. Making an entry on the wrong side.

5. Mistake in casting the subsidiary Books.

6. Mistake in posting the discount columns of cash book.

A Trial balance cannot locate certain types of errors. In other words a trial balance may

agree despite of the existence of following errors:

(1). Errors of omission- a transaction entirely omitted from records in the original books

or partially omitted while posting.

(2). Errors of Commission- wrong posting of either of the amount or in the wrong side or

in the wrong account. An error in casting subsidiary book is also an error on

commission.

(3). Errors of Principle- wrong classification of expenditure or receipt.

(4). Compensating Errors- The errors at (1) , (2) and (4) are also called clerical errors

whereas errors at (3) will be known as book keeping errors.

These errors can be rectified by passing rectifying entries after closing the books of

accounts and final accounts are prepared. Rectification of such errors will be discussed in a

separately.

2.8 Methods of preparing a Trial Balance:

There are three methods of preparing a trial balance .They are

28

a. Totals Method

b. Balances method

c. Totals and Balances Method.

Format of Trial Balance under different methods

(1) Trial balance as on

(Totals Method)

Sl.No Name of the Accounts L.F. Dr

(Total)

Cr

(Total)

(2) Trial balance as on

(Balances Method)

Sl.No Name of the Accounts L.F. Dr

(Balance )

Cr

(Balance)

(3)

Trial balance as on

(Total and Balance Method) Sl.No Ledger Accounts L.F. Dr

(Total)

Cr

(Total)

Dr

(Balance)

Cr

(Balance)

Out of these three methods, the Balance Method is most popular .In Totals Method

calculation involved are general big and cumbersome and chances of committing mistake are

many.

29

2.9 Presentation of a Trial Balance:

A Trial balance may be presented in two different forms – Traditional Trial Balance

and Modified (Adjusted) Trial Balance. In the Traditional form the balances extracted from

the ledger accounts are shown in the respective debit and credit columns. Items for

adjustment and additional information are being given at the bottom. In the modified

(adjusted) trial balance everything will be shown in the body of the Trial Balance after proper

adjustment and nothing will be kept for additional information or otherwise. The latest trend

is to present the Trial Balance in the adjusted form and this will make the work of accountant

more handy and simplified while he prepares Final accounts. The guiding principle for

drawing up a Trial Balance is to enter all assets, expenses, losses in the debit column and to

enter all liabilities, capital, income and fund in the credit column.

A. A specimen of Traditional Trial Balance drawn up by using Balance

Method:

Trial Balance as on 31st December, 2004

Heads of Account Debit (Rs.) Credit (Rs.)

13,200

9,000

6,000

43,200

-

1,200 -

92,500

30,000

2,400

20,000

27,200

60,000

52,500

77,800

1.

2.

3.

4.

5.

6. 7.

8.

9.

10.

11.

Salary

Rent paid

Cash in hand

Sundry Debtors/Sundry

Creditors

Loan from Mr. X

Interest on Loan paid Capital

Purchases/Sales

Furniture & Fittings

Insurance Premium

Stock (1.1.2004)

27,500

27,500

Additional Information:

(a) Salary due to shop Assistant on December, 31 2004 is Rs. 1,800

(b) Loan from Mr. X taken on October 1, 2004 carries interest at 12% p.a.

(c) Cost of goods in stock on December 31, 2004 was Rs. 35,000.

(d) Insurance premium for the period from September 1, 2004 to August 1, 2005

has been paid.

(e) Furniture is to be depreated @ 10% p.a

B. A specimen of Modified Trial Balance drawn up by using Balance Method:

Trial Balance as on 31st December, 2004

Heads of Account Debit (Rs.) Credit (Rs.)

1.

2.

3.

4.

5.

6.

Salary

Rent paid

Salary Outstanding

Cash in hand

Sundry Debtors/Sundry

Creditors 12% Loan from Mr. X (taken on

15,000

9,000

--

6,000

43,200

1,800

27,200

30

--

1,800

--

57,500

27,000

3,000

35,000

20,000

1,800

600

60,000

--

52,500

77,800

600

7.

8.

9.

10. 11.

12.

13.

14.

15.

1.10.2004)

Interest on Loan

Capital

Purchases/Sales (adjusted)

Furniture & Fittings Depreciation on Furniture &

Fittings

Closing Stock

Opening Stock

Insurance Premium Insurance

Premium Prepaid

Interest on loan outstanding

2,19,900

2,19,900

2.10 Errors and their rectification in Book Keeping:

Errors are of two types. They are one sided error and two sided errors. In the case of the

existence of the first type of error the trial balance will not agree or the balance in the cash

book, for example , will not agree with the actual balance in hand Whenever a trial balance

does not agree, the mistake, whatever small it is , must be unearthed. A small amount may be

the net result of a host of mistakes and it is not safe to ignore a difference in trial balance ,

however small it is .

2.10 (i). Steps to rectify one sided errors:

1. Total the Dr and Cr Columns of the trial balance again. If one amount has been shown

for a group of accounts ( as in the case of Sundry debtors or Sundry Creditors)

recheck the total of such accounts.

2. See that balances of all the accounts including cash and bank balances have been

written in the trial balance.

3. Find out the exact difference in the Trial balance .Look for such accounts showing

such amount of difference .It is possible that the balance of the particular account has

been omitted. Amount showing a balance equal to difference, half the difference and

double the difference should be carefully checked. If the difference is exactly

divisible by 9 it is possible that the error arises of transposition or transplacement or

sliding of figures. Check where there is mistake in balancing accounts in the ledger.

4. Recheck the totals of subsidiary books particularly when the difference is of 1,10,100

and so on .

5. If the difference is big enough comparison of the present figure with the figure in the

Trial Balance of the corresponding dates of the previous year may be useful.

6. Posting of all amount corresponding to the difference or half the difference should be

checked.

7. If the difference still persists posting of all accounts should be checked .For this

purpose, take up the nominal accounts first, real accounts next and than the personal

accounts.

8. If there is still a difference check the postings with the help of persons not related to

the accounting works.

9. For the purpose of checking such errors it is always advisable to do the work with a

fresh mind and mental make up. Takings rest in between the works will be very

helpful.

31

2.10(ii) SUSPENSE ACCOUNT:

Unless the difference in the Trial balance is quickly located, it is usual to put the difference to

a suspense account and make the trial balance agreed. If the debit side is short, the suspense

account will be debited saying “ To difference in Trial Balance “and similarly the suspense

account will be credited saying “ By difference in Trial balance “ .When the difference in a

Trial balance is put to Suspense account the account to be corrected will be debited or

credited as the case may be and the Journal entry will be completed by crediting or debiting

the suspense account. When all the mistakes have been rectified the suspense account will be

closed automatically.

Since it is desirable to ascertain the profit or loss of each period separately it should be

necessary to rectify errors in such a way as not to affect the current year’s expenses, losses or

income. For the purpose of correcting errors in the next accounting year, a separate account

should be prepared in that year (next year).Accounts for errors committed in the previous

accounting period should be parsed through that account.

2.10(iii) Steps to rectify two sided errors:

As discussed earlier, Errors of omission, Errors of Commission, Errors of principle

and Compensating errors cannot be detected by Trial Balance. These errors are to be rectified

by passing Rectification entries only.

Case I: Since the error of omission is the result of non –entry of a transaction, such

error can be rectified by passing the Journal entry which should have been passed.

For example, Receipt of Rs 2000 from Mr.X was not recorded earlier. In that case, the

rectifying entry is:

Cash a/c Dr 2000

To Mr A’s a/c ------------ 2000

(Being the entry for receipt of cash not recorded earlier)

Case II: In the case of the other types of two sided error we have to follow the

following steps for the purpose of rectification.

Step 1: Reproduce the wrong entry passed already in the books.

Step 2: Pass a cancellation entry reversing the incorrect entry in Step 1

Step 3: Pass the correct entry that would have been passed by using the Rules of

Debit and Credit

Step 4: Compound the entries in Step 2 and step 3 above .The resultant entry is

the rectification entry or rectifying entry.

Example: Rs 3750 paid for wages to workman for making show cases had been charged

wrongly to wages Account.

Now, by applying the above steps of rectification, we have,

1. Wages a/c Dr 3750

32

To cash a/c

(Reproduction of wrong entry) 3750

2. Cash a/c Dr 3750

To wages a/c 3750

(Cancellation of wrong entry

As per step -2 )

3. Furniture a/c Dr 3750

To cash a/c 3750

(Correct entry that should have been

Passed as per step -3)

4. Furniture a/c Dr 3750

To wages a/c 3750

(Rectifying entry for wages

Wrongly debited)

Note: Errors of commission generally consists of (a) Recordings wrong amount in the books

of original entry. For example , if stationary purchased for cash for Rs 175 is recorded in the

cash book as Rs 751 and posted to Stationery Account in the Ledger as Rs 751, the Trial

balance will still agree. (b) Recording both aspects of the transaction more than once in the

books of account. For example, if a credit purchase of Rs 4000 from Mr X is entered in the

Purchases Day Book twice, the error will not cause a disagreement in the Trial Balance and

(c) Errors in recording a transaction on the correct side of a wrong account. For example , if

Rs 500 paid to Suresh is wrongly debited to Shambu it will not affect the agreement of a Trial

balance.

2.11 Correction of Errors in the next Accounting period:

It is necessary to rectify errors in such a way as not to affect the current year’s

expenses losses or income. To take an example , if an error committed in 2007-08 is rectified

in 2008-2009 by debiting Purchases Account, it would mean that it would be treated a an

expenditure for 2008-2009. This will be wrong and the proper way is to leave the purchases

Account and all other nominal accounts for 2008-2009 unaffected by errors in 2007-2008.

For this purpose, a separate account under the name and style of profit and loss Adjustment

Account shall be opened and all debits and all credits in respect of nominal accounts for

errors committed in the previous accounting period should be passed through that account.

The balance of this account is finally transferred to the Capital Account. It is to be noted that

this procedure will be followed only in respect of nominal accounts and only if rectification is

made in the next accounting period. Further, if the rectification is made in the current year

and suspense account is opened for the purpose there should be no balance in the suspense

account after rectification . If the balance exists it will be presumed that all the errors have

not yet been located and corrected.

33

Problem on Rectification of errors and their solution:

Problem 1: Pass necessary journal entries to rectify the following errors:

(i) An amount of Rs 2,000 withdrawn by the proprietor for his personal use

had been debited to trade expense account.

(ii) A purchase of goods from Nathan amounting to Rs 3,000 has been

wrongly entered in the sales book.

(iii) A credit sale for Rs1,000 to Santhanam has been wrongly passed through

the book.

(iv) Rs1,500 received from Malhotra have been credited to Mehrota.

(v) Rs 3,750 paid on account of salary to the cashier Dhawan stands debited to

his personal account.

(vi) A Contactor’s bill for extension of premises amounting Rs 27,500 has

been debited to building repairs accounts.

(vii) On 28th

March , goods of the value of Rs 500 were returned by Akash

Deep and were taken into stock but return was entered in the books on 3rd

April i.e after the expiration of the financial year on 31st March.

(viii) A bill of Rs 2,000 for old office furniture sold to Sethi was entered in the

sales book .The book value of the furniture sold was Rs. 2,500.

(ix) An amount of Rs 800 received on account of interest was credited to

commission account.

Solution:

Journal entries in the books of …… Particulars L.F Dr

Rs

Cr

Rs

(i) Drawing Account Dr

To Trading Expenses Account

(Drawing by the Proprietor credited to trading

expenses account; error now rectified)

2,000

2,000

(ii) Purchases Account Dr

Sales Account

To Nathan

(Credit Purchase recorded in the sales book, error

now rectified)

3,000

3,000

6,000

(iii) Santhanam Dr

To Purchases Account

To Sales Account

(Credit sale of Rs 1,000 to Santhanam recorded in

the purchase book , error now rectified)

2,000

1,000

1,000

(iv) Mehotra Dr

To Malhotra

(Amount received from Malhotra credited to

Malhotra , error now rectified)

1,500

1,500

(v) Salary Account

To Dhawan

(Salary to Dhawan debited to Dhawan , error now

rectified)

3,750

3,750

(vi) Building Dr

To Building repairs account

27,500

27,500

34

(Amount spent on extension of building debited to

building repairs account, errors now rectified)

(vii) Sales Return Account Dr To Akash Deep

(Sales return by Akash omitted to be recorded in the

relevant year’s book of account , now being

recorded)

500 500

(viii) Sales Account Dr

Loss on Sale of Furniture Account Dr

To Furniture Account (Sale of old furniture for Rs 2,000 recorded on sales

book; error now rectified. Loss on sale furniture also

being recorded.)

2,000

500

2,500

(ix) Commission Account Dr

To Interest Account (Interest received credited to commission account;

error now rectified)

800

800

Total 35,050 35,050

Problem 2: Pass Journal entries to rectify the following errors:

(i) A sum of Rs 12,000 paid to Subhash was debited to Suresh.

(ii) Repairs of a machine amounting to Rs 1,745 were debited to machinery

account.

(iii) A bill receivable for Rs 15,000 accepted by Soni Bros. was recorded in

bills payable book.

(iv) A credit sale of goods in trade for Rs 15,870 to Surya Prakash was

recorded in the sales book as Rs 18,570.

(v) Goods sold to Mohan for Rs 2,140 were returned by him but no entry was

passed in the books.

(vi) Goods costing Rs 800 taken by the proprietor for birthday gift to his

daughter were not recorded in the books of account.

(vii) A sum of Rs 1,300 was received from Anand , a customer against the

amount previously written off as bad debt; the amount received was

credited to Anand.

(viii) Received interest Rs 500 posted to loan account.

(ix) Carriage outward, Rs 100 was posted to carriage inward account.

(x) Goods invoiced at Rs 1,870 to Mohit were returned by the Cutomer .The

return was recorded in return outward book as Rs 1,780.

(xi) A purchase amounting to Rs 1,000 made to Harish , a staff member was

recorded in the purchases book.

35

Solution: Journal entries in the books of ……

Particulars Dr

Rs

Cr

Rs

(i) Subhash Dr

To Suresh

(Amount paid to Subhash wrongly debited to Suresh

earlier, error being rectified now)

12,000

12,000

(ii) Repairs Account Dr

To Machinery Account

(Repairs to a machine wrongly debited to machinery

account, error now rectified.)

1,745

1,745

(iii) Bills Receivable Account Dr

Bills Payable Account

To Soni Bros.

(Acceptance received from Soni Bros. wrongly

recorded in the bills payable book, error now

rectified)

15,000

15,000

30,000

(iv) Sales Account Dr

To Surya Prakash

( credit sale of Rs 15,870 to Surya Prakash wrongly

recorded in the sales book as Rs 18,570 , adjustment

to rectify the error now made)

2,700

2,700

(v) Sales Returns Account Dr

To Mohan

(Sales return by Mohan for Rs 2,140 not recorded

earlier being recorded now)

2,140

2,140

(vi) Drawings Account Dr

To Purchase Account

(Goods taken away by the proprietor for personal use

not recorded earlier , being recorded now)

800

800

(vii) Anand Dr

To Bad Debts Recovered Account

(recovery of a Bad debt credited to the payers

account; error being rectified now)

1,300

1,300

(viii) Loan Account Dr

To Interest Earned Account

(Rectification of the wrong credit given to loan

account for interest received)

500

500

(ix) Carriage Outward Account Dr

To Carriage Inward Account

(Carriage outward wrongly posted to carriage inward

account error being rectified now)

100

100

(x) Return Inward Account Dr

Return Outward Account Dr

To Mohit

(Goods invoiced at Rs 1,870 returned by Mohit , a

customer recorded in returns outward book as Rs

1,780, error being rectified now)

1,870

1,870

3,650

(xi) Harish Dr

To Purchase Account

(Purchase made for Harish , a staff member entered in

purchases book, error now rectified.)

1,000

1,000

Total 55,935 55,935

Problem 3: While trying to close his books for the year ended 31st March, 2008.Murthy

found that the Trial Balance did not agree. He traced the following errors.

36

(a) The purchases Day Book for November , 2007 was over cast by Rs 100.Also during

January , 2008 the total of one page , Rs 5,394 was carried forward to the next page as

Rs 5,934.

(b) In the Sales Book for March, 2008 a sale of Rs 340 to Bhatia was entered as Rs 430.

(c) Purchases Return Book was not posted for the month of February , 2008 Total was Rs

850.

(d) A Sale return from Dutta in October , 2007 Rs 210 ,, was entered in the Sales Book.

(e) Cash received from M.Ray , Rs 300 was posted to the debit of N.Ray the cash book

was correctly posted.

(f) Purchases of an office typewriter for Rs 1,350 from R.Ltd. on Credit was entered in

the Purchases Day Book.

(g) Annual whitewashing , Rs 350 was debited to Building Account.

Given the entries that should be recorded to rectify the error mentioned above, assuming:

(i) That no suspense Account has been opened with the difference in the Trial Balance;

(ii) that such a suspense account has been opened.

Solution:

Case (i) When no Suspense Account is opened:

Journals Entries in the books of Murthy: (a)

There was overcast of Rs 100 in 2007 and excess carry forward

of Rs 540 in 2008 .Therefore purchases account has been

wrongly debited with Rs 640.In order to correct this mistake

purchases account should be credited with Rs 640.

To purchases a/c

( one sided error)

640

(b) Sales Account Dr

To Bhatia

(Being excess record of sales to Bhatia , now rectified)

90

90

(c) Purchases Return a/c was not posted therefore, it should be now

credited with Rs 850

(d) Sales a/c Dr

Sales Returns a/c Dr

To Dutta

(Being wrong entry in Sales Book regarding sales return now

rectified)

210

210

420

(e) The account of M.Ray will be credited by Rs300 and the

account of N.Ray will also be credited by Rs 300 to rectify the

error.

(f) Office Equipment a/c Dr

To Purchases a/c

(Being wrong debit to Purchases a/c for Purchase of Office

Typewriter now rectified)

1,350

1,350

(g) Building Repairs a/c

To Building a/c

(Being whitewashing expenses wrongly debited to Buildings

Accounts, now rectified)

350

350

Case (ii) When no Suspense Account has been opened:

Journals Entries in the books of Murthy: (a) Suspense a/c Dr

To Purchase a/c

(Being rectifying entry made for eliminating wrong

carry forward and excess credit in Purchase Book)

640

640

37

(b) Sales Account Dr

To Bhatia

(Being excess record of sales to Bhatia , now rectified)

90

90

(c) Suspense a/c Dr

To Purchase a/c (being omission of posting of purchases returns now

rectified)

850

850

(d) Sales a/c Dr

Sales Returns a/c Dr

To Dutta

210

210

420

(e) Suspense a/c Dr

To N.Ray

To M.Ray

(Being wrong debit to N.Ray’s account and omission of

posting in M.Ray ‘s account now rectified)

600

300

300

(f &g) Entries for ‘f’ and ‘g’ will be the same as in the previous case(i) above , where no Suspense Account was opened.

1,350 1,350

Problem 4: The trial balance of M/s Ramani Bros. , as on 31st March, 2008 show a

difference of Rs 8,350 , the debit total being excess of the credit total .The Accountant of the

firm closes the books placing this amount in an account styled. As “Difference in the Books

Account” .The following errors were located in the books of account subsequently in April ,

2008.

(i) A sum of Rs 845 being the goods sold on cash was wrongly entered as Rs

485 in Sales account.

(ii) Cheque for Rs 7,210 received from a debtor Mr A was deposited in bank

account but was omitted so be entered in the account of Mr A.

(iii) Rs 4,810 being cash paid to a creditor Mr B was entered as Rs 4,010 and

that too in the account of another creditor Mr C.

(iv) Painting expenses Rs 840 were paid by a cheque but no entry for this

transaction appears in the bank account.

(v) Goods purchased on credit at a cost of Rs. 1,310 from Mr. C were returned

to him but no entry was passed in his account at the time of returning the

goods although the transaction was duty accounted for in the purchases

account.

You are required to pass journal entries (with full marriation) for rectifying the

above errors and also draw the “Difference in Books Account” to arrive at the

closing balance therein as at the end of the April.

38

Solution:

Journal Entries in the books of M/s Ramani Bros.

Date Particulars L.F Debit

Rs

Credit

Rs

(i) Difference in Books a/c Dr

To Sales a/c

(Being goods sold for Rs 845 was

wrongly entered as Rs 485 in Sales

Account. Now rectified)

360

360

(ii) Difference in Books a/c Dr

To Mr. A’s a/c

To Mr. C’s a/c

(Being entry for giving credited to Mr A

for cheque received from him .Now

rectified)

7,210

7,210

(iii) Mr B ‘s a/c

To Difference in books a/c

(Being Rs 4,810 paid to a creditor Mr B

was entered as Rs 4,010 and that too in

the account of another creditor Mr C;

now rectified)

4,810 800

4,010

(iv) Printing and Stationary a/c Dr

To Bank

(Being Printing expenses paid by cheque

not recorded. Now rectified)

840

840

(v) Mr C’s a/c

To difference in books a/c (being entry for giving debit to Mr C

for goods returned by him. Now

rectified)

1,310

1,310

Practical (A Comprehensive example of Unit 1 and Unit 2)

Problem 01:

Following transactions relate to Shri Nimai Singh for April, 2008. Record them by

using (a) Journal proper and (b) Journal special. Also post the transactions into the Ledger

and draw up Trial Balance by applying different methods.

April,

2008 Rs.

1 Nimai started business with cash

And furniture for cash

95,000

5,000

3 Bought goods for cash 7,500

4 Paid into Bank 50,500

5 Drew cash from bank for office use 7,500 6 Sold goods to Ram 7,500

10 Bought goods from Krishan on credit 3,400

19 Received from Ram 7,350

Allowed him discount 150

20 Cash Sales 12,000

27 Paid to Krishan 3,250

39

He allowed discount 150

30 Paid rent 750

Paid Salary for staff 1,500

Purchased a computer from the Computer Center,

Imphal and paid by cheque

30,500

(a) By using Journal Proper:

Journal Entries (in the books of Nimai)

Amount Date Particulars L.F.

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

2008,

April

1

Furniture a/c Dr

Cash a/c

To Nimai’s Capital a/c

(Being cash received for

commencement of business and

furniture bought in)

50,500

95,000

1,00,000

3 Goods a/c (Purchases a/c ) Dr

To Cash a/c

(Being goods purchased for cash)

7,500

75,000

4 Bank a/c Dr

To Cash a/c

(Being the amount paid into bank)

50,500

50,500

5 Cash a/c Dr

To Bank a/c

(Being cash with drawn from bank for

office use)

7,500

7,500

Amount Date Particulars L.F.

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

6 Ram a/c Dr

To Goods a/c(Sales a/c) (Being goods sold to Ram on credit)

7,500

7,500

10 Goods a/c (Purchases a/c) Dr

To Krishan a/c

(Being goods purchased on credit)

3,400

3,400

19 Cash a/c Dr

Discount a/c Dr

To Ram (Being cash received and discount

allowed to him)

7,350

150

7,500

20 Cash a/c Dr

To Goods a/c (Sales a/c)

(Being goods sold for cash)

12,000

12,000

27 Krishan a/c Dr

To Cash a/c To Discount a/c

(Being cash paid to Krishan and

discount received)

3,400

3,250 150

30 Rent a/c Dr

Salary a/c Dr

To Cash a/c

750

1,500

2,250

40

(Being amount paid for rent and salary)

30 Computer a/c Dr

To Bank a/c

(Being the purchased of computer by

cheque)

30,500

30,500

(1) Nimai’s Capital account:

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

30

To Balance c/d 1,00,000 2008,

April 1

By Cash a/c

95,000

2008,

April 1

By Furniture

a/c

5,000

1,00,000 1,00,000

2008,

May 1

By Balance

b/d

1,00,000

(2) Bank account:

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

4

To Cash a/c 50,500 2008,

April 5

By Cash a/c

7,500

2008,

April 30

By Computer

a/c

30,500

2008,

May 30

By Balance

c/d

12,500

50,500 50,500

2008,

May 1

To Balance b/d 12,500

(3) Furniture account:

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

4

To Nimai’s

Capital a/c

5,000 2008,

April 30

By Balance

c/d

5,000

5,000 5,000

2008,

May 1

To Balance b/d 5,000

(4) Computer Account Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

To Bank a/c 30,500 2008,

April 30

By Balance

30,500

41

30 c/d

30,500 30,500

2008,

May 1

To Balance b/d 30,500

(5) Purchase Account Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

3

To Cash 7,500 2008,

April 30

By Balance

c/d

10,900

April 10

To Krishan’s a/c

3400

10,900 10,900

2008,

May 1

To Balance b/d 10,900

(6) Cash Account Date Particulars L.F Amount

(Rs)

Date Particulars L.F Amount

2008 2008

April 1 To Capital a/c 95,000 April 3 By purchases 7,500

(Capital brought in) (goods) a/c

,, 5 To Bank a/c 7,500 ,, 4 By Bank a/c 50,500

(withdrawal for office

use) (Deposit with

Bank)

,, 19 (To Ram’s a/c 7,390 ,, 27 By Krishan’s a/c 3,250

Receipt from Ram) (Payment to

Krishan)

,, 20 To Sales a/c 12,000 ,, 30 By Rent a/c 750

(goods) (Rent Paid)

(Cash sale of goods) ,, 30 By Salary a/c 1,500

(Salary Paid)

,, 30 By Balance c/d 58,350

1,21,850 1,21,850

2008

May 1 To Balance b/d 58,350

(7) Rent a/c

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount (Rs.)

2008,

April 30

To Cash a/c 750

750

(8) Salary a/c

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount (Rs.)

2008, To Cash a/c 1,500

42

April 30

1,500

(9) Discount (received) a/c Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount (Rs.)

2008,

April 27

By Krishan’s

a/c

150

150

(10) Discount (Paid) a/c

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount (Rs.)

2008,

April

19

To Ram’s a/c 150

150

(11) Sales Account

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008, April

30

To Balance c/d 19,500 2008, April 6

By Ram’s a/c

7,500

April 20 By Cash 12,000

19,500 2008

May 1

19,500

By Balance

b/d

19,500

(12) Krishan’s Account

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April

27

To Cash a/c 3250 2008,

April 10

By Purchase

a/c

3,400

April

27

To Discount

(receipt)

150

3400 3,400

43

(13) Ram’s Account

Dr. Cr.

Date Particulars L.F. Amount

(Rs.)

Date Particulars L.F. Amount

(Rs.)

2008,

April 6

To Sales a/c 7500 2008,

April 19

By Cash a/c

7350

April 19 By Discount

(allowed) a/c

150

7500 7500

Trial Balance as on 30th

April, 2008

(Both totals method and Balance method being used)

Sl.No Name of the Accounts L.F Dr

(Total)

Rs

Cr

(Total)

Rs

Dr

(Rs)

Cr

(Rs)

1 Nimai’s Capital 1,00,000 1,00,000

2 Rent 750 750

3 Salary 1,500 1,500

4 Bank a/c 50.500 38,000 12,500

5 Furniture 5,000 5,000

6 Computer 30,500 30,350

7 Cash a/c 1,21,850 63,500 58,350

8 Discount (payable) 150 150

9 Discount (receivable) 150 150

10 Sales 19,500 19,500

11 Purchases 10,900

12 Krishan’s a/c 3,400 3400 ---- ----

13 Ram’s a/c 7,500 7500

Total 2,32,050 2,32,050 1,19,650 1,19,650

(b) By using Journal special: If the record have been maintained under Journal special ( or practical system of Book

keeping or English system of Book Keeping) we have to prepare (i) Purchases Day Book (ii)

Sales Day Book (iii) Return Inwards Book (iv) Return outward Book, (v) Cash book and son

on )

(i) Purchases Day Book( to record credit Purchases) Date Particulars Inwards Invoice No L.F Amount

?

?

?

?

(ii) Sales Day Book( to record credit sales)

Date Particulars Outwards Invoice No L.F Amount

?

?

?

?

44

(iii) Cash Book

Receipts Cash Book Payments Amount Amount Date Particulars L.F

. Cash

(Rs)

Bank

(Rs)

Date Particulars L.F

Cash

(Rs)

Bank

(Rs)

2008 2008

April 1 To Capital a/c 95,000 April 3 By Purchases a/c 7,500

(Capital

brought in)

50,500 (Cash Purchases of

goods)

April 4 To Cash a/c ,, 4 By Bank a/c 50,500

(Deposit with

Bank )

( c) (Deposit with Bank) (c)

,, 5 To Bank a/c (c) 7,500 ,, 5 By Cash a/c (c) 7,500

(withdrawal

for office use)

(Withdrawal for

office use)

,, 19 To Ram’s a/c 7,350 ,, 27 By Krishan’s a/c 3,250

(Receipt from

Ram)

(Payment to Krishan)

,, 20 To Sales a/c 12,000 ,, 30 By Rent a/c 750

(Cash sale of

goods)

(Rent Paid)

,, 30 By Salary a/c 1,500

(Salary paid)

,, 30 By Computer a/c 30,500

(Payment for

computer purchased)

,, 30 By Balance c/d 58,350 12,500

2008 1,21,850 50,500 1,21,850 50,500

May 1 By Balance

c/d

58,350 12,500

(iv) Return Inward Book

(Sales Return Book)

Date Particulars Credit note No L.F Amount

?

?

?

?

Total ?

(v) Return Outward Book

(Purchases Return Book)

Date Particulars Debit Note No L.F Amount

?

?

?

?

Total ?

On the basis of the figures available from theses book of account maintained as above , the

following Trial Balance may be drawn up:

45

Trial Balance as on 30th

April , 2008

Sl.No Name of the Accounts L.F Dr

(Total)

Rs

Cr

(Total)

Rs

1 Nimai’s Capital 1,00,000

2 Rent 750

3 Salary 1,500

4 Cash at Bank 50.500

5 Furniture 5,000

6 Computer 30,500

7 Cash in hand 58,350

8 Return Inward ?

9 Return Outward 150 ?

10 Discount 150

11 Sales 19,500

12 Krishan’s a/c NIL

13 Ram’s a/c NIL

14 Purchase 10,900

15 Drawings ?

Total 1,19,650 1,19,650

Note that:

(i) Figures for credit Purchases and credit sales will be extracted from the Purchases day

Book and the Sales Day book. They will be added together with the figures for cash

purchases and cash sales from the CASH BOOK . The respective figures, of total

sales and total purchases so obtained will be reflected in the Trial Balance.

(ii) Figures for Sales Return (Return Inward) and Purchases Return (Return Outward) will

be extracted from the respective Books of account and shown in the Trial Balance.

(iii) Drawings for private use, if nay should be shown in the Trial balance.

(iv) Fixed assets like Computer, Furniture etc are to be recorded in the Assets Account or

Assets Register and their W.D.V will be shown in the Trial Balance at the end of the

period.

(v) Total of L.H.S in the Discount Column, of the cash finds place in the debit column of

Trial balance. Total of R.H.S of the discount column goes to credit column of Trial

balance.

(vi) Figures for salaries, Rent etc are to be extracted from the relevant books or Register or

A.C Roll.

(vii) No entry has been made in Purchases Day Book, Sales Day Book etc because there

are no credit purchases and credit sales in the given problem.

With the recording of the transactions in the Journal Proper as well as in the Journal special

and preparation of Trial Balance the accounting cycle as mentioned in 1.4 (ii) is going to be

46

completed. Our next step is to prepare for adjusting entries, if any and to draw up FINAL

ACCOUNTS. The Trial Balance has agreed and the Books of Account may be treated as

correct.

47

UNIT- 3

Posting of Cash book, Transaction with Bank and Preparation of Bank

Reconciliation Statement

3.0 Subsidiary Books of Accounts under practical system of Book keeping or English

system of Book keeping or Journal Special:

As discussed in the previous chapter transactions can be recorded by using subsidiary books

or special journals. Employment of journal proper involves the tedious work of applying the

rules of debit and credit .Hence, government offices employ subsidiary books out of which

cash book is the most important book of account. Within the meaning of Journal Special,

Stock Register, G.P.F Advance Recovery Register, Loan Register, Bills Payable book or any

other record book maintained for recording transactions can be included. In business houses

the important subsidiary books are purchases book, sales book, Return Inward Book, return

Outward Book, Bills Payable Book and Bills receivable Book. These are in addition to cash

book.

3.1 Cash book: Cash book is a bound book containing all records pertaining to cash

receipts and cash payments .The cash book serves the function of a cash account and as such

it is, ruled like a ledger account, divided into debit and credit. The L.H.S(debit side) is for

receipts of cash and the R.H.S(credit side) is for the payments or disbursements. Cash

includes currency notes, coins, cheques, bank drafts etc. But items like postage stamp,

dishonoured cheques, post dated cheques, securities etc. are excluded. For all practical

purposes it has been considered as a Financial Book.

3.2 CASH BOOK-A journal or a Ledger

A Cash book is considered to be journal and a ledger as well. Since the cash book records

transactions in analytical order and balancing of such book is necessary, as in the case of

other accounts, at regular intervals of time, it is Ledger. Again a cash book is ruled in the

same way as an account in the ledger is ruled. It may be noted that only in Government

offices and departments cash book is closed and balanced at the close of every working day.

However, a cash book is a substitute of journal in as much as the maintenance of cash book in

an organization has done away with the necessity for using journal entries. This is what

exactly happened in the Government offices which adopt cash basis accounting and which do

maintain only cash book and no other books of journal entry. Cash book serves the function

of a journal in the sense that every entry in it will have to be supplemented by a narration

.Cash book acts as a Day Book for cash transactions. If we closely examine the nature of a

cash book, it is more of a ledger than a Journal .The simple reason is that balances in the cash

book are directly posted to Trial Balance. This is possible only in the case of ledger and not

for a journal. It is principal book rather than a subsidiary book.

Nowadays, transactions with or through banks have become quite common. Bank

transactions are found to be more numerous when compared with cash transactions. Every

D.D.O/H.O.O will have to open an account with the scheduled bank for carrying on

Government transactions. In addition to this, in mercantile houses discount which effects

receipts and payments are to be recorded in the cash book. In some departments the necessity

for helping the Head cashier by another person who meets petty expenses has become the

order of the day .Amidst the growing complexities adoption of a type of cash book which will

help the employer in exercising internal check and internal control is also necessary. Hence,

we may have the following types of cash book for practical purpose.

48

3.3 TYPES OF CASH BOOK

1. Single –Column (or Simple) Cash Book.

2. Double- Column (or Two Column) Cash Book.

3. Triple- Column (or Three Column) Cash Book.

4. Multi- Column Cash Book.

5. Mini-Max Cash Book.

6. Petty Cash Book.(Which may be Simple Petty Cash book or Analytical Petty cash

Book)

In single column or simple cash book the amount column is only one. Cash book used in

Manipur Government offices [in T.R-4 under Rule 77(1)] is an example of simple cash book.

In double column cash book the amount column is divided into two columns which may be

cash and bank or cash and discount or bank and discount. In triple column cash book the

amount column consists of cash, bank and discount. In multi-column cash book there will be

more than three columns in the amount. Mini Max cash book is nothing but a double column

cash book with a separate way of rulings.

A petty cash book is simply a statement of receipts and petty expenses classified into

several heads like refreshment, cartage, postage, stationary, conveyance etc. prepared to

facilitate posting in the main cash book. It is prepared by the junior staff. It is prepared to

record the day to day but varied expenses.

The petty cash book will become more effective if it works under the Imprest system.

In this system a fixed sum called Imprest fund or Imprest money or Float money is

periodically, say, weekly, advanced to the petty cashier (generally junior staff engaged to

assist the Head Cashier) who meets the concerned expenses as and when arise in that week

.At the week-end, he is reimbursed with the sum actually spent and restored to the original

state. Thus, he starts for the next week with the same sum as held previously .For example, if

Rs 500 are advanced in the first week of April, 2008 and the petty cashier has spent Rs.440

by the week-end, he would be reimbursed Rs 440 so as to restart with the Rs 500 in the

beginning of the 2nd

week of April, 2008.This advance arrangement of funds is called Imprest

system.

Float money is relative a term .How much will be the amount of the float money will

be decided by the size and the volume of the business unit or office and other relevant factors.

In our state big departments like P.W.D can successfully employ such type of cash book and

give a sigh of relief to the Head cashier. At the same time it has the benefit of providing some

sort of in service training in handling cash to the junior staff. Nowadays, this type of cash

book is better known as Analytical petty cash book under Imprest system. A petty cash book

may also be a simple petty cash book.

3.4 CONTRA ENTRY

While preparing a double column or a Triple column cash book we may find a situation

whereby a record is to be made simultaneously on both side of the cash book. For example,

cash is deposited with the bank or cash is withdrawn from the bank for office use. In these

49

cases, entries for both receipt and payment will appear in the same cash book simultaneously

on the two sides in appropriate column. This is made necessary because of the double entry

system of book keeping .These entries are known as Contra Entries. Existence of such entries

will be denoted by assigning the letter ’C’ in the L.F (ledger Folio) column in the L.H.S. and

the R.H.S

3.5 DISCOUNT-Trade Discount and Cash Discount Discount means allowance .It is an amount taken off the cost of goods .According to

the nature of the transaction it may be receivable or payable. Discount is classified into (a)

Trade discount and (b) cash discount. In accounting, trade discount is not recorded in the

books of account but cash discount is to be reflected in the books and as such in the cash

book. Hence, a proper distinction between cash discount and trade discount is absolutely

necessary.

Trade discount arises when a customer buys goods in bulk (large quantity) and the

seller gives some concession or allowance. Such discount is also known as quantity discount.

Cash discount, on the other hand, will be allowed for making prompt payment of cash. If

trade discount is allowed with cash discount in the same transaction, trade discount will be

calculated first and thereafter cash discount will be calculated on the balance .Distinction

between trade discount and cash discount may be summarized as under.

Cash Discount Trade Discount

1. It is a reduction in the amount payable by the

customer.

1. It is reduction in the catalogue price granted

by the supplier.

2. It is allowed at the time of making payment

for the purchase and not shown in the invoice.

2. it is allowed at the time of purchase and

shown by way of reduction in the invoice.

3. It has been allowed to encourage the buyers

to make payment at an early date.

3. It is allowed to encourage the buyer to buy

goods in large quantity.

4. It is to be recorded in the ledger and as such

in the cash book.

4. It is not to be recorded in the ledger or any

other books of account.

Example,

A sells 10 computers worth Rs. 50,000/- each to B at 10% Trade discount and 2% Cash

discount.

Now, Trade discount = 10% of Rs (50000 X 10)

= 10% of Rs 5, 00,000

= Rs 50,000

Cash discount = 2% of Rs (5, 00,000-50,000)

= 2 % of Rs 4, 50,000

= Rs 9,000

Since, discount is a nominal account, while preparing cash book of a A, discount of

Rs.9,000 will be shown on the L.H.S(debit side) in the discount column of cash book because

it is a loss to him. In the cash book of B it is a gain and as such it will be shown on the R.H.S

(credit side) of the cash book.

Remember, discount column on the debit and credit side are totalled and respectively

debited and credited to the discount account in the ledger.

50

3.6 Different forms of Cash Book :

The format of cash book may slightly differ from organization to organization. Even the cash

book in T.R-4 in Government accounting can be supplemented with additional details as

required by the Ministry/department concerned. However, the fundamentals will remain the

same whether it is for mercantile accounting or government accounting.

Cash books which can be conveniently used in different departments /units for

different purposes are as under.

(A). A specimen of

Cash book

(as given in Annexure -VIII)

Of Accounting Procedure

For District/Block/Village Levels/Panchayat Raj Institution

Name of the Office……………………………………….

LEFT PAGE RIGHT PAGE

Amount Amount Date Particular Ledger

Folio Cash

(Rs)

Bank

(Rs)

Date Particular Ledger

Folio Cash

(Rs)

Bank

(Rs)

(B). A specimen of

Simple Cash book

RECEIPTS PAYMENT Date Particulars L.F Amount

(Rs)

Date Particulars L.F Amount

(Rs)

(C).

A specimen of

Simple petty Cash book

Cash Received

(Rs)

Cash Book

Folio

Date Particulars Voucher

No.

Total

Payment

Rs

51

(D). A Specimen of Double Column Cash Book

(Suitable for Govt .Office and Mercantile)

Houses having account with the bank

RECEIPTS PAYMENT

Date

Particu

lars

L.F

Vou

cher N

o

Cash

(Rs).

Ban

k o

r

Disco

unt (R

s)

Date

Particu

lars

L.F

Vou

cher N

o

Cash

(Rs).

Ban

k o

r

Disco

unt (R

s)

Note: Vouchers No. (credit Voucher and debit voucher nos) mentioned herein do not mean

the Sl.No given in the cash memo , T.R.-5, APR or any other document. Vouchers are simply

documents in proof of the payment or receipt. Voucher numbers are assigned by the office at

the time of making entry in the cash book. Treasury challans (T.R 6) will also serve the

purpose of voucher and accordingly serialize and voucher no assigned.

(E). A Specimen of Triple Column Cash Book

(Suitable for Commercial undertaking)

RECEIPTS PAYMENT

Date

Particu

lars

L.F

Cash

(Rs).

Ban

k (R

s)

Disco

unt (R

s)

Date

Particu

lars

L.F

Cash

(Rs).

Ban

k (R

s)

Disco

unt (R

s)

52

(F). A Specimen of Cash Book in

T.R.4 [under Rule 77(1)]

Office of ………………… Month ……………..2008

RECEIPTS Contingencies Date No. of

receipt Where

necessary

Particulars Pay Allowance

in

recoupment

of advance

Advance

payment

Mics. Total Classification

(F).contd. A Specimen of Cash Book in

T.R.4 [under Rule 77(1)]

Office of ………………… Month ……………..2008

PAYMENTS Contingencies Date Sub

Voucher

No.

Particulars Pay Allowance

Out of permanent

Advance

Out of money

drawn in

anticipation

of payment

Miscellaneous Total Classification

53

(G). A specimen of

Analytical petty Cash Book (under the Imprest Systems)

(Suitable for big department)

Amount

Received

(Rs)

Date Cash

Book

Folio

Particulars Voucher

No.

Amount

(Rs)

Analysis of payments

Fax and

packages

Xerox

and stationary

Carriage

Conveyance

Refreshment Coolie

and wags

Misc Ledger

Account

Rs Rs Rs Rs Rs Rs Rs

(H). A Specimen of the Cash Book

(Suitable for Self help group)

RECEIPTS PAYMENT Date From

whom

Received

For

what

purpose

Receipt

Voucher

No.

L.F Cash

(Rs)

Date To

whom

paid

For

What

Purpose

Payment

Voucher

No.

L.F Cash

(Rs)

Total:…………………. Rs,…………. Total…………….. Rs

Opening ……………….. Rs………… Closing Balance

Balance ……………. Rs……….. Grand Total

(I). Format of Multi Column Cash Book Receipts Payments Date Particulars Sales Debtors B/R Interest Misc Date Particulars Sales Debtors B/R Interest

54

BALANCING THE CASH BOOK

3.7. In order to find out the cash in hand and /or cash at bank at the end of the month/day,

the cash book is to be balanced like an ordinary account. The steps are:

1. Add up the debit side (LHS) of the cash book with pencil.

2. Add up the credit side (RHS) of the cash book with pencil.

3. Find out if the debit side total is greater than the credit side total or the credit

side total is greater than the debit side total and by how much.

4. Enter the balance (difference) in the side with smallest total as ‘ By balance

c/d’ or ‘To balance c/d’ whichever is applicable.

5. Erase the pencil total.

6. Draw a single line just below the balance amount (only the amount column) on

both sides.

7. Now, add both sides including balance. Total of each side should be the same.

8. Underline the totals with double lines (below the amount column only)

9. carry down the balance to the opposite side as ‘To Balance b/d’ or ‘By Balance

b/d’ whichever is applicable.

10. cash book is now ready for making entries for the next working day or for the

next month.

Note:

1. In the cash books with cash and bank columns which are suggested for Government

offices it is always better to give classification of cash balances in hand and at bank as

on the date of closing the cash book.

2. A cash verification certificate showing physical verification of cash balances as on

that date may also be recorded by the D.D.O.

3. Only in the cash book with cash and bank columns(called Double Column cash book )

the credit side total can exceed the debit side total in the bank column. This is a

situation where there is bank overdraft.

4. In certain departments the cash book, as it is closed on the last working day of a

month, will be appended with a Bank Reconciliation Statement tallying cash book

bank balance and pass book balance on that date.

5. Correction, alterations etc in the cash book shall be made according to accepted

principles/norms.

6. Cover page may be earmarked for paging certificate in those cash books used in the

Government offices.

7. It shall be duly signed and kept in a safe and secure place .Special care shall be taken

for those figures which may be easily changed /altered.

8. In the cash books maintained in mercantile office which adopts double entry system,

correction and alterations shall be made not by crasing or rubbing the figures but by

using rectification entries.

9. In its strict sense the entry in the cash book shall be supported by narration as in the

cash of journal entries

Problem 1. Record the following transactions in the cash book and post the same into

the relevant ledger accounts:

2009,

55

January 1 Commenced business with an investment of Rs.75,000.

5 Purchased building Rs 40,000; and office equipment Rs 5,000.

10 Bought goods Rs 20,000.

14 Sold to X for cash Rs.15,000

21 Purchased from Y for cash , Rs 22,000

22 Sold for cash Rs.20,000

23 Withdrew for personal use Rs.1,000

25 Borrowed Loan from Q. Rs 10,000

29 Cleared the advertisement bill, Rs 75.

31 Paid salaries Rs 300; and received rent Rs.600.

Solution: Receipts Cash Book Payments

Date Particulars L.F Amount

Rs

Date Particulars L.F. Amount

Rs

2009 2009

Jan 1 To Capital a/c 75,000 Jan 5 By Building 40,000

Jan 14 To Sales 15,000 Jan 5 By office

equipments 5,000

Jan 22 To Sales 20,000 Jan 10 By Purchases 20,000

Jan 25 To Q’s Loan a/c 10,000 Jan 21 By Purchases 22,000

Jan 31 To Rent 600 Jan 29 By Advertisement

75

Jan 31 By Salary 300

Jan 31 By Balance c/d

32,225

1,20,600 1,20,600

2009

Feb 1 To Balance b/d 32,225

LEDGER

(1)

Dr Capital a/c Cr Dr Office Equipment a/c Cr

2009 Rs 2009

Jan 1 By Cash 75,000 Jan 5 To Cash 5000

(2)

Dr Sales a/c Cr (4) Dr Purchases a/c Cr

2009 Rs 2009 Rs

Jan 14. By Cash 15,000 Jan 10 To Cash 20,000

Jan 22. By Cash 20,000 Jan 21 To Cash 22,000

(5) (8) Dr Drawing a/c Cr

Dr Q’s Loan a/c Cr

2009 Rs 2009 Rs

Jan 25. By Cash 10,000 Jan 23 To Cash 1000

56

(6) (9) Dr Advertisement a/c Cr

2009 Rs

Dr Rent a/c Cr Jan 29 To Cash 1000

2009 Rs

Jan 31. By Cash 600

(7) (10) Dr Cr

Dr Building a/c Cr 2009 Rs

2009 Jan 31 To Cash 300

Jan 5 To Cash 40,000

Problem 2: Enter the following transaction in the appropriate type of cash books and post

them to the relevant ledger accounts.

2008, July 1 Started business with an investment of Rs 1,00,000.

2 Deposited in Bank of India , Rs 95,000

4 Acquired a building by issuing a cheque of Rs 60,000

10 Paid the bill of the furniture by cheque of Rs 10,000

15 Purchased Rs 20,000 of merchandise by cheque.

18 Withdrew Rs 2,000 from the bank.

20 Sold merchandise for Rs 25,000

22 Deposited Rs 22,000

25 Brought Rs 5,000 merchandise by crossed cheque.

26 Sold goods and received cheque Rs 8000

27 Paid Rs 100 cheque as the premium of insuring building against

fire.

28 Paid freight Rs. 50.

30 Withdrew from bank for personal use Rs 500.

31 Cleared electricity bill Rs. 90.

Solution:

Receipt Cash Book Payments

Date Particulars L.F Bank

Rs

Cash

Rs

Date Particulars L.F. Bank

Rs

Cash

Rs

2008 2008

July 1 To Capital

a/c

C* 95,000 1,00,000 July 2 By Bank C 95,000

July 2 To Cash C 2,000 July 4 By Building 60,000

July 18 To Bank C 25,000 July 10 By Furniture 10,000

July 20 To Sales July 15 By Purchases 20,000

July 22 To Cash 22,000 July 18 By Cash C 2,000

July 26 To Sales 8,000 July 22 By Bank 22,000

July 25 By Purchases 5,000

July 27 By Insurance

Premium

100

July 28 By Freight 50

57

July 30 By Drawings 500

July 31 By Electricity 90

July 31 By Balance

C/d

32,400

4,860

1,25,000 1,27,000 1,25,000 1,27,00

2009

August 1

To Balance

b/d

32,400

4,860

Note that:

“C” mean Contra.

1. Both cash and bank column serve the purpose of prime and final entries .Hence , they

are also the cash and bank accounts. Accordingly, neither account appears in the

ledger.

2. Transactions concurrently affecting cash and bank appear on both the debit and credit

sides of the cash book. Deposit of cash into bank entails decrease in cash followed by

increase in bank; and conversely on the withdrawal of cash from bank .The related

entries appearing on both the sides of the cash book are called contra entries.

3. Withdrawal from bank for personal use of the proprietor does not raise the business

cash and hence no debit being given to cash.

4. Cash account never shows a credit balance (i.e excess of credits over the debits ) as

the disbursements cannot exceed the cash in the till. But bank account may show a

credit balance as the banker may allow the depositor to overdraw his account ( called

bank over draft)

5. The above cash book has not provided narration.

Dr Capital Account Cr Dr Sales Account Cr

2008 Rs 2008 Rs

July 1 By cash 1,00,000 July 20 By Cash

25,000

July 26 By Bank

8,000

Dr Building Account Cr Dr Furniture Account

Cr

2008 Rs 2008 Rs

July 4 To Bank 60,000 July 10 To Bank 10,000

Dr Purchases Account Cr Dr Insurance Premium Account Cr

2008 Rs 2008 Rs

July 15 To bank 20,000 July 27 To Bank 100

July 25 To cash 5,000

Dr Freight Account Cr Dr Drawings Account

Cr

2008 Rs 2008 Rs

July 28 To cash 50 July 30 To Bank 500

Led

ger

58

Dr Electricity Account Cr

2008 Rs

July 31 To Cash 90

For the deposit of Rs 95,000 with the bank on July 2, the writing of ‘To cash ‘ in the

particulars and entry of Rs 95,00 in the ‘Bank Column on the debit side , and the expression

‘By Bank ‘ in the particulars and mention of Rs 95,000 in the ‘Cash ‘ column on the credit

side may be easily grasped by journalizing and posting as shown below:

2008

July 2 Bank Dr 95,000

To Cash a/c 95,000

(Deposit with the Bank of India)

Dr Bank Account Cr Dr Cash Account Cr

2009 2009

July 2 To cash 95,000 July 2 By bank 95,000

By similar process, the cash book records for the withdrawal of cash from the bank can be

readily grasped.

Problem 3. Record the following transaction in the triple column cash book:

2008

October 1 Balances : Cash Rs.500 and bank (cr.) of Rs.2,000

2 Invested additional capital of Rs.10,000

5 Deposited Rs .8,000 in the bank

8 Received from R.Roy Rs.890, allowed him discount of Rs 30.

12 Paid Rs 1200 to Ghose who allowed us discount of Rs.30.

15 Brought merchandise for cash 1,000

17 Sold merchandise for cash 1,000

18 Purchased furniture by cheque of Rs.230 from S.Sundaram in full

settlement of the debt of Rs240.

19 Paid commission of Rs150 by cheque.

Withdrew for personal use Rs300

26 Paid to K.Krishnan Rs 700 by cheque; discount received by Rs 20.

27 Withdrew from Bank Rs1,000

29 Received dividend by an order cheque Rs30 , deposited in the

bank on the same day.

30 Cleared telephone bill Rs.50

31 Paid manager’s salary Rs 350 rent Rs 200, and wages Rs 150

Solution: Dr Cr

Date Particulars LF Disc -

ounts

Bank Cash Date Particulars LF Disc

ount

Bank Cash

2008 2008

Oct 1 To Balance b/d 500 Oct 1 By Balance b/d 2,000

Oct 2 To Capital 10,000 Oct 5 By Bank C 8,000

Oct 5 To Cash C 8,000 Oct 12 By Ghose 30 1,200

Oct 8 To R.Roy 5 890 Oct 15 ByPurchases 700

Oct 17 To Sales 1,000 Oct 18 By Furniture 1,500

Oct 19 To S.Sundaram 10 230 Oct 22 By Commission 150

Oct 27 To Bank C 1,000 Oct 25 By Drawings 300

Oct 29 To Dividend 30 Oct 26 By K.krishanan 20 700

59

Oct 27 By Cash C 1,000

Oct 30 By telephone

charges

50

Oct 31

Oct 31

ByManager ‘s

By Salary

350

Oct 31 By Rent 200

Oct 31 By Wages 150

Oct 31 By Balance b/d 2,910 2,440

Total 15 8,260 13,390 Total 50 8260 13,390

Note that the debit and credit totals of the discount columns differ. This is because ‘discount’

in the cash book is merely a subsidiary record. Unlike cash and bank , it is not treated as an

account and hence it is not balanced. It is posted to the ledger like any subsidiary book. Debit

and credit totals are respectively debited and credited to ‘Discount Allowed Account’ and

‘Discount Received Account’. These facilitated the separate disclosure of received discount(a

gain) and allowed discount (a loss) in the profit and loss Account.

As regards the receipt of a crossed cheque , bank account is always debited as it can be

collected only by depositing with the bank. However the position differs in case of an order

or bearer cheque which is encashable at the bank counter. Hence, it is regarded as a cash

receipt, unless deposited in the bank on the day received. On a subsequent deposit , a contra

entry is made at the deposit date, Viz Bank is debited and cash credited. For cheques issued

whether crossed or not bank account ( not cash account) is credited.

3.7(1)

Simple Petty Cash Book

The Simple Petty Cash Book is written just like the Cash Book. Any cash which the

petty receives will be recorded in the left-hand side cash column(debit column) and any cash

which he pays out will be recorded in the right-hand side payment column. The date and

particulars of every transaction will be written in the same date and particulars column. The

ruling of a simple Petty Cash Book is given below :

Simple Petty Cash Book

Dr. Cr. Cash Received C.B.Folio Date Particulars Vouchers No. Total Payment

Money received

Money paid

The operations of the Simple Petty Cash Book is illustrated below.

Problem 1

From the following information, write up a Simple Petty Cash Book for the 1st week of

January, 2007: Rs.

60

Jan 1 Received Rs 200 from Chief Cashier for Petty Cash Jan 5 Purchased stationery for

Office use Rs. 50

Jan 2 Bought postage stamps Rs. 10 Jan 6 Paid for milk and sugar for

office tea Rs. 30

Jan 4 Paid bus fare Rs. 6

Jan 7 Paid window-cleaner Rs. 4

Solution:

Dr. Simple Petty Cash Book

Cr.

Cash Received C.B. Folio Date Particulars Voucher No. Total

Payment

2007 Jan 1 To Cash Rs

Jan 2 By Postage A/c 10

Jan 4 By Travelling Expenses A/c 6

Jan 5 By Stationery A/c 50

Jan 6 By Office Expenses A/c 30

Jan 7 By Miscellaneous Exp. A/c 4

200

Jan 7 By Balance c/d 100

200

200

Problem 2

From the following particulars prepare a Petty Cash Book for the month of January 2007 :

Jan. 1 Drew for petty cash

100

3 Paid for postage

15

5 Paid for telephone

2

8 Paid for cartage

7

9 Paid for postage

10

12 Paid for sundries

5

27 Paid for taxi fare

12

If the imprest amount is Rs.100, show what amount the petty cashier would be entitled to

drew at the beginning of the next month.

Solution

Dr. Simple Petty Cash Book

Cr.

Cash Received C.B.

Folio

Date Particulars Voucher

No.

Total

Payment

2007 Jan 1 To Bank Rs 100

Jan 3 By Postage A/c

15

61

Jan 5 By Telephone A/c -2

Jan 8 By Cartage A/c 70

Jan 9 By Postage A/c 10

Jan 12 By Miscellaneous Expenses A/c 5

Jan 27 By Travelling Expenses A/c 12

Jan 31 By Balance c/d 49

100 100

49 Feb.1 To Balance b/d

51 Feb 1 To Bank Tutorial Note : Total petty expenses for the period is Rs.51. At the beginning of February 1997, the petty cashier will get

Rs.51

3:7 (2) Analytical Petty Cash Book

The most advantageous method of recording petty cash payment is to enter them in

the Analytical Petty Cash Book. In the Analytical Petty Cash Book, a separate column is used

for each commonly occurring item of expenditure such as postage, stationery, traveling,

wages, and the like. When a petty expense is recorded in the right-hand total payment

column, the same amount is immediately recorded in the appropriate analysis column. At the

end of a particular period, all the analysis columns are added and posted to the debit side of

the respective accounts.

Under the imprest system of petty cash, the new petty cash will be reimbursed, at the

end of each week or other convenient period, with the exact amount he has spent. The petty

cashier will start the period with same amount of money – the imprest amount.

The following points are worth noting :

1. The pages are not divided down the centre, major space is provided for

credit side and the debit side contains only two columns-money columns

and cash book folio column.

2. The chief item of receipt is the original imprest. Other items include the

money collected from private telephone calls, sale of old newspapers, and

so on.

3. Money disbursed is recorded in the credit side and then analysed out into

number of analysis columns which serve as collection columns for a large

number of small items. Thus all the stationery is collected in the

‘Stationery’ column.

4. Certain payments cannot be added together in the above way, for example,

small payments to creditors. A special column is provided, under the

62

heading ‘Ledger Account’ to record these types of payments. These items

are posted separately to their respective accounts in the ledger.

Balancing off the Petty Cash Book

At the time of balancing off the Petty Cash Book, a line is drawn right across the figures on

the credit side and all the columns are added up. Then only the analysis columns are closed

with a double line, the total column being left open.

The balance of petty cash in hand is found out after deducting the total of the payment

column in the credit side from the received column in the debit side. This is inserted in the

credit column, the book is balanced off and the balance is brought down.

The ruling of an Analytical Petty Cash Book is given below :

Dr. Simple Petty Cash Book

Cr.

Cash

Recei-

ved

C.B.

Folio

Date Particulars Petty

Cash

Book

Total

Payment

Postage Travelling

Expenses

Stationery Sundry

Expenses

Ledger

Account

Folio

Problem 3

From the following transactions for the month of March 2007, draw up a Petty Cash

Book in analytical form with:

(i) Postage and Stamps; (ii) Coolie and Cartage; (iii) Printing and Stationery; (iv)

Conveyance; (v) Miscellaneous; and (vi) Ledger Account – columns.

Show the reimbursement by the General Cashier to the Petty Cashier on 1.4.2007

under the imprest system of petty cash: (all figures in rupees)

March1 Petty cash balance 22.00 22 Rs.10.00 was paid to coolies for shifting

office furniture

Reimbursement by general cashier 278.00 23 Mr. Ram Murty was paid Rs.28.50 out of

petty cash

March 5 Conveyance Rs.18.00 paid to an

employee

27 Local traveling expenses reimbursed to

office peon

4.00

March 9 Postal stamps bought 4.50 29 The driver of the office car was given

Rs.15.00 to pay

March 16 Cost of blank papers and carton papers 11.00 the ‘fine’ for violation of traffic rules.

March 19 Tips given to the office peon for extra

work

5.00 31 Rs.12.00 was spent to send a registered

letter by post

March 21 Purchased memo-books for Rs.143.00,

carrying cost on the same amounted to

2.00

63

Solution

Dr. Simple Petty Cash Book

Cr. Cash

Recei-

ved

C.B.

Folio

Date Particulars Petty

Cash

V.No.

Total

Payment

Postage

&

Stamps

Coolie

&

Cartage

Printing

&

Statio-

ery

Conve-

Yance

Miscelle-

neous

Ledger

Account

Rs. 2007 Rs. Rs. Rs. Rs. Rs. Rs. Rs.

22.00 March 1 To Balance b/d

278.00 1 To Bank a/c 18.00

5 By Conveyance 18.00

9 By postages & Stamps

A/c

4.50 4.50

16 By Printing &

stationary A/c

11.00 11.00

19 By Miscellaneous A/c 5.00 5.00

21 By Printing & stationary A/c

145.00 145.00

22 By coolie & Cartages

A/c

10.00 10.00

23 By Ram Murthy A/c 28.50 28.50

27 By Conveyance a/c 4.00 4.00

29 By Miscellaneous A/c 15.00 15.00 31 By Postages & Stamps

A/c

12.00 12.00

Total 253.00 16.50 10.00 156.00 22.00 20.00 28.50

300 March 31 By Balance c/d 47.00

47

2007 April

To Balance b/d

300.00

253 1 To Bank A/c

Problem 4:

Shri P.Sharma , maintains a columner Petty cash book on the Imprest system.The

Imprest amount is Rs 400 .From the following information write up the petty Cash Book for

the 1st week of January , 2007.

1. Brought stamps (Voucher No.1) 50 3 Paid V.Sribastab, a creditor (Voucher No.6)

62

1 Paid bus fares (Voucher No.2) 4 4 Paid for postage (Voucher No.7)

20

2 Paid postages(Voucher No.3) 10 5 Paid R.Smith ,a creditor (Voucher No.8)

105

2 Brought envelopes (Voucher No.4) 30 6 Paid train fares (Voucher No.9)

45

2 Paid for refreshment (Voucher No.5)14 7 Restored imprest

64

Solution: In the books of P.Sharma

Dr. Analytical Petty Cash Book

Cr.

Cash

Recei-

ved

C.B.

Folio

Date Particulars Petty

Cash

V.No.

Total

Payment

Postage

Travelling

Expenses

Statio-

ery

Sundry

Expenses

Ledger

Account

Folio

Rs. 2007 Rs. Rs. Rs. Rs. Rs. Rs. Rs.

400 Jan 1 To Cash A/c

1 By postages A/c 1 50 50

1 By Traveling Exp. A/c 2 4 4

2 By Postages A/c 3 10 10

2 By Stationery A/c 4 30 30

2 By refreshment A/c 5 14 14

3 By V.Sribastab A/c 6 62 62 CL-

25

4 By postage A/c 7 20 20

5 By R.Smith A/c 8 105 105 CL-29

6 By Traveling Exp. A/c 9 45 45

340

6 By balance c/d 60

400 80 49 30 14 167

400 2007

Jan 7

To Balance b/d

70 7 To Cash A/c

330 19

3.8 Transactions with Bank: Opening of an account with a commercial bank preferably a nationalized bank

has become more or less compulsory for all types of organizations. Government employees

have to open account with the bank failing which they may find difficulty in collecting their

salary and other entitlements. This is all the more true for all types of business houses

wherein transactions are mostly settled with negotiable instruments including cheques, drafts

and so on. Hence, we have to open a bank account.

In India there are four types of bank account which can be opened and

operated .They are (a) Fixed deposit Account (b) Savings Bank Account (c) Current Account

and (d) Recurring Deposit Account .In the U.S.A. there are only two types of Account viz.

Time liabilities and Demand Liabilities .Nowadays , certain banks like PNB (Punjab National

Bank) uses the term ‘Fund’ in place of ‘Account’. Fixed Deposit Account or Fixed Deposit

Fund. Savings Bank Account or Savings bank fund will not be suitable for Govt. Offices.

Because,, deposits and withdrawals from the accounts are subject to certain limitations. For

example withdrawal from the fixed deposit Account can be made generally on the date of

maturity which was specified at the time of deposit. Similarly, withdrawal from the savings

Bank Account can be made once a day .In the case of Current Account there is no limitation

as to the number of deposits and withdrawals in a single day provided that the fund (balance )

is sufficient.

The ICICI which is the largest commercial bank in the private sector has two more

types of current account known as Elite current account and Roaming current account. These

current accounts have certain other facilities.

3.9 Opening of an Account with the bank :

Any person can open an account with the bank in his individual capacity or in his

official capacity (as is done by H.O.O. and H.O.D of Government offices or Secretary of a

club ) provided that he/she fulfils all terms and conditions as laid down in the application

65

form available for opening an account, fulfillment of conditions laid down in the K.Y.C

(know Your Customer) format and deposit of the minimum amount. KYC norms may slightly

differ from bank to bank. However, the fundamentals about identity of the customer will

remain the same. The minimum amount of opening an account will differ from account to

account, from bank to bank and from area to area i.e urban area to rural area . For instance, in

the case of the State Bank of India the minimum amount for opening a Savings Bank Account

is Rs 500 without cheque Book facilities. For current account the minimum balance in urban

areas is Rs 5000 whereas it is Rs 2,500 in rural areas. However, this ceiling may change from

time to time. At the moment service charge levied on cash transactions above Rs 1,00,000 has

been removed in the case of Savings Bank Account but not in current account. If such service

charge under the cash Banking Transactions Act, can be avoided of accounting problems

relating to preparation of cash book and bank reconciliation statement may be solved.

As soon as the bank agrees the opening of account a Pass Book (also known as Bank

statement ) and a Cheque Book ( in the case of account with cheque facilities ) will be issued

.Now, the banker has obliged to honour cheques , to keep a proper record of transactions and

not to disclose the state of his customers account. At the same time, the banker has the right

to claim for incidental charges and interest. Also the bank acquires the right of appropriation

and setting off one account with another in the customers accounts.

3.10 Remittance of money, honouring and dishonouring of cheques:

Activities undertaken by banks include personal banking ( non business customers) ,

commercial banking (small and medium sized business customers) and corporate banking

(large international and multinational corporations ) and different codes are assigned while

allotting account numbers by the bank for these categories. One of the most important

functions of such bank is to transfer money at home and abroad. In other words , bank will

act as agent for transmitting money and securities for a commission. Herein lies the necessity

for maintaining Remittance Book. It is just a book or Register showing the particulars of (a)

Remitter (b) Remitlee ,, (c) amount remitted and (d) Commission or fee . It has been drawn

up on the lines of books under special Journal (like purchases Day book, Sales Day Book

etc.). It works as a memorandum book whereby entries are made directly from the vouchers

without forming a part of double entry system.

Another important function of the bank with relation to the customers is to receive

demand deposits and honour customer’s cheque.

Normally, a banker having sufficient funds of the customer, properly applicable to the

payment of cheques is duly bound to honour (pay) his customers cheques. However, a cheque

may be dishonoured (refused to pay) by a bank on the following grounds:

a) Fund is insufficient.

b) Drawer’s signature differs.

c) Amount in words differ from amount in figure (of course the bank can pay the amount

in words if it so desires)

d) Cheque is post dated or Stale

e) Cheque is ante dated

f) Cheque is mutilated

g) Cheque is not properly endorsed.

h) Cheque is ambiguous or of doubtful legality.

66

Failure to comply with these requirements at the time of dishonour of cheque on the part

of bank will attract the provision for wrongful dishonour. The loss or damage which the

customer can recover in such a case not only includes any pecuniary loss or damage but also

the loss arising on account of injury to his reputation.

While making entry in the cash book bearer cheques other than crossed cheques includings

Account payee cheques will be treated as ordinary cash. In the case of crossed cheques both

the receipt and the deposit with the bank for collection will be reflected. For dishonoured

cheques there is no necessity for observing the rules of debit and credit. Only a cancellation

entry will serve the purpose.

3.11 Bank reconciliation Statement: A Bank reconciliation Statement (BRS) is a statement which contains a comprehensive and

satisfactory explanation of the difference between the cash book bank balance and the pass

book balance on a stipulated date. On principle, the two balances should be equal and

opposite on a stated date. Practically, however, these two balances do not agree. The main

reason is that no party ,whether the account holder or the bank, does not intimate each other

each time a transaction takes place. Rather, banker is intimated by the third party and not by

the account holder (for instance when a cheque is presented to the bank or by a person other

than the drawer), time and again in a banking transaction.

The correctness of the cash book balance can be established by comparing it with the

pass book(bank statement) .Since the banker is trustee of the account holder ,the bank will be

required to provide to its customer a bank statement at regular intervals( generally during the

first week of every month). The statement will summarize payments as well as deposits and

other charges for the period .In fact, the pass book is a copy of customer’s account in the

Running balance form in the Bank’s Ledger. The idea behind the preparation of a bank

reconciliation statement is that when all facts and figures from the two sets of the book are

brought together and checked, difference, if nay, can be settled. Preparation of such statement

on monthly basis is recommended for all types of organization. It has become mandatory for

the DRDA/ZPs and some other organization to update their bank pass book twice in a month

i.e. on the 10th

and the last working day of every month. For these institution/offices

reconciliation of the cash book balance with the pass book balances will be shown on the last

page of the cash book for the month .Even if the two balances agree reconciliation is

necessary because there might have been compensating errors in the entries and the

agreement may be a show only.

The probable causes of difference between the balances as given in the pass book and

the cash book are many and varied. They may relate to timing of entry, nature of transaction

and existence of errors.

67

In this connection, the following points are important:-

1. Un-presented cheque-cheque issued but not presented for the payment to the bank

(arising out of the fact that the validity of a cheque is 6/3 months. 3 months after the

month of issue in Govt. cheques and 6 months after the date of issue in other cheques.

2. Uncollected or Un-cleared cheques-cheques entered in the cash book but not

collected by the bank on the date under reference.

3. Cheques received and debited in the cash book but omitted to be sent to the bank for

collection.

4. Interest on deposit entered in the pass book only.

5. Direct debits including bank charges, commission, service charges ( under Cash

banking Transaction Act, 2005), interest on overdraft debited in the pass book only.

6. Interest on investment (including Government bonds, NSC, debentures etc.) and

dividend collected by the bank directly but not intimated to the customer as yet.

7. Payment by the bank as per standing instruction (like payment of the LIC premium,

club membership fee etc.) entered in the pass book only.

8. Credit transfers, direct deposit by a third party etc. into the customers account and

credited in the pass book but not entered in the cash book.

9. Cheques and bills sent to the bank for collection being dishonoured and recorded in

the pass book but not intimated as yet.

10. Errors in the cash book or pass book –difference in the balance may arise owing to

errors committed by the bank or by the person responsible for preparing the cash

book.

3.12 Method for preparing a Bank Reconciliation Statement

Methods for preparing a bank reconciliation statement comprise of (a) ± Method (b)

Debit Credit method (c) Statement method (d) Adjusted cash Book Method and (e) Tabular

Method. Of these methods ± Method is considered to be most simple. But this method is an

arithmetical method rather than a method of Book Keeping.

In examination, however, if we find an overdraft cash book or pass book balance, debit credit

method will be better. In all methods, if the starting point is cash balance the final answer is

pass book balance and vice versa.

68

3.13 Steps for preparing a Bank reconciliation Statement:

A bank reconciliation statement will be prepared on common sense basis. We may start the

preparation either with the cash book bank balance or the pass book balance. If the starting

point is favourable cash book balance (Debit balance) the items to be added are (a) cheques

issued but not presented for payment as yet (b) interest on deposit by the bank in the pass

book only (c) credit transfer, direct deposit and other direct collection as interest on

investment etc. and (d) any other items entered in the pass book in the credit column but

having no corresponding debit entry in the cash book. The items to be deducted include (a)

Cheques deposited into the bank for collection and entered in the cash book but not collected

as yet (b) cheques omitted to have been sent to the bank although entered in the cash book (c)

post dated cheques debited in the cash book and cannot be collected on technical grounds (d)

bank charges, commission , interest on overdraft, service charges entered in the pass book

only, (e) payment as per standing order like the payment of LIC premium etc. (f) any other

items debited in the pass book but not recorded in the cash book. If the difference is due to

mistake or error in casting in either set of books, the books are to be properly rectified.

If the starting point is favourable pass book balance (credit balance) converse will be

the above rules. It means that all the rules followed in the case of Debit balance of Cash book

will be reversed if we start with pass book credit balance.

In the case of the overdraft balances (credit balance of cash book and debit balance of

pass book) general rules as applicable to favourable balances (debit balance of cash book and

credit balance of pass book) will be reversed

3.14

TYPES OF PROBLEMS

(for Bank Reconciliation Statement)

Where causes of

difference are given

Where causes of

difference are not given

Reconciliation

without

Adjusting cash

book

Reconciliation after

adjusting cash book

Reconciliation

without

Adjusting cash

book

Reconciliation after

adjusting cash book

69

Problem 1. Problem on Bank Reconciliation Statement- a general problem From the following cash book (bank column only) and the relevant bank pass book draw up

a bank reconciliation Statement as at 31st January, 2008.

Cash Book (bank column only)

2008 Rs 2008 Rs

Jan 1 To Cash 10,000 Jan 3 By Khalsa Medicos 2,500

Jan 5 To B/R 11,900 Jan 9 By T. Achou 1,000

Jan 10 to Sardar Bros 400 Jan 16 to State Academy of Training 1,500

Jan 20 To Kulabidhu & sons 1,800 Jan 21 By M.N.Singh 2,000

Jan 24 to Kangleipak Industries 4,000 Jan 27 By Cash 1,200

Jan 28 to Cash (deposit) 600 Jan 30 By P.C.Jain 5,500

Jan 31 to M/S Manipur Furniture House 3,000 Jan 31 By Balance c/d 18,000

31,700 31,700

Pass Book

(Anand Sharma in account with SBI,Imphal)

Date Particulars Withdrawals

(Dr)

Deposit

(Cr)

Balances

2008

Jan 1

Jan 4

Jan 5

Jan 12

Jan 13

Jan 17

Jan 27

Jan 28

Jan 29

Jan 30

Jan 30

Jan 31

Jan 31

Jan 31

Jan 31

By Cash

To Khalsa Medicos

By B/R discounted

By Sardar Bros

To T.Achou Singh

To State Academy of Training

To Self

By cash

To B/R discounted but

dishonoured

By Gokul Sharma

By Automobiles Ltd (interest)

By Cheque

No.08768 (Kulabidhu & sons)

To Bank charges

To Service charges

By Interest on Deposits

Rs

2,500

1000

1,500

1200

12,000

10

40

Rs

10,000

11,900

400

600

1,100

300

1,800

40

Rs

10,000(cr)

7,500(cr)

19,800(cr)

19,800(cr)

18,800(cr)

17,300(cr)

16,100(cr)

16,700(cr)

4,700(cr)

5,800(cr)

6,100(cr)

7,900(cr)

7,890(cr)

7,850(cr)

7,890(cr)

70

Solution:

Here, cash book and pass book balances are respectively Rs.18,000 and Rs. 7,890 as at 31st

January , 2008.The pass book is a copy of Anand Sharma in the ledger of SBI, Imphal and

hence converse (in sides) are the entries in the clients cash book (bank column). Thus the two

balances should agree. But it does not happen so because of the following reasons:

(1). Deposited cheques of Rs 4000 (Kangleipak Industries ) and Rs 3000 (M/S Manipur

Furniture House) debited in the cash book but remain uncollected in the pass book as

on 31st January, 2008.

(2). Issued cheques of Rs 2000 (M.N.Singh) and Rs 5,500 (P.C. Jain & Co) credited in

the cash book remain unpaid (un-presented) and non-debited in the pass book as on

31st January, 2008.

(3). Direct deposits of Rs 1,100 (by Gokul Sharma) and Rs. 300 (for interest from

Automobile Ltd.) Credited in the pass book are not yet debited in the cash book.

(4). Dishonoured Bills Receivable (B/R) of Rs.12, 000.bank charges of Rs 10, service

charges of Rs.40 have not been entered in the cash book as yet.

(5). Interest on deposit amounting to Rs 40 has not been found in the cash book although

the same has been recorded in the pass book.

To adjust these, the starting point may be cash book balance of Rs 18,000 (cr) or pass book

balance of Rs 7890 (cr).If we proceed with cash book balance item (i) & (ii) will be deducted

and items (ii),(iii) and (V) will be added. If the staring point is pass book balance item

(ii),(iii) & (v) will be deducted and item (i) &(iv) will be added.

Now, we have (under ± Method) with cash book balance as starting point.

(1) Bank Reconciliation Statement as at 31st January, 2008 (under ± Method)

Particulars (+) Items (-) Items

Balances as per cash Book

(dr)

Cheques issued but not presented for payment (2000+5000)

Cheques deposited but not collected

• Kangleipak Industries Rs 4000

• M/S Manipur Furniture House Rs.3000

Direct deposit into the bank not yet debited in the cash book

• Gokul Sharma Rs 1,100

• Automobile Ltd (interest) Rs 300

Direct deduction by the bank

• Dishonoured discounted B/R …………..12,000

• Bank charges…………………………… 10

• Service charges…………………………. 40

Direct credit by the bank entered in the pass book only

Interest on deposit

18,000

1,400

40

7,000

12,050

26,940 19,050

71

Here, Balance as per pass book = Rs 26,940 –Rs 19,050

= Rs 7,890 (Cr)

Again, we have, (under ± method) with pass book balance as starting pont.

(2) Bank Reconciliation Statement as at 31st January, 2008 (under ± Method)

Particulars (+) Items (-) Items

Balances as per Pass Book (cr)

Cheques issued but not presented for payment (2000+5000)

Cheques deposited but not collected

• Kangleipak Industries Rs 4000

• M/S Manipur Furniture House Rs.3000

Direct deposit into the bank not yet debited in the cash book

• Gokul Sharma Rs 1,100

• Automobile Ltd (interest) Rs 300

•

Direct deduction by the bank

• Dishonoured discounted B/R …………..12,000

• Bank charges…………………………… 10

• Service charges…………………………. 40

Direct credit by the bank entered in the pass book only

Interest on deposit

7890

7,000

12,050

7,500

1,400

40

26,940

8,940

18,000

Balance as per cash book(Dr)

26,940 26,940

72

Now, we have (under Debit –Credit Method)

(3) Bank Reconciliation Statement as at 31st January, 2008 (under Debit Credit method)

Particulars Dr Cr

Balances as per Pass Book

Unpresented Cheques(2000+ 5500)

Uncollected Cheques(4000 + 3000)

Direct Collection by the bank (1,100 +300)

Items debited in the pass book but not debited in the past

book

• B/R discounted dishonoured 12,000

• Bank charges 10

• Service charges 40

Interest on deposit credited in the pass book only

18,000

7,500

1,400

40

7,000

12,050

26,940

19,050

7,890

Balance as per Pass book(cr)

26,940 26,940

(4) Under adjusted Cash book method.

CASH BOOK (as adjusted)

Dr Cr

2008 Rs 2008 Rs

Jan 31 to Balance b/d 18,000

Jan 31, By B/R discounted

&Dishonoured (B/R cancelled)

12,000

To Gokul Sharma a/c (receipt

of Cheque)

11,000 By bank charges 10

To Interest (receipt of

Interest ) from Automobile ltd.

300 By service charges

40

To Interest a/c (interest from

bank)

40 By balance c/d

7,390

19,440 19,440

73

Bank Reconciliation Statement as at 31st January, 2008(under adjusted Cash book method

A. Balance as per pass book (cr) 7890

Add cheques deposited but not collected as yet

• Kangleipak Industries 4000

• M/S Manipur Furniture House 3000

7000

14,890

Less cheques issued but not presented as yet

• M.N.singh 2000

• P.C.Jain 5,500

7,500

Debit balance as per cash book (as adjusted) Rs 7,390

Special problems on Bank Reconciliation Statement

Where causes of difference are given: (Situation – I)

Problem 1: When transit Co. Ltd. Received its Bank Statement showing a favorable of Rs

7,392 for the period ended on 30 June 2007, this do not agree with the balance in the cash

book.

An examination of the Cash Book and Bank Statement disclosed the following :

1. A deposit of Rs 492 paid on 29th

June, 2007 had not been credited by the bank until 1st

July, 2007.

2. Bank charges amounting to Rs 17 had not been entered in the Cash book.

3. A debit of Rs 42 appeared on the Bank Statement for an unpaid cheque, which had

been returned marked’ Out of date’. The cheque had been re-dated by the customer

and paid into the bank again on 3rd

July, 2007 .

4. A standing order for payment of annual subscription amounting to Rs 10 had not been

entered in the cash book.

5. On 25th

June , the managing director had given the cashier a cheque for Rs 100 to pay

into his personal account at the bank .The cashier had paid it into the company’s

account by mistake.

6. On 27th

June, two customers of Transit Co.Ltd, had paid direct to the company‘s bank

account Rs 499 and Rs 157 respectively in payment for goods supplied. The advices

were not received by the company until 1st July and were entered in the Cash book

under that date.

7. On 30th

March,2007 the company had entered the hire purchase agreement to pay by

banker’s order a sum of Rs 26 on the 10th

day of each month, commencing , April.

No entries had been made in the cash book.

8. Rs 364 paid into bank had been entered twice in the cash book.

9. Cheques issued amounting to Rs 4,672 had not been presented to the bank for

payment until after 30th

June , 2007

By using the

format

recommended

by the

Ministry of

Rural

Development,

Govt.of India

for Panchayt

Raj Institution

D.R.D.A.

74

10. A customer of the company , who received a cash discount of 2- ½ % on his account

of Rs 200 paid the company a cheque on 10th

June. The cashier erroneously entered

the gross amount in the bank column of the cash Book.

11. You are required : (a) To show the necessary adjustments in the Cash Book of Transit

Co. Ltd, bringing down the correct balance on 30th

June, 2007 and (b) To prepare a

Bank Reconciliation Statement on that date.

Solution:

Transit Company Limited

Bank Reconciliation Statement as on 30.06.2007

492

17

42

10 78

364

5

656 100

4,672

7,392

1,008

8,400

5,428

Bank balance as per the pass book

Add:

1. . Deposited but not credited by bank.

2. Bank charges had not been entered in the Cash book

3. Cheque returned dishonoured

4. Payment as per standing order not entered in the cash book.

7. Payment as per order not entered in the cash book (Rs 26 X 3)

8. Deposit entered in the Cash book twice.

9. Discount allowed wrongly entered in the bank column.

Less:

6. Cash directly deposited by customer not entered in the cash

book ( Rs 499 + 157) 5. Cheque of M.D wrongly deposited into the company’s account.

9. Cheques issued but not presented to Bank.

Bank Balance as per cash book 2,972

In the books of Transit Company Limited

Cash Book (Bank Column)

Dr Cr

Date Particulars L.F Rs Date Particulars L.F Rs

2007

June 30

To Balance b/f

To Customer A/c

2,972

656

3,628

2007

June 30

By Bank Charges A/c

By Subscription A/c

By Hire Vendors A/c

By Errors

By Discount Allowed A/c

By Balance c/d

17

10

78

364

5

3,154

3,638

Bank Reconciliation Statement as on 30.06.1997

Bank balance as per the Amended Cash Book Add: (5.) Cheque of Managing Director wrongly deposited in

Company’s Account

(9.) Cheque issued but not presented

Less: (1.) Deposited but not credited by Bank

(3.) Cheque returned by bank as out of date not entered

in the cash book

Bank Balance as per Pass Book

100

4,672

492

42

3,154

4,772

7,926

534

7,392

75

Where causes of difference are not given, but extract of the Cash Book and Pass Book are given: (Situation – 2)

In the practical situation no ready made causes of discrepancies are available .Bank

Reconciliation Statement is required to be prepared from the extract of the Cash Book and the

Pass Book. In this situation the causes of discrepancies are to be searched out first and then

the Bank Reconciliation Statement isto be prepared.

(i) When both the Cash Book and the Pass Book of the Same period are given , following

steps are taken:

Step 1. Compare the amount of the deposits listed on the Bank Statement (Pass book)

with the amount of the deposits listed on the cash Book Bank Column (debit Column) Place

tick marks in the Cash Book and on the Bank statement beside the items that agree. Any

unticked items in the Cash book represents deposits not yet recorded by the bank .Now, list

down these items under the heading, ’Cheque/money deposited but not yet credited by the

Bank’. Any unticked items in the Bank Statement represent deposits not yet recorded in the

Cash Book. List down these items under the heading ‘ Amount credited by the bank but not

yet recorded in the Cash Book.

Step 2: Compare the amount of the withdrawals listed on the Bank Statement (Pass

Book) with the amount of the payments listed on the credit side of the Cash Book (Bank

Column) .Place tick marks in the cash book and on the Bank Statement beside the items that

agree. Any unticked items in the Cash book represent payments not yet recorded by the bank.

Now list down these items under the heading ‘Cheque issued/drawn but not presented for

payment to the bank’. Any unticked items in the Bank Statement will be withdrawals not yet

recorded in the Cash book. Now list down these items under the heading ‘amount debited by

the bank but not yet credited in the cash book.

Example - I

Cash Book (Bank Column)

Dr Cr

Date Particulars L.F Rs Date Particulars L.F Rs

2007

Jan 1

Jan 15

Jan 25

Jan 30

To Balance b/f

To G.Roy

To A.Mukherjee

To P.Sharma

� 300

� 30

40

20

2007

Pass Book Date Particulars Dr(withdrawn) Cr(Deposited) Balance (Rs)

2007

Jan 1

Jan 15

Jan 20

Jan 30

To Balance b/f

By Cheque

By ITC Dividend

By Interest on

deposit

� 30

25

5

� 300(Cr)

From the above it is clear that:

1. Cheque deposited but not credited by the Bank; A Mukherjee Rs 40 + P Sharma Rs 20

= Rs Total Rs 30

2. Amount credited by the Bank not recorded in the Cash Book: ITC Dividend Rs 25 +

Interest on deposit Rs 5 = Total Rs 30

76

Example -2 Cash Book (Bank Column)

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

2007

Jan

To Balance b/f

500

2007

Jan 1

Jan 10

Jan 20

Jan 30

By P.Halder (Ch.No.825)

By O.P.Khanna (Ch.No.826)

By K.D.Rowan (Ch.No.827)

By R.P Singh (Ch.No.828)

� 200

� 50

100

50

Bank Statement Date Particulars Dr(withdrawn) Cr(Deposited) Balance (Rs)

2007

Jan 1

Jan 15

Jan 25

Jan 25

Jan 30

To Balance b/f

To Cheque(825)

To Cheque(826)

To Bank charges

To Insurance Premium

� 200

� 50

10

100

500 (Cr)

From the above it is clear that:

1. Cheque issued but not presented to the Bank for Payment : K.D Rowan Rs 100 +R.P.

Singh Rs 50 = Total Rs 150.

2. Amount debited by Bank not recorded in the Cash Book : Bank Charges Rs 10 +

Insurance Premium Rs 100 = Total 110.

Step 3: And finally , list any other discrepancy item under the appropriate discrepancy

heading. For example, show any errors discovered in the Cash Book and in the Bank

Statement.

Step 4: Prepare a Bank Reconciliation Statement in the usual manner after taking into

consideration all the listed items and closing balances of the cash book or pass Book/Bank

Statement. The following exampleswill make the matter more clear.

Special Problem 2: The following were the bank column of the Cash Book of Prakash

Agarwal.

Dr Cash Book (Bank Column) Cr Date Particulars L.F Rs Date Particulars L.F Rs

2007

Dec 1

Dec 8

Dec 10

Dec 15

Dec 22

Dec 28

Dec 31

To Balance b/f

To R.Sen

To P.Dasgupta

To B.K. Roy

To P.Patel

To H.Kabir

To T.K.Basu

450

210

600

780

100

240

300

2,680

2007

Dec 2

Dec 6

Dec 8

Dec 12

Dec 16

Dec 22

Dec 24

Dec 28

Dec 30

Dec 31

Dec 31

By P.K. Sharma

By T.Khanna

By Abdul Amin

By L.Narayan

By K.Kundu

By C.Banerjee

By T.Sen

By Wages

By B.K.Aggarwal

By L.N.Mishra

By Balance c/d

150

60

10

120

400

300

40

250

150

80

1,120

2,680

77

Bank Statement

Date Particulars Dr

(withdrawn)

Cr

(deposited)

Balance Rs

2007 Dec 1

Dec 6

Dec 10

Dec 12

Dec 13

Dec 14

Dec 15

Dec 15

Dec 19

Dec 20

Dec 25

Dec 28

Dec 29

Dec 31

Balance b/f

Cheque

Cheque

Deposit

Bank charges

Cheque

Deposit

Cheque

Deposit

Cheque

Deposit

cheque

Cash

Standing order- club

Suscription

150

60

10

5

120

400

40

250

100

210

600

780

100

450 Cr

300 Cr

240 Cr

450 Cr

440 Cr

1,040 Cr

1,035 Cr

915 Cr

1,695 Cr

1,295 Cr

1,395 Cr

1,355 Cr

1,105 Cr

1,005 Cr

You are required to prepare a Bank Reconciliation Statement.

Solution:

1. Cheque deposit but not credited by Bank: H.Kabir Rs 240 + T.K. Basu Rs 300 = Rs

540.

2. Cheque issued but not presented : C.Bannerjee Rs 300 + B.K.Aggarwal Rs 150 + L.N.

Mishra Rs 80 = Rs 530.

3. Amount debited by Bank not entered in the Cash Book : Bank Charges Rs 5 +

Subscription Rs 100 = Rs 105.

Bank Reconciliation Statement as on 31.12.2007

Rs Rs

530

540

5

100

1,120

530

1,650

645

Bank balance as per the Cash Book Add: 2. Cheque issued but not presented to the Bank

Less: 1. Cheque deposit but not credited by Bank

3. Bank Charges debited by the Bank , not recorded in

the cash book

3. Subscription paid by the bank, as per standing

order, not recoded in the Cash Book

Bank balance as per the Pass Book(Cr) 1,005

Special Problem 3: The following are extracted from the Bank Column of the Cash Book

of S.Sweetcorn.

Dr Cash Book (Bank Column) Cr Date Particulars L.F Rs Date Particulars L.F Rs

2007

March 15

18

19

Cash

C.Croydon

A.Ash

18,000

12,000

5,000

2007

Mar 1

6

7

15

30

31

By Balance b/f

By P.People

By W.Wright

By D.dobson

By W.Whipple

By Balance c/d

20,000

1,000

200

120

17,500

On 31st March, 2007 he received the following Bank Statement from his bank:

Bank Statement Date Particulars Dr(withdrawn) Cr(deposited) Balance Rs

2007

March 1

5

Balance (Dr)

Interest

500

120

20,000

20,500

78

12

15

15

18

25

28

31

Charges

D.Dobson

Cash

C.Croydon

Interest on Securities

Credit Transfer-Poster, R.

Divident Warrant

120

18,000

12,000

540

100

500

20,620

20,740

2,740

9,260

9,800

9,900

10,400

You are requested to : (1) Rewrite the cash book for the March 2007,bringing it upto date,

showing the new balance at 31st March,2007 ; (2) Prepare a statement to reconcile the

difference between it new upto date balance in the cash book and the balance in the Bank

Statement on 31st March , 1997.

Solution: List of causes of difference (1) Cheque deposit but not credited by the bank Rs 5000; (2) Interest on securities collected

by the bank not recorded in the Cash Book Rs 540 (3) Credit transfer not recorded in the

Cash Book Rs 100; (4) Dividend collected by the bank directly not recorded in the cash book

Rs 500; (5) Cheque issued but not presented to the bank for payment –P. People Rs 1,000 +

W.Wright Rs 200 + W.Whipple Rs 17,500 = Total Rs 18,700; (6) Interest debited by the

bank not recorded in the Cash Book Rs 500 ; (7) Bank

Charges not recorded in the Cash Book Rs 120. Date Particulars L.F Rs Date Particulars L.F Rs

2007

Mar 15

18

19

31

31

31

31

Cash

C.Croydon

A.Ash

To Interest on Securities

To Poster

To Dividend

To Balance c/d

18,000

12,000

5,000

540

100

500

3,300

39,440

2007

Mar 1

6

7

15

30

31

31

By Balance b/f

By P.People

By W.Wright

By D.Dobson

By W.Whipple

By Interest on O/D

By Bank Charges

20,000

1,000

200

120

17,500

500

120

39,440

Bank Reconciliation Statement

Bank Overdraft as per the Amended Cash book

Add: Cheque deposit but not credited by the Bank

Less: Cheque issued but not presented for payment

Bank Balance as per the Bank Statement (Cr)

5000

18,700

3,300

5,000

8,300

18,700

10,400

Special Problem 4: The internal control procedure over Cash transaction in the Modern Snacks are not adequate ,

Mr Fox, the Cashier/Accountant handled the cash receipts , made small disbursement from

the cash receipts , maintained accounting records and prepared the monthly reconciliation of

the bank accounts. At April 30,2007 the statement from the bank show a balance of Rs

17,183.33. The outstanding cheque were as follows:

Cheque No Amount(Rs) Cheque No Amount(Rs)

44 333.33 66 222.22

55 555.55 88 11.11

77 444.44 99 111.11

79

The balance of the cash and Bank as shown by the Modern Snacks records was Rs

21,655.55 which includes the cash on hand. The Bank Statement of April showed a credit of

Rs 333.33 arising from the collection of note left with the Bnak ; Modern snacks did not

make any entry to record this collection.

Recognising the weakness existing in internal control over cash transaction , Mr Fox

removed all the cash in excess of Rs 4,816.66 and then prepared the following reconciliation

in an attempt to conceal his theft.

Rs Rs

Cash and Bank balance per books April 30

Add: Outstanding cheque

No 66

No 88

No 99

Less: Cash in hand

Balance as per Bank Statement April, 30

222.22

11.11

111.11

21,655.55

344.44

21.999.99

4,816.66

17,183.33

You are required:

(a) To prepare a correct bank reconciliation.

(b) Determine how much cash was misappropriated.

(c) How the cashier/Accountant attempt to conceal his theft.

Solution: (a) Bank Reconciliation Statement and 30.4.2007

Rs Rs

Balance as per Bank Statement

Add: cheque issued but not presented

44

55

77

66

88

99

Collection of note but not recorded in Cash Book

Correct Bank Balance as per Cash Book

333.33

555.55

444.44

222.22

11.11

111.11

1,677.76

333.33

17,183.33

2,011.09

15,172.24

Special Problem 5: From the following particulars ascertain the balance that would appear

in the Bank Pass Book of Shri A. Kumar at 31st December 2003.

1) The bank overdraft as per Cash Book on December 31, 2003 Rs. 22,680.

2) Interest on overdraft for 6 months ending December 31, 2003 Rs 320 is entered into

the pass book.

3) Bank Charges for Rs 60 fro the above period are debited in the pass book.

4) Cheque issued but not presented prior to December, 1983, amounted to Rs. 2,336.

80

5) Cheques paid into the bank but not cleared before December 31, 2003 were for Rs

4,340.

6) Interest on investments collected by the bank and credited in the pass book, Rs 2,400.

Solution:

Bank Reconciliation Statement as on 31st December , 2003

Overdraft as per Cash Book 22,680

Add: Interest on overdraft 320

Bank charges debited in the pass book 60

Cheques paid but not cleared by the bank 4,340 4,720

Less: Cheques issued but not yet 27,400

Presented for payment 2,335

Interest on investment 2,400 4,735

Credit balance as per pass book 22,665

Special Problem 6: On 30

th June 2004, the cash book of Mr Ram showed a bank balance of Rs 3,425. A

comparison of the book with the pass book showed:

(a) Out of cheques issued for Rs 1,200 a cheque for Rs 200 had been cashed, the other

not presented.

(b) A B/R for Rs 700 sent for collection had been realized .But it was not entered in the

cash book.

(c) Out of cheques for Rs 1,800 paid in, there was credit in the pass book Rs 1,100 only.

(d) A debit for Rs 225 relating to some other account was found in the pass book.

Ascertain the pass balance.

Solution:

Bank Reconciliation Statement as on 30th

June , 2004

Bank balance as per Cash Book 3,425

Add: (1) Cheques issued but not yet 1000

Presented

(2) B/R collected and entered in the Pass book ,

But not in the Cash book 700 1,700

Less: (1) Cheques paid in but not collected and credited 700 5,125

(2) Wrong debit in the Pass Book 225 925

Balance as per Pass Book

Special Problem 7:

On 31st December 2003, the cash book of Jain works showed an overdraft of Rs

15,600. from the following particulars, make out a Bank reconciliation statement:

(a) Cheques drawn but not cashed before 31st December 2003 amount to Rs 3,946.

(b) Cheques paid into the Bank but not collected and credited before 31dt December

2003 amounted to Rs 4,891.

(c) A bill receivable for Rs 520 previously discounted with the bank had been

dishonoured and debited in the pass book.

(d) Debit is made in the Pass Book for Rs 120 on account of interest on overdraft and

Rs 55 on account of cheques for collecting bills.

(e) The Bank has collected interest on investments and credited Rs 760 in the Pass

Book.

81

Solution:

Bank Reconciliation Statement as on 31st December , 2003

Overdraft as per Cash Book 15,600

Add: Cheques paid into the bank but not credited 4,891

Bills Receivable discounted but dishonoured 520

Interest on overdraft 120

Debit made by the bank for collecting the bills 55 5,586

Less: Cheques issued but not presented for payment 3,946 21,186

Interest on Investment collected by the bank 760 4,706

Overdraft as per Cash Book Rs 16,480

Special Problem 8:

From the following information given by the Accountant prepare a Bank

Reconciliation Statement as on 31st December 2000.

1) Cash Book Balance Dr Rs 5,000:

(a) Cheque in favour of Mr Ram for Rs 300 dated 29th

December 2000.

(b) Cheque in favour of Mr Rahim dated 31st December 2000 for Rs 750.

2) The following cheques were paid into the bank , cleared and credited by the bank on

dates mentions:

(a) Cheque from Mr Johan Rs 1,00 cleared on 1st January 2001

(b) Cheque from Mr Singh Rs 750 cleared on 5th

January 2001

3) The bank has, as per standing instruction paid insurance premium for Rs 300 on 28th

December 2000 and the bank intimation was received on 5thh February 2001.

4) The bank has received from clients Rs 3,500 being the collection on account on 26th

December 2000 received on 10th

January 2001 only.

5) Bank charges Rs 50 towards Ledger Folio charges on 30th

December 2000.

6) The bank has credited our account with Rs 10,000 on 28th

December 2000 wrongly

due to some other clients and reversed it on 28th

January 2001.

Bank Reconciliation Statement as on 31st December , 2000

Particulars Rs Rs

Debit balance as per the cash book 5,000

Add: Cheque issued but not yet presented for payment

Mr Ram 300

Mr Rahim 750 1,050

Add: Amount received by the bank from the client but

Not entered in the cash book upto 31st December

1980 3,500

Add: Wrong credit given by the bank for which no effect

Is given in the cash book 10,000 14,550

19,550

Less: Cheque deposited but not cleared

Mr Johan 1,000

Mr Singh 750 1,750

Less: Insurance premium paid directly by the bank ,

in respect of which no entry is made in cash book. 300

Less: Ledger Folio charges debited by the bank but not

entered in cash book 50 2,100

Credit balance as per Pass Book 17,450

82

Special Problem 9: On 30

th June 2003, Dimple Cash Book showed that had no overdraft of Rs 300 on her

current account at the bank.

On checking the cash book with the bank statement she found the following:

(i) Cheques drawn amounting to Rs 500 have been entered on cash book but had not

been presented for payment.

(ii) Cheques received amounting to Rs 400 had been entered in the cash book but had

not been credited by the bank.

(iii) On instructions from Dimple the bank had transferred interest Rs60 from her

deposit account to her current account, recording the transfer on 5th

July 2003. This

amount had however been credited in cash book on 30th

June 2003.

(iv) Bank charges Rs 35 shown in bank statement had not been entered in the cash book.

(v) The payment side of the cash book has been under cast by Rs 10.

(vi) Dividends amounting to Rs 200 collected by the bank on standing instruction not

recorded in cash book .

(vii) A cheque of Rs 50 drawn on deposit account had been shown in the cash book as

drawn on current account.

(viii) A cheque issued to Suresh for Rs 25 was replaced when got stall. It was entered

again in cash book, no other entry made. Both Cheques were included in the total of

unpresented cheques shown above.

You are required –

(i) To indicate the appropriate adjustment in cash book; and

(ii) To prepare a statement reconciling the cash book balance with the balance shown in

the bank statement.

Bank Reconciliation Statement as on 30th

June , 2003

Items Amount

Rs

Amount

Rs

Overdraft as per cash book 300

Add: Cheque deposited but not yet collected 400

Interest transferred from deposit to current A/c 60

Bank charges charged by the bank 35

Undercasting of payment side of the cash book 10 505

Less: Cheques issued but not presented 500

Dividends collected by the bank 200

Cheques wrongly credited to current account in

Cash book 50 750

Overdraft as per pass book 55

Cash Book (Bank Column)

Receipt Amount

Rs

Payments Amount

Rs

To Dividend A/c 200 By Balance b/d 300

To deposit bank A/c 50 By Bank charges 35

To Suresh 25 By Undercasting 10

To Balance C/d 70`

345 345

83

Special Problem 10:

Shyam’s cash Book showed a debit balance of Rs 6,500 on 31st March 2004. On

comparing the pass book, it was find out that cheques of Rs 500 and Rs 700 which were

deposited in Bank on 30th

March have not been collected so far. Cheques of Rs 600 Rs 800

and Rs 1,200 were issued on 20th

March , but none of these cheques was presented for

payment , not recorded in Shyam’s Cash book .bank charges were Rs 15 which were also not

recorded in Shyam ‘s Cash book.

Prepare bank reconciliation Statement on 31st March, 2004

Solution:

Bank Reconciliation Statement as at 31st March , 2004

Balance as per Cash book 6,500

Add: Cheques issued but not presented 2,600

Interest 125 2,725

9.225

Less: Cheques paid in but not collected Rs

500

700

1,200

Bank charges

15 1,215

Balance as per pass book Rs. 8,010

Special Problem 11: From the following particulars , prepare a Bank reconciliation Statement showing the

balance as per Pass book on 31st March , 2003.

The following cheques were paid into firm’s current account in March , 2003 but

were credited by the bank in April, 2003.

A Rs 2,500; B Rs 2,500 and C Rs 2,900.

The following cheques were issued by the firm in March 2002 and were cashed in

April , 2003.

P Rs 2,500 ; Q Rs 4,500 and R Rs 4,000.

A cheque of Rs 1,000 which was received from a customer was entered in the Bank

Column of the Cash Book in March, 2003, but the same was paid into the Bank in April,

2003.

The pass Book shows a credit balance of Rs. 2,500 for interest and a debit balance of

Rs 10,000 for Bank charges. The Balance as per Cash Book was Rs 1,80,000 on 31st March,

2003.

Solution:

Bank Reconciliation Statement as at 31st March , 2003

Dr.Balance as per Cash book Rs Rs

Add: Cheques issued but not presented for payment 1,80,000

P 2,500

Q 4,500

R 4,000 11,000

Interest allowed by bank 2,500 13,500

1,93,500

Cheque paid into bank but not credited by the bank

A 2,500

B 2,500

C 2,900 7,900

Less: Cheques though entered in the cash book but

omitted

84

To be sent to the bank 1,000

Bank charges made by bank 10 8,910

Credit Balance as per Pass Book Rs 1,84,590

Special Problem 12: On 31st March, 2004 the cash book of Sri Krishan showed a balance of

Rs 20,500. On comparing it with the pass Book, it was ascertained.

1) That out of cheque for Rs 2,000 issued prior to that date, cheque for Rs 1,500 only

had been cashed.

2) That out of cheques and bills of Rs 4,000 sent for collection, only Rs 3,000 were

collected and credited.

3) A cheque of Rs 600 received and entered in the cash Book and sent for collection and

on 30th

March, 2004 was omitted to be sent to bank.

4) Beside in the Pass Book there is a credit of Rs 120 for interest on deposit and a debit

of Rs 20 for bank charges.

From the above information prepare a Bank Reconciliation Statement on 31.3.2004.

Solution: Sri Prakash

Bank Reconciliation Statement as on 31.3.2004

Balance as per Cash book 20,500

Add: 1. Cheques issued but not cashed 500

2. Interest credited in the Pass Book but not entered

in the Cash Book 120

620

21,120

Less: 1. Cheque paid in but not collected & credited 1,000

2. Cheques received and entered in the cash book but

omitted to be sent to the bank 600

3. Bank charges debited in the pass Book but not

entered in the pass book 20 1,620

Bank balance as per Pass Book 19,500

Special Problem 13: On the basis of the following information available from the books and

records of M/s Rajesh & Sons , you are required to prepare a Bank Reconciliation Statement

as on 31st March, 2003.

(i) Overdraft balance as per pass book Rs. 14,360.

(ii) Cheques amounting to Rs 24,450 were deposited by the firm in its bank account

on or before 31st March, 2003 but the bank cleared them and credited the account

on 4th

April 2003 excepting one cheque for Rs. 980 which was returned unpaid on

6th

April, 2003.

(iii) The bank debited Rs.11 on 6th

April, 2003 towards its charges on the aforesaid

cheque.

85

(iv) Cheques aggregating Rs. 4,110 issue by the firm on or before 31st March 2003

were presented and debited to the account on 2nd

April, 2003.

(v) Cheques dated 26th

March , 2003 issued by the firm for Rs. 3,080 was returned

unpaid on 29th

March 2003 on account of a technical defect therein .The firm

received the intimation about the return of cheque on 3rd

April, 2003.

(vi) A cheque for Rs. 1,415 deposited by another firm was wrongly credited by the

bank to the account of this firm on 25th

march 2003 and the entry was reversed on

3rd

April, 2003.

(vii) Interest on overdraft amounting to Rs 181 was debited by the bank on 31st March ,

2003 but the advice thereof was received by the firm on 2nd

April , 2003.

You are required to arrive at the balance as per cash book as on 31st March , 2003.

Solution:

Bank Reconciliation Statement as on 3rd

March , 2003

Particulars Rs Rs

Overdraft balance as per pass book 14,360

Add: Cheques issued but not presented for payment till date 4,110

Cheque issued but dishonoured and the intimation being

Received only on April 3, 2003 3,080

7,190

21,550

Less: Cheques deposited but not credited by the bank till date 24,450

Less: Bank has wrongly credited the cheque deposited by

another firm. 1,415

Less: Interest on overdraft debited by the bank but not entered

in the cash book 181 26,046

Balance as per cash book 4,496

86

UNIT –IV

4.0 Depreciation valuation of assets –Reserves provisions and other funds:

General Rules for the classifications of expenditure into capital and revenue:

Depreciation may be defined as dimunition in the value of an asset or a fall in quality .

It is the shrinkage in the value of an asset at a given date as compared with its value at a

previous date. It has been used in many senses in book keeping .It may be considered as a fall

in price, physical deterioration, fall in value or a cost allocation. It is neither a source of fund

nor an application of fund. It does not effect working capital (current assets minus current

liabilities).Depreciation does not raise or reduce funds outflow through tax savings in the

context of companies .Deprecation is calculated only on fixed asset. Current assets take care

of their own values.

4.1 Causes of depreciation:

(i) Wear and tear (due to constant use)

(ii) Efflux of time - passage of time may cause a fall in values.

(iii) Obsolescence becoming outdated (economic deterioration) due to invention and / or

change in demand (originally this economic deterioration was outside the preview

of depreciation)

(iv) Physical deterioration due to accidents etc.

(v) Fall in Market price.

(vi) Expiration of legal rights- relating to lease, patents licences, franchise etc.

American authors use such expiration of intangible assets as amortization .In

amortization the useful life is predetermined and includes depletion of wasting assets

like coal mine, lime, quartz .

4.2 Basic factors for calculating depreciation:

(i) Original cost of asset (C)

(ii) Estimated scrap value or salvage value or residual value at the end of its life (S)

(iii) Effective life or economic life of the asset. (n)

Hence, the formula for depreciation:

Depreciation (dn) =

Thus, depreciation provided will be sufficient to reduce the value of the asset to its

scrap value at the end of its estimated life. Original cost includes purchase price, freight,

transit insurance, installation cost and so on .Scrap value is normally taken to be zero as it

may not be so easy to estimate the amount at the time of acquisition of the asset. Estimated

life is not the actual year for which it may be used or can be used but the number of years for

which the assets is likely to be used effectively. A machinery may be capable of running for

20 years but it is to used only for 10 years. To take the advantage of new inventions, the

estimated life for the purpose will be 10 years instead of 20 years .It may be expressed in

terms of years /months/hours or unit of output. Physical life is found to be longer than

economic life is normal situation . Estimated life depends on (a) extent of use (b) physical

deterioration (physical process of wearing out and (c) obsolescence

C-S

n

87

4.3 Methods for providing depreciation:

(i) Straight line or Fixed percentage on original cast or Fixed Installment Method .(

suitable when scrap value is Zero)

(ii) Curved line or written down value or Fixed percentage on diminishing balance or

Reducing Installment Method .( suitable when scrap value is significant)

(iii) Annuity Method.

(iv) Depreciation Fund/ Sinking Fund Method.

(v) Insurance Fund method.

(vi) Sum of Years Digit method.

(vii) Revaluation /Inventory method.

(viii) Depletion Method.

(ix) Repairs Provision .Method /Depreciation and Repairs method.

(x) Double Declining Method.

(xi) Machine Hour Rate Method.

For Loose tools, Jigs and patents revaluation method is suitable. For Patents and Trademarks

etc. we may use Straight line method. For Mines, Oil, fields, quarries, Depletion Method may

be recommended.

Of these, only straight line method and reducing Balance method are the principal methods.

All the other methods are subsequent developments and they cannot work alone without

straight line method or Reducing Balance method. In Straight line method a fixed amount

calculated on the original cost of the asset is provided as depreciation every year during life

time of the asset so that the value of the asset is reduced to zero or its break-up value, as the

case may be, at the end of its estimated life. This method is popular because of its simplicity

of concept, clearity of presentation in the balance sheet and its easy applicability in the assets

of the small value and in assets which do not require large scale repairs as in the case of

furniture, patents, short lease. However, one major defect of this method is that it does not

take into account the interest on the capital invested in the asset. Also it has the tendency to

equalize the charge to profit and loss account when depreciation and repairs are put together.

Under the Reducing Balance Method the rate or percentage of depreciation is fixed but it

applies to the value at which the asset stands in the books in the beginning of the year. In the

first year depreciation is written off proportionate to the actual period for which the asset has

been used. For example, the original cost of an asset is Rs. 20,000.If the rate of depreciation

is 10% and if the asset was put to use for one year, depreciation will be 10% of 2,00.

Depreciation for the 2nd

year will be 10% of Rs. (20,000 -2000) or 10% of Rs.18, 000 or Rs

1,800 and so on . In this case, depreciation in the earlier years will be heavy but will be light

as the asset get sold. Repairs, on the other hand, are light in the earlier years and heavy latter.

The impact is that depreciation and repairs taken together will be constant all through .It has

the effect of reducing book figure atop its appropriate value as soon as the asset is put to use.

Further, the income tax authorities recognize this method .But, this method as in Straight line

Method , ignores interest on capital invested in the asset.

4.4 Factors to be considered while selecting depreciation method:

(i) Consistency

(ii) Conservation (Prudence Concepts)

(iii) Calculation

(iv) Benefit

(v) Income tax

(vi) Causes

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(vii) Law of Land and

(viii) Technological

4.5 Valuation of asset and need of depreciation: The value of an asset is to be determined from year to year and their written down value

(WDV) or Net Book value(NBV) will be shown year wise. This is necessary for all types of

organisation including Government Office and department. Depreciation is charged even to

the asset that normally appreciates in value in money terms (e.g. .Land and buildings)

provided that the extent of obsolescence can be anticipated .Here, obsolescence refers to

decline in value through external causes. In Government system of Accounting the fixed

assets entered in the Asset Register under GFR-40[ See Rule 190(2) (i) ] are to be subjected

to depreciation and such losses shall be analyzed and recorded under different heads such as

normal fluctuation of market prices, normal wear and tear, lack of foresight in regulating

purchases and negligence after purchase. At present due to the absence of uniform rules for

the valuation of asset many legal complication come up. We have to value assets at cost less

depreciation till the Indian Accounting Standards (IAS 30 and 31) are made mandatory.

4.6 Depreciable Assets and Depreciation Accounting: Depreciable assets (like plant & Machinery with Loktak Development Authority, Sports

Equipment with sports Authority of India, Takyel are distinguished from wasting assets (like

Coal mine, gold mine etc) on the ground that the former is a bundle of services and usually

retains its physical characteristics as it performs services. The latter is in essence a long term

inventory or store of raw materials (like consumables) and spare parts recorded in G.F.R-4 in

Govt. accounting ) and gets physically exhausted by the removal of its contents.

There are two accounting procedures for treating depreciation.

(i) To debit depreciation a/c with the amount of the

And credit asset a/c annual depreciation

(ii) To debit Profit & Loss a/c Transfer of depreciation being a

And credit depreciation a/c charge against profits

These two entries are repeated year after year till the asset retires.

Under the 2nd

procedure we have,

(i) To debit Profit & Loss a/c With the amount

And credit provision for depreciation of annual depreciation

Accumulated Depreciation a/c at each accounting year

(ii) To debit provision for depreciation a/c

Or Accumulated Depreciation a/c Transfer of the depreciation

And credit Asset a/c of retirement of the asset

Problems on depreciation and valuation of Assets: Problem 1: A firm purchased machinery on 1

st June, 2003 for Rs 50,000. Depreciation is

written off at the rate of 10 percent annum. The firm close its books on 31st March every year.

89

The Machinery Account under Straight Line Method and written Down Value Method will

be as follows: Assume that a Financial year is an Accounting year.

Dr Machinery Account Cr Date Particulars L.F Straight

Line

Method

Written

Down

Value

Method

Date Particulars L.F Straight

Line

Method

Written

Down

Value

Method

2003 Rs Rs 2004 Rs Rs

June1 To Bank 50,000 50,000 Mar 31 By Depreciation 3,750 3,750

Mar 31 By Balance c/d 46,250 46,250

50,000 50,000 50,000 50,000

2004 2005

April 1 To Balance b/d 46,250 46,250 Mar 31 By Depreciation 5,000 4,625`

Mar 31 By Balance c/d 41,250 41,625

46,250 46,250 46,250 46,250

2005 2006

April 1 To Balance b/d 41,250 41,625 Mar 31 By Depreciation 5,000 4,163

Mar 31 By Balance c/d 36,250 37,462

2006 41,250 41,625

April 1 To Balance b/d 36,250 37,462

2007 5,000 3,746

36,250 37,462 Mar 31 By Depreciation 31,250 33,716

2007 Mar 31 By Balance c/d 36,250 37,462

April 1 To Balance b/d 31,250 33,762 2008

31,250 33,762 Mar 31 By Depreciation 5,000 3,372

2008 26,250 30,344 Mar 31 By Balance c/d 26,250 30,344

April 1 To Balance b/d 31,250 33,716

Sale of Asset: If an asset is disposed off the amount realized should be credited to the asset

account. Depreciation for the period used (during the year) should be written off in the usual

manner. The remaining balance in the asset account is loss ( or profit) and should be written

off to the Profit and Loss Account. Suppose, the machinery mentioned above is sold on 30th

June, 2008 Machinery Account will then stand as follows:

Dr Machinery Account Cr 2008 Rs Rs 2008 Rs Rs

April 1 To Balance b/d 26,250 30,344 June 30 By Bank 20,000 20,000

‘’ By Depreciation 1,250 759

,, By Profit & Loss A/c 5,000 9,585

26,250 30,400 25,250 30,344

If the part of the asset is disposed of or discarded , it is better to open an account

called , say , Machinery Disposal Account .If the books show the asset less depreciation , the

book value of the discarded portion of the asset should be debited to the Machinery Disposal

Account by giving credit to the asset account. If the asset account is maintained at cost, there

being a separate Provision for Depreciation Account, the Machinery Disposal Account should

be opened.

Problem 2: On 1st July , 2007 a company purchased a machine for Rs 3,90,000 and spent

Rs 10,000 on its installation .It decided to provide depreciation @ 15% per annum , using

written down value method. On 30th

November, 2008 the machine was dismantled at a cost of

Rs 5,000 and then sold for Rs 3, 00,000.On 1st December, 2009 the company acquired and

put into operation a new machine at a total cost of Rs 7,60,000. Depreciation was provided on

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the new machine on the same basis as had been used in the earlier case of the earlier machine

.The company closes its book of account every year on 31st March.

Prepare Machinery Account and Depreciation Account for accounting years 2007-08 and

2008-09.

Solution:

Machinery Account 2007 Rs 2008 Rs July 1 To Bank/cash 3,90,000 March 31 By Depn. 45,000

July 1 To Cash(installation expenses) 10,000 March 31 By Balance c/d 3,55,000

2008 2008

April 1 To balance b/d 3,55,000 Nov. 30 By Depn. 35,500

Nov.30 To Bank (dismantling Charges) 5,000 Nov. 30 By Bank a/c (sales value) 3,00,000

Dec.1 To Bank (total cost of new

machine)

7,60,000 Nov.30 By P/L a/c (Loss on Sale) 24,500

2009

March 31 By Depn. 38,000

March 31 By. Balance c/d 7,22,000

11,20,000 11,20,000

2009

April 1 To balance b/d 7,22,000

RESERVES PROVISION AND OTHER FUNDS:

4.7 Reserves, Provisions and Reserve Funds. Any amount set aside out of profits or other surpluses which are not meant to cover

any liability or contingency commitment are called reserves. In other words, reserves

mean anything which is set side out of the profit for future use. The purpose of

maintaining such reserves is to enable the firm to tide over a difficult financial period and

not to meet any particular contingency. They are generally classified into (a) capital

reserves and (b) revenue reserves Capital reserves are mainly created out of capital profits

which may arise out of the sale of fixed assets, appreciation (upward revaluation) of fixed

assets etc. Revenue Reserves are those reserves which are not capital reserves and which

are otherwise available for distribution or collection as profit. Examples are credit balance

of profit and loss account, fluctuations reserve or any other reserve created out of revenue

profit. Revenue reserves are again classified into (a) General Reserves and (b) Specific

Reserves. General Reserves are not created for any particular purpose. Specific reserves

are created for a specific purpose i.e for meeting a known Contingency. These specific

reserves are called Provisions.

Provision can be created for:

(a) Liabilities and charges (eg provision for taxation , provision for sales tax etc) or

(b) Valuation adjustment on fixed assets (eg. Provision for depreciation)

(c) Current assets (e.g Provision for bad debt)

A Reserve becomes a Reserve Fund when the amount involved have been invested in

outside securities. If there is no specific investment it cannot be Reserve Fund but merely a

Reserve .For Example, if a business unit sets aside profits for building construction and an

amount equal to the reserve created is invested outside the business we have ‘Building Fund’.

Here ‘fund ‘is used to include securities (money invested in income bearing assets).

4.8 Distinction between Reserves and Provisions:

91

Following are the main points of difference between provisions and reserves:

a) A provision is a charge against profit (a debit in the Profit and Loss Account),

whereas a reserve is an appropriation of profit (undrawn profits – a debit in the

Profit and Loss Appropriation Account). A reserve rise from other factors

(profit on sale of machine, a credit in the profit and Loss Account). It may not

involve either Profit and Loss Account or Profit and Loss Appropriation

Account (issue of shares at a premium or upward revaluation of assets).

b) Creation of Provision has nothing to do with the amount of net profit. In fact,

provisions are created in order to assist in the calculation of a correct profit.

But creation of a revenue reserve depends on the amount of profits earned by

the business.

c) Provision are required for future liabilities and charges or for valuation

adjustment but reserves are created for safeguarding the business against

unforeseen losses in the future or for capital formation – with a view to

planning for further development of the business.

d) Provisions are created for some specific purpose and are utilised for that

particular purpose for which they are created. Conversely, reserves that are

created are mostly general, and /or in a few cases, particular (reserve fund).

e) Provisions cannot be distributed as profits except in cases where the actual

liabilities or charges fall short of the amount provided for. But reserves, other

than capital reserves, can be distributed as profit.

4.9 Secret reserves and Hidden Reserves: Secret Reserves and are reserves which cannot be seen on the face of the Balance

Sheet which is the mirror of an organization. Only a careful scrutiny will reveal the existence

of such reserves. When such reserves exist, the financial position of the organization is shown

better than what actually is. In some establishments like banks and other financial institutions

the maintenance of such reserves may be made necessary .Such establishment, depending

upon Public Confidence, cannot afford to show a loss in any trading period. Secret reserves

enable them to show a profit even when thee is a loss. Following are the principal ways of

creating such reserves.

(a) Writing off excessive depreciation

(b) Charging capital expenditure to Profit and Loss account

(c) Undervaluation of Closing stock

(d) Overvaluation of opening stock

(e) Suppression of sales

(f) Showing a contingent liability as actual liability

(g) showing an asset as a contingent asset

(h) Crediting revenue receipt to an asset (e.g rent received credited to Building account).

Sometimes, secret reserves may arise themselves .For example, assets might increase in

value permanently or there may be permanent dimunition in a particular liability .Such

charges are not generally brought into books.

Hidden Reserves:

As against secret, a hidden reserve is one where an item of profit is described in a

manner indicating liability. For example, the credit balance of profit and Loss account

may be included in ‘Sundry credit balances’. Inner reserves are such reserves as are

92

openly made in the profit and loss account but are not shown separately in the Balance

Sheet,, being grouped with other liabilities. For example, a bank may show its

contingency reserve as part of deposit and other liabilities.

4.10 SINKING FUND: A sinking fund is a fund created by regular contribution and the interest received by

investing the amount so contributed together with the interest thereof. The purpose of

building up a sinking fund be either for the redemption of a liability on a certain date in future

or accumulation of funds to replace an asset. The present Government of Manipur announced

on the floor of the assembly to create two of such funds w.e.f the fiscal year 2008-2009.

Sinking fund to replace an asset is different from sinking Fund to redeem a liability in that the

first is a charge against profit and second is an item of appropriation. It stands to reason that

when a loan is repaid, there is no profit or loss (as money was received previously) and now

it is to be paid off and hence the annual installment cannot be debited to profit and loss

account.

At the end of the stipulated period the old asset will be written off by transferring the sinking

Fund. In the case of sinking Fund to repay a liability the loan will be repaid together with

interest by selling out the investment .Thus, the loan account and the Investment account will

be closed .Surplus, is any , will be transferred to General reserve

Problems on Reserve and Provision

Problem 1: On 31

st December, 2007 Debtors stood at Rs 76,800 but debtors list on the same date

revealed that there was a long over due of Rs 1,500 from a debtor, the collection of which

was considered doubtful.

You are required to show the relevant journal entries and ledger accounts in the books of X in

the following circumstances: (i) if he decides to write off the balances due from the debtors as

a bad debt; and (ii) if he decides to make a provision of Rs 1,500 for the debt.

Solution: Case (i)

Dr Journal entries in the books of X Cr

Date Particulars L.F Rs Rs

Bad Debt A/c Dr

To Sundry Debtors A/c

(Being Bad debts written off)

2007

Dec.31

Profit & Loss A/c Dr

To Bad Debt A/c

(Being bad Debts charged to Profit and

Loss Account)

1,500

1,500

1,500

1,500

Dr Bad Debt Account Cr Date Particulars Rs Date Particulars

2007

Dec.31

To Sundry Debtors

A/c

1,500 2007

Dec.31

By profit and Loss A/c 1,500

Case (ii) Journal entries in the books of X

Date Particulars L.F Rs Rs

2007

Dec.31

Profit & Loss A/c Dr

To Provision for Bad Debt A/c

(Being the creation of necessary provision)

1,500

1,500

93

Provision for Bad Debt Account Cr

Date Particulars Rs Date Particulars

2007

Dec.31

To Balance b/d 1,500 2007

Dec.31

By profit and Loss A/c 1,500

Problem 2: Following are the balances taken from the Trial balance of a Trader as on

31.12.2007.Provision for bad debts –Rs 5000 Sundry Debtors-Rs 90,000; Bad Debts-Rs

5000. You are required to prepare Provision for Bad debts Account after considering the

following: (i) further bad debts to be written off Rs 10,000; and (ii) a provision for doubtful

debts to be created @ 10% on closing debtors.

Solution:

In the books of the Trader

Provision for Bad Debt Account Cr Date Particulars Rs Date Particulars

2007

Dec. 31

Dec. 31 To Bad Debts A/c (Rs 5,000 + 10,000

To balance c/d [10% on Rs (90,000 -

10,000]

15,000

8,000

23,000

2007

Jan 1

Dec.31

2008

Jan 1

By Balance b/d

By Profit and Loss A/c

( balancing figure)

By Balancing b/d

5,000

18,000

23,000

8,000

Tutorial Notes:

(i) Provision for bad debts appearing in the Trial Balance represent s opening provisions.

(ii) Bad debts are increased by Rs 10,000 and Sundry debtors are decreased by the same

amount .Following is the Journal entry :

Bad Debts Account Dr Rs 10,000

To Sundry Debtors Account Rs 10,000

(iii)bad Debts of Rs 5,000 appearing in the Trial balance represent bad debts already

written off by passing the above Journal Entry for Rs 5,000 .Therefore , closing

balance of sundry debtors is Rs 80,000 (Rs 90,000 – 10,000)

(iv) Assume accounting year begins on 1st January every year.

Problem 3: Mr X a trader. had incurred a loss of Rs 3,000 as bad debt during the year 2006 ,

and then decided to create a Provision for Bad Doubtful Debts at 5% on debtors amounting to

Rs 50,000. On 31st December, 1997 , his debtors amounted to Rs65,000 and decided to

maintain the Provision for Bad and Doubtful Debts at 4% .Pass the necessary Journal entries

in the books of Mr X for the year 2006 and 2007.Assume that his bad debt for the year 2007

was Rs. 2,000.

94

In the book of the Trader

Journal

Dr Cr

Date Particulars L.F Rs Rs

Bad Debt A/c Dr

To Sundry Debtors A/c

(Being Bad debts written off)

Profit & Loss A/c Dr

To Bad Debt A/c

(Being bad debt transferred to Profit and Loss

Account)

Profit & Loss A/c Dr

To Provision for Bad & Doubtful Debts A/c

(Being the creation of necessary provision @

5% on Rs 50,000)

Bad Debt A/c Dr

To Sundry Debtors A/c

(Being bad debt written off)

Provision for Bad & Doubtful Debt A/c Dr

To Bad Debt A/c

(Being bad debt of the period adjusted against

the provision for bad & doubtful debt)

2007

?

Dec.31

Dec 31

Dec 31

Dec 31

Dec 31

Profit and Loss A/c Dr

To Provision for bad & Doubtful Debts A/c

(Being creation of necessary provision)

3,000

3,000

2,500

2,000

2,000

2,100

3,000

3,000

2,500

2,000

2,000

2,100

Note:-

Closing Provision required (4% of Rs 65,000) Rs 2,600

Add: Bad Debt Rs 2,000

Rs 4,600

Less: Opening balance of provision Rs 2,500

Rs 2,100

Problem 4:

The Balance Sheet of A as on 31.12.2005 included the following items:

Sundry Debtors Rs 98,000

Less: provision for bad debts Rs 2,450

Rs 95,550

95

At the end of the following financial years, the gross amount of Debtors (before deducting a

provision ) were as under:

As on 31.12.2006 –Rs 94,000 .as on 31.12.2007 –Rs 1, 02,000.

On each of these years there was a provision for bad debt debts calculated on the same

percentage basis as on 31.12.2005.The actual amount of bad debts written off from Debtors

Account over those periods were:

For the Year ended 31.12.2006 –Rs 2,600; For the year ended 31.12.2007-Rs 2,300

You are required to prepare Bad Debts Account and Provision for Bad Debts Account for the

year 2006 and 2007.

Solution:

In the books of A

Bad Debts Account

Dr Cr Date Particulars Rs Date Particulars Rs

2,600

2,600 2006

Dec.31

2007

Dec.31

To Sundry Debtors A/c

To sundry Debtors A/c 2,300

2006

Dec.31

2006

Dec.31

By provision for Bad

Debts A/c(transfer)

By provision for Bad

Debts A/c (transfer)

2,300

Provision for Bad Debts Account

Dr Cr

Date Particulars Rs Date Particulars Rs

2,600

2,350

2,450

2,500

4,950 4,950

2,300

2,550

4,850

2,350

2,500

4,850

2006

Dec.31

Dec.31

2007

Dec.31

To Bad Debt A/c

To Balance c/d (2.5% on

Rs 94,000)

To Bad Debt A/c

To Balance c/d (2.5% on

Rs 1,02,000)

2006

Jan. 1

Dec.31

2007

Jan 1

Dec.31

2008

Jan 1

By Balance b/d

By Profit and Loss A/c

(Balancing figure)

By Balance b/d

By Profit and Loss A/c

(Balancing figure)

By Balance b/d

2,550

Note: Percentage of provision to be created

Problem 5: The trial balance as on 31.12.2007 of Mr X contains the following items:

a) Provision for Bad Debts- Rs. 12,000;

b) Sundry Debtors – Rs. 1,00,000;

96

c) Bad debts - Rs. 8,000

(i) Rs 10,000 due from A (creditors include Rs 15,000 due to the same party)

(ii) Rs 5,000 due on account of sale of furniture ; and

(iii) Bad debts Rs 5,000.

You are required to show Bad Debts Account and Provision for Bad Debts Account.

A Provision for bad debts @ 2% is to be created on closing debtors.

In the books of X

Bad Debts Account

Dr Cr Date Particulars Rs Date Particulars Rs

8,000

5,000

13,000

2007

?

2007

Dec.31

To Balance b/d

To sundry Debtors A/c

13,000

2007

Dec.31

By provision for

Bad Debts A/c

13,000

Dr Provision for Bad Debts Account Cr

Date Particulars Rs Date Particulars Rs

13,600

1,600

12,000

2,600

14,600 14,600

2007

Dec.31

Dec.31

To Bad Debt A/c(Rs 8,000 + 5,000)

To Balance c/d (2.0% on Rs 80,000)

2007

Jan 1

Dec.31

2008

Jan 1

By Balance b/d

By Profit and Loss A/c

( Balancing figure)

By Balancing b/d

1,600

* Rs 1,00,000 –Rs 10,000 –Rs 5,000 – Rs 5,000 = Rs 80,000.

Problem 6: Mr X started business on 1.1.1995 .Following is the information provided for

the year ended 31st December

Year 2005 2006 2007

Credit Sales 50,000 70,000 1,00,000

Received from Debtors 30,000 50,000 50,000

Discount allowed 5,000 7,000 6,000

Returns inward 3,000 2,000 23,000

Bad debts 2,000 6,000 1,000

Provision is to be created for doubtful debts @ 10% on closing debtors. You are

required to prepare Sundry Debtors Accounts, bad Debts Accounts and Provision for Bad

Debts Account for the years 2005 to 2007.

97

In the books of X

Sundry Debtor’s a/c

Dr Cr Date Particulars Rs Date Particulars Rs

2005 2005 By Bank A/c 30,000

Dec.31 To Sales A/c 50,000 Dec.31 By discount Allowed A/c 5,000

,, By Return Inwards A/c 3,000

,, By Bad Debts A/c 2,000

,, By Balance c/d 10,000

50,000 50,000

2006 2006

Jan 1 To Balance b/d 10,000 Dec.31 By Bank A/c 50,000

Dec.31 To Sales A/c 70,000 Dec.31 By discount Allowed A/c 7,000

Dec.31 By Return Inwards A/c 2,000

Dec.31 By Bad Debts A/c 6,000

By Balance c/d 15,000

80,000 80,000

2007 2007

Jan 1 To Balance b/d 15,000 Dec.31 By Bank A/c 50,000

Dec.31 To Sales A/c 1,00,000 Dec.31 By discount Allowed A/c 6,000

Dec.31 By Return Inwards A/c 23,000

Dec.31 By Bad Debts A/c 1,000

Dec.31 By Balance c/d 35,000

1,15,000 1,15,000

Dr Bad Debts Account Cr

Date Particulars Rs Date Particulars Rs

2005Dec.31 To Sundry Debtors A/c 2,000 2005Dec.31 To Profit and Loss A/c 2,000

2006Dec.31 To Sundry Debtors A/c 6,000 2006Dec.31 By Provision for Bad Debts A/c 6,000

1997Dec.31 To Sundry Debtors A/c 1,000 2007Dec.31 By Provision for Bad Debts A/c 1,000

Provision for Bad Debts Account

Dr Cr

Date Particulars Rs Date Particulars Rs 2005Dec.31 To Balance c/d (10% of

Rs 10,000)

1,000 2005Dec.31

To Profit and Loss A/c

1,000

2006Dec.31

To Bad Debts A/c

6,000

2006 Jan 1

By Balance b/d

1,000

2006Dec.31

To Balance c/d (10% on

Rs 15,000)

1,500 2006Dec.31

By Profit and Loss A/c

( balancing Figure)

6,500

7,500 7,500

2007Dec.31 To Bad Debts A/c 1,000 2007 Jan 1 By Balance b/d 1,500

2007Dec.31

To Balance c/d (10% on

Rs 35,000)

3,500

2007Dec.31

By Profit and Loss A/c

(Balancing figure)

3,000

4,500 4,500

2008 Jan 1 By Balance b/d 3,500

Problem 7:

A trader had incurred a loss of RS 2,500 as bad debt during the year 2005 and then

decided to create a provision for bad and doubtful debts at 5% on the good debtors amounting

to Rs 75,000 on 31st December, 2005.

During the year ended 31st December 2006 his debtors worth Rs 1,500 failed to pay

their dues. On 31st December 2006, his good debtors amounted to Rs. 40,000 and he decided

to maintain the provision for bad and doubtful debts at 4% on Debtors. During 2007 his bad

98

debts amounted Rs 3,000 and Sundry Debtors stood at Rs. 80,000 on 31st Dec. 2007.

Provision is to be made at 5% a Debtors.

Pass necessary Journal entries and show the Bad debts Account Provision for Bad

Debts Account and also appropriate entries in the Profit and Loss Account and Balance Sheet

of 2005 , 2006 and 2007.

Journal Dr Cr

Date Particulars L.F Rs Rs

Bad Debt A/c Dr

To Sundry Debtors A/c

(Being Bad debts written off)

Profit and Loss A/c Dr

To Bad Debt A/c

(Being bad debt charged to P & L Account)

Profit and Loss A/c

To Provision for Bad & Doubtful Debts A/c

(Being the creation of Provision forbad & doubtful

debts @5% on Rs 75,000

Bad Debt A/c Dr

To Sundry Debtors A/c

(Being bad debt written off)

Provision for Bad & Doubtful Debt A/c Dr

To Bad debts A/c

(Being bad debt loss transferred to provision for

bad & Doubtful debt account)

Provision for Bad & Doubtful Debt A/c

To Profit & Loss A/c

(Being the excess provision credited to Profit and

Loss Account

Bad Debt A/c Dr

To Bad debts A/c

(Being bad debt written off)

Provision for Bad & Doubtful Debt A/c Dr

To Profit & Loss A/c

(Being bad debt loss transferred to provision for

bad & Doubtful debt account)

2005

?

Dec.31

Dec 31

2006

?

Dec 31

Dec 31

2007

?

Dec 31

Dec 31

Profit & Loss a/c Dr

(being the short provision debited to P/L a/c

2,500

2,500

3,750

1,500

1,500

650

3,000

3,000

5,400

2,500

2,500

3,750

1,500

1,500

650

3,000

3,000

5,400

Dr Bad Debts Account Cr

Date Particulars Rs Date Particulars Rs

2,500

2,500

1,5 00 1,500

2005Dec.31

2006Dec.31

2007Dec.31

To Sundry Debtors A/c

To Sundry Debtors A/c

To Sundry Debtors A/c

3,000

2005Dec.31

2006Dec.31

2007Dec.31

To Profit and Loss A/c

By Provision for Bad

Debts A/c

By Provision for Bad

Debts A/c

3,000

99

Provision for Bad Debts Account

Dr Cr

Date Particulars Rs Date Particulars Rs 2005Dec.31 To Balance c/d (5% of

Rs 15,000)

3,750

2005Dec.31

To Profit and Loss A/c

3,750

2006Dec.31 To Bad Debts A/c 1,500 2006 Jan 1 By Balance b/d 3,750

2006Dec.31 To P & L

A/c(Balancing figure)

650

2006Dec.31 To Balance c/d (4% of

40,000)

1,600

3,750 3,750

2007Dec.31 To Bad Debts A/c 3,000 2007 Jan 1 By Balance b/d 1,600

2007Dec.31 To Balance c/d (5% on

Rs 80,000)

4,000

2007Dec.31

By P/ L A/c (

balancing Figure)

5,400

7,000 7,000

2008

Jan 1 By Balance b/d 4,000

P & L Account for the year ended on 31.12.2005 (includes)

Dr Cr

To Bad Debt A/c

To Provision for Bad & Doubtful Debts A/c

2,500

3,750

P & L Account for the year ended on 31.12.2006 (an extract)

Dr Cr

By Provision for Bad & Doubtful Debts A/c 650

P & L Account for the year ended on 31.12.2007 (an extract)

Dr Cr

To Provision for Bad & Doubtful Debts A/c 5,400

Balance sheet as at 31st December, 2005(an extract)

Sundry Debtors

Less: Prov. for Bad & Doubtful Debts @ 5%

Rs 75,000

Rs3,750

71,250

Balance sheet as at 31st December, 2006(an extract)

Sundry Debtors

Less: Prov. for Bad & Doubtful Debts @ 4%

Rs 40,000

Rs 1,600

38,400

Balance sheet as at 31st December, 2007(an extract)

Sundry Debtors

Less: Prov. for Bad & Doubtful Debts @ 5%

Rs 80,000

Rs 4,000

76,000

4.11 Generals Rules for the classification of expenditure into capital and revenue:

Capital expenditure is the outflow of funds to acquire an asset that will benefit the business

more than one accounting year. It takes place when an asset or service is acquired or

improvement of a fixed asset effected. These assets are expected to provide benefit to the

business in more than one accounting year and not intended for resale in the ordinary course

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of business. Obvious example are land,, machinery etc. Expenditure which does not result in

increase in the capacity or reduction of day to day expenditure is not capital expenditure

unless there is tangible asset to show it.

Revenue expenditure is the outflow of funds to meet the running expenses of a business and it

will be of benefit for the current period only. It has been incurred to carry on the normal

course of business or maintain capital assets in good condition. Examples are wages, salaries,

interest etc. An expenditure need not necessarily be a payment made to somebody in cash –it

may be made by cash, by the exchange of another asset or by incurring a liability.

Basically, there is no difference in between the definition of capital expenditure and revenue

expenditure as given in mercantile accounting and Government system of accounting .In

Govt. system of accounting significant expenditure incurred with the object of acquiring

tangible assets of a permanent nature (for use in the organization and not for the sale in the

ordinary course of business) or enhancing the utility of existing asset shall be broadly

classified as capital expenditure. Subsequent charges on maintenance , repair , upkeep and

working expenses which are required to maintain the assets in a running order as also all

other expenses incurred for the day to day running of the organization including

establishment and administration expenses shall be classified as revenue expenditure (Rule

90 of General Financial Rules , 2005)

In Government accounts expenditure of capital nature shall be distinguished from Revenue

Expenditure in the Budget estimate. Classification of expenditure between Capital and

revenue forms the basis for delegation of financial powers to Heads of office and Heads of

Department. As far as practicable attempts have been made to give full power to the Heads of

office to meet revenue expenditure . Capital Expenditure is generally met from receipts of

capital nature. However, it is open to the Government to meet capital expenditure from

ordinary revenues, provided there are sufficient revenue resources to cover this liability

.Classification becomes more complex in mercantile system of accounting .In business

accounts the concept of capital and revenue are of fundamental importance to the correct

determination of Profit for a period and recognition of business assets at the end of that

period. The distinction affects the measurement of profit in a number of accounting periods.

If the capital expenditure is wrongly charged as revenue expenditure here is the effect of

creating secret reserve which may not be allowed as per accounting practice. The net profit

may be deflated or the net loss inflated. The balance sheet will not exhibit a true and fair view

of the State of affairs. The relationship between capital and revenue should be considered as

between tree and its fruits. The tree will be tendered with care to produce more fruits.

In book keeping and accounts the distinction between capital expenditure and revenue

expenditure may not be so easy.

For example, a cinema converts its ordinary screen into one for Cinemascope. Is it a case of

revenue expenditure or of capital expenditure? One can maintain that since the seating

capacity of the hall does not change, the expenditure is revenue expenditure. On the other

hand, it may be argued that since Cinemascope pictures attract large audience, the hall will be

often full .The expenditure will result in higher earnings and should be classified as capital

expenditure.

To sum up Capital expenditure differs from revenue expenditure on the following points:

(a) Capital expenditure is incurred in acquiring or improving permanent assets which are

not meant for resale. But revenue expenditure is a routine expenditure incurred in the

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normal course of business and includes cost of sales , as also the upkeep of fixed

assets.

(b) Capital expenditure seeks to improve the business but revenue expenditure proposes

to maintain (the earning capacity of) the organization.

(c) Capital expenditure is normally a non recurring outlay but revenue expenditure is

usually a recurring item.

(d) Capital expenditure produces benefits over several years .Hence only a small part is

charged to income statement (profit and loss A/c) and the rest appears in the Balance

sheet .But revenue expenditure is consumed within an accounting year and the entire

amount is charged to current years income statement.

The following items of expenditure seem to be revenue expenditure but in actual .Practice

they are treated as capital expenditure since they lead to business being established and run

efficiently:

(a) Preliminary expenses-Expenses for the formation of a Co-operative Society.

(b) Cost of issuing of shares and debenture, such as legal expenses, etc.

(c) Interest on capital upto the point where production is ready to commence;

(d) Expenses on acquisition and installation of assets e.g. Registration fee for the

purchase of land, wages for workman to install computer in the office, freight etc.

Expenses given above are also called Capitalised revenue expenditure. The expenses at (d)

above include a host of other items. They are absolutely necessary for making an asset fully

workable .In this sense, even the head of office (H.O.D’s) may be given full power to accord

sanction for such expenditure irrespective of the amount involved and of their nature.

Hence , it may be noted that the aforesaid lists enumerate capital and revenue items generally

and not universally. Whether any item entails capital or revenue expenditure rests on its

purpose which may vary from one concern to another or from one time to another. For

instance, outlay on plant and machinery is generally a capital expenditure .But in the case of

an engineering concern, these are usually bargained for resale and hence a revenue

expenditure. But the acquisition of a heavy plant and machinery meant for reproduction of

machines is a capital expenditure. Further, other smaller machines used in the installation and

working of this machine are also capitalized. Similarly, the dealer in buildings charge land

etc., may charge certain expenditure to revenues unless intended to be retained in which case

the same would be capitalized. So also, outlay on items , generally of revenue nature, may

need capitalization (hence termed capitalized expenditure) under certain situation as

instanced below:

Wages to labourers are normally charged to the income statement. However, they also may

be employed in installing a machine or constructing a building. In that case, the relevant

wages ought to be capitalised and added to the cost of machine or building as the case may

be. In certain cases, the same labour may be partly used for revenue and partly be utilised in

the construction of another kiln. In that case, proper allocation of wages between revenue and

capital may be made according to hours worked, etc. Note that bricks used in kiln

construction would also be capitalized.

Repairs are also revenue charges generally, But the repair of a recently acquired second hand

machine to put into an efficient state is a capital expenditure and added to its acquisition cost.

Legal charges are ordinarily revenue expenses. But any such expense incurred on the

acquisition of property, etc, is capitalized and the concerned asset raised accordingly.

Alterations may be minor or major. The former is invariably charged to revenue. But the

latter may better the existing asset in which case it is capitalised.

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Replacement may be part (unless substantially superior) or the whole of the old asset. The

former (termed renewal) is revenue expenditure as it merely maintains the asset in an

efficient state. The latter results in the acquisition of a new (possibly improved) asset, and is

capitalized. But the residual book value of the replaced part is written off the income

statement in the year replaced.

4.12 Replacement of Fixed Assets:

Rules of capital and revenue expenditure do not hold good when an existing asset is replaced

for another. If an existing asset is replaced with a similar kind of asset, the expenditure

incurred is treated as Revenue expenditure. For example, if a set of weighing machines in a

hospital become defective and is replaced with the similar set, the cost of replacement should

be treated as revenue expenditure and it should be charged to Profit and Loss account.

However, if asset so replaced is superior and better than previous one, the expenses is partly

capital and partly revenue. For example, if a typewriter costing Rs.10,000 is replaced with an

electronic typewriter costing Rs 20,000 , than Rs 10,000 will be revenue expenditure and the

Excess value of the new electronic typewriter over the old one Rs 10,000 will be capital

expenditure.

4.13 Deferred Revenue Expenditures

The benefit of revenue expenditure may be available for a period exceeding one accounting

year. These expenditures are carried forward and are written off in future accounting periods.

If we undertake substantial repairs to the existing office building, the deterioration of the

premises will be avoided. We may employ our own employees to do the work and pay them

at the prevailing wage rate which is of a revenue nature. If the expenditure is treated as

revenue expenditure and the current years profit is charged with these expenses we should be

making the current year absorbing the entire expense, the benefit of which will be enjoyed

over a number of accounting years. This is not only undesirable but also unjust from the

prudent accounting policy. Thus, such expenditure should be spread over a number of

accounting years and treated accordingly, when loss of a specially heavy and exceptional

nature is sustained it can also be treated as deferred revenue expenditure .For example, a huge

loss is suffered due to fire (as in the case of fire at Win Bazar in Ukhrul in March , 2009) and

a huge amount of loss is suffered , such loss will be considered as deferred revenue

expenditure and as such the loss may be written off over a period of three to five years and

reflected in the profit and loss account for the years .The portion not yet written off will be

shown on the asset side as Deferred Revenue Expenditure till the whole of the amount is

written off.

In Government system of accounting the term deferred revenue expenditure is not yet

applied. For the government expenditure on account of reparation of damage caused by

extraordinary calamities such as fire, etc shall be charged to capital or to the revenue or

divided between capital and revenue depending upon whether such expenditure results in

creating /acquisition of new assets or whether it is only for restoring the condition of the

existing assets, as may be determined by the Government in the given situation.

But, it should be noted that the loss resulting from transactions entered into, such as a

speculative purchase or sale of a large quantity of a commodity cannot be treated as deferred

revenue expenditure. Only loss arising from circumstances beyond ones control can be so

treated.

Thus deferred revenue expenditure mainly comprises of:

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(a) Expenditure wholly paid in advance, e.g.; telephone rental applicable in its entirely to

the future period. No benefits accrue to the current year and hence the total amount is

carried forward.

(b) Expenditure partly paid in advance e.g., insurance premium partly applicable to the

current year and partly to the next year. This is allocated between the current and

future periods in proportion to their utilised and unutilized benefits. Utilised portion is

charged to the current years income statement and the rest appears as a prepaid item

on the asset side of the balance sheet while preparing final accounts. In this way used

portion of rent, rates, insurance etc. Paid in advance would also appear in the Balance

Sheet.

(c) Abnormal losses: Any losses of an exceptional nature e.g. heavy loss arising from the

occurrence of natural calamities like earthquake may not be entirely written off the

current years revenue. It may be treated as deferred revenue expenditure and spread

over two or three years .Unwritten off portion would appear on the asset side of the

balance sheet. However, it is devoid of future benefits and hence a worthless or

fictitious asset.

4.14 RECEIPTS

3.2.1 Distinguish tests: Following are some of the important teats which are

applied in distinguishing between capital receipts and revenue receipts.

1. Fixed and circulating: A receipt on account of fixed assets is a capital receipt

whereas, a receipt against circulating asset is a revenue receipt and, therefore, taxable.

Fixed capital is retained in business in order to earn profits, e.g. plant and machinery,

etc. Circulating capital on the other hand circulates in business and it is out of such

circulation that profit is earned .An example may be cited in this regard of stock in

trade.

2. Loss of source of income or suspension: Compensation received for the

immobilization, sterilization, or destruction of a capital asset is capital receipt. On the

other hand, compensation received for injurious affection of a trading asset is income

liable to tax. In the same way amount received for breach of a business contract shall

be revenue in nature.

3. Motive of seller: In the case of an isolated transaction of purchase and

sale of property, the motive of the seller is a deciding factor in determining the nature

of a receipt. When securities are held as investment, sale proceeds thereof will be

capital in nature. The same amount will be treated as revenue receipt in the hands of

one who holds them as stock –in – trade.

4. Surrender of rights: When a sum is received for surrender of certain rights under an

agreement, it is a capital receipt because capital asset (right) is given up. On the other hand

any amount received by way of compensation for loss of future profits will be revenue

receipt.

4.15. Irrelevant considerations: While deciding the nature of any income we are not

impressed by the following considerations which will not go to decide nature of any

particular amount.

1. Lump sum of instalments: It does not mater whether the amount has been received

in lump sum or in instalments. Salary will continue to be a revenue receipt whether it is

received once in a year or periodically every month.

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2. Nomenclature: The nomenclature given to the transaction by the parties concerned

does not necessarily decide the nature of a transaction. Similarly the way in which the receipt

has been dealt with in the accounts of the trader is not a conclusive proof for or against him.

For example, sale proceeds of the house sold will remain capital receipt even if the amount

has been credited to the Profit and Loss account by the trader.

3. Treatment of payment in the hands of payer: It may at times happen that a

particular payment might not be allowed as a deduction to the person making it . Yet the

amount might fall in the category of chargeable income in the hands of recipient. For

example, house rent received by the assessee within the meaning of Income Tax Acts is

taxable even if the same is not treated as business expenditure in the hands of payer.

4. Nature of payment: The nature of receipt is decided exclusively by its character in

the hands of receiver. The nature of payment is immaterial.

5. Magnitude of a sum: The magnitude of a sum is not significant for the purposes of

determining its nature, for magnitude is a relative term. But at the same time the magnitude of

a transaction is not an entirely irrelevant consideration.

6. Payer’s motive immaterial: It is not the motive of the person who pays that is

relevant. More relevance attaches to the nature of the receipt in the hands of the person who

receives it though in trying to find out the quality of receipt, one may have to examine the

motive out of which the payment was made. The fact that the amount paid was large or that it

was periodic in character, or described as “Pay” ‘Remuneration”, etc. do not determine its

quality.

7. Profit motive not decisive: Profit motive is not decisive of the question whether a

particular receipt is capital or income. An accretion to capital does not become taxable

income merely because an asset is acquired in the hope that it may be sold at a profit.

8. Nature under company law not decisive: It was held by the Supreme Court in

Punjab Distilling Industries Ltd. V CIT [1965] 57 ITR 1 that there was no inconsistency

between a receipt being a capital one under the Company law and, by fiction, being treated as

revenue receipt, and, therefore, taxable, under the Income-tax law.

9. Lack of assessment in earlier year not material: The mere fact that the income-tax

authorities had not levied, in earlier year, tax on the portion of annual payments which

represented interest would not alter the character of such annual payment, namely, that they

represented partly capital payment and partly interest.

Problems on capital expenditure and revenue expenditure.

Illustration 1. Good Pictures ltd. Construct a cinema house which become operational in

1st January, 2000, and incur the following expenditure during the first year ending 31

st March,

2000.

(1) Second-hand furniture worth Rs.90,000 was purchased; repairing of the furniture cost

Rs.10,000. The furniture was installed by own workmen – wages for this being

Rs.2,000.

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(2) Expenses in connection with obtaining a licence for running the cinema were

Rs.30,000. During the course of the year, the cinema was fined Rs.500 for

contravening rules. Renewal fee, Rs.750, for next year was also paid.

(3) fire insurance, Rs.12,000 was paid on 1st October, 1999 for one year.

(4) Temporary huts were constructed costing Rs.12,000. ‘These were necessary for

construction of the cinema and were demolished when the cinema was ready.

(5) During the first week of the cinema’s running, free tickets were distributed. These

numbered 4,000, the average value being Rs.20 per ticket.

Classify the above items into Capital and revenue expenditure.

Solution:

(1) The furniture should be capitalized at Rs.1,02,000, that is, the price paid, cost of

repairing and the cost of installing it. Rs. 2,000 presumably stands debited to Wages

Account. If it is so, furniture account should be debited and Wages Account credited

with this amount.

(2) Money paid for obtaining a licence to operate the cinema is capital expenditure. The

fine of Rs.500 for Contravening Rules is revenue expenditure. The renewal fee for

next year already paid is next year’s revenue expenditure. This year it will be treated

as a sort of asset (prepaid expense) and shown in the Balance Sheet.

(3) Fire insurance premium is, of course, revenue expenditure because it is meant only

to maintain assets. But the premium has been paid up to 30th

Sept. 2000 whereas the

accounts are being made up to 31st March, 2000. Six months premium, Rs.6,000 is a

prepaid expense and will be charged to next year’s revenue. Rs.3,000 being the

premium up to 31st December, 1999 should be capitalized as part of the cost of the

hall; the remaining Rs.3,000 will be this year’s revenue expenditure.

(4) The cost of the temporary huts should be added to the cost of constructing the

cinema, since it was only to construct the cinema that the huts were set up.

(5) The value of the free tickets, Rs.80,000, is strictly speaking, a revenue loss but since

the object was to popularize the cinema and thus get a permanent advantage, the

loss may be spread over three or four years. Since nothing has been spent in cash,

probably no entry has been passed.

Illustration 2. State which of the following items should be charged to capital and

which to revenue:

(1) Rs.13,960 expended of dismantling, removing and reinstalling plant and

machinery to a more convenient place.

(2) Rs.2,600 paid for removal of stock to new site.

(3) Before removal to the new site a machine which stood in the books at Rs. 18,200

was found obsolete and sold as scrap for Rs.6,000. A new machine was installed

in its place at the new site at a cost of Rs.32,000.

(4) Rs.2,200 paid for the erection of a new machine.

(5) Rs.25,000 paid on the repairing of the new factory.

(6) Rs.4,500 spent as lawyer’s fee to defend a suit claiming that the firm’s factory site

belonged to the plaintiff. The suit was not successful.

(7) A car engine’s rings and pistons were changed at a cost of Rs. 7,500; this resulted

in improvement of petrol consumption to 12 km. per litre; it had fallen from 15

km. to 8 km.

106

(8) A building constructed in 1970 at a cost of Rs.5,00,000 was written down by the

year 2000 to Rs.1,50,000; then it was demolished and a new building with 25%

extra space was constructed at a cost of Rs.20,00,000, including Rs.50,000 for

demolishing the old building.

Solution:

(1) and (2) When a factory is removed to a new and more convenient site, the

expenses are treated as deferred revenue expenditure because the benefit from the

removal is not temporary. Therefore, Rs.13,960 plus Rs.2,600 should be put to

Suspense account and a portion, say one-fourth, charged to the Profit and Loss

Account every year.

(3) The loss on the sale of old machinery, is Rs.12,200 Rs. i.e., Rs.18,200 – Rs.6,000

is revenue loss and should be written off to the Profit and Loss account. The cost

of the new machine should be capitalized.

(4) Cost of erecting the new machine should also be capitalized.

(5) Presumably, the new factory has been bought ‘second hand’. In this case, all

expenses to renovate it would be capital expenditure. Hence, the expenditure of

Rs.25,000 should be capitalized.

(6) Rs.4,500 spent as lawyer’s fee to defend the suit is revenue expenditure since the

aim is to maintain the firm’s title to the assets and not to acquire any new asset.

(7) The amount, Rs.7,500, has been spent only to partly restore the efficiency of the

engine. The expenditure is, therefore, revenue expenditure.

(8) The book value of the old building, Rs.1,50,000 should be treated as a loss;

Rs.20,00,000 should be treated as capital expenditure. The amount spent on

demolishing the old building is legitimately a capital expenditure since it is

required to construct the new building. The fact that the new building has 25%

extra space has no effect on the treatment.

107

UNIT-V

5.0. FINAL ACCOUNTS: In the accounting cycle for a sole trader, the last stage of work in book-keeping and

Accounts is the preparation of Final Accounts. It includes (a) Preparation of Trading

Account, (b) Preparation of Profit and Loss Account and (c) preparation of Balance Sheet.

Trading account and profit and loss account are together called Income statement whereas

Balance Sheet is called position Statement by the American accountants. We prepare Trading

account for ascertaining gross profit or operating profit or overall profit and profit and loss

account for finding on net profit or clear profit or net operating profit,

While preparing final account we shall remember that:

(i) Debit balances usually represent assets, expenses or drawing and they are shown in

the debit column of Trial Balance.

(ii) Income, liabilities or capital are shown in the credit column of Trial Balance.

(iii) The L.H.S of Trading and Profit and Loss account will comprise of items of

expenses shown in the debit column of Trial Balance.

(iv) The R.H.S of Trading and profit and loss account consists of items of income as

shown in the credit column of Trial Balance.

(v) Assets, liabilities and drawings are shown in the balance sheet.

(vi) Additional information given by way of note at the bottom of Trial Balance in the

Traditional format have not been recorded in the ledger accounts and as such they

will require both a debit and credit entry .This is usually effected by entering them

in both the Trading and Profit and loss account or in Trading account and balance

sheet . No double entry is required for these items.

Trading account gives the gross profit or gross loss. Gross profit is said to have earned

when the sale proceeds exceed the cost of goods sold. The profit and loss account measures

the net income on getting all the nominal accounts in the Trial balance transferred and

matched (revenues matching with expenses). If the credit side is more than the debit side it

indicates net profit. Conversely, if the debit side is more than the credit side it shows net loss

for the period. Trading account and Profit and loss account may be prepared either in

horizontal format (‘T’ form) or vertical format Trading account may be prepared as a sub

section of profit and loss account in the horizontal format.

The next step is to prepare Balance sheet. Balance Sheet is prepared to ascertain the

financial position of the organization on a given date by using the remaining accounts in the

Trial Balance. They represent mainly asset, liabilities and adjustments. Simon Stevin of

Burges (Belgium) first devised a statement of affairs of business using data provided by the

residue of Trial balance in the early sixteenth century.

The British Companies Act, 1856 prescribed a format of Balance sheet exactly in the style

laid down by Simon Stevin three centuries before. This style was copied by commonwealth

and colonial Countries including India and as such Balance Sheet has been drawn up by

placing assets in the L.H.S and liabilities on the R.H.S. The U.S.A and Australia have

abandoned this style. In their case, assets are shown in the L.H.S and liabilities on the R.H.S.

Balance sheet accumulates the various financial equation whereby, Assets = liabilities +

capital. Like Trading account and Profit and Loss Account a Balance Sheet may be drawn up

either in ‘T’ form or vertical format.

5.1 ITEMS ON THE DEBIT SIDE OF TRADING ACCOUNT

1. Opening stock: It will appear on the debit side (L.H.S) of Trading account usually

as, item No.1 .In case of newly set up organization there will be no opening stock.

108

2. Purchases include cash purchase and credit purchase of goods. From the total

purchase in the L.H.S of Trading account, purchase of Capital asset, Private

purchases and goods returned to supplier are to be deducted .Goods withdrawn for

personal use will also be deducted.

3. Purchases Returns: Returns outward or purchases returns will be shown in the

Trading account by way of deduction from the figure for purchases.

4. Direct Expenses: Direct expenses are those expenses which are directly attributable

to the purchase of goods or to bring the goods in saleable condition. All direct

expenses are shown in the Debit side of Trading account. Direct expenses generally

include:

(i) Freight and Insurance

(ii) Carriage Inwards

(iii) Wages

(iv) Octroi

(v) Fuel, Power and lighting Expenses,

(vi) Packing Charges

(vii) Duty on Purchases and

(viii) Factory rent etc.

If the item carriage appears in the Trial balance without specifying whether it is carriage

Inward (freight on Purchases) or carriage Outward (freight on sales ) the accounting practice

is to treat this item as direct expense and be show in the Trading account.

5.2 ITEMS ON THE CREDIT SIDE OF TRADING ACCOUNT

• Sales: The total sales which include both cash sale and credit sale will appear on the credit

side of Trading account. From the figure for sales we deduct:-

(i) Goods sold but not dispatched as yet (but the closing stock will be increased by the

cost of such goods)

(ii) Sales of asset other than merchandise and

(iii) Sales return, goods sold on hire purchase, provision for sales Tax included in the

Sales figure .

• Sales Return (Returns Inward)

It may be shown either by way of deduction from the Sales figures in the credit side

of

Trading account or straight on the debit side of Trading account.

• Closing Stock:

The item normally appears as an item of adjustment at the bottom of Trial balance. It

may

also appear in the body of Trial Balance in a Modified Trial Balance. In any case it

will be shown on the R.H.S. of Trial Balance at cost price or Market price whichever

is less.

5.3.1 ITEMS ON THE DEBIT SIDE OF PROFIT AND LOSS ACCOUNT

The items of expenses which generally appear in the debit side of profit and loss account can

be broadly classified as under:

(a) Management Expenses which comprise of office salaries , office rent and

office lighting , printing & Stationery ,telegram , telephone , Fax, etc.

(b) Maintenance Expenses which consists of expenses incurred for maintaining

fixed assetsof the administrative office [like repairs and renewals etc.]

109

(c) Selling and distribution Expenses comprising of expenses for promoting sales

and distribution of goods sold. Examples are godown rent, carriage outward ,

advertisement, selling agents , Commission, bad debts so on .

(d) Financial Expenses: These expenses include interest on loans, discount on

bills , brokerage , legal expenses, cash discount etc.

(e) Abnormal Losses: All types of expenses which are extraordinary are included.

Examples are stock lost by fire and not covered by insurance policy , Loss on

sale of machinery , cash defalcations etc.

(f) Gross Loss, if any, transferred from Trading Account.

5.4 Expenses not to be shown in the Profit and Loss Account: (i) Domestic and household expenses of the proprietor.

(ii) Drawings in the form of cash , goods etc. by the proprietor.

(iii) Income Tax, L.I.C Premium, Club membership fee etc paid by the organization

on the behalf of the proprietor.

(iv) If certain portion of building hired by the business house on payment of rent ,

rent of that portion occupied by self for residential purpose or otherwise will be

treated as drawings .Such portion of rent will be shown by way of deduction

from capital in the balance sheet.

5.5 Expenses incurred but not paid out, partly or fully during the current year: If the expenditure is incurred in one year and also paid for in the same year, the

treatment becomes simplest and least troublesome. If the expenses are incurred in the current

accounting year but not paid for, partly or fully, by the end of the accounting year they have

become outstanding expenses in Accrual basis accounting . In cash basis accounting such

transaction is non existent such expenses include outstanding salaries interest, rent, wages

and so on. These must be shown by way of addition to the proper head of expenses so as to

determine the total claim. At the same time they have become liabilities and they should have

their place in the liability side of the balance sheet at the end of the accounting year.

Contrary to the outstanding expenses there may prepaid expenses. For example, when

premium on Fire Insurance policy is paid a portion of such premium policy may be for a

period beyond the given accounting year. In such case, the expenses paid in advance will be

shown on the asset side of balance sheet. Such item will be shown by way at deduction from

the proper head in the trading and profit and loss account.

ON THE CREDIT SIDE OF PROFIT AND LOSS ACCOUNT

The items that appear on the credit side of a profit and Loss accounts can broadly be

classified as:

(a) Gross profit transferred from profit and Loss Account,

(b) other income of financial nature like discount received and commission received.

(c) Non trading income including capital gain i.e profit on sale of fixed asset and

(d) Others like Interest on drawings which are internal transactions.

As in the case of outstanding expenses accrued income will be shown by way of addition to

the appropriate head on the credit side. The accrued income will find its place in the balance

sheet on the asset side (R.H.S). Contrary to the accrued income, if there is income received in

advance, the same will be shown by way of deduction from the appropriate head and it will

be reflected on the liability side(L.H.S) of the balance sheet.

110

5.6 ADJUSTMENTS ITEMS OF FINAL ACCOUNTS

1. Bad debts: No further entry is necessary for adjustment if it appears already in the

Trial Balance. If it is given at the bottom of trial balance it should be added to the bad

debts given already in the Trial balance and amount of sundry debtors given in the

trial balance will be reduced by that amount of new bad debt. Any further calculation

of provision for bad debt (new) will be from the resultant figure.

2. Provision for bad debts:

Situation 1 :When provisions for bad debt (new) not appearing in the Trial balance.

Profit & Loss a/c …………. Dr

To provision for bad debt a/c

[ To be shown in the Balance Sheet as a deduction from debtor]

Situation 2: When provision for bad debt (old) appears in the Trail balance.

First calculate the amount of provision to be created at the end of the period

Now, compare the provision (new) with the provision(old) as appearing in the Trial

Balance.

(a) If the new provision is more than the old provision , the entry is-

Profit & Loss a/c Dr

To provision for [New from Provision Less old provision]

Bad debts

(b) If the new Provisions is less than the old provision, the entry is-

Provision for bad debt a/c Dr

To Profit & Loss a/c [Old Provision Less new (fresh) provision]

It should be noted that only fresh provision should be shown in the balance sheet as a

deduction from Sundry debtors. Provision for bad debt and Reserve for bad debt mean the

same thing. If it is mentioned that provision for bad debt will be maintained but the rate at

which it is to be calculated or the amount to be provided is not given, the accounting

practice is to provide the same amount as provided in the last accounting year.(as shown

in the Trial balance).

Further, for the purpose of calculating provision for bad debt (new) the figure for the

Sundry Debtors as per Trial balance will first be reduced by the amount of bad debt (new)

and the amount of good debt, if any thereafter, the P.C.(%) will be applied.

3. Provision for discount on debtors:

It will be ascertained only after the calculation of provision for bad debt (new) .Its

treatment will be almost the same as provision for bad debt. It will shown by the way of

deduction from the Sundry debtors in the Balance Sheet.

Example:

Given

(a) Sundry Debtors as

per Trial balance Rs 50,600

(b) Bad Debts

after Trial balance Rs 600

(c) Bad Debts

in Trial balance Rs. 3000

(d) Debt considered good Rs. 10,000

Provision for bad debts is to be created (a) 5% on Sundry debtors and provision for

discount on debtors @ 2%

111

Debtors as per Trial Balance Rs. 50,600

Less bad debt (new) Rs. 600

Rs. 50,000

Less debt considered good Rs. 10,000

Rs. 40,000

Provision for bad debt

(new) =5% of 40,000

= 2,000

Provision for discount on

debtors = 2% of (40,000 – 2,000)

= 2% 0f 38,000

= 760

4. Provision for discount on creditors :

It is calculated on the balance of sundry creditors in the Trial balance. It finds its

place on the credit side of profit and loss account. The amount will be shown by way of

deduction from Sundry Creditors in the balance sheet.

5. Depreciation:

When the asset is maintained at written down value , the entry is –

(i) Depreciation a/c Dr

To asset a/c

(ii) Profit & Loss a/c Dr

To Depreciation a/c

When the asset is maintained at original cost, the entry is

(i) Depreciation a/c Dr

To provision for

depreciation a/c

(ii) Profit & Loss a/c Dr

To depreciation a/c

If the depreciation appears in the Trial balance it is to be debited in the profit and loss

account only. Again, if it is instructed to charge depreciation at 10% (say) then

depreciation is to be calculated ignoring time factor. But if it is instructed to charge

depreciation @ 10% per annum then the depreciation will be calculated on the basis

of time.

Example: Plant cost Rs 1,00,000

and Accounts are prepared for six months (1st Jan, 2008 to 30

th June 2008)

(i) Depn = Rs 10,000 if the rate is 10%

(ii) Depn = Rs 5,000 if the rate is 10% p.a.

6. Goods distributed as Free samples:

It will be treated as advertisement expenses. The entries are:

(i) Advertisement a/c Dr

To purchases a/c

(or Trading a/c)

(ii) Profit and loss a/c Dr

To Advertisement a/c

112

7. Income Tax, L.I.C Premium , Club Membership fee etc:

For a Sole trader income tax is payable by the proprietor and not by the business. If it

appears in the Trial balance it should be treated as drawing s and should be deducted from

capital in the balance sheet. Same in the case with the L.I.C. Premium etc.

8. Advance Tax : For a sole trader advance tax is payable by the owner. Hence it

should be treated as drawings.

9. Interest on advance Tax

If any interest is received on advance tax, it is not the income of the business, it is the

income of the proprietor. If it is found in the Trial Balance it should be added to the

Capital.

10. Mutual Indebtedness

Sometimes a debtor may also be a creditor for the business. In such case we transfer

the account which has a smaller balance to the account having bigger balance and in

effect, one account is closed.

11. Abnormal loss of stock by accident i.e. by Fire etc.

If a portion of the stock is lost, the value of such loss is first to be ascertained.

Therefore, abnormal loss (loss of stock by Fire) is to be debited and Trading account

credited. Abnormal loss account is closed by transferring to the Profit and Loss account.

If the loss is insured, Insurance Company Account is to be debited and Abnormal Loss

Account is to be credited. Till the time money is not received Insurance Company

Account will find a place in the asset side of the Balance Sheet. If the goods are partially

insured the portion not covered by Insurance is to be charged to profit and loss account.

12. Goods sent on sale or return

When goods are sold to customers on sale or return it is not considered as sale till the

time it is not approved by the Customers on the expiry of a fixed period as agreed by the

parties. When the goods are sold initially to a customer on approval basis the entry for sales is

passed. At the year end, if the goods are still lying the Customers pending approval, the

following entries are to be passed.

(i) Sales a/c Dr

To Sundry Debtors (Sales value)

(ii) Stock with Customers a/c Dr

To trading a/c

These entries will have the effect of reducing sales figure and the figure for

sundry Debtor by the amount of goods sent on sale or return. At the same time the

closing stock will be increased by the cost price of the goods sent out on sale or

return in preparing Trading Account and Balance Sheet.

13. Interest on Loan- not yet paid-fully or partly

In the Trial balance, the amount of loan appears in the credit column and the interest

on loan paid appears in the debit column. If nothing has been paid as interest we are to

find out the amount by applying the rate with the amount of the loan. The total amount of

interest which remains unpaid will be added to the interest on loan paid while preparing

profit and loss account. Such outstanding interest on loan will appear as liability in the

Balance sheet.

14. Interest on Capital:

For a sole trading concern it is to be shown on the debit side of profit and loss

account. The same item will be shown by way of addition to capital in the balance sheet.

113

15. Interest on drawings:

Interest on drawings is charged generally to restrict drawings. It will appear on the

credit side of profit and loss account and the same will be shown by way of deduction

from capital in the balance sheet.

16. Sales tax and Provision for Sales Tax:

When goods are sold to customers either in cash or credit, sales tax are collected from

them along with the price of goods sold. Periodically, this sale tax is deposited with the

Government through bank. If sale tax collected appears in the trial balance it is to be

treated as liability and shown directly in the balance sheet on the liability side.

Sometimes, sale tax is included in the sales figure (as under Value added Tax) and

provision foe sales tax account is opened. In such case the adjusting entry is:

Sale a/c Dr

To provision for

Sale Tax a/c

This entry will have the effect of reducing the figure for sale while preparing Trading

Account and the provision for Sale Tax will appear on the liability sides of the balance

Sheet.

Example

Sales as per

Trial balance Rs. 56,000

(Inclusive of tax @ 12% under VAT System)

Provision is to be made for sales tax

Now, provision for sales tax,

=(12/112)X 56,000

= Rs 6,000. This will appear on the liability side of Balance Sheet.

17. Provident Fund:

When salaries are paid to employees, employer deducts the employees ‘share of

contribution from salary and net salary is paid to employees. Employers own

contributions as well as deducted amount of employees share are deposited within a

specified period with the proper authority. This is now true for all organizations including

Govt. office and department. Thus when salaries are paid, the following entries are

passed:

(i) Salary a/c Dr(Gross salary)

To Bank/Cash a/c ( with the net amount)

To provident Fund deduction a/c

(with the amount deducted from employees)

(ii) Salary a/c Dr

To own contributions a/c

To provident Fund Account

(iii) Provident Fund Deduction a/c Dr

Own contribution to

Provident Fond a/c Dr

To Bank/Cash a/c

114

If the amount has not been deposited, within the accounting period it is to be

shown in the Balance Sheet as a current liability.

Example

Given:

(i) Salary (as per Trial balance) Rs. 16,000(Dr)

(ii) Provident fund

Deducted from salary (as per Trial balance) Rs 1000 (cr)

(iii) Employers share of

Provident Fund to be provided Rs 1000

How would you deal with these items in the Final account.?

Solution: Salary account is to be charged to profit and loss Account with Rs.17, 000 (Rs

16,000 + Rs 1000). In balance sheet Provident fund deducted from salary of Rs. 1000 and

provident Fund outstanding of Rs 1000 will be shown as liability.

5.7 SOME IMPORTANT POINTS FOR PREPARING FINAL ACCOUNTS.

1. Wages and salaries- Salaries and Wages.

The earlier practice was to treat wages & salaries as item of Trading account and

salaries &wages as item of profit and loss Account. But there is liberalization in the

accounting practice after 1972 so much so that both the item may be shown either in the

Trading account or in the profit and loss account.

2. Trade expenses:

These expenses include a number of small or petty expenses. If Trade

expenses singly appears in the Trial balance the accounting practice is to treat such item in

the profit and Loss account. If it appears with another item like Misc.expenses, other Misc.

charges etc in the Trial balance the accounting practice is to charge such trade expenses to

the Trading Account.

3. Depreciation on newly added fixed asset:

If the date acquisition is given there is nothing wrong in calculating depreciation with

effect from the date of purchase. If the date of purchase is not given we have two options.

The first option is to neglect depreciation on the addition. The 2nd

option is to calculate

depreciation on average basis. Here average depreciation means depreciation for 6th

months is an accounting period of 1 year. For examination purpose it is always better to

ignore depreciation on addition if the date of addition is not given.

4. Hidden transaction:

There may be certain transactions which are not seen on the face of the trial balance

and additional information. As the final accounts will have to reveal true and fair view of

the state of Affairs we have to deduce if certain vital information are not disclosed. If so,

115

the information are to be extracted and treated accordingly by employing the available data

and by using common sense.

5. For examination, purpose trading and profit and loss account shall be prepared in a

single Format in ‘T’ form. It is always advisable to go through the Trial Balance and

additional information given (in a Traditional Trial Balance in particular at least

twice) and make the necessary adjustment in a rough sheet. If Trial balance is not

given , it is advisable to draw up an adjusted trial balance before the preparation of

final accounts actually starts.

6. If an item which may be expense or income is given together with an item which shall

be compulsorily an expense, such compound item will be treated as expense. For

example we find an item like rent and taxes .Here rent may be receivable (income) or

payable (expense). But taxes cannot be receivable (income) for a sole trader .Hence,

rent and taxes will be taken as an item of expense.

7. If there is an item on rent for building owned by the proprietor and used by the

business it will be shown as business expense and the same will be added to capital in

the balance sheet.

8. If the proprietor is entitled to any salary in the organization it will be business expense

and added to capital in the Balance Sheet

9. If a ‘Loan’ appears in the Trial Balance as ‘Loan Account’ the practice is to show the

principal and the interest thereof together. If it appears simply as ‘Loan’, the principal

will be shown separately.

5.8 Marshalling of Balance Sheet:

For getting best result, assets can be put down in a balance sheet in two ways:- either in the

order of liquidity (i.e in the order of the ease at which they can be converted into cash) or in

the order of permanence (i.e in the order of the desire to keep them in use)

Assets in the order of Liquidity Assets in the order of permanence

• Cash in hand

• Cash in bank

• Govt securities & gilt edges securities

• Sundry Debtors/debtors/Trade

Debtors/Book Debts/Sundry

Customers/debtor

• Stock of goods (closing stock)

• Prepaid expenses

• Furniture’

• Machinery

• Patents

• goodwill

• Goodwill

• Patents

• Machinery

• Furniture

• Prepaid expenses

• Stocks of goods(closing

Stock)

• Sundry Debtor.

• Government securities

• Cash in bank

• Cash in hand

116

Some assets cannot be easily classified .For example, investments can be easily sold but there

is desire to retain them. Hence, it is both liquid and semi permanent. This arrangement of

asset is usually adopted by Sole Trading concerns.

Liabilities can be arranged either in the order of urgency of payment or in the reverse order:

Liabilities in the order of dischargeability Liabilities in the order of permanence

• Bills payable

• Trade creditors/Sundry creditors/

Sundry suppliers /Creditors on open

account /Creditors.

• Loans

• Outstanding Expenses

• Reserves & Surplus

• capital

• capital

• reserve and Surplus

• outstanding Expenses

• Loans

• Trade Creditors

• Bill Payable

Note:

1. The above arrangement of assets and liabilities are called marshalling of

Balance Sheet.

2. Contingent Liability will not appear on the face of the balance sheet. It will be

shown by way of a note to the Balance sheet

5.9 Specimen of Trial balance (under Balance Method ) from which Final Accounts

are prepared:

Trial Balance

As on 31st December, 2008

Head of Account Dr Cr

1. Opening Stock

2. Purchases

3. Returns

4. Carriage In

5. Wages

6. Sales

7. Discount

8. Cash in hand

9. Cash at bank

10. Gas, water and Full

11. Factory Expenses

12. Salaries

13. Office rent, rates and taxes

14. printing and Stationary

15. Insurance

16. Electricity charges

17. Telephone

18. Repairs and renewals

19. Building

20. Office Furniture

21. Advertisement

22. Carriage outward

Rs

40,000

1,75,000

3,000

5,000

40,000

700

12,200

24,000

5,000

5,000

25,000

5,000

2,000

1,500

1,000

2,000

1,000

50,000

10,000

16,000

2,000

(Rs.)

117

23. Bud debt

24. Commission (Sellers)

25. Bills receivable

26. Land

27. Commission received

28. Bank Interest

29. Rent of building sublet

30. Interest on Investment

31. Capital

32. Profit on sale of Plant and Machinery

33. Profit on sale of investment

34. Bank charges

35. Interest on Loan paid

36. Loan at 10% p.a

37. Sundry Creditors

38. Sundry Debtors

39. Bills Payabl

500

1,800

30,000

50,000

100

200

32,000

3,000

13,000

16,000

11,000

1,00,000

12,000

23,000

10,000

28,500

3,500

5, 40, 000 5, 40,000

Adjustments:

(i) Closing Stock as on 31st December 2008 was valued at Rs 65,000 (market price Rs

68,000)

(ii) Depreciation on building and office furniture was to be provided at Rs 700 and Rs

300 respectively.

(iii) Provision for bad debt on Sundry debtors was to be made Rs 200.

Trading Account in ‘T’ form (horizontal Format)

Dr Cr

To opening Stock 40,000

To purchases 1,75,000

Less return 5,000

1,70,000

To carriage In 5,000

To wages 40,000

To gas, water & Fuel 5,000

To factory Expenses 5,000

To Gross Profit c/d 1,00,000

3,65,000

By sales 3,03,000

Less Return 3,000

3,00,000

By closing Stock 65,000

3,65,000

Trading Account in Vertical format

Particulars Rs Rs Rs

Sales

Less returns (Inward)

Opening Stock

40,000

3,03,000

3,000

3,00,000

118

Note:

1. Nowadays, vertical Format is more commonly used for profit statement and

reporting.

2. Presentation of final account in vertical Format is more suitable for Accounting

Tally and Computer application.

2. Profit and Loss Account in Horizontal Format

Dr Cr Rs. Rs.

To Salaries 25,000 By Gross Profit b/d 1,00,000

To office rent, rates & taxes 5,000 By Discount received 12,000

To printing & Stationary 2,000 By commission received 3,000

To Insurance 1,500 By Bank Interest 13,000

To Electricity charges 1,000 By rent of building sublet 16,000

To Telephone 2,000 By Interest on investment 11,000

To repairs & Renewals 1,000 By Profit in sale of machinery 12,000

To Depn. On building Office Furniture 3,00 By Profit on sale of investment 23,000

To Advertisement 16,000

To carriage outward 2,000

To bad debt 500

To provision for bad debt 200

To commission (sellers) 1,800

To bank charges 100

To Interest on Loan 200

To Discount 700

To Net profit transferred to 1,30,000

capital a/c

1,90,000 1,90,000

Profit and Loss account

In the Vertical Format

Particulars Rs Rs Rs

Gross Profit

Add other income:

Discount received

Commission received

Add Non Trading income:

12,000

3,000

15,000

1,00,000

Purchases

Less returns (outward)

Direct expenses:

Carriage In

Wages

Gas, water & Fuel

Factory Expenses

Less closing stock

Cost of goods sold (COGS)

Gross Profit

1,75,000

5,000

5,000

40,000

5,000

5,000

65,000

1,70,000

55,000

2,65,000

2,00,000

1,00,000

119

Bank Interest

Rent of building Subnet

Interest on Investment

Abnormal gain:

Profit on sale of machinery

Profit on sale of investment

Less management Expenses

Salaries

Office Rent , rates & taxes

Printing and Stationary

Insurance

Electricity charges

Telephone

Less Maintenance Expenses:

Repairs & Renewals

Depn. Of Building

Depn. Of office Furniture

Less Selling and distribution

expenses:

Advertisement

Carriage outward

Bad debt

Provision for bad debt

Commission (sellers)

Less Financial Expenses:

Bank charges

Interest on Loan

Discount

Net profit transferred

To capital a/c

13,000

16,000

11,000

12,000

23,000

25,000

5,000

2,000

1,500

1,000

2,000

1,000

700

300

16,000

2,000

500

200

1,800

100

200

700

40,000

35,000

36,500

2,000

20,500

1000

90,000

1,90,000

60,000

1,30,000

Balance sheet in Vertical Format:

Particulars Rs Rs Rs

A. Fixed Assets

Land

Building

Less depn.

Office Furniture

Less Depn.

A. Currents Assets

50,000

700

10,000

300

50,00

49,300

9,700

1,09,000

120

Stock

Debtors 32,000

Less provision for bad

Debt 200

Bills receivable

Cash at bank

Cash in hand

B. Current liabilities

Loan at 10% p.a

Sundry Creditors

Bills payable

Working Capital (BC)

Working Capita(B-C)

NET ASSETS EMPLOYED

FINANCED BY :

Capital

Add Net Profit

65,000

31,800

30,000

24,000

12,200

10,000

28,500

3,500

1,63,000

42,000

1,00,000

1,30,000

1,21,000

2,30,000

2,30,000

Balance Sheet in horizontal Format:

Capital & Liabilities Property & Assets

Capital as on Rs Rs

1.1.08 1,00,000

Add net

Profit For the Year 1,30,000

2,30,000

Sundry Creditors 28,500

Bills payable 3,500

Loan at 10% p.a 10,000

Rs Rs

Land 50,000

Building 50,000

Less depn. 700

49,300

Office Furniture 10,000

Less Depn. 300

9,700

Closing stock …… 65,000

Bills receivable 30,000

Sundry debtors 32,000

Less provision

for bad debt 200

Cash in hand 12,200

Cash at bank 24,000

121

2,72,000

2,72,000

SPECIAL PROBLEMS RELATING TO FINAL ACCOUNTS:

Illustration I: From the following Trail Balance of A. Atmaram as at 31st March, 2008 you

are required to prepare a trading and Profit and loss Account for the year ended at 31st March

, 2008 and a Balance sheet as at date , after making the necessary adjustments . Also give

journal entries for the adjustments

Trial Balance as on 31st March, 2008

Dr

Rs

36,000

1,20,000

25,000

95,000

7,82,000

12,000

20,600

15,000

2,000

500

24,600

3,800

5,400

800

2,700

31,300

6,200

30,500

Cr

Rs

1,81,000

40,000

9,80,000

3,000

400

1,800

7,200

A.Atmaram ‘s Capital Account

A.Atmaram ‘s Drawing Account

Plant and Machinery(balance on 1st April,2007)

Plant and Machinery (additional on 1st October,2007)

Stock on 1st April, 2007

Purchases

Return Inwards

Sundry Debtors

Furniture and Fixtures

Freight and Duty

Carriage Inwards

Rent, rates and taxes

Printing and stationary

Trade Expenses

Sundry Creditors

Sales

Return Inwards

Postage and Telegrams

Provision for Doubtful Debts

Discount

Rent of premises sub-let for a year up to 30th Sept,2008

Insurance charges

Salaries and wages

Cash in hand

Cash at Bank

12,13,400 12,13,400

Adjustments:

1. Stock on 31st March 2008 was valued at Rs 94,600.

2. write off Rs .600 as Bad debts

3. The provision for Doubtful Debts is to be maintained at 5 percent on Sundry Debtors.

4. Create a provision for discounts on Debtors and Reserve for Discounts on Creditors at

2 percent .

5. Provide for depreciation on Furniture and Fixtures at 5 percent per annum , and on

plant and Machinery at 20 percent per annum.

122

6. Insurance unexpired was Rs 100

7. A fire occurred on 25th

March, 2008 in the godown and stock of the value of Rs 5,000

was destroyed .It was fully insured and the Insurance Company admitted the claim in

full.

Solution:

Adjustment journal entries

Bad Debts Account ….. Dr

To Sundry Debtors

(The amount written off as bad debt)

Provisional for Doubtful Debts Account ….. Dr

To Bad Debts Account

(The transfer of bad debts to the Provisional for

Doubtful Debt Account)

Profit and Loss Account …. Dr

To Provision for Doubtful Debts Account

(The amount required to make up the provision up to

Rs. 1000 i.e.,5 percent on Rs 20,000) as under:

Rs

Provision required 1,000

Add: Bad Debts 600

1,600

Less : Existing Provision 400

Additional amount required 1,200

Profit and Loss Account … Dr

To Provision for Discounts on Debtors Account

(The amount required as provision for discounts on

debtors @ 2 percent on Rs.19,000)

Reserve for Discounts on Creditors Account … Dr

To Profit and Loss Account

(The amount expected to earned as discount on

Creditors @ 2 percent on Rs 40,000)

2008

March,31

.. ..

.. ..

.. ..

.. ..

.. ..

Depreciation Account

To Plant and Machinery Account

To Furniture and Fixture Account

(The amount written off as depreciation as follows:)

Machinery: Furniture:

20% on Rs 1,20,000 Rs 24,000 5 percent on

20% on Rs. 25,000 Rs 15,000 = Rs 750

For six months Rs 2,500

Rs 26,500

Dr

Rs

600

600

1,200

380

800

27,250

Cr

Rs

600

600

1,200

380

26,500

700

123

Unexpired Insurance Account … Dr

To Insurance Account

(The amount of unexpired insurance premium)

Insurance Co.

To Trading Account

(Value of stock destroyed by fire, which will be

recovered from the insurers.)

Rent Received Account ... Dr

To Rent Received in Advance Account

(The rent for premises sub let from 1st April, 2000 to

30th

September, 2000 already received and credited to

Rent account, transferred to Rent Received in

Advance Account.)

100

5,000

3,600

100

5,000

3,600

A. Atmaram

Trading and Profit and Loss Account for the year ended March, 31, 2008.

Cr

To stock on (1st April,2007)

To purchases

Less: Return Inwards

To Freight and Duty

To Gross Profit transferred to

Profit and Loss Account

To Salaries and wages

To Rent, Rates & Taxes

To Printing & stationary

To Trade expenses

To postage & Telegrams

To Insurance Charges

Less: Unexpired

To Carriage Outwards

To Depreciation on:

Plant and Machinery

Furniture & Fixtures

To Provision For Doubtful Debts

Required

Add: Bad Debts

Less: Existing Provision

Rs

7,82,000

3,000

2,700

100

26,500

750

1,000

600

1,600

Rs

95,000

7,79,000

2,000

1,91,600

10,67,600

31,000

24,000

3,800

5,400

800

2,600

500

27,250

By sale

Less: Return Inwards

By Insurance Co.

(Goods destroyed)

By stock on 31st March ,2008

By Gross Profit –transfer from

trading Account

By Discounts

By reserve for Discounts on

Creditors.

By rent Received

Less: Received in Advance

Rs

9,80,000

12,000

7,200

3,600

Rs

9,68,000

5,000

94,600

10,67,600

1,91,600

1,800

800

3,600

124

To Provision for Discounts on

Debtors

To Net Profit Transferred to

Capital Account

400

1,200

380

99,970

1,97,800

1,97,800

A .Atmaram

Balance Sheet as on 31st March,2008

Capital & Liabilities Property & Assets

Rs Rs

Capital as on 1st April, 2007 1,81,000 Plant and Machinery 1,20,000

Net profit for the year 99,970 Addition during the year 25,000

2,80,970 1,45,000

Less Drawings 36,000 Less depreciation 26,500

2,44,970 1,18,500

Sundry Creditors 40,000 Sundry Debtors 20,600

Less Provision for Discount

On Creditors

800 Less bad debt written off 600

39,200 20,000

Rent received in Advance 360

Less provision for bad debt 1000

19,000

Less Provision for discount

On debtors

380

18,620

Furniture & Fixture 15,000

Less Depreciation 750

14,250

Cash in hand 6,200

Cash at Bank 30,500

Closing Stock 94,600

Unexpired Insurance 100

Insurance Company Account 5,000

2,87,770 2,87,770

Illustration 2: Prepare a Trading Account and a Profit and Loss Account for the year ended 31

st December

2007 and a Balance Sheet as on that date from the following Trial Balance and Adjustment

items: Particular Dr(Rs) Cr.(Rs) Particulars Dr.(Rs) Cr.(Rs)

Opening Stock 46,000 Office electricity expenses 9,400

Purchases and Sales 4,42,000 8,20,000 Telephone charges 4,400

Sales returns and purchases return 8,000 12,000 Cash at Bank 18,000

Discount received 2,200 Printing and Stationery 11,200

Wages 43,500 Postage Stamps 1,090

Salaries 66,000 Furniture 2,00,000

Carriage Inwards 39,100 Petty cash 210

Advertising expenses 10,200 Prepaid printing 1,200

Bills receivable and payable 9,000 10,000 Insurance premium 3,000

12% bank loan ( taken on 1st Nov.2007) 1,50,000 Carriage outwards 12,000

Office equipment 1,99,700 Bad debts 800

Land and Building 3,36,000 Interest on Bank loan paid 1,500

Provision for Doubtful debts 3,200 Capital Account 4,76,900

Sundry Debtors and Sundry Creditors 45,000 40,000 Reserve for Discount on

creditors

1,700

Rates and Taxes 5,300 TOTAL 15,14,300 15,14,300

125

Adjustments items:

(a.) Closing stock was valued at Rs.38,000 on 31st December 2007.

(b.) Goods worth Rs 2,500 were distributed by salesman as free samples, but no entry has

been made for this.

(c.) Depreciation furniture by 7½ % p.a. and office equipment by 10% p.a.

(d.) Reserve for discount on creditors to be maintained at 2 %

(e.) Provision for Doubtful debts to be maintained 5% on debtors.

(f.) Create a provision for discount on debtors at 2%

(g.) Commission of Rs 1,300 was earned but not yet received.

(h.) Rates and Taxes of Rs 800 was paid in advance for 2008.

(i.) Creditors include a debt of Rs 4,000 to Mr Nayak who is also include in the list of

debtors for Rs 5,000 and therefore to be set off before calculating the reserve.

Solution:

Dr Trading and Profit and Loss Account for the year ended 31st December ,2007 Cr

Rs Rs Rs Rs

To Opening Stock 46,000 By Sales 8,20,000

To Purchases 4,42,000 Less: sales Return 8,000

Less: Purchases Returns 12,000 8,12,000

4,30,000 By Advertisement expenses 2,500

To Wages 43,500 By closing Stock 38,000

To Carriage Inwards 39,100

To Gross Profit c/d 2,93,900

8,52,500 8,52,500

To salaries By Gross Profit b/d 2,93,900

To Advertisement expenses

10,200 66,000

By Reserve for Discount on

Creditors (Note 1)

1,220

Add: Goods Distributed as free Sample 2,500

12,700

To Bank interest 1,500 By Accrued Commission 1,300

Add: outstanding 1,500 By provision for Doubtful

debts Old

3,200

3,000

To Rate & taxes’ 5,300 Less: New 5% on Rs41,00 2,050

1,150

Less: Paid in advance 800

4,500

To Office electricity 9,400

To Telephone charges 4,400

To Printing & stationery 11,200

To Postage & stamps 1,090

To Insurance Premium 3,000

To Carriage outwards 12,000

To Bad Debts

To depreciation

800

On Furniture 15,000

On office equipment 19,970

34,970

To Prov.for dis. On Debtors @ 2% on

Rs. 38,950

779

To net profit (transferred to Capital a/c) 1,33,731

2,97,570 2,97,570

126

Balance Sheet as at 31st December, 2007

Liabilities Rs Rs Assets Rs Rs

Capital (1.1.2007)

Add: Net profit

12% Bank Loan

Add: Outstanding Interest

Sundry Creditors

Less: Debtors Set –off (minimal

debt)

Less: Reserve for Discount on

Creditors

Bill Payable.

4,76,900

1,33,731

1,50,000

1,500

40,000

4,000

36,000

720

6,10,631

1,31,500

35,280

10,000

8,07,411

Land & Building

Office Equipment

Less: Depreciation

Furniture

Less: Depreciation

Closing Stock

Sundry Debtors

Less : Creditors set off

(minimal debt)

Less: Provision for doubtful

debts

Less: Provision for discount

on Debtors

Bills Receivable

Cash at Bank

Petty cash

Rate paid in Advance

Accrued commission

Prepaid Printing

1,99,700

19,970

2,00,000

15,000

45,000

4,000

41,000

2,050

38,950

779

3,36,000

1,79,730

1,85,000

38,000

38171

9,000

18,000

210

800

1,300

1,200

8,07,411

Working Note( I) when Reserve for Discount on Creditors Account is maintained , any

discount received is credited to this Account . For creating a new reserve for Discount on

Creditors is also taken into consideration. Thus,

Dr Reserve for Discount on Creditors Account Cr

Particulars Rs Particulars Rs

1,700 2,200

1,220 720

To Balance b/d

To profit and Loss A/c

(Balancing Figure) 2,920

By Discount Received A/c

By Balance c/d (2% of Rs

36,000) 2,920

(2) Provision for Doubtful Debts and Discount Rs

Debtors as per Trail Balance 45,000

Less : Set off with creditors 4,000

41,000

Less: Provision for bad debts (new) 5% 2,050

38,950

Less: Provision for Discount @ 2% 779

38,171

127

Illustration 3: Hari Singh has extracted the following Trial Balance from his book as on March 31,2008.

Dr(Rs) Cr(Rs) Dr(Rs) Cr(Rs)

Drawing 16,000 Electricity 6,000

Cash 6,760 Motor car 10,000

Petty cash 1,000 Advertising 9,000

Leasehold land 20,000 Sundry Creditors 35,000

Opening stock at market value 50,000 Purchases 4,00,000

Salary 12,000 Postages & telephone 3,000

Sundry Debtors 50,000 Sales 6,00,000

Wages 40,000 Discount 11,400

Bank 21,000 General charges 4,000

Capital 34,000 Petty cash expenses 9,600

Rent 9,000 Suspense 10,000

TOTAL 6,79,000 6,79,000

You are required to prepare a Trading, Profit and Loss Account and the Balance Sheet using

the following information:

(a.) Closing Stock at a market value as on March 31,2008 was Rs 80,000 (cost Rs

75,000).Stock is being valued on a consistent basis of cost or market price whichever

is lower.

(b.) The petty cash balance represents the month end imprest amount. As on the closing

date , the petty cashier had vouchers totaling to Rs 400 for which he had not received

reimbursement from the main cashier.

(c.) Discount allowed amounting to Rs.1000 had been posted to the Debit of Sundry

Debtors.

(d.) Cash withdrawn from bank Rs.4,000 had not been entered in the bank column of the

cash book.

(e.) Sales Account had been under cast on the credit side by Rs 4,000.

(f.) The motor car which was purchased in 2004-05 was being depreciated at 20% on the

reducing balance method. The original cost of the car is Rs 20,000 .it is now decided

to charges depreciation at 6% on the Straight line Method and to make the change

effective from the year of the purchase of the car.

(g.) The leasehold land was purchased during the year. On the date of the purchase the

unexpired period of the lease was five years.

(h.) No entry had been passed in the books for stock withdrawn from the business by the

proprietor of Rs 10,000.

(i.) Advertising includes cost of a campaign run during the year Rs 6,000. It is expected

that the effect of this campaign will be felt at least for 3 years.

(j.) Telephone bills amounting to Rs 1,000 remain unpaid.

128

Solution: Dr Trading and Profit and Loss Account for the year ended 31

st March,2008 Cr

(Rs) Rs

4,00,000

10,000

To Opening stock

To purchase

Less: Drawings

To Wages

To Gross Profit c/d

50,000

3,90,000

40,000

1,99,000

6,79,000

By Sales (Note c)

By closing Stock

6,04,000

75,000

6,799,000

1,200

4,000

To Salary

To Rent

To Electricity

To Postage & telephone

To general Charges

To Petty cash expenses (note f)

To Depreciation on car

On leasehold Land

To Advertising (Note d )

To Discount

To Net Profit (transferred to

capital a/c)

12,000

9,000

6,000

4,000

4,000

10,000

5,200

5,000

11,400

1,32,400

By Gross profit b/d

1,99,000

1,99,000

1,99,000

Balance sheet of Mr Hari Singh as at 31st March ,2008

Liabilities Rs Rs Assets Rs Rs

Capital (1.4.2007)

Add: profit

Add: Depreciation Written

back

.Less: Drawings: Rs(16,000 +

10,000)

Sundry Creditors

Outstanding expenses ( for

Telephone Bill)

34,000

1,32,400

6,160

1,72,560

26,000

1,46,560

35,000

1,000

1,82,560

Leasehold land

Less: Depreciation

Motor car(note g)

Less: Depreciation

Closing stock

Sundry debtors(note a)

Cash at Bank ( Note b)

Cash in Bank ( Note c)

Unexpired Advertisement

Cost

20,000

4,000

16,400

1,200

16,000

15,200

75,000

48,000

17,000

7,360

4,000

1,82,560

Working Notes:

(a.) Sundry Debtors has been credited by Rs 2,000 to rectify wrong debit of discount of Rs

1,000.

(b.) Cash at bank has been reduced by Rs 4,000 for omission of posting of withdrawal.

(c.) Sales have been increased by Rs 4,000 due to undercasting of Rs 4,000 of Sales

Account.

(d.) 1/3 of Rs 6000 spent on advertisement , has been treated as revenue expenditure and

2/3 has been carried forward as unexpired cost; Amount to be charged to Profit and

Loss Account = Rs 9000 – 4,000 = Rs 5,000;

(e.) Cash includes petty cash of Rs 600;

(f.) Petty cash expenses as per trail Balance is Rs 9,600 .Rs 4000 petty expense not yey

adjusted .Therefore , total petty expenses will be Rs 10,000.Petty cash in hand

= Rs 1,000 -400 = Rs 600

(g). Excess depreciation on car =(20,000 – 10,000) –(1200) X 3 = 6,400

and value of car as on 1.4.2007 =Rs 10,000 + 6400 =Rs 16,400

129

Illustration 4:

Mr X , a trader , has extracted the following Trial Balance from his books as on 31st

March,2008.

Dr(Rs) Cr(Rs) Dr(Rs) Cr(Rs)

Purchases 4,00,000 Claim Recoverable 5,000

Sundry debtors 1,50,000 Advertisement Suspense 9,000

Cash in hand 4,000 Furniture and Fittings 23,000

Cash at Bank 8,000 Deposit with supplier 6,000

Rent,Rate & Taxes 3,000 Office Equipment 10,000

Insurance premium 9,000 Bills Receivable 6,000

Salaries 42,000 Bad debts 4,000

Carriage outwards 21,000 Sales 7,00,000

Carriage Inwards 18,000 Opening stock 30,000

Sundry Creditors 50,000 Electricity Expenses 2,000

TOTAL 7,50,000 7,50,000

The following further information is provided:

1. A Purchases invoice for Rs 15,000, received from a creditor, has not been entered

through oversight.

2. The claim recoverable has been settled with the insurance company for Rs 2,000.

3. 50% of the advertisement suspense account is to be written off this year. The amount

represents the cost of an advertising campaign conducted this year.

4. Depreciation is to be provided on the straight line method on furniture and fittings

and office equipment at 5% .The original costs were: Furniture and Fittings Rs.

30,000 ; Office equipment Rs 15,000.

5. Goods costing Rs 5,000 were dispatched out on 29th

March .The sale, however, took

place on 2nd

April , 2008, when an invoice for Rs 7,500 was raised against the

customer.

6. Insurance Premium includes a prepaid amount of Rs 1,000.

7. the deposit with a supplier was made on 1st October,2007 .It carried interest @ 12%

p.a.

8. Two bills receivable from customer of Rs 700 and Rs 1,300 were dishonored on 30th

March .These had earlier been discounted with the bank.

9. Provide 2% on sundry debtors for doubtful debts.

10. Physical stock of goods on hand on 31st March , 2008 at a cost was Rs 1,00,000.

Prepare Trading, Profit and Loss Account and the Balance Sheet from the information

given, above.

130

Solution: Trading and Profit and Loss Account for the year ended 31st March , 2008

Rs Rs

30,000

4,15,000

18,000

3,42,000

8,05,000

7,00,000

1,05,000

8,05,000

To Opening Stock

To Purchases

To carriage inwards

To gross profit c/d

To Salaries

To Rent ,rates & taxes

To Electricity Expenses

To Insurance Premium

(Less : Prepaid Rs 1,000)

To Advertisement

To Carriage outwards

To claims Written –off (note 6)

To Bad debts

To provision for doubtful debts

To Depreciation on:

Furniture

Office Equipment

To Net Profit ( transferred to

Capital)

1,500

750

42,000

3,000

2,000

8,000

4,500

21,000

3,000

4,000

3,040

2,250

2,49,570

3,42,360

By Sales

By Closing stock in hand

By closing stock in transit (note 8)

By Gross profit b/d

By interest on deposit with

Supplier.

1,00,000

5,000

3,42,000

360

3,42,360

Balance sheet of Mr X as on 31st March, 2008

Liabilities Rs Assets Rs

Capital: Opening

Add: Net profit

Sundry Creditors

Add: Unrecorded Purchases

Invoice

Nil

2,49,570

50,000

15,000

2,49,570

65,000

3,14,570

Fixed Assets

Furniture & Fittings

Less: Depreciation

Office Equipment

Less: Depreciation

Current assets

Stock in Trade at cost

Sundry debtors ( note 4)

Less: Provision for doubtful debts

Bills receivable ( Note 7)

Claim receivable

Deposit with suppliers

Cash in hand

Cash at bank ( note 2)

Accrued interest on deposit with

supplier.

Advertisement suspense

Prepaid expenses (Insurance

Premium)

23,000

1,500

10,000

750

1,52,000

3,040

21,500

9,250

1,05,000

1,48,960

6,000

2,000

6,000

4,000

6,000

360

4,500

1,000

3,14,570

131

Working Note:

1. It is presumed that closing stock includes goods worth Rs 15,000.

2. Bank Balance has been reduced by Rs 2,000 on account of the bills discounted having

been dishonored.

3. Purchases will be increased by Rs 15,000 for unrecorded purchases invoice.

4. Sundry debtors will be increased by Rs 2,000 for bill dishonored.

5. Sundry Creditors will be increased by Rs 15,000 for unrecorded purchases invoice.

6. Claim recoverable as per trial balance is Rs 5,000.It has been settled with Insurance

Company for Rs 2,000.The balance of Rs 3,000 is to be written-off.

7. Dishonored of discounted bill will not affect the bills receivable balance.

8. Goods dispatched on 29th

March is to be included in the closing stock of 2007-08

because the sales took place on 2nd

April, 2008. it will be added to the closing stock at

cost of Rs 5000

Illustration 5: The following is the Trial Balance of B. Govil on 31st March ,2009:

Rs Rs

Cash in hand ….. 540

Cash at Bank ….. 12,630

Purchases Account ….. 1, 40,675

Sales Account …. 2, 58,780

Return Inwards Accounts ….. 2,680

Return Outwards Accounts …. 1,500

Wages Account ….. 20,480

Fuel and power Account ….. 4,730

Carriages on Sales Accounts ….. 3,200

Carriages on purchases Account ….. 2,040

Stock Account( 1st April , 2008) …. 25,760

Building Account ….. 30,000

Freehold Land Account ….. 20,000

Machinery Account ….. 20,000

Patents Account ….. 7,500

Salaries Account ….. 15,000

General Expenses Account ….. 13,000

Insurance Account ….. 600

Drawings Account ….. 15,245

Capital Account ….. 82,000

Sundry Debtors ….. 14,500

Sundry Creditors ….. 6,300

3,48,580 3,48,580

Taking into account into following adjustments, make the necessary journal entries, and

prepare Trading and Profit and Loss Account and the Balance Sheet.

(a.) Stock on hand on 31st March, 2009 is Rs 26,800.

(b.) Machinery is to be depreciated at the rate of 10% and patents at the rate of 20%.

132

(c.) Salaries for the month of March, 2009 amounting to Rs. 1,500 were unpaid.

(d.) Insurance includes a premium of Rs.170 on a policy, expiring on 31st September,

2009.

(e.) Wages include a sum of Rs 2,000 spent on the erection of a cycle shed for

employees and the customers.

(f.) A provision for Bad and Doubtful Debts is to be created to the extent of 5 percent

on Sundry Debtors

Solution: Journal Entries in the Book of G. Govil

Dr Cr

Depreciation Account …. Dr

To Machinery Account

To patent Account

(Amount written off as depreciation on

machinery)

( 10 per cent on Rs 20,000) and on Patents

( 20 per cent on Rs 7,500)

Rs

3,500

Rs

2000

1,500

2009,

Mar 31

(*)Salaries Account ….. Dr

To Salaries Outstanding account

(The amount still due on account on salaries)

(*) Insurance Prepaid Account …… Dr

To Insurance Account

(Half the premium on a policy which will expire

on 31st September,2000 i.e 6 months after the

closing date.)

(*)Building Account ….. Dr

To wages Account

(Wages spent on erection of a cycle shed

transferred to Buildings Account)

(*)Profit and Loss Account ….. Dr

To provision for Bad Doubtful debts Account

(The provision required to be maintained in

respect of anticipated bad debts.)

(*)Sales Account ….. Dr

To Return Inwards Account

(Return Inwards Account transferred to Sales

Account)

(*)Return Outwards Account … Dr

To Purchases account

(Return outwards Account transferred to

purchases account)

1,500

85

2,000

725

2,680

1,500

1,500

85

2,000

725

2,680

1,500

133

(*)Trading Account …. Dr

To Stock Account

To Purchases Account

To Wages Account

To Fuel and Power Account

To carriage on Purchases Account

(Various accounts transferred to the debit side of

the Trading Account)

(*)Sales Account ….. Dr

To Trading Account

(Sales Account transferred to the credit of the

Trading Account)

(*)Stock Account ….. Dr

To Trading Account

(The value of the closing stock)

(*)Trading Account ….. Dr

To profit and Loss Account

(Transfer of the gross profit from Trading

Account to Profit and Loss Account.)

(*)Profit and Loss Account … Dr

To Carriage on Sales Account

To Salaries Account

To General Expenses Account

To Insurance Account

To Depreciation Account

(Various expenses transferred to the debit of the

profit and Loss Account)

(*)Profit an Loss Account … Dr

To Capital Account

(Transfer of net profit from Profit and Loss

account to Capital Account)

(*)Capital Accounts … Dr

To Drawing account

(Transfer of the Drawings Accounts to the

Capital Account.)

1,90,185

2,56,100

26,800

92,715

36,715

55,275

15,245

25,760

1,39,175

18,480

4,730

2,040

2,56,100

26,800

92,715

3,200

16,500

13,000

515

3,500

55,275

15,245

1. The Students should prepare the Accounts and carefully note how the adjustments

change the various accounts and how new come into being Accounts.

2. (*) These are closing entries and the rests are adjustments entries.

B.Govil

Dr Trading and profit and Loss Account for the year ended in 31st March, 2009 Cr

To stock Account

To purchases Account

Less: Return Inwards

To wages Account

To Fuel & Power Account

To Carriages on Purchases

Account

To Gross Profit transferred to

Rs

1,40,675

1,500

Rs

25,760

1,39,175

18,480

4,730

2,040

By Sales Account

Less: Return

Inwards

By Stock Account

Rs

2,58,780

2,680

Rs

2,56,100

134

Profit and Loss Account

To Salaries Account

Add: Salaries outstanding

To carriage on Sales

To General Expenses

To Insurance Account

Less: Insurance Prepaid

To Provision for bad and

Doubtful Debts account

To Depreciation Account:

On Machinery

On Plant

To Net Profit –transferred to

Capital Account

15,000

1,500

600

85

2,000

1,500

92,715

2,82,900

16,500

3,200

13,000

515

725

3,500

55,275

92,715

By Gross Profit-

transferred from

Trading Account

2,82,900

92,715

92,715

Balance sheet of B. Govil as on 31st

March, 2009 Liabilities Rs Rs Assets Rs Rs

Current Assets:

Sundry Creditors 6300 Cash in hand 540

Salaries Outstanding 1,500 Cash at Bank 12,630

Capital: Sundry Debtors 14,500

Balance in the beginning

Add: Net Profit during

the year

82,000

55,275

Less: Provision for

Bad and Doubtful

Debts

725

1,37,275 13,775

Less: Drawings 15,245 Insurance Prepaid 85

1,22,030 Stock in hand

Fixed Assets:

26,800

Freehold Land 20,000

Buildings 32,000

Machinery 20,000

Less: Depreciation 2,000

18,000

Patents 7,500

Less: Depreciation 1,500

6,000

1,29,830 1,29,830

Illustration 6: The Trial Balance of M/s. R.S Corporation as on December 31,2007 was as

under:

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

Bad debts 300

Suresh Capital A/c 1,80,000 Bills payable 12,000

Discount 500

Land and Building 90,000

Stock as on 1.1.2007

Raw materials

Finished goods

2,500

6,500

Plant and machinery 70,000

Purchases 64,500 Furniture 1,000

Sales 1,19,000 Sundry Debtors 25,400

Sales return 2,000 Sundry Creditors 42,000

Wages 16,000

Manufacturing expenses 12,000

Drawings

3,200

135

Salaries 8,000

Insurance 1,500 Cash in hand 500

Postage 100 Cash at bank 49,000

Advertisement 1,000 Total 3,53,500 3,53,500

Prepare Trading , Profit and Loss Account for the year ended 31st December 2007, and

also the Balance sheet as on that date after taking into consideration the following

adjustments.

1. Stock on 31st December , 2007 : Raw materials Rs 4,000 ; Finished goods Rs 12,000.

2. Provide depreciation on land and building @ 5% ; on furniture @ 10% ; and on plant

& machinery @ 5%.

3. Outstanding expenses: salaries Rs 1,500 ; wages Rs 2,100

4. Insurance paid for 15 months upto March , 2008.

5. Reserve for doubtful debts @ 5% of Debtors.

6. Goods withdrawn for personal use Rs 2,000.

7. Provide Further Bad debt of Rs. 400.

Solution: M/s R.S. corporation

Trading and profit and Loss Account for the year ended 31st

Dec , 2007

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

To Opening Stock:

Raw materials

Finished goods

2,500

6,500

9,000

By sales

Less :Sales Return

1,19,000

2,000

1,17,000

To Purchases

Less: goods taken for personal use

64,500

2,000

62,500

By closing stock

Raw materials

Finished goods

4,000

12,000

16,000

To Wages

Add: Outstanding

16,000

2,100

18,000

12,000

To manufacturing Expenses 31,400

To Gross profit c/d 1,33,000 1,33,000

To Salaries

Add: Outstanding

8,000

1,500

9,500

By Gross Profit b/d

By Discount received

31,400

500

To Insurance

Less :Prepaid

1,500

300

1,200

To Postage 100

To Advertisement 1,000

To Bad Debt

Add: Further bad debts

300

400

To Provision for Doubtful debts 700

To Depreciation 1,250

On Land & Building @ 5% 4,500

On Furniture @ 10% 100

On Plant and Machinery @ 5% 3,500 8,100

To Net Profit (Transfer to capital) 10,050

31,900 31,9000

136

Balance Sheet of M/s R.S. Corporation as on 31st December , 2007

Liabilities (Rs) .(Rs) Assets (Rs) (Rs)

Capital Accounts: 1,80,000 Fixed Assets 90,000

Add Net Profit 10,050 Land and Building 4,500

1,90,050 Less: Depreciation 70,000 85,500

Plant and Machinery 3,500

81,225 Less :Depreciation 1,000 66,500

Furniture 100

Less: Drawings 5,200 Less: Depreciation 900

1,84,850 Current Assets

Closing Stock

Sundry creditors 42,000 R aw materials 4,000

Bills payable 12,000 Finished goods 12,000 16,000

Outstanding Expenses Sundry Debtors 25,400

Salaries 1,500 Less: Bad debts 400

Wages 2,100 3,600 Less provisions for 25,000

bad debts 1,250

23,750

Cash in hand 500

Cash at Bank 49,000

Prepaid Insurance 300

2,42,450 2,42,450

Illustration 7: Prepare a Trading A/c for the year ending 31st March, 2004 from the following

Stock(1st April 2003) 20,000 Octroi duty 75

Cash Purchases 30,000 Drawings of goods 500

Credit Purchases 20,000 Clearing charges 25

Purchases return 1,000 Goods given in Charity 100

Cash Sales 40,000 Closing Stock 3,500

Credit sales 30,000 Railway Freight 1,400

Loss of goods by fire 1,500 Carriage inward 50

Wages 500 goods given in sample 100

Sales return 2,000 Goods sent on consignment 1,500

Solution: Trading Accounts

(For the Year ending 31st March , 2004)

Rs Rs

To opening Stock 20,000 By Sales Rs

To Purchases Cash sales 40,000

To Cash Purchases 30,000 Credit sales 30,000

Credit 20,000 70,000

50,000 Less Returns Inwards 2,000 68,000

Less Return Outwards 1,000 By Goods sent on consignment 1,500

Good withdrawn 500 By profit and Loss a/c

Goods in Charity 100 (Loss by Fire) 1,500

Given in sample 100 48,300 By Closing stock 3,500

1,700

To Railway freight 1,400

To Carriage inward 50

To wages 500

To Octroi duty 75

To Clearing charges 25

To Gross Profit taken to P&L a/c 4,150

74,500 74,500

137

Alternate method

Trading Account

(For the Year ending 31st March , 2004)

Rs Rs

To opening Stock 20,000 By Sales Rs

To Purchases Cash sales 40,000

To Cash Purchases 30,000 Credit sales 30,000

Credit 20,000 70,000

50,000 Less Returns Inwards 2,000 68,000

Less Return Outwards 1,000 49,000 By Goods sent on consignment 1,500

To Railway freight 1,400 ,, Advertising (free samples)

To Carriage inward 50 ,, Charity (goods given) 100

To wages 500 By profit and Loss a/c

To Octroi duty 75 (Loss by Fire) 1,500

To Clearing charges 25 ,, Drawing (goods withdrawn) 500

To Gross Profit taken to P&L a/c 4,150

By Closing stock 3,500

75,200 75,200

Illustration 8: From the following balance taken from the books of Ram & Co. Prepare

Tarding & Profit & Loss a/c for the year ending on 31st Dec.2003 and Balance Sheet as on

that date:

Capital 35,000 salaries 1,110

Building 18,750 Discount allowed 200

Machinery 9,250 Stock(1st Jan ) 16,500

Debtors 7,000 Bills Payable 5,000

General Expenses 800 Sales 63,500

Rent paid 3,710 Purchases 46,850

Propietor’s Drawings 650 Wages 2,500

Electric charges 190 Cash in hand 1,800

Carriage Inwards 850 Sundry Creditors 10,000

Cash at bank 3,000 Return inward 450

Return outwards 110

Closing stock Rs 18,210

Solution:

Trading Accounts

(For the Year ending 31st December , 2003)

Rs Rs

To opening Stock 16,500 By sales 63,500

To Purchases 46,850 Less Return inwards 450

Less Return 110 46,740 63,050

18,210

To wages 2,500

To Carriage inwards 850

To Gross profit transferred to Profit

& Loss Account 14,670

81,260 81,260

To General Expenses 800 By Gross Profit b/d 14,670

To Rent 3,710

To Electric charges 190

To salaries 1,110

To Net Profit transferred to Capital

Account 9,660

14,670 14,670

138

Balance Sheet

(As on 31st December, 2003)

Liabilities Amount

Rs

Assets Amount

Rs

Bills payable 5,000 Cash in hand 1,800

Sundry Creditors 10,000 Cash at bank 3,000

Capital 35,000

Add Net Profit 8,660 Debtors 7,000

43,660 Closing table 18,210

Less Drawings 650 43,010

Machinery 9,250

Building 18,750

58,010 58,010

Illustration 9: The following balance of Shyam Lal & Sons are given .You are required to

prepare a Trading and profit and Loss Account for the year ending 31st December , 2003 and

a Balance Sheet on that date:

Debit Balance:

Purchases 60,000 Freight outward 1,200

Sales Returns 1,500 Rent, rates and Taxes 2,000

Plant and machinery 90,000 Advertisements 2,000

Opening Stock 40,000 Cash in Bank 7,000

Discount allowed 350 Credit Balance:

Bank charges 100 Capital Account 1,13,000

Sundry Debtors 46,000 Purchases Returns 1,200

Salaries 7,000 Commission Received 800

Wages 10,000 Sundry Creditors 25,000

Freight Inwards 1,000 Rent Received 1,150

Sales 1,27,000

Adjustments:

a. Closing Stock was valued at Rs 35,000.

b. Outstanding wages Rs 500 and Salaries Rs 1,000.

c. Prepaid taxes Rs 200.

d. Half of the Advertisement is to be carried forward to the next year.

e. Rent Receivable Rs 450 and Accrued Commission Rs 400.

f. Further Bad Debts Rs 1,000.

Make Provision for doubtful debts @ 5% and for discount on debtors and Reserve for discount on creditors @ 2%.

Solution; Trading and profit and Loss A/c of Shyam Lal

(For the year ended 31st December, 2003) Rs Rs

To Opening stock 40,000 By Sales 1,27,000

To Purchases 60,000 Less Sales return 1,500 1,25,500

Less return purchases 1,200 58,800

To wages 10,000 By Closing stock 35,000

Add outstanding 500

10,500

To Freight Inward 1,000

To gross profit c/d 50,200

1,60,500 1,60,500

To discount allowed 350 By Gross Profit b/d 50,200

To Bank charges 100 By Commission received 800

To advertisements 2,000 Add: Earned but not yet received 400

Less Carried forward 1,000 1,000 1,200

To salaries 7,000

Add: Add outstanding 1,000 8,000 By Rent Received 1,150

Add Rent receivable 450 1,600

To Rent, Rates and Taxes 2,000 ,, Discount on creditors 500

139

Less: Prepaid 200 1,800

To Freight outward 1,200

To Bad debt 1,000

Add: New Provision 2,250 3,250

To Provision for discount on Debtors 855

To Net profit transferred to capital a/c 36,945

53,500 53,500

Balance Sheet

(As on 31st December, 2003)

Liabilities Amount

Rs

Assets Amount

Rs

Creditors 25,000 Cash in hand 7,000

Less discount Creditor 500 24,500 Sock 35,000

Debtors 46,000

Outstanding : Liabilities Less further bad Debts 1,000

Wages 500 45,000

Salaries 1,000 1,500 Less: Provision 2,250

Capital 1,13,000 42,750

Add: Net Profit 36,945 1,49,945 Less Provision for

discount on debtor 855 41,895

Accrued Commission 400

Prepaid taxes 200

Advertisement carried

Forward

Rent receivable 450

Plant and Machinery 90,000

1,75,945 1,75,945

Illustration 10: From the following Balance of Shri Shyam Lal, prepare a Trading and

profit and Loss Account for the year ended on 31st March, 2000 and a Balance Sheet as on

that date: Debit Balance :

Cash in hand 2,050 Taxes and Insurance 2,890

Opening stock 6,840 Furniture 6,880

Sundry Debtors 20,100 Discount 1,540

Drawings 3,000 Advertisement 3,260

Land and Buildings 12,000 Misc. Expenses 3,490

Interest on loan 300 Rent 6,640

Purchases 60,460 Credit Balances:

Carriage Inwards 2,930 Sales 1,10,240

Motor Car 20,000 capitals 28,000

Salaries 9,100 Bills payable 12,610

Bills Receivable 3,000 sundry Creditors 10,400

Carriage outwards 2,500 Purchases returns 1,340

Cash at Bank 3,555 Rent Received 750

Bad Debts 525 Loan ( on 1-10-99 @ 10%) a/c 12,000

Bad Debts Reserve 1,720

Adjustments:

a. Stock in hand on 31st March , 2000 was Rs 6,250.

b. Depreciate land and Building @ 2½ and Motor Car @ 10%

c. Salaries and Taxes amounting to Rs 750 and Rs 350 respectively are outstanding .

d. Further Bad debts are Rs 100.

e. Make a provision 5% on sundry debtors for doubtful debts.

f. Create a provision for Discount on Debtors and Creditors @ 2%

g. Rent Receivable Rs 50

h. Prepaid Insurance Rs 200

i. Allow interest on capital 10%.

j. Charge interest on drawing Rs 150.

140

Solution; Trading and profit and Loss A/c of Shyam Lal

(For the year ended 31st March, 2003)

Rs Rs

To Opening stock 6,840 By Sales 1,10,240

To Purchases 66,460 Closing stock 6,250

Less :Return purchases 1,340 65,120

To carriage inward 2,930

To Gross Profit c/d 41,600

1,16,490 1,16,490

To Interest on loan 300 By Gross profit b/d 41,600

Add outstanding 300

600

By Interest on Drawings 150

To Salaries 9,100 By Rent Received 750

Add : Outstanding 750 Add: Rent Receivable 50 800

9,850 By Old Reserve for b/d 1,720

To carriage outwards 2,500 Less Bad Debts (old) 525

,, Taxes and insurance 2,890 ,, Further bad Debts (new) 100

Add: outstanding 350 ,, New Provision 1,095

3,240 for bad debt 1,000

Less: Prepaid 200 3,040 95

To Discount 1,540 By provision for Discount on Creditors 208

,, Advertisement 3,260

,, Misc. Expenses 3,490

,, rent 6,640

,, Interest on Capital 2,800

,, Depreciation on land and Building 300

On Motor Car 2,000 2,300

,, provision for

Discount on Debtors 380

,, Net Profit transferred to Capital a/c 6,453

42,853 42,853

Balance Sheet of Shri Shyam Lal

(As on 31st March, 2003)

Liabilities Amount

Rs

Assets Amount

Rs

Creditors 10,400 Cash at bank 3,555

Less provision for Discount 208 10,192 Cash in hand 2,050

Stock 6,250

Loan 12,000 Bills Receivable 3,000

Add outstanding 300 12,300 Rent Receivable 50

Prepaid Insurance 200

Bills payable 12,610 Sundry Debtors 20,100

Outstanding ; Liabilities: Less: Bad debts (new) 100

On Salaries 750 20,000

On Insurance & Taxes 350 1,100 Less Provision (new) 1,000

19,000

Capital 28,000 Less Provision for discount 380

Less Drawing 3,000 18,620

25,000 Land & Building 12,000

Less Interest on Drawings 150 Less depreciation 300

24,850 11,700

Add Interest on capital 2,800 Motor car 20,000

27,650 Less depn. 2,000

Add: Net Profit 6,453 18,000

34,103 Furniture 6,880

70,305 70,305

Illustration 11. From the following trial balance prepared from the books of Tony

Greig, prepare trading and profit and loss account and balance sheet:

141

Trial Balance (As on 31st December, 2002)

Dr. Cr.

Rs. Rs.

10,800

1,200

300

14,360

1,500

3,000

1,590

67,350

5,100

1,310

1,590

1,450

4,950

11,070

2,610

40,000

80,410

2,520

150

400

4,700

Capital on 1st January 2002

Freehold property

Depreciation on free hold property

Insurance prepaid (1-1-02)

Stock on 1st January 2002

Furniture and fittings

Insurance paid

Sales

Returns inwards

Purchases

Returns outwards

Office expenses

Bad debts

Carriage outwards

Carriage inwards

Salaries and Commission

Discount

Creditors for expenses

Account receivable

Accounts payable

Cash Bank

1,28,180 1,28,180

Adjustments:

(i) Stock on hand Rs. 10,700 (including stationery stock Rs. 200).

(ii) Insurance prepaid was Rs. 330.

(iii) Office expenses include stationery purchased Rs. 800.

(iv) Carriage inwards include carriage paid on purchase of furniture Rs, 50.

(v) Include among office expenses is an amount of Rs. 1,000 paid for the acquisition of free

hold property which was purchase on 1st January, 2002.

(vi) Debtors include— (a) Amount due from Gavaskar Rs. 400—considered definitely bad;

(b) Amount due from Bedi Rs. 1,000—considered definitely good;

(c) Amount due from Chandra Shekhar Rs. 600—considered very much doubtful.

(vii) Make provision for doubtful debts at 5 % on other debtors.

Trading and profit and Loss A/c of Tony Greig

(For the year ended 31st December, 2002)

Rs Rs

To Opening stock 14,360 By Sales 80,410

To Purchases 67,350 Less Sales return 1,590 78,820

Less :Return 2,520 64,830

By closing stock 10,700

To carriage inward 1,450 Less stationery stock 200 10,500

Less for furniture 50 1,400

To Gross Profit c/d 8,730 89,320

89,320 By Gross profit b/d 8,730

,, Discount 150

142

To Salary and commission 4,950 ,, Net loss transferred to capital a/c 8,494

To Carriage outwards 1,590

,, provision for bad debts 1,054

,, Stationery

Paid 800

Less unused 200 600

To Office expenses 5,100

Less Paid for stationery 800

4,300

Less paid for freehold

property

1,000

To Insurance 3,000 3,300

Add prepaid on 1-1-2002 300

3,300

Less prepaid on 31-12-2002 330 2,970

To Depreciation : in

Freehold property 1,200

To Bad debts

w/off during the year 1,310 1,710

Add w/off on 31-12-2002 400

17,374 17,374

Balance Sheet of Shri Shyam Lal

(As on 31st December, 2003)

Liabilities Amount

Rs

Assets Amount

Rs

Accounts payable 4,700 Cash at bank 2,610

Creditor for expenses 400 Account receivable 11,070

Capital: Less Bad debts 400

Opening balance 40,000 10,670

Less net loss 8,494 Less Written off

31,506 Provision for b/d 1,054

9,616

Closing stock 10,500

Stationary stock 200

Prepaid insurance 330

Furniture and Fitting 1,550

Freehold property 11,800

36,606 36,606

Note: Calculation of Provision for bad debt (new) Rs.

Accounts receivable as per Trial Balance. 11,070

Less bad debt(new) 400

10,670

Less good debt 1,000

9,670

Less doubtful 600

9,070

Reserve for doubtful debt @ 5% on debtors = 5% of 9070 =454(appx).

Hence, Reserve for doubtful debt chargeable to profit & loss a/c = 600 + 454 = 1,054.

Illustration 12: From the following figures extracted from the books of Govind, you are required to prepare a

Trading and Profit and Loss Accounts t for the year ended 31st March, 2008 and a balance

Sheet as on that date after making the necessary adjustments.

143

Particulars Rs Particulars Rs

Shri Govind ‘s capital 2,28,800 Stock 1.4.97 38,500

Shri Govind’s drawings 13,200 Wages 35,200

Plant and Machinery 99,00 Sundry Creditors 44,000

Freehold Property 66,000 Postages & Telegrams 1,540

Purchases 1,10,000 Insurance 1,760

Return outwards 1,100 Gas and Fuel 2,970

Salaries 13,200 Bad debts 660

Office Expenses 2,750 Office rent 2,860

Office furniture 5,500 Freight 9,900

Discount A/c (Dr) 1,320 Loose tools 2,200

Sundry Debtors 29,260 Factory lighting 1,100

Loan to Shri Krishna @ 10% p.a

balance on 1.4.2007

44,000 Provision for Doubtful Debts 880

Cash at bank 29,260 Interest on loan to shri Krishna 1,100

Bills payable 5,500 Cash in hand 2,640

Sales 2,31,440

Adjustments:

1. Stock on 31st March, 2008 was valued at Rs. 72,600.

2. A new machine was installed during the year costing Rs.15, 400 but it was not

recorded in the books as no payment was made for it. Wages Rs. 1,100 paid for its

erection has been debited to wages accounts.

3. Depreciate Plant and Machinery by 331/3 %, furniture by 10% and Freehold property

by 5%

4. Loose tools were valued at Rs 1,760 on 31.3.2008.

5. Of the Sundry Debtors Rs 660 are bad and should be written off.

6. Maintain a provision of 5% on Sundry Debtors for doubtful debts.

7. The manager is entitled to a commission of 10% of the net profits after charging such

commission.

Solution: Govind

Trading and Profit & Loss Account for the year ended 31st March, 2008

Dr Cr Particulars Rs Rs Particulars Rs Rs

To Opening Stock 1.4.07 38,500 By Sales 2,31,440

To Purchases 1,10,000 By Closing Stock 72,600

Less : Returns 1,100 1,08,900

To Wages 35,200

Less: Wages for erection of

machinery

1,100 34,100

To Gas & Fuel 2,970

To Freight 9,900

To factory lighting 1,100

To Gross profit c/d 1,08,570

3,04,040 3,04,040

To salaries 13,200 By gross Profit b/d 1,08,570

To Office expenses 2,750 By Interest 1,100

To Postage and Telegram 1,540 Add: outstanding 3,300 4,400

To Insurance 1,760

To Office Rent 2,860

To Discount 1,320

To bad debts 1,320

To Provision for Doubtful debts

New provision 1,430

Less: Old provision 880 550

To depreciation;

On machinery 38,500

144

On furniture 550

On Freehold property 3,300

On Loose tools 440 42,790

To Commission to Manager (Note 1) 4,080

To net Profit (transferred capital) 40,800

1,12,970 1,12,970

Balance Sheet of Govind as on 31st March, 2008

Liabilities Rs Rs Assets Rs Rs

Capital: 2,28,800 Plant and Machinery 99,000

Add: Net profit 40,800 Add : New machinery

(15,400 + 1,100)

16,500

2,69,600 1,15,500

Less : Drawings 13,200 2,56,400 Less: Depreciation 38,500 77,000

Bills payable 5,500 Freehold property 66,000

Sundry Creditors (Rs 44,000 +

Rs 15,400)

59,400 Less : Depreciation 3,300 62,700

Manager’s Commission payable 4,080 Office furniture 5,500

Less: Depreciation 550 4,950

Loose tools 2,200

Less: Depreciation 440 1,760

Closing stock 72,600

Sundry Debtors 28,600

Less: provision for

doubtful debts

1,430

Loan to Shri Krishna 44,000

Add: Interest outstanding 3,300 47,300

Cash at Bank 29,260

Cash in hand 2,640

3,25,380 3,25,380

Working Note: (1) Before charging manager’s commission profit is Rs 44,880. Let the

profit after charging manger commission be Rs 100. Commission is payable @ 10% i.e., Rs

10. Therefore, profit before commission will be : Rs 100 +10 =Rs 110. When profit before

commission is Rs 110 then commission will be Rs 10. Therefore, when profit before

commission is Rs 44,800 commission will be: 10/110 X Rs 44,880 =Rs 4,080.

Illustration 13: From the following Trial Balance of Hari and additional information prepare Trading and

profit and Loss Account for the year ended 31st March, 2005 and Balance Sheet as on that

date:

Particulars Rs Cr(Rs) Particulars Rs Dr.(Rs) Capital 1,00,000 Bad debt Written off

Furniture 20,000 Creditors

Purchases 1,50,000 Drawings Debtors 2,00,000 Provision for bad debts Interest earned 4,000 Printing and stationery Salaries 30,000 Insurance Sales 3,21,000 Opening stock Purchases returns 5,000 Office expenses

Wages 20,000 Provision for Depreciation Rent 15,000 Sales Return 10,000

145

Additional information;

1. Depreciate furniture by 10% on original cost.

2. A provision for Doubtful Debts is to be created to the extent of 5% on sundry

Debtors.

3. Salaries for the month of March 2005 amounting to Rs 3,000 were unpaid which must

be provided for. However, salaries included Rs 2,000 paid in advance.

4. Insurance amounting to Rs 2,000 is prepaid.

5. Provide for outstanding office expenses Rs 8,000.

6. Stock used for private purpose Rs 6,000.

7. Closing stock in trading Rs 60,000.

Hari

Trading and Profit & Loss Account for the year ended 31st March, 2005

Dr Cr Particulars Rs Rs Particulars Rs Rs

To Opening Stock 1.4.07 50,000 By Sales 3,21,000

To Purchases 1,50,000 Less: Sales Return 10,000 3,11,000

Less : Purchases Returns 5,000 By Closing Stock 60,000

1, 45,000

Less: Goods taken for personal use 6,000 1, 39,000

To wages 20,000

To Freight 1,62 ,000

To Gross profit c/d 3,71,000

To salaries 30,000 3,71,000

Add: outstanding 3,000 By gross Profit b/d 1,62,,000

33,000 By Interest 1,100 4,000

Less: Prepaid 2,000 31,000 Add: outstanding 3,300

To Rent 15,000

To Printing and Stationery

To Insurance 12,000

Less: Prepaid 2,000

To Office expenses 12,000

Add: outstanding 8,000

To bad debts 880 550

To Provision for Bad debts:

New 10,000

Less: Old 6,000

To Provision for depreciation (10%

of Rs 20,000)

To Net Profit (transferred to capital) 4,000

2,000

69,000

1,66,000 1,66,000

Balance Sheet of Hari as on 31st March, 2005

Liabilities Rs Rs Assets Rs Rs

Capital: 1,00,000 Furniture 20,000

Add: Net profit 69,000 Debtors 2,00,000

1,,69,000 Less Provision forbad Debt 10,000

146

Less : Drawings

(24,000 + 6000)

30,000 Closing stock 1,90,000

1,39,000 Salary paid in advance 60,000

Creditors 1,20,000 Prepaid Insurance 2,000

Outstanding Salaries 3,000 2,000

Outstanding Office Expenses 8,000

Provisions for Depreciation 2,000

Addition for the year 2,000

4,000

2,74,000 2,74,000

Illustration 14 Following is the Trial Balance of M/s Ray Trader as at 31

st December, 2002. You are asked

to prepare the Trading and profit and Loss Account for the year ended 31st December , 2002

and Balance Sheet as on that date; (all figures in Rs)

Particulars Dr. Cr Particulars Dr Cr. Ray’s Capital 2,16,000 Income from investments 500

Stock as on 1st January 2002 93,600 Cash at Bank 23,000

Sales and sales returns 17,200 5,79,200 Discount received 8,560

Purchase and purchase returns 4,86,200 11,600 Investments 10,000

Freight and carriage 37,200 Furniture and fittings 13,600

Rent nad taxes 11,400 Discount paid 5,080

Salaries and wages 18,600 General expenses 7,820

Sundry debtors 48,000 Audit fees 1,400

Sundry creditors 29,600 Insurance 1,200

Bank loan (at 12% p.a) 40,000 Travelling expenses 4,660

Bank Interest on above 3,800 Postage and Telegram 1,740

Printing and Advertisement 20,200 Cash in hand 20,760

Drawings 20,000 Fixed deposit with State

Bank of India

40,000

TOTAL 8,85,460 8,85,460

Additional information:

(a) Closing stock as on 31.12.2002 Rs. 1,57,200 (b) Included amongst the Debtors is

(b) Rs. 6,000 from Mr S.Naha and included amongst the creditors is Rs 2,000 to Mr S.

Naha

(c) The effect of advertisement being not yet expired, a quarter of the amount of

“Printing and Advertisement” is to be carried forward to the next year.

(d) Provide 2% for Discount on Debtors and Create a Provision for Bad and Doubtful

Debts at 5% on Debtors.

(e) Depreciation of 10% is to be written off on Furniture and fitting

(f) Wages owing on 31st December, 2002 Rs 600, and salaries owing Rs 1,000.

(g) Insurance was paid in advance upto 31st March, 2003

147

(h) Furniture which stood at Rs 1,200 in the books on 1st January , 2002 was disposed of

at Rs 580 on 30th

June , 2002 in part exchange for a new furniture costing Rs. 1040.

The net amount payable Rs 460 was through the purchase book by mistake.

(i) Two dishonoured cheques for Rs 400 and Rs 600, it is expected that the Debtors

would be in a position to pay a dividend of 60 paise in the rupee.

(j) Interest receivable from Fixed Deposit with State Bank of India @ 12% p.a and

provide for interest on Bank loan for the Whole year. (working notes must be shown).

M/s Ray Traders

Trading and Profit & Loss Account for the year ended 31st December, 2002

Dr

Cr Particulars Rs Rs Particulars Rs Rs

To Opening Stock 93,600 By Sales 5,79,200

To Purchases (Note 1) 4,85,740 Less: Sales return 17,200 5,62,000

Less: Purchases returns 11,600 4,74,140 By Closing Stock 1,57,200

To Freight & carriage 37,200

To Gross Profit c/d 1,14,260 By Gross Profit b/d 1,14,260

To Rent and taxes 11,400 By Income from Investments 500

To Salaries & Wages 18,600 By Accrued interest on fixed 4,800

Add: outstanding salaries & wages 1,600 20,200 By Discount received 8,560

To Printing and advertisement 20,200

Less: Unexpired amount (1/4) 5,050 15,150

To bad Debt(dishonoured cheque) 400

To discount 5,080

To general expenses 7,820

To Audit fees 1,400

To Interest on loans 3,800

Add: Accrued interest 1,000 4,800

To Traveling expenses 4,660

To Postages & Telegram 1,740

To Provision for bad & doubtful

debts (Note 2)

2,540

874

To Provision for discount on Debtors

(Note 4)

620

To Loss on exchange of furniture &

fitting (Note 5)

1,344

To Insurance Premium 1,200

Less: Prepaid (Note 6) 240 960

To Net Profit (transferred to Capital) 49,132

1,28,120 1,28,120

Balance Sheet of M/s Ray Trader as on 31st December, 2002

Liabilities Rs Rs Assets Rs Rs

Capital: Opening 2,16,000 Furniture (Note 5) 20,000

Add: Net profit 49,132 Debtors 2,00,000

2,,65,132 Less Provision forbad Debt 10,000

Less : Drawings 20,000 Closing stock 1,90,000

1,39,000 Salary paid in advance 60,000

Sundry Creditors (Rs 29,600 –Rs 460) 29,140 1,20,000 Prepaid Insurance 2,000

Less: Due to S.Naha 2,000 3,000 2,000

148

12% Bank Loan 40,000 8,000

Add; Accrued interest (not yet paid) 1,000

Outstanding expenses:

Salaries 4,000

Wages 1,000

Creditors for purchase of furniture 600 1,600

460

3,15,332 3,15,332

Working Notes: (1) Purchases as per Trial Balance Rs 4,86,200; Less: Purchase of

Furniture ; Net amount =Rs 4,85,740

(2) Sundry Debtors (3) Cash at Bank As per Balance Sheet 48,000 As per trial balance 23,000

Less: Due from S.Naha 2,000 Less : Dishonoured Cheque : Rs(400 +600) 1,000

46,600 22,000

2,300 (4) Provision for Discount on Debtors Rs

Provision for doubtful debts @ 5%

on Rs 46,000

240 @ 2% on Rs (46,000- Rs 2,300)

No Provision for discount is to be created for

dishonoured cheque of Rs 600.

874

(5) Loss on exchange of furniture: Book value of furniture sold is Rs 1,200. It was exchange

for Rs 580. Therefore, loss on exchange will be Rs 1,200- Rs 580 =Rs 620 .(No depreciation

has been charged on old furniture ). To rectify the error for purchase of new furniture, the

following entry is to be passed

New furniture Account: Dr Rs 1,040

Profit and Loss Account Dr Rs 620

To Purchase Account Rs 460

To Old Furniture Account Rs 1,200

The final balance of Furniture Account will be ; Rs 13,600 –Rs 1,200 + Rs 1,040

= Rs 13,440. therefore, depreciation will be 10% of Rs 13,440 = Rs 1,344.

(6) Insurance of Rs 1,200 paid for 15 months. Therefore , three month’s insurance premium

should be carried forward =Rs 1,200 /15 X 3 = Rs 240.

(7) It should be noted that depreciation on furniture is to be charged @ 10% (not 10% p.a).

Therefore, depreciation on new furniture has been charged for the full year and no

depreciation has been charged on exchanges furniture.

Illustration 15 The following is the Trial Balance of Mr Tendulkar as at 3

rd March , 2005

Particulars Dr. Cr Particulars Dr Cr.

Stock (1.4.94) 45,000 Building 35,000

Sales 3,25,000 Discount Received 2,300

Purchases 2,40,000 Drawings 10,000

Capital 1,30,000 Bank Current Account 24,000

Wages 10,000 Fixed Deposit bank Account 16,000

Salaries 15,000 Provision for Doubtful Debts 1,500

Discount Allowed 3,000 Debtors 45,000

Creditors 35,000 Bills Receivable 10,000

Rent and Taxes 2,000 Cash 8,000

Trade Expenses 15,000 Sales return 2,000

Purchases Return 3,000 Sale of Furniture 1,200

Furniture (1.4.94) 18,000 TOTAL 4,98,000 4,98,000

149

Prepare Trading and profit and Loss Account for the year ended 31.3.2005 after taking into

account the following adjustments:

(a) Stock on 31.3.2005 Rs 40,000.

(b) Opening and Closing stock includes stock of stationery amounting to Rs 200 and Rs

150 respectively. Trade Expenses include payment of stationery of Rs 1,800. Credit

purchases of stationery for Rs 450 recorded as ordinary purchases; Stationery of Rs

300 is consumed by the proprietor.

(c) Furniture which stood in the book of Rs 2,000 on 1.4.204 was sold on 30.9.1004.

(d) Bills Receivable include a dishonoured bill of Rs 1,500 and debtors include of Rs

1,000 in respect of an insolvent customer whose estate is expected to realize only 50

paise in the rupee.

(e) Tendulkar received Rs 15,000 from Kambli in respect of joint business with him. The

sum received so credited to Sundry Creditors Account . It is noted that a sum of Rs

5,000 is due to Tendulkar as his share of profit from the business.

(f) During the year the proceeds of a matured fixed deposit amounting to Rs 14,000 has

been credited to Fixed Deposit Account . The original amount was Rs 10,000.

(g) Provide depreciation on all fixed assets @ 10% p.a and provide 5% for doubtful debts

of unknown nature.

Solution:

Mr Tendulkar

Dr Trading and Profit & Loss Account for the year ended 31st March , 2004 Cr

Particulars Rs Rs Particulars Rs Rs

To Opening Stock 45,000 93,600 By Sales 3,25,000

Less: Stock of Stationery 200 Less: Sales return 2,000 3,23,000

To Purchases

2,40,000

By Closing Stock 40,000

Less : Purchases of Stationery

450

Less: Stock of Stationery 150 39,850

2,39,550 3,62,850

Less : Purchases Return 3,000 2,36,550 By Gross Profit b/d 71,500

10,000 By Discount received 2,300

To Wages 71,500 By interest on fixed

Deposit

4,000

To Gross Profit c/d 3,62,850 By Share of Profit of Joint

Business

5,000

By Gross Profit b/d

By Discount received

To Salaries 15,000

To Discount Allowed 3,000

To Rent and Rates 2,000

To Trade Expenses 15,000

Less: payment for Stationery 1,800 13,200

To Depreciation on:

Building 3,500

Furniture 1,700 5,200

To Loss on Sales of Furniture(Note 3) 700

To Stationery (Note 1) 2,000

To Provision for Doubtful Debts:

New 2,775

Less : Old 1,500 1,275

To Net Profit (transferred to capital) 40,425

82,800 82,800

Illustration 16

150

The following is the trial balance of Shri Paras, as on 31st March, 2008. You are requested to

prepare the final account in the vertical format , after giving effect to the adjustments. Particulars Dr. Cr Particulars Dr Cr.

Sundry Creditors - 63,000 Carriage on Purchases 20,400 -

Sundry Debtors 1,45,000 - Carriage on sales 32,00 -

Capital Account - 7,10,000 Fuel and power 47,300 -

Drawings 52,450 - Wages 1,04,800 -

Insurance 6,000 - Return Outwards - 5,000

General Expenses 30,000 - Return Inwards 6,800 -

Salaries 1,50,000 - Sales - 9,87,800

Patents 75,000 - Purchases 4,06,750 -

Machinery 2,00,000 - Cash at Bank 26,300 -

Freehold Land 1,00,000 - Cash in hand 5,400 -

Building 3,00,000 - -

Stock on 1.4.07 57,600 - TOTAL 17,65,800 17,65,800

The following adjustments are to be made:

1. Stock on 31st March, 2008 was valued at Rs 68,000

2. A provision for bad and doubtful debts is to be created to the extent of 5% on sundry

Debtors

3. Depreciate Machinery by 10% and Patents by 20%

4. Wages include a sum of Rs 20,000 spent on the erection of a cycle shed for the

employees and customers

5. Salaries for the month of March, 2008 amounting to Rs 15,000 were unpaid

6. Insurance includes a Premium of Rs 1,700 on a policy , expiring on 30 September,

2008

Solution

Shri Paras

Trading and Profit & Loss Account for the year ended 31st March , 2008

Particulars Rs Rs Rs

Sales 9,87,800

Less: Return Inwards 6,800

9,81,000

Opening Stock 57,600

Purchases 4,06,750

Add: Carriage on Purchases 20,400

4,27,150

Less: Return outwards 5,000 4,22,150

Wages 1,04,800

Less: Wages of Cycle Shed 20,000 84,800

Fuel and Power 47,300

6,11,850

Less: Closing Stock 68,000

Cost of Goods Sold 5,43,850

Gross Profit 4,37,150

Less: Insurance 6,000

Less: Prepaid 850 5,150

General Expenses 30,000

Salaries 1,50,000

Add : Outstanding 15,000 1,65,000

Carriages on Sales 32,000

Provision for Bad debts 7,250

Depreciation on:

Machinery 20,000

Patents 15,000 35,000 2,74,400

Net Profit 1,62,750

Balance Sheet of Shri Paras

151

as on 31st March, 2008

Particulars Rs Rs Rs

Fixed Assets

Building 3,00,000

Freehold land 1,00,000

Machinery 2,00,000

Less: Depreciation 20,000 1,80,000

Patents 75,000

Less: depreciation 15,000

Cycle Shed 60,000

A Current Assets 20,000 6,60,000

Sundry debtors 1,45,000

Less Provision for Bad debt 7,250 1,37,750

Closing stock 68,000

Cash at bank 26,300

Cash in hand 5,400

Insurance prepaid 850

2,38,300

Current Liabilities(B) 63,000

Sundry Creditors 15,000

Outstanding Salary 78,00 1,60,300

Working Capital (A-B) 8,20,300

NET ASSETS EMPLOYED

Financed by:

Capital 7,10,000

Add Net profit 1,62,750

Less drawings 8,72,750

52,450

8,20,3,00

Arithmetic in Book-keeping 1. Mr Chaoba intends to purchase a power tiller costing Rs. 2, 00,000 by borrowing

money from the State Bank of India at 18% p.a.

152

Determine (a) amount of an installment and (b) schedule of repayment if he is willing

to repay the loan in 5equal annual installments.

Take the present value of an annuity of Rs. 1 at 18% p.a. as Rs 3.127 at the end of 5

years.

Solution:

(a) Amount of an installment

Amount of loan

═

P.V. factor of annuity

2, 00,000

═

2.127

═Rs. 63,959(appx) p.a

(b) Schedule of repayment

Year Loan Balance in

the beginning of

the year

Loan

Installment

Interest

payment

Principal

Payment

Loan

Balance at

the end of the

year

1

2

3

4

5

Rs

2,00,000

1,72,041

1,39,049

1,00,119

54,181

63,959

63,959

63,959

63,959

63,934

Rs

36,000

30,967

25,029

18,021

9753

Rs

27,959

32,992

38,930

45,938

54,181

Rs

1,72,041

1,39,049

1,00,119

54,181

NIL

Note: The amount of the loan installment in the 5th

and the last year is different from the

equal annual installment because of compensation from rounding error.

2. Mr Chaoba is an employee of Social Welfare Department. He is willing to avail Bank

loan .His net salary is Rs 12,000 p .m. Determine his capacity to repay loan as per

existing bank norm.

Solution:

Total salary income of Shri Chaoba

for one year ═ Rs 12,000 X 12

═ Rs 1, 44,000.

His capacity to repay ═ 40% of 12,000

═ Rs 4,800 [Since his total net salary per year is

below Rs 2, 00,000]

Note:

1. If his annual net salary was above Rs 2,00,000 his capacity to repay would have been

50% of monthly home take pay (net salary)

153

2. On the basis of the capacity to repay the size of bank loan ( particularly the personal

loan) will be determined by the bank.

3. Capacity to repay a loan is co-related with size of loan and subsequently with E.M.I

(Equated Monthly Installment)

3. A supplier has submitted a bill for Rs 56 Lakhs ( inclusive of Sales Tax @ 12% under

VAT).

Find out the total amount of Sales tax for the preparation of Challan T.R.6.

Solution:

Amount of bill ═ Rs. 56,00,000

Rate of SalesTax ═ 12%

Hence, amount of Sales Tax

═ Rs. 6,00,000

Note:

If the amount of bill is Rs 56 lakhs ( exclusive of Sales Tax @ 12%), the amount of

sales tax would have been or Rs. 6,72,00.

4. The Manager of AB & Sons is entitled to a Commission of 10% on net Profit before

charging the Commission . If the net profit before charging such Commission is Rs 1,10,000 ,

Find out his Commission.

Solution: Commission = Net Profit X Rate of Commission

Hence, Manager’s Commission

=Rs. 11,000

5. A Manager is entitled to a Commission at 10% on net profit after charging such

commission. If the net profit before charging manager’s Commission is Rs 1,10,000 ,

ascertain his Commission.

Solution:

= Rs 10,000

Alternately,

Let the total Commission of the Manager be Rs x

154

By question, x = 10% of (1, 10,000 – x)

= Rs 10,000

6. A Manager is entitled to a Commission of 10% on net operating profit after charging

his commission .If the net profit is Rs 1,20,000 as given by Profit and Loss Account and non

operating income is Rs 10,000 , ascertain the Manager’s Commission.

Solution:

Net Profit = Rs 1,20,000

Non operating income= Rs 10,000

Now, Net operating Profit = Rs 1,20,000 – Rs 10,000

= Rs 1,10,000

= Rs 10,000

Note:

Net operating Profit implies the profit arrived at after making adjustment of non

operating income. Non operating income may include income from investment ,income

/profit from the sale of fixed asset etc in a sole trading concern.

(i) The general Manager is to be given commission of 10% after charging the

commission of works Manager and his own on net profits.

(ii) The works Manager is to be given commission of General Manager and his own

on net profits ( Such commission shall be calculated to the nearest multiple of a

rupee)

(iii) Net profit before charging commission = Rs 82,960

Calculate the Commission of General Manager and works Manager.

Solution: Let Rs x be the total Commission to General Manager and Rs y be the total

commission to works manager

Now,

10 (Rs 82,960 –y) = x ……………….. (i)

110

155

5 ( Rs 82,960 –x) = y …………………(ii)

105

From (i) we have,

.09091 ( 8290 –y) = x

=> x + .091 y = 7541.818 ………………….( iii)

Similarly, from (ii) we have

.04762 ( 82960 – x) = y

=> y + .04772 x = 3950.476 …………………..(iv)

Multiplying (iv) by 21 and (iii) by 1 we get

x + 21 y = 82960

x + .091 y = 7541.818

20.909 y = 75418.182 By subtraction,

y = 75418.182/20.909 = Rs 3607 (appx)

and x = (82960 ) – ( 21 X 3609.97)

= Rs 7213.58 = Rs 7214( appx)

Hence, General Manager’s Commission = Rs 7214

And Work Managers Commission = Rs 3607

8. Mr Tomba purchased a bull dozer costing Rs 5,00,000 on hire purchase basis payable

in 4 equal annual installments of Rs 2,05,000 each. Split the installments into principal and

interest.

Solution:

Hire purchase Price = Rs 2, 05,000 X 4

= Rs 8, 20,000

Cash price = Rs 5,00, 000

Hence total interest charged = Rs 8,20,000 – Rs 5,00 ,000

=Rs 3,20,000

Here sum of the digits = 4+2+3+1=10

Year Installment Interest Principal

156

1

Rs.

2,05,000

Rs

Rs

77,000

2

2,05,000

1,09,000

3

2,05,000

1,41,000

4

2,05,000

1,73,000

9. Ascertain the net income of Shri Singh for the year ended 31st Dec, 2007 if:

(i) Fees received in 2007 = 42,120

(ii) Outstanding fees = 2470

(iii) Expenditure incurred = 11,050

(iv) Outstanding expenses = 1,300

(v) Fees received in advance= 780

(vi) Expenditure incurred in = 650

advance

Solution: Income under the cash basis accounting

( Govt. system of accounting)

= Rs 42,120 – Rs 11,050 = Rs 31,070

Income under accrual basis accounting

(Mercantile system of accounting)

= (42,120 – 780 + 2470 ) – ( 11,050 + 1300 -650)

= Rs 43,810 – Rs 11,700

= Rs 32,110

10. Given:

(i) Opening stock of materials = Rs 50,000

(ii) Closing stock of materials = Rs 45,000.

(iii) Opening stock and closing Stock include stationery amounting to Rs 2000 and Rs

1500 respectively

Trade expenses include payment for stationery of Rs 18,000. Credit purchase of

stationary for Rs 4500 recorded as ordinary purchase. Stationery of Rs 500 has been

consumed by the proprietor.

Determine the amount of the stationery to be charged to profit and loss account.

157

Solution: Stationary to be charged to Profit and loss account

= ( 2000 + 18,000 + 4500) – (1500 +500)

= 22,500

Effects:

(i) Opening stock is reduced by Rs 2000.

(ii) Closing stock is to reduce by Rs 1500.

(iii) Purchase is to reduce by Rs 4500.

(iv) Trade expenses are to be reduced by Rs 18,000.

(v) Drawings will be increased by Rs 500.

12. A computer was purchased in 2000 at a cost of Rs 80,000 and spent Rs 10,000 in its

installation. Find the Book Value (written Down value) of the computer in 2006 if

(a) Depreciation is charged under straight line Method (SLM) and

(b) Depreciation is charged under Reducing Balance Method (RBM)

Take rate of depreciation to be 10% p.a.

Solution:

Cost of computer = Rs 80,000 + Rs 10,000

= Rs 90,000

( cost of installation being included)

(a) Written Down Value (WDV)

Of computer under SLM

= 90,000 – (90,000 X 6)

= 90,000 – 54,000

= Rs 36,000

[ Depreciation per annum = 10/100 X 90,000= 9000]

(b) Written Down Value (WDV) of computer under

Reducing Balances Method (RBD) = 90,000 – (9000 + 8100 + 7290 + 6561 +

5909 + 5314)

= 90,000 – 42,170

= 47,830

Alternately, Book Value of computer at the end of 2006

= 90,000 X (0.9)6

= 47,829.69

Say 47,830

[Depreciation:

2000 = 10% of 90,000 =9000

2001= 10% of (90,000 -9000)= 81,00

158

2002= 10% of ( 81,000 -8100) = 7290 and so on ]

13. The present written down value of a Xerox machine purchased 4 years ago is Rs

59,049. If the rate of depreciation charged is 10% p.a under the reducing Balance

method, find the original cost of the machine.

Solution: Present Book Value of the machine = Rs 59,049

Rate of depreciation = 10% p.a

Method of the depreciation employed = Reducing balance Method

Hence, original cost of the machine

= Rs 90,000

14. You have received the following rate quotation for the supply of stores in your office.

1. M/s highland Agency Rs 2.20 per unit.

2. Surana Works Rs 2.10 per Unit + Transportation charges of

Rs 2,000

Determine the number of units to be purchased so that the total expenditure in both

cases is the same

Solution: Difference in rate quoted = Rs 2.20 – Rs 2.10

= Rs 0.10 pre unit.

Fixed cost = Rs 2000

Hence , the required no. of units = 2000/ 0.10 = 20,000 units.

Verification:

1. @ Rs 2.20 / unit for 20,000 units

= 2.20 X 20,000 = Rs 44,000

2. @ Rs 2.10/ unit + Rs 2000 ( Transportation charge)

= (2.10 X 20,000) + 2,000

= 42,000 + 2000

= Rs 44,000

159

Note: If the purchase is for the quality which is more than 20,000 units firm i. e Surana works

will be cheaper . If the size of the order is less than 20,000 units the 1st firm i.e M/s Highland

Agency will be cheaper.

15. In the 1st week of January , 2009 the following stores have been purchased by the

Electricity Department

Stores Purchased and received:

Jan 2, 2009 1200 units @ Rs 60 per unit

Jan 5, 2009 1000 units @ Rs 70 per unit.

Stores issued:

Jan 6, 2009 1500 units

Find the issue price by using different methods and the value of inventory on the date

of such issue.

Solution:

(i) Under FIFO ( First in First out)

Issue price on Jan 6, 2009

= ( 1200 X 60) + ( 300 X 70)

= 72,000 + 21,000

= Rs 93,000

Value of inventory as on Jan 6, 2009

= ( 1000 X 70) – (300 X 70)

= 7000 – 21,000

= Rs 49,000

Hence, unit price for the purpose of entry in column 8 of G.F.R-41 = Rs 70.

(ii) Under LIFO ( Last in First out)’

Issue price on Jan 6, 2009

= (1000 X 70 ) + ( 500 X 60)

= 70,000 + 30,000

= Rs 1, 00,000

Value of inventory on Jan 6, 2009

= 700 X 60 = Rs 42,000

Hence unit price for G.F.R-41 in Column 8 = Rs 60

(iii) Under Simple Average Method

Issue price on Jan 6, 2009

= 1500 X 65

= Rs 97,500

160

Value of inventory = Rs 44,500

i.e Rs 1,42,000 – Rs 97,500

Hence, unit price for the column in G.F.R-41

16. The Loktak development Authority has been charging depreciation at 20% p.a on its

heavy Machinery costing Rs 10,00,000 under straight line Method w.e.f. 2006 to 2008

. However , it has decided to charge depreciation at the same rate but under Reducing

Balance method respectively from 2006.

Calculate the amount required for adjustment at the end of 2008.

Solution:

Total depreciation charged under S.L.M during 2006 to 2008

= 2,00,000 + 2,00,000 + 2,00,000

= Rs 6,00,000

Total depreciation to be charged

= 2,00,000 + 20% of ( 10,00,000 – 2,00,000)+ 20% of (

8,00,000 – 1,60,000)

= 2,00,000 + 1,60,000 + 1,28,000

= 4,88,000

Hence ,depreciation charged is excess and for which adjustment is necessary

= 6,00,000 – 4,88,000

= 1,12,000

17. The Medical Department , Government of Manipur purchases X-ray machine and

made the following payment in January , 2009.

Cost as per Price list Rs 12,00,000

Less T.D @ 10% 1,20,000

Rs 10,80,000

Delivery charges Rs 4000; installation Charges 20,000; Maintenance charges Rs

16,000 ; Additional Component to boost image Rs 36,000 and spare parts Rs 10,000

161

Solution:

Cost price for the purpose of entry in the Register of Fixed Assets in GFR 40

[ See Rule 190 (2) (i)]

= Rs 10,80,000 (cost)

(+) Rs 4,000 ( delivery charges)

(+) Rs 20,000 (Installation charges)

(+) Rs 36,000( Additional charges)

11,40,000

If the scrap value at the end of 10 years (as estimated ) is Zero , rate of depreciation per

annum under straight line Method will be calculated as under:

Rate of depreciation per annum

= 10% p.a

18. Due to mishandling in the store room 20 units of Article X and 10 units of Article Y

have been reported by the Stores in charge as unserviceable.

The following information pertains to the stores/consumables.

Rs

Article ‘X’ 1000 units @ Rs 20 each 20,000

Article ‘Y’ 1200 units @ Rs 16 each 19,200

Insurance 980

Freight 1100

Sales Tax 1960

Determine the guiding price/ reserved price of the unserviceable articles for the

purpose of disposal

Solution: STATEMENT OF COST

Material X Material Y Details

Amount Unit Amount Unit

Payment to the supplier

Add Insurance

(200: 192)

Rs

20,00

500

1000

Rs

19,200

480

1200

162

Freight

(10:12)

Sales Tax

(200: 192)

610

960

22,000

1000

(-) 20

21,250

1200

(-10)

Total

Less unserviceable due to

mishandling in the stores

22,000 980 21,250 1190

Rate of Issue for ‘X’ = Rs 22.45 (appx)

Rate of Issue for ‘Y’ = Rs 17.86 (appx)

The issue price of Rs 22.45 per unit for Material ‘X’ and Rs 17.86 per unit for Material ‘Y’

may be taken as the guiding price/Reserved price for the disposal of unserviceable goods

under Rule 196 (iii) of G.F.R, 2005.

Note: Insurance , freight and sales tax have been apportioned as below;

(i) Insurance and sales tax in the ratio of cost of materials (200:192)

(ii) Freight in the ratio of the no. of units of materials 910:12).

19. You are given that the closing stock of a firm is twice the opening stock and

percentage of profit on sales is 20% . Find the amount of sales if the figure for the purchases

and opening stock are Rs 50,000 and Rs 14,000 respectively.

Solution:

Given

Opening Stock = Rs 14,000

Closing Stock = Rs (2 X 14,000)

=Rs 28,000

Purchases = Rs 50,000

P.C. of Profit = 20% of sales

Sales = ?

Profit = Sales – Cost of goods sold

Where, cost of goods (COGS)

= Opening stock + Purchases – Closing Stock

= 14,000 + 50,000 – 28,000

163

= 36,000

Now,

Sales = Profit + Cost of goods sold

= 25% of 36,000 + 36,000

=9000 + 36,000

= Rs 45,000

Alternately,

Let Rs X be the amount of sales for the period under reference ,

Then , we have ,

X + 28,000 = 14,000 +50,000+ 20% of X

=> X + 28,000 = 64,000 + X/5

=> 5X + 1,40,000 = 3,20,000 + X

=> 4X = 1,80,000

X = 45,000

Hence the amount of sales (turnover)

= Rs 45,000

20. Del Bros. is a firm dealing in Pest Control. Its owner Syamsunder employs a team of

eight workers who were paid Rs 3000 per month each in the year to December 31, 2007. At

the start of 2008 he raised their salary by 1000 to Rs 3,300 per month each.

On July1, 2008 he hired a trainee at a salary of Rs 2,100 per month .He pays his

employees on the first working day of every month, one month in arrear so that they receive

their salary for January on Feb 1 (if it is working day).

You are requested to calculate:

(a) Amount of salaries which would be charged to the profit and loss Account for

the year ended 31st Dec. 2008

(b) Amount actually paid on salaries during the year.

(c) Amount of outstanding salaries which would appear in the balance sheet as on

31st December , 2008.

Solution:

(a) Salaries to be charged to profit and loss Account for the year ended 31st Dec, 2008

(i) Salaries of 8 employees for 12 months

At Rs 3,300 per month each

(8X3300X12) = Rs 3,16,800

(ii) Salaries of 1 trainee for 6 month

Month at Rs 2,100 per month each

(1X2100X6) = Rs 24,000

Rs 3,29,400

(b) Salaries actually paid in 2008

(i) December , 2007 Salaries paid in

164

January, 2008 (8X3000) = Rs 24,000

(ii) Salaries of 8 employees for January to

November, 2008 paid in February to

December, 2008 (3300 X11X8) = Rs 2,90,400

(iii) Salaries of trainee for July to

November , 2008 paid in August to

December , 2008 (2100 X5) = Rs 10,500

Rs 2,90,400

(c) Salaries outstanding as on 31st December, 2008

(i) 8 employees at Rs 3300 each per month (8X3300) = Rs 26,400

(ii) 1 Trainees at Rs 2,100 per month (1X 2100) = Rs 2,100

Rs 28,500

Addenda

165

A1 Government System of Accounting Vs Mercantile System of Accounting

In Accrual basis accounting transaction will be recorded as and when they are due for

payment. This is what we find in mercantile houses /offices. Where the operation of certain

Government departments working on a commercial or quasi- commercial basis, the Heads of

the units shall be required to maintain such subsidiary pro-forma accounts in commercial

form as may be agreed in between Government and Comptroller and Auditor General (C &

AG). This includes preparation of final accounts as in the case of commercial undertakings.

Formerly, no proprietorship firm, was legally required to maintain account books. But now

under the Taxation Laws (Amendment Act), 1975 read with Income Tax (Ninth Amendment)

Rules, 1981 maintenance of books of account irrespective of income under Accrual basis,

accounting has become compulsory for the Union Government. Under Cash basis, accounting

shall be prepared every year showing the receipts and disbursements for the financial year

running from 1st of April to 31

st of March of the following year, surplus or deficit generated

during the year and changes in Government liabilities and assets. Going one step further, as

specified in the accounting procedure for Panchayati Raj Institution (as amended from 2001

by the Government of India, Ministry of Rural Development) the accounts of each District

Rural Development Agency (DRDA) and Block shall be maintained on accrual basis/double

entry system like other commercial organizations. This may be in view of the successful

implementation of schemes under the poverty Alleviation and Rural Employment through

DRDAs. Moreover, with the growing of PPPs (Public Private Partnerships), J.Vs. (Joint

Ventures) etc. the adoption of accrual basis accounting in various fields has become all the

mere necessary. For taking decision as to whether a project is to be taken up or not and for

enabling an authority as to whether subsidy is to be granted or not accrual basis accounting

has become quite unavoidable.

A2 Classification of Accounts under Govt. System of Accounting:

A Government is an agency of the state, carrying out ideals and objectives through

positive functions. A state is and should therefore giving a taste of good life, rather better life.

A state exists to promote good life, as observed by Aristotle. How it should be done is

decided by the Government, which in a democracy consists of representatives of people. To

be able to discharge its catalogue function Government has to raise money and spend it as per

dictates of the representative of the people.

Naturally, therefore, under the Government system of accounting the classification

becomes much wider, Government accounting comprises three categories of accounts, each

category being sub-divided into major Heads of Account. Also major Heads are further sub-

divided into minor Heads and so on. This process continues till the preparation of detailed

heads of account. The three main accounts are:-

I. Consolidated fund

166

II. Contingency fund

III. Public accounts

Consolidated fund is again classified into:-

1. Revenue and Expenditure Heads.

2. Capital Receipts and Disbursement Heads

3. Public Debts and loans and Advances

Public account is also divided into:-

1. Debts and deposit division

2. Remittance division

A3 Debit Card (Safety measures)

It is a financial tool as good as cash. Formerly traveller’s cheque was used extensively

while traveling from place to place. Now, with the help of debit cards issued by major banks

in India we can draw the money at an ATM. Accordingly debit card should be placed where

we can notice its absence immediately. The tips for enhancing safety of debit card among

other things are:

(a) Subscribing to SMS Alerts,

(b) Not sharing your PIN with anyone and not carrying it with card,

(c) Not disclosing CVV number to anyone (CVV no. is the three digit number

present on the reverse of debit card next to the space provided for signature).

(d) Preserving your charge-slips for tallying them with the account statement and

(e) Keeping banks’ costumers service phone number(s) handy.

Whenever debit card is found lost we have to report the loss to the bank immediately

so that the card is blocked.

A4 Debit Note: It is a term used for evidencing a debit to be raised against a party for reasons like

returning of goods to the supplier or when additional amount is recoverable from a customer.

A5 Credit Note: A credit note is made out when a party is to be given a credit except against the bill

already received from it. It is usual to make it out in red ink. When goods are received back

from a customer a credit note should be sent to him.

A6 Credit Card:

Credit cards are issued by different banks like Citi Bank, Standard Chartered Bank,

State Bank of India, Canara Bank, ICICI and a host of other banks. Presently available

popular credit cards are Visa Card, Master Card, American Express Card and others.

We know that it is a plastic card issued by a bank to a prospective cardholder after

verifying his credibility. The card would contain an embossed 16-digit card number and name

of the card holder. When goods are intended to be bought through the credit card, the seller

fills in a form giving the details of the goods by using the embossed nature of the credit card

167

to print data of the customer on the credit card. The form is to be countersigned by the

customer. A carbon copy of the form is given to the customer. Everyday, the seller sums up

the different amount sold like this and should submit all such forms to his bank. The amount

is credited to his account as deposit and debited to the account of the credit card company.

For this purpose, the Credit Card Company charges commission which varies from 1% to

4%.

A7 Cheque:

A cheque is an unconditional order, drawn upon a specified banker, signed by the

maker, directing the banker to pay or demand a certain sum of money only to the order of a

person or to the bearer of the instrument.

The parties to a cheque are (a) Drawer or Maker (b) Drawee and (c ) Payee. Cheques

may be drawn in two ways : (a) Payable to person named ‘or bearer’ and (b) ‘ to order’. A

cheque may be an open cheque or crossed cheque. A crossed cheque is one which generally

carries two parallel lines in the left hand corner of the instrument .For entries in Book

Keeping and accounts all cheques will be considered to be crossed cheques unless otherwise

stated.

The person who /signs issues the cheque is called ‘Drawer’ (s). In the case of

companies, firms, clubs etc. Cheques are issued by the authorized signatory (ies) . The bank

on which the cheque is drawn is called the ‘drawee’. The person who is named in the cheque

for receiving the payment is called ‘payee’.

A8 Bank overdraft and Bank draft:

Bank overdraft means drawing out from a bank account of more than what has been

deposited in it. Therefore, an overdraft is a credit balance in the books of an enterprise and a

debit balance in the bank pass book. The bank and the borrower agree upon the maximum

size of the overdraft .In effect, an overdraft is a loan by the banker to the customer, but

interest is only charged to the extent and period that the overdraft is used. Account of the

Govt. of Manipur with the Reserve Bank of India was showing overdraft balance in certain

days of a month and salary of the employees could not be paid at times in certain months in

the past.

Bank drafts or Banker’s cheques , on the other hand, is a written order of a bank to

pay a certain some of money to a person in whose favour the draft has been issued. Normally,

bank draft has been issued for payment in another town .It is thus a remittance facility made

available by a bank for its customer and the public.

A9 Obsolescence:

It is the process of becoming obsolete. It is the decline in the value of fixed asset

through external causes such as technological change or change in demand. In accounting, its

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significance is that it is one of the factors leading to a reduction in the useful economic life of

fixed asset.

A10 Red ink interest:

In case the due date of a bill falls after the date of closing the accounts, generally no

interest is allowed for that. However, interest from the date of a closing to such due date is

written in the appropriate side of the ‘current Account’. This interest is called Red ink interest

.This Red ink interest is treated as negative interest.

A11: Voucher:

Any document in proof of the payment made or received is termed as voucher. It

includes T.R-5,A.P.R, Cash memo, bills and so on provided they can establishthe transaction.

In Book keeping and Accounts we come across with a type of voucher (specially in

the Double Entry system). This voucher does not represent any receipt or payment in cash.

Rather, it is a document used to prove credit transactions and non cash transactions .Internal

transactions like goods purchased on credit, depreciation on assets, outstanding expenses,

accrued income etc. are goodexamples. The transactions recorded in the journal voucher is

analysed in order to show the effect of the transaction. In short Journal entries made by using

the rules of debit and credit are Journal Vouchers.

To record purchase of Computer, for example , the following form of voucher (new form)

may be used

Voucher No. Dated : 3rd

June, 2009

Debit Computer Account Rs

88,000

Received Rupees Eighty thousand

Rs 80,000/-

+ VAT 8,000

Purchase of Computer from……………….

as per cash memo no…………………….

88,000

Credit Cash Account 88,000

(Payment of cash for computer)

Sd/-

Accountant

A12 Journalised ledger:

Cash book performs the functions of Journal and ledger at the same time .Cash book

acts as ‘Day Book’ i.e the book in which all cash transactions are recorded as soon as it

occurs. It also acts as a ledger in so far as its ruling are concerned .Hence, cash book is called

Jounalised ledger.

A13 Elite current account: It is a type of current account which can be opened with ICICI Bank. Its features are:

(a) Deposit of Rs. 75, 00,000 at base branch/branch per month.

(b) Free clearing, check book charge, Business banking debit card, up

country cheque collection and pay orders and demand draft.

(c) Monthly average balance will be Rs. 10, 00,00.

Revenue

Stamp

169

In addition the ICICI Bank offers for Roaming current account with different

features

A14 NPS (New pension system)

Question 1: What is the new Pension System?

Ans: It is a system where individuals fund, during their work life , their financial security

for old age when they no longer work. All those who join would get a Permanent Retirement

Accounts (PRA), no which can be accessed online and through so called points of presence

(POPs). A central record keeping agency will maintain all the accounts, just like a depository

maintains demat accounts for shares. Six different pension fund managers (PFMs) would

share this common CRA infrastructure. The PFMs would invest the saving people put into

their PRAs, investing them in three asset classes, equity (E) , government securities (G) and

debt infrastructure that entail credit risk ( c) , including corporate bonds and fixed deposits.

This contribution would grow and accumulate over the years , depending on the

efficiency of the fund manager. The NPS in this form has been availed of by civil servants for

the past one year. Subscribers can retain their PRAs when they change jobs residence, and

even change their fund mangers and the allocation of investments among the different asset

classes, (although exposure to equity has been capped at 50%).

Question 2: Where can people signup for the NPS? Ans: People can subscribe to the scheme from any of 285 PoPs across the country. These are

run by 17 banks – SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank,

Citibank, IDBI, Orinetal Bank of Commerce, south Indian Bank, Union Bank of India- four

other financial entities, LIC, IL & FS , UTI Asset Management and Reliance Capital. A

subscriber can shift his pension account from one PoPs to another .Subscribers can choose

from six fund managers-ICICI Prudential, IDFC, Kotak Mahindra , Reliance Capital ,SBI and

UTI.

Question 3: Is the scheme open to all? Ans: NPS is available for people aged between 18 years and 55 years.

Question 4: How often should a subscriber contribute to NPS? Ans: The minimum amount per contribution is Rs. 500, to be paid at least four times in a

year. The minimum amount to be contributed in a year is Rs. 6,000.

Question 5: How will the subscribers get the money back?

Ans: If the subscriber exits the scheme before the age of 60 .she/he may keep one fifth of

the accumulated saving and invest the rest in annuities offered by the insurance companies.

An annuity transforms a lump sum spent on buying the annuity into a steady stream of

payments for the rest of the annuity holder. Now, how long an annuity buyer would live is

something that take a life insurance company expertise to compute and that is how they come

into picture. Insurance companies offer flexible investment and payment on annuities. A

person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy

an annuity and can take the rest of the money out in one go or in installment . If a subscriber

dies, the nominee has the option to receive the entire pension wealth as a lump sum.

Question 6: Is the scheme tax free?

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Ans: Long term saving have three stages: contribution, accumulation and withdrawal. The

NPS was devised when the government was planning to move all long term savings to a tax

regime called exempt –exempt taxed (EET) , standing for exempt at the time of contribution ,

exempt during the period when the investment accumulates and taxed at the time of

withdrawal . So, NPS come under the tax regime EET. However, the government could not

muster the politics to change the taxation regime of EET on several saving scheme. So, the

pension fund regulator has taken up wit the financial ministry the need to remove the

asymmetry in tax treatment between the NPS and other scheme such as PPF. In any case, the

amount spent on buying an annuity would be exempt from the tax.

Question 7: What is the default allocation of savings towards different asset classes for

those who do not make an active choice?

Ans: For a saver not yet 35 years of age, half the investments will go into asset class E, one

fifth into asset class G, and the rest into the asset class C. Above the age of 35, the default

proportion going to equities would come down and the proportion going to equities would

come down and the proportion going to government securities, go up. By the age of 60, these

investments will gradually be adjusted so that only one tenth remains in corporate bonds and

80% in central and state government bonds.

Question 8: How does the NPS compare with the mutual funds?

Ans: Since the NPS is meant for post retirement financial security, it does not permit

flexible withdrawal as are possible in the case of mutual funds. Fund management charges

are ridiculously low (0.0009% a year) , as compared with the mutual funds . The cost of

opening and maintaining a permanent retirement account, and the transaction charge on

changing address, pension fund manager, etc are around Rs 400 now.

Question 9: What kind of returns would the NPS generate?

Ans: The NPS generate an average return in excess of 14% in the last financial year (2008-

09) the first one in which it operated, handling the corpus of civil service pensions.

A15: NPS disappoints (Too Costly for a Mass retirement Scheme):

As the contours of the new pension scheme (NPS) unfold, it is becoming clear that it

is an expensive, even unattractive, mass market retirement scheme. The fixed charges of the

NPS are very steep, which loads the scheme in the favour of wealthier investors. The pension

regulator should have negotiated harder. Each subscriber is required to pay an annual record

keeping charge of Rs 350. In addition, any subsequent transaction would invite a Rs 30 levy –

Rs 10 by the CRA (Central Record Keeping Agency) and Rs 20 from the intermediaries -

point of presence (PoPs). Since there will have to be at least four transactions every year, the

minimum annual cost come to Rs 470. The base charges would drop to about Rs 350 a year

once the subscriber number increase, but even that would be steep for the lowest bracket

saver who put in the minimum four contribution of Rs 500 each. For every Rs 2,000 he

contributes to the scheme, such a saver is paying nearly Rs 350 in fixed costs every year.

Why such small saver should not put the entire Rs 2,350 in a fixed deposit or other scheme

such as the public Provident fund? On the other hand, those having provident fund account

could top up their contribution instead of putting in the NPS. To be fair, as contributions

build up, total charges would fall as a percentage of assets because the fund management fee

for NPS is very low . But the idea is to encourage small saver and they will be put off by the

big initial levy.

171

One solution is to reduce the charges for contributions up to a threshold and increase

for those investing large be back-loaded, initially low but can increase as contribution rise so

that as a percentage of total funds they remain low. Alternatively, the government could pitch

in and subsidire small saver giving the key role the NPS is expected to play in providing old

age security. Besides, if it does gather momentum, the long term orientation of the scheme

could help fund infrastructure in a big way.

A16: Compound Journal/Compound Entry:

In a situation where a single transaction involves at least three accounts, all the accounts to be

debited are listed first and then all the accounts to be credited are entered in the Journal. Such

a journery entry is called a compound entry or compound journal. Such entry is also passed

when the transactions with similar feature occur on the same day and one account is common.

Example of a Compound entry is :

Cash a/c Dr 60,000

Furniture a/c Dr 15,000

Stock of goods a/c Dr 25,000

To Capital a/c 1,00,000

(Being Capital brought in cash furniture and stock of goods)

A17: Transposition error and transplacement (or slide) error:

A Transposition error occurs if the figures are disarranged. For example 7598 may be

wrongly written as 5789. A Transplacement error occurs when the digits , without any

disarrangement , of the number move to the left or right of the decimal point. For example,

158.68 may be written as 15.868.

Transplacement Error Transposition Error

158.68 7598

15.868 5789

148.812 1809

In both cases the difference is exactly divisible by 9.

A18: Accounting Information: External User

Management Group

• Board of Directors

• Partners.

• Managers.

• Officers.

Accounting Information

Financing Ground

• Investors

• Landers

• Suppliers

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From the above diagram it is seen that the accounting information is needed by two

sets of people – internal and external. Internal users are associated with the management of

the concern whereas external users consist of several explicit groups.

A19: Verification of Stock In Mercantile system of accounting stock taking is done once a year or once in six

months. The actual quantity of each item is listed and compared with book figures. If no

mistake or wastages or theft has taken place, the books figure (as per Bin card or stores

Ledger should agree with the actual physical stock. If there is any disagreement, it should be

capable of explanation .But since this involves giving through the records of the whole of the

year and trying to remember what happened throughout the year generally the disagreement

cannot be explained and the book figure adjusted. But stock verification sheet to record the

discrepancies, if any , and the action taken report will have to be submitted to the higher

authority.

Under Government system of Accounting Procedure for verification of stock is given

in Rule 192(3) of G.F.R. 2005 which among other things states that a certificate of

verification along with the findings shall be recorded in the Stock Register. Rule 192(1),

192(2) and 194 relate to physical verification of Fixed Assets, Consumable and Library

Books respectively.

A20: Valuation of Stock

Valuation of stock particularly, the stock at the end of the accounting year is a very

important work. In Mercantile accounting it is all the more important because if it is not

properly valued it has the impact of either inflating or deflating the profit or loss of the

concern for the given period. It has also the effect of creating secret reserve.

In the Government system of accounting although there is no specific provision for it Rule

196(III) of the G.F.R. 2005(Disposal of Goods ) states that the book value, guiding price and

reserve price which will be required while disposing of surplus goods should also be worked

out. In case where it is not possible to work out the book value, the original procurement

price of the goods in question may be utilized. A report of stores for disposal shall be

prepared in G.F.R-17.

In Mercantile accounting the guiding principle is to value stock at cost or market price

whichever is low .It will not be shown in the Trial Balance if it is not an adjusted or modified

Trial Balance. Every possible care will have to be taken for correctly valuing the closing

stock particularly when stock taking could not be done on the last day of the accounting year.

Illustration 1: The Mohon Motors Ltd. a dealer in second hand cars has five vehicles in stock at the

end of the financial year 2007-08.

Public Group

• Government

• Labour Union

• Employees

• Customers

173

Car FAIT Ambassador

Mark II

Maruti

Esteem

Maruti

800

Zen Total(Rs)

Value

(Market

Price)

95,000 1,55,000 2,65,000 1,25,000 2,30,000 8,70,000

Cost 90,000 1,15,000 2,75,000 1,00,000 2,00,000 7,80,000

You are required to calculate the value of stock to be included in the Balance sheet of the

Company.

Solution:

The value of stock will be at cost or market price (Net Realisable Value) whichever is

low.

Car FAIT Ambassador

Mark II

Maruti

Esteem

Maruti

800

Zen Total(Rs)

Value

(Rs)

95,000 1,55,000 2,65,000 1,00,000 2,00,000 7,70,000

Hence , value of closing Stock will be Rs. 7,70,000

Illustration 2:

Mr Chaoba closes his books of account on 31st December, 2007 on which date he

could not take stock. The stock was taken on January , 2008. Following the transactions

during Jan 1, 2008 to Jan 10, 2008.

(a.) Purchases Rs 45,000

(b.) Purcahses return Rs. 3,000

(c.) Sales Rs 80,000

(d.) Sales return Rs 2,000

(e.) Inventory taken on 10th

Jan, 2008 Rs 75,000

(f.) Gross Profit ratio 2500 on net sales.

Find the value of stock on 31st December, 2007.

Solution:

(A) Sales Rs 80,000

Less return In 2,000

Add Value of stock on 10th

Jan,2008 78,000

75,000

1,53,000

(B) Purchases Rs 45,000

Less return out 3,000

42,000

2,000

Add Margin of profit 44,000

(25% of 78,000) 19,500

Value of stock (A-B) =Rs 89,500 Rs.63,500

A20: Joint Venture:

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It is a combination of two or more parties to undertake a commercial venture and to

share profit (and loss) thereof in agreed proportion. The two parties may agree to undertake

the construction of buildings in a housing colony jointly or sell a particular lot of goods or

construction of a Dam to generate hydro electricity and irrigation- both the parties sharing the

benefits. It is undertaken when different parties have mutual advantages in taking a particular

business venture together without using a firm name. It is temporary and no liability attaches

to any party after the transaction or the particular series of transactions is complete. In the

absence of an agreement on the point, parties will share profit and losses equally. The

Government of Manipur is likely to enter into Joint Venture with a Company for the

Construction of Tipaimukh Dam in Manipur. Joint venture Accounts can be kept in the

manner that will suit the co-ventures in a particular case. Accounting treatment differs in (a)

situation arising out of maintaining separate set of books and (b) situation arising out of not

maintaining a separate set of books.

A. 21 Mutual Fund:

Mutual Funds are recent entrants in the field of investment and are fast –

emerging as a buffer between gullible but vulnerable retail investors and treacherous

stocks market. Anywhere in the world they have proved to be safe intermediary in the

capital and money market. They are non-depository financial intermediaries. Mutual

Funds act as mobiliser of savings, particularly, from the small and household sectors

for investments in stock and money market. Earlier private sector Mutual Funds were

not permitted but now to ensure healthy competition, as per SEBI (Securities and

Exchange Board of India) policy guidelines they can also be floated in private sector.

ICICI Prudential Mutual Fund is one example of Private sector M.F. whereas SBI

M.F. is an example of Public sector. At present India has 32 Mutual Fund houses

Based on its operation Mutual Fund schemes may be classified as (a) Open ended and

(b) close ended.