1. FINANCIALACCOUNTINGB.Com/BBAII SemesterCORE COURSE(2011 ADMISSION ONWARDS)UNIVERSITY OF CALICUTSCHOOL OF DISTANCE EDUCATIONCalicut University, P.O. Malappuram, Kerala, India-673 635307

2. SchoolofDistanceEducationFinancialAccounting 2UNIVERSITY OF CALICUTSCHOOL OF DISTANCE EDUCATIONCORE COURSEB.Com/BBAII SEMETERFINANCIAL ACCOUNTINGPrepared by: Udaya Kumar.O.K.Associate Professor,Dept. of Commerce,Govt. College Madappally.Scrutinised by: Dr. K. VenugopalanAssociate Professor,Dept. of Commerce,Govt. College Madappally.Layout & Settings: Computer Section, SDE Reserved 3. SchoolofDistanceEducationFinancialAccounting 3CONTENTS PAGESModule I 05 13Module 2 14 71Module 3 72 86Module 4 87 115Module 5 116 133 4. SchoolofDistanceEducationFinancialAccounting 4 5. SchoolofDistanceEducationFinancialAccounting 5 Module 1INTRODUCTION TO ACCOUNTINGMeaning and Definition of AccountingAccounting has rightly been termed as the language of the business. It records, classifies, analysesand communicates all the business transactions that have taken place during a particular period. It is asystem of recording and reporting business transactions in financial terms, to interested parties.According to American Institute of Certified Public Accounts Accounting is the art of recording,classifying and summarizing in a significant manner in terms of money, transactions and eventswhich are , in part at least, of a financial character and interpreting the results there of. Thusaccounting is the art of recording, classifying, summarizing, analyzing and interpreting the financialtransactions and communicating the results thereof to the interested person.Features or characteristics or nature of AccountingFollowing are the features of accounting:-(1) Accounting is an art.(2) Accounting is a science.(3) Recording of business transactions.(4) Classifying business transactions.(5) Summarizing the classified data(6) Analysis and interpret the summarized data(7) Communicating information to the interested parties.(8) Records transaction and events which are financial character.Objectives of Accounting or functions of accountingThe following are the main objectives:1. To keep systematic records.2. To ascertain the operational profit or loss.3. To ascertain the financial position of the business.4. To make information available to various users.5. To protect business properties.6. To facilitate rational decision making.7. To ascertain the cost of production and selling price.8. To control expenditure of business.9. To satisfy the requirements of law.10.To calculate the amount due to and due from others.Importance of accounting (Uses or advantages)Accounting brings the following advantages: 6. SchoolofDistanceEducationFinancialAccounting 61. It serves as a historical record.2. It facilitates the preparation of financial statements.3. It supplies information to interested persons4. It helps the management in taking important business decisions.5. It facilitates comparative study of the performance of business over different periods.6. It provides evidence in case of disputes.7. It helps to forecast the future.8. It provides information for judging the efficiency of business9. It is useful in getting loans.10. It helps in valuation of good will.11. It helps in controlling expenses.12. It helps in controlling employees.13. It helps in prevention and detection of errors and frauds.Scope of Financial accountingFollowing activities are included within the framework of financial accounting:(1) Book-keeping(2) Financial Statements(3) Analysis and interpretation of financial statements.(4) Financial reporting(5) Accounting principles(6) Accounting standards.Limitations of AccountingAccounting suffers from the following limitations:1. It is historical in nature.2. Transactions of non-monetary nature will not be recorded in accounting.3. Information recorded in accounts is influenced by the personal judgment of the accountant.4. In accounting valueless assets are also shown.5. In accounting price changes are not considered.6. It is not an exact science.7. Use of different accounting methods reduces the reliability of accounts.8. Account records show only actual cost figures.Accounting Concepts or principlesAccounting concepts are those assumptions, principles or conditions on which the accounting systemis based. Principles are set of rules to be followed in accounting. The following are importantaccounting concepts or principles : 7. SchoolofDistanceEducationFinancialAccounting 71. Business Entity Concepts: According to these concepts, a business is treated as separateEntity distinct from its owner. This means that in accounting the business and owner must betreated separately. Thus, when one person invests amount in to the business, it will be deemedto the liability of the business. The concept of separate entity is applicable to all form ofbusiness.2. Going concern concepts: According to this, it is assumed that business will exist for a longtime. There is no intention t o liquidate the business in the immediate future.3. Money measurement concepts: Accounting records only those transactions which areexpressed in monetary terms. Transactions which cannot be expressed in money do not findplace in the books of accounts.4. Cost Concepts: According to this concept, all transactions are recorded in the books ofaccounts at actual price involved.5. Dual aspect Concepts: according to this concept, every transaction has two aspects. Thesetwo aspects are receiving aspect and giving aspect. These two aspects have to be recorded.The basis of this principle is that for every debit, there is an equal and corresponding credit.6. Realization Concept: According to this principle revenue is said to be realized when goodsor services are sold to be a customer. It emphasizes the fact that the mere receipt of an orderfor goods or services cannot be taken for the realization of revenue. So advanced paymentreceived from a customer cannot be considered as revenue earned.7. Matching Concept: According to this concept, cost of a business of a particular period iscompared with the revenue of that period in order to ascertain net profit or net loss.8. Accounting period Concept: According to this assumption, the life of a business is dividedin to different periods for preparing financial statements. Generally business concern adopttwelve months period for measuring the income of the concern. This time interval is knownas accounting period.Accounting conventionsAccounting conventions are the customs and traditions which guide the accountant whilepreparing accounting statements. Some of the accounting conventions are:-(1) Convention of consistency: - This convention follows that the basis followed in severalaccounting periods should be consistent. This means the methods adopted in one accountingyear should not be changed in another year. Then only comparison of results is possible.(2) Convention of conservatism: - This is a convention of playing safe, which is followed whilepreparing the financial statements. The idea of this convention is to consider all possible losses andto ignore all probable profits.(3) Convention of Materiality: - Materiality means relevance or importance or significance. It isgenerally accepted in the accounting circle that the accounting statements and records mustreveal all material facts. 8. SchoolofDistanceEducationFinancialAccounting 8(4) Convention of full disclosure: - The accounting convention of full disclosure implies thataccounts must be honestly prepared and all material information must be disclosed therein.Accounting standardsAccounting standards are considered as a guide for maintaining and preparing accounts. They arethe rules that ensure uniformity of preparation, presentation and reporting of accountinginformation.Accounting standards may be defined as the accounting principles and rules which are to befollowed for various accounting treatments while preparing financial statements on uniform basisand which will reveal the same meaning to all the interested groups.Need for accounting standards (Objects of Accounting standards):The need for accounting standards arises from limitations of financial statements. The need foraccounting standards arises due to the following reasons.1. To communicate uniform results to external users as well as internal users for decisionmaking.2. To serve as a tools for information systems catering the needs of management, owners ,creditors , Government etc.3. To facilitate inter firm, intra firm comparison.4. To make the financial statement more reliable comparable and understandable.Accounting standard Board of India ( ASB)The institute of Chartered Accountant of India, set up, Accounting Standard Board. Theprimary duty of ASB is to formulate the accounting standard for India. During the formulationof accounting standards, the ASB considered the applicable laws, usage, customs and thebusiness environment existing in our country. The ASB will give due consideration toInternational Accounting Standards (IASs) issued by the International Accounting StandardCommittee and tries to integrate them to the extent possible.The body consists of the following members: Company Law Board, CBDT, Central Boardof Excise and Customs, SEBI, Comptroller and Auditor General of accounts, UGC,Educational and Professional institutions, and councils of the institutes and representatives ofIndustry.The following are the objectives and functions of the ASB:(1) To suggest areas in which accounting standards need to be developed.(2) To formulate accounting standards.(3) To review the accounting standards at periodical intervals.(4) To provide guidance on accounting standards.(5) To carry out other functions relating to accounting standards.Accounting Standards in IndiaASB of India has issued 32 accounting standards so far. They are as follows 9. SchoolofDistanceEducationFinancialAccounting 9As1: Disclosure of accounting policiesAs2: Valuation of inventoriesAs3: Cash flow statementsAs4: Contingencies and events occurring after the B/S dateAs5: Prior period and extra ordinary items and change in accounting policiesAs6: Depreciation accountingAs7: Accounting for construction contractsAs8: Accounting for research and developmentAs9: Revenue recognitionAs10: Accounting for fixed assetsAs11: Accounting for effects of changes in foreign exchange ratesAs12: Accounting for govt. grantsAs13: Accounting for investmentsAs14: Accounting for amalgamationAs15; Accounting for retirement benefits in the financial statements of employersAs16: Borrowing costAs17: Segment reportingAs18: Related party disclosuresAs19: LeasesAs20: Earning per shareAs21: Consolidated financial statementAs22: Taxes on incomeAs23: Accounting for investment in associates in consolidated financial statementAs24: Discontinuing operationsAs25: Interim financial reportingAs26: Intangible assetsAs27: Financial reporting of interest in joint venturesAs28: Impairment of assets.As29: Provisions, contingent liabilities and contingent assetsAs30: Financial instruments-recognition and measurementsAs31: Financial instruments-presentationAs32: Financial instruments disclosureAccounting processAccounting process begins when a financial transactions takes place. Firstly day to daytransactions are recorded in the journal or subsidiary books. From the journal the transactionsmove further to ledger. Here entries are posted in the appropriate accounts, and then accountsare balanced to get the effect of debit and credit. These balance moves to a statement calledtrial balance. From the trial balance, we can prepare trading and profit and loss accounts andbalance sheet. The different stages through which the transactions move from journal to finalaccounts are collectively known as accounting cycles or accounting process. 10. SchoolofDistanceEducationFinancialAccounting 10Journal and ledgerA book of original entry in which transactions are recorded in the order of their occurrence iscalled journal. Journal is a primary record of business transactions. Recording of transactionsin the journal is known as journalizing and recorded transactions are called journal entriesLedger is a book, which contains various accounts it is said to be secondary books of account.It is a collection of all accounts debited or credited in journal. Ledger is defined as, a book inwhich all the personal, real, and nominal accounts of business are kept for permanent recordsso that up to date statement of an account can be easily known.Rules of accountingAccounts are classified in to three namely real accounts, personal accounts and nominalaccounts. There are separate rules for each type of accounts they are as follows1. Real accountsAn account relating to an asset or property is called real account.cash, furniture, plant andmachinery etc are examples of real accounts the debit, credit rule applicable to real account is:Debit what comes inCredit what goes out2. Personal accountsIt includes the account of person with whom the business deals. These accounts are classifiedin to three categoriesa) Natural personal accounts the term natural persons mean persons who are creation ofgod. For e.g.;-Rajas accounts, Gupthas accounts etcb) Artificial personal accounts-these accounts includes accounts of corporate bodies orinstitutionsb) Representative personal account-these are accounts which represents certain person orgroup of persons. For example salary due, rent outstanding etcthe rule of personal account isDebit the receiverCredit the giver3) Nominal accountsAccounts relating to expenses and losses and incomes and gains are called nominal accounts.Salary accounts, commission account etc are examples.Debit all expenses and lossesCredit all incomes and gains 11. SchoolofDistanceEducationFinancialAccounting 11PostingThe term posting means transferring the debit and credit items from the journal to theirrespective accounts in the ledger. It is the process of recording the transaction from journal toledger.The following rules should be observed while posting transactions in the ledger from thejournal:a) separate account should be opened in the ledger for posting transactions relatingto different accounts recorded in the journalb) The concerned account, which has been debited in the journal should also be debited inthe ledgerc) The concerned account, which has been credited in the journal shouldalso be credited in the ledgerSUB-DIVISION OF JOURNALThe journal is sub-divided into many subsidiary books called special journals. Thejournal in which transaction of a similar nature is recorded is known as special journalor day book.The special journals are ruled differently on the basis of the nature of transactions tobe recorded. Transactions that cannot be recorded in any of the special journals arerecorded in a journal called journal proper or miscellaneous journal.Advantages of Special Journals1. Division of work: since there are so many subsidiary books, the accounting workmay be divided amongst a number of clerks.2. Specialization: when the same work is allotted to a period of time he acquires fullknowledge of it and becomes efficient thus the accounting works will be done moreefficiently.3. Save in time: the trader can save time and labor by avoiding repetitions4. Availability of information: since separate subsidiary book is kept for each classof transactions, information relating to that will be readily available.5. Facility in checking: checking is facilitated in subsidiary books which will preventerrors and fraudsImportant special journalsThe journal is sub divided in to the following subsidiary books1. CASH BOOK: For recording all cash transactions2. PURCHASES BOOK: For recording credit purchases of goods 12. SchoolofDistanceEducationFinancialAccounting 123. SALES BOOK: For recording credit sales4. PURCHASE RETURNS BOOKS. For recording the goods returned by the traderto the suppliers5. SALES RETURNS BOOK: For recording the goods returned to the trader by hiscustomer6. BILLS RECIEVABLE BOOKS: For recording all bills received by the traderfrom his customer7. BILLS PAYABLE BOOK: For recording all the bills given (accepted)to suppliers8. JOURNAL PROPER: For all transactions that do not find a place in any of theabove booksTRIAL BALANCETrial balance is a statement containing the various ledger balances on a particular date.This statement is prepared to check the correctness of ledger posting and balancing ofaccounts. If the total of the debit balances is equal to the credit balances. It is impliedthat posting and balancing of accounts are correctFeatures of trial balance1. It is prepared on a specific date2. It is not a part of double entry and not an account3. It is a statement of balance of all accounts or totals of ledger accounts4. Total of the debit and credit columns of the trial balance must tally5. If the debit and credit columns are equal it is presumed that accounts arearithmetically accurate6. Difference in the debit and credit columns indicate that some mistakes havebeen committed7. Tallying of trial balance is not a conclusive proof of accuracy of books ofaccounts;it serves to prove only the arithmetical accuracy of booksObjectives of trial balanceThe following are the objectives of preparing trial; balance1. To ascertain the arithmetical accuracy of the ledger accounts2. To help in locating errors3. To help in the preparation of final accounts 13. SchoolofDistanceEducationFinancialAccounting 13Specimen of trial balance is given belowTrial Balance as on .Accountcode Name of the accountDebitAmount(Rs)CreditAmount(Rs)Cash in handCash at bankSundry debtorsSundry creditorsSalesSales returnsPurchasesPurchase returnsDrawingCapitalBills receivableBills payableStock of goodsBank loan/overdraftCarriage inwardsCarriage outwardsRent paidInterest paidSalary paidDiscount receivedCommission receivedPlant and machineryBuildingsFurnitureVehiclesGoodwillProvisionsOutstanding expensesPrepaid expensesAccrued incomePre received incomeReserve accountsAdvance from customersXxxXxxXxxXxxXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXXXXXxxXxxxxxxxxxxxXxxXxxxxxXxxxxxXxxXxxxxxxxxx 14. SchoolofDistanceEducationFinancialAccounting 14Module 2CAPITAL AND REVENUEAll accounting items are broadly classified into capital and revenue items. Capitalitems are further classified into capital expenditure and capital receipts similarly allrevenue items are sub divided revenue expenditure and revenue receipts.Classification of incomeIncome can be classified into two categories namely capital income and revenueincome.Capital income:The term capital income means an income which does not grow out of or pertain to therunning of the business proper. It is synonymous to the term capital gain. For e.g.: if abuilding costing20000 purchased by a business for its use is sold for Rs 25000,Rs5000 will be taken as capital profit. Capital profit transferred to the capital reserve andis shown in the balance sheet on the liabilities side.Revenue income:Revenue income means an income, which arises out of and in the course of the regularbusiness transactions of a concern. For eg: in the course of ramming the business, theprofit is made on sales of goods, income is received from letting out the businessproperty, dividend received on business investment etc is revenue income.Classification of expenditureExpenditure can be classified into three categories.1. Capital expenditure: It means an expenditure, which has been incurred for thepurpose of obtaining a long term advantage. It consists of expenditure the benefit ofwhich is not fully consumed in one accounting period, but spreads over severalaccounting periods. It is nonrecurring in nature. In short expenditure incurred forincreasing earning capacity of a business is known as capital expenditure. Examples:purchase of plant and machinery, expenses in connection with acquisition of asset likeduty freight, installation charges etc.It is shown on the asset side of the balance sheet.2. Revenue expenditure: An expenditure that arises out of and in the course of regularbusiness transactions of a concern is termed as revenue expenditure. It includes themoney spend on day to day operations of business for current and immediate use. It isrepetitive in nature. Its benefit will be realized in the current year itself. Wages, legalexpenses, transport charges, freight and carriage etc are some of the revenue expenses.it is charged to the trading and profit and loss account.3. Deferred revenue expenditure: It is that class of revenue expenditure which isincurred during a particular year but benefit of which may extend to a number ofyears. The whole amount of such expenditure cannot be treated as the expenditure ofthe year in which it is incurred. Therefore a portion of such expenditure is charged 15. SchoolofDistanceEducationFinancialAccounting 15every year to profit and loss account and remaining portion is shown on the assetside of the balance sheet.Classification of receipts:It can be classified into two categories.1. Capital receipts: it consists of payments made by the shareholders or proprietor ofthe business or receipts from the sale of fixed assets. Sale of machinery or furniture iscapital receipt.2. Revenue receipt: all incomes or receipts that are received by a business in theordinary conduct of activities are called revenue receipts. Sale of goods, interest andrent received etc are examples.FINALACCOUNTSOFASOLETRADERFinal account means accounts. Which are prepared at the final stage to give the financial position ofthe business It consists of trading account profit and loss account and balance sheet.TRADING ACCOUNTTrading account gives the overall result of trading, that is purchasing and selling of goods.The result of trading accounting may be gross profit or gross loss. If the sale proceeds exceed the costof goods sold the difference is gross profit. Opening stock, purchases, direct expenses, are debitedand sales and closing stock are credited to this account.Specimen of Trading account is given below:Trading account for the year ended..ToopeningstockTopurchasesxxxxLessreturnsxxxToDirectexpenses:CarriageinwardFreightOctroiDockduesExcisedutyRoyaltyMotivepowerCoal,gas,waterFactoryexpensesToGrossProfit(ifprofit)xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxBySalesxxxxLessreturnsxxByclosingstockBygrossloss(ifloss)xxxxxxxxxxxxxxxxxxxx 16. SchoolofDistanceEducationFinancialAccounting 16PROFITANDLOSSACCOUNT Profitandlossaccountispreparedtoascertainthenetprofitornetlossofthebusinessforanaccountingperiod.Theamountofgrossprofitisshownonthecreditside.Indirectexpenses,operatingexpensesandlossesareshownonthedebitsideofthisaccountandallincomesandgainsareshownonthecreditside.Ifcreditsideismorethandebitside,thedifferenceisnetprofit.ASpecimenofProfitandLossaccountisgivenbelow:ProfitandLossaccountfortheyearended.ToGrosslossb/dTosalariesTorent,rates&taxesToprinting&stationaryToPostageToauditfeesToGeneralexpensesTorepairTofireInsurancepremiumTolegalexpensesToofficeexpensesTointerestonloanTobaddebtsTodiscountallowedTocommissionToadvertisingTotravellingexpensesTodepreciationTosundryexpensesToestablishmentexpensesTolossonsaleofassetsTocarriageoutwardTonetprofitXxxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxxxxBygrossprofitb/dByrentreceivedBydiscountreceivedBycommissionreceivedByinterestByotherincomes(ifany)ByNetloss(ifloss)XxxXxxXxxXxxXxxxxxxxxx xxxx MANUFACTURING ACCOUNTManufacturing account is an account prepared by manufacturing concerns to ascertain cost ofgoods manufactured during a period. All the expenses relating to manufacturing activity are debited.The total represents cost of manufactures, which is transferred to trading account. A specimen ofmanufacturing account is given below: 17. SchoolofDistanceEducationFinancialAccounting 17Manufacturingaccountfortheyearended.ToopeningWorkinprogressToRawmaterialconsumed:OpeningstockofrawmaterialxxxAddpurchase(lessreturn)xxxLessclosingstockofrawmaterialxxTodirectwagesTocarriageinwardTofreightTofactoryexpensesToworksmanagerssalaryToconsumablestoresTodepreciationofplantTorepairsofplantTocoal,gas,waterTomotivepowerXxxxXxxxXxxXxxXxxXxxXxxXxxXxxXxxXxxXxxByclosingworkinprogressBysaleofscrapBycostofgoodsmanufactured(balance,transfertotradingaccount)XxxxXxxxxxxxxxx xxxxxBALANCESHEET Balance sheet is a statement showing the assets and liabilities of a business on a particulardate. It reveals the financial position of a business. Hence it is also known as position statement. Inthe words of Francis R Stead, balance sheet is a screen picture of financial position of a goingbusiness at a certain moment. 18. SchoolofDistanceEducationFinancialAccounting 18SpecimenofBalanceSheetisgivenbelow:BalanceSheetasatLiabilities Assets Currentliabilities:BillspayableCreditorsBankoverdraftOutstandingexpensesIncomereceivedinadvanceLongtermliabilities:LoanCapitalxxxxAddNetprofitxxxxxxxxLessdrawingsxxxxxxxxxxxxxxxxxxxxxxxxxxxCurrentAssets:CashinhandCashatbankDebtorsBillsreceivableMarketablesecuritiesPrepaidexpensesAccruedincomesClosingstockLongterminvestmentsFixedassets:FurnitureVehiclesPatentLoosetoolsPlantLandandbuildingGoodwillxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxx OPENINGCLOSINGANDADJUSTINGENTRIES Opening entries are passed at the beginning of an accounting period. When a businessmanstarts business with cash and other form of assets, it becomes essential to open the necessary ledgeraccounts. This is made by passing entries through journal proper. 19. SchoolofDistanceEducationFinancialAccounting 19At the end of every accounting period, all revenue items are closed by transferring to tradingand profit and loss account, such entries are known as closing entries. Thus closing are those entriespassed at the end of the accounting year to close the accounts relating to incomes, expense, gains andlosses.In the mercantile system of accounting, various adjustments had to be made to accounts ofincomes and expenses, so as to show correct figure for the current year. These entries are passed foradjusting the incomes, expenses etc are called adjusting entriesWhen a sum of money from one account to another account has to transferred it is done by ameans of an entry called transfer entry.TREATMENTOFCERTAINITEMSCLOSINGSTOCKIf it is given in the adjustment it is shown on the credit side of the trading account and also shown onthe assets side of the balance sheet. If it is given in the trial balance, It should be shown only in thebalance sheet.OUTSTANDING EXPENSES:These are those expenses which remains unpaid at the end of the accounting period. If it is given inthe adjustment, it should be added to the concerned expenses on the debit side of the trading accountor profit or loss account and it should also be shown in the balance sheet as liability. If it is given inthe trial balance, it should be shown in the balance sheet as liabilities.PREPAID EXPENSESPrepaid expenses are payments made in the current year but related to the next accountingyear. Prepaid expenses are also known as expenses paid in advance or unexpired expenses. If it isgiven in the adjustment, it should deducted from the concerned expenses on the debit side of tradingaccounting or profit and loss account and it should also be shown on the asset side of balance sheet. Ifit is given in the trial balance, it should be taken only in the balance sheet as assetACCRUED INCOMEThis is the income earned but not received by the end of the accounting year. This is alsoknown as outstanding incomes. If it is given in the adjustment, it should be added to the concernedincome on the credit side of the profit and loss account and it should also be shown on the asset sideof balance sheet .If it is given in the trial balance, it should be shown only in the balance sheet on theasset sideINCOME RECEIVED IN ADVANCE It means income which has been received by business before it been earned by the business. Itrelate to the next accounting period. It is also known as unearned income or income received inadvance. If it is given in the adjustment its should be deducted from the concerned income on thecredit side of the profit and loss account and it should also be shown on the liability side of balancesheet. If it is given in the trial balance it should be shown only in the balance sheet on the liabilityside. 20. SchoolofDistanceEducationFinancialAccounting 20DEPRECIATIONIf it is given in the adjustment, it should be shown on the debit side of the profit and lossaccount and deducted from concerned asset on the balance sheet. If it is given in trial balance,depreciation should be taken only on the debit side of profit and loss account.BAD DEBTSWhen an amount due from debtors is found irrecoverable it is called bad debt .it is a loss thebusiness. If it is given in the adjustment it should be taken on the debit side of the profit and lossaccount by adding to the bad debt already given in the trial balance and it should also be deductedfrom debtors on the asset side.PROVISION FOR BAD DEBTSThe provision given in the trial balance is the provision created in last year; it is taken oncredit side of profit and loss account. If there is bad debt and provision required are given, it shouldbe adjusted against the opening provisions. The treatment is as follows.Bad debt (given in the trial balance xxxxAdd: further bad debt (given in the adjustment) xxxProvision required (given in the adjustment) xxx-------xxxxLess existing provision (given in the trial balance) xxx--------Amount shown on the debit side of the P&L account xxx---------If the existing provision is more than the bad debt and new provisions, then the balance should beshown on the credit side of profit and loss account. Bad debts and new provisions given in theadjustments are also deducted from the debtors account on the asset side of the balance sheet.LOSS OF STOCK BY FIREIn case goods are not insured the total loss should be shown on the credit side of thetrading account. The same amount should be shown on the debit side of the profit and loss account. Ifgoods are insured and insurance company admitted the claim, the total loss should be credited to thetrading account, amount claim not admitted by the insurance company is debited to P&L account andclaim admitted is shown on the asset side of balance sheet.MANAGERS COMMISSIONCommission is shown on the debit side of P&L account. It should also be shown onthe liability side of the balance sheet (if it is given in the adjustment). It is calculated as follows.a) FixedpercentageofnetprofitbeforechargingsuchcommissionCommissioniscalculatedasfollowsNetprofitxrateofcommission100b) Fixedpercentageofnetprofitafterchargingsuchcommission 21. SchoolofDistanceEducationFinancialAccounting 21CommissioniscalculatedasfollowsNetprofitxrateofcommission100+rateofcommissionIllustration1:Mr.A,whoisasoletrader.followingisthetrialbalanceason31dec2011Cashatbank61,590sales9,36,200Cashinhand11,80012%bankloan80,000Drawings20,000capital1,60,000Billreceivable39,600billspayable5200Salary44,000discountreceived2400Sundrycreditors1,26,200InvestmentIncomefrominvestment1980(MarketvalueRs28000)24,000Purchasereturn7,400Stockon1120111,27,360Landandbuilding80,000Travellingexpenses13,800Motorvan32.000Furniture16,000Telegram1,600Sundrydebtors1,28,000Discountallowed3,600Sundryexpense37,240Stationary3,200Bankloaninterest6,000Establishment9,190Advertisement2,000Salesreturn5,000Purchase6,53,400 13,19,38013,19,380Additionalinformation1.Closingstockisvaluedat2,40,0002.Maintainareserveof10%ofdebtorsasreservefordebtors3.Provideareserveof5%onsundrydebtorsasreservefordiscountand5%onsundrycreditors4.StockworthRs20,000destroyedbyfireon25112011inrespectofwhichtheinsurancecompanyadmittedtheclaimonlyRs15,0005.Themanagerofthebusinessisentitledtogetacommissionof10%ofnetprofitaftercalculatingsuchcommission6.Chargedepreciation2.5%onlandandbuilding,10%onfurniture,20%onmotorvan7.Salarypaidinadvance3000. 22. SchoolofDistanceEducationFinancialAccounting 22Prepareatradingandprofitandlossaccounton31Dec2011.andbalancesheetonthatdate.Tradingandprofitandlossaccountfortheyearended31Dec2011particulars amount particulars AmountOpeningstockPurchase653400Lessreturn7400GrossprofitSalary44000Lessprepaid3000EstablishmentexpensesstationaryTelegramTravellingexpensesSundryexpensesLossbyfireInterestonbankloan6000Addoutstanding3600AdvertisementDiscountProvisionfordoubtfuldebtsprovisionfordiscountdepreciationlandandbuilding2000furniture1600motorvan6400managerscommissionnetprofit1,27,3606,46,0004,17,480Sales936200Lessreturn5000LossofstockonfireClosingstockGrossprofitbdIncomefrominvestmentDiscountreceivedReserveordiscountoncreditors93120020000240000119120041,0009190320016001380037,240500096002000360012,800576010,00024,8852,48,8554285301191200417840198024006310428530Workingnote:Netprofitafterchargingcommission=2,73,740Commission2,73,740X10/110=24,885 23. SchoolofDistanceEducationFinancialAccounting 23Balancesheetasat31stDecember2011Liabilities Assets Sundrycreditors1,26,200Lessprovision63,10BillspayableInterestonbankloanCommissionpayableBankloanCapital1,60,000Addnetprofit2,48,8554,08,855Lessdrawings20,0001,19,8905,2003,60024,88580,0003,88,855CashinhandCashatbankBillsreceivableSundrydebtors1,28,000Lessprovision12,8001,15,200LessprovisionFordiscount5,760ClosingstockSalaryprepaidInsuranceclaimInvestmentFurniture16,000Lessdepreciation1,600MotorVan32,000Lessdepreciation6,400Landandbuilding80,000Lessdepreciation2,00011,80061,59039,6001,09,4402,40,0003,00015,00024,00014,40025,60078,0006,22,430 6,22,430 24. SchoolofDistanceEducationFinancialAccounting 24Illustration2ThefollowingbalancesareextractedfromthebooksofaccountsofRamanon31dec2011Purchases40000sales70185Purchasesreturn1410stock(1111)5730Capital50500drawing8800Baddebts700baddebtreserve(1111)1620Carriageinwards1155officeexpenses670Postageandstationary330billsreceivable620Discount(Cr)115wages3140Salesreturn2120rentreceived1050Building13000cashinhand1105Cashatbank6200salary4500Officefurniture1800postage410Commissionpaid435sundrycreditors9490Sundrydebtors31035sundryexpenses8470Building(new)3500 ratesandinsurance 650Preparetradingandprofitandlossaccountfortheyearended31dec2011andpreparebalancesheetonthatdateconsideringthefollowing:1) InsuranceunexpiredRs1202) Provideinterestoncapital@5%3) RentnotreceivedRs1004) Depreciateonoldbuilding@2.5%,new@2%andofficefurniture@5%5) WriteofffurtherbaddebtsRs2856) Increasetheprovisionforbaddebts@6%ondebtors7) SalaryoutstandingRs2858) Stockon31122009valued@Rs7145 25. SchoolofDistanceEducationFinancialAccounting 25SolutionTrading&profitandlossaccountofRamanFortheyearending31dec2011particulars amount particulars amountToopeningstockPurchases40000Lessreturns1410TowagesTocarriageinwardsTogrossprofitTosalaries4500Addoutstanding285Toratesandinsurance650Lessprepaid120ToofficeexpensesToprintingandstationaryTopostageTosundryexpensesTodepreciationBuilding(old)325New70Officefurniture90To provision for bad and doubtfuldebts:Baddebts700Additionalbaddebt285Addnewprovision18452830Lessexistingprovision1620TocommissionTointerestoncapitalTo net profit transferred to balancesheet5730385903140115526595Bysales70185Lessreturns2120ByclosingstockBygrossprofitBydiscountRent1050Addoutstanding100680657145752105306703304108470485121043525258010752102659511511502786027860 26. SchoolofDistanceEducationFinancialAccounting 26BalancesheetAson31dec2011SundrycreditorsCapital50500Addnetprofit801058510Addinterestoncapital252561035Lessdrawings8800Outstandingsalary94905223528562010CashinhandCashatbankBillsreceivableSundrydebtors31035Lessbaddebts28530750Lessnewprovision1845ClosingstockOfficefurniture1800Lessdepreciation90InterestaccruedUnexpiredinsuranceBuildings:Old130000New350016500Lesstotaldepreciation3951105620062028905714517101001201610562010 27. SchoolofDistanceEducationFinancialAccounting 27Illustration3 From the following trial balance of Mr. Arthur on 31 Dec 1987, prepare trading and profit andloss account for the year ending 31stDecember 1987, and a balance sheet on that date:Arthursdrawings 10550 Arthurscapital 119400Billsreceivable 9500 loan@6%p.a 20000Plantandmachinery 28800 commissionreceived 5640Sundrydebtors(includingMadanfor sales 356430DishonoredchequeRs1000) 62000 Sundrycreditors 59630Wages(manufacturing) 40970Returninwards 2780Purchases 256590Rentandtaxes 5620Stockon1stJan11987 89680Salaries 11000Travellingexpenses 1880Insurance 400Cash 530Bank 18970Repairsandrenewals 3370Interestonloan 1000Interestanddiscount 4870Baddebts 3520Fixturesandfittings 8970 561100561100 ======= ========The following adjustments are to be made:a) Stock in trade in hands on 31 Dec 1987 Rs 128960b) Write off half of Madans chequec) Create a provision of 5% on debtors.d) Manufacturing wages include Rs 1200 for erection of new machinery 28. SchoolofDistanceEducationFinancialAccounting 28e) Depreciateplantandmachineryby5%andfurnitureandfixturesby10%p.af) CommissionnotearnedbutreceivedamountstoRs600Tradingandprofitandlossaccountfor31stDec1987TostockTopurchasesTowages40970Lessplantandmachine1200GrossprofitRentandtaxesSalariesTravellingexpensesInsuranceRepairsInterestonloan1000Addoutstanding200InterestanddiscountBaddebts3620AdddishonoredchequeOfMadan500Provisionforbaddebt(5%on61000)DepreciationPlant1500Fixtures897NetprofittransferredTocapitalaccountRs896802565903977096570482610562011000188040033701200487041203050239763703101610Bysales355430Lessreturns2780BystockGrossprofitCommission5640Lessnotearned600Rs353650128960482610965705040101610 29. SchoolofDistanceEducationFinancialAccounting 29BalancesheetofMr.ArthurArthurscapital:Balance119400Addprofit63703Lessdrawings10550LoanCreditorsOutstandingcreditors:Forinterestonloan200Forcommissionreceivedinadvance600Rs1725532000059630800252983Plant30000Lessdepreciation1500Fixturesandfittings8970Lessdepreciation897ClosingstockBillsreceivableDebtors62,000LeeDishonor(50%)500Lessprovision3050BankCashRs28500807312896095005845018970530252983Illustration4ThefollowingisthetrialbalanceofMr.Ramlalasat31stDec2011 Dr CrRamlalscapital 86690Stockason1stJan2011 46800 Sales 389600Returninwards 8600 Purchases 321700 Returnoutwards 5800Freightandcarriage 18600 Rentandtaxes 5700 Salaryandwages 9300 Sundrydebtors 24000 Sundrycreditors 14800Bankloan@6%p.a 20000Bankinterest 9000 Printingandadvertisement 14600 Miscincome 250 30. SchoolofDistanceEducationFinancialAccounting 30Cashatbank 8000 Discountearned 4190Furnitureandfittings 5000 Discountallowed 1800 Generalexpenses 11450 Insurance 1300 Postageandtelegram 2330 Cashinhand 380 Travellingexpenses 870 Drawings 40000 521330 521330 ====== ======The following adjustment should also be made:a) Included amongst the debtors is Rs 3000 due from Abraham and included amongst creditorsRs 1000 due to himb) Provision for bad and doubtful debts be created at 5% and reserve for discount 2% on sundrydebtorsc) Depreciation on furniture and fittings at 10%.shall be written offd) Personal purchases amounting to Rs 600 has been included in the purchase day booke) Interest on bank loan shall be provided for the whole yearf) A quarter of the amount of printing and advertising is to be carried forward to the next year.g) Credit purchase invoice amounting to Rs 400 had been omitted from the booksh) Stock on 31-12-2011 was Rs 78600Prepare trading and profit and loss account for the year ended 31-12-1987 and balancesheet as on 31 Dec 2011 31. SchoolofDistanceEducationFinancialAccounting 31Solution TradingandprofitandlossaccountofSriRamlal.OpeningstockPurchases321700Addomittedinvoice400322100Lessreturns5800316300Lessdrawings600TofreightandcarriageGrossprofitc/dRentandtaxesSalaryandwagesBankinterest900Adddue300Printingandadvertising14600Lessprepaid36500DiscountallowedGeneralexpensesInsurancePostageandtelegramTravellingexpensesProvisionforbaddebtsReservefordiscountondebtorsDepreciationonfurnitureNetprofitRs468003157001860078500459600570093001200109501800114501300233087011504375003595382940Bysales389600Lessreturns8600ByclosingstockGrossprofitb/dMiscincomeDiscountRs3810007860045960078500250419082940 32. SchoolofDistanceEducationFinancialAccounting 32Balancesheetason31Dec2011Capital86690Addnetprofit35953122643Lessdrawings:Cash40000Goods600 40600Sundrycreditors14800LessamountduetoA600BankloanBankinterestdueRs820431420020000300116543Furnitureandfittings5000Lessdepreciation500Sundrydebtors24000LessamountduefromA1000Lessreserveforbaddebtors115021850Lessreservefordiscount437StockPrintingandstationaryCashinhandCashatbankRs4500214137860036503808000116543 33. SchoolofDistanceEducationFinancialAccounting 33ACCOUNTS FOR NON PROFIT CONCERNNonprofit organization or non trading organization are those organizations which are established notfor earning profits but for promoting art, culture, sports, education etc. Medical institution, Charitabletrusts, welfare societies, educational institutions etc are examples of non trading organizationsThe final accounts of non trading organizations include the following:1) Receipts and payment account2) Income and expenditure account3) Balance sheet1) Receipts and payment accountReceipts and payment account is a summary of all cash transactions for aparticular period. It is prepared from the cashbook at the end of the year. It contains of all cashreceipts and payments. It does not include outstanding items. The features of receipts and paymentaccounts are follows1) It is a real account2) It is a classified summary of cashbook3) It starts with opening cash and bank balance and ends with the closing cash and bank balances4) All receipts and payment s are included in this items5) The receipts are entered on the debit side and payments are entered on the credit side6) It does not show the profits or losses during the period2) Income and expenditure accountIt is a revenue account prepared by a nonprofit organization to ascertain surplusor deficit for a particular period. It is a nominal account. In this account only revenue receipts andrevenue expenses are recorded. All revenue expenses of the current year are recorded on the debitside and revenue incomes of the current year are recorded on the credit side, the differencebetween incomes and expenditure represents surplus or deficit.3) Balance sheetA balance sheet contains of assets and liabilities. Assets or capital expenditure,outstanding incomes prepaid expenses etc are shown on the asset side. Capital receipts orliabilities, capital fund, outstanding expenses, incomes received in advance are shown on theliability side of the balance sheet, generally surplus is shown by adding it to the capital fund.Difference between receipts and payment account and income and expenditure account1) The receipts and payment account is only classified summary of the cashbook. It is in thenature of real account. On the other hand income and expenditure account is equal to theprofit and loss account of trading concerns and in the nature of nominal accounts.2) The receipts and payment account is generally begins with the opening cash balance. But theincome and expenditure account does not begins with any such balances 34. SchoolofDistanceEducationFinancialAccounting 343) Receipts and payment account contains both capital and revenue items but income andexpenditure contains revenue items only4) Receipts and payment account may contain income and expenditure not only current periodbut also of the previous period .but income and expenditure accounts deals with current perioditems5) In the receipts and payment account, receipts are shown on the debit side and payment areshown on the credit side in the income and expenditure account, income are shown on thecredit side and expenses are shown on the debit side6) Receipts and payment account is prepared on cash basis but income and expenditure accountis prepared on accrual basisTreatment of some items1) SubscriptionIt is a recurring income for nonprofit organizations. This is one of the main sources of revenue.This is shown on the credit side of income and expenditure account. Adjustment should be made toshow the correct income for the period.Subscription received for certain specific purpose like subscription for tournament fund,subscription for construction of pavilion etc should be capitalized (that is shown on the liability sideof the balance sheet)2) DonationsThe amount received from a person, firm or company by way of gift is called a donation.Donations may be specific donation or general donations.Specific donations: if the donations are for a specific purpose, example donation for building,donation for library, donation for furniture etc it must be treated as capital receipts and should beshown on the liability side of the balance sheet. The expenditure incurred on this account should bededucted and the balance should be shown until it is completely used up.a) General donations: when the donations are given for a general purpose, it is the amountwhich will determine whether it is a capital or revenue receipts. Donation of a comparativelysmall amount must be treated as income. But if the amount of such donation is big , it must betreated as capital receipts and it should be shown on the liability side of the balance sheet.3) GrantsGrant received from central, state or local bodies for routine expenses are treated as income.Grant for specific purpose such as constructions of buildings, purchase of x-ray equipmentsetc is capitalized4) LegacyIt is the amount received by the nonprofit organizations as per the will of a deceased person. Itis a capital receipt and is shown on the liability side of the balance sheet, but if the amount is small itmay be treated as income and may be shown on the credit side income and expenditure accountIn the absence of any specific information legacy must be preferably be capitalized. 35. SchoolofDistanceEducationFinancialAccounting 355) Endowment fundThe fund meant for permanent means of support is known as endowment fund. It is acapital receipt6) Entrance feesThis is the amount of fee collected on the admission of members. Accountants differon the treatment of entrance fees. Many feel that since the amount is collected onlyonce and as it is of non recurring in nature it should be capitalized and taken to theliability side of the balance sheet but others argue that though it is paid is eachmembers only once, the clerk or institution receives fairly regularly every year becauseof regular entrance of members. So it should be shown as an income in the credit sideof income and expenditure account. In the absence of specific instruction in thequestion, students may treat it any way but they must append a note justifying thechoice made7) Sale of old assetsThe amount realized from the sales of old assets should be treated as capital receiptsand should be credited to asset account. But loss or profit on its sales should be treatedas revenue and is taken to income and expenditure account8) Sale of newspapers and periodicals etcThe amount received on selling newspapers, periodicals, etc should be treated asincome and is credited to income and expenditure account9) Expenditure stock itemsItems like stationery sports ,materials like bats balls etc are called expenditure stockitems .the value of that type of items which remains unused should be deducted fromthe total amount spent so that only the amount actually used up is debited to incomeand expenditure account . Treatment is as follows:Stock of stationery (opening) xxAdd purchase during the year xx-----------xxxLess stock of stationery (closing) xx balance sheet (assetside}-------------Stationery item used during the year xxx (debited in the I and Eaccount)10) Sale of scraps, grass etcThese are treated as revenue receipts and shown on the income side11) Life membership feeLife membership may, sometime, be granted to members on their making a lump sumpayment in lieu of annual subscription. As the service has to be rendered for a longtime without further payment, it must be treated as capital receipts and should becapitalized. 36. SchoolofDistanceEducationFinancialAccounting 3612) Payment of honorariumAmount paid to a person for the specific service rendered by him is called honorarium.For example payment made to singers ,dancers etc is shown on the expenditure side13) Special purpose fundIf there is any special purpose fund example tournament fund, charity fund, prize fund,endowment fund etc. and there are certain items of expenses and incomes relating tothat fund. Then income and expenses should not be shown in the income andexpenditure account but income should be added to the fund and expenses deductedfrom such fund on the liability side of the balance sheetIllustration 1Following is the receipts and payments accounts of majestic club. Calicut for the year ending 31stDecember, 2003Receipts Amount Payments AmountBalance b/dSubscriptionsInterestDonation(general purpose)Donation for building fundMisc receiptsSale of grass210056800400600055000620200121120RentSalariesSundry expensesInvestment purchasedNewspapersSports equipment(30-06-2003)Balance c/d9500250003500250008003000027320121120Subscription outstanding at the end of the year 2002 were Rs 4500 and at the end of the year2003 were Rs 6500.salary outstanding at the end of 2002 and at the end of 2003 were Rs 2500 and3000 respectivelyOn 31stDecember 2002 the club had investments worth Rs 15000, furniture Rs 12000 andsports equipment valued at Rs 40000 Prepare income and expenditure account for the year ended 31 Dec2003 and a balancesheetasonthatdateafterdepreciatingfurnitureby10%andsportsequipmentby20% 37. SchoolofDistanceEducationFinancialAccounting 37SolutionBalance sheet as on 31stDec 2002Salary outstandingCapital fund (balancing figure)Rs25007110073600Cash in handSubscriptions outstandingInvestmentFurnitureSports equipmentRs2100450015000120004000073600Incomeandexpenditureaccountfortheyearended31stDecember2003Expenditure Amount Income AmountRentSalaries25000Addoutstanding300028000Lessoutstanding20022500SundryexpensesNewspaperDepreciation:Furniture1200Sports equipment11000Excessofincomeoverexpenditure9500255003500800122001452066020Subscriptions:Received56800Addoutstanding2003650063300Lessoutstanding20024500InterestDonationMiscreceiptsSaleofgrass58800400600062020066020Balancesheetason31stDec2003Liabilities Rs Assets RsSalaryoutstandingDonationforbuildingfundCapitalfund71100Addsurplus1452030005500085620143620CashinhandSubscriptionoutstandingInvestments15000Addaddition25000furniture12000lessdepreciation1200Sportsequipment40000Addaddition3000070000Lessdepreciation11000273206500400001080059000143620 38. SchoolofDistanceEducationFinancialAccounting 38Illustration2From the following receipts and payment account of an institution and further information suppliedprepare an income and expenditure account for the year ended 31stDecember 2003 and a balancesheet as on that date ReceiptsandpaymentaccountReceipts Rs Payment RsBalance112003Subscription:2002200200321002004150EntrancefeesLockerrentIncomefromrefreshments100002450800700400017950Expenses2002120020032000CostofleaseonlandInterestpaidRefreshmentbalanceason31122003320040004002000835017950Balancesheetason31stDecember2002Liability Rs Assets RsFundSubscriptionsreceivedAdvanceOutstandingexpensesLoanIncomeandexpenditureaccount3200060014005000162040620BuildingOutstandingdebtorsForsubscriptionsForlockerrentCashinhand300003802401000040620Adjustments1) Expenses due but not paid2) Subscription due but not received Rs 8003) Salary due but not paid Rs 2004) Depreciation on building Rs 20005) The entrance fees is to be capitalized 39. SchoolofDistanceEducationFinancialAccounting 39SolutionIncome and expenditure accountFor the year ended 31stb December 2003Expenditure Rs Income RsExpenses(2003)2000Addoutstanding500InterestpaidSalaryoutstandingRefreshmentexpensesDepreciationonbuildingExcessofincomeoverexpenditure(surplus)2500400200200020008607960Subscription(2003)2100AddsubscriptionreceivedIn2002for2003600Addoutstanding(2003)800Lockerrent700Lessoutstandingfor2002240Incomefromrefreshments350046040007960BalancesheetAson31stDecember2003Liabilities Rs Assets RsCapitalfund32000Addentrancefees800SubscriptionreceivedInadvanceOutstandingexpensesFor2002200For2003500OutstandingsalaryLoanIncomeandexpenditureAccountBalance1620addsurplus(2003)860328001507002005000248041330Building30000Lessdepreciation2000LeaseholdlandOutstandingdebtorsForsubscription:Fortheyear2002:180Fortheyear2003800Cashinhand280004000980835041330 40. SchoolofDistanceEducationFinancialAccounting 40Illustration3Given below are the balance sheet as on 1stJanuary 2011 and receipt and payment accounts for theyear ending 31-2dec 2011 of a club. You are required to prepare income and expenditure account forthe year ended 31 Dec 2011 and the balance sheet on that date.Balancesheetasat1stJan2011SubscriptionsreceivedinadvanceSportsmaterialbilloutstandingCreditorsTournamentfundCapitalfundRs35012005007002650029350CashinhandSportsmaterialStationerystockSalarypaidinadvanceSubscriptiondueFixeddeposit(tournamentfund)@5%FurnitureBuildingRs1500300020080070070024502000029350Receiptsandpaymentaccountfortheyearended31stDec2011BalanceSubscription2010200201173002012500EntrancefeesSaleofsportsmaterialDonationforbuildingSubscriptionfortournamentReceiptsfromBilliardroomCardroomTenniscourtSwimmingpoolRs1500800040015010000250034002000545015000SalariestostaffHonorariumElectricityandpowerandWaterchargesPrintingandstationeryEntertainmentRent,rates,taxSundrycreditorsfor2010SportsmaterialExtensionofbuildingTournamentexpensesBalanceRs85405605650222052050804001070400670023003860Notes:Half of the entrance fees shall be capitalized1) Interest on fixed deposit is available on 31stDec each year2) Subscription in arrears on Dec 31,2001.Rs.1503) Stock of stationary on 31stDec. Rs100 41. SchoolofDistanceEducationFinancialAccounting 41Solution Income and Expenditure accountExpenditure Rs Income RsSalaries8540Addadvancepaidin2000800HonorariumElectricityWaterchargesPrintingstationary520Addopening200Lessclosing100EntertainmentRent,rates,taxesSportsmaterial6700Lesslastyear1200Addopening3000Surplus93405605650222062050801070850096034000Subscription7300Addreceivedinlastyear350Addoutstandingthisyear150EntrancefeesSaleofsportsmaterialBilliardroomfeesCardroomfeesTenniscourtfeesSwimmingpoolfees78002001503400200054501500034000Balancesheetason31Dec2001Liabilities Rs Assets RsSubscriptioninadvanceCreditorsfor2000BuildingfundTournamentfund:Openingbalance700Addreceivedthisyear2500Addinterestonfixeddeposit353235Lessexpenses2300CapitalfundOpeningbalance26600Addentrancefee200Surplus960500100100009352776039295CashinhandFixeddepositInterestaccruedSubscriptiondue:20005002001150StockofstationaryBuilding20000Addextension11500Furniture38607003565010031500245039295Illustration4FollowingisthereceiptandpaymentaccountofKennedyclubfortheyearending31stDec.2011 42. SchoolofDistanceEducationFinancialAccounting 42ReceiptandpaymentsaccountDrcrReceipt Rs. Payment Rs.Balanceb/dSubscriptionsdonation250055006508650SalariesRentPostage&telegramStationaryinvestmentSundryexpensesBalancec/d:CashatbankCashinhand80090015090400035016507108650Youarerequiredtoprepareanincome&expenditureaccountaftermakingfollowingadjustments:1. Subscriptions outstanding at 31st December, 2011 amounted to Rs. 500. SubscriptionsreceivedincludeRs.200for20122. Salariesunpaidat1stJanuary,2011Rs.150andat31stDecember,2011Rs.1003. RentwasprepaidtotheextentofRs.75at31stDecember,20114. OnehalfofthedonationsshouldbecapitalizedSolution KennedyclubIncome&expenditureaccountFortheyearended31stDecember,2011Dr.Cr.expenditure Rs. Income RsSalaries800Lessrelatingto2010150650Add:outstanding100Rent900Less:prepaid75Postage&telegramStationarySundryexpenseExcessofincomeoverexpenditure(surplus)7508251509035039606125Subscriptions5500Lessrelatingto20102005300Add:outstanding500Donation()58003256125 43. SchoolofDistanceEducationFinancialAccounting 43Illustration 5From the following particulars, calculate the subscription amount to be credited to theincome and expenditure account for the year ending 31stDecember .2011RsSubscriptions received in 2011 16500Subscriptions outstanding on 1stJanuary, 2011 900Subscriptions outstanding on31stDecember, 2011 1300Subscriptions received in advance on 1stJanuary, 2011 750Subscriptions received in advance on on31stDecember 2011 540Solution Rs.Subscriptions received in 2011 16500Add: outstanding on31stDecember, 2011 1300,, received in advance on 1stJanuary, 2011(i.e., received during 2010. For 2011) 750---------18550Less: outstanding on 1stJanuary, 2011 900 : received in advance on on31stDecember 2011(i.e., received in 2010. For 2011 540 1440-------- --------Amount to be credited to income and expenditure account 17,110----------Illustration 6From the given particulars ascertain the amount to be credited to income and expenditureaccount for the year ending 31stDecember, 2011Rs.Subscription received during the year 9350Subscription outstanding on 1stJan. 2011 Rs. 900Of which Rs. 810 were received in 2011Subscription received in advance on 1stJan. 2011 350Subscription received in advance on31stDec. 2011 150Subscription outstanding on 31stDec. 2011 250SolutionSubscription received during 2011 9350Add: outstanding Subscriptions for the current year (2011) 250 44. SchoolofDistanceEducationFinancialAccounting 44 : Subscription received in advance as at the beginningOftheyear(i.e.,receivedin2010,for2011)3509950Less:SubscriptionreceivedinadvanceasattheendoftheYear(i.e.,receivedin2010,for2011)150Less:Subscriptionoutstandingfor2010,receivedin2011810960Amounttobecreditedtoincomeandexpenditureaccount8990=======Illustration7Fromthefollowingparticulars,arriveattheamountofsalariestobedebitedtotheincomeandexpenditureaccountfortheyearending31stmarch,2011Rs.Salarypaidduringtheyear1800Salaryunpaidon31stmarch2011550Salaryunpaidon1stApril2010740Salaryprepaidon1stApril2010 430Salaryprepaidon31stmarch2011570SolutionSalarypaidduringtheyear1800Add:Salaryunpaidon31stmarch2011550,,,,:Salaryprepaidon1stApril2010 430 2780Less:Salaryprepaidon31stmarch2011570:Salaryunpaidon1stApril20107401310Salarytobedebitedtoincome&expenditureaccount1470 =======ACCOUNTING FROM INCOMPLETE RECORDS-SINGLE ENTRY SYSTEMSingle entry system is a system of accounting, which does not follow the double entry system.Under this system, accounts relating to debtors and creditors are maintained. Kohler defines singleentry system as a system of book keeping which as a rule only records of cash and personal accountsare maintained, it is always incomplete double entry varying with circumstances 45. SchoolofDistanceEducationFinancialAccounting 45Features of single entry system1) Maintenance of personal accounts2) Maintenance of cashbook3) Dependence on original vouchers4) It does not follow strict double entry system5) No uniformity. The system may differ from firm to firm.6) Suitability. The system suitable in case of small firms, partnership firm etcMerits1) It is simple method of accounting2) It is economically3) It is suitable for small enterprises4) It is possible to record transactions quicklyDemerits1) Arithmetical accuracy cannot be checked2) Nominal accounts are not maintained3) It does not record of all assets and liability4) Financial position of business cannot be judged5) True profit cannot be ascertained6) It is not suitable to limited companies7) It is not acceptable to income tax authoritiesComputation of profitThe profit or loss in case of a business maintaining accounts according to single entrysystem can be computed by two methods namely, statement of affairs method and conversionmethod.StatementofaffairsmethodornetworthmethodAccording to this method, the profit or loss made by the business is computed by comparingthe capital of the business on two different dates. The following procedure is followed1) Astatementofaffairsatthebeginningoftheyearispreparedtoascertaincapitalatthebeginning.2) Closingstatementofaffairsispreparedtoascertaincapitalattheend3) ProfitisascertainedbyCapitalattheendxxxAdd:drawingsxxxxxxLessfurthercapitalintroducedxx 46. SchoolofDistanceEducationFinancialAccounting 46 xxxxLesscapitalatthebeginningxxx Profitmadeduringtheyearxx========Illustration1Akeepshisbooksbysingleentrysystem.Hispositionon1stJan2011wasasfollowsCashatbankRs5000MachineryandplantRs6500CashinhandRs1000 BillsreceivableRs2600StockRs7000 creditorsRs2500SundrydebtorsRs8400 BillspayableRs4000On31stDec2011hispositionwasasunderCashatbankRs4300MachineryandplantRs6500CashinhandRs1700 BillsreceivableRs3200StockRs9000 CreditorsRs1600SundrydebtorsRs6000 BillspayableRs3200DuringtheyearaintroducedfurthercapitalofRs2000,andhisdrawingswereRs.800permonthDepreciatemachineryandplantby5%andcreateareserveforbadanddoubtfuldebtsat5%.fromtheaboveinformationprepareastatementshowingtheprofitandlossmadebyhimfortheyearended31stDec2011SolutionStatementofaffairsason1stJan2011Liabilities Rs Assets RsCreditorsBillspayableCapital(balance)250040002400030500BankCashinhandStockDebtorsMachineryBillsreceivable50001000700084006500260030500 47. SchoolofDistanceEducationFinancialAccounting 47Statementofaffairsason31dec2011Liabilities Rs Assets RsCreditorsBillspayableCapital(balance)160032002527530075BankCashinhandStockDebtors(60005%)Machinery(65005%)Billsreceivable43001700900057006175320030075Statementofprofitfortheyearended31stDec2011Capitalason31stDec2011Add:drawings(800x12)Less:furthercapitalintroducedLesscapitalason112011Profitmadeduring20112527596003487520003287524000887Illustration 2Sri C Sharma commenced business on 1-jan-2003 with a capital of Rs 25000: Rs 20000 brought incash and the balance in the form of machinery. On 1stOctober 2003 he introduced Rs 10000 in thebusiness for which Rs 6000 were borrowed from his wife during the year. He withdraw at the rate ofRs 500 a month his position on 31stDec 2003 was as followsASSETSStock of goods Rs 12500: sundry debtors Rs 10500: machinery Rs 6000: cash at bank Rs3000: cash in hand Rs 500: bills receivable: Rs 3800 and furniture Rs 10000LIABILITIESSundry creditors Rs 8500: loan from wife Rs 6000: bills payable Rs 1500Ascertain his profit for the year ended 31 Dec 2003 48. SchoolofDistanceEducationFinancialAccounting 48Solution STATEMENTOFAFFAIRSAsat31122003liabilities Rs asset RsSundrycreditorsLoanfromwifeBillspayableCapital(balancingfigure)8500600015003030046300StockSundrydebtorsMachineryCashatbankCashinhandBillsreceivableFurniture12500105006000300050038001000046300 Statementofprofitorlossfortheyearended31122003Capitalattheend(31122003)AdddrawingsduringtheyearLessadditionalcapitalintroducedLesscapitalatthebeginning(112003)Profitearnedduringtheyear(2003)Rs30300600036300400032300250007000 49. SchoolofDistanceEducationFinancialAccounting 49Illustration3SriShankarkeepshisbooksonsingleentryandfollowinginfoisdisclosedfromhisrecords 31122002(Rs) 31122003(Rs)BalanceatbankSundrydebtorsFurnitureStockintradeInvestmentsCashinhandSundrycreditorsBillspayableLoanfromteapankaj(Cr)25001400029000150006000200250001000.55002100027500200006000500290006004000Sri V Shankar transferred Rs 300 per month from the business to his private bank account byway of drawings. In addition, he withdraws Rs 6000 for his daughters marriage and Rs 500 forcharitable purpose. He also withdraws goods worth Rs 2500 for domestic purpose.In august 2003 he had received a lottery price of Rs 6000 of which he invested Rs 3000 in tothe business. He sold some private property for Rs 8000 and processed were utilized for the businessHe wants his furniture to be depreciated at 10% per annum and a reserve for doubtful debts becreated at 6%.he had not paid 2 months salary to his accountant at the rate of 400 per month and 2months rent of the shop was unpaid amounting to Rs 500.interest earned but not received by him wasRs 2100.prepare a statement of profit and loss for the year ending 31-12-2003.SolutionTo calculate the opening capital, the statement of affairs as at 31-dec-2002 is prepared thus:Statement of affairs as at 31-12-2002Liabilities Rs Assets RsBankoverdraftSundrycreditorsBillspayableCapital(bal.fig)25002500010003570064200SundrydebtorsFurnitureStockintradeInvestmentCashinhand140002900015000600020064200 50. SchoolofDistanceEducationFinancialAccounting 50Similarly, a statement of affairs at Dec 31, 2003 will show the closing capital, thus:Statementofaffairsasat31122003Liabilities Rs Assets RsSundrycreditorsBillpayableLoanfromT.PankajCapital(bal.fig)2900060040004690080500CashatbankSundrydebtorsFurnitureStockintradeInvestmentCashinhand5500210002750020000600050080500Then arrive at the Profit or loss made by him during the year, a statement of profit or lossisprepared,thus:Capitalattheend(31122003)AdddrawingduringtheperiodLessadditionalcapitalintroducedLesscapitalatthebeginning(31122002)ProfitsubjecttoadjustmentsLessdepreciationonfurnitureof10%ReserveforDoubtfuldebtsat6%OutstandingsalaryOutstandingrentAddinterestearnedbutnotreceivedNetprofit,transferredtocapitalRs27501260800500Rs469001260059500110004850035700128005310749021009590 51. SchoolofDistanceEducationFinancialAccounting 51CONVERSION METHODConversion of single entry in to double entry involves the complete process ofjournalizing, posting, balancing and preparation of trial balance. Then final accounts are to beprepared .if any information is missing, it should be ascertained by preparing the relevant accountsbefore preparation of final accountsFollowing steps are taken1) Prepare statement of accounts in the beginning so as to ascertain capital in the beginning2) Prepare cashbooks, cashbook reveals missing figure cash or bank balance at the beginning orat the end as the case may be. Sometimes cashbook reveals the amount of sundry expenses ordrawings or cash purchases(if credit side is shorter than debit) or cash sales or sundry incomesor capital introduced(if debit side is shorter than credit side)3) Then prepare I(1)total debtors account (2) total creditors account,(3) bills receivable account(4) bills payable account(these accounts help in finding out credit sales, credit purchases,debtors or credit balances4) After preparing these accounts, calculate total sales by adding credit sales and cash sales totalpurchases by adding cash purchases and credit purchases5) Information relating to nominal accounts can be ascertained from the cashbook. Real accountsand amounts outstanding are given by way of information. These accounts can be completed6) After these it will be possible to prepare final accounts in the usual mannerSpecimenTOTAL DEBTORS ACCOUNTOpeningbalanceofcreditorsCreditsalesBillsreceivabledishonoredRsXxxXxxXxxxxxCashreceivedfromdebtorsBillsreceivablereceivedDiscountallowedAllowancesclaimedReturninwardsBaddebtsTransferto/fromcreditorsClosingbalanceofdebtorsRsXxxXxxXxxXxxXxxXxxXxxXxxXxx 52. SchoolofDistanceEducationFinancialAccounting 52TOTALCREDITORSACCOUNTCashpaidtocreditorsBillspayableacceptedDiscountreceivedAllowancesreceivedReturnoutwardsTransferto/fromdebtorsClosingbalanceofcreditorsRsXxxXxxXxxXxxXxxXxxXxxxxxxOpeningbalancesofcreditorsCreditpurchasesBillspayabledishonoredRsXxxXxxXxxXxxxBILLSRECIEVABLEACCOUNTOpeningbalanceSundrydebtors(B/Rreceived)RsXxxXxxxxxxCash(realizationofbill)Sundrydebtors(billreturneddishonored)ClosingbalanceRsXxxxxxXxxXxxxBILLSPAYABLEACCOUNTSCashpaid(onaccountofbillspayable)Sundrycreditors(B/Pdishonored)ClosingbalanceRsXxxXxxXxxxxxxOpeningbalanceSundrycreditors(billsaccepted)RsXxxXxxXxxx 53. SchoolofDistanceEducationFinancialAccounting 53Illustration4AscertaincreditsalesandpurchasesfromthefollowingfiguresDebtorsRscreditors RsOpeningbalances10800openingbalances5900Cashreceived 36850 cashpaid 24800Discountallowed 2000 discountreceived450Baddebtswrittenoff 450 returns 540Returns 800 billspayableissued 2860 Billsreceivablereceived 8400 closingbalances6200Billsreceivabledishonored 600Closingbalance 8700SolutionTotaldebtorsaccountBalanceb/dBillsreceivable(dishonored)Creditsales(balancingfigure)Rs108006004580057200CashDiscountallowedBaddebtsReturnsBillsreceivableBalancec/dRs3685020004508008400870057200TotalcreditorsaccountsCashDiscountreceivedReturnsBillspayableBalancec/dRs248004505402860620034850Balanceb/dCreditpurchases(balancingfigure)Rs59002895034850 54. SchoolofDistanceEducationFinancialAccounting 54Illustration5From the following particulars extracted from the books of a trader kept under the singleentry system you are asked to find out the figure for credit sales and credit purchases bypreparing the total debtors account and total creditors account show also the bill receivableaccount and bills payable account.Balance,1stJan2011 Rs Totaldebtors 18700 Totalcreditors 8500 Billsreceivable 1400 Billspayable 900 Cashreceivedfromcustomers 46500 Cashpaidtocreditors 24720 Discountallowedtocustomers 1450 Discountreceivedfromsuppliers 950 Baddebtswrittenoff 850 Returnstosuppliers 435 Returnsfromcustomers 945 Cashreceivedagainstbillsreceivable 4660 Cashpaidagainstbillspayable 2230 Baddebtspreviouslywrittenoff,nowreceived 450Billsreceivabledishonored 500Balance31stDecember,2011 Totaldebtors 17800 Totalcreditors 9400 Billsreceivable 350 Billspayable 1050 55. SchoolofDistanceEducationFinancialAccounting 55SolutionBillsreceivableaccountBalanceb/dSundrydebtors(balancingfigure)Balanceb/dRs140041105510350CashSundrydebtors(billsdishonored)Balancec/dRs46605003505510BillspayableaccountCashBalancec/dRs223010503280Balanceb/dSundrycreditors(balancingfigure)Balanceb/dRs900238032801050TotaldebtorsaccountBalanceb/dBillsreceivable(dishonored)Salescredit(balancingfigureRs187005005245571655CashDiscountBaddebtsReturnsBillsreceivableBalancec/dRs46500145085094541101780071655 56. SchoolofDistanceEducationFinancialAccounting 56TotalcreditorsaccountCashDiscountReturnsBillspayableBalancec/dRs247209504352380940037885Balanceb/dPurchasescredit(balancingfigure)Balanceb/dRs85002938537885940Illustration6Fromthefollowingdataascertaintotalsales RsBalance of debtors on 1-1-2011 24000Sales returns 10000Cash received from customers 90000Discount allowed t them 6000B/R received 34000Bad debts 3000B/R dishonored 7000Balance of debtors as on 31-12-2011 20000Cash sales 50000 57. SchoolofDistanceEducationFinancialAccounting 57TotaldebtorsaccountBalanceb/dB/R(dishonored)Sales(creditbalancingfigure)Rs240007000132000163000CashDiscountB/RBaddebtsSalesreturnsBalancec/dRs9000060003400030001000020000163000Totalsales=132000+50000=182000Illustration7Fromthefollowing,ascertaintotalpurchases: RsBalancesofcreditorson112011 14000Cashpaidtocreditors 10000B/Pgiven 10000Discountallowedbythem 500Returnoutward 3000Creditorsason31122011 25000Cashpurchases 10000 58. SchoolofDistanceEducationFinancialAccounting 58Solution TotalcreditorsaccountCashB/PDiscountReturnsBalanceb/dRs100001000050030002500048500Balanceb/dPurchases(creditbalances)Rs140003450048500Totalpurchases=34500+10000=44500Illustration 8A commenced as a business as a cloth merchant on 1-1-2011 with a capital of rs 10000.on the samedate he purchased furniture and fitting for cash 3000From the following particulars obtained from his books kept by single entry, you are requiredprepare trading and profit and loss account for the year ending 31stDecember 2011 and a balancesheet on that date:Sales(inclusiveofcashRs7000) 17000Purchases(inclusiveofcashRs4000) 15000Asdrawings 1200Salarytostaff 2000Baddebtswrittenoff 500Businessexpenses 700 A took cloth worth Rs 500 from the shop for private use and paid Rs 200 to hisson, but omitted to record these transactions in his books on 31stDecember 2011.his sundry debtorswere Rs 5200.and sundry creditors Rs 3600.stock in hand on 31stDec 2011 was Rs 6500 59. SchoolofDistanceEducationFinancialAccounting 59Astrading&profitandlossaccountfortheyearending31stDec2011purchases15000lessdrawings500Grossprofitc/dSalariesBaddebtsBusinessexpensesNetprofit14500900023500200050070058009000SalesClosingstockGrossprofitb/dRs1700065002350090009000Asbalancesheetason31December2011SundrycreditorsCapital10000Lessdrawings190081000Addnetprofit5800Rs36001390017500CashSundrydebtorsClosingstockFurnitureRs280052006500300017500Workingnotes:SundrydebtorsaccountSalescreditRs1000010000Cash(balancingfigure)BaddebtBalancec/dRs4300500520010000 60. SchoolofDistanceEducationFinancialAccounting 60 Sundrycreditorsaccountcash(balancingfigure)balancec/dRs7400360011000PurchasescreditRs1100011000CashaccountCapitalSalesDebtorsRs100007000430021300FurniturePurchasesDrawings(1200+200)SalariesBusinessexpensesCreditorsBalancec/d(balance)Rs30004000140020007007400280021300 Illustration9 Sunil keeps his books on single entry system. From the following information provided byhim prepare a trading and profit and loss account for the year ended 31stDecember 2011 and abalance sheet on that dateParticular 31122010 31122011FurnitureStockSundrydebtorsPrepaidexpensesSundrycreditorsOutstandingexpensescash10000600012000.50001400240012000300013000500.2200800 61. SchoolofDistanceEducationFinancialAccounting 61ReceiptsandpaymentaccountduringtheyearwasasfollowsReceivedfromdebtors 40500Paidtocreditors 19000Carriageinwards 4500Drawings 10000Sundryexpenses 12500Furniturepurchased 2000 Otherinformation Therewereconsiderableamountofcashsales.CreditpurchasesduringtheyearamountedtoRs24000.createaprovisionof10%ondebtorsfordoubtfuldebts.CASHBOOKReceipts Rs Payments RsBalanceb/dDebtorsSales(balancingfigure)Balanceb/d240040500590048800800CreditorsCarriageinwardsDrawingsSundryexpensesFurnitureBalancec/d1900045001000012500200080048800TotaldebtorsaccountBalanceb/dSales(balancingfigure)Balanceb/dRs12000415005350013000CashBalanceb/dRs405001300053500TotalcreditorsaccountCashBalancec/dRs190001000029000Balanceb/dPurchasesBalanceb/dRs5000240002900010000 62. SchoolofDistanceEducationFinancialAccounting 62Balancesheetason31122010Liabilities Rs Assets RsOutstandingexpensesSundrycreditorsCapital(balancingfigure)140050002400030400CashDebtorsFurnitureStock24001200010000600030400TradingandprofitandlossaccountFortheyearended31stDecember2011OpeningstockPurchasesCarriageinwardsGrossprofitc/dSundryexpenses12500Lessprepaid50012000Lessoutstanding2010140010600Addoutstanding20112200ProvisionfordoubtfuldebtsNetprofittransferredtocapitalRs60002400045001590050400128001300180015900Sales:Cash5900Credit41500ClosingstockGrossprofitb/dRs474003000504001590015900 63. SchoolofDistanceEducationFinancialAccounting 63Balancesheetasat31December2011Liabilities Rs Assets RsSundrycreditorsOutstandingexpensesCapital(opening)24000Addnetprofit180025800Lessdrawings100001000022001580028000FurnitureStockSundrydebtors13000LessprovisionforDoubtfuldebts1300PrepaidexpensesCash1200030001170050080028000Illustration10Fromthefollowingdata,ascertaintotalsales.Balancesofdebtorson112011Rs.24000Salesreturn10000Cashreceivedfromthecustomers90000Discountallowedtothem6000B/Rreceived34000Baddebts3000B/Rdishonored7000Balanceofdebtorson3112201120000Cashsales50000 64. SchoolofDistanceEducationFinancialAccounting 64Solution TotalDebtorsA/cTobalanceb/d,,B/R(dishonored),,creditsales(Bal.fig.)240007000132000163000Bycash,,Discount,,B/R,,Baddebts,,salesreturns,,balancec/d9000060003400030001000020000163000Totalsales=132000+50000=182000Illustration 11A, B and C were in partnership and towards the end of 2011 most of their records weredestroyed by fire. The balance sheet as on 31stDec. 2010 was as followsCreditorsCapitalA4500B3000C1500CurrentAccountsA145B100Rs5500900024514745CashDebtorsStockMachineryFixtures&fittingAdvancePaymentsCurrentAccount(C)Rs24003600650014406003517014745The partners drawings during 2011 have been provided at A Rs.1400; B Rs. 1000 and CRs.650; on 31stDec. 2011, the cash was Rs.3200, Debtors Rs.4045 stock Rs. 5900, Advancepayment Rs. 25 and creditors Rs.6040. machinery is to be depreciated by 10% per annum andfixtures and fitting at 7.5%, 5% interest is to be allowed on capital. The partners share profitsin the proportion of , 1/3 and 1/6. 65. SchoolofDistanceEducationFinancialAccounting 65You are required to prepare a statement showing the net trading profit for the year 2011and the division of the same between partners, together with the balance sheet as on 31stDec.2011SolutionStatementofaffairsofM/sA,BANDCAson31stDec2011Liabilities Rs Assets RsCreditorsCapital:A4500B3000C15006040900015040CashinhandDebtorsAdvancepaymentStocksFixturesandfitting600Less:7.5%dep.45Machinery1440Less:depreciation144Combined current account ofAB&C3200402525590055512963915040 66. SchoolofDistanceEducationFinancialAccounting 66StatementofprofitandlossofA,BandCFortheyearended31stDec2011CombinedcurrentaccountsofA,B&Con31122011(Dr)Add:Drawing:ABCLESS:combinedcurrentaccountsofA,BandCon112011A(Cr)B(Cr)C(Dr)ProfitmadeduringtheyearbeforeallowinginterestoncapitalLess:interestoncapital(5%)A(4500X5/100)B(3000X5/100)C(1500X5/100)NetprofitmadeduringtheyearShareofprofitAsshare=2486x=Bsshare=2486x1/3=Csshare=2486x1/6=Rs1400100065014510024517025515075Rs39.3050301175293645024861243828415 67. SchoolofDistanceEducationFinancialAccounting 67 BalancesheetofM/sA,BandCasat31stDec.2011liabilities Rs Assets RsCreditorsCapital:A4500B3000C1500AsCurrentsA/cason11.11145Add:profit1243Add:interest2251613Lessdrawing1400BscurrentA/c:Ason1111100Add:profit150Add:interest8281078Less:drawing1000 604090002137815331CashDebtorsAdvancepaymentStockFixtures&fitting600Less:depreciation45Machinery1440Less:depreciation144CscurrentA/cason1111170add:drawing650820Less:interest75745Less:profit41532004025255900555129633015331 68. SchoolofDistanceEducationFinancialAccounting 68Illustration12Mrs. SAJINA keeps her books of accounts under single entry system. From thefollowing prepare Trading and profit & loss account for the year ended 31-03-2011 togetherwith balance sheet as on that datesCash book analysis shows the followings:-Interest charges 100 balance at bank on 31-03-2011 2425Personal withdrawals 2000 cash in hand as on 31-03-2011 75Staff salaries 8500 received from debtors 25000Other business exp. 7900 cash sales 15000Payments to creditors 15000Further details available are:As on 1-4-2010 as on 31-3-2011Stock in hand 9000 10220Creditors 8000 5500Debtors 22000 30000Furniture 1000 1000Office premises 15000 15000Provide 5% interest on Xs capital balance as on 1-4-2010. Provide Rs. 1500 forD/D, 5% depreciation on all fixed assets. 5% group commission to staff has to be provided foron N/P after meeting all expenses and the commission.SolutionTradingandprofitandlossa/cfortheyearended31032011OpeningstockPurchaseGrossprofitc/dInterestSalariesExpensesProvisionfordoubtfuldebtsInterestoncapitalDepreciation:FurnitureOfficepremisesGroupcommissionNetprofitc/dRs.9000125003672058220=======1008500790015001750507507701540036720SalesClosingstockGrossprofitb/dRs.480001022058220======3672036720 69. SchoolofDistanceEducationFinancialAccounting 69BalancesheetasonMarch312011Liabilities Rs Assets RsCapital35000Add:interest1750Add:netprofit1540052150Less:Drawing2000CreditorsGroupcommission50150550077056420Premises15000Less:depreciation750Furniture1000Less:depreciation50StockonhandDebtors30000Less:prov.ForD/D1500CashinbankCashinhand14250950102202850024257556420Workingnote:(1)CASHBOOK2009 Rs. 2008 Rs.March31TodebtorsSales250001500040000March312009March31By Balance b/d(balance)InterestDrawingsalariesexpensescreditorsbalancec/d:bankcashinhand40001002000850079001500024257540000 70. SchoolofDistanceEducationFinancialAccounting 70(2)StatementofaffairsasatApril1.2010Liabilities Rs. Assets RsCapital(balance)BankoverdraftCreditors350004000800047000StockinhandDebtorsFurnitureOfficepremises90002200010001500047000(3)TotalDebtorsAccountOpeningbalanceCreditsales(bal.fig)Rs220003300055000CashClosingbalanceRs250003000055000Totalsales=cashsales+creditsales=Rs.15000+33000=48000(4)TotalcreditorsaccountCashClosingbalance15000550020500OpeningbalancePurchase80001250020500(5)GrossprofitRs.36720Less:allexpensesexceptcommission20550Netprofitbeforecommission16170Commission16170x5/105770Netprofitaftercommission15400======= 71. SchoolofDistanceEducationFinancialAccounting 71Trialbalancedebtors Rs. Creditors Rs.OpeningstockDebtorsFurniturePremisesInterestchargesDrawingStaffsalariesBusinessexpensePurchaseCashinhandCashatbank9000300001000150001002000850079001250075242588500CreditorsCashsalesCreditsalescapital550015000330003500088500 72. SchoolofDistanceEducationFinancialAccounting 72Module 3HIRE PURCHASE AND INSTALLAMENT SYSTEMHire Purchase systemIt is a system of purchase under which the buyers enters into agreement with the seller to paythe price in installments. The buyer gets the possession of goods immediately on paying the downpayment but does not get ownership. He becomes the owner only after the last installment is paid.Under this system the buyer fails to pay any installment, the seller has the right to tack back thegoods.Difference between hire purchase and saleThe main difference between hire purchase agreement and sale are given below:1. Under the sales ownership is transferred at the time of purchase. But under hire purchaseownership is transferred only after payment of the last installment2. In the case of sale payment of price is generally made in lump sum. In the case of hirepurchase payment of price is always made installment3. In the case of sales buyer can dispose of the goods in any way he likes. But a buyer under hirepurchase agreement has no such right before he becomes the owner on payment of theinstallment.4. In the case of sale on credit the seller can sue the buyer for the payment of the priceoutstanding. Bur a seller under hire purchase system can take back the goods in case of defaultby the buyer in payment of any installment5. In case of sale, the buyers position is like that of an owner. But the position of an under hirepurchase is like that of a bailee in respect of the goods until he becomes the owner.6. In case of sale on immediate cash, the price does not include any interest. But under hirepurchase the installment includes interest.Accounting for hire purchase transactionsIn the books of hire purchaserThere two methods for making entries of the hire purchase transactions in the books of hirepurchaser.1) When asset is recorded at full cash price and2) When asset is recorded at the cash price actually paidWhen asset is recorded at full cash priceUnder this method the asset is recorded at the full price. Thus this method treats the hirepurchaser as owner of the asset.Accounting entries in the books hire purchaser as follows:1) When the asset is acquired on hire purchaseAsset account Dr.To hire vendor a/c (cash price) 73. SchoolofDistanceEducationFinancialAccounting 732) When down payment is madeHire vendor a/c Dr.To cash a/c3) When interest becomes dueInterest a/c Dr.To hire vendor a/c4) When installment is paidHire vendor a/c Dr.To cash5) When depreciation is charged on assetDepreciation a/c Dr.To asset6) For closing interestP & L a/c Dr.To interest7) For closing depreciationP & L a/c Dr.To Depreciation a/cIn the books of hire vendorAccounting entries are as follows:1) When the asset is soldHire purchase a/c Dr.To hire purchase sales a/c2) When down payment receivedCash a/c Dr.To hire purchase a/c3) When interest become dueHire purchase a/c Dr.To interest4) When installment receivedCash A/c Dr.To hire purchaser5) For closing interestInterest a/c Dr.To P & L a/c 74. SchoolofDistanceEducationFinancialAccounting 74Illustration1On1stJan.2008ALtdpurchasedfromBLtd.fivetracksunderhirepurchasesystem.Rs50000beingpaidondeliveryandthebalanceinfiveinstallmentsofRs75000eachpayableannuallyon31stDec.thevendorcharges5%p.ainterestonyearlybalances.ThecashpriceoffivetruckswasRs.375000Show how this transaction should be recorded in the books of A ltd, if A Ltdwritesoffdepreciationat10%p.aonthewrittendownvalue.InthebooksofALtdTrucksaccount2008Jan12009Jan12010Jan12011Jan12012Jan1ToBLtdTobalanceb/dbalanceb/dbalanceb/dbalanceb/dbalanceb/d3750003750003375003375003375003037503037502733702733702460302460302008Dec31Dec31Dec31Dec31Dec31BydepreciationBybalancec/dBydepreciationBybalancec/dBydepreciationBybalancec/dBydepreciationBybalancec/dBydepreciationBybalancec/d3750033750037500033750303750337500303802733703037502734024603027337024600241430246030 75. SchoolofDistanceEducationFinancialAccounting 75BLtd2008Jan1Dec312009Dec312010Dec312011Dec312012Dec31TocashTocashTobalanceb/dTocashTobalancec/dTocashTobalancec/dTocashTobalancec/dTocash5000075000266250391250750002045602795607500013979021479075000717801467807500075000Jan1Dec31Jan131stDec.Jan131stDecJan131stDecJan131stDecBytrucksByinterestBybalanceb/dByinterestBybalanceb/dByinterestBybalanceb/dByinterestBybalanceb/dByinterest375000162503912502662501331027956020456010230214790139790699014678071780322075000 76. SchoolofDistanceEducationFinancialAccounting 76Interestaccount2000Dec312000Dec312000Dec312000Dec312000Dec31ToBLtd.ToBLtd.]ToBLtd.ToBLtd.ToBLtd.1625013310102306990322031stDec31stDec31stDec31stDec31stDecByP&La/cByP&La/cByP&La/cByP&La/cByP&La/c16250133101023069903220CALCULATIONOFINTEREST1. Calculation of interest when cash price and rate of interest and amount of installment aregiven total interest is the difference between hire purchase price and cash price. Interestfor each year is calculated on the amount of outstanding cash price2. Calculation of interest when cash price and amount of installment are given. In the case ,total interest apportioned to each year on the ratio of installment price outstanding3. When rate of interest and installment are given but total cash price is not given. In thismethod, interest is calculated from the last year firstly and then previous year and at lastfist year. For this purpose. Rate of interest must be converted on cash to on installment.Illustration2X purchased a radiogram on HP system. He is required to pay Rs 800/- down, Rs. 400/-at the end of first year and Rs. 300/- at the end of second year and Rs.700/- at the end of third year.Interest is charged at 5% p. a. calculate cash price and interest of each installmentyear installment Interestpaid Cashprice1styeardownpayment 800 Nointerest 800Firstyearend400 400+254+667*5/105=63 337Secondyear300 330+667*5/105=46 254Thirdyearend 700 700*5/105=336672058Default and re possessionWhen hire purchaser is not able to make the payment in time, then default is committed byhim and the owner takes back the possession of goods. There are two possibilities: 77. SchoolofDistanceEducationFinancialAccounting 771) When seller takes back the possession of complete goods2) When seller takes possession of only part of the total assets soldWhen seller takes back the possession of complete goodsIn the case accounting treatment is as follows:In the books of purchaser:1) All entries are passed as usual up to the date of default.2) Buyer closes the account of seller by passing the entry:Hire vendor account DrTo assets account3) Any balance left in asset account is closed by transferring to P & L account.In the books of seller1) All entries are passed as usual up to the date of default.2) Seller closes the purchaser account by passing:Re possessed goods account Dr.To hire purchaser3) Re possessed goods account or goods returned account is debited with all expensesincurred and re sale price is credited and if any balance, it is transferred to P & Laccount.When seller takes possession of the total assets soldIn the case accounting entries are similar to those of complete repossession. Theadditional precautions to be taken are:1) Both the buyer and seller do not closes sellers account and buyers account in theirrespective books. The entry for repossession is passed with the agreed value of assetstaken by the vendor.2) The buyer finds out the value of asset still left with him using the normal rate ofdepreciation. This account shows the balance of asset, which is left, to him3) Aftercreditingtheassetaccountwiththevalueofassettakenawaybythesellerandafter keeping the balance of asset left, the difference by the asset account istransferredtoP&LaccountIllustration3A Machinery is sold on hire purchase. The terms of payment is four annual installment of Rs.6000at the end of each year commencing from the date of agreement. Interest is charged @ 20% and isincluded in the annual payment of Rs. 6000 78. SchoolofDistanceEducationFinancialAccounting 78Show machinery account and hire vendors account in the books of the purchaser whodefaulted in the payment of the third yearly payment where upon the vendors re-possessed themachinery. The purchaser provides depreciation on the machinery @ 10% p. a on written down valuemethod. All workings should form part of your answerSolutionCALCULATIONOFCASHPRICENo. ofinstall-mentAmount due afterpayment of installmentAmount ofinstallmentTotalamountInterest20/120OpeningBalance1234Rs.5000916712639Rs.6000600060006000Rs.6000110001516718639Rs.1000183325283106Rs.500091671263915533CashpriceofthemachineryisRs.15533 MACHINERYACCOUNTYEARIIIIIITohirevendorsBalanceb/dBalanceb/dRs.155331553313980139801258212582YEARIIIIIIBydepreciationa/cBybalancec/dBydepreciationa/cBybalancec/dBydepreciationa/cByhirevendora/cByprofit&lossa/c(lossindefaultRs.155313980155331398125821398012581100032412