CHAPTER-1 INTRODUCTION TO ACCOUNTING Accounting …€¦ · 3/8/2018 · RUSHABH SHAH 1 3CA1355...

RUSHABH SHAH 1

3CA1355 Managerial Economics and Financial Management

CHAPTER-1 INTRODUCTION TO ACCOUNTING

Accounting Introduction

Accounting is basically a data processing activity which convert raw data into some

meaningful information.

It is a communication process that transmit information to the internal and external

groups.

Banks and creditors are consider as external groups while executives and promoters

are consider as internal groups.

Generally accounting information supplied to external users is known as Financial

Accounting.

The accounting information supplied to internal users is known as Management

Accounting.

Financial Accounting presents the information in an aggregated manner while the

Management Accounting presents the same information in segregated manner.

Accounting is a language of Business.

Accounting maintain systematic record of Business Transactions.

Accounting maintain the records under certain laws e.g. Company law, Company

Act1956, Income tax law1961 etc.

If the company is not maintaining account properly it result into a violation of some law.

Difference between Internal Users and External Users

Internal Users External Users

Management (Chairman, MD, Board of

Directors), Executives are internal users

Investors, Banks, Financial Institutions,

Customers, and Employees etc. are

External Users.

They use Segregated information

processed in the form of Management

Accounting.

They use Aggregated information

processed in the form of Financial

Accounting.

The output of the Management Accounting

is reports, cost sheet, budgets, variance

analysis and many other form of specific

studies.

The output of the financial accounting is

Profit and Loss Account and Balance

Sheet.

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Accounting as an Information System

The raw data are numerous transactions and events (i.e. inputs) and the outputs

are profit and loss account and the balance sheet.

The accounting process is the journal ledger and trial balance.

The schematic diagram is as follows.

The numerous transactions occurring during the whole year and events considered

by management at the end of the year are ultimately presented in balance sheet.

Thus balance sheet provides the meaningful information through the accounting

mechanics of journalizing, ledgering, and summarizing in trial balance.

The arrows in the above diagram indicates the step by step processing from

transactions to balance sheet.

Definition of Accounting:

Accounting is an art of recording, classifying and summarizing in a significant manner

and in terms of money, transactions and events which are in part at least of financial

character and interpreting the results thereof.

Why Accounting is an Art?

Inputs Transaction and

Events

Processing

Journal-> Ledger-> Trial Balance

Output

Profit and Loss Account ->

Balance Sheet

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Various firms have different or diverse nature of transactions. E.g. the transaction of

hotel varies from hospitals. So account has to be made universally acceptable such that

each and every different organizations does calculations in the same way. Thus account

is an art.

Objectives of Accounting

1. Providing suitable information with an aim of safeguarding the interest of business

and its proprietors and other connected with it.

2. To emphasise on the ascertainment and exhibition of profits earned or losses incurred

in the business.

3. To ascertain the financial position of the business as a whole.

4. To ensure accounts are prepared according to some accepted accounting concepts and

conventions

5. To comply with the requirement of the companies Act, Income tax act etc.

Steps of Accounting Process

1. Recording:

Recording all the transaction in subsidiary book for the purpose of future

record reference it is referred as ‘Journal’.

Thus recording is journalizing.

Journal is daily chronological record. It is known as ‘Rojmal’.

2. Classifying:

All recorded transactions in subsidiary books are classified and posted to the

main book of accounts known as ‘Ledger’.

Ledger is a classified record of each account it is known as ‘Khatavahi’.

3. Summarizing:

All recorded transactions in main book will be summarized for the

preparation of Trial Balance, Profit and Loss Account and Balance Sheet.

4. Interpreting:

Interpreting refers to the explanation of the meaning and significance of the

result of financial accounts and Balance Sheet so the parties concerned with

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Business can determine the future earning, ability to pay interest, liquidity

and profitability of a sound dividend policy.

Limitations of Accounting

Accounting provide only limited information to the management.

Accounting consider only those transactions which can be measured in terms of money

or quantities.

It does not take quality into considerations.

Accounting uses only historical data to provide information.

Branches of Accounting

The main function of accounting is to provide the required information to the different

party who are interested in the organization. So in order to solve the needs of management

and outsiders various new branches of accounting has been developed.

The main three branches of Accounting are

1. Financial Accounting:

Financial Accounting refers to the branch of accounting which deals with

financial account of a business.

It is mainly concerned with preparation of two important statements.

(i) Income statement (profit and loss statement)

(ii) Positional Statement (Balance Sheet)

This information serves the need of all those who are not directly associated with

the management of business.

There are certain limitations:

(i) It reveals only overall result of the business.

(ii) It is static in nature.

(iii) There is a possibility of manipulation of financial account.

(iv) It fails to provide adequate data for managerial decision making.

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2. Cost Accounting

It refers to the branch of accounting dealing with the classification, recording,

allocation, summarization and reporting of amount and prospective cost.

(i) Classification: Classification which refers to grouping of like items of

cost into a common group.

(ii) Recording: Recording which refers to costing of cost transaction into

various ledgers maintained under cost accounting system

(iii) Allocation: Allocation which refers to allotment of cost to various

products and departments.

(iv) Summarization: Summarization which refers to considering cost

information for quick interpretation and for taking action for improving

efficiency.

(v) Reporting: Reporting which refers to furnishing of cost data on regular

basis.

3. Management Accounting

Management Accounting refers to the application of professional knowledge and

skill in the preparation and the presentation of accounting information in such

a way to assist management in the formulation of policies and in planning, and

control of the operation of business.

From Book

(1) Financial accounting refers to a branch of accounting which deals with financial

transactions of a business. It is mainly concerned with preparation of two

important statements, viz.,

(a) Income statement or profit and loss account.

(b) Positional statement or Balance Sheet. This information serves the needs of all those

who are not directly associated with the management of business. Thus financial

accounts are concerned with external reporting as it provides information to external

authorities. In this book the entire study relates to financial accounting. However

financial accounting suffers from certain limitations. These limitations are as follows :

(a) It provides only past data.

(b) It reveals only over all result of the business.

(c) It is static in nature.

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(d) There is a possibility of manipulation of financial account.

(e) It fails to exercise control over resources of the business.

(f) It fails to provide adequate data for managerial decision making.

(g) It fails to provide adequate data for price fixation.

(h) It does not use any technique to reduce expenses which is responsible for decrease in

profit.

To overcome these disadvantages the other branches of accounting was evolved.

(2) Cost Accounting. Kohler in his Dictionary for Accountants defines cost accounting

as that “branch of accounting dealing with the classification, recording, allocation,

summarisation and reporting of amount and prospective costs”. An analysis of this

definition reveals the following aspects of cost accounting.

(a) Classification which refers to grouping of like items of costs into a common group.

(b) Recording, which refers to posting of cost transactions into various ledgers maintained

under cost accounting system.

(c) Allocation, which refers to allotment of costs to various products or departments.

(d) Summarisation which refers to condensing cost information for quick interpretation

and for taking prompt action for improving the inefficiencies.

(e) Reporting, which refers to furnishing of cost data on a regular basis so as to meet the

requirements of management.

(3) Management Accounting. The terminology published by the Institute of Cost and

Management accounting, London, defined management accounting as “the application of

professional knowledge and skill in the preparation and presentation of accounting

information in such a way as to assist management in the formulation of policies and in

the planning and control of the operation of the undertaking. It is a branch of accounting

which furnishes useful data in carrying out the various management functions such as

planning, decision making and controlling the activities of a business enterprise.

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What are Transactions and Events?

Transactions

In the world of business numerous transactions are transacted with the outside

world.

The 7 transaction model for that is as under.

First three of them are of non-recurring and relates to the creative phase and the

later four transactions are recurring and relate to the operative phase of the

business.

(a) Non-Recurring Transactions

(i) Equity(E) : Original capital contribution of owners including reinvested

profits claim of owners.

(ii) Liability(L) : Outside debt funds created on the basis of primary equity

funds.

(iii) Assets (A) : Operating assets are primarily consist of investments of above

E + L funds in (a) fixed assets and (b) net current assets (or working

capital).

(b) Recurring Transactions

(iv) Purchases (P) : Purchases of finishing goods by trading organizations and

raw materials by manufacturing organizations. This is transacted with the

suppliers.

(v) Sales (S) : Sales of the finished goods. This is transacted with the

customers.

(vi) Expenses (Exp) : Every business unit has to incur varied types of

manufacturing (e.g. Factory insurance), administrative (e.g. salary to

executives) and sales expenses (e.g. advertisements) for conducting the

business activity.

(vii) Income (I) : In the business practice some form of income occurs like

interest, rent, commission received. While considering periodic profits

such incomes are considered.

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It should be carefully noted that non-recurring part of above categories transactions

indicates the one time creative part which is shown in balance sheet format while

the recurring part indicates repetitive operating transactions are shown in the profit

and loss account.

Balance Sheet (Non-Recurring) Profit and Loss Accounts (Recurring)

Equity

Liability

E

L

Assets A Purchases

Expenses

Profits

P

Exp

?

Sales

Incomes

S

I

Events

Events are the situations which affect the profit ascertainment even though they do

not involve any transaction with the outside parties.

Events are decided on the last day of the accounting year and is decided by the

internal management.

They result into either inflation or deflation of the profit.

Difference between Transactions and Events

Transactions Events

Transactions are always with some outside

party

Events are decided internally by the

management.

They are objective in nature resulting from

the negotiations and resultant contracts

legally enforceable.

They are subjective in nature, decided by

the need of the management to inflate or

deflate profits of course within the legal

provisions and professional

recommendations.

They are supported by documentations like

bills, invoices, contracts, receipts etc.

As they are internal there is no legal

documentation. However they are required

to be disclosed to the external users.

Transactions are occurring throughout the

year.

Events are considered only on the last day

of the accounting year.

Transactions primarily creates or converts

the equity, liabilities or assets.

Events occur only after transactions, and

they result into either increase or

decrease into equity, liabilities or assets.

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Book Keeping

Definition: It is the Science and art of correctly recording in books of accounts all those

business transactions that result in the transfer of money or money’s worth.

SYSTEM OF BOOK KEEPING

Book keeping can be prepared and maintained under two systems. They are known as

(a) Single Entry System and (b) Double Entry System.

(a) Single Entry System :

Only records of cash and personal accounts are maintained.

This system is adopted by small business enterprises for the sake of their

convenience.

Under this system only personal accounts of debtors and creditors and a

cash book is maintained.

As only one aspect of the transaction is recorded under this system, it is

called a Single entry system.

(b) Double Entry System :

As such we find two aspects in every business transaction viz., the receiving

aspect and the giving aspect.

Under this system, every transaction is recorded twice, one on the debit side,

i.e., the receiving and the other on the credit side, i.e., giving aspect.

For example, when a businessman buys goods worth Rs. 10000, he

exchanges money for goods.

The features of double entry system can be summarised under the following

points:

(a) It records the two aspects of a transaction.

(b) It records both personal and impersonal aspects of a transaction.

(c) While one aspect is debited, its corresponding aspect is credited.

(d) Because debit and credit aspects of all transactions are recorded, the total of

debit and credit columns are always equal. This ensures the arithmetical accuracy

of accounts.

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ADVANTAGES OF DOUBLE ENTRY SYSTEM OF BOOK KEEPING

(a) It records all the transactions considering both the aspects of the transactions.

Hence it gives the complete information about the business.

(b) By recording both the debit and credit aspects it ensures the mathematical

accuracy or correct preparation of accounts.

(c) It enables to prevent misappropriation and frauds involved in recording the

transactions.

(d) By recording all types of transactions it reveals the correct result of the business

for a year.

(e) By recording all assets, liabilities and capital it reveals the true financial position

of the business.

(f ) The accounting system satisfies external parties including government, tax

authorities etc.

DISADVANTAGES

(a) It involves maintenance of many books and ledgers which are very expensive.

(b) It involves more of clerical labour.

Book Keeping is concerned with two important steps involved in the procedure of

accounting. They are: (I) recording of all business transactions in a book known as

Journal and (ii) posting all recorded transactions into another book known as a

ledger.

Subsequently, the various accounts in the ledger are balanced to know the net

effect of all transactions. In brief, the subject matter of book keeping includes

preparation and maintenance of all records up to the stage of preparation of a

statement known as Trial Balance.

The scope of book keeping is limited to writing of journal and ledger, closing of

journal and preparing the trial balance.

In a book keeping transaction and event is splitted into two parts, and are recorded

as debit and credit accounts.

The book keeping is also popularly known as ‘Double Entry Book Keeping’.

Book keeping confines only to financial accounting but accounting scope is wider

than book keeping e.g. cost accounting, management accounting etc.

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Book keeping is an art of recording the business transaction in the books of account

in a systematic manner.

Person maintaining records of the business transactions is known as a ‘Book

Keeper’.

OBJECTIVES OF BOOK KEEPING

The objectives of book keeping can be summarised under the following headings :

(A) Main Objectives:

The main objectives of book keeping are as follows :

(a) To know the result of the business over a period of time. The result of a business

may be profit or loss.

(b) To know the financial position of business at a point of time. This can be known

by presenting all assets and liabilities in the form of a statement known as a Balance

Sheet.

(c) To maintain all records for a given period to serve as permanent reference in

future.

(d) To know the amount which a business owes to others for having bought goods

on credit basis.

(e) To know the amount due to business by others on account of goods sold on

credit basis.

(f) To meet provisions of various laws as in the case of Joint Stock Companies which

have to prepare accounts according to the Provisions of Companies Act 1956.

(B) Other Objectives:

These include:

(a) To improve the business on the basis of past performance.

(b) To know the composition of capital in terms of size, the causes for change in

capital structure and whether maximum use of the same is made.

(c) To exercise control over expenses thereby to increase profitability of the business.

(d) To know the position of cash so that in case of need further amount can be

arranged.

(e) To meet the requirements of tax and legal authorities.

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CLASSIFICATION OF ACCOUNTS

There are two basis of classification of accounts, viz., (i) Traditional or English System

and (ii) Modern or American System.

1. Traditional or English System of Classification of Accounts:

Under this system accounts are broadly classified into two types, viz., (i) Personal account

and (ii) Impersonal account.

(A) Personal Account. Personal accounts are accounts of persons with whom the

business deals. Personal accounts may take the following forms:

(a) Natural personal accounts such as Ashok’s a/c, Vivek’s account, Naveen’s a/c,

Sunil’s a/c etc.

(b) Artificial persons or body of personal accounts such as State Bank of Mysore a/c,

M.C.C. Publications a/c, Associate Traders a/c. etc.

(c) Representative personal accounts representing outstanding expenses, prepaid

income a/c. Examples: Salary outstanding a/c, prepaid insurance a/c, interest received

in advance a/c.

(B) Impersonal Account. Impersonal account is classified into two types: viz., (a) Real

account and (b) Nominal account.

(a) Real Account : Accounts of Assets and possessions or things owned by business are

called real accounts. Real accounts are again classified into two types viz., (i) Tangible

asset a/c and (ii) Intangible asset a/c.

(i) Tangible Asset a/c: Tangible asset a/c is an a/c relating to things which can be

touched, felt, measured, purchased, sold etc. Examples are Land a/c, Building a/c, Stock

a/c etc.

(ii) Intangible Asset a/c: represent such things which cannot be touched, but can be

measured in terms of money. Examples are goodwill a/c, trade mark a/c, patent a/c.

(b) Nominal Account: Accounts in which expenses, losses, income or gain of business

are recorded are known as nominal accounts. Examples of nominal accounts are wages

a/c, discount received a/c, interest paid a/c.

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Problem 1. Classify the following accounts :

1. Buildings a/c

2. Royalty a/c

3. Loan a/c

4. Murthy’s a/c

5. Garden English School a/c

6. Avinash a/c

7. Vasavi Trading a/c

8. Goodwill a/c

9. Salary A/c

10. Interest A/c

11. Bank A/c

12. Cash A/c

13. Capital A/c

14. Furniture A/c

15. Bills Receivable A/c

16. Machinery A/c

Solution

1. Building a/c—Real a/c

2. Royalty a/c—Nominal a/c

3. Loan a/c—Personal a/c

4. Murthy’s a/c—Personal a/c

5. Garden English School a/c—Personal

a/c

6. Avinash a/c—Personal a/c

7. Vasavi Trading a/c—Personal a/c

8. Goodwill a/c—Real a/c.

9. Salary A/c – Nominal A/c

10. Interest A/c – Nominal A/c

11. Bank A/c – Personal A/C

12. Cash A/c – Real A/C

13. Capital A/c – Personal A/C

14. Furniture A/c – Real A/C

15. Bills Receivable A/c – Nominal A/C

16. Machinery A/c – Real A/C

Rules of Debit and Credit under English System

1. Personal Account :

Debit the Receiver

Credit the Giver

2. Real Account :

Debit what comes in

Credit what goes out.

3. Nominal Account :

Debit all expenses and losses

Credit all incomes and gains.

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Problem 2. Examine the following transactions and determine the two accounts

affected according to the double entry book keeping.

(a) Bought goods for cash Rs. 2000

(b) Sold goods for cash Rs. 1000

(c) Received cash from Kulkarni Rs. 500

(d) Received interest on loan Rs. 180

(e) Paid salary to Manager Rs. 5000

(f) Paid rent Rs. 1500

(g) Purchased goods from Desai & Co. Rs. 1500

(h) Goods sold on credit to Lalit Rs. 1000

(i) Purchased motor car equipment from Mumbai Motor Agency and paid Rs. 8900

(j) Purchased machinery from India Tools Limited Rs. 7000

(k) Withdrew cash for household expenses Rs. 300

(l) Introduced further Rs. 50000 into business in cash.

Solution

The two account involved in the transactions are :

(a) Purchases a/c and cash a/c

(b) Sales a/c and cash a/c

(c) Kulkarni’s a/c and cash a/c

(d) Interest a/c and cash a/c

(e) Salary a/c and cash a/c

(f) Rent a/c and cash a/c

(g) Purchases a/c and Desai & Co. a/c

(h) Sales a/c and Lalit’s a/c

(i) Motor car equipment a/c and cash a/c

(j) Machinery a/c and India Tools Ltd. a/c

(k) Drawings a/c and cash a/c

(l) Capital a/c and cash a/c.

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Problem 3. State, giving reasons, the accounts you would debit and credit for each

of the following transactions :

1. Mr. Rao commenced business with a capital Rs. 1,00,000

2. Bought machinery Rs. 30000

3. Bought goods for cash from Ram Manohar Rs. 5000

4. Sold goods for cash to Harish Rs. 4000

5. Purchased goods from Jailal on credit Rs. 22000

6. Opened an account with Canara Bank and Deposited cash Rs. 20000

7. Credit sales to Hari Rs. 1700

8. Bought office furniture from Modern Furniture Ltd., CASH Rs. 3050

9. Sold a spare part of Motor car and inverted proceeds in business Rs. 3500

10. Paid cartage to Deluxe Roadlines Rs. 700

11. Paid trade expenses Rs. 200

12. Paid advertisement expenses to Anil agencies Rs. 200

13. Received interest from Anil Rs. 500

14. Deposited cash into Bank Rs. 1000

15. Paid Rent Rs.1500

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MODERN OR AMERICAN SYSTEM OF CLASSIFICATION OF ACCOUNTS

Under American system accounts are classified into the following types

(i) Assets : It refers to the property owned or possessed by the businessman. Assets can

be of the following types

(a) Fixed assets : Such assets are used for carrying on the business but not for immediate

sale. Some examples of fixed assets are land and building, machinery, furniture etc.

(b) Currents assets : These are the assets which are capable of converting into cash

immediately without much difficulty, usually within a period of one year. These are the

assets which are used in the business in the normal course of running the business.

Current assets change from period to period. Hence they are also called as fluctuating

assets. Examples of current assets are stock of materials, Debtors, cash, bills receivable

etc.

(c) Tangible Assets : These are the assets which can be touched and felt. Examples of

tangible assets are stock of materials, vehicles, building etc.

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(d) Intangible Assets : These assets cannot be touched and felt but they have money

value to the business. Examples of intangible assets are goodwill, trade mark, patent

rights.

(e) Wasting Asset : These assets exhaust as they are continuously used. Mineral ores

such as iron ore, quarries etc., are common examples of wasting asset.

(f) Liquid Asset : These are a type of current assets which are in the form of cash or

readily convertible into cash. Examples of liquid assets are cash, bills receivables etc.

(g) Fictitious Assets : These refer to worthless assets. They cover expenses and losses

which are shown for the sake of meeting legal requirements or for technical purpose.

Examples of such assets are preliminary expenses, advertisement expenses etc.

2. Liability. It refers to the amount due by the business to others. Liabilities may be of

the following types :

(a) Current Liabilities : They represent short term liabilities which are to be paid within

a period of one year.

(b) Fixed Liabilities : They represent long term liabilities payable after a long period of

time.

3. Capital. Capital generally refers to the amount or resources invested by the owner in

the business. In accounting language it is taken to mean excess of assets over liabilities.

Capital = Assets – Liabilities.

4. Revenue and Profit. Revenue and profit is taken to mean income earned by a business

during a given period of time. These two items constitute the liability of the business as

profit is given to businessman as a reward for the risk taken by the proprietor.

5. Expenses and Losses. The cost incurred during the course of running the business

is known as expense. The excess of expense over income constitute loss.

Rules of Debit and Credit under American System

The rules of debit and credit under American system is based on Accounting equation.

The rules are as follows :

1. Asset :

Debit increase in asset

Credit decrease in asset.

2. Liabilities :

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Debit decrease in liability

Credit increase in liability.

3. Capital :

Debit decrease in capital

Credit increase in capital.

4. Income and Gain :

Debit decrease in income and gain

Credit increase in income and gain.

5. Expenses and Losses :

Debit increase in expenses and losses

Credit decrease in expenses and losses.

It is to be noted that expenses and losses and income and gain are not the components

of accounting equation. Their effect is shown through capital account. The rules given for

them is only for an easier understanding.

Problem 4. Identify the debit and credit aspects of the following transactions under

American system giving reasons for the same.

1. Mr. Soumya Gupta started business with a capital Rs. 5,00,000

2. He purchased machinery on credit from Ram Rs. 40,000

3. He purchases goods for cash Rs. 1,00,000

4. He sold goods to Satish for Rs. 50,000

5. He paid rent for the month Rs. 5,000

6. He received commission Rs. 10,000

7. He received cash from Satish Rs. 20,000

8. He withdrew for personal use Rs. 5,000

9. He purchased goods from Ratan Rs. 40,000

10. He returned goods to Ratan Rs. 6,000

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Difference between Traditional Approach and New Approach

Traditional Approach New Approach

It emphasize on the routine mechanical

aspects of accounting process.

It emphasize on the managerial aspect of

the accounting process.

It is a forward transaction process like

journalizing, ledgering, trial balance, profit

and loss account and balance sheet.

It is a backward transaction process. It

shows every transaction effects on the

balance sheet by passing the mechanical

details of journalizing, ledgering, and trial

balance.

Accounts are classified in three category.

1. Personal A/c

2. Real A/c

3. Nominal A/c

It classifies the transaction result into 3

categories.

1. Equity

2. Liability

3. Assets

3 rules of debit and credit apply like

1. Personal

Only primary rule is applied for Credit and

Debit.

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Debit the Receiver

Credit the Giver

2. Real

Debit what comes in

Credit what goes out

3. Nominal

Debit Expenses

Credit Incomes

E + L = A

It does not signifies the overall scenario

and impact of each transaction on the

financial condition.

It emphasize that every transaction is

going to affect the balance sheet.

Aggregate effect of all the transaction can

be known only at the end of the year.

It will show the impact of transaction on

the balance sheet instantly.

Accounting System

3 types of Accounting Systems are used for recording Business Transaction.

1. Cash System Accounting

2. Merchantile / Accrual of Accounting

3. Mixed / Hybrid System

There are so many other system but these are most used popular system.

1. Cash System:

System will consider only the cash transaction that are falling in the current

accounting period.

Under this system only the actual cash receipt and cash payment are recorded

means no credit transaction is recorded.

This system is used by the government organization and financial institute.

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2. Merchantile / Accrual System :

Under this system all the business transaction are recorded in the books of

account.

Cash receipts and cash payments or any amount which is due a specific period of

time means both the cash and credit transaction are in the books of account.

It will also be used to manage the mismatch of the transactions.

In this systems Accrual concepts relating to expenses and incomes are recorded

under the four different type of situation.

(i) Accrued Expenses (not paid)

(ii) Accrued Incomes (not received)

(iii) Advanced Expenses (advanced paid)

(iv) Advance Incomes (advanced received)

3. Hybrid System

This system is a combination of cash system and merchantile systems.

Under this systems some transactions are recorded under the cash system and

the other transactions are recorded into merchantile system.

Accounting Concepts

The following are considered as the important accounting concepts.

1. Business Entity Concept.

The business transactions must be kept completely separate from the private

affairs of the proprietor.

This enables the proprietor to ascertain the true picture of the business. This is

business entity concept

2. Money Measurement Concept.

While preparing accounts in a business, only those transactions which are

capable of expressing in terms of money alone are recorded.

For example, efficient leadership is essential for the success of the business.

But leadership ability cannot be expressed in terms of money.

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The transactions are recorded only at their original value of money.

Subsequent change in the value of money or the purchasing power of the

money is ignored.

Recording of transactions at its original value is justified as it facilitates the

addition of all assets of the business to know the total value of assets as on

a given period of time.

3. Going Concern Concept.

While maintaining accounts it is presumed that the business enterprise will

continue to exist for an indefinite period of time.

Firstly, it facilitates classification of expenditure into capital expenditure and

revenue expenditure. While capital expenditure benefits the business for a

longer duration, revenue expenditure relates to short duration.

Secondly, because of this assumption, fixed assets are shown at its original

cost, less its depreciation.

4. Dual Aspect Concept or Equation Concept.

Under this concept, each and every transaction is split up into two

aspects.

One aspect relates to receiving the benefit and other aspect relates to

giving the benefit.

For example, when a machinery is bought by the business it receives the

machinery by paying cash to the supplier of machinery.

Equation Used is

Assets = Liabilities + Capital

Capital = Assets – Liabilities.

5. Historical Record Concept or Realisation Concept.

According to this concept the sale proceeds of goods or services are realised

only when the buyer is legally bound to pay for the delivery of goods or

rendering of service.

This concept is based on historical events of business transactions and

therefore it is also known as historical record concept.

To take an example suppose a businessman receives an order on 1st January,

2004 and supplies goods on 10th January and he receives payment on 15th

RUSHABH SHAH 23


January. In this transaction, the revenue from sale of goods is recorded on

10th January but neither at 1st January nor on 15th January.

6. Cost Concept.

According to this concept all transactions are recorded in the books of

accounts at the cost price or purchase price.

For example, if a building is bought for Rs. 75000 which is actually worth Rs.

100000 then the cost price of Rs. 75000 will only be entered in the books of

accounts.

7. Accounting Period Concept.

Usually accounts are prepared for a period of one year which may be a

calendar year or a financial year.

8. Matching Concept.

One of the objectives of every business organisation is to know its results as

on a given period of time.

In order to know the profit or loss of the business the costs incurred during

a given period is matched against the revenue earned during that period.

Journal : Journal is a tabular record in which business transactions are analysed in

terms of debits and credits and recorded in a chronological order prior to being

transferred to the ledger accounts. It is also referred to as the book original entry or book

of prime entry.

Simple and Compound Journal Entry : If a journal contains only one debit and one

credit it is called a simple journal entry. A journal entry which includes more than one

debit or more than one credit is called compound journal entry. A compound journal

entry is a combination of two or more simple journal entries.

Procedure for Recording Transactions in the Journal :

The procedure for recording transactions in the journal are as follows :

RUSHABH SHAH 24


1. The Date: The year, month and date of transaction are written in the date column.

The year is recorded at the top of the date column of each journal page. The month is

written in the first line of the date column. Neither the month nor the year is repeated on

the page unless the month or year changes. The date of each transaction is recorded in

the journal.

2. Particulars: The title of the account to be debited is listed at the left of the particulars

column and traditionally recorded first. The abbreviation “Dr” is written after the name

of the account debited. The title of the account to be credited is listed on the line below

the account debited and is indented, i.e., placed about an inch to the right of the date

column. The abbreviation “To” is to be written before the name of the account credited.

The narration is written below the account credited. The narration should be as brief as

possible consistent with disclosure of all the information necessary to understand the

transaction being recorded.

3. Amount: The debit amount is recorded in the debit column opposite the title of the

account debited. The credit amount is recorded in the credit column opposite the title of

the account credited.

4. Writing Folio Number: The ledger folio refers to page number of the ledger account to

which debits and credits are transferred from the journal. This column is not used at the

time transactions are recorded in the journal. When the debits and credits are later

transferred to ledger accounts the page number of the ledger account is listed in this

column to provide a convenient cross reference with the ledger.

Specimen Journal Entry format is as below

Date Particulars L/F Debit Credit

2016

Jan

1 Cash A/C Dr

To Capital A/C

200000

200000

Problem:5 Journalize the following Transactions in the book of Manish Ltd 1-June-

2016

June 1 Purchase Machinery for cash Rs 5000

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June 2 Sold goods to Ramesh for cash 2000 Rs

June 3 Sold goods to Kanan Rs 1000

June 4 Cash Received from Manish 700 Rs

June 5 Cash withdraw from Bank 500 Rs

June 6 Paid Salary Rs 800

June 7 Purchased goods of Rs 1000 less 10% discount

June 8 The correction charges Machinery amounted to Rs 500 which is paid in cash.

June 9 Cash paid to Ramasami 400 Rs

June 10 Paid interest 400 Rs

June 11 Return Goods to Premkumar Rs 300

June 12 Return goods from Prakash Rs 200

June 13 Received Dividend on Sales 500 Rs

June 14 Paid Rent Rs 400

June 15 Old Furniture sold Rs 200

Solution:

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

2016

June

1 Machinery A/C Dr 5000

To Cash A/C 5000

2 Cash A/C Dr 2000

To Sales A/C 2000

3 Kanan A/C Dr 1000

To Sales A/C 1000

4 Cash A/C Dr 700

To Manish A/C 700

5 Cash A/C Dr 500

To Bank A/C 500

6 Salary A/C Dr 800

To Cash A/C 800

7 Purchase A/C Dr 1000

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To Cash A/C

To Discount A/C

900

100

8 Machinery Correction A/C Dr 500

To Cash A/C 500

9 Ramasami A/C Dr 400

To Cash A/C 400

10 Interest A/C Dr 400

To Cash A/C 400

11 PremKumar A/C Dr 300

To Purchase Return A/C 300

12 Sales Return A/C Dr 200

To Prakash A/C 200

13 Cash A/C Dr 500

To Dividend A/C 500

14 Rent A/C Dr 400

To Cash A/C 400

15 Cash A/C Dr. 200

To Furniture A/C 200

Total ______ ______

Problem:6 Journalize the following Transactions in the book of Ravi’s Journal.

July-1 2015 Ravi started business with Rs 42000

July-3 2015 Goods purchased for cash Rs 18400

July-6 2015 Goods sold to Ramesh on credit Rs 11200

July-7 2015 Buy goods from Ram Rs 6600

July-10 2015 Cash received from Ramesh Rs 7200

July-12 2015 Paid to Ram for Cash Rs 4200

July-16 2015 Goods sold to Rajiv Rs 7500

July-20 2015 Goods sold for cash Rs 15000

July-27 2015 Amount paid to Ram Rs 2400

July-29 2015 Cash Received from Rajiv Rs 7500

July-31 2015 Paid rent in cash Rs 900

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July-31 2015 Salary paid to office staff Rs 1400

Solution:

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

2015

July

1 Cash A/C Dr 42000

To Capital A/C

(Being business started with cash)

42000


To Cash A/C

(Being Goods Purchased)

18400

6 Ramesh A/C Dr 11200

To Sales A/C

(Being goods sold on credit)

11200


To Ram A/C

(Being goods purchased on credit)

6600

10 Cash A/C Dr 7200

To Ramesh A/C

(Being cash received from Ramesh)

7200

12 Ram A/C Dr 4200

To Cash A/C

(Being cash paid to Ram)

4200

16 Rajiv A/C Dr 7500

To Sales A/C

(Being goods sold to Rajiv on credit)

7500

20 Cash A/C Dr 15000

To Sales A/C 15000

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(Being goods sold for cash)

27 Ram A/C Dr 2400

To Cash A/C

(Being paid to Ram)

2400

29 Cash A/C Dr 7500

To Rajiv A/C

(Being cash received from Rajiv)

7500

31 Rent A/C Dr

Salary A/C Dr

900

1400

To Cash A/C

(Being salary and Rent paid in Cash)

2300

Total (Write

Total here)

(Write

Total

here)

Problem:7 Journalize the following Transactions in the books of Shri. More. 2009 Dec.

1 Shri More started business with cash Rs. 15000.

2 Purchased goods from Mr. Singh Rs. 30,000 3 Deposited cash into the Bank Rs. 4,000

4 Sold goods to Mr. Gujar Rs. 2,500 5 Purchased furniture of Rs. 2,500 from furniture and Co. 6 Paid to Mr. Singh by cheque Rs. 1,000

7 Received a cheque from Mr. Gujar Rs. 1,200 8 Paid Interest Rs. 450 9 Withdraw cash Rs. 3,000 for personal use

10 Cheque received from Mr. Gujar Deposited into the Bank. 11 Returned goods to Mr. Singh Rs. 500

12 Received goods returned by Mr. Gujar Rs. 300 13 Paid salary by cheque Rs. 4,000 14 Received a cheque for rent Rs. 900. The cheque is deposited into the Bank.

15 Withdraw cash Rs. 3,000 from Bank for office use. 16 Returned Furniture of Rs. 400 to Furniture and company.

RUSHABH SHAH 29


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Problem:8 Journalize the following Transactions in the books of Mr. Ashok.

March, 2009

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1 Mr. Ashok commenced business with Rs. 10,000 of his own and Rs. 5,000 borrowed

from his friend Pramod.

2 Opened a current account in the Bank of Maharashtra by depositing Rs. 4000.

3 Purchased goods worth Rs. 3,000 from Anil and Co. subject to the 2% Trade Discount.

4 Credit Sales of Rs. 4,000 to Mr. Desai.

5 Cash Sales of Rs. 6,000 to Mr. Kulkarni.

6 Purchased furniture costing Rs. 4,000 of which furniture of Rs. 600 was for residential

use of Mr. Ashok.

7 Received cash from Mr. Desai Rs. 3,800 and he was allowed cash discount Rs. 200.

8 Cash purchases of Rs. 1,000 paid carriage Rs. 300.

8 Withdrew from Bank Rs. 2,000 for office use.

10 Returned goods to Anil and Co. Rs. 100.

15 Paid cash to Anil & Co Rs. 980, who allowed us discount Rs. 20.

16 Received a cheque for Rs. 300 in exchange of cash from Raju.

18 Received Interest from M/s Shah and Sons Rs. 800.

20 Sale of goods to Kadam Rs. 500.

21 Distributed goods of Rs. 500 as free samples.

22 Goods of Rs. 500 were used by Ashok for his private purposes.

25 Paid Rs. 400 to Manan on behalf of our creditor, Anil and co.

30 Our debtor Ketan paid our office Rent Rs. 800.

30 Received goods returned by Kadam Rs. 100.

31 Ashok brought into business sale proceeds of his personal Furniture Rs. 7,000.

31 Invested Rs. 10,000 in the shares of ABB Co. Ltd.

31 Received Rs. 360 in full settlement of Kadam dues.

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Ledger

Ledger refers to the book of main entry and it contain various accounts such as

personal, real and nominal accounts.

Ledger is providing consolidated view of transactions that are entered in the

journal.

Ledger account can be defined as a summary statement of all the transaction

relating to a person, assets, expenses and incomes.

Ledger is designed as the book of a second stage in the accounting cycle.

For example, there may be 100 or more transactions affecting cash spread

throughout the journal. So to ascertain net change in cash all these effects are to

be brought together in the cash account. This is accomplished through ledger.

Ledger accounting is representing in a “T” form like

In a ledger a process of entering transaction in the account is known as ‘posting’.

Difference between Journal and Ledger

Journal Ledger

It is the book of original entry or The first

entry

It is the book of second entry

It is the book of chronological record. It is the book of analytical record.

The process of recording the transaction in

the journal is called ‘Journalizing’.

The process of recording transaction in the

ledger is known ‘Posting’

Journal is a book which is supported by

source of evidence.

Ledger is dependent on journal.

Journal is focusing on recording of

transactions.

Ledger is focusing on the process of

classification of different heads of account.

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The process of journalizing the transaction

is a continuous process.

The process of posting in a ledger to be

done according to the need and

convenience.

Sub-division of a Ledger

A ledger is a group of accounts. Hence on the basis of accounts, ledger may be sub-

divided into three categories :

1. Debtors ledger or customers ledger or Sales ledger : It is a section of the ledger

containing accounts of trade debtors, i.e, persons to whom goods are sold on credit.

2. Creditors ledger or suppliers ledger or Bought ledger : It is a section of ledger

containing accounts of the trade creditors i,e, persons from whom goods are purchased

on credit.

3. Impersonal ledger or General ledger : It contains all the accounts that are not

recorded in the cash book, the creditors ledger and the debtors ledger. To be more specific

it contains all other personal accounts (excluding those of trade debtors and trade

creditors), accounts of asset, expenses, revenues and similar accounts.

Posting

The process of transferring the debit and credit items from the journal to their

appropriate ledger accounts is known as posting. Each amount listed in the debit

column of the Journal is posted by entering it on the debit side of an account in

the ledger and each amount listed in the credit column of the Journal is posted to

the credit side of a ledger account. The following procedure is commonly used in

posting process.

(a) Locate in the Journal the account named in the debit portion of the Journal entry.

(b) Enter the date of the transaction in the ledger account.

(c) Enter the name of the account to be debited in the particular column. The world “To”

is prefixed to the debit entries and the word “By” is written before the credit entries.

(d) Enter in the debit column of the ledger account the amount of the debit as shown in

the journal.

(e) Enter in the folio column of the ledger account the number of the journal page from

which the entry is posted.

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The recording of the debit in the ledger account is now complete. Repeat the steps

mentioned above for the credit portion of the journal entry.

Procedure of recording transactions in an account

In the Journal entries Look for the item for which you are creating an account if it is debit or credit If the item is debit, record the transaction on the debit side of account and vice versa Record the opposite item in the Description column of account

What's Balance c/d

Balance c/d is short for Balance Carried forward (ending balance of an account), it is the balance that we would carry forward in the next accounting period (for example an year). In the next accounting period it would become Balance b/d (b/d is short brought forward)

that would be the opening balance of our account. How to calculate Balance c/d or ending balance of an account

Add up Debit side and then Credit side of the account

Find the difference between Debit and Credit side total balances. The difference

would be Balance c/d

Write Balance c/d on the smaller side of account

Balancing of an Account

The difference between the sum of the debits of an account and the sum of its

credits at any particular time is the balance of an account”. The balance of an

account is always known by the side which is greater. The process of ascertaining

the difference is known as “balancing of an account”.

If the sum of the items on the debit side of an account exceeds those on the credit

side, then the difference is called “debit balance”. If the sum of credits in an account

exceeds the sum of the debits, the resulting balance is known as “credit balance”.

Balancing Figure

Balancing figure is one which makes two sides of an account equal. If the totals of

two sides of an account are unequal the difference is inserted on the side having

the lesser total to make the two sides equal. The figure so inserted is known as the

“balancing figure”. The normal balances that one customarily expects to find in

different categories of accounts are as follows :

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Trial Balance:

It is essential to prepare the trial balance to ensure the proof of completion and

arithmetical correctness of the accounting books.

Trial balance is a statement of ledger balances carrying either debit balance or

credit balance.

Trial balance is not a separate books of account but it is just a list or a statement

of living ledger account.

Generally trial balance is prepared on separate sheet or on the last page of ledger.

In a trial balance total of debit side must be equal to the total of credit side.

Verify that all the account are properly recorded or not.

Problem-8 Prepare the ledger for the Ravi’s Journal as in example-6 given above

Solution:

CASH A/C

Dr Cr

Date Particular J/F Amount Date Particular J/F Amount

1/7 To Capital A/C 42000 2/7 By purchase A/C 18400

10/7 To Ramesh A/C 7200 12/7 By Ram A/C 4200

20/7 To Sales A/C 15000 27/7 By Ram A/C 2400

29/7 To Rajiv A/C 7500 31/7 By Salary A/C 1400

31/7 By Rent A/C 900

31/7 By Balance Carry

Forward

44400

RUSHABH SHAH 39


Total 71700 Total 71700

1/8 To Balance

Brought Forward

44400

CAPITAL A/C

Dr Cr


1/7 By Cash A/C 42000

31/7 To Balance C/d 42000

Total 42000 Total 42000

31/7 By Balance B/d 42000

RAMESH A/C

Dr Cr


6/7 To Sales A/C 11,200 10/7 By Cash A/C 7,200

31/7 By Balance C/d 4,000

Total 11,200 Total 11,200

31/7 To Balance B/d 4,000

PURCHASE A/C

Dr Cr


2/7 To Cash A/C 18,400

7/7 To Ram A/C 6,600




RUSHABH SHAH 40


SALES A/C

Dr Cr


6/7 By Ramesh A/C 11,200

16/7 By Rajiv A/C 7,500

20/7 By Cash A/C 15,000

31/7 To Balance C/d 33,700


31/7 By Balance B/d 33,700

RAM A/C

Dr Cr


12/7 To Cash A/C 4,200 7/7 By Purchase A/C 6,600

27/7 To Cash A/C 2,400


RAJIV A/C

Dr Cr


16/7 To Sales A/C 7,500 29/7 By Cash A/C 7500


SALARY A/C

Dr Cr


31/7 To Cash A/C 1,400



RUSHABH SHAH 41



RENT A/C

Dr Cr


31/7 To Cash A/C 900

31/7 By Balance C/d 900

Total 900 Total 900

31/7 To Balance B/d 900

Problem-9 Prepare the trial balance for the Ravi’s Journal from the ledger as in

example-7 given above

Solution:

Ravi’s Trial Balance

Sr No Type of Account Debit Credit

1 Cash A/C 44,400 -

2 Capital A/C - 42,000

3 Purchase A/C 25,000 -

4 Ramesh A/C 4,000 -

5 Sales A/C - 33,700

6 Salary A/C 1,400 -

7 Rent A/C 900 -

TOTAL 75,700 75,700

(Problem 10 and 11 taken from Futureaccountant.com)

Problem-10 Journalize the following transactions and then post the entries into

the ledger.

RUSHABH SHAH 42


1. 15th June 2015: Ibrahim a sole proprietor Commenced a business with a capital

of Rs. 2,00,000.

2. 17th June 2015: Bought Furniture for Cash Rs 20,000.

3. 17th June 2015: Paid Rent to the shop owner Mr. Murugan Rs 5,000.

4. 18th June 2015: Paid cash into bank Rs. 1,50,000.

5. 18th June 2015: Bought Goods for cash Rs. 10,000 from M/s Shamir Jain and

Co.

6. 18th June 2015: Bought Goods on credit from M/s Ramdas & Brothers for Rs.

10,000.

7. 19th June 2015: Goods Sold for Cash Rs. 12,000.

8. 20th June 2015: Bought Machinery from M/s Bootani Machinery and paid by

cheque Rs. 25,000

9. 21st June 2015: Paid weekly wages to workers Rs. 5,000.

10. 24th June 2015: Paid M/s Ramdas & Brothers by cheque Rs. 5,000.

11. 24th June 2015: Received from Mr. Natekar Rs. 2000.

12. 24th June 2015: Received commission from M/s Orion Traders for giving a

trade lead Rs. 500.

Problem-11 Journalize the following transactions and then post the entries into

the ledger and prepare a trial balance for the Year 2015.

1. 1st Oct : Neel started business with a capital of Rs. 80,000.

2. 3rd Oct: Bought goods from Karl on credit Rs. 20,000.

3. 4th Oct: Sold goods to Tarl Rs. 25,000.

4. 5th Oct: Cash purchases Rs. 25,000.

5. 7th Oct: Cash sales Rs 15,000.

6. 9th Oct: Goods returned to Karl Rs. 2000.

7. 10th Oct: Bought furniture for Rs. 15,000.

8. 11th Oct: Cash paid to Karl Rs. 12,000.

9. 12th Oct: Goods returned by Tarl Rs. 3,000.

10. 14th Oct: Goods taken by Neel for personal use Rs. 3,000.

11. 15th Oct: Cash received from Tarl Rs. 12,000.

12. 16th Oct: Took loan from Parl Rs. 30,000.

RUSHABH SHAH 43


13. 17th Oct: Salary paid Rs. 5,000.

14. 18th Oct: Bought stationery for Rs. 1,000.

15. 19th Oct: Amount paid to Parl on loan account Rs. 18,000.

16. 20th Oct: Interest received Rs. 4,000.

Final Accounts

Preparation of final account is the last stage of the accounting cycle.

Basic objective of every concern maintaining the book of accounts is to find out the

profit and loss in their business at the end of the year.

In order to achieve the objectives for the firm it is essential to prepare final accounts

which include trading, manufacturing, profit and loss account and balance sheet.

The final accounts of a trading concern involves preparation of two statements

known as (a) Income statement and (b) Position statement.

The Income statement shows the details of incomes and expenditures and the profit

earned or loss suffered by the business. The income statement of a trading concern

consists of : (a) trading account (b) profit and loss account.

In case of manufacturing concerns, it also includes preparation of manufacturing

account in addition to the above accounts.

The position statement also known as balance sheet discloses the financial position

of the business.

The trading and profit and loss account and Balance Sheet prepared at the end of

the year is collectively known as final accounts.

Manufacturing Account

In order to calculate the gross profit or gross loss it is essential to determine the

cost of good manufactured or cost of goods sold.

The main purpose of preparing manufacturing account is to ascertain the cost of

goods manufactured or cost of goods sold which is measured to the trading

accounts.

RUSHABH SHAH 44


Trading Accounts

Trading Account and profit and loss account are the two important parts of income

statement.

Trading account is the first stage in the financial account which is prepared to

know the trading results of gross profit or loss during a particular period.

In short it is a summary of purchase and sales of a business or production cost of

goods sold and the value of sales.

The different between the elements establish gross profit or loss which is then

carried forward to the profit and loss account for calculating net profit or loss.

On the debit side, the following items usually appear ; (a) Opening stock (b)

Purchases of goods and returns outwards or purchase returns and (c) Direct

expenses. On the credit side usually two items appear ; (a) Sales and Returns

inwards or Sales returns and (b) Closing Stock. The excess of credit side over debit

side is known as gross profit. On the other hand, the excess of debit side over credit

side is known as gross loss.

Profit and Loss Account:

Profit and Loss Account is the second statement of final accounting process.

In other word all operating expenses such as office and administrative expenses,

selling expenses, distribution expenses and non-operating expenses are shown on

the debit side and all the operating and non-operating gains and incomes are

shown on the credit side of the account.

Difference is net profit or net loss.

RUSHABH SHAH 45


The difference of profit and loss accounts reflects the profits or losses as under.

Part-I : Sales – Cost of goods = Gross Profits.

Part-II : Gross profits + Incomes – Expenses = Net Profits.

Part-III : Net Profits – Dividends to equity = Reinvested Profits.

The profit and loss account is debited with the following expenses :

1. FINANCIAL EXPENSES :

(a) Interest on loan

(b) Discount allowed

(c) Interest on capital

(d) Bad debts

(e) Discount on bills discounted

(f) Bank expenses

(g) Charities and donations etc.

2. ADMINISTRATION EXPENSES :

(a) Salaries of office staff

(b) Printing and stationary

(c) Office rent

(d) Postage and Telegram expenses

(e) Trade expenses

(f) Office lighting expenses

(g) Audit

(h) Operating expenses of office

(i) Insurance & Taxes

(j) Repairs and maintenance expenses of office

(k) Legal charges

(l) Telephone expenses.

RUSHABH SHAH 46


3. SELLING AND DISTRIBUTION EXPENSES :

(a) Carriage outwards

(b) Advertisement expenses

(c) Export duty

(d) Salaries to salesmen

(e) Sales tax

(f) Warehouse insurance

(g) Warehouse rent

(h) Delivery van expenses.

4. DEPRECIATION AND OTHER PROVISION :

(a) Depreciation of various assets such as land and building, plant and machinery,

furniture and fixture

(b) Provision for doubtful debts

(c) Provision for discount on debtors.

On the credit side of the profit and loss account, the following items are recorded.

1. Income received :

(a) Rent received

(b) Interest received

(c) Commission received

(d) Discount received

(e) Income from investment

(f) Profit on sale of asset

(g) Bad debts recovered.

2. Reserve or provision for discount on creditors :

(a) Reserve for discount on creditors :

The excess of credit side over debit side reveals net profit and the excess of debit side

over credit side reveals the net loss. The net profit or net loss is transferred to the

proprietor’s capital account. A proforma of profit and loss account is shown below :

RUSHABH SHAH 47


Problem :11

RUSHABH SHAH 48


Problem 12:

RUSHABH SHAH 49


Problem 13 :

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Balance Sheet

A balance Sheet is a statement which portrays the financial position of the

business. It is so called because it is a sheet of all ledger balances pertaining to

assets and liabilities for a given period of time.

Its purpose is to known the exact financial position, i.e., solvency or insolvency of

a business for a specified time.

After the preparations of trial balance and trading and profit & loss account all

nominal accounts gets closed. In the ledger only personal and real accounts will

show the balances. no transfer of the ledger account balances are necessary. Only

RUSHABH SHAH 52


the relevant particulars are extracted from the ledger while preparing a balance

sheet.

The process of arranging assets and liabilities in a definite order is known as “

marshalling of balance sheet”.

There are two ways of arranging assets and liabilities. viz (1) In the order of

permanency and (2) in the order of liquidity.

The usual method of arranging assets by a trader takes the following forms:

a) Liquid assets : These are the assets which are in the form of cash or which can be

converted into cash easily. Examples are cash in hand, cash at bank, bills

receivable, short term debtors.

b) Fixed Assets : These are the assets which are meant for use in the business and

not for sale in the ordinary course of business. Examples are land & building, plant

and machinery, furniture and fixtures.

c) Wasting assets : Fixed assets which are consumed in course of exploitation as in

mines are termed as wasting asset.

d) Current or Floating assets : These are the assets which are acquired for sale or

held for its conversion into cash in course of time. Example of such assets are

stock, debtors etc.

e) Intangible Assets : There are the assets which are not visible and touchable but

business is benefited by such assets. Examples of such assets are goodwill ,

patents, Trade marks.

f) Fictitious assets : The assets arise from abnormal expenses which are not yet

written off and which are not representative of tangible value. Examples of such

assets are expenditure incurred in developing a new product, special advertising

expenses incurred to promote a product, preliminary expenses in the formation of

a company. The benefit of such expenditure will arise in future accounting period.

Therefore it is not desirable to charge the expenses entirely to the period in which

it is incurred.

The liabilities are classified into :

RUSHABH SHAH 53


(a) Capital : It is the amount introduced into the business by the proprietor. While

recording capital on the liability, side certain adjustment are to be made. These

adjustment relate to (a) additional capital introduced (b) profit earned in the business (c)

Interest on capital. From the total of the above amount, the amount of capital with drawn

during the year and net loss if there is any is to be deducted. The balance of capital now

represent net liability due by business to the proprietor.

(b) Fixed or long-term liabilities : They represent a type of liability which is to be

repayable over long period of time Examples are long term loans borrowed from banks,

debentures in case of companies.

(c) Current liabilities : They represent a type of liability which is to be paid back on

demand or in the short term, which is usually within a period of one year. One more

criterion used to identify a liability as current liability is, it is to be discharged from a

current asset. Examples of a current liabilities are sundry creditors, Bank overdraft etc.

(d) Contingent liabilities : They represent a type of liability which arises for payment on

the happening of an event. Examples are discounting of a bill before maturity,

compensation payable in a court of law.

Format of Balance Sheet

RUSHABH SHAH 54


Problem : 14

RUSHABH SHAH 55


Problem : 15

RUSHABH SHAH 56


ADJUSTMENTS TO BE MADE WHILE PREPARING FINAL ACCOUNTS

RUSHABH SHAH 57


1 Closing Stock / Inventory :-

Unsold goods in stock at the end of the period. Closing stock is valued at cost or market

value which ever is lower. For accounting following entry is pass

Closing Stock A/c…………………....Dr XX

To Trading A/c XX

While closing stock appears on credit side of Trading A/c and it also appears on an assets,

in the Balance Sheet.

2 Outstanding Expenses :-

The nominal accounts records the actual expenses paid during the period, However some

expenses are incurred, (due) but not paid, hence it is not accounted, are also brought

into the books to help in proper matching of revenues and expenses. e.g. Firm pays wages

on 10th of the subsequent mouth. These for at the end of the year say 31st march ’10,

wages account is debited up to Feb. 10; since March wage not paid. These unpaid /

outstanding expenses must also be included. This is done by passing following

adjustment entry.

Wages A/c……………………………..Dr XX

To outstanding wages A/c XX

The above entries increases wages in Trading A/c and it is since not paid shown a Liability

in the balance sheet.

3 Prepaid Expenses :-

Certain expenses paid may relate to more than one accounting period. It is necessary to

ascertain that portion of expense which the benefit is not yet received by the concern.

e.g. In such premium paid Rs. 6000, for the year ended 31st march 2010. Prepare Final

Accounts for the ended 31st Dec 2009. Hence Jan to March, three month insurance

premium benefit to the subsequent three month. Such expenses paid in a advance are

called ‘pre-paid expenses’. Adjustment entry pass as under :

Prepaid Expenses A/c…………..…...Dr XX

To Expenses A/c XX

Prepaid expenses deducted from concern period and shown in the balance sheet an

assets.

4. Accrued Income. This is also known as outstanding income or income earned but not

received. Sometimes a business would have earned some income such as commission,

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interest, dividend relating to a period but would not have actually received. Such income

is called as accrued income. Such transaction is to be adjusted in the final accounts by

passing the following entry.

Accrued income a/c Dr.

To Income a/c

5. Income received in advance. This is also known as income received but not earned.

Sometimes a business receives some amount much before rendering service. Such

incomes which are received in the current period relating to a future period is known as

income received in advance. Examples of such transactions are insurance premium

received by an insurance company. Advertisement expenses received by an advertising

agency, apprentice premium received from learners etc. The following entry is made for

adjusting income received in advance.

Income a/c Dr.

To Income received in advance a/c

The income received but not earned is to be deducted from respective incomes on the

credit side of the profit & loss account. This item also appears on the liability side of the

balance sheet to indicate that this much money is owed by business to others. If this

adjustment is not made it amounts to overstating of profit and liability is understated.

6. Depreciation. It refers to decrease in the value of an asset owing to its constant use.

The asset would lose its value owing to wear and tear of the asset of passage of time. If

the asset is not depreciated it does not show its true value. In fact depreciation is a loss

of value of asset and hence it is to be adjusted in the final accounts by passing the

following entry.

Depreciation a/c Dr.

To Asset a/c

The depreciation being nominal account appears on the debit side of profit and loss

account. The same amount of depreciation is deducted from the concerned asset on the

asset side of balance sheet.

7. Interest on capital. Sometimes a proprietor may decide to charge interest on capital

out of the profit earned by the business. The amount of interest on capital is to be paid

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to proprietor in addition to profit which belongs to the proprietor. Interest on capital is

provided under the assumption that had the same capital is invested in some other form

it would have fetched some interest or dividend to the businessman. Provision of interest

on capital is calculated at the time of preparation of final account by means of the

following adjusting entry.

Interest on capital a/c Dr.

To capital a/’c

Interest on capital appears in two places. Firstly, it is debited to profit and loss account

as this constitutes an expense to the business. Secondly, interest on capital is added to

capital on the liability side of the balance sheet.

8. Interest on drawing. Whenever a businessman withdraws any amount from the

business, interest on such drawings may also be provided in the books of accounts. This

is on the assumption that if the same amount is invested by the business on some other

form of investment it would have earned either interest or dividend. Interest on drawing

is calculated based on amount withdrawn and period for which it is withdrawn. Interest

on drawings is calculated at the time of preparation of final accounts and is recorded

through the following adjusting entry.

Drawing a/c Dr.

To Interest on Drawing a/c

Interest on drawings appear in two places firstly it appears on the credit side of profit &

loss account as it is an income to the business. Secondly, the interest on drawings is to

be deducted from proprietor’s capital on the liability side of the balance sheet.

9. Bad debts. Debts which are irrecoverable are known as bad debts. It constitutes a

loss to the business and hence it is to be adjusted in preparing final account by

passing the following Journal entry.

Bad debts a/c Dr.

To debtor’s a/c

The bad debts amount is debited to profit and loss account. It is deducted from sundry

debtors on the asset side of the balance sheet. Sometimes additional bad debts are

anticipated for the current year in which case it is mentioned as one of the adjustments.

Such additional bad debts are given outside the trial balance. This additional bad debts

is also to be shown on the debit side of profit & loss account. On the asset side of the

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balance sheet only the amount given as adjustment is to be deducted from sundry

debtors.

For Other refer Page No 121 to 124 of AFM for MCA soft copy book. Summary is

given in below table.

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Problem: 16

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Problem 17:

l

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Inventory Evaluation

Problem 18: Prepare the Inventory Sheet form the following information using

FIFO system

1. 1st April : Opening Stock : 100 KG @ Rs. 10

2. 5th April : Purchase : 200 KG @ Rs. 11

3. 10th April : Purchase : 80 KG @ Rs. 11.50

4. 15th April : Issue to department A 120 KG

5. 21st April : Purchase : 150 KG @ Rs. 12

6. 28th April : Issue to Department B 230 KG

Solution:

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance

Qty Rate Total Qty Rate Total Qty Rate Total

1st April 100 10 1000 - - - 100 10 1000

5th April

200 11 2200 - - - 100 10 1000

- - - - - - 200 11 2200

10th April

80 11.5 920 - - - 100 10 1000

- - - - - - 200 11 2200

- - - - - - 80 11.5 920

15th April

- - - 100 10 1000 180 11 1980

- - - 20 11 220 80 11.5 920

21st April 150 12 1800 - - - 180 11 1980

- - - - - - 80 11.5 920

- - - - - - 150 12 1800

28th April - - - 180 11 1980 30 11.5 345

- - - 50 11.5 575 150 12 1800

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Material Cost: (Purchase) Production Cost: (Issue) Closing Stock:

100 * 10 = 1000

200 * 11 = 2200

80 * 11.5 = 920

150 * 12 = 1800

Total : 5920

100 * 10 = 1000

20 * 11 = 220

180 * 11 = 1980

50 * 11.5 = 575

Total : 3775

30 * 11.5 = 345

150 * 12 = 1800

Total : 2145

Problem 19: Find out the closing stock on the basis of FIFO method from the

following inventory

1. 2nd October : Opening Stock : 150 units @ Rs. 80

2. 6th October : Purchase : 200 units @ Rs. 90


4. 13th October : Issue 250 units


6. 23rd October : Issue 225 units

7. 25th October : Purchase 125 units @ Rs. 100


Solution:

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance


2nd Oct 150 80 12000 - - - 150 80 12000

6th Oct

200 90 18000 - - - 150 80 12000

- - - - - - 200 90 18000

l10th Oct

100 84 8400 - - - 150 80 12000

- - - - - - 200 90 18000

- - - - - - 100 84 8400

13th Oct

- - - 150 80 12000 100 90 9000

- - - 100 90 9000 100 84 8400

150 94 14100 - - - 100 90 9000

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19th Oct - - - - - - 100 84 8400

- - - - - - 150 94 14100

23rd Oct

- - - 100 90 9000 125 94 11750

- - - 100 84 8400 - - -

- - - 25 94 2350 - - -

25th Oct 125 100 12500 - - - 125 94 11750

- - - - - - 125 100 12500

29th Oct - - - 125 94 11750 100 100 10000

- - - 25 100 2500 - - -

Material Cost: Production Cost: Closing Stock:

150 * 80 = 12000

200 * 90 = 18000

100 * 84 = 8400

150 * 94 = 14100

125 * 100 = 12500

Total : 65000

150 * 80 = 12000

100 * 90 = 9000

100 * 90 = 9000

100 * 84 = 8400

25 * 94 = 2350

125 * 94 = 11750

25 * 100 = 2500

Total : 55000

100 * 100 = 10000

Total : 10000

Problem 20: Find out the closing stock on the basis of LIFO method from the

following inventory

1. 2nd October : Opening Stock : 150 units @ Rs. 80





6. 23rd October : Issue 225 units

7. 25th October : Purchase 125 units @ Rs. 100


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Solution:

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance


2nd Oct 150 80 12000 - - - 150 80 12000

6th Oct

200 90 18000 - - - 150 80 12000

- - - - - - 200 90 18000

l10th Oct

100 84 8400 - - - 150 80 12000

- - - - - - 200 90 18000

- - - - - - 100 84 8400

13th Oct

- - - 100 84 8400 200 90 18000

- - - 150 90 13500 50 90 4500

19th Oct

150 94 14100 - - - 200 90 18000

- - - - - - 50 90 4500

- - - - - - 150 94 14100

23rd Oct

- - - 150 94 14100 175 90 15750

- - - 50 90 4500 - - -

- - - 25 90 2250 - - -

25th Oct 125 100 12500 - - - 175 90 15750

- - - - - - 125 100 12500

29th Oct - - - 125 100 12500 125 80 11250

- - - 25 80 2250 - - -


150 * 80 = 12000

200 * 90 = 18000

100 * 84 = 8400

150 * 94 = 14100

125 * 100 = 12500

Total : 65000

100 * 84 = 8400

150 * 90 = 13500

150 * 94 = 14100

50 * 90 = 4500

25 * 90 = 2250

125 * 100 = 12500

25 * 90 = 2250

Total : 57500

150 * 90 = 11250

Total : 13500

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Treatment of Returns and Shortages

Inventory stock position is also affected by following two types of internal events –

returns and shortages.

1. Returns

The returns are treated as purchases made on the date of return and their

valuation is made as under.

(i) If return is identifiable as per the material requisition Note that rate for the

receipt column is to be considered.

(ii) If the surplus represents several mixes of previous requisitions then

generally it is considered that the returns are from the latest requisitions

made.

(iii) If the returns are not identifiable as per the requisition then they are

recorded at the latest rate of the latest purchases made by the company.

2. Shortages

In Case of Shortages stock is issued at the price of which method we are following.

Problem 21: Find out the closing stock on the basis of FIFO method and LIFO

from the following inventory for Alpha Ltd

1. 1st Jan: Opening Stock : 100 units @ Rs. 40

2. 8th Jan : Purchase : 200 units @ Rs. 42

3. 10th Jan : Purchase : 500 units @ Rs. 44

4. 12th Jan : Issue to department A 120 units

5. 15th Jan : Issue to department B 200 units

6. 21st Jan : Purchase 300 units @ Rs. 45

7. 25th Jan : Return form Department A 20 units which are issued on 12th January

8. 29th Jan : Issue Department B 80 units

9. 31st Jan : In Store Verification found 10 units of shortage.

Solution with FIFO Method

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance


1st Jan 100 40 4000 - - - 100 40 4000

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8th Jan

200 42 8400 - - - 100 40 4000

- - - - - - 200 42 8400

10th Jan

500 44 22000 - - - 100 40 4000

- - - - - - 200 42 8400

- - - - - - 500 44 22000

12th Jan - - - 100 40 4000 180 42 7560

- - - 20 42 840 500 44 22000

15th Jan - - - 180 42 7560 480 44 21120

- - - 20 44 880 - - -

21st Jan

300 45 13500 - - - 480 44 21120

- - - - - - 300 45 13500

25th Jan

20 42 840 - - - 480 44 21120

- - - - - - 300 45 13500

- - - - - - 20 42 840

29th Jan - - - 80 44 3520 400 44 17600

- - - - - - 300 45 13500

- - - - - - 20 42 840

31st Jan - - - 10 44 440 390 44 17160

- - - - - - 300 45 13500

- - - - - - 20 42 840


100 * 40 = 4000

200 * 42 = 8400

500 * 44 = 22000

300 * 45 = 13500

20 * 42 = 840

Total : 48740

100 * 40 = 4000

20 * 42 = 840

180 * 42 = 7560

20 * 44 = 880

80 * 44 = 3520

10 * 44 = 440

Total : 17240

390 * 44 = 17160

300 * 45 = 13500

20 * 42 = 840

Total : 31500

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Solution with LIFO Method

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance


1st Jan 100 40 4000 - - - 100 40 4000

8th Jan

200 42 8400 - - - 100 40 4000

- - - - - - 200 42 8400

10th Jan

500 44 22000 - - - 100 40 4000

- - - - - - 200 42 8400

- - - - - - 500 44 22000

12th Jan - - - 120 44 5280 100 40 4000

- - - - - - 200 42 8400

- - - - - - 380 44 16720

15th Jan - - - 200 44 8800 100 40 4000

- - - - - - 200 42 8400

- - - - - - 180 44 7920

21st Jan

300 45 13500 - - - 100 40 4000

- - - - - - 200 42 8400

- - - - - - 180 44 7920

- - - - - - 300 45 13500

25th Jan

20 44 880 - - - 100 40 4000

- - - - - - 200 42 8400

180 44 7920

300 45 13500

- - - - - - 20 44 880

29th Jan - - - 20 44 880 100 40 4000

- - - 60 45 2700 200 42 8400

- - - - - - 180 44 7920

- - - - - - 240 45 10800

31st Jan - - - 10 45 450 100 40 4000

- - - - - - 200 42 8400

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- - - - - - 180 44 7920

- - - - - - 230 45 10350


100 * 40 = 4000

200 * 42 = 8400

500 * 44 = 22000

300 * 45 = 13500

20 * 44 = 880

Total : 48780

120 * 44 = 5280

200 * 44 = 8800

20 * 44 = 880

60 * 45 = 2700

10 * 45 = 450

Total : 18110

100 * 40 = 4000

200 * 42 = 8400

180 * 44 = 7920

230 * 45 = 10350

Total : 30670

Problem 22: Prepare the FIFO and LIFO inventory sheet from the following details

of Mukesh Ltd 2016

1. 1st Dec: Opening Stock : 1000 units @ Rs. 26

2. 5th Dec : Purchase : 500 units @ Rs. 24.5

3. 7th Dec : Issue : 750 units

4. 10th Dec : Purchase 1500 units @ Rs 24

5. 12th Dec : Issue 1100 units

6. 15th Dec: Purchase 100 units @ Rs 25

7. 17th Dec: Issue 500 units


9. 25th Dec : Purchase 1500 units @ Rs. 26


Solution: with FIFO Method

Date

Material Cost

Receipt

Production Cost

Issue

Closing Stock

Balance


1st Dec 1000 26 26000 - - - 1000 26 26000

5th Dec 500 24.5 12250 - - - 1000 26 26000

- - - - - - 500 24.5 12250

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Blue Print of Sessional

1. Theory 5-10 marks

2. Inventory sum 5 marks

3. Journal, ledger, trial balance 15 marks

4. Trading, P/L account, Balance Sheet 10-15 Marks

Cost Accounting

Cost: Cost may be defined as resources sacrificed or foregone to achieve a specific

objective. Human efforts, consumption of materials, use of machines are sacrificed to

produce an article or to render a service. Such sacrifices are always monetized in the

form of salary wages, material cost and depreciation expenses respectively.

Costing: Costing is a process or a technique for determining the cost of doing something

like , cost of manufacturing , generating cost for units of electricity, providing transport

for passengers per kilometre.

Cost Accounting: Cost accounting is a specialized branch of accounting which deal with

the classification, recording, allocation and control of cost.

Cost Objective: The objects of costing are always some activities. The article

manufactured, a service rendered or a function performed is known as the object of

costing. Cost objective is defined as any activity for which a separate measurement of

cost is desired.

Cost Unit: The cost units are the bases in terms of which the costs are ascertained and

expressed. In case of physical goods, they are number of fans, tonnes of coals, meters of

cloth etc. while in case of intangible services they are units of electricity generated,

transport service in terms of passenger – mile, beds in the hospital, students in the college

or university etc.

Cost Centre: A cost centre is a department or a part thereof, a machine or an item of a

machine, a person or a group of persons in respect of which the costs are ascertained.

The whole organization is artificially divided or sub divided into various cost centres for

the purpose of cost ascertainment and cost control.

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Specific cost Concepts:

1. Sunk Cost: Sunk cost are those costs or cash outflows which cannot be converted

into cash by reversing the decision e.g. stamp duty or legal expenses incurred,

share and debenture issue cost, company promotion expenses, massive

advertisement campaign etc.

2. Opportunity Cost:

Resources or inputs like men, machines, materials and money (i.e. 4m’s) are

limited and they have alternative uses. Eg. It is required to deposit in 15%

dealership securities to obtain the dealership. Because of such deposit payment

the company loses the opportunity of using such moneys on which it can earn 20%

return.

3. Effective Cost: Monetary cost are generally expressed in percentage say 15%

interest cost on loan. Such 15% indicates service charges paid to the lender of

money for using Rs 100 upto 1 year. Suppose that to borrow such Rs. 100, Rs. 5

is incurred on documentation (e.g. stamp duty) then only Rs. 95 net are received

on which Rs. 15 will be paid as interest. Thus though the commited interest rate

is 15% the effective interest rate would be as under:

Effective Interest Rate = Committed Interest rate in Rs * 100 / Net Proceeds

= 15 * 100 / 95

=15.79%

4. Real Cost: The purchasing power of the rupee decreases due to inflation in the

economy. Where the monetary cost are adjusted for the rate of inflation it is known

as real cost. Eg. The bank allows 15% on fixed deposits, and the inflation rate in

the economy is 7%. In such case the real cost to the bank would be only 8%(15-7).

It should be noted that under the inflation the borrower (here banks) is at gains

and the investor (i.e the depositor) is loser.

5. Conversion cost: Conversion cost refers to the cost of converting the basic raw

materials into a finished goods concluded at the end to the production stage. Thus

is excludes the cost of raw materials and considers all other costs upto the stage

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of factory cost like, direct labour, direct materials and all factory overheads.

Conversion cost is defined as under:

(i) Conversion Cost = direct Labour + Direct Expense + Factory Overhead

(ii) Conversion Cost = (Prime Cost – Direct materials) + Factory Overheads

(iii) Conversion Cost = Factory cost – Direct Materials.

6. Committed Cost: Committed cost compare cost refers to the cost resulting from

the managerial decisions. Mostly it is of fixed nature and is to be Borne by the

company during the contractual period committed by the management. Generally

it has a period reference rather than product or quantity reference. Example if an

outside contractor is retained for two years for the need based repair and

maintenance work committed periodic maintenance charges would be treated as

committed cost.

7. Discretionary Cost: Like committed cost discretionary cost also arise from the

nature of contract made by the management. Unlike committed cost discretionary

cost is of variable nature. Management enjoy a privilege of revising the decision.

Example in case of repair and maintenance function the company may invite any

of the available repair and maintenance contract as per the nature of repair rather

than committing to single contractor for all repair works. In such case the

management has a discretion of carrying out repair work from its own staff or can

hire any private contractor for a specific repair and maintenance becomes the

discretionary cost.

Difference between Financial Accounting and Cost Accounting

Financial Accounting Cost Accounting

It is an art and science of recording

classifying and summarising a financial

transaction or event for ascertainment of

profit and financial condition.

It is an art and science of classifying

recording and allocating various expenses

for cost per unit.

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Objectives are

1. to know aggregate profit and loss during

a specified period

2. to know the financial condition of owner

at specific period of time

Objectives are

1. to control the cost

2. to plan a business activity

3. and a certain cost per unit.

Financial accounting is used by external

users like shareholders bank and

Financial Institutions employees etc.

Cost accounting is for internal use her like

a management executives etc.

The output of financial accounting are

Profit and loss account

Balance sheet.

The output of cost accounting are

Cost sheet

Labour cost

Budget

Materials Sheet

Difference between Non-Profit Organization vs Profit Organization

Non-Profit Organization Profit Organization

It does not focusses on maximizing profit. It focusses on maximizing profit.

Non-profit organizations aim to provide

society's needs.

Forward these profits to the company's

owners and shareholders,

They will not pay taxes if they are

exempted by government.

Profit organizations must pay taxes on

their net income

A non-profit does not use a balance sheet,

because it has no owners. They will

instead compile a "statement of financial

position," which focuses only on assets

and liabilities.

Most for-profit organizations prepare a

balance sheet every quarter. A balance

sheet lists the company's owner's equity.

Owner's equity is comprised of assets,

which is everything the company owns,

and liabilities, which is everything the

company owes to others.

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Problem: 2 From the following details prepare the cost sheet and find out

profit/loss if any for XYZ limited

Total production and sales : 10,000 units

Direct Material : 80,000 Rs

Direct Labour : 50,000 Rs

Direct Expenses : 10,000 Rs

Factory Overhead : 12,000 Rs

Administrative Overhead : 16,000 Rs

Sales and Distribution Overhead : 8,000 Rs

Condition : Sales is Rs 2,00,000

Solution:

Particular Total Cost Cost per unit

Direct Material 80,000 8:00

Direct Labour 50,000 5:00

Direct Expenses 10,000 1:00

1. Prime Cost 1,40,000 14:00

Factory Overhead 12,000 1:20

2. Factory Cost 1,52,000 15:20

Administrative Overhead 16,000 1:60

3. Cost of Production 1,68,000 16:80

Sales and Distribution Overhead 8,000 0:80

4. Cost of Sales 1,76,000 17:60

Profit 24,000 2:40

5. Sales 2,00,000 20:00

So the total profit is 24,000 Rs.

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Problem: 3 Prepare the cost sheet from the following detail of Pritesh Limited and

find out the profit or loss.

1. Opening stock of raw material : 24,000 Rs

2. Opening stock of finished goods : 16,000 Rs

3. Closing stock of raw material : 20,000 Rs

4. Closing stock of finished goods : 17,000 Rs

5. Purchase of raw materials : 82,000 Rs

6. Sales : 1,90,000 Rs

7. Direct Wages : 32,000 Rs

8. Factory Wages : 1,000 Rs

9. Carriage Inward : 2,000 Rs

10. Carriage Outward : 1,500 Rs

11. Power / Electricity : 5,000 Rs

12. Office Salary : 13,000 Rs

13. Office Rent : 7,000 Rs

14. Postage and Telegram : 2,000 Rs

15. Printing and Stationary : 1,000 Rs

16. Salesman Salary : 3,000 Rs

17. Advertisement : 2,000 Rs

18. Factory Rent : 2,000 Rs

19. Depreciation on plant and machinery : 3,000 Rs

20. Bad Debts : 500 Rs

Solution:

Particular SubTotal Total

Prime Cost

Opening Stock 24,000

Purchase of Raw material 82,000

Carriage Inward 2,000

1,08,000

- closing stock of raw material 20,000

88,000 88,000

Direct Wages 32,000

A. Prime Cost 1,20,000

Factory Overhead

Factory Wages 1,000

Power Electricity Cost 5,000

Factory Rent 2,000

Depreciation on plant and machinery 3,000

11,000 11,000

B. Factory Cost 1,31,000

Administrative Overhead

Office Salaries 13,000

Office Rent 7,000

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Postage and Telegram 2,000

Printing and Stationary 1,000

23,000 23,000

C. Cost of Production 1,54,000

Cost of Production

Opening stock of finished goods 16,000

1,70,000

- closing stock of finished goods 17,000

1,53,000

Cost of Sales(Selling and Distribution)

Carriage Outward 1,500

Salesman Salary 3,000

Advertisement 2,000

Bad Debts 500 7,000

D. Cost of Sales 1,60,000

Profit 30,000

E. Sales 1,90,000

Problem: 4 Prepare cost sheet of XYZ Limited and find out profit or loss.

1. Sales : 7,80,000 Rs

2. Raw Material : 4,50,000 Rs

3. Stationary : 4,000 Rs

4. Packing of Material : 2,500 Rs

5. Salary of factory staff : 50,000 Rs

6. Administrative Staff salary : 40,000 Rs

7. Sales Staff Salary : 20,000 Rs

8. Factory Rent : 2,700 Rs

9. Office Rent : 1,400 Rs

10. Advertisement : 4,700 Rs

11. Telephone Expenses : 3,000 Rs

12. Office Staff Travelling Expense : 3,000 Rs

13. Selling Staff Travelling Expense : 4,500 Rs

14. Depreciation on plants and machinery : 90,000 Rs

15. Office Equipment : 30,000 Rs

16. Sales Department Vehicle Charges : 10,000 Rs

17. Office General Expense : 16,500 Rs

18. General Expense of Sales : 8,500 Rs

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Solution:

Particular SubTotal Total

Prime Cost

Raw Material 4,50,000

Prime Cost 4,50,000

Factory Overhead

Salary of factory staff 50,000

Factory Rent 2,700

Depreciation on plant and machinery 90,000 1,42,700

Factory Cost 5,92,700

Administrative Overhead

Stationary 4,000

Administrative Staff Salary 40,000

Office Rent 1,400

Telephone Expenses 3,000

Office Staff Travelling Expense 3,000

Office Equipment 30,000

Office General Expenses 16,500

97,900 97,900

Cost of Production 6,90,600

Cost of Sales(Selling and Distribution)

Packing of material 2,500

Sales Staff Salary 20,000

Advertisement 4,700

Selling staff training expense 4,500

Sales department vehicle charge 10,000

General Expenses of sales 8,500 50,200

Cost of Sales 7,40,800

Profit 39,200

Total Sales 7,80,000

CHAPTER-1 INTRODUCTION TO ACCOUNTING Accounting …€¦ · 3/8/2018 · RUSHABH SHAH 1 3CA1355...

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