Financial Accounting

Peshawar Business School Affilated with University Of Peshawar

IntroductionDefinition of Accounting. Definition of Book Keeping. Difference between Accounting and Book Keeping. Accounting Terminologies. Branches of accounting, Parties interested in accounting information.

Accounting EquationIntroduction Assets and equities (Liabilities) Balance Sheet Equation. Effect of transactions. Practice.

Business transactions and its recording in the books of accounts.Rules for Debit and Credit General Journal Forms of Journal Journalizing Compound and simple entry Merchandise account. Ledger and Trail Balance. Definition of Ledger and Trail Balance. Posting in to Ledger. Preparation of Trail Balance. Practice. Cash Book Definition of Cash Book Simple or one column Cash Book. Two column Cash Book Three column Cash Book Petty Cash Book Cash Receipt Journal (CRJ) Cash Payment Journal (CPJ) Practice. Bank Reconciliation Statement. Definition of Bank Reconciliation Statement Bank Balance Bank Statement Causes of disagreement Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 1

Peshawar Business School Affilated with University Of PeshawarReconciling Bank Statement Practice. Financial Statement of merchandise concern. Definition of financial statement Purposes of financial statement Forms of income statement Forms of Balance Sheet. Classification of Assets and Liabilities. Adjustments in Financial Statement of merchandise concern Practice.

Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

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IntroductionDefinition of Accounting. Definition of Book Keeping. Difference between Accounting and Book Keeping. Accounting Terminologies. Branches of accounting. Parties interested in accounting information.

Definition of accounting1).The technique of recording, process of identifying, method of measuring and language of communicating business transaction is known as ACCOUNTING. 2). Accounting is the art & science of recording classifying and summarizing , analyzing & interpreting the business transactions in a systematic way & chronological order. 3) Accounting is the language of business. From the above definitions we can conclude that Accounting mainly concerned that 1)Recording of business transaction 2)Classification of recorded data 3)Analysis of summarized data. 4)Preparation of statements and reports.

Definition of Book Keeping1)Book Keeping is an art recording in the books of accounts transaction in money or moneys terms. 2)The systematic recording of financial transaction of an enterprise is known as Book Keeping.

Difference between Accounting and Book Keeping.Points of difference Scope of work Book Keeping Book keeping is the fiRst phase in accounting. It involves the recording of the business transaction in prescribed manner. The job of book keeper is of clerical nature The Book keeper requires no professional knowledge. It is sufficient that he can write in the prescribed manner. Accounting Accounting is next phase. It includes classification of the recorded data, preparation of statements and ascertaining The job of accountant is of technical nature. Professional knowledge and skill is required for the accountant.

Job Description Knowledge and skill


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Peshawar Business School Affilated with University Of PeshawarDecisions The record maintain by the The accounting record is book keeper serve as a base used to make decisions for the accounting processes regarding the business activities.

Basic accounting terminologies:In every field of study some words are used with their specific means are called terms. In accounting also some terms are used. These terms and their meaning are explained as under.

1.

Business

It is general term and includes any legal activities under taken for the purpose of earning profits such as buying and selling of goods, rendering services and manufacturing good. The business organization which are engaged in buying and selling of good/merchandise are called as merchandising or trading concern while those which are engaged in providing any services are called service concern. The business organization engaged in producing good are called as manufacturing concern.

2.

Proprietor

A peRson who invest the money or things in the business is called owner/proprietor. In fact he is that peRson who invest capital and gives his time in attention to the business. He is entitled to receive the profit and bear the losses of the business.

3.

transactions

Any dealing between two or more peRsons for goods or services which effect the financial position of a business and also can be measured in term of money is called transaction.

4.

Voucher

Any written evidence of business transaction is called voucher. 5. Merchandise The thing purchased by a business organization for the purpose of reselling them in the same condition is called merchandise/goods.

6.

Purchases

The cost of merchandise purchased is called merchandise. When the price of goods is paid in cash is called cash purchases and when it is paid on any future dates it is called credit purchase. 7. Sales The amount earn from sale of goods is called sales. If the price is received in cash it is called cash sales and when it is to be received on any some future dates is called credit sale.

8.

Revenue

All sort of income received or accrued is called as revenue. This revenue may be earned from sale of merchandise or by rendering for the customer. Prepared By Kamran Ali Khan Khattak 4 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of PeshawarIt is also earned in the shape of commission, interest or discount.

9.

Expenses

To active the objective of business certain payment or obligation are expenses of business. The example of such expenses are carriage, freight, cartage, salaries, wages, rent, advertisement, insurance etc.

10.

Profit/Income

The amount which a business organization by deducting the cost of product from the revenue or excess amount over the expenses or cost is called income or profit.

11. 12.

Loss Trade Discount

The excess of expense over revenue is called loss

When concession or allowance is given by seller to buyer on list price is called trade discount. There is no accounting record for trade discount.

13.

Cash Discount

A discount which is allowed or received at the time of cash payment on credit sales or purchases is called cash discount.

14. 15.

Stock(Inventory) Balance

Goods or merchandise on hand, that is good remaining unsold is called Stock inventory or stock in trade The balance means the remaining. It may be balance of cash, goods, account receivable and account payable which is carried down for next period for treatment. The difference two sides of an account is called balance.

16. 17. 18.

Account Receivable/Debtor Account payable/ Creditors Assets

A person to whom goods are sold on credit by a business organization is called account receivable. A person from whom a business organization purchase goods on credit is called Account payable. Things possessed by business organization is called Assets. OR Any thing valuable by a business with the following three features qualities has assets. a) The legal title of ownership b) Right to use c) Right to sale/ dispose off The example of assets are cash, building, furniture, machinery, plant, investment, good well, account receivable etc. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 5


According to the features the assets can be divided in the following groups.

I.Current AssetsWhich are either cash or easily convertible into cash. The example of such assets are cash, bank, account receivable, bounds and stock etc. II. Fixed Assets these assets are acquired to retain in the business or which can not be easily convertible into cash such as land, building, plant and machinery, furniture and fixtures, motor vehicles etc. III. Intangible assets the assets which are not physically routable but still valuable for business. Such as trade mark, Good well, copy right, patent right etc.

LiabilitiesIt is the claim of the outsider against the assets of the business. The liabilities also called external equities. It may be following types.

Short term/current LiabilitiesThe liabilities which are payable in near future (within one year) are called as short term liabilities. The example are account payable, notes payable, expenses payable, bank overdraft etc.

Long term liabilitiesThese are three loans which are raised for payment finance of the business. These are payable after number of years. The examples of long term liabilities are long period bank loan, securities and debentures issued, mortgage loans etc.

Special field of accounting/ Branches of accounting.With the development of business activities and specialization in various fields of these activities a number of branches for special study in accounting have evolved. Some important branches of accounting are explained as under.

1)Financial accounting.This field of accounting concern with general accounting system. It is engaged in recording the business transaction in books and preparation of periodical reports for managers and general public.

2)Cost accountingThe main object of this branch of accounting is to control the cost of production and distribution. It checks the efficiency of producing, Selling and administrative department by applying actual and pre determine cost Prepared By Kamran Ali Khan Khattak 6 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of Peshawartechniques. It also shows effects on cost with changes in volume of production and sales.

3)Management accountingThis field of accounting mainly concern with the selection of best among various alternatives. It use the techniques of historical estimated and actual data as a device towards change.

4)Government accountingIt is the method of recording the financial transaction of the central and provincial governments. It keeps the record of expenditure, taxes, revenues and budget of various government departments.

5)AuditingIt is the examination of the accounting record. The purpose of examination is to check the fairness and accuracy of the accounting record and its reconciliation with the prescribed policies and procedure.

Parties interested in accounting information.The information communicated by the accounting is needed for the following purposes. 1)Owner of the business want to know their result of activities i.e. profit and loss suffered and also the financial strength of the business. 2)The investors and creditors of the business to know the profitability and financial status of the business. 3)The employees want to know the stability, future prospects and scope of business. 4)The manager needs various kinds of classified information for decision making techniques. 5)Various government agencies are interested in firms activities and income.


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Accounting EquationIntroduction Assets and equities (Liabilities) Balance Sheet Equation. Effect of transactions. Practice.

IntroductionIn the previous topics we have discussed the basic terms used in accounting. One of the most important term among them is the Balance Sheet. In this topic we shall further explain this term and show the effect on the Balance Sheet.

Assets and equities (Liabilities)Assets refers to all the valuable properties possessed by the business and the equities means the claim against theses assets. The equities are further divided into capital and liabilities. Capital refer to the owners equity which means the right of the owner in the assets of the firm and liabilities refer to outside equities which means the right of the outsiders in the assets of the business.

Balance Sheet Equation.When any asset is purchased the owner not only acquires the property but also right associated to that property. The right in assets are equal to value of the assets. In accounting we refer to these right as claim against asset or equities. From this concept the following equation is derived.

Effect of transactions.(ASSETS =LIABILITES+EQUITIES)As we know that a single proprietor can not contribute all the required fund from his own pocket. He has to raise fund by means of credit purchases, loan from bank. Friends and from many other sources. In this way the right against the assets i.e. equities will be divided in to owners equities and outsiders equities. The outsiders equities are called as Liabilities and owners equities are called as capital. Therefore the Balance Sheet equation can be written as under. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 8

Peshawar Business School Affilated with University Of Peshawar(ASSETS =LIABILITES+EQUITIES)

State that whether the balance of the following accounts should be placed in debit column or credit column of the Trail Balance. 1. 2. 3. 4. 5. 6. 7. Plants and machinery Furniture salary discount allowed Bank overdraft Cash in hand Creditor 8. sundry debtors 9.Carriege Inwards 10.Carriege out ward 11.Sales 12.Purchase 13.Discount Received 14.Interest

SolutionSI. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Trail Balance as at .. Heads of Account LogicAsset Asset Expense Expense Liability Asset Liability Asset Expense Expense Income Expense Income Expense

Dr Balance (Rs)

Cr Balance (Rs)

Plant and Machinery Account Furniture Account Salary Account Discount allowed Account Bank overdraft Account Cash In hand Account Creditors Account Or Accounts Payables Sundry Debtors Account Or Accounts Receivables Carriage Inward Account Carriage out ward Account Sales Account Purchase Account Discount Received Account Interest paid Account

Practical QuestionsQ.1) Following are the transactions of Noman & Co. a) Introducing cash as a capital Rs.20000 b) Purchased merchandise for cash Rs.5000 c) Purchased Computer for cash Rs.1000 d) Merchandise costing Rs.1400 sold to Ahmad for Rs.1800 on account. e) Purchased merchandise from Aftab for Rs.500 Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 9

Peshawar Business School Affilated with University Of Peshawarf) Received Rs.1000 from Ahmad g) Sold merchandise for cash Rs 800 which cost Rs.700 h) Paid salaries in cash Rs.400. REQUIRED:- Record the above transaction in EQUITION form.

Q.2) Mr. Saliq Hassan started business with cash Rs.100000 his selected transactions during the month are given below. a) Bought merchandise on credit Rs.6000 b) Bought Furniture for cash Rs.12000 c) Bought merchandise for cash Rs.40000 d) Paid carriage on purchases Rs.400 e) Sold merchandise for cash Rs.26000 costing Rs.20000 f) Paid cash Rs.6000 against Account Payable. g) Paid salaries in cash Rs.400. REQUIRED:- Show the effect of each transaction on ACCOUNTING EQUATION. Q.3) Following are the transactions of Mr. Ali Hassan & Co for the month of May 2008. 1) Started business with cash Rs.100000, Furniture Rs. 47000. 5) Purchased Equipment on credit for Rs.24000 8) Purchased merchandise from Imran for Rs.14000 15) Bought merchandise for Rs.10000 18) Purchased supplies Rs.26000 20) Return merchandise to Imran for Rs.500 21) Paid wages Rs.1000 30) Paid insurance premium Rs.2000 REQUIRED:-Reflect the effect of above transaction on ACCOUNTIONG EQUATION. Q.4) a) Started business with cash Rs.50000 b) Deposited Rs.15000 in the bank. c) Purchased for cash Rs.2000 and on account from Aslam for Rs.7000 d) Paid cash to Aslam Rs.5000 through check. e) Sold merchandise to Bashir Rs.1500 costing Ts.1000 f) Paid rent by check Rs.500 g) Received cash from Bashir Rs.1200 h) Withdrew cash Rs.1000 and merchandise worth Rs.200 for personal use. REQUIRED:- Show the effect of each transaction on ACCOUNTING EQUATION. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 10

Peshawar Business School Affilated with University Of Peshawar Business transactions and its recording in the books of accounts.Definition of Journal Rules for Debit and Credit Journalizing Compound and simple entry Practice.

Definition of JournalThe word Journal has been derived from the French word Jour which means Day. Thus journal means daily record. In Accounting the journal has been defined as. A book in which a business transaction are recorded first is called Journal. It also known as book of original entry or day book because the day to day transactions are recorded in it. These names are given below with reasons. 1)Day Book: The Journal contains a daily record of all the business transaction therefore it is sometimes called a Day Book 2)Book of Original entry: As the business transaction are firstly recorded in Journal. It is called as Book of Original entry 3)General Journal: In American terminology Journal is known as General Journal.

Rules for Debit and CreditRules for DEBIT 1)When assets are increases will be debited 2)When liabilities are decreases will be debited 3)When expenses are increases will be debit ed

Rules for CREDIT1)When assets are decreases will be credited 2)When liabilities are increases will be credited 3)When incomes are increases will be credited.


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Journalizing SPECIMEN OF A JOURNAL Date Description / Particulars

L/F

Debit Rs

Credit Rs

Recording of transaction in journalThe process of recording the transaction in journal is called Journalizing or making entry. The procedure of making entry is explained as under. 1. DATE:- The date of transaction is recorded in this column. The date is recorded in two lines, in first line the year and in the second line the month and the date. 2. DESCRIPTION OR DETAILS :- In this column the account to be debited is inserted at the extreme left and account to be credited below it after providing some space on the left side. 3. LEDGER FOLIO (L/F):- At the time of posting into ledger the folio (page Number) of the concerned account in the ledger is written. 4. AMOUNT:- Two amounts columns are provided in journal. The debit amount is written in the first column against the name of account to be debited and the credit amount in the second column against the name of account credited. 5. NARRATION:- When the entry is made in journal a brief explanation is also written under description column. This brief explanation is called narration. A line is drawn after it to indicate that the entry is complete.

Compound and simple entryPrepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 12

Peshawar Business School Affilated with University Of PeshawarSimple entry:- By simple entry we means those entries where only one account is debit and one account is credit. Compound entry:- Those entries where two or more then two accounts are debit or credit.

Practical QuestionsQ.1) On January 1st a Irfan started business with cash Rs.50000 and his transaction for the month were as follows. 4. Purchased merchandise for cash Rs.2000 6. Purchased Furniture for cash Rs.3000. 10. Purchased merchandise from Zeeshan for Rs.15000 14. Sold merchandise for cash Rs.20000 18. Sold merchandise to Anwar for Rs.12000 22. Paid cash to Zeeshan Rs.10000 25. Received cash from Anwar Rs.8000 31. Paid salaries Rs.20000 31. Paid rent for the month Rs.5000 REQUIRED:- Pass Journal entries. Q.2) Imran Started business with cash Rs.40000, Furniture Rs.20000, Machinery Rs.40000 2) Purchased merchandise on credit from Benazir & Co for Rs.1000 5) Purchased merchandise for cash Rs.20000 8) Bought goods on account from Zeeshan for Rs.5000 10) Purchased a truck for 50000. Paid cash Rs.20000 and give a note payable For the balance. 15)Purchased office equipment on account for Rs.3000 16)Paid insurance premium Rs.3000 19)Recorded sales on account Rs.4000 20)Return goods to Z for Rs.200 22) Paid to Zeeshan Rs.3000. 25)Paid miscellaneous expenses Rs.100. 26)Sold merchandise to Ajmal worth Rs.4000 27)Return by Ajmal Rs.300 28)Received cash from Ajmal Rs.2000 30) Paid salary to Afan (Secretary and Record keeper) Rs.4000 REQUIRED:- Journalized the above transaction


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Peshawar Business School Affilated with University Of PeshawarQ.3) (a) Commence business with cash Rs.100000 of which Rs.70000 were deposited in to bank. (b) Bought machinery for Rs.10000 ( c)Bought stationary by check Rs.2000 (d) Purchased merchandise for cash Rs.2000 and on credit Rs.4000 (e) Sold goods to Amin & Brothers for Rs.5000 (f) Rs.100 given as a charity. (g) Paid advertisement expenses Rs.200 (h) Return goods by Amin & Brothers Rs.50 (i) Received cash from Amin & Brothers through check. (j) Paid telephone charges Rs.200 (k) Paid carriage on merchandise purchased Rs.100 REQUIRED:- Record the above transactions General Journal. I) Purchased merchandise for Rs.50000 subject to 10% trade discount. II) Sold goods for Rs.70000 subject to 5% trade discount. III)Paid cash to Asad Rs.4800 and discount received Rs.200 IV)Rs.50000 payable to Ashraf less 15% cash discount. V)Received cash from Shehzad Rs.48000 and discount Allowed Rs.2000. VI)Cash receivable form Mr. Umar Rs.70000 less 3% discount. REQUIRED:- Journalized the above transaction. From the following transaction pass JOURNAL entries. 1)Started business with Cash Rs.10000, and Furniture Rs.5000 and Machinery Rs.20000 2)Purchased merchandise for cash Rs.5000 3) Purchased merchandise from Adnan for Rs.4000 4)Sold goods for cash Rs.6000 5)Sold merchandise to Irfan for Rs.6000 6)Return goods to Adnan worth Rs.500 7)Paid cash to Adnan Rs.2000 8)Received cash from Irfan Rs.3000 9)Paid wages Rs.1000 10)Paid salaries Rs.3000.

Q.4)

Q.5)

Q.6). Following are the transaction of Afan & Co Company for the month of Jan 2005. 1) Started business with cash Rs.50000 5) Purchased merchandise for cash Rs.4000 9) Sold goods for cash Rs.10000 12) Sold goods to Zeeshan for Rs.5000 18) Paid Rent Rs.7000 REQUIRED:- Record the above transaction in JOURNAL


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Peshawar Business School Affilated with University Of PeshawarQ.No.7. On first 1 January, 1995, a trader stated with a capital of Rs. 10,000 in cash and his transactions for the month were: 2. Purchased merchandise for cash Rs. 2000. 4. Purchased furniture for cash Rs. 1500. 6. Purchased merchandise from Shan Ali worth Rs. 5000. 8. Sold merchandise in cash for Rs. 6000. 12. Sold merchandise to Azkar for Rs. 8000. 18. Paid to Shan Ali on account Rs. 3000. 25. Received cash from Azkar Rs. 7000. 30. Paid the following expenses: Salaries Rs. 500; Wages Rs. 300; Rent Rs. 1000. 31. Received discount Rs. 50 and commission Rs. 500.Required : Record the above transactions in Journal .

Q.No.8. Record the following transaction in Journal : 1. Started business with Rs.120000 in cash; machinery worth Rs. 8000; stockin trade valued Rs. 50000; Accounts Receivables Rs. 2000. 2. Purchased merchandise from B for Rs. 30000. 3. Sold merchandise to Shabbir for Rs. 20000. 4. Returned merchandise to B worth Rs. 500. 5. Merchandise were sold for cash Rs. 22000. 6. Sold merchandise to Anwar for Rs. 2700. 7. Paid to B Rs. 19000. 8. Received cash Ts. 1500 from Shabbir. 9. Paid telephone bill Rs. 500. 10. Sold merchandise to Sadiq worth Rs. 800. 11. Received cash from Anwar Rs. 2500 . 12. Purchased merchandise from Pak Trading Co. for Rs. 35000. 13. Sadiq returned merchandise worth Rs. 125. 14. Salaries paid Rs. 220 Q.No.9. 1. Muskan & Company started business with a capital of Rs. 100000 out of which Rs. 85000 was deposited into the bank. 2. Purchased supplies for Rs. 1750. 3. Purchased equipments o account for Rs. 14600. 4. Purchased a Truck for Rs. 48000. Paid cash Rs. 8000 and gave a notes payable for the balance. 7. Paid rent for the month Rs. 2250. 10.Received cash for job completed Rs. 26000. 13.Paid wages to employees Rs. 5000. 15.Paid insurance premium Rs. 3440. 18.Recorded sales on account Rs. 28250. 20.Utility expenses Rs. 330. 25. Miscellaneous expenses Rs. 240. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 15

Peshawar Business School Affilated with University Of Peshawar28. Received cash from customeRs Rs. 19400. 30. Withdrew cash for personal use Rs. 6000. 31. Paid salaries to Rehan ( Secretary & Record Keeper ) Rs. 3250. Ledger and Trail Balance. Definition of Ledger and Trail Balance. Posting in to Ledger. Preparation of Trail Balance. Practice.

Definition of LedgerLedger is book which contain a condensed record of all the business transactions. In other words ledger is book in which every account is allotted a separate page and all the transactions relating to that account are written on that page in a summery form. Ledger is called the king of all the books of accounts. Thus we can say classification of Journal is called ledger.

SPECIMEN OF A LEDGERTitle. Account No:----------Dr Date Description Ref Amount Date Description Cr Ref Amount

Definition of Trail Balance.When all the posting in the ledger has been made it is better to prove the accuracy of the recorded before proceeding further. The device used for the proof of arithmetical accuracy is called as Trail Balance. A Trail Balance is two column statement consisting of all the account ting and their balances as they appear in the ledger. The debit balance of ledger accounts are inserted on debit side of the Trail Balance and credit balance of ledger account on the credit side of the Trail Balance. According to the principles of Double Entry Book Keeping System, two sides of the Trial Balance must agree, provided no error is committed in record. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 16


SPECIMEN OF A TRAIL BALANCES. No Description / Items Reference Debit Balance Credit Balance

Total

.

..

Practical QuestionsQ.No1) On January 1st a trader started business with cash Rs.150000 and his transaction for the month were as follows. 4. Purchased merchandise for cash Rs.12000 6. Purchased Furniture for cash Rs.13000. REQUIRED:- From the above transaction pass JOURNAL ENTRIES post them in to LEDGER and prepare TRAIL BALANCE. Following are the transaction of ABC Company for the month of Jan 2005. 1) Started business with cash Rs.50000 5) Purchased merchandise for cash Rs.4000 9) Sold goods for cash Rs.10000 12) Sold goods to Zeeshan for Rs.5000 Prepared By Kamran Ali Khan Khattak 17 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Q.No.2)

Peshawar Business School Affilated with University Of Peshawar18) Paid Rent Rs.7000 REQUIRED:- From the above transaction pass JOURNAL ENTRIES post them in to LEDGER and prepare TRAIL BALANCE

Q.No.3)

From the following transaction pass JOURNAL entries post them into LEDGER and prepare Trail Balance. 1)Started business with Cash Rs.10000, and Furniture Rs.5000 and Machinery Rs.20000 2)Purchased merchandise for cash Rs.5000 3) Purchased merchandise from Adnan for Rs.4000 4)Sold goods for cash Rs.6000 5)Sold merchandise to Irfan for Rs.6000 6)Return goods to Adnan worth Rs.500 7)Paid cash to Adnan Rs.2000 8)Received cash from Irfan Rs.3000 9)Paid wages Rs.1000 10)Paid salaries Rs.3000.

Q.No.4)Jan 1. Started business with cash Rs.25000, Building Rs.55000 and Machinery Rs.45000. Jan 2. Purchased merchandise for cash Rs.15000 and Furniture Rs2000 Jan 7. Sold goods to Asim & Sons for Rs.9000 Jan 9. Received cash from Asim & Sons Rs.89000 in full settlement of his Account. Jan 31. Paid salaries Rs.3000 and Rent Rs.5000 for the month. REQUIRED:- Record the above transaction in Journal. Post them into Ledger and Prepare Trail Balance. Q.NO.5 Following are the transaction of Ali TradeRs.1990 June 1 . Started business with cash Rs.8000. 2 Purchased furniture for cash Rs.1000. 2 Purchased office equipments for Rs.1500. 2. Purchased machinery for Rs. 3900. 3. Merchandise purchased for cash Rs.500. 4. Purchased inventories on credit from J for Rs.1000. 05. Paid carriage and octroi on merchandise purchased Rs.70. 08. Paid advertising expenses Rs.100. 10. Sold merchandise on credit to K for Rs.1000. 15. Merchandise sold for cash Rs.700. 20. Received cash from K Rs.600. 24. Paid cash to J Rs. 500. 25. Merchandise returned by K Rs.100. 28. Returned merchandise to J worth Rs.30. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 18

Peshawar Business School Affilated with University Of Peshawar31. Paid insurance Rs.500; and salaries Rs.200. Instruction: (a) Record the above transactions in journal. (b) Post them into ledger. (c) Prepare a Trial Balance . Q.NO.6 July 01. Faizan started business with Rs.30,000 in the bank and Rs.10,000 cash. 2. Bought goods o n credit from Tehniyat Rs.4800. 3. Purchased machinery for cash Rs.12,300. 4. Paid rent by check Rs.500. 07. Sold merchandise to Raja on account Rs. 66,000. 08. Paid wages in cash Rs.150. 10. Returned goods to Tehhiyat Rs.300. 13. Bought shop fittings in cash Rs.425. 18. Raja returned goods to us Rs.200. 21. Payment made to Tehniyat in full settlement by check; discount received Rs.100 24. Received part of amount owing from Raja by check Rs.2000. 25. Paid Rajas check into the bank. 28. Paid salaries by check Rs.700. Instructions: ( a) Record the above transaction in Journal. (b) Post them into Ledger ( c ) extract the balances of ledger and prepare a trial balance .

Illustration NO.1From the following List of balance , Prepare a Trail Balance. Rs Capital Account 100,000 Opening stock Account Debtors Account 20,000 Creditor Account Fix Asset Account 92,000 Purchase Account Sales Account 1,10,000 Return Inward Account Return outward Account 1,000 Wages and Salaries Account Bills Payable Account 8,000 Bills Receivable Account Bank overdraft Account 11,000 Rent Account Rs 15,000 20,000 70,000 2,000 30,000 15,000 6,000

Solution Illustration NO.1SI.No. 1 2 3 4 5 6 7 Heads of Account Capital Account Debtors Account Fix Asset Account Sales Account Return outward Account Bills Payable Account Bank Overdraft Account

Trail Balance of As at 31st DecLF Debit Balance RS 20,000 92,000 1,10,000 1,000 8,000 11,000 Credit balance RS 1,00,000


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Peshawar Business School Affilated with University Of Peshawar8 9 10 11 12 13 14 15 Opening Stock Account Creditor Account Purchase Account Return Inward Account Wages and salaries Account Bills Receivable Account Rent Account Total 15,000 20,000 70,000 2,000 30,000 15,000 6,000 2,50,000

2,50,000

Illustration NO 2From the following list of balances. Prepare a Trail Balance as on 30.6.1997: Rs 1. Opening Stock 18,000 13.Plant and Machinery 2. Wages 10,000 14.Loose Tools 3. Sales 1,20,000 15. Lighting 4, Bank Loan 4,400 16. Creditors 5. Coal and coke 3,000 17. Capital 6. Purchases 75,000 18. Miscellaneous Receipts 7. Repair 2,000 19. Office Salaries 8. Carriages 1,500 20. Office Furniture 9. Income Tax 1,500 21. Patents 10. Debtors 20,000 22. Good Will 11. Lease hold Premises 6,000 23.Cash at Bank 12. Cash in hand 200 24. Closing Stock Rs 7,500 1,800 2,300 8,000 40,000 600 2,500 600 1,000 15,000 5,100 6,000

Solution Illustration NO 2Trail Balance as at 30.6.1997SI. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Heads of Account Opening Stock Wages Sales Bank Loan Coke and coal Purchases Repairs Carriage Income Tax Debtors Leasehold Premises Cash In hand Plant and machinery Loose Tools Lighting Creditors Capital Miscellaneous Receipts Office Salaries Office Furniture Patents Good Will Cash at Bank Total LF Debit Balance(Rs) 18,000 10,000 3,000 75,000 2,000 1,500 1,500 20,000 6,000 200 7,500 1,800 2,300 8,000 40,000 600 2,500 600 1,000 15,000 5,100 1,73,000 Credit Balance(Rs)

1,20,000 4,400

1,73,000


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Correction of Trail Balance Illustration NO.3The clerk of a business wrongly prepared the following Trail Balance. You are required to draw up a Trial Balance Correctly stating reasons in Brief: SI. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Heads of Account Capital Stock at commencement Discount allowed Commission Received Fixed Assets Sales Purchases Return outward Return Inward Carriage Inward Carriage out ward Wages and salaries Bills Receivable Debtors Bills payable Rent Interest paid Cash Creditors Stock at the End Total LF Debit Balance(Rs) 5,000 500 700 60,000 85,000 45,000 1000 2,000 600 700 25,000 7,000 9,000 7,000 3,000 2,000 800 6,900 33,800 1,77,500 Trail Balance as at .. LF Debit Balance(Rs) 5,000 500 700 60,000 85,000 45,000 1000 2,000 600 700 25,000 Credit Balance(Rs) 60,000

1,77,500

Solution Illustration NO3SI. No. Heads of Account Capital Stock at commencement Discount allowed Commission Received Fixed Assets Sales Purchases Return outward Return Inward Carriage Inward Carriage out ward Wages and salaries

Credit Balance(Rs) 60,000


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Peshawar Business School Affilated with University Of PeshawarBills Receivable Debtors Bills payable Rent Interest paid Cash Creditors Total 7,000 9,000 7,000 3,000 2,000 800 1,60,600 6,900 1,60,600

Reasons: 1. Discount Allowed is an expense , so its balance will be a debit balance. 2. Fixed Assets always reflect debit balance because assets coming in are debited . 3. Sales are income , so its balance will be a credit balance, 4. Purchases are expenses, so its balance will be a debit balance. 5. Carriage inwards is an expense, so its balance will be a debit balance. 6. Carriage outward is an expense, so its balance will a debit balance. 7. Interest paid is an expense, so its balance will a debit balance. 8. A creditor is an liability, so its balance will a credit balance. 9. Closing stock is not an account, so it cannot have any balance and consequently , it cannot find a place in the Trial Balance. Only when closing stock is adjusted against purchases, it appears in the Trial Balance

Illustration NO.4The total of debit side of the Trail Balance of a daily newspaper firm at 31st December, 1997 is Rs1.80,590 and that of the credit side is Rs 36,470. after the several checking and rechecking the following mistakes are discovered: Name of Account Opening Stock Advertisement IncomeCorrect figure (as it should be) Figure as it appear in the trial

12,700 71,780

Balance 12,600 71,780

Rent and rates 2,260 Sundry Creditors 6,170 Sundry Debtor 8,150 Ascertain the correct total of the Trial Balance

(But appear on the debit side) 2,500 6,000 8,400


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Definition of Cash Book A book in which the cash receipt cash payment transaction are recorded is called cash book. Simple or one column Cash Book This type of cash book is used by such firms where Receipt and Payment And Payment are usually made in cash.

Specimen of simple cash bookReceipt Date Vr. Description Ref No Amount Date Vr. No Payment Description Ref Amount


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Peshawar Business School Affilated with University Of Peshawar Practical QuestionsQ.No.1) Following are the receipts and payments of the Mr. Javed for the month of October 2005. 1) Cash in hand Rs.15000 6) Purchased merchandise for cash Rs.2000 10) Received from Akbar Rs.3000. 18) Paid to Babar Rs.1000 25) Paid for stationary Rs.60 30) Paid salaries Rs.1000 31) Purchased office Furniture Rs.2000. REQUIRED:- Prepare cash book. Record the following transaction of Kalid. For the month of May 2005 1) Started business with cash Rs.5000 5) Purchased merchandise for cash Rs.2000 7) Paid carriage and octroi Rs.100 10) Paid Rent Rs.500 12) Sold merchandise for cash Rs.800. 13) Received from customers Rs.1000 15) Paid wages Rs.100 17) Paid cash to supplier Rs.2000 20) Purchased merchandise for cash Rs.2000 25) Sold merchandise for cash Rs.2000 30) Paid salaries Rs.1000 REQUIRED:- Prepare one column cash book.

Q.No.2)

Q.No.3. IRFAN LODHI operated a business I his home. His transactions for the month of January 1988 were : 01. He invested Rs.2,500 cash. 02. Paid Rs.500 to English Biscuits Company ; voucher No 1. 08. Paid Rs.850 for supplies ; voucher No2. 10. Received from customers Rs.650 ; voucher No. 3. 20. Paid Rs.39 for telephone bill ; voucher No. 4. 22. Received Rs.1975 from sales ; voucher No. 5. 27. Paid for equipments Rs.475 ; voucher No. 6. 30. Paid for repairs to typewriter Rs.15 ; voucher No. 7. 30. Paid to creditors Rs.150 ; voucher No. 8.


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Two column Cash BookIn some business the receipt and payment of discount at the time of payment and receipt of cash is very usual. In order to avid the separate record of discount allowed and received a column provided along with the amount column on the both sides of the cash book. This type of cash book is called as Two Column Cash Book. The discount allowed is recorded on debit (Receipt) side and discount received on credit (Payment) side.

Specimen of Two Column cash bookReceipt Date Vr Description No Ref Discount Allowed Amount Da te Vr No Payment Description Ref Discount Received Amount

Practical QuestionsQ.No. 1) 7) 15) 20) Cash in and Rs.2000 Received Rs.190 from Irfan Gul ,Discount Allowed Rs.10 Paid Kamran Rs.485 discount received Rs15 Purchased merchandise Rs300 Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

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Peshawar Business School Affilated with University Of Peshawar25) Received from Zeeshan cash less 3% discount in full settlement of his Account Rs.300 27)Paid to Asad Rs.300 28)Bought Furniture for cash Rs.100 29)Paid rent Rs.100 REQUIRED:- Prepare Two Column Cash Book.

Q.No.2 Record the following transaction in Two Column cash book of a trader and find out the Balance of cash at the end of month Feb 2005 1) Started business with cash Rs.20000 2) Purchased furniture for cash Rs2500 3) Paid insurance premium Rs 100 6) Paid rent for the month Rs 150 8) Received cash from Karim Rs 429 Discount allowed Rs 5 9) Paid cash for purchase of merchandise Rs.2700 10) Paid to Nazir Rs.385 in full settlement of Rs.400 13) Received cash from Rashid Rs 1200 in full settlement of Rs 1250 15) Paid to Javid Rs.5685 discount received Rs15 Q.No.3. Record the following transaction in the cash book of SHARIF CLOTH MERCHANTS and post them into Ledger :1988 February: 01. Cash in hand Rs.44,000. 02. Purchased cloth for Rs.14,000. 04. Paid Rs.100 for carriage 05. Sold merchandise for cash Rs.17,300. 10. Purchased merchandise for cash Rs.10,000. 20. Paid to Sarwar Rs.6,855; discount received Rs.45. 22. Received cash on sales Rs.8,500 ; Insurance Rs.250 ; SalariesRs.700. Answer : Balance Rs.37,395.


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Three Column Cash Book.As an enterprise makes most of the payments and receipt through bank it is useful to provide a bank column on the receipt as well as payment side of the cash book. This helps the cashier to record cash and bank transactions in one book. This type of cash book is called as Three Column cash book

Specimen of Three Column cash bookReceipt Payment Date Description Discount Amount Bank Date Description Discount Amount Bank Allowed Received

Practical Questions of Three Column Cash Book.Q.No.1)The following balances have been taken from the books of HONDA (Ltd) Co For the month ended as at 31st March 2009 Prepared By Kamran Ali Khan Khattak 27 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of Peshawar1) Cash in hand Rs.1532 and balance at bank Rs.18500 2) Received from Kamal Rs.590 and allowed him discount Rs10 3) Paid salaries for the month Rs 200 4) Purchased merchandise payment made by cheque Rs.3200 8) Paid Majid & Co by cheque Rs800 Discount received Rs20 10) Withdrew from bank for office use Rs400 paid rent in cash Rs300 14) Deposited into bank Rs500 15) Cash sales Rs2460 18) Purchased a motor car for Rs 6500 payment made by cheque 23) Received a cheque from Kamal for Rs 391 discount Rs9 25) Paid wages Rs 350 28) Kamals cheque paid in to bank 29) Paid general expenses Rs 360 30) Bank notified that Kamals cheque has been dishonored. 31) Bank charges as shown in pass book Rs15 31) Cash sales Rs 6440. REQUIRED:- Record the above transactions in a Three Column Cash Book. Q.No.2. Enter the following transactions which take place during the month of September 2005. 1 A business has started with cash of Rs. 15000 4 Bought merchandise for cash Rs 1500 5 Purchased furniture for cash Rs 500 8 Cash deposited into bank Rs 8000 10 Sold office equipment Rs 3000 to Sunny & Sons and received from him Rs 1400 in cash and balance by cheque which was deposited in to bank. 16 Withdrew from bank Rs 1200 for office use. 18 Paid for repair and other charges Rs 175 24 Withdrew from business Rs 500 for personal use 29Paid to Manzoor Rs 560 in full settlement of Rs 600 by cheque. REQUIRED:- Three column cash book.

Q.No.3. Jan 1. S started business with cash $ 20000 3. He receives a cheque for $ 600 from K 7. He pays $ 19000 into bank account. 12. He pays into bank $ 450 15. He pays into bank the cheque received from K. 25.He pays R by cheque $ 330 and is received from him $ 20 Discount 27.He received cheque for $ 450 from M and allowed him $ 35 discount 28.He pays $ 375 to J in full settlement of his account $ 425. 29.He draws cheque for his personal expenses $ 250 31.He draws cheque for office use $ 400 Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 28

Peshawar Business School Affilated with University Of PeshawarREQUIRED:- Prepare Three Column Cash Book Q.No.4. On December 1, 2005 Madina Stores Cash Book Showed debit balance of cash $.2150 and bank $ 15375. during the month of December following transaction Took place. Prepare Cash Book from the following. Dec. 1. Paid Kamran by cheque $ 1365 discount received $ 15 3. Deposited into bank $ 1250 4. Drawn cash for domestic use by proprietor $ 175. 5. Received cheque from Chawan for $ 1385, discount allowed $.15. This Cheque is paid into the bank. 10. Sale old furniture $ 350 payment was received in cheque which deposited into bank 12. Bank returned the cheque of Chawan dishonored. 15. Cash withdrawn from bank for office use $ 1100 22. Cash sales $ 1600 of which $ 900 was paid into bank. 25. Paid by cheque for merchandise purchased worth $ 1365. 28. Deposited into bank $ 1120. 31. Purchased a motor car for $5600 and drew a cheque for the amount.

Petty Cash BookIn large business concern all the money received is deposited into bank and payments are made by cheques. A difficulty arises for making small payments for which cheque could not be issued. The example of these payments are post stamps, envelop, taxi fares, entertainments ect. These payments are to be made in cash at the spot. Therefore it is necessary to have some cash in hand for making such payments

Practical Question Q.NO.5on January 1, 2005 Farooq and Irfan established a petty Cash fund with an imprest fund Rs100. The following payments were made during the month. 1. Paid for postage charges Rs10 2. Paid for telegram Rs 5 5. Paid for stationary purchased Rs 8 . 7. Paid for tips to peon Rs 10 9.Paid for tea offered to customer Rs 15 12.Paid for postage stamps Rs6 14. Paid for Rakshaw fare to clerk Rs 4 18. Paid for paper purchased Rs 3 20. Paid for postage charges Rs 2 24. Paid for printing charges Rs 1 26. Paid for postage charges Rs 8 Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

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Peshawar Business School Affilated with University Of Peshawar28. Paid for taxi charges of Manager Rs 5. REQUIRED:- Prepare a Petty Cash Book

Q.No.6.Enter the following transactions in the cash book of ALLAH DITTA & SONS for March,1988. 01. Cash In hand Rs.550 ; balance at bank Rs.7,000. 02. Received from Yasin Rs.590 and allowed him discount Rs.10. 04. Paid salaries by cash Rs.200. 04. Cash sales Rs.134. 05. Paid Ze Shan by check Rs.300 ; Cash purchases Rs.60. 07. Paid Najma by check Rs.584 ; discount received Rs.26. 08. Cash sales Rs.112 ; Paid cartage ( ) Rs.6. 09. Withdrew from bank for office use Rs.200. 09. Paid rent Rs.50. 10. Cash sales Rs.212 ; Paid cash for advertisement Rs.35. Answer : Balance cash Rs.1447 ; Bank Rs.5916.

Q.No.7 Prepare a Three Column Cash Bank from the following transactions of M .M. Company for the period ending April, 1988. 01. Rs.3,000 brought in by the owner on starting the business, of which Rs.2,000 were deposited into the bank. 02. An account of Rs.370 due to Hanif for goods purchased on credit was settled by check after deduction of 5% cash discount. 03. Bought goods for Rs.380 less trade discount 5% . Paid cash for the same . 04. Cash sales of Rs.400, of which Rs.290 were banked. 05. Paid wages by check Rs.250. 06. Purchased an office safe for cash Rs.150. 07. Paid cash for personal expenses of the owner Rs.60. Answer : Balance Cash Rs.539 ; Bank Rs.1688.50 Q.No.8. Enter the following transactions in the Cash Book of HASSAN AITAMAD which took place during the month of May 1988. 1. 04. 06. Started business with cash Rs.15,000. Purchased merchandise for cash Rs.4,500. Deposited into bank Rs.38,000. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 30

Peshawar Business School Affilated with University Of Peshawar07. 10. 15. Purchased furniture for Rs.1,500 and paid by check. Withdrew from bank Rs.2,000 . Sold equipments for Rs.3,000 to Amen Bros ; Received Rs.2,000 in cash and balance by check which was paid into bank . 18. Paid for repairs and other charges Rs.570. 20. Cash withdrawn for personal use Rs.500. 28. Paid check to NAZEER & COMPANY for Rs.1560 in full settlement of Rs.1,600. 30. Deposited cash into bank Rs.2,500. Answer : Balance Cash Rs.2,930 ; Bank Rs.6,440. Q.No.9. Prepare Three Column Cash Book from the following transactions : June 1988 01. Started business with Rs.20,000. Opened a bank account with Rs.10,000. 02. Received from Waqar & Co. for Rs.450 ; allowed them discount Rs.20. 05. Paid to AZKAR cash Rs. 725 ; discount Rs.25. 08. Paid to Syed Bros . Rs.790 ; received discount Rs.45. 10. Purchased furniture for cash Rs.900. 15. Received from sales Rs.300. 20. Purchased merchandise for cash Rs.400. 22. Drew check for office Rs.100. 28. Drew from business for personal use Rs.475. 30. Paid office rent Rs.250. 30. Paid salaries Rs.750. 30. Cash sales Rs.1200. Q.No.10. Enter the following transaction in a three column cash book.. Close the cash book and bring down the balance as on July 31, 1988. 1. Rs.8,000 paid in by he owner on commencing busi9ness, of which Rs.6,000 was banked and the balance was kept I the safe. 2. Paid cash paid for personal expenses Rs.60. 4. An account of Rs.375 due to Saleem for merchandise purchased on account was settled ; issued a check after deducting 7% discount. 5. Paid carriage Rs.150 by check. 8. Rs.190 paid for office supplies. 12. Purchased merchandise for Rs.375 less 7% trade discount; paid cash for the same . 14. Babar who owed Rs.90 on an invoice, a check was received from him subject to 5% cash discount. The check was lodged into bank. 18. Cash sales Rs.6,000 of which Rs.3,000 was banked. 20 Received payment from Ajmal on account Rs.127; discount Rs.13. 22. Paid to Jameel Rs.500 by check less 3% discount. 25. Paid electricity bill Rs.200 for the residence of the owner. 28. Paid on account of Notes Payable Rs.1050 including interest Rs.50. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 31

Peshawar Business School Affilated with University Of Peshawar30. Purchased government securities Rs.1,600. 31. Personal withdrawals Rs.1,000. Q.No.11. On August 1, 1988 Cash Book of MUNAWAR TRADING CORPORATION LAHORE showed debit balance of cash Rs.15,500 and bank Rs.12,096. During the month following transactions were completed. August 1. Purchased merchandise for cash Rs. 12,500. 2. Cash sales Rs.8,150. 3. Deposited cash Rs.4,000 into the bank. 6. Sold merchandise to Hassan for Rs.2,000 who paid by check which was lodged into the bank, 8. Paid by check for merchandise Rs.1,000. 10. Received Rs.875 from Umar in part payment of his account. 12. Paid to Uzma Rs.560 by check. 15. Received a check amounting to Rs.500 from Ali in full settlement of Rs.540. 20. Alis check paid into the bank . 25. Paid to Shah Ali Rs.300 by check less discount Rs.5. 30. Drew from bank for personal use Rs.300. 31. Paid salaries Rs.1250 and rent Rs.250 by check . Instruction : Enter the above transactions in a Three Column Cash Book .

Illustration 1Record the following Transaction in a suitable cash book of Mr. P Basu For the month of January, 1997 and show he closing balances of cash and bank (All Figures in Dollars).1. He has cash in hand 2. Opened A bank Account 2. Received from Mr. Bose 3. Paid to Mr. N Gopal In cheque 3. Purchase made in cash 3. Paid Rent 3. with drawn from Bank 4. Cash Sales 4. Received a cheque from Sunil Ranjan 4. Paid Wages 4. Purchase furniture in cash And Paid by Cheque 4. Cash Purchases 50,000 30,000 4,000 500 1,000 250 3,000 5,000 10,000 200 4,000 3,000 5 Deposited the cheque received from Mr. SonilRanjan 5 withdrawn from bank for personal use 5 Paid electricity Bills 5 Paid rates and Taxes 5 Purchase made in Cash 5 Cash Sales 5 sold to Sree Nagarjun 5 Purchases from the Nemai Bose 7 Received a cheque from sree Nagarjun and send to Bank 7 paid railway Freight 7 Purchase stamp and stationary 7 Deposit in bank Account

3,0005 100 7,000 12,000 5,000 2,000 3,000 250 25 300

Illustration 2Shri P operates two bank Accounts both of which are maintained in three column cash Book it self. You are required to draw up a Performa of the cash Book and show how the following transactions relating to 28th February. 1997 will appear there in and close the Cash Book for the day: Opening Balance : Cash Rs100 : State Bank (overdraft): Rs 10,000: United Bank : Rs30,000 Received a cheque for Rs1,000 in respect of sales for which SBI charged Rs 2 as realization charge and credited the Balance. Purchases goods for Rs 13,000 and cheque issued on the United Bank Paid Office Expenses Rs 45 and Rs 15 for stationery Out of cash sales of Rs 13,000 a sum of Rs 10,000 was deposited in the state Bank


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Peshawar Business School Affilated with University Of PeshawarCredit Purchases of Rs 15,000 were made from Q, who sent the documents relating to the goods through the United Bank for 90% of their value s. the Bank Charged Rs 100 for releasing the documents. Deposited Rs 5,000 in state Bank A B/R for Rs 10,000 was discounted with the United Bank, which charged 1% towards discounting. Withdrew Rs 5,000from United Bank A Demand draft was purchased for Rs 3,000 from a Bank After paying Rs 2 towards charges .

Bank Reconciliation StatementIntroduction Cash Book Pass Book Difference Between Pass Book and Cash Book.

Causes of Disagreement DefinitionAdvantages Practical Questions

INTRODUTION In the previous chapter we have discussed and illustrated the method of recording Banking transactions in cash book ascertaining the bank balance as appears at the end of accounting period .the businessman periodically verifies balance at bank. For g this purpose, the bank balanced appears in cash book compared with the Balance as shown by the bank this is called as reconciliation of bank balance In this chapter, we shall discuss and illustrate the method of reconciliation of bank balance CASH BOOK Cash book generally refers to three columns cash book maintained by the traders Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

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Peshawar Business School Affilated with University Of PeshawarFor recording the cash and banking transactions. in the cash book ,column is Provided for on debit and credit side. When the cash is deposited in bank, it is inserted On the debit side, when cash is drawn, it is recorded on the credit side. The difference Of the two sides is called as bank balance. When the debit side is heavier, it mean cash At bank when the credit side heavier, it bank overdraft. The balance as ascertained from Cash book is usually written as Balance of bank as per cash book PASS BOOK OR BANK BOOK. The bank also records all the transaction relating to these customers in its ledger. a copy Of the ledger account is provided to the customer. This copy is called as pass book Sometimes, a monthly computerized statement is provided in lieu of pass book in the pass book or bank statement, all the amounts paid in by the customer are credited and All the cheques drawn by him are debited. The difference is called as his balance as pass book this balance is debit in case of overdraft and credit in case of cash at bank.

DISTINCTION BETWEEN CASH BOOK AND PASS BOOK The main points of difference between cash book and pass book and pass book are listed below

CASH BOOK

PASS BOOK


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Peshawar Business School Affilated with University Of Peshawar1 The customer himself makes the entries in cash book. 2 3 the debit balance means cash at bank and credit balance means bank overdraft when the cash is deposited, it is recorded on the debit side when cheque is deposited it entered on the same day on debit side. When the cheque is issued, it is entered on the credit side on the same day 5 1 2 3 the bank makes the entries in pass book the debit balance means bank overdraft and credit balance means cash at bank when the customer deposits cash it is recorded on the credit side when customer deposits the cheque, it is sent for collection and the entry is made on the credit side when the amount is collected. when the customer issues cheque, it is recorded on debit side when the cheque is paid

4 5

4

CASH BOOK (Bank column only)Date Particulars Bank Date Particulars Bank


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Peshawar Business School Affilated with University Of Peshawar2007 jan.01 Jan.05 Jan.14 Jan .20 Cash Cash Irfan Interest collected Rs 10,000 20,000 15,000 2,000 52,000 Feb.01 Balance c/d 32,950 2007 Jan.10 Jan.14 Jan.20 Jan .31 Cash Jamil Bank charges Balance c/d Rs 4,000 10,000 50 32,950 52,000


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Date

Particulars

Debit (withdrawals)

Credit (Deposits) Rs

Balance

D

2007 Jan .01 05. 10 . 15 20 20 20 Cash Cash Cash Jamil (cheque) Irfan (cheque) Collection charges Interest collected 50 2,000 4,000 10,000

Rs 10,000 30,000 26,000 16,000

10,000 20,000

15,000

31,000 30,950 32,950

From the above illustration, it is clear that the debit balance of cash book Should always be equal to the credit balance of pass book. Similarly, the credit balance of cash book should always be equal to debit balance of pass book. These balances will disagree only if there is certain omission or mistake in any book.

CAUSES OF DISAGREEMENT. The usual causes of difference in pass book balance with that of cash book Balance are discussed as under 1. un presented cheques or Outstanding cheques. These are the cheques issued to the customers and recorded on the credit side of the cash book, but not presented in the bank Prepared By Kamran Ali Khan Khattak 37 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of PeshawarFor payment hence not recorded on the debit side of the pass book. 2. Uncollected cheqes or uncredited cheques. These are the cheques deposited into bank and entered on the debit side of the Cash book, but still the bank has not collected and as such not recorded on the credit side of the pass book. 3. DEPOSITS in Transit it is possible that cash sent to the bank and debited in cash book, may not be Recorded by the bank on the credit side of the pass book on the same day 4. Cheques deposited but dishonored. The cheques deposited and debited in cash book may have been dishonored but the intimation have not yet been received .these cheques are not credited By the bank but when the information is received they are credited in cash book. 5. CHEQUES ISSUED BUT DISHONOURE When the cheques is issued to the creditor, it is credited in cash book. It Happen that when such no debit is given in pass book when the information Is received, it is debited in cash book. 6. SERVICE CHARGES. The bank usually debits the customer s, account for collection charges or any Other service charges. These charges are credited in cash book when the information is received 7 INTERESTS CREDITED The bank may credit the account of the customer for any interest given to him. This is income for the customer, as such debited in cash book when The information is received. 8. DIRECT PAYMENTS BY THE BANK. Some times bank may pay certain amount on our standing orders like payment of bills, etc when such payments are made, the debits the customers account and intimate the customer. When the intimation is Received the entry is made on the credit side of cash book. 8. DIRECT RECEIPTS BY THE BANK. Some times a debtor may pay the amount due to him direct into the bank when this type of amount is received, it is shown on the credit side of the Pass book. On receipt of intimation, it is entered on the debit side of Cash book. 9. Errors and omissions. The cash book and pass book balance may differ due to the following errors And omission (a) The debit or credit side of the cash book may be overcastted or undercoated. (b) Errors of transposition of figures such as achque of Rs 861 may be entered as 816 or 186. (c) Any entry may be made in wrong side of cash book (d) Any entry may be made in wrong column of cash book. (e) Any cheque deposited or issued may be omitted to be recorded in Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 38

Peshawar Business School Affilated with University Of PeshawarCash book. (f) Any other error of omission, which may affect the bank balance. BANK RECONCILIATION STATEMENT. On account of the reasons mentioned above the cash book balance may not Agree with the pass book balance. There fore, it becomes essential to compare the entries of cash book with the pass book so that the errors or omission (if any) may be rectified this comparison is called as bank reconciliation statement. The bank reconciliation statement is prepared periodically in order to find out reasons for disagreement between the banks Pass book and cash book balance of bank and to test whether the frequently conflicting balances do really agree. ADVANTAGESS. The preparation of bank reconciliation gives the following advantages 1. the mistake in cash book or pass book is detected. 2. It gives better control over banking transaction. 3. The delay in collection of cheques can be found. 4. It controls the fraud committed by any person in handling banking account. 5. The correct bank balance is ascertained for recording in Balance sheet. Practical Questions QNo..1 On 31st January 2007 the cash book of Mr Zaffar showed a balance of $. 7,900 at bank. This did not agree with pass book. On comparing of entries in Cash book with pass book, it is discovered that. 1. cheques deposited in bank but not yet credited by bank $ 2,150. 2. Cheques issued but not yet presented at bank $ . 2,550. 3. Bank charges entered in pass book not yet entered in cash book $20 4. Interest charged by bank not yet entered in cash book $ 100. 5. Interest on investment collected by bank not yet entered in cash book $ 1,500. REQUIRED:- Prepare Bank Reconciliation Statement. Q.No.2 Sultan Traders cash book showed a credit balance of $ 6,000 on 31st December 2007 this does not agree with pass book balance. On checking The entries it is found that. (a) a cheques issued to Rehman for $ 3,000 has not been presented for payment. (b) a cheque for $ 2,700 dated 15th January 2008 is entered on debit side of cash book but could not be collected be for due date. (c) a cheque for $ 4,500 has been sent to the bank for collection has not yet been collected. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 39

Peshawar Business School Affilated with University Of Peshawar(e) Insurance premium paid by the bank under standing order $ 300 entered in cash book. REQUIRED:- Prepare Bank Reconciliation Statement. Q.NO.3 On April 30, 1987 an traders account as per bank statement is debit $.19537.00. On reference to the cash book the . following items were noted : a) Interest amounting to $.1467.00 credited by bank. b) Bank charges of $.21.75debited in the bank statement. c) Uncredited checks $.155.00. d) Unpresented checks $.932.50. Required : Statement reconciling the bank balance. Answer : Balance as per depositors record ( credit ) = $.21759.75 Q.NO.4 On May 31, 1987 cash book of a trader showed an overdraft of Rs.11950. On reference to bank statement, the following items wee noted : a) Interest Rs.85 credited by the bank. b) Bank charges Rs.25 debited by the bank. c) Checks deposited for collection not yet credited by the bank Rs.11550. d) Checks passed for payment Rs.19320 had not been presented to the bank. Prepare bank reconciliation statement. Answer : Balance per bank statement ( debit ) = Rs.4120. Q.NO.5 On June 30, 1987 a traders cash book showed an overdraft of Rs.1195.37 at the bank On reference to the bank statement the following items were noted : a) Interest amounting to Rs.8.50 had been credited by the bank, but it did not appear in the depositors record. b) Checks issued totaling Rs.193.20 had not been presented at the counter for payment. c) An out station check for Rs.115 banked on June 29, had not yet collected. d) Bank charges amounting to Rs.2.50 debited by the bank, were not entered by The trader in his own record. Required : Bank reconciliation statement . Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 40

Peshawar Business School Affilated with University Of PeshawarAnswer : Balance per bank statement (debit/overdraft) = Rs.111.17

Q.NO.6 From the following particulars prepare a bank reconciliation statement as on July 31, 1988. a) Bank overdraft as per cash book on July 31, 1987 was Rs.6000. b) Interest on overdraft for six months Rs.200 is debits in the bank statement. c) Bank charges Rs.50. d) Checks issued but not presented Rs.1500. e) Checks paid into bank but not credited 2500. f) Interest on investment collected by the bank Rs.1800. Answer : Balance per bank statement [ debit ( overdraft ) ] = 5450. Q.NO.7 On August 31, 1987 the cash book of a trader showed a balances of Rs.8655. The balance of cash book and bank statement were not agreed due to the following reasons: a) Check No. 109885 for Rs.1200 was issued but not presented for payment. b) A treasury challan No.375 for Rs.788 was not collected and credited by the bank. c) Bank charges Rs.15 and a note payable paid by the bank Rs.600 appearing in the bank statement were not recorded in the depositors record . Required : 1. Balance shown by the bank statement. 2. Bank reconciliation statement. Answer : 1. Balance per bank statement ( credit ) = Rs.8452.

Q.NO.8 From the following particulars prepare bank reconciliation statement as on Oct.31 1988. a) Balance as per cash book Rs.3425. b) Checks issued but not presented for payment Rs.800. Prepared By Kamran Ali Khan Khattak 41 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of PeshawarA note receivable for Rs.700 was realized by the bank on October 28, but not entered in the cash book. d) Checks for Rs.1800 paid into the bank on Oct.28 but one check for Rs.700 was not yet credited in the bank statement. e) Debit entry for bank charges Rs.32.50 and a credit entry for interest Rs.140 appear in the bank statement but not recorded in the cash book. Answer : Balance s per bank statement ( credit ) Rs.4332.50. c)

Q.No.9 Show the balance as per cash book of M/S Nasim & co as on 30th June 2007 from the following particulars. (a) Balance as per pass book on 30th June 2007 is Rs 11,500 (b) cheques for Rs. 500 and Rs 1,700 were deposited on 30th June 2007,the bank credited the cheques on 1st July 2007. (c) chequs for Rs 400 and 950 were issued on 30th June 2007, but thy are presented on the following day. (d) A cheque deposited in bank for Rs 450 has been dishonored. (e) Bank has charged Rs 450 as service charges. REQUIRED:- Prepare Bank Reconciliation Statement. Q.No.10 From the particulars given below, find out the balance that would appear in cash book as on 31st July 2007. (1) Bank overdraft as per pass book Rs 16,600. (2) Amount deposited directly into bank by a debtor Rs 2,000 on 28th July But not recorded in cash book. (3) Interest on overdraft Rs. 400 and bank charges Rs 200 are debited in Pass book but not entered in cash book. (4) cheque of Rs 8,000 deposited on 29th July is credited by bank in August. (5) cheque of Rs 16,000 drawn on 26th July but presented in Aug REQUIRED:- Prepare Bank Reconciliation Statement. Q.No.11 On June 30 the cash book of Kabir & Sons showed an overdraft of Rs7500. from the following information ascertain the balance that would appear in pass book. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 42

Peshawar Business School Affilated with University Of Peshawar1. 2. 3. 4. 5. Interest on overdraft Rs 165 appear in the pass book. Dividend on NIT units collected by the bank Rs.1535 Check paid in the bank but not collected and credited by the bank Rs1700 Check issued but not presented Rs.1300 A cheque was received from Aslam and was entered in Cash Book was omitted to be deposited in the bank Rs435. REQUIRED:- Prepare Bank Reconciliation Statement.

Q.NO.12Ranganath has two accounts with Hanuman Bank Ltd, Styled Account No. 2. on 31.12.1997, his Cash Book showed balances of Rs 5,400 and Rs 2,70,400 in the tow accounts respectively . On an examination of the bank 's statements , the following were noticed: a) Rs 27,000 have been transferred from Account No.2. to Account No.1 by the bank without advice to Ranganth . b) Rs 10 have been the bank's incidental charges in respect of each account , which have also not been advised c) Cheque for Ts 5,421 issued on Account No.1 Late in December have not yet been presented to the bank. d) A cheque for Rs 4,272 deposited by Ranganath into A/c No.2 has been credited by the bank into A/c No.1. You are required to prepare reconciliation statements showing the balance as per bank Statements

Illustration 5The treasurer of the Calcutta Club is attempting to reconcile the balance shown in the cash Book with that appearing on the Bank Statement. According to the Cash Book the balance at the bank as at 31st May,1997 was Rs 1,900 while the Bank Statement disclosed an overdraft amount of Rs 470. Upon investigation the Treasurer discovers the following errors: a) A cheque paid to S Ltd for Rs 340 had been entered in the Cash Book as Rs 430 b) Cash paid to the bank for Rs 100 had been entered in the Cash Book as Rs 90 c) A transfer of Rs 1,500 to the Savings Bank had not been Entered in the Cash Book d) A receipt of Rs 10 shown on the Bank statement had not been entered in the Cash Book e) Cheques drawn amounting to Rs 40 had not been presented in to the Bank f) The cash Book balance had been incorrectly brought down at 1st June 1997 as a debit Balance of Rs1,200 instead of a debit Balance of Rs 1,100 g) Bank Charges of Rs 20 did not appear in the Cash Book h) Receipts of Rs 900 paid in to the bank on 321st had not been entered in the Cash Book i) A standing order payment of Rs 30had not been entered in the cash Book j) A cheque for Rs 50 previously received and paid into the bank had been returned by the marked "account closed " k) The bank received a direct deposit of Rs 100 from an anonymous member l) Cheques paid into the bank had been incorrectly totaled. The total amount should have been Rs 170 instead of Rs 150 Draw up a Bank Reconciliation statement as 31st May ,1997

Q.NO.13Mr. Jones is having accounts (A and B) with the central Bank of India . On 31.12.1997 his ledger shows a balance of Rs 5,000 in Account A and an overdraft of Rs 2,250 in Account B. On verifying the ledger entries with the respective Bank Statements, the following


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Peshawar Business School Affilated with University Of Peshawarmistakes were noticed. i) A deposit of Rs 1,500 made into "A" on 20.11.1997 has been entered in the ledger in account "B". ii) A withdrawal of Rs 500from Account A on 20.11.1997 has been entered in the ledger in Account B. iii) Two cheques of Rs 500 and Rs 750 deposited in Account A on 11.2.1997 (and entered in the book in Account the B) have been dishonored by the bankers. The entries for the dishonor of these cheques have been entered in the books in Account B. iv) In the Account A and B Mr. Jones has issued on 29.12.1997 cheque for Rs 10,000 and Rs 1,000 and Rs 1000 respectively and those have not been cashed till 31.12.1997. v) Incidental charges of Rs 10 and Rs 25 charged in the Account A and B respectively have not been entered in the books. vi) The Bank credited an interest of Rs 50 for Account A and has charged interest of Rs 275 for Account B which have not been recorded in books. vii) The deposits of Rs 5,000 and Rs 3,500 made into the Accounts A and B both on 30.12.1997 have not been given credit by the bank till 31.12.1997. Draw the bank reconciliation Statement for the above tow account.

Where Causes of difference are not givenDate97 Dec 1 Dec 8 Dec 10 Dec 15 Dec 22 Dec 28 Dec 31 Dec

The following were the bank column of the cash book of parakash Agarwal. Dr Cash Book (Bank Column) Particulars Lf Rs Date ParticularTo Balance B/f To R. Sen To P. Dasgupta To B.K. Roy To P. Patel To H. Kabir To T>K. Basu 450 210 600 780 100 240 300 97Dec 2 Dec 6 Dec 8 Dec 12 Dec 16 Dec 22 Dec 24 Dec 28 Dec 30 Dec 31 Dec 31 By P.k. Sharma By Khanna By Abdul Amin By L. Narayan By k. Kundu By c.Banerjee By T. Sen By Wages By B.K. Agarwal By L>N. Mishra By Balance C/d

Cr Lf

Rs150 60 10 120 400 300 40 250 150 80 1,12 0

2,680 2,68 0

Bank statementDate Particulars Dr. (withdrawal ) Cr.(Deposited )

Balance(Rs)


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Peshawar Business School Affilated with University Of Peshawar97 Dec 1 6 10 12 13 14 15 15 19 20 25 28 29 31

Balance B/f Cheque Cheque Deposit Cheque Deposit Bank Charges Cheque Deposit Cheque Deposit Cheque Cash Standing order Club subscription

150 60 210 10 600 5 120 780 400 100 40 250 100

450 Cr. 300 Cr. 240 Cr. 450 Cr. 440 Cr. 1,040 Cr. 1,035 Cr. 915 cr. 1,695 Cr. 1,295 Cr. 1,395 1,355 Cr. 1,105 Cr. 1,005 Cr.

NON TRADING CONCERNIntroduction Definition Distinction between Trading Concern and Non Trading Concern Sources of income of Non Trading Concerns Income and Expenditure Account Balance Sheet

IntroductionAny legal activity undertaken to earn profit is called business. The business activities are further divided into Trading concern and Manufacturing concern. The trading concerns means the individuals and firm engaged in the buying and selling activities. The main purpose of Trading concerns is to earn profit. Apart from Trading and Manufacturing concerns there are also some institutions or associations which are formed for welfare purpose and not for earning the profit. For example hospitals, school, schools, clubs. These institutions are called as non trading concern.

DefinitionThe institutions or individuals which are engaged in activities in activities other than trade are called as Non Trading Concerns. Such institutions are formed not for carrying on business and making profit but they work for some activities of public Prepared By Kamran Ali Khan Khattak 45 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of Peshawarinterest. These are engaged for promotion of some charitable, religious, social, cultural, and sports activities. The income of such institutions is derived from donations, subscription, entrance fee, service fee etc.

Distinction between Trading Concern and Non Trading ConcernS.No 1. Point Of Difference Source of income Trading Concerns Non Trading Concern The main source of income is The main source of income are the revenue receive from sale of donation, fees and charities goods. from Govt and private institutions and members. The main objective is to earn profit The main objective is to provide some social, charitable or recreational services. It may be in form of society, club, association or trust. The management lies in the hands of president, secretary or executive body elected by the members. There is no capital invested, hence there is no question of ownership. The persons carrying on the affaiRs are called as members.

2 3 4

Objectives

Organization It may be in form of sole proprietor, partnership, company. Management The management lies in the hands of owner, partners or board of directors. Ownership The ownership remains in the hands of persons investing capital. They are called as owner, partner or shareholders

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Sources of income of Non Trading ConcernsWe know that in trading concern the main source of income is sale of goods. But in the case of non trading concerns the income is divided from some special sources. Some of these sources are discussed as under along with their accounting treatment. 1. Entrance Fee. Amount received from any person for becoming the member or beneficiary of any institution is called as entrance fee. This is treated as revenue income and recorded on the credit side of the income and Expenditure Account. 2. Subscription. It is periodical receipt from members or beneficiaries. It is a recurring income for meeting the expenditure. In fact subscription are the main sours of income for non trading concerns. 3. Donation The donation means any amount received from government or other agencies or from the members 4. Legacies This is the amount received by way of will from the estate of deceased person. It is usually treated as revenue income. 5. Special Fund Prepared By Kamran Ali Khan Khattak 46 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of PeshawarSometimes a special fund is raised for certain purposes. The receipts in this fund are not treated as revenue income but it is treated as capital receipt and show as liability in the Balance Sheet. 6. Locker Rent Some institutions may provide lockers facility to its members. The rent received from the lockers facility to its members. 7. Proceeds from lecture Some institutions may arrange special lectures for its members and public. The money receive from this services is treated as income. 8. Endowment Fund. It is the amount or property given to an institution for meeting its expenditures.

Practical Questions Q.No.1. Receipt and Payment Account of Azad Cricket Club for the year ended on 31 st December 2007 is given as under. Receipt Rs Payment Rs


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Peshawar Business School Affilated with University Of PeshawarBalance b/d Annual subscription Membership Fee Entrance fee Interest on Securities Misc Receipt Total 6200 8150 1250 1200 900 250 17950 General Expenses Salaries Furniture Rent, Rates & Taxes Printing & Stationary Repairs Balance c/d Total 2750 2750 4000 2500 620 750 4580 17950

REQUIRED:- Prepare Income and Expenditure for the year ended on 31-12-2007 Q.No.2 Given below is the Receipt and Payment Account of Football Club for the year ended on 31st December 2007. Receipt Balance of cash Subscription Entrance fee Ground rent District Govt Donation Rs 2310 3250 2100 5000 2500 Payment Rent & Rates Salaries Furniture purchased Misc Expenses Refreshment Balance c/d Rs 1580 2870 3500 1900 3500 1810

Total 15160 Total 15160 The club owed Land and Building Rs.100000 and Furniture Rs.10000 at the beginning of the year. REQUIRED:- Prepare Income and Expenditure for the year ended on 31-12-2007 and Balance Sheet on that date.

Q.No.3. The following is the summery of the accounts received and spent by the Star Club st January 2007 to 31st December 2007. from 1 Receipt Subscription Rs 11525 Payments Land & Building Rs 25000 48


Peshawar Business School Affilated with University Of PeshawarSales of Refreshment Loan from Bank 8483 15000 Purchase of Refreshment General Expenses Electricity Charges Purchase of Furniture Wages Rates Telephone charges Printing & Stationary Bank Interest Balance c/d Total 3685 867 480 1800 500 180 357 180 296 1663 35008

Total 35008 Adjustments. a).A bill for Rs 256 was outstanding at 31st December 2007 b).The stock of refreshment on hand at 31st December 2007 was Rs 190 c).The Rates paid up to 31st December 2007 included Rs 80 paid in advance. d).Subscription in arrear amounted to Rs 475. REQUIRED:- Prepare Income and Expenditure for the year ended on 31-12-2007

Q.No.4. Given below is the Receipt and Payment Account of Volley ball Club for the year ended on 31st December 2007. Receipt Balance at Bank Subscription Special match Earnings District Govt Grants Ground Fund Interest on Deposits Payments Rs Salaries 1968 Special match Expenses 1140 Refreshment Expenses 600 Cost of Furniture 6000 Sports and other Utilities 2520 Sports fee paid 2010 Balance at Bank 3741 Total 17979 Total 17979 The Club owed a land costing Rs.24000 on which it is proposed to build volley boll ground. Donation of Rs 300 received for Ground Fund was wrongly included in subscription. A bill utilities purchased during the year amounted to Rs 384 was still payable. REQUIRED:- Prepare Income and Expenditure for the year ended on 31-122007 and Balance Sheet on that date. Rs 6030 3345 810 3000 4680 114

CAPITAL AND REVENUEIntroduction Capital and Revenue Expenditure Deferred Revenue Expenditure Capital and Revenue Receipts Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 49

Peshawar Business School Affilated with University Of PeshawarCapital and Revenue Payments Capital and Revenue Profits Capital and Revenue Losses

IntroductionThe term expenditure means making a payment or raising an obligation to make future payment for acquiring any asset or service. The benefit of asset or service may be for short period or it may also be for a very long period. For example when we pay for a lunch, the benefit of the expenditure is exhausted when the lunch is taken. But when we pay for purchase of a motor van the benefit of expenditure is derived for many years. Therefore all the business expenditures are classified as Capital and Revenue Expenditures. The payment of lunch is an example of Revenue Expenditure and Payment for purchase of van is Capital Expenditures.

Capital ExpenditureThe expenditure for the acquiring fixed assets or increasing the earning capacity of the business are called as Capital Expenditures. These expenditure include the followings. 1. Purchase of Fixed Assets. The Fixed assets means the assets that are acquired for use in the business for a long period of time. For example, machinery, furniture, building, motor vehicles, equipments, land etc. all the expenses connected with acquiring of such assets are capital expenditures like carriage, insurance, freight, octori, commission, clearing charges, custom duty, duck charges etc. 2. Improvement of Fixed Asset. When any addition or improvement is made in fixed assets as to make it more efficient or increase in the value is treated as Capital Expenditure. For example addition of new rooms in building, purchase of new engine for factory, conversion of manual machinery into automatic ect. 3. Increasing the Earning Capacity. The expenditure which results in increasing the production or sales of business for a long period to come or results in decreasing the cost of production selling or distribution are treated as Capital Expenditure. For example the expenditures on the shifting of business to a bitter site. Heavy expenditures on the advertisement to introduce a new product or capture a new market. 4. Increasing the Capital. The expenditures incurred to raise the capital or long term loans are also Capital Expenditures. The example are brokerage or commission paid for issue of shares or debentures, preliminary expenses for the formation of new company etc 5. Development Cost. The expenditure incurred for the development of land, experimental cost for discovery of mineral reserves, installation of new factory etc. 6. Attaining the Rights. All sorts of expenditures for acquiring Goodwill of a running business, or patent rights of a product or copyright of a book are Capital Expenditures. Prepared By Kamran Ali Khan Khattak Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810 50

Peshawar Business School Affilated with University Of Peshawar7. Research and Experiments. The expenditure incurred on experiments and research which results in innovations of new products or new methods are treated as Capital Expenditures. NOTE:- All the Capital Expenditures are recorded in the Balance Sheet.

Revenue Expenditures.The expenditure which are incurred to carry on the day to day business are called as Revenue Expenditures. These includes the followings. 1. Purchase price and other costs incurred for the purchase of merchandise. For example cost of goods, carriage, octori , storage, insurance, etc on the purchase of goods. 2. Cost incurred to manufactured the goods in the factory. For example cost of raw materials used, labour cost, other factory costs etc. 3. Selling and distribution of goods. For example selling salaries, commission, advertisement etc. 4. Expenses incurred in maintaining fixed assets in working conditions like repairs, depreciation, taxes etc. 5. Expenses incurred to replace the worn out part of machinery to maintain it in working condition. 6. Repair of the machinery, motor vehicles, building met with accident or natural calamities. 7. Cost and expenses paid as penalty or compensation of loss caused during the course of business or due to accident or due to breach of contract. NOTE:- All revenue expenses are recorded in the Income Statement.

Capitalized Or Deferred Revenue ExpenditureIf the benefit of an expenditure is likely to spread over a number of years is treated as capital expenditure up to the extent of unexpired benefit. For example when an Prepared By Kamran Ali Khan Khattak 51 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of Peshawarinsurance premium is paid for 6 years the unexpired portion of insurance premium is treated as an asset. Similarly in case of heavy advertisement it is usually written off a number of years. Some portion of it is charged to revenue and remaining is shown as an asset in the Balance Sheet. The object of doing this is to spread such expenses over numbers of years so that the burden should not fall on one year profits. These type of expenditures are called as deferred revenue expenditures or capitalized expenditures.

Capital and Revenue ReceiptsCapital Receipt:- When some money is received on account of the following reasons it is treated as Capital Receipt. 1)As a loan from bank or other resources. 2) The capital contribution of the owners. 3) Receipts for the bills or accounts receivable. 4) Receivable from the sale of fixed assets. 5) Receipts from the capital gains. Revenue Receipt:- When some money is received on account of the following reasons it is treated as Revenue Receipt. 1)Money received from the sale of merchandise. 2)Money received on account of interest or commission earned during the ordinary course of business. 3) Money received on account of bad debts recovered. 4) Money received as profit dividend from investment. 5) Money received from insurance company against the claim for loss of insured Merchandise. 6)Money received on account of any other revenue profit.

Capital and Revenue ProfitsCapital Profit:- Following are some examples of capital gains. 1)Profit earned on the sale of fixed asset. 2)Profit earned on the sale of investment held by the form. 3) Premium earned on the issue of shares of the company. 4) Premium earned on the issue of debentures. 5) Profit earned on the forfeiture of shares. Revenue Profit:- Following are some examples of Revenue gains. 1)Amount received or earned on the sale of merchandise. 2)Commission earned for buying and selling activities. 3) Discount earned for purchase of merchandise or payment of cash. 4) Compensation received from the insurance company.

Capital and Revenue LossesCapital loss:- Any loss on account of the following reasons are treated as capital loss. Prepared By Kamran Ali Khan Khattak 52 Lectrurer @ PBS. Peshawar Business School. Contact : 03149086491 , 03339276810

Peshawar Business School Affilated with University Of Peshawar1)Loss caused on the sale of fixed assets. 2)Loss on the redemption of debentures. 3)Discount on the issue of shares of a company. 4)Loss on the sale of investment. 5)Loss on the sale of shares of a company. Revenue Loss:- Any loss on account of the following reasons are trea

Financial Accounting

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