ACCOUNTING FOR MANAGERS

Level of knowledge : Basic

Aim : To assess whether students have acquired
basic knowledge about what is
accountancy & book keeping, various
statements to be prepared and different
method of accounting.
Detailed Syllabus:
1. Meaning and Importance of Book keeping and accountancy
2. Classifying accounts according to their nature, importance and
value.
3. Journal Entries – importance of a journal and its relevance
4. Ledger accounts – its importance, preparation of ledger
accounts – balancing of accounts and postings
5. Subsidiary books – various forms, and its relevance –
Purchases book, Sales book, Returns book, etc.
6. Bank Reconciliation Statement
7. Trial balance – closing of accounts – rectification of errors and
Suspense Account
8. Bills of Exchange and Promissory Notes – types of negotiable
instruments – its importance and its use
9. Final Accounts – Closing of accounts – Depreciation on assets –
Trading and Profit & Loss Account and Balance Sheet
Reference books –
Advanced Management Accounting Techniques & Applications by Ravi
M.Kishore
Cost and Management Accounting by V.K.Saxena & C.D.Vashist

Disclaimer – students should note that the module is not meant to be an exclusive study material
and students should refer to other recommended books. It is not necessary that the questions in
examination will be from this module. Though every care has been taken to make this module
correct in every manner, errors may creep in. Any error or discrepancy noticed may be brought to
the notice of the Institute. It is notified that the author is not responsible for damage or loss to any
one, of any kind, in any manner arising therefrom.
 CONTENTS

Page
(I) Fundamental Principles of Accounting 3
(II) Classification of Accounts 12
(III) Journal 23
(IV) Ledger 39
(V) Subsidiary Books 54
(VI) Cash Book 73
(VII) Bank Reconciliation Statement 94
(VIII) Trial Balance 109
(IX) Rectification of errors 122
(X) Bills of Exchange & Promissory Notes 137
(XI) Depreciation 156
(XII) Final Accounts 165
(XIII) Management Accounting 193

(I) Fundamental Principles of Accounting

A business house must necessarily keep a systematic record of

what happens from day-to-day to know the financial picture of the

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business. A systematic record of the daily events of a business leading
to presentation of a complete picture is known as accounting, or in its
elementary stages, as book-keeping. The financial picture mostly has
two parts, one showing how much profit has been earned or loss
suffered, and the other showing assets and liabilities and the
proprietors’ interest in the firm.
Book keeping is basically concerned with recording of business
transactions as and when they take place. A businessman is primarily
interested to know from the record of books of account two important
things:
1) The progress made by business in a certain period called
accounting period; and
2) The financial position or worth of the business on a particular day.

The progress of business is indicated by Profit and Loss A/c and the
position of business is disclosed by Balance Sheet. Accounting is a
wider concept of which bookkeeping is a part. In other words
accounting includes bookkeeping. In accounting in addition to
recording of business transactions following aspects are included –
1) Summary of transactions those have taken place.
2) Classification of various accounting record in the most logical
manner.
3) Analysis and interpretation of transactions to know their effect on
the working of business.
4) Drawing certain conclusions from the statements and summaries
prepared.

The American Institute of Certified Public Accountants has once

defined accounting as “the art of recording, classifying and
summarising in a significant manner and in terms of money
transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof”. This definition brings
out the following as the attributes of accounting: -
1) Events and transactions of a financial nature are recorded

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2) The record must be in such a way as to be able to portray the
significance of all transactions and events individually and
collectively
3) The parties concerned must be able to gather the true message of
the results embodied in the statements finally prepared.

Transactions
In a business everything that is exchanged is recorded in its money
value. A person’s dealing in money or money’s worth is known as a
transaction. It involves transfer of money or its equivalent from one
person to another. The transactions cause a change in the ownership
of the item, which is being exchanged.
1) Cash transaction:
It involves transfer of cash from one person to another so that cash
balance of the receiver increases and that of giver decreases.
2) Credit transaction:
In a credit transaction transfer of cash does not take place at the time
of occurrence of transaction but is expected to be transferred at some
later period usually agreed between two parties.
3) Transactions in exchange:
In this type of transaction present or future cash balance is not
affected. It amounts to exchange of one asset against another asset.
This transaction is similar to barter system followed in olden days. The
transaction, which takes place, has certain money value and is
expressed as such but there is no cash flow in present or future period.

Parties Concerned
It is worth mentioning that besides the people concerned with the firm
or institution, there are numerous other parties interested in the
financial statements. These are the following:
1) Shareholders: - In the case of companies, shareholders get the
financial statements of the company only through the annual
statements showing profit earned or loss suffered and the assets
and liabilities.

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2) Investors: - Investors are people those who are interested in buying
the shares of the company or in advancing money to the company,
and therefore they are naturally interested in knowing the financial
position.
3) Creditors: - A number of suppliers make supplies on credit, they
also would like to be satisfied that they would be paid in time. Banks
and other financial institutions give loans and advances to the
business on the basis of the financial strength and viability. For
ascertaining the credit worthiness banks and finance institutes
require help of accounts
4) Labour: - In India, workers are entitled to payment of bonus, which
depends on the size of the profit earned. Naturally, they would like
to be satisfied that the bonus being paid to them is correct.
5) Government: - Governments are interested in ascertaining Income
tax payable, which is based upon the profit, earned for a particular
period as calculated in the financial statements. There are
numerous other taxes such as excise, sales tax, works contract tax,
profession tax, octroi etc. For ascertaining the correct tax liability
under various tax laws the Government even requires the
businesses community to maintain the accounts in a particular
manner.
6) Researchers: - The financial statements, being a mirror of business
conditions, are of inestimable value to research into business
affairs. These statements are, therefore, of great interest to scholars
undertaking research in accounting theory as well as business
affairs and practices.

Important terms in Accountancy

1) Debit – It denotes that the account has received a benefit in a
transaction for which it is debited.
2) Credit – It denotes the account that has parted with the benefit in a
transaction for which it is credited.
3) Debtor – A debtor is a person who owes money. In other words, he
is a person from whom we have to recover money.

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4) Creditor – A creditor is a person to whom money is payable. In other
words, he is a person to whom we owe money.
5) Goods – The term goods means articles, commodities or things in
which a trader is dealing.
6) Expense – An amount, which is paid, in return of a particular
service, is called an expense.
7) Income – An amount, which is received, in return of rendering a
particular service, is called an income.
8) Capital – It is an amount contributed by the proprietor for
conducting business. It is excess of assets over liabilities.
9) Drawings – It is the amount of cash or goods withdrawn from the
business by the proprietor to meet personal or household
expenses.
10) Asset – Anything, which is convertible into cash or its equivalent, is
termed as asset.
11) Liabilities – These are the debits for which a trader is responsible
for payment.
12) Account – It is a summarised and systematic record of transactions
relating to person, property, income or an expense.
13) Invoice – It is a business document or statement sent by the seller
of goods to the purchaser of goods.
14) Folio – It is a technical word, normally used in accounts to denote a
page number.
15) Bad Debts – It is the amount of debt, which is now irrecoverable
from a debtor.

Accounting Concepts
Accounting is the language of business; affairs of a business unit are
communicated to others as well as to those who own or manage it
through accounting information which has to be suitably recorded,
classified, summarised and presented. To make the language convey
the same meaning to all people, as far as practicable, and to make it
full of meaning, accountants have agreed on a number of concepts,
which they try to follow. These are given below:

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1) Business Equity Concept
Accountants treat a business as distinct from the persons who own it;
then it becomes possible to record transactions of the business of a
proprietor or partnership firm also. Without such a distinction, the
affairs of the firm will be all mixed up with the private affairs of the
proprietor/partners and the true picture of the business will not be
available. This concept has now been extended to accounting of
various divisions of a firm in order to ascertain the results for each
division separately.

2) Money Measurement Concept

Accounting records only those transactions that are expressed in
monetary terms, though quantitative records are also kept. An event,
even though important, like a quarrel between the production manager
and sales manager, will not be recorded unless its monetary effect can
be measured with a fair degree of accuracy. It should be remembered
that money enables various things of diverse nature to be added up
together and dealt with. The use of a building and the use of clerical
services can be added up only through money values and not
otherwise.

3) Cost Concept
Transactions are entered in the books of accounts at the amounts
actually involved. Suppose a firm purchases a piece of land for Rs.5,
00,000.00 but considers it as worth Rs.7, 50,000.00. The purchase will
be recorded at Rs.5, 00,000.00 and not any more. This is one of the
most important concepts – it prevents arbitrary values being put on
transactions, mainly those resulting in acquisition of assets.

4) Going Concern Concept

It is assumed that the business will exist for a long time and
transactions are recorded from this point of view. It is this that
necessitates distinction between expenditure that will render benefit

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over a long period and that whose benefit will be exhausted quickly,
say, within a year. This concept helps other business undertakings to
make contract with specific business unit for business dealings in
future. It also stresses emphasis on earning capacity in judging overall
performance of business.

5) Dual Aspect Concept

Each transaction has two aspects. If a business has acquired an asset,
it must have resulted in one of the following: -
a) Some other asset has been given up, or
b) The obligation to pay for it has arisen, or
c) There has been profit, leading to an increase in the amount
that the business owes to the proprietor, or
d) The proprietor has contributed money for the acquisition of
the asset.
At any time; Asset = Liabilities + Capital; or
Capital = Assets – Liabilities.
In other words, capital i.e. the owner’s share of the assets of the firm, is
always what is left out of assets after paying off outsiders.

6) Realisation Concept
According to this concept, revenue is considered as earned on the date
on which it is realised. Thus revenue realised during the accounting
period only be considered while preparing income statement or profit
and loss a/c. Unearned or unrealised revenue should not be taken into
account. When the goods are sold to customer, transaction is recorded,
but if only purchase order is received or an advance amount is
received from a customer, it will not be recorded because revenue is
not realised.

7) Accrual Concept
Realisation concept considers only revenue but accrual concept
considers both revenue and expenses. Accordingly it makes distinction
between right to receive cash or actual receipt of cash and obligation to

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pay cash and actual cash payment. According to this, expenses even
though not paid but if it is obligatory to pay in future are recorded.
Income for the period even not received but we have right to receive in
future is recorded.

In addition to above-mentioned concepts, the following should also be

noted –
i) Transactions should be recorded in such a manner as to reflect
the true and fair position of the affairs of the business.
ii) Even though it is assumed that business will continue for a long
time, it is necessary to keep accounts in such a manner as to
permit results being ascertained and presented for each
financial period, usually a year, separately.

Accounting Convention
The term convention is the general agreement on the usage and
practices in social and economic life. Accounting conventions are
procedures followed by the accountant in recording the transaction on
the basis of long-standing traditions. In order to make the message
contained in the financial statements clear, meaningful and
understandable to everyone concerned, these are drawn up according
to the under mentioned conventions:

1) Consistency
The accounting practices should remain the same from one year to
another. For e.g. it would not be proper to value stock-in-trade
according to one method one year and according to another method
next year. If a change becomes necessary, the change and its effect
should be stated clearly.

2) Disclosure
Accounting report should give full disclosure of information, which it is
supposed to give. The practice of giving footnotes and references in
the statements is according to this convention in order to facilitate

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understanding of accounting information. Whether something should
be disclosed or not will depend on whether it is material or not.
Materiality depends on the amounts involved in relation to the asset or
transaction group involved or to profits.

3) Conservatism
It relates to the principles and practices, which are established as a
tradition. Accountants are supposed to be conservative in their
approach so far as accounting work is concerned. Accountants are not
supposed to take into account anticipated profit but must consider
anticipated losses.

4) Materiality
American Accounting Association defined materiality as, “an item
should be regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed investors.”
Materiality depends on the amounts involved and account so affected.
It emphasises that accounting records should consist only of such
events, which are significant from the point of view of income
determination and status assessment.
Questions
(1) What do you mean by bookkeeping? How does bookkeeping differ
from accountancy?
(2) What is Accounting and attributes of accounting?
(3) What is a transaction? Which are the parties interest in knowing the
financial statements of the business?
(4) Write a note on Accounting concepts.
(5) What are Accounting conventions? Explain with the use of
examples.

(II) Classification of Accounts

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 The accounting system, as developed originally, concerned only
the financial state of affairs and the financial results of operations. This
is called Financial Accounting. It includes preparation of accounts,
generally on historical basis, so as to enable the management to
prepare the financial statements showing the results of operations and
the financial state of affairs, to exercise full control over the property
and assets of the firm or the institution concerned and to prepare
returns and statements concerning taxation.
Cost Accounting developed because of the limitations of
financial accounting in respect of information relating to the cost of
individual jobs, products, etc. This information is needed for purposes
of making numerous decisions (e.g. the price to be quoted to a special
customer or the priority to be accorded to a product when resources
are scarce, etc.) and for exercising control over the costs being
incurred. Cost Accounting basically involves estimating costs in
advance and detailed analysis.
A third branch of accounting, which has now developed, is
Management Accounting. It means such accounting as will enable
management to discharge its functions properly, chiefly in respect of
forecasting and budgeting, control over costs and revenues and
decisions, both routine and strategic.

Systems of Accounting
There are two systems of recording transactions – Single Entry System
and Double Entry System. Single Entry System sounds economical but
is really costly because it is rather a lack of system. The only real
system is the Double Entry System. Before we try to understand the
system of recording the transactions, it is absolutely necessary to
understand the term account.

Account
An account is a statement for grouping together the transactions
relating to individual, or property or expenditure etc. Therefore, an

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account is a systematic and summarised record of transactions relating
to person, property, income, expense etc. The spaces allotted in the
ledger for recording these transactions are called the account.
Specimen of an account is shown in Fig.2.1 below.
It is true that Journal is regarded as preliminary record of transactions
in a chronological, systematic and analysis form. We are going to learn
about a Journal in subsequent chapter. The nature of recording the
transactions in Journal is such that we cannot get exact position of a
particular party or account on a particular day.
If the transactions are recorded in the accounts, then this difficulty can
be solved. Thus we can maintain separate accounts such as Cash A/c,
Goods A/c, Assets A/c, Personal A/c and can get knowledge of the total
effect of transactions on these accounts.

Fig. 2.1
Specimen of an Account
Name or Heading of the Account
Dr.(Debit) Cr.(Credit)

Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs. Rs.

Debit and Credit

The left-hand side of an account is known as Debit Side (Dr.). An entry
on the debit side is called debit entry. The right hand side of an account

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is known as Credit Side (Cr.). An entry on the credit side is called credit
entry.
From Fig.2.1 you must have noticed that every account has two sides
debit side and credit side. On these two sides there are four important
columns.
1) Date
It indicates the date of transaction on which this account is debited or
credited.
2) Particulars
It gives the name of the other account, which is affected in the
transaction.
3) Journal Folio
It shows the page number of journal on which the transaction is
originally recorded. From the journal folio, we can collect all the details
of the transaction at any time.
4) Amount
It is the amount of transaction with which the account is debited or
credited.

Balancing
Depending upon the nature of transaction, a particular account is
debited and credited. During a particular period, we my find that a
certain account is debited and credited on various days. This does not
give us any clear idea of that account unless difference between the
debit side and credit side is found. This difference is known as a
Balance, and this act is called as Balancing. Such a balance may be
debit balance or credit balance.

Classification of Accounts
There are a large number of transactions and accounts involved in
accounting and hence, it becomes necessary to classify the
transactions according to their nature so as to ease the work of
recording of transactions and their further processing. The ledger can
be subdivided on the basis of nature of accounts so that the work of

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record keeping can be given to different assistants. Classification of
accounts is shown in Fig.2.2

Fig.2.2
Classification of Accounts

Personal Accounts Impersonal Account

Real Accounts Nominal Accounts

1) Personal Accounts
These are the accounts of individual, firm or company. Personal
accounts are opened for only those persons or firms with whom a
trader has a credit or a debit transaction on account of purchase or
sale of goods or amount borrowed by one party from the other.
Examples of personal accounts are Amar’s A/c, Telco A/c, Allahabad
Municipal Corporation A/c, Bank A/c etc. The firms and companies are
treated like a person and their accounts are opened. Capital A/c and
Drawings A/c are personal accounts because these are the accounts of
proprietor.

2) Impersonal Accounts
All the accounts other than personal accounts are known as
impersonal accounts. As you can see from the figure above,
impersonal accounts are classified into two types of accounts
(a) Real Accounts
These include the accounts, which record traders’ transactions relating
to property and material things. These are the accounts of assets.
Examples of real accounts are Cash A/c, Furniture A/c, Motor Car A/c,
Plant & Machinery A/c, Goods A/c, Goodwill A/c etc.
(b) Nominal Accounts

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These accounts record the transactions relating to incomes, gains,
expenses and losses. Examples of nominal accounts are Salary A/c,
Discount Allowed/Received A/c, Rent A/c, Interest A/c, Advertisement
A/c, etc.

Rules of Debit and Credit

If A and B go to see a cricket match and A buys the ticket for B
also, one says that B has been placed under an obligation or a debt
and that A has done a creditable thing and, therefore, entitled to a
credit. In the accountant’s language, B will be debited and A will be
credited. At the next match, B might repay the debt and buy tickets
both for himself and for A. repaying a debt is also creditable and the
accountant will be making another entry, this time debiting A and
crediting B. one must treat each transaction separately. From this one
develops the rule: “Debit the receiver and credit the giver”. This holds
good in case of all transactions with persons.
Now suppose the business receives cash. It will certainly
appoint a person to receive and pay cash. Following the rule of ‘debit
the receiver and credit the giver’, one should debit Mr. Cashier
whenever he receives cash (and credit the person who gives it) and
credit him whenever he pays out cash (and debit the person who
receives it). It is convenient to name Mr. Cashier’s Account as just
Cash Account. In case of receipt of goods, one could debit Mr. Godown
Keeper and in case of issue of goods (on sale or otherwise), one could
credit him. But this will raise difficulties. Mr. Godown Keeper is merely
an employee who looks after stores and godowns as best as he can.
He is responsible for the goods only in general way and not in a very
strict sense, which is applicable to the cashier. It is, therefore,
convenient to name Mr. Godown Keeper’s account as simply “Goods”
or “Stock” Account. Similar reasoning applies to all other things that the
business acquires or disposes of. The rule is “Debit what comes in and
credit what goes out”. If cash has come in, debit cash; if goods have
come in, debit goods; and so on.

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 Another broad category of transactions remains to be dealt with.
Suppose, at the end of the month, salary is paid to a clerk. Following
the two rules, one should debit Mr. Clerk (because he has received
cash) and credit Cash Account (because cash has gone out). But
debiting Mr. Clerk is useless, since he is not going to pay the money
back; he has already rendered service for a month and that is all. If one
debits’ Mr. Clerk the debits will go on mounting and the entire sum
standing to his debit will be a ‘loss’. It is far better to recognise, from
the beginning, that the money paid to the clerk is an expense and,
realistically, one should debit ‘Salaries Account’. If one pays rent, one
should debit Rent Account and not the landlord personally. Thinking of
incomes, which the business gets, one can easily establish the rule
that instead of crediting the person from whom such incomes are
received, one should credit the income account such as “Commission
Received Account” or “Interest Account”. Therefore, “Debit all losses
and expenses and credit all incomes and gains”.

We can therefore sum up the three rules and relate them with
the three types of accounts:
1) Personal Account
Debit the receiver, Credit the giver
2) Real Account
Debit what comes in, Credit what goes out.
3) Nominal Account
Debit all expenses and losses, Credit all incomes and gains.

One may put these rules in a different manner, noting that the
left hand side of an account is called the debit side and the right hand
side, the credit side, with the help of a simple figure. See fig.2.3 given
below

Fig.2.3
Assets Liabilities and Capital
Increases Decreases Decreases Increases

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 Expenses or Losses Liabilities and Capital
Increases Decreases Decreases Increases

The student should clearly understand the nature of debit and credit.
A Debit denotes:
1) In the case of a person, that he has received some benefit against
which he has already rendered some service or will render service
in future. When a person becomes liable to do something in favour
of the firm, the fact is recorded by debiting that person’s account.
2) In the case of goods or properties, that the stock and value of such
goods or properties has increased, and
3) In the case of other accounts like salary or rent that the firm has
incurred some expense or has lost money.
A Credit denotes:
1) In the case of a person, that some benefit has been received from
him, entitling him to claim from the firm a return benefit in the form
of cash or goods or service. When a person becomes entitled to
money or money’s worth for any reason, the fact is recorded by
crediting him;
2) In the case of goods or properties, that the stock and value of such
goods or properties has diminished; and
3) In the case of other accounts, that the firm has made a gain.
A Debit balance shows that:
1) money is owing to the firm; or
2) the firm owns some property (cash, goods, furniture, etc.); or
3) the firm has lost money or has incurred some expenses.

A Credit balance shows that:

1) money is owing to some person; or
2) the firm has given up so much property; or
3) the firm has earned an income.

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Double Entry Book Keeping
Double entry book keeping is regarded as the most important
modern method adopted by traders in maintaining their books of
accounts. The method assumes that every transaction has a two-fold
effect and therefore, in each transaction, there are two parties, or
accounts. In a transaction one account receives benefit and other
account gives the benefit.
In other words, if one account receives a benefit in the form of
cash, goods or service, there must be corresponding loss or benefit by
other account. The account receiving the benefit is debited and other
account parting with the benefit is credited. Thus, double entry book
keeping system may be defined as a system of recording two-fold
effect of each and every transaction in proper set of books. For every
debit, there is a corresponding equivalent credit and therefore, in a
particular period, all debits are equal to all credits.
Advantages of Double Entry Book-keeping
1) Since it maintains both personal and impersonal accounts, a
complete record of each and every transaction is available.
2) It ensures arithmetic accuracy of recording because for every debit,
there is a corresponding equivalent credit.
3) The method furnishes full information about debtors and creditors
as it maintains personal accounts.
4) The method makes possible, the comparison of purchases, sales,
expenses, profits etc of two different accounting periods.
5) In this method errors and mistakes in recording are easily detected
and rectified.

Illustration
From the following transactions find out which accounts are affected
and why, by presenting the same in a tabular form.
(1) A started business with Rs.25,000

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(2) He purchased goods for cash for Rs.7,500
(3) Purchased machinery from ABC Ltd. for Rs.1,00,000
(4) Sold goods on credit to B for Rs.5,000
(5) Paid for electricity charges of Rs.2,000
(6) Sold goods to C for cash of Rs.2,500
(7) Paid to S Rs.1,500 for advertising
(8) Paid salary Rs.6,600 to M
(9) Paid in bank a/c Rs.3,000
(10) Withdrawn from bank for personal use Rs.750

Solution:
Sr. Accounts Type of Debited/ Reason for Debit or
No. Affected Accounts Credited Credit
1) Cash A/c Real Debited Cash coming in
Capital A/c Personal Credited Given the benefit
2) Goods A/c Real Debited Goods coming in
Cash A/c Real Credited Cash going out
3) Machinery Real Debited Machinery coming in
a/c Real Credited Cash going out
Cash A/c
4) B A/c Personal Debited Receiving of benefit
Goods A/c Real Credited Goods going out
5) Electricity A/c Nominal Debited Debit expenses
Cash A/c Real Credited Cash going out
6) Cash A/c Real Debited Cash coming in
Goods A/c Real Credited Goods going out
7) Advt. A/c Nominal Debited Advt is expense
Cash A/c Real Credited Cash going out
8) Salary A/c Nominal Debited Salary is expense
Cash A/c Real Credited Cash going out
9) Bank A/c Real Debited Cash coming in
Cash A/c Real Credited Cash going out
10) Drawings A/c Personal Debited Drawings recd benefit
Cash A/c Real Credited Cash going out

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Questions
(1) Explain briefly the branches of accounting.
(2) What is an Account?
(3) What do you mean by Double Entry Book Keeping?
(4) What are the advantages of Double Entry Book Keeping?
(5) What do you understand by Personal Account, Real Account and
Nominal Account?
(6) What are the rules of debiting and crediting the Personal, Real and
Nominal Accounts?
(7) Give the correct classification of the following accounts

Name of the Account Classification

a) The London Times a) Nominal Account
b) Machinery b) Real Account
c) Unit Trust of India c) Nominal Account
d) Electricity charges d) Real Account
e) Goods e) Nominal Account
f) Capital f) Real Account
g) Furniture g) Nominal Account
h) Shahrukh h) Personal Account
i) Postage stamps i) Real Account
j) Furniture j) Nominal Account

(8) From the following transactions, find out the accounts that are
affected and state the reasons for the same.
a) Paid to A Rs.1, 000 for commission.
b) Purchased goods from Z for Rs.5, 000 on credit.
c) Paid Rs.500 cash to B
d) Paid municipal taxes of Rs.4, 250
e) Purchased scooter from Bajaj for Rs.35, 000
f) Sold goods for cash Rs.2, 000
g) Received commission of Rs.7, 500 from A
h) Borrowed a sum of Rs.1 lack from State Bank of India
i) Paid salary of Rs.6,000 to M

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 j) Paid Rs.10, 000 to S

(9) Fill in the blanks with correct entries

a) Journal is regarded as _____________ record of transactions.
b) Anything that is convertible into cash or its equivalent is termed
as _______________.
c) A person who owes money is known as ______________.
d) ________________ records transactions relating to property
and material things.
e) In Double entry system the account receiving the benefit is
___________ and other account parting with the benefit is
___________.

(10) Classify the following accounts

a) Machinery Account
b) Electricity Account
c) Purchases Account
d) Kishan’s Account
e) L & T Ltd.
f) Drawings Account
g) S.K. Engineering College
h) Salary Account
i) Rent Account
j) Furniture Account
k) Taxes & Octroi Account

(III) Journal

Journal
The word journal comes from French word ‘Jour’ meaning day. It is a
subsidiary book meant for recording the day-to-day transactions of the
business in the order in which they take place. The term Journal may

21
be defined as the book of account which maintains original and
detailed record of transactions that have taken place in the business in
a chronological order, in an analytical way showing the debit and credit
effect of the accounts which are affected in the transaction.

Features of a Journal
1) It maintains original record of all the transactions.
2) It records transactions in the order of date of their occurrence.
3) It maintains a detail record of transactions by writing the narration at
the end of every journal entry.
4) It is the original record, which provides base for subsequent
accounting work.
5) It analyses each transaction in such a way to get knowledge of
debit and credit effect of the accounts, which are affected in the
transaction.

Advantages of Journal
1) It helps the ledger keeper to maintain the ledger clearly and
accurately.
2) Every transaction entered in the journal is supported by narration,
which facilitates to understand the details of transactions at any
future time.
3) It records all the transactions daily in a day to day order, and
therefore there is no possibility of any particular transaction omitted
to be recorded in the journal.
4) The analytical method of recording the transaction into debit and
credit helps posting in the ledger books.
5) It strengthens the understanding of the principles of double entry
system and the importance of such system.

Explanation of the form of Journal

A specimen Journal can be illustrated from the following fig.3.1

Fig.3.1

22
 Journal
Debit Credit
Date Particulars L.F.
Rs. Rs.
11/03

1 Cash A/c …………………Dr. 20,000.00

To Goods A/c 20,000.00

( Being Goods sold for cash)

The information to be filled in the above columns can be explained as

given below:
1) Date
The date of the transaction is recorded in the date column. The date,
month and year are entered in this column. Generally year and month
is recorded on top of the page and the date is recorded whenever it
changes.
2) Particulars
The account to be debited is written first and close to the date column.
Just before the L.F. column the word Dr. is written. The account to be
credited is written on the next line in particulars column leaving some
space on the left hand side so that credit entry can be separated from
debit entry. The word ‘To’ is written before the account to be credited.
3) Ledger Folio
It displays the page number of ledger on which debit and credit effect
of an account is recorded in the summarised manner.

4) Debit amount / Credit amount

The amount to be debited is written in front of the debit entry in the
debit column; and the amount to be credited is written in front of the
credit entry in the credit column.
5) Narration
There is no separate column in the journal for writing the narration. At
the end of the journal entry, explanation called narration should be

23
written in the Particulars column. It generally begins with the word
‘being’. It gives the complete details of the transaction passed at any
time.
Since Journal is a basic accounting record, it should be written
in neat and legible handwriting and maintained safely. It forms the
basis for preparation of ledger books and subsidiary books. This is the
first step in accounting and therefore students must thoroughly
understand the same. The correct method of preparation of a journal is
given below with the help of an illustration.

Illustration
Record the following transactions in the books of Salman for the month
of April 2003.
1. Commenced business with Cash Rs.20,000
2. Bought goods from Shahrukh at 5 % trade discount for Rs.14,000
3. Paid to Sanjay for office rent Rs.10,000
4. Sold goods for cash Rs.5,000
5. Goods returned to Shahrukh Rs.7500
6. Sold goods to Prashant for Rs.1,500 at 5 % trade discount
7. Paid to Shahrukh on account Rs.15,000
8. Goods sold for cash Rs.4,000
9. Received from Prashant Rs.1,400
10. Paid for salaries Rs.1,000 of which Rs.500 paid in cash and bal. in
goods.
11. Placed an order for goods Rs.10,000 to Sunil to be executed next
month.
12. Purchased computer for Rs.30,000 and paid Rs.2,000 for octroi
charges.
13. Goods purchased for cash Rs.1,000
14. Free samples of Rs.2,000 distributed
15. Paid to Shahrukh Rs.20,000 on account.

Solution:
In the books of Salman

24
 Journal
Date Particulars L.F. Debit Credit
2003
01/04 Cash A/c …………………..Dr. 25000
To Capital A/c 25000
(Being capital brought in)
02/04 Goods A/c ………………..Dr. 13300
To Shahrukh A/c 13300
(Being credit purchase of
goods)
03/04 Office Rent A/c ………….Dr. 10000
To Cash A/c 10000
(Being rent paid)
04/04 Cash A/c …………………Dr. 5000
To Goods A/c 5000
(Being cash sales)
05/04 Shahrukh’s A/c ……………..Dr. 7500
To Goods A/c 7500
(Being goods returned)
06/04 Prashant’s A/c……………….Dr. 1425
To Goods A/c 1425
(Being credit sales)
07/04 Shahrukh’s A/c……………..Dr. 15000
To Cash A/c 15000
(Being amt paid on account)
08/04 Cash A/c…………………..Dr. 4000
To Goods A/c 4000
(Being cash sales)
09/04 Prashant’s A/c……………….Dr. 1425
To Cash A/c 1400
To Discount A/c 25
(Being amt paid in full
settlement)
10/04 Salary A/c …………………Dr. 1000
To Cash A/c 500
To Goods A/c 500
(Being salary paid)
11/04 No Entry
12/04 Computer A/c……………..Dr. 30000
To Cash A/c 30000
(Being computer purchased)
13/04 Goods A/c…………………Dr. 1000
To Cash A/c 1000
(Being goods purchased for
cash)
14/04 Advertisement A/c………..Dr. 2000
To Goods A/c 2000

25
 (Being goods distributed as
free samples for advertisement)
15/04 Shahrukh’s A/c……………..Dr. 20000
To Cash A/c 20000
(Being amount paid on
account)
Total 136650 136650

Illustration
Record the transactions for the month of January 2004 in the books of
A&B
1. A sold goods to B on credit for Rs.25000
2. B sold goods to A on credit for Rs.12000
3. B returned goods of Rs.2500 to A.
4. B paid to A Rs.15000 in cash
5. A sold machinery worth Rs.100000 to B who paid Rs.25000 in cash
immediately
6. A purchased goods of Rs.15000 from B and paid Rs.7500 in cash
7. A paid to B Rs.10000 in cash

Solution
In the books of A
Journal
Date Particulars L.F. Debit Credit
2004
01/01 B’s A/c …………………..Dr. 25000
To Sales A/c 25000
(Being Sales on credit)
02/01 Purchase A/c ………………..Dr. 12000
To B’s A/c 12000
(Being credit purchase of goods)
03/01 Return Inwards A/c ………….Dr. 2500
To B’s A/c 2500
(Being goods sold to B returned)
04/01 Cash A/c …………………Dr. 15000

26
 To B’s A/c 15000
(Being amount recd in cash)
05/01 Cash A/c ……………..Dr. 25000
B’s A/c ……………….Dr. 75000
To Machinery A/c 100000
(Being machinery sold to B)
06/01 Purchases A/c……………….Dr. 15000
To Cash A/c 7500
To B’s A/c 7500
(Being goods purchased partly
on credit from B)
07/01 B’s A/c……………..Dr. 10000
To Cash A/c 10000
(Being amt paid in cash)
Total 179500 179500

In the books of B
Journal
Date Particulars L.F. Debit Credit
2004
01/01 Purchases A/c ……………..Dr. 25000
To A’s A/c 25000
(Being Purchases on credit)
02/01 A’s A/c ………………..Dr. 12000
To Sales A/c 12000
(Being credit sale of goods)
03/01 A’s A/c ………….Dr. 2500
To Return Outward A/c 2500
(Being goods purchased
returned)
04/01 A’s A/c …………………Dr. 15000
To Cash A/c 15000
(Being amount paid in cash)
05/01 Machinery A/c ……………..Dr. 100000
To Cash A/c 25000
To A’s A/c 75000
(Being machinery purchased)
06/01 Cash A/c……………….Dr. 7500
A’s A/c ………………..Dr. 7500
To Sales A/c 15000
(Being goods sold partly on
credit to A)
07/01 Cash A/c……………..Dr. 10000
To A’s A/c 10000

27
 (Being amt received in cash)
Total 179500 179500

Illustration
Journalise the following transactions in the books of Mr. Satav for the
month of August 1999
1.Commenced business with Rs.50000 of which Rs.10000 was
borrowed from his wife as a loan at 18 % p.a.
3.Sold goods worth Rs.27450
5.Cash deposited into bank Rs.15000 for opening a new bank a/c
8.Bought goods from Mr.Sinha for Rs.15000 at 10% trade discount and
paid him full amount on the spot at 5% cash discount.
11.Sold goods of Rs.15860 to M/s Shah & sons. on credit
15.Purchased machinery of Rs.7860 and made the payment by
cheque. He also paid wages of Rs.640 for the installation of machinery
in cash.
17.Goods worth Rs.7000 were damaged in transit and claim was made
to transport company for Rs.4500
19.Placed an order of goods of Rs.3600 with Mr.Shashi
22.Goods worth Rs.1000 were distributed as free samples.
25.Goods worth Rs.2500 were damaged by fire and insurance
company admitted the claim of Rs.2000
27.Paid Salary of Rs.8600 in cash
29.Received cash from insurance company for the claim made on 25 th
for Rs.2000
30.Sold goods to Shirish of Rs.6400 out of which he paid Rs.2000
immediately in cash, Rs.2000 by cheque and balance agreed to be
paid within 10 days.
Solution:
In the books of Mr.Satav
Journal
Date Particulars LF Debit Credit
1999
01/08 Cash A/c ……..Dr. 50000
To Capital A/c 40000
To Mrs.Satav’s Loan A/c 10000

28
 (Being capital brought in and
amount borrowed from wife)
03/08 Cash A/c ….Dr. 27450
To Goods A/c 27450
(Being Cash sales)
05/08 Bank A/c ……Dr. 15000
To Cash A/c 15000
(Being cash deposited in bank)
08/08 Cash A/c…….Dr. 12825
Discount A/c ….Dr. 675
To Goods A/c 13500
(Being goods purchased)
11/08 M/s Shah & sons A/c …Dr. 15860
To Goods A/c 15860
(Being goods sold on credit)
15/08 Machinery A/c ….Dr. 8500
To Bank A/c 7860
To Cash A/c 640
(Being machinery purchased)
17/08 Goods Damaged A/c …. Dr. 7500
To Goods A/c 7500
(Being goods damaged in transit)
17/08 Transport Co.A/c …… Dr. 4500
To Goods Damaged A/c 4500
(Being claim admitted)
19/08 No Entry
22/08 Advertisement A/c .. Dr. 1000
To Goods A/c 1000
(Being goods distributed as free
samples)
25/08 Goods Destroyed A/c ..Dr. 2500
To Goods A/c 2500
(Being goods destroyed by fire)
25/08 Claim Admitted A/c ..Dr. 2000
To Goods Destroyed A/c 2000
(Being claim admitted by
insurance co.)
27/08 Salary A/c .. Dr. 8600
To Cash A/c 8600
(Being salary paid for the month)
29/08 Cash A/c …. Dr. 2000
To Claim Admitted A/c 2000
(Being claim amount received in
cash)
30/08 Cash A/c … Dr. 2000
Bank A/c …. Dr. 2000
Shirish’s A/c .. .Dr. 2400
To Goods A/c 6400

29
 (Being sale of goods)
Total 164810 164810

Illustration
Journalise the following transactions in the Journal of Mr. D’Souza for
the month of June 2000
1.Commenced business with cash Rs.10000 and furniture of Rs.25000
2.Bought goods on credit from Dinesh of Rs.12640
5.Sold goods for cash Rs.9820
9.Paid into bank Rs.10000
13.Purchased machinery of Rs.5000 and paid Rs.2000 by cheque
14.Sold goods to Arvind Rs.5210
16.Sold goods for cash Rs.2130
19.Paid to Dinesh Rs.5000 on account
21.Paid Life Insurance premium of Rs.1395
24.Paid to Rakesh for commission Rs.980
25.Received from Arvind Rs.5150 in full settlement of his account
27.Purchased shares of Reliance Co. Rs.2500 and paid the amount by
cheque.
29.Paid telephone charges of Rs.540
30.Paid to Dinesh Rs.7600 in full settlement of his account.
Solution:
In the books of D’Souza
Journal for the month of June 2000
Date Particulars LF Debit Credit
2000
01/06 Cash A/c ….Dr. 10000
Furniture A/c ……Dr. 25000
To Capital A/c 35000
(Being capital brought in)
02/06 Goods A/c …….Dr. 12640
To Dinesh A/c 12640
(Being credit purchases)

30
05/06 Cash A/c … Dr. 9820
To Goods A/c 9820
(Being cash sales)
09/06 Bank A/c ….. Dr. 10000
To Cash A/c 10000
(Being cash deposited in bank)
13/06 Machinery A/c …. Dr. 5000
To Bank A/c 2000
To Singh A/c 3000
(Being machinery purchased)
14/06 Arvind’s A/c …… Dr. 5210
To Goods A/c 5210
(Being credit sales)
16/06 Cash A/c ….. Dr. 2130
To Goods A/c 2130
(Being cash sales)
19/06 Dinesh A/c …. Dr. 5000
To Cash A/c 5000
(Being paid on account)
21/06 Drawings A/c …. Dr. 1395
To Cash A/c 1395
(Being LIC Premium paid)
24/06 Commission A/c … Dr. 980
To Cash A/c 980
(Being paid for commission)
25/06 Cash A/c ….Dr. 5150
Discount A/c … Dr. 60
To Arvind A/c 5210
(Being received in full settlement
of account)
27/06 Shares A/c ….Dr. 2500
To Bank A/c 2500
(Being shares purchased)
29/06 Telephone charges A/c … Dr. 540
To Cash A/c 540
(Being telephone charges paid)
30/06 Dinesh A/c ……. Dr. 7640
To Cash A/c 7600
To Discount A/c 40
(Being the amount paid in full
settlement of account)
Total 103065 103065

Questions
(1) What is a Journal? Why is it important to maintain a journal?
(2) What are the features of Journal? What are the benefits of
maintaining a journal?

31
(3) Write short notes on:
1. Ledger Folio
2. Narration
(4) Journalise the following transactions of Mr.XYZ for the month of
Sept.2003
1.Started business with cash of Rs.15000 and goods of Rs.7000
3.Bought goods of Rs.1500 for cash
4.Sold goods of Rs.1470 for cash
6.Deposited Rs.5000 in bank a/c for opening an account
8.Purchased furniture of Rs.1800 for office and Rs.500 for
residence and paid the amount by cheque.
12.Paid Rs.350 towards taxes & insurance
15.Sold goods of Rs.3000 to Mr.ABC at 5% trade discount
17.Bought goods of Rs.5000 from Mr.PQR at 10% trade discount
22.Received Rs.2500 from Mr.ABC on account and supplied him
goods of Rs.1200
25.Paid Rs.4000 to Mr.PQR on account
27.Goods of Rs.200 were distributed as free samples
29.Sold goods of Rs.500 to Mr.ABC and paid Rs.300 on his behalf
for carriage of goods
30.Paid salaries & wages for Sept.2003 of Rs.820
(5) Journalise the following transactions in the books of M/s Rathi &
Co. for the month of July 2002
1.Commenced business with Cash Rs.20000, Furniture Rs.8000
and Goods of Rs.7000
5.Sold Goods of Rs.2000 for Cash at 2% cash discount
7.Opened a bank a/c with State Bank of India by depositing the
sales proceeds of 5th July 2002
12.Purchased Machinery of Rs.9500 on credit from Sharmili &
Associates and paid Cash for its erection Rs.500
15.Goods costing Rs.250 were distributed as free samples.
20.Purchased goods of Rs.10000 from M/s Bharat on credit. He
paid carriage of Rs.500 on our behalf

32
 24.Paid Office Rent of Rs.200, Salary to Clerk of Rs.500, College
fees of Rathi’s son of Rs.250 by cheque
29.Settled M/s Bharat’s a/c by paying cash. He allowed cash
discount of Rs.250

(6) Journalise the following transactions in the books of Mr.Jagtap

for the month of March 2003
1.Started business with Cash Rs.120000 out of which Rs.50000
was borrowed from Prakash at 12 % p.a.
4.Deposited Rs.20000 cash in Bank A/c newly opened
6.Purchased goods from Jeevan Rs.25000 at 20% trade discount
9.Purchased goods of Rs.2000 in cash
12.Received commission from Jyoti Industries of Rs.3000
15.Paid Office Rent to Landlard of Rs.1800 be cheque
19.Goods invoiced to Jitendra worth Rs.6000 at 5% trade discount
and 2% cash discount. Carriage and transport charges of Rs.300
paid on his behalf
21.Javed invoiced to Jagtap, goods worth Rs.16000 at 12.5% trade
discount and received 1/4th amount in cash
23.Sold goods to Jaydeep of Rs.10000 at 10% trade discount and
5% cash discount and received 50% amount in cash
28.Paid Life Insurance Premium of Rs.525 and Rent for residential
premises of Rs.675
31.Goods of Rs.3000 destroyed by fire and Insurance Co. admitted
the claim of Rs.2500

(7) Journalise the following transactions in the books of Vikas for

the month of Sept.2002
1.Started business with Cash Rs.20000 and Office equipment of
Rs.10000
4.Bought goods of Rs.6000 from Raju at 20% trade discount
6.Sold half of the above goods to Amar at 20% profit
10.Received from Amar amount due from him after deducting 2%
discount

33
 12.Purchased goods from Jaya of Rs.3000 and 1/3 rd amount paid in
cash
14.Sold goods to Vijay Rs.8000 at 10% trade discount and 2%
Cash discount and received half amount
15.Goods returned to Raju Rs.200 (Gross)
17.Goods of Rs.3000 dispatched to Kulkarni on the instructions of
Joshi
18.Bought Rice for Rs.1000
19.Vijay became insolvent and 60% amount received from his
estate
23.Borrowed from Anil Rs.5000 at 5% interest
24.Goods of Rs.100 were distributed as free samples
27.Paid installation charges of Rs.1000 for machinery

(8) Journalise the following transactions in the books of Mr.Santosh

for the month of September 2001
1.Commenced business with cash Rs.5000, bank balance of
Rs.25000 and furniture of Rs.20000
3.Bought goods from Vijay of Rs.16220 on credit
5.Bought goods of Rs.9760 and paid Rs.9700 by cheque
8.Sold goods to Ashish of Rs.10500 on credit
10.Paid for stationery of Rs.1200 in cash
13.Purchase machinery of Rs.48000 from Mr.Singhania and paid
Rs.12000 by cheque.
16.Paid to Vijay Rs.6000 by cheque on account
19.Sold goods of Rs.29540 and received Rs.4500 in cash and
Rs.25000 by cheque in full settlement of account
21.Received Rs.10000 from Ashish in cash on full settlement of
Account
25.Paid salary of Rs.12500 in cash
26.Withdrawn cash of Rs.2500 from bank of which Rs.1000 was for
personal use and the rest for official use.
28.Paid commission of Rs.2710 by cheque to Satish

34
 30.Paid to Vijay Rs.10000 by cheque on full settlement of his
account.

(9) Fill in the blanks with appropriate answers

a) __________ discount does not appear in the books of accounts.
b) At the end of each journal entry ____________ is written.
c) The ____________ method of recording the transaction into debit
and credit helps posting in the ledger books.
d) The journal is called a book of ____________ entry.
e) Journal strengthens the understanding of the principles of
______________ and the importance of such system.

(10) State whether following statements are true or false and

comment
a) Cash discount always shows a credit balance
b) Journal records the transactions in a summarised form
c) The word journal comes from German word ‘Jour’ meaning entry
d) Journal is a book which is maintained in a columnar form
showing debit on left side and credit on right side of the account
e) Writing of narration after a journal entry is compulsory by law

(IV) Ledger

Ledger
The book that contains accounts is known as the ledger. Ledger is
called as the Principal book, since final information pertaining to the
financial position of a business. Other books like the Purchases Book,
Sales book or Journal merely facilitate the preparation of accounts of
the ledger and hence are known as Subsidiary books.
The Cash Book is unique in that respect. It is a subsidiary book
because cash entries are first entered here and the other accounts are
prepared. But Cash book contains two accounts of Cash and Bank,

35
and hence it is a part of ledger also. Therefore, Cash book is both a
Principal book as well as Subsidiary book.
The benefits of preparation of ledger accounts are:
1) Profit & Loss account is prepared with the help of ledger accounts
only.
2) It differentiates information on the basis of various accounts,
whether it is an income or expense or an asset or liability, which
helps in controlling the business.
3) By preparation of Profit & loss account and Balance Sheet, we get
the knowledge about the business condition, and overall business
position.
Preparation of ledger or Posting
Posting is an act of transferring the entries from journal or subsidiary
books in the ledger account. First of all, the opening entry should be
posted. It indicates the balances of assets and liabilities with which the
new year of the business starts. The opening entry is posted on debit
side in case of assets by writing “By Balance b/f” and the amount. In
the case of liabilities and capital, the same entry is posted on credit
side.
Balancing of accounts
The process of finding the difference between debit side of an account
and credit side of an account is called as balancing of account. It is
done on a specific day on which you want to find out the balance of
that account. It is normally done on the last day of the accounting year.
If the total of debit side is more than the total of credit side of an
account, the account is said to have a debit balance, and the difference
is shown on the credit side by writing the words “By Balance c/f” on a
particular date. If the total of credit side is more than the total of debit
side of an account, the account is said to have a credit balance, and
the difference is shown on the debit side by writing the words “To
Balance c/f” on a particular date. The accounts to be balanced are
those relating to persons and property like machinery, building, plant,
capital etc., but other accounts should not be balanced, because their

36
amounts will have to be transferred to other accounts in order to
ascertain profit and loss.
Illustration
Record the following transactions in the Journal of Z Ltd. and then post
them in the ledger for the month of October 2003.
1) Commenced business with Cash of Rs.20000 and machinery of
Rs.40000
2) Deposited Rs.15000 in Bank A/c
3) Bought goods for Rs.2500 in cash
4) Sold goods to X for Rs.9500
5) Purchased goods from Y for Rs.5000
6) Goods returned to Y of Rs.500
7) Received cash of Rs.9000 from X for full and final settlement of
accounts
8) Paid Rs.4950 by cheque to Y for full and final settlement of
accounts
9) Sold goods of Rs.3000 for cash
10)Paid Rs.7500 as rent of resident premises to A
11) Purchased goods for personal use for Rs.2000
12)Stock in hand of goods Rs.1000

Solution
In the books of Z Ltd.
Journal
Date Particulars L.F. Debit Credit
Rs. Rs.
2003
October
1 Cash A/c ………...Dr. 20000
Machinery A/c …..Dr. 40000
To Capital A/c 60000
( Being capital brought into the
business)

2 Bank A/c ………….Dr. 15000

To Cash A/c 15000

37
 (Being amount deposited in bank)

3 Goods A/c ………..Dr. 2500

To Cash A/c 2500
(Being goods purchased for cash)

4 X's A/c ……………..Dr. 9500

To Goods A/c 9500
(Being Sale of goods on credit)

5 Goods A/c ………..Dr. 5000

To Y's A/c 5000
(Being Goods purchased on credit)

6 Y's A/c …………..Dr. 500

To Goods A/c 500
(Being goods returned to Y)

7 Cash A/c ………..Dr. 9000

Discount A/c ……Dr. 500
To X's A/c 9500
(Being amount recd in cash on full
& final settlement of account)

8 Y's A/c ………….Dr. 4500

To Bank A/c 4450
To Discount A/c 50
(Being amount paid by cheque on
full & final settlement of account)

9 Cash A/c ……….Dr. 3000

To Goods A/c 3000
(Being goods sold for cash)

10 Drawings A/c …….Dr. 7500

To Cash A/c 7500
(Being rent of residential premises
paid)
11 Drawings A/c …….Dr. 2000
To Goods A/c 2000
(Being goods used for personal
use)
Total 109000 109000

Ledger Accounts in the books of Z Ltd.

Capital Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount

38
2003 2003
Oct. Oct.
12 To Balance c/d 60000 1 By Cash A/c 20000
By Machinery A/c 40000
60000 60000
Oct.
13 By Balance b/d 60000
Drawing A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
10 To Cash A/c 7500 12 By Balance c/d 9500
11 To Goods A/c 2000
9500 9500
Oct.
13 To Balance b/d 9500
Cash A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
1 To Capital A/c 20000 2 By Bank A/c 15000
7 To X's A/c 9000 3 By Goods A/c 2500
9 To Goods A/c 3000 10 By Drawings A/c 7500
12 By Balance c/d 2000
32000 27000
Oct.
13 To Balance b/d 2000
Bank A/c Cr.
Dr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
2 To Cash A/c 15000 8 By Y's A/c 14450
12 By Balance c/d 550
15000 15000
Oct.
13 To Balance b/d 550

Goods A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003

39
Oct. Oct.
3 To Cash A/c 2500 4 By X's A/c 9500
5 To Y's A/c 15000 6 By Y's A/c 500
9 By Cash A/c 3000
11 By Drawing's A/c 2000
12 By Profit & Loss 1500
A/c
12 By Balance c/d 1000
17500 17500
Oct.
12 To Balance b/d 1000
X's A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
4 To Goods A/c 9500 7 By Cash A/c 9000
By Discount A/c 500
9500 9500
Y's A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
6 To Goods A/c 500 5 By Goods A/c 15000
8 To Bank A/c 14450
To Discount A/c 50
15000 15000

Machinery A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
1 To Capital A/c 40000 12 By Balance c/d 40000
40000 40000
Oct.
13 To Balance b/d 40000
Discount A/c
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2003 2003
Oct. Oct.
7 To X's A/c 500 8 By Y's A/c 50
12 By Profit & Loss 450
A/c

40
 500 500

Illustration
There are two parties Mr. X and Mr. Y who deal with each other.
Prepare X’s A/c in the books of Y and Y’s A/c in the books of X from the
information given below for the month of Nov.2003
1.Balance amount receivable from X is Rs.4320
5. Goods of Rs.2500 sold to X at a trade discount of 10%
7. Goods of Rs.250 (Gross) returned by X
12.Cash Rs.2900 received from X
17. Goods sent to X on invoice of Rs.1500
25. Sold goods for cash to X of Rs.300
30. Received cash Rs.2800 from X

Solution
In the books of Mr. X
Mr. Y’s A/c
Dr. Cr.
Date Particulars JF Amt Date Particulars JF Amt
2003 2003
1/11 To Balance b/d 4320 7/11 By Goods A/c 180
5/11 To Goods A/c 2250 12/11 By Cash A/c 2900
7/11 To Goods A/c 1500 30/11 By Cash A/c 2800
30/11 By Balance c/d 2190
8070 8070
1/12 To Balance b/d 2190

In the books of Mr. Y

Mr. X’s A/c
Dr. Cr.

41
Date Particulars JF Amt. Date Particulars JF Amt.
2003 2003
7/11 To Goods A/c 180 1/11 By Balance b/d 4320
12/11 To Cash A/c 2900 5/11 By Goods A/c 2250
30/11 To Cash A/c 2800 17/11 By Goods A/c 1500
30/11 To Balance c/d 2190
8070 8070
01/12 By Balance b/d 2190

Illustration
Following balances were extracted from the books of Mr. Ravindra as
on 1st January 1998
Particulars Debit Credit
Capital A/c 60000
Cash A/c 7500
Goods A/c 36500
Sudhir’s A/c 24450
Akash’s A/c 18760
Following transactions took place during the month of January 1998.
You are requested to post them in appropriate ledger accounts.
1.Sold goods for cash Rs.27120
3.Bought goods on credit from Sudhir at Rs.11460 and he allowed
trade discount of Rs.60
5.Sold goods to Akash of Rs.9820
7.Paid to Sudhir Rs.15000
10.Received from Akash Rs.20000
15.Distributed goods as free samples of Rs.2000
19.Sold goods to Akash of Rs.5430
22.Returned goods from Akash Rs.540
25.Furniture purchased for cash Rs.24000

42
29.Paid commission of Rs.4600
30.Bought goods for cash of Rs.7450
31.Stock of goods on hand Rs.7500
Solution:
In the books of Mr. Ravindra
Ledger Account for the month of January 1998
Dr. Capital A/c Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
31/01 To Balance c/d 60000 31/01 By Balance b/d 60000
60000 60000
01/02 By Balance b/d 60000
Cash A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
01/01 To Balance b/d 7500 07/01 By Sudhir A/c 15000
01/01 To Goods A/c 27120 25/01 By Furniture A/c 24000
10/01 To Akash A/c 20000 29/01 By Commission 4600
A/c
30/01 By Goods A/c 7450
31/01 By Balance c/d 3570
54620 54620
01/02 To Balance b/d 3570
Dr. Goods A/c Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
01/01 To Balance b/d 36500 01/01 By Cash A/c 27120
03/01 To Sudhir A/c 11400 05/01 By Akash A/c 9820
22/01 To Akash A/c 540 15/01 By Advertise- 2000
ment A/c
30/01 To Cash A/c 7450 19/01 By Akash A/c 5430
31/01 By Profit & 4020
Loss A/c
31/01 By Balance c/d 7500
55890 55890
01/02 To Balance b/d 7500
Sudhir A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
07/01 To Cash A/c 15000 01/01 By Balance b/d 24450

43
31/01 To Balance c/d 20850 03/01 By Goods A/c 11400
35850 35850
01/02 By Balance b/d 20850
Akash A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
01/01 To Balance b/d 18760 10/01 By Cash A/c 20000
05/01 To Goods A/c 9820 22/01 By Goods A/c 540
19/01 To Goods A/c 5430 31/01 By Balance c/d 13470
34010 34010
01/02 To Balance b/d 13470
Advertisment A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
15/01 To Goods A/c 2000 31/01 By Balance c/d 2000
2000 2000
01/02 To Balance b/d 2000
Furniture A/c
Dr. Cr.
Date Particulars JF Amt.Date Particulars JF Amt.
1998 1998
25/01 To Cash A/c 24000 31/01 By Balance c/d 24000
24000 24000
01/02 To Balance b/d 24000
Commission A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
1998 1998
29/01 To Cash A/c 4600 31/01 By Balance c/d 4600
4600 4600
01/02 To Balance b/d 4600

Questions
(1) What is a ledger? Why is it necessary to maintain a ledger?
(2) Explain Posting? How is a transaction posted? Explain with
example.

44
(3) What do you mean by Balancing of accounts? When is balancing
done? Why?
(4) Journalise the following transactions in the books of Ashish and
post them in ledger accounts for the month of Jan.2004
1.Ashish commenced business with cash of Rs.45000
3.He purchased goods of Rs.10000 in cash
5.Sold goods of Rs.4800 for cash
8.Bought goods from Amit of Rs.12000 on credit
10.Returned goods to Amit worth Rs.1200
13.Paid Rs.700 in cash for printing & stationery
15.Sold goods to Amar of Rs.8000 at 5% trade discount
20.Paid Rs.10000 on account to Amit
23.Paid life insurance premium of his life of Rs.600
27.Received Rs.5000 from Amar on account
28.Invoiced goods worth Rs.4200 to Amar and paid Rs.250 towards
carriage on Amar’s behalf
29.Paid electricity bill of Rs.170 for business and Rs.150 of
residential premises
31.Stock of goods on hand Rs.6500

(5) Prepare ledger accounts of Mr. Sharma from the information given
as follows for the month of July 2003
1.Started business with Rs.30000 as capital in the business
3.Bought goods on credit for Rs.15000 from Mr. Shah
5.Sold goods of Rs.3200 for cash
6.Purchased furniture worth Rs.2700 for shop in cash
9.Sold goods of Rs.10500 to Mr. Singh on credit
12.Paid carriage of Rs.700
15.Paid Rs.12000 to Mr. Shah on account
16.Paid rent of Rs.2500 for shop to the landlord
20.Received Rs.10000 from Mr. Singh on account
22.Purchased postage stamps of Rs.60 and paid Rs.50 for postage
25.Sold goods of Rs.6000 to Mr. Singh
26.Bought goods of Rs.4700 for cash

45
 28.Paid Rs.1000 for household expenses
30.Stock of goods on hand Rd.5200

(6) From the following transactions write the necessary accounts and
balance them in the books of Mr. Girish Khanna for the month of
August 1999
1.Amount due from Shirish Rs.8460
3.Bought goods from Suresh Rs.5430 for cash
5.Received cash from Shirish on account Rs.5000 and allowed hi,
discount of Rs.120
6.Sold goods to Shirish Rs.6400 less 5% trade discount
7.Paid delivery expenses on his account on above goods Rs.70
10.Invoiced goods to Shirish Rs.4650
16.Received back goods from Shirish Rs.640 net
20.Bought goods from Ashish for cash Rs.2760
21.Paid carriage on same chargeable of goods Rs.40
26.Received from Shirish Rs.5000
29.Sold goods to Shirish for cash Rs.3640

(7) Following are the transactions between Green Ltd. And Blue Ltd. for
the month of October 2001. Show Green’s A/c in the books of Blue
Ltd. And Blue’s A/c in the books of Green Ltd.
1.Green sales goods worth Rs.24120 to Blue
5.Blue returned goods of Rs.5120 to Green
9.Green purchases goods of Rs.12730 from Blue
15.Green returns goods of Rs.2410 to Blue
18.Green pays’ Rs.10000 to Blue on full & final settlement of his
account
25.Blue pays Rs.12000 to Green on account.
29.Green purchases’ furniture of Rs.18000 from Blue and pays
Rs.8000 in cash immediately.

(8) Following are the ledger accounts in the books of Mr. Arun Kumar
for the month of April 2000. Some posting are missing. You are

46
 required to find out missing postings and post them and rectify the
entries if any.
Cash A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
01/04 To Capital A/c 75000 05/04 By Purchases 12450
A/c
31/04 To Amit A/c 17500
Capital A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
01/04 By Machinery 36000
Purchases A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
07/04 To Shriram A/c 14300
Shriram A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
10/04 To Cash A/c 14200
10/04 To Discount 100

Machinery A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
01/04 To Cash A/c 48000
Sales A/c
Dr. Cr.
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
16/04 By Cash A/c 24120
Amit A/c
Dr. Cr.

47
Date Particulars JF Amt. Date Particulars JF Amt.
2000 2000
20/04 To Sales A/c 16200

(9) Fill in the blanks

a) When credit side total exceeds debit side, it is called
___________ balance.
b) Loose Tools account shows a __________ balance.
c) Ledger is called as the ____________ book.
d) ___________ is an act of transferring the entries from journal or
subsidiary books in the ledger account.
e) The opening entry is entered on ___________ side in case of an
asset account.
f) Debtors Account shows ______________ balance.

(10) State whether the following statements are true or false

a) Personal accounts are closed by transferring them to profit and
loss account.
b) Ledger helps in preparation of a Journal.
c) Ledger account differentiated information on the basis of amount
of transaction and then posted to appropriate account.
d) The balance at the end of the period in the case of asset
account is transferred to Profit & loss account and account is
closed.
e) Cash book is purely a Principal book
f) Posting is an act of transferring the entries from ledger to
various subsidiary books.

48
 (V) Subsidiary Books

In a business most of the transactions generally relate to

receipts and payment of cash, sale of goods and their purchase.
Journal was the main book of original entry, and all the entries were
passed in the journal first and then transactions were posted in the
ledger. Thus journal and ledger were the main books of accounts. But
with the expansion of business it became inconvenient to have just one
journal book. So Journal was sub-divided into various sub-journals
called as subsidiary books.
It is convenient to keep a separate register for each class of
transactions – one for receipts and payments of cash, one for purchase

49
of goods and one for sale of goods. The system in which such
transactions are first recorded in an account specially maintained for it
and then posted into ledger accounts is known as Practical system of
Book keeping. These books of original or prime entry are called
subsidiary books. Normally the following subsidiary books are prepared
in a business:
1) Cash book which records receipts and payments of cash, including
receipts into and payments out of a bank.
2) Purchases Book to record credit purchases of goods or materials
and stores required in the factory.
3) Purchase Returns Book to record the returns of goods or materials
purchased earlier.
4) Sales Book to record the sales of the goods in which the firm is
dealing.
5) Sales Return Book that records the goods returned by customers.
6) Bills Receivable Book to record the receipts of promissory notes or
hundies received from various parties.
7) Bills Payable Book to record the issue of promissory notes or
hundies to other parties.
8) Journal (Proper) to record the transactions, which cannot be
recorded in any of the books mentioned above.
We will discuss all the books mentioned above in detail in this chapter,
except Cash Book which will be dealt with in the next chapter.

Advantages of maintaining subsidiary books

1) A Journal book is sub-divided into various subsidiary books, which
divided the accounting work, and therefore more than one clerk can
work on accounts writing at the same time.
2) When the same work is allotted to a person over a period of time,
he acquires full knowledge of it and becomes efficient in handling it.
Thus the accounting work will be done efficiently.
3) Since various accounting works can be done simultaneously, it will
help in saving valuable time and work will be completed quickly.

50
4) Since a separate register or book is kept for each class of
transactions, the information relating to each class of transactions
will be available at one place.
5) When the trial balance is prepared and it does not agree, the error
or errors can be located easily due to existence of various books.
Even the commission of errors or frauds will be checked by the use
of various subsidiary books. We are going to learn rectification of
errors in subsequent chapters.

(I) Purchases Book

Purchase book is maintained to record the credit purchases of goods
or materials and stores used in the factory. It is also known as Invoice
book or Bought book. Purchase of stationery or paper or any material
for business use is not to be recorded in the purchase book. A blank
purchase book is shown in Fig.5.1
Points to be remembered
1) Only credit purchases are to be recorded, and no cash purchases
are to be recorded.
2) Credit purchases of things other than goods or materials in which
the firm is dealing should not be recorded in this book.

Fig.5.1
Purchases Book

Date Particulars L.F. Details Amount

Rs. Rs.

The Particulars column is meant to record the name of the supplier and
also the details of goods purchased and the respective quantities. The

51
amount in respect of each article in single purchase is recorded in the
Details column. The net amount of single purchase is then entered in
the amount column. The total of Purchase book is normally taken at the
end of the month and that indicates the total credit purchases for that
month. This total is then recorded in the Purchase account on debit
side and respective double entries are made to the parties account on
the credit side.

Illustration
Record the following transactions for the month of Dec.2003 in the
Purchase book of Mr.A
1. Purchased goods of Rs.4000 from Mr.B
8. Purchased 5 ballpens at Rs.10 each and 8 ink pens at Rs.25 each
from Mr.C
15. Purchased goods of Rs.7500 from Mr.D for cash
21. Purchased computer for Rs.40000 on credit from Mr.E
25. Purchase 12 dozens of computer stationery @ Rs.100 each dozen
and 10 dozens of ruled paper @ Rs.25 each dozen and received trade
discount of 10% from Mr.F

Solution
In the books of Mr.A
Purchases Book
Date Particulars L.F. Details Amount
Rs. Rs.

52
1. Mr.B
Goods purchased 4000 4000
8. Mr.C
5 ballpens @ Rs.10 each 50
8 inkpens @ Rs.25 each 200 250

25. Mr.F
12 dozens @ Rs.100 per dozen 1200
10 dozens @ Rs.25 per dozen 250
1450 1450
Total 5650

Note:
Entry dated 15 and 21 will not be entered in this book since purchases
by cash and purchase of computer cannot be entered in this book.
Here it is important to explain the term trade discount and cash
discount before we move to the next type of subsidiary book

Trade Discount: - Trade discount is an allowance given by one trader to

another trade. E.g. a manufacture gives discount to a wholesaler or a
wholesaler gives discount to a retailer etc. This discount is mentioned
in the invoice. Trade discount generally covers the expenses of the
middlemen and their profit margin. The percentage of trade discount is
a matter of negotiation between the two dealers. It is deducted from the
invoice price and therefore, while writing the accounts, it will never be
entered any, where and only the net amount will be posted in the
subsidiary books and ledger.
Cash Discount: - Cash discount is a concession given by the dealer to
the customer if he pays the amount immediately. Cash discount is also
given if the customer pays the amount due within a given time. Cash
discount is given over and above trade discount. E.g. If A sells goods of
Rs.5000 to B at 10 % trade discount and 5 % cash discount, then the
calculation is done as below:

53
 Rs.
Gross amount of goods 5000
Less Trade discount @ 10 % 500
_______
4500
Less Cash discount @ 5 % 225
_______
4225
(II) Sales Book
The Sales book is a register specifically maintained to record credit
sales of goods. Cash sales are not entered in this book but they are
entered in the Cash book. Entries in the Sales book are also made in
the same way as in the Purchases book. The blank Sales book is
shown in Fig.5.2 below
Points to be remembered
1) Only credit sales are to be recorded and no cash sales are to be
recorded in this book.
2) Credit sales of things other than goods or materials in which the
firm is dealing should not be recorded in this book.
Fig.5.2
Sales Book
Date Particulars L.F. Details Amount
Name of the supplier Rs. Rs.

The Particulars column will record the name of the customers

concerned together with particulars and quantities of the goods sold.
For each item, the amount is entered in the Details column, after
totaling the amounts for one sale, and the net amount is written down
in the amount column. The total of the Sales book shows the total
credit sales for the period. Normally the total of the Sales book is taken
at the end of every month and this amount is posted in the Sales

54
account on the credit side. The debit effect is given to the respective
parties’ accounts in the ledger as to sales account.

Illustration
Write up the Sales book of Arvind from the information given below for
the month of June 2003
1. Sold goods of Rs.7500 to Pradeep on credit
2. Sold goods of Rs.6000 to Shri at 5% trade discount
3. Sold goods of Rs.2500 to John for cash
4. Sold ‘A’ grade goods of Rs.10000 and ‘B’ grade goods of Rs.5000
to Prashant
5. Sold office furniture of Rs.5000 to Jacob on credit

Solution
In the books of Arvind
Sales Book
Date Particulars L.F. Details Amount
Rs. Rs.
1. Pradeep
Goods sold 7500 7500
2. Shri
Goods sold 5700 5700
5. Prashant
‘A’ grade goods 10000
‘B’ grade goods 5000 15000
Total 28200
Note :
Entry dated 3 & 4 will not be entered in this book since cash sales and
sale of furniture cannot be entered in this book.

(III) Sales returns book or Returns Inward book

This book is maintained to record the goods returned by customers. If
customers return the goods frequently then it is convenient to maintain
a separate book for recording such returns. If the number of such

55
transactions is small it can be easily recorded in the journal. The ruling
of the book is similar to the Purchases or Sales book and entries are
also made in the similar manner.
The specimen of Returns inward book is shown in Fig.5.3
Fig 5.3
Return Inward Book
Date Particulars L.F. Credit Note Amount
No. Rs.

The total of return inward book is taken monthly and this total is debited
to Return Inward A/c as ‘To Sundries’. The credit effect is given to those
accounts of customers who have returned the goods. The posting in
the customers’ account will be ‘By Return Inward A/c’.

Credit Note:
When the customers return the goods to the seller, then a credit note is
issued to the customer on receipt of goods. This indicates that the
customers a/c has been credited by the seller. The reasons for return
of goods may be numerous like, defective goods supplied or price is
overcharged, or excess goods are supplied etc.

Illustration
Enter the following transactions in Returns Inward Book of M/s Sharma
& sons
1. Goods of Rs.1250 returned by Mr.Shastri
2. 2 boxes of Red colour paint of Rs.1000 and 1 box of Black colour
paint of Rs.400 returned by Sohoni & co.
In the books of M/s Sharma & Sons
Returns Inwards Book

56
Date Particulars L.F. Credit Amount
Note No. Rs.
1. Mr.Shastri
Goods returned 1250
2. Sohoni & co.
2 boxes of Rs.500 each 1000
1 box of Rs.400 400
Total 2650

(IV) Purchase Returns or Returns Outward Book

This book is maintained to record the goods returned by us to our
suppliers. If the return of goods is frequent then it is convenient to
maintain a separate book for recording such returns. If the number of
such transactions is small it can be easily recorded in the journal. The
ruling of the book is similar to that of the Purchase Book and entries
are also made in the similar manner.
The specimen of Returns outward book is shown in Fig.5.4
Fig 5.4
Return Outward Book
Date Particulars L.F. Credit Note Amount
No. Rs.

The total of Return outward book is taken monthly and this total is
credited to Return Outward A/c as ‘By Sundries’. The debit effect is
given to parties account as ‘To Return Outward A/c’

Debit Note:
The person returning the goods issues a debit note to the suppliers.
This is issued to inform the other party or creditor to inform him that his
account has been debited for that returns.

57
Illustration
Prepare Returns Outward book of Mr.Nitish from the information given
below:
1. Returned goods of Rs.2250 to Mr.Naresh
2. Sent a debit note of Rs.1000 to M/s Gandhi & sons
3. Returned defective metal rolls of Rs.5000 to Satish

Solution
In the books of Mr.Nitish
Returns Outward book
Date Particulars L.F. Credit Note Amount
No. Rs.
1. Mr.Naresh 2250
Goods returned
2. M/s Gandhi & Sons 1000
Debit note issued on return
of goods
3. Mr.Satish 5000
Defective metal rolls
returned
Total 8250

(V) Bills Receivable book & Bills Payable book

If a firm receives any promissory notes or hundies, they are recorded in
a separate book called as Bills Receivable book. Similarly if a firm
issues promissory notes or hundies frequently, then they are recorded
in a separate book called as Bills Payable book.

(VI) Journal (Proper)

We are familiar with the word Journal. We have learnt in the earlier
chapter what is a journal and how it is prepared. We have also learnt
the importance of maintaining different books like Purchases Book,

58
Sales Book, Returns Inward Book, Returns Outward Book, Bills
Receivable book and Bills Payable book. Apart from the transactions
recorded in these books, there are some other entries also which have
to be recorded. For recording these other transactions the proper place
is the Journal (Proper). Therefore the role of a Journal is restricted to
the following types of transactions:
1) Opening Entries: - These entries are passed when books are
started or a businessman starts a new business. They are recorded
at the start of the year to journalise the assets and liabilities of the
business.
2) Closing Entries: - At the end of the year the Profit & Loss account
and Balance Sheet has to be prepared. For this purpose all nominal
accounts balances like incomes, expenses, sales, purchases,
carriage inward, rent, power, taxes etc. are transferred to Trading
and Profit & Loss Account by passing the closing entry.
3) Rectification Entry: - When a error is made while passing the entry
and such error is to be eliminated, then a rectification entry is
passed in the journal.
4) Transfer Entry: - If some amount is to be transferred from one
account to another, then such transfer will be made through a
journal entry.
5) Adjusting Entries: - In order to arrive at the correct profit and loss at
the end of the year some adjustments are required to be made.
Such adjustments are made by passing suitable journal entries.
Some entries are as following:
a) Outstanding expenses – expenses incurred but not yet paid.
b) Prepaid expenses – expenses paid in advance for some period
in future
c) Interest on capital – the interest which the proprietor thinks
proper to allow on his investment
d) Depreciation – fall in the value of the assets used on account of
wear and tear
6) Miscellaneous entries: - Following are the entries which also require
journalizing:

59
 1) Credit purchases of assets or goods in which the firm is not
dealing.
2) An allowance to be given or a charge to be made on a customer
after the issue of invoice.
3) Receipt of promissory notes if separate books are not
maintained

Illustration
Record the following transactions in Journal (Proper) in the books of
Sachin for the month of Feb.2002
1.Purchased furniture of Rs.8000 from Sujeet Furniture House on
credit
2.Sold goods to Ahmed for Rs.6000, out of which Rs.3000 was paid
immediately by him.
3.Ahmed declared insolvent, a first and final dividend of 50 paise in a
rupee is received from him.
4.Interest on capital provided Rs.400

Solution:

In the books of Sachin

Journal (Proper)
Date Particulars L.F. Debit Credit
Amount Amount
1. Furniture A/c ……………..Dr. 8000
To Sujeet Furniture House 8000
(Being furniture purchased on
credit)
3. Bad debts A/c ……………..Dr. 1500
To Ahmed A/c 1500
(Being 50 % amount due written

60
 off as bad debts on Ahmed
becoming insolvent)
4. Interest on Capital A/c …….Dr. 400
To Capital A/c 400
(Being interest on capital
provided)

Note: Entry No.2 not entered in Journal (Proper) since it will be entered
in other subsidiary books maintained.

Illustration
Enter the following transactions in proper subsidiary books and post
them in the ledger and balance the ledger accounts for the month of
Dec.2002
1.Purchased goods from Ansari Rs.900 less trade discount of Rs.20
2.Sold goods to Menon Rs.500
4.Purchased goods from Kikabhai Rs.2100 on credit
5.Sold goods for cash Rs.200
7.Returned goods to Kikabhai Rs.200
9.Sold goods to Amin Rs.600
12.Purchased goods from Jadhav Rs.7000 at 5% trade discount
15.Sold office furniture to Mohan for Rs.1000
16.Returned goods to Jadhav Rs.300 (Gross)
18.Sold goods to Narayan of Rs.1500 at 2% trade discount
19.Returned goods from Narayan of Rs.200
21.Sold goods to Mohan Rs.850
24.Purchased telephone instrument of Rs.5000 from Facit & Co. on
credit
25.Returned goods from Menon Rs.50
27.Sold goods to Amin of Rs.1000
29.Sold goods to Shri Chemicals Rs.350

Solution:

61
 Purchases Book
Date Particulars L.F. Details Amount
Rs. Rs.
1. Ansari 880
4. Kikabhai 2100
12. Jadhav 6650
Total 9630

Sales Book
Date Particulars L.F. Details Amount
Rs. Rs.
2. Menon 500
9. Amin 600
18. Narayan 1470
21. Menon 850
27. Amin 1000
29. Shri Chemicals 350
Total 4770

Return Inward Book

Date Particulars L.F. Details Amount
Rs. Rs.
19. Narayan 196
25. Menon 50
Total 246
Return Outward Book
Date Particulars L.F. Details Amount
Rs. Rs.
7. Kikabhai 200
16. Jadhav 285
Total 485
Ledger Accounts
Purchases Account

62
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
30 To Sundries A/c 9630 30 By Balance c/d 9630
As per purchase
book
9630 9630
1 To Balance b/d 9630
Sales Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
30 To Balance c/d 4970 5 By Cash A/c 200
30 By Sundries 4770
As per Sales Book
4970 4970
1 By Balance b/d 4970
Return Inward Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
30 To Sundries A/c 246 30 By Balance c/d 246
As per returns book
246 246
1 To Balance b/d 246
Return Outward Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
30 To Balance c/d 485 30 By Sundries A/c 485
As per returns
book
485 485
1 By Balance b/d 485

Ansari’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
30 To Balance c/d 880 1 By Purchases A/c 880
880 880
1 By Balance b/d 880

Kikabhai’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
7 To Return Outward 200 4 By Purchases A/c 2100

63
 30 To Balance c/d 1900
2100 2100
1 By Balance b/d 1900

Shri Chemicals Account

Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
29 To Sales A/c 350 30 By Balance c/d 350
350 350
1 To Balance b/d 350

Jadhav’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
16 To Return Outward 285 12 By Purchases A/c 6650
30 To Balance c/d 6365
6650 6650
1 By Balance b/d 6365

Menon’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2 To Sales A/c 500 25 By Return Inward 196
21 To Sales A/c 850 30 By Balance c/d 1154
1350 1350
1 To Balance b/d 1154

Amin’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
9 To Sales A/c 600 30 By Balance c/d 1600
27 To Sales A/c 1000
1600 1600
1 To Balance b/d 1600

Narayan’s Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
18 To Sales A/c 1470 19 By Return Inward 196
30 By Balance c/d 1274
1470 1470

64
 1 To Balance b/d 1470

Questions:
(1) What do you understand by subsidiary book? What are the types of
subsidiary books?
(2) What are the advantages of maintaining Subsidiary books?
(3) Why are Subsidiary books known as books of original entry?
(4) Explain the use of Various Subsidiary books.
(5) Explain what are a Debit Note and a Credit Note.
(6) What is a Journal (Proper) and what entries are required to be
made in this book?

(7) Enter the following transactions into appropriate Subsidiary books

of Ashish for the month of March 2003
1.Purchased goods worth Rs.80000 at 20% trade discount from
Ajay and goods worth Rs.40000 at 15% trade discount from Sanjay.
5.Sold goods worth Rs.48000 to Anil and goods worth Rs.30000 to
Sunil
15.Returned goods of Rs.4000 to Ajay and goods of Rs.2000 to
Sanjay.
19.Received from Anil goods of Rs.3000 and from Sunil goods of
Rs.1000 being return of goods.
24.Purchased office furniture of Rs.10000 from Dinesh

(8) Enter the following transactions in the Purchase Book, Sales Book
and Returned Books of Mr.Shankar and post them into the Ledger
for the month of April 2003
1.Purchased goods from Rajendra of Rs.32000 at 2% trade
discount
3.Sold goods of Rs.10000 to Ram on credit
7.Returned goods of Rs.4000 (Gross) to Rajendra

65
 11.Goods of Rs.30000 were invoiced by Reema at 10% trade
discount and 2% cash discount terms. Paid half the amount
immediately.
15.Sold goods of Rs.12000 to Ranjan
20. Goods of Rs.750 returned by Ram and the same goods were
returned to Rajendra at 2.5% less than the price charged to Ram.
25.Ranjan returned 1/4th of the goods supplied to him.

(9) Following transactions appear in the books of M/s Popatlal & Sons.
Prepare necessary subsidiary books and post them into the ledger
for the month of May 2003
1.Balance of the following accounts Mr.Shah (Dr. bal.) Rs.6300,
Mr.Kamat (Dr.bal.) Rs.9450, Mr.Gupta (Cr. Bal.) Rs.3700
2.Sold goods of Rs.15000 to Shah
3.Purchased goods of Rs.9200 from Gupta
7.Goods of Rs.350 are returned by Shah
9.Goods of Rs.500 are returned by us to Gupta
15.Sold goods of Rs.20000 to Jankidas at 10% trade discount
17.Sold furniture of Rs.450 to Preetam
20.Purchased goods of Rs.10000 from Avinash
22.Purchased goods of Rs.1800 from Milind for cash
25.Sold goods of Rs.4000 to Balasaheb
27.Goods returned by Balasaheb of Rs.450
30.Purchased goods of Rs.1000 from Harish & Co.

(10) Enter the following transactions in the books of M/s Amar

Trading Co. in proper subsidiary books and post the same to the
Ledger and balance the ledger accounts for the month of Jan.2001
1.Started business with cash of Rs.10000
3.Purchased goods of Rs.5000 at 5% trade discount from Shah
5.Sold goods worth Rs.4000 at 10% trade discount and 5% cash
discount to Patel
8.Purchased goods of Rs.10000 at 10% trade discount from Sane
and half the amount in cash

66
 10.Returned goods of Rs.200 (Gross) to Shah
13.Sold goods of Rs.9000 to Paresh and received 1/3 rd amount in
cash
15.Purchased a digital diary of Rs.4000 from John & Co. on credit
18.Patel returned goods of Rs.100 (Net) being damaged goods
20.Purchased goods of Rs.3000 from Kale at 2.5% trade discount
for cash
22.Sold goods for Cash of Rs.2000 at 1% cash discount
25.Sane declared insolvent and half the balance amount received
from him as final recovery
28.Parekh returned us defective goods of Rs.50

(11) Fill in the blanks

a) Subsidiary books are part of ______________.
b) Credit sale of _____________ cannot be entered in the sales
book.
c) When goods once sold are received back, a ____________
note must be sent to the purchaser.
d) The discount that is mentioned in the invoice is called as
__________ discount.
e) Debit note is given to _____________.

(12) State whether the following statements are true or false

a) A ledger is sub-divided into various sub-ledgers called as
subsidiary books.
b) Purchases book is used to record credit purchases as well as
cash purchases.
c) All credit sales including credit sale of assets should be
recorded in the sales book.
d) Returns Inward book is maintained to record the goods returned
by customers.

67
 e) Journal and Journal (Proper) are the same and do no differ from
each other.
f) If a firm receives any promissory notes or hundies, they are
recorded in a separate book called as Bills Receivable book.
g) Cash discount is calculated on gross amount and then trade
discount is calculated.

(VI) Cash Book

In every business, cash transactions play an important role

because of its very nature. To maintain a complete record of cash
received and cash paid a separate book called Cash Book is
maintained. It is very necessary to maintain such a separate book
because of the quantum of transactions and its importance to the
business and also because of its nature. It is necessary to maintain a
close eye on all the cash transactions, because there is a high
possibility of pilferage and misappropriations. By maintaining a
separate account for all cash transactions, one can easily locate any
transaction from the Cash book instead of looking through the whole of
ledger accounts.
Cash transactions are directly recorded in the Cash book and on
the basis of such a record, ledger accounts are prepared. Therefore,
Cash book is a Subsidiary book. But the Cash book on its own serves
as the cash account and the bank account. The balances of cash
column and bank column are directly entered in the Trial balance. It

68
therefore forms part of the ledger also. Hence, Cash book is also a
principal book. The Cash book is thus both a Subsidiary book and a
Principal book.
Types of Cash Book
Cash book can be designed depending upon the business
requirements. But following are the normal forms of Cash book:
1) Simple Cash Book
2) Two-column Cash book
3) Three-column Cash book
4) Multi column Cash book
5) Petty Cash book
1) Simple Cash Book
Such a book is similar to an ordinary ledger account. It has one column
of Amount on each side. The left-hand side records receipts and the
right hand side records the payments.
The Cash book is balanced like other accounts. The receipts side is
always bigger than the payments side. The difference is written on the
credit side at the end of the period as “By Balance c/d”. This balance
shows the cash in hand at the end of the period and available for the
next period as opening balance shown on debit side as “To Balance
b/d”

Illustration:
Enter the following transactions in the books of Mr.Rajesh in a Simple
Cash book for the month of January 2001
1.Cash in hand is Rs.2000
5.Received from Sham Rs.500
8.Paid to Arvind for purchase of Stationery Rs.500
13.Sale of goods of Rs.7500
16.Purchased raw material of Rs.4000
21.Paid Salaries of Rs.2500
25.Withdrawn for personal use by Rajesh Rs.250
30.Deposited Rs.1500 in bank
Solution:

69
 In the books of Mr.Rajesh
Simple Cash Book for the month of Jan.2001
Dr. Cr.
Date Particulars LF Amount Date Particulars LF Amount
(Rs.) (Rs.)
Receipts Payments
1. To Balance b/d 2000 8. By Stationery 500
5. To Sham’s A/c 500 16. By Purchases 4000
13. To Sales 7500 21. By Salary 2500
25. By Drawings 250
30 By Bank 1500
31. By Bal. c/d 1250
10000 10000
Feb
1. To Balance b/d 1250
2) Two-column Cash Book
This Cash book is similar to the Simple Cash book except that one
more column is added on both debit side and credit side, alongside the
amount column. This column records cash discount allowed and cash
discount received. Now let us understand the term cash discount
before we proceed with this type of Cash book

Cash Discount
Cash discount is an allowance given for prompt payment of cash. Cash
discount is not compulsory but conditional. It accompanies cash
payments or cash receipts only. For a person making the payment,
cash discount is a gain and for a person receiving the payment, it is a
loss.
For example – If a customer owes Rs.1000 and is promised a
deduction of 5% if the payment is done within, say, 5 days then, the
customer can repay only Rs.950 within 5 days to relieve himself of the
liability of Rs.1000. Here the customer is benefited by Rs.50 but the
receiver on cash has to bear a loss of Rs.50. Since cash discount is
allowed only if cash is paid, it is easy to add this column for discount
allowed on the debit side and a column for discount received on the
credit side.

Trade Discount

70
This is another term, which is used frequently. But the effects of trade
discount and cash discount are different on the books of accounts. So
it is necessary to understand this term also. Trade discount is an
allowance made by manufacturer or wholesalers to their customers on
the catalogue price or list price or invoice price. The allowances are
directly deducted from catalogue or list or invoice price by the seller.
These allowances are deducted as a fixed percentage of this price
depending upon the customer. So the customer has to pay the amount
which is less trade discount. The invoice price or list price is therefore
no where recorded, and therefore it is neither a loss nor a profit to
either of the parties. Therefore, Trade discount does not appear in the
books of accounts.

In the Cash book, on the debit side cash actually received is entered
and discount allowed if any is also entered in the discount column.
Similarly, actual cash paid is entered on the credit side in the amount
column and discount received if any is entered in the discount column.
It should be noted here that like cash columns, discount columns are
not balanced. They are only totaled. The total of discount allowed
column in the Cash book is debited to the Discount Account opened in
the ledger and the total of discount received column in the Cash book
is credited to the Discount Account opened in the ledger.
In this two-column cash book, bank account is not opened separately.
If there are bank transactions, they are recorded through Cash book
and then posted to Bank a/c opened separately in the ledger.
Therefore, bank transactions are not entered directly in the Bank a/c
but entered through Cash book.

Illustration:
From the following transactions in the books of Rahul prepare Cash
Book with Cash and Discount column for the month of December 2001
1.Cash in hand Rs.5000
4.Received from Atul Rs.2000
6.Paid to Amar Rs.1800 less 5% discount

71
9.Sold goods of Rs.7500 at 1% discount
12.Purchased goods worth Rs.4500
16.Deposited Rs.2600 into Bank a/c
19.Paid for Furniture Rs.1200
21.Withdrawn Rs.1000 for personal expenses
25.Paid salary of Rs.2500
27.Received Rs.4750 from Paresh on settlement of his account of
Rs.5000
29.Paid Rs.2500 to Anil for settlement of account of Rs.2600
31.Paid petty cash expenses of Rs.250
Solution:
In the books of Mr.Rahul
Cash Book with two columns for the month of December 2001

Dr. Receipts
Date Particulars LF Discount Amount
Dec.
1. To Balance b/d 5000
4. To Atul’s A/c 2000
9. To Sales 75 7425
27. To Paresh’s A/c 250 4750

325 19175
1. To Balance b/d 2915

72
 Payments Cr.
Date Particulars LF Discount Amount
Dec.
6. By Amar’s A/c 90 1710
12. By Purchases 4500
16. By Bank A/c 2600
19. By Furniture A/c 1200
21. By Drawings A/c 1000
25. By Salaries A/c 2500
29. By Anil’s A/c 100 2500
31. By Petty expenses A/c 250
31. By Balance c/d 2915
190 19175

73
3) Three-column Cash Book
In Three-column Cash book one more column is added to the two-
column cash book. That column is added on both the sides i.e. debit
side and credit side adjacent to the cash column. Any person keeps
most of the money into the bank. We have studied in detail, in the
earlier chapter, the importance of a bank account and also how the
transactions take place through a bank. Money can be deposited and
withdrawn from the bank account at will. So there is a little difference
between cash in hand and cash at bank. Therefore it is very convenient
to maintain a separate column for bank transactions in the Cash book
itself. Money deposited or received is written on the debit side and
money withdrawn or payment made is written on the credit side of a
three-column cash book in the bank column.
All the other points relating to cash transactions and discount received
or given remain the same as discussed for a two-column cash book.
The discount columns are totalled and not balanced at the end of the
period. The cash columns are balanced in the same way as discussed
in a two-column cash book. The bank columns are also similarly
balanced at the end of the period. But the basic difference between a
cash column and a bank column is that, a bank column may have
overdraft at the end of the period. It means that a bank may allow its
customers to withdraw more amounts than is available in his account.
In such a case, the total of bank column on credit side is more than the
total of debit side. The difference is written on debit side as “To Balance
c/d”.
Another point worth noting is a transaction where cash is withdrawn
from bank for official use. In such a case amount is entered in the bank
column on credit side and in the cash column on the debit side, since
amount is withdrawn from bank which reduces the bank balance but
simultaneously it increases the cash balance or cash in hand. On the
other hand, if cash is deposited into bank, then cash column is credited
with the amount of deposit and bank column is debited by the same
amount.

74
Illustration:
Enter the following transactions in the books of Avinash in Cash book
with Bank and Discount columns for the month of Oct.2002
1.Cash in Hand on 1st Oct.2002 Rs.6800
3.Goods sold of Rs.12500 for a discount of Rs.150 in cash
5.Cash deposited in bank by opening a new bank account Rs.10000
6.Purchased goods of Rs.7500 by cheque
9.Received a cheque of Rs.25000 from Kiran on account
12.Paid to Abdul Rs.13450 by cheque
15.Paid sundry expenses in cash Rs.1280
17.Paid for stationary Rs.2500 by cheque
21.Wthdrawn for personal use Rs.1000 from bank
23.Received a crossed account payee cheque of Rs.4000 on sale of
furniture
26.Paid salary of Rs.4400 in cash
28.Received interest on bank a/c Rs.120
28. Cash withdrawn from bank Rs.2400
30.Avinash pays Rs.600 to Jatin in cash and is allowed a discount of
Rs.25
31.Paid to Anand Rs.6400 by cheque

Solution:

75
Solution:
In the books of Avinash
Cash Book with three-columns for the month of October 2002

Dr. Receipts

Date Particulars LF Discount Bank Cash

1. To Balance b/d 6800
3. To Sales 150 12350
5. To Cash A/c C 10000
9. To Kiran’s A/c 25000
23. To Furniture A/c 4000
28. To Bank Interest 120
28. To Bank A/c C 2400

Total 150 39120 21550

Nov.
1. To Balance b/d 8270 5270

Payments Cr.

76
Date Particulars LF Discount Bank Cash
5. By Bank A/c C 10000
6. By Purchases 7500
12. By Abdul’s A/c 13450
15. By Sundry expenses 1280
17. By Stationery 2500
21. By Drawings 1000
26. By Salary 4400
28. By Cash A/c C 2400
30. By Jatin’s A/c 25 600
31. By Balance c/d 8270 5270
Total 25 39120 21550

77
4) Multi column Cash Book
Multi column Cash book as the name suggests, is a cash book with a
number of columns. Receipts and payments are recorded either
departmentwise, or articlewise or bankwise or any other way which is
most beneficial to the firm. So every transaction is recorded in the
column depending upon the department or article or bank to which it
relates. This helps in automatically segregating the amount received
and spent, with relation to each column separately. This helps the firms
who need such information for their business use.

5) Petty Cash Book

In most of the large businesses a number of payments, which are small
in amount are to be made. If all these payments are entered in the
main cash book, then the cash book will unnecessarily became heavy
and inconvenient. So a Petty Cash book is maintained where the main
cashier transfers small amount of cash from the cash available to the
person responsible for maintaining petty cash book. That amount is
recorded in this book and all small payments like for postage, taxi or
auto fare, carriage expenses, petrol expenses etc. are made.

Imprest System of Petty Cash

In this system, a fixed or definite sum of money is entrusted to the petty
cashier in the beginning of the period. He is then reimbursed for the
payments at the end of the period. Thus he will again have fixed
amount of petty cash for the next period. The exact sum spent by the
petty cashier is reimbursed. The meaning of the word imprest means
money advanced on loan.
Advantages of imprest system
i) The amount in the hands of petty cashier is limited to the
amount entrusted. Thus misuse of cash is avoided.
ii) At the time of reimbursing the amount to petty cashier, the main
cashier checks all the payments made, and makes sure that
amount is correctly arrived at. So this helps in keeping a check
on frauds.

78
iii) It saves the time of the head cashier, and relieves him of this
small responsibility.
iv) This delegates the work of the head cashier to the petty cashier,
thus helping in speeding the work.
v) The liability of the petty cashier never exceeds the imprest
amount and he will not be required to give explanations of
transactions of past.
This system is very useful specially when an Analytical Petty Cash
book is maintained.

Analytical Petty Cash Book

In Analytical petty cash book a separate column is used for each
common expenditure such as postage, wages, stationary,
miscellaneous expenses, etc. For each separate expenditure a
separate column is there and therefore, this cash book is also called as
columnar petty cash book. There is a total column and then one
column for each expenditure separately. Each transaction is recorded
in the totals column and then to its respective head column. There is
only one amount column on the debit side and many columns on the
credit side of this cash book. Any cash received as imprest and any
other miscellaneous income is recorded in this column.
The Petty Cash book is considered as one of the subsidiary book,
which is a book of prime entry. This book like Cash Book serves the
dual purpose of a Journal and Ledger.

Balancing and posting the Petty Cash Book

In the ledger, a petty cash account is maintained. When some amount
is given to the petty cashier, the petty cash account is debited. At the
end of each period the total of the payments made is credited to this
account. The debit side of petty cash book should always be more than
the credit side. The difference between the debit column and credit
column of Petty cash book represents the balance in hand. A petty
cash account will show some cash balance in hand at the end of that
period. This cash is physically verified and it should tally with the

79
balance shown in the petty cash book. At the end of the year, the
balance is shown in the balance sheet as part of the main Cash Book.
No separate account of petty cash is shown.

Illustration
From the following particulars, prepare analytical petty cash book on
Imprest System in the books of Mr.Jha for the first 10 days of January
2001
1.Received Rs.1500 from Cash book for Petty cash
2.Paid auto charges Rs.25
2.Paid Office cleaning charges Rs.70
3.Purchased postage stamps of Rs.120
4.Paid to Ajay Rs.100 on account
5.Paid for purchase of stationary Rs.180
5.Paid Rs.32 for registered post
5.Paid for repairs to window pane Rs.250
6.Paid petrol charges Rs.115
7.Bought office files of Rs.220
8.Gave a marriage gift to receptionist Rs.101
9.Paid local railway fare of Rs.34
10.Bought cold drinks for customers Rs.22

Solution:

80
Solution :
In the books of Mr.Jha
Petty Cash Book

Receipts Date Particulars V. Total

No. Payments
Jan.
2001
1500 1. To Cash A/c
2. By Auto Charges 1. 25
2. By Office cleaning charges 2. 70
3. By Postage Stamps 3. 120
4. By Ajay’s A/c 4. 100
5. By Stationery 5. 180
5. By Registered Post 6. 32
5. By Repairs to window pane 7. 250
6. By Petrol charges 8. 115
7. By Office files 9. 220
8. By Gift to receptionist 10. 101
9. By Local railway fare 11. 34
10. By Cold Drinks for customers 12. 22

Total 1269
10. By Balance c/d 231
1500 1500
231 11. To Balance b/d
1269 11. To Cash A/c

81
 Payments Side

Conveyance Sundries Postage & Stationary Ledger

Telegram A/c

25
70
120
100
180
32
250
115
220
101
34
22

174 443 152 400 100

82
Questions
(1) What is a Cash book? What are its advantages?
(2) Explain the different types of Cash book.
(3) What do you mean by Imprest system of Petty cash? What are its
advantages?
(4) Explain with example whether a Cash Book is a principal book or a
subsidiary book.
(5) What is a Cash discount? Who is it recorded? What is the
difference between cash discount and trade discount?
(6) What is the difference between the two-column cash book and
three-column cash book?
(7) Enter the following transactions for the month of April 2000 in the
Cash book of Mr.Vaibhav and balance the same.
1.Cash in hand Rs.7860
3.Paid for purchase of goods Rs.2160
7.Paid for stationery of Rs.255
10.Sold goods to Kiran for Rs.3450
13.Deposited Rs.1800 into bank and opened a bank account
18.Received commission from Kartik of Rs.350
22.Withdrawn cash from bank Rs.500
25.Paid Rs.2400 for purchase of machinery
29.Paid Rs.1000 to Manas
30.Paid salary of Rs.2200
(8) Prepare a Two-column Cash book from the following transactions of
Mr.Gopichand for the month of September 2001
1.Commenced business with cash of Rs.10000
4.Purchased goods for cash of Rs.5470
6.Sold goods to Mangaldas for cash of Rs.7650
9.Received Rs.2000 in cash from Shekhar
11.Received Rs.1160 from Sunil and allowed him a discount of
Rs.40
15.Paid cash Rs.2140 to Shri on final settlement of account of
Rs.2200
19.Paid Rs.260 for stationery

83
 22.Paid rent of Rs.2600 in cash
25.Paid to Kantilal Rs.4350 and received a discount of Rs.50 on
final settlement of account.
27.Paid for purchase of office furniture Rs.4000
29.Paid salary of Rs.1000
30.Deposited Rs.500 in bank
(9) Enter the following transactions in Cash book with Discount and
Bank columns in the books of M/s XYZ for the month of October
2001
1.Commenced business with Cash of Rs.25000
2.Purchased goods for cash Rs.7560
3.Cash paid into bank account Rs.10000
7.Sold goods of Rs.9980 to Ketan and received a cheque of
Rs.4980 and cash Rs.4950 on final settlement of account.
9.Paid to Rajan Rs.5000 by cheque and received a discount of
Rs.150
11.Paid Rs.450 in cash for stationery
15.Paid Rs.4500 by cheque for purchase of Office furniture
17.Received a cheque of Rs.7500 from Jagtap on sale of goods
and allows a discount of Rs.150
18.Cash withdrawn from bank Rs.5000
21.Paid Office rent of Rs.2000 in cash
22.Draws a cheque for personal use of Rs.1400
25.Pays Rs.760 to Jagdish as commission by cheque
27.Purchased goods of Rs.1800 in cash and discount received
Rs.200
29.Paid salary of Rs.3300 in cash
31.Sold goods of Rs.3000 for cash and allowed a discount of
Rs.150
31.Receives commission of Rs.500 by cheque from Sarang
31.Paid Rs.12000 in cash to Jain & Co. for purchase of Office
Furniture

84
(10) Enter the following transactions of Mrs.Rajeshwari for the month
of June 2000 in three-column cash book and balance the same.
1.Cash in hand Rs.7600 and Bank overdraft Rs.41450
2.Bought goods of Rs.13760 from Jitendra and paid by cheque
4.Received Rs.35000 from Akshay by cheque and he was allowed
a discount of Rs.200
5.Paid travelling expenses of Rs.800 in cash
7.Goods of Rs.6000 destroyed by fire. The Insurance co. admitted
the claim and paid the amount immediately by cheque.
8.Received a cheque of Rs.12500 from Tarun in full settlement of
his account of Rs.13000
10.Paid Rs.9800 net to Akash after receiving a discount of 2% from
him by cheque
14.Deposited cash Rs.5000 in bank
16.Sold investments of Rs.50000 for Rs.65000 and received a
cheque
18.Withdrawn cash of Rs.12000 from bank
21.Paid Office rent of Rs.2500 in cash
22.Paid commission to Shyam Rs.7500 in cash
24.Cheque received from Tarun on 8th was endorsed to Soham in
full settlement of his account of Rs.12750
25.Paid Rs.22000 by cheque for purchase of motor cycle for office
use.
26.Withdrawn Rs.1500 from bank for personal use.
27.Received a cheque from Daksh of Rs.7860 and discount allowed
Rs.140. The cheque was deposited into bank on the same day.
28.Paid for purchase of office stationery in cash Rs.860
29.Cheque received from Daksh returned dishonoured and bank
charges of Rs.25 paid
30.Paid Salary of Rs.5800 by cheque

85
(11) Mr.Sudhir maintains an analytical petty cash book on Imprest
system. Following is the information for the month of August 2002.
Prepare Analytical Petty Cash book from the following details.
1.Deposited Rs.1500 from Cash book in Petty Cash book
3.Paid Rs.100 for purchase of postage stamps
5.Purchased Pen stands for office of Rs.75
8.Paid carriage on goods Rs.50
10.Paid for tea expenses Rs.90
11.Paid for petrol Rs.50
13.Paid for registered post Rs.58
15.Paid carriage of Rs.35 on goods
16.Purchased paper for office printing Rs.180
16.Paid for autorickshaw Rs.27
19.Paid advance to receptionist Rs.150
20.Paid for tea expenses Rs.65
21.Purchased cold drinks of Rs.40
25.Gave a festival gift to customers Rs.110
26.Paid to Leela Rs.100 on account
27.Paid for taxi charges Rs.45
29.Paid carriage on goods Rs.45
30.Paid for tea expenses Rs.100
31.Paid Rs.25 for courier charges

(12) Mr. Patel maintains a columnar petty cash book on the Imprest
system. The imprest amount is Rs.2000. From the following
information draw Petty Cash book and the balance the same at the
end of the period and restore the imprest amount.
1.Balance brought forward from last period Rs.271
1.Balance imprest amount received from Cash book
2.Paid postage Rs.44
2.Paid for stationary Rs.78
2.Paid for travelling & conveyance Rs.192
3.Paid for miscellaneous expenses Rs.79
3.Paid for autorickshaw charges Rs.40

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 3.Paid for entertainment Rs.55
4.Paid carriage on goods Rs.60
5.Paid for courier charges Rs.72
6.Paid advance to peon Rs.100
6.Paid for freight charges Rs.66
7.Paid petrol expense Rs.80
7.Purchased office files Rs.260
8.Lock repairs and amount paid Rs.35
8.Paid for stationary Rs.210
8.Paid for entertainment expenses Rs.60
9.Rickshaw charges paid Rs.15
9.Paid for postal stamps Rs.120
9.Paid office cleaning expenses Rs.25
10.Paid for repairs Rs.80

(13) Fill in the blanks

a) Cash Book is both a ____________ and a _______________.
b) The bank account shows deposits and withdrawals of money
from _______________.
c) Cash account can never have a _______________ balance.
d) Petty cash book is primarily used for recording _____________
expenses incurred on day to day basis.
e) In a Three-column cash book the alphabet ‘C’ is written in the
Ledger Folio Column to indicate ___________ entry.
f) The bank supplies the depositor ______________ book.

(14) State with reasons whether the following statements are True or
False.
a) A cheque received and paid into the bank will be entered on the
payment side of the Cash Book
b) No entry should be passed when the cheque, which is deposited
in the bank is dishonoured and presented again.
c) Bank overdraft represents a debit balance in cash book and a
credit side in Pass book

87
d) In a Two column cash book there are debit and credit columns
and in a Three column cash book there are debit, credit and
discount columns.
e) Bank Account always shows a debit balance.
f) Cash book is a separate book because it is neither a principal
book nor a subsidiary book.
g) Cash deposited into bank is entered as
Cash A/c ………… Dr.
To Bank A/c
h) Petty Cash book is a part of the main Cash book.

88
 (VII) Bank Reconciliation Statement

Bank Reconciliation statement is prepared to resolve the

differences between Bank Pass Book and Cash Book. But before we
understand the concept of Bank Reconciliation, we will first discuss the
methods of dealing with a bank.
Banks are very important for very business in a modern world.
Bank as an institution has gained a lot of importance. No person can
even imagine of doing a business or earning or dealing with money
without having a bank account in his own name. A bank is required to
deposit our savings safely. Those who deposit the money can even
withdraw them whenever required. There are three main forms of
deposits or accounts which a customer can open with a bank – 1)
Current account, 2) Savings account and 3) Fixed deposit account. In a
fixed deposit money is kept for a fixed tenure, say, 1 month or 3
months or 1 year or even 3 years. The bank gives interest on this
account. In a savings account money can be deposited at any time and
any number of times but there are restrictions on withdrawals, with
regard to number of withdrawals or amount of withdrawals or both. The
bank gives interest on such deposits. In a current account, there are no
restrictions on deposits or on withdrawals. Therefore no interest is
given by bank on these deposits. But the bank charges a nominal
amount as bank charges for the services rendered. So by opening a
bank account a businessman or trader enjoys many advantages
1) Safety
2) Payments by cheques, drafts etc.
3) Collection of cheques by banks
4) Overdrafts and loan facilities

Opening a bank account

For opening a bank account, one has to make an application on a
printed form provided by the bank. There are different procedures for
opening a bank account depending upon whether it is an individual or a

89
firm or a company etc. and also depending upon the type of account.
For opening a current account the bank requires introduction by
someone known to the bank. If a company wants to open an account,
the following have to be generally submitted:
1) A certified copy of resolution of Board of Directors for opening an
account.
2) A copy of certificate of incorporation and certificate of
commencement of business.
3) A copy of Memorandum of Association and Articles of Association
4) Specimen signatures of the persons authorised to operate the
account

Once a bank account is opened, the bank supplies the account holder
with a pass book, a slip book and a cheque book.
1) Pass Book
A Pass Book is simply a copy of the depositors account into the bank
ledger. Amount paid in the bank and amount withdrawn from the bank
are entered in this book alongwith the date of deposit or withdrawal.
The account holder is allowed to keep this book with him and can fill up
the book periodically. The banker also records the interest allowed or
interest charged to the account holder in the pass book. It is the duty of
the account holder to verify all the entries and inform the banker in
case of an error or discrepancy.
Some bank issue Statement of accounts to the account holders. It is
similar to the pass book, but they are loose sheets issued by the bank
periodically.

2) Slip book
This book contains pay in slips. These slips are used to deposit Cash
or Cheques into the bank account. All the details about the
Cash/Cheque paid in the bank are entered in these slips. The bank
retains the main form of the slip and the other counterfoil is stamped
and returned to the account holder.

90
3) Cheque book
This book contains a number of blank cheques printed by the bank,
which are used by the account holder to withdraw cash from the bank
or to make payments to their clients. Therefore, a cheque is a written
unconditional order drawn on a specified banker signed by the drawer
directing the banker to pay a certain amount to or to the bearer. There
are three parts to a cheque
1. Drawer – A person who draws a cheque
2. Drawee – The bank on whom a cheque is drawn
3. Payee – The person in whose favour a cheque is drawn to whom
the amount is payable by the bank.
Types of cheques
A cheque can be a bearer cheque or an order cheque. A bearer cheque
can be encashed by any person who is holder of that cheque. An order
cheque is payable to the person whose name appears on the cheque
or to the person under the order of the payee. An order cheque is
issued so that no person other than the payee receives the payment, in
case the cheque is lost or stolen. An order cheque can be issued by
crossing a cheque.
Crossing a cheque
When two parallel lines are drawn across the cheque, it is said to be
crossed. The effect of crossing is that the amount of the cheque will not
be paid across the counter, but it can be paid only through a bank. The
various types of crossing are shown below with the help of Fig.7.1
Fig.7.1

& Co. Not Negotiable

(a) (b) (c)

A/c Payee Only Dena Bank

(d) (e)

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The crossings shown in Fig7.1 (a) & (b) have the same effect. This
cheque can be easily accepted by anyone who takes it in good faith
even if the person in possession of the cheque has a defective title.
The effect of crossing shown in fig.(c) is that only the person having
good title gets the cheque. If the title of the holder is defective, the
defect will pass on to the person receiving the cheque on endorsement.
The effect of crossing as shown in Fig. (d) is that, it restricts the
negotiability of the cheque. Payment can be made only to the payee
and no one else. In Fig. (e) the name of the bank is written in between
the two parallel lines. This is called as special crossing. The first four
crossings were general crossings. In this case, payment to the payee
will be refused if the cheque is presented through any other bank. A
combination of any of the above crossings can also be done, to gain
more safety.
Endorsement of a cheque
Endorsement means the writing of instructions to pay the cheque to a
particular person and then signing it. This is done at the back of the
cheque. A cheque can be given by the payee to some other person and
then by that person to some other, till the cheque is crossed as “A/c
Payee Only”. A cheque, which has been endorsed but not delivered, is
not said to be endorsed.
For e.g. A bearer cheque is drawn by P in favour of R. Then R
endorses the cheque in the name of S, and S in turn endorses the
cheque in the name of T. In this case T can claim the payment of
cheque.

Bank Reconciliation Statement

Bank Reconciliation statement has to be prepared when there are
differences between balances in Bank pass book and Cash book. We
have learnt the working of a bank account and its use. Now, we shall
try to understand the reasons for such differences and also the ways to
reconcile them.
It may happen that a particular entry is recorded on a specific date in
Cash Book but on some different date in the Pass Book, which results

92
in differences in balances on that date. Such differences may arise on
account of the following reasons:
1) Cheque issued but not presented for payment
When the account holder issues cheque for payment, entry is
immediately made in the Cash Book. But entry in the Pass Book only
when the cheque is presented for payment. So, there is a gap of few
days between the entry in Cash book and entry in Pass Book.
2) Cheque deposited into bank but not cleared
As soon as the cheque is deposited in the bank, entry is passed in the
Cash Book. But usually banks credit the customer’s account only when
they have received payment from the other bank. So, there is a gap of
few days between the entry in Cash Book and entry in Pass Book.
3) Interest allowed by bank
If the bank has allowed interest on bank account, then such entry is
passed by the bank directly in the Pass Book. The customer comes to
know of this entry only when he gets the extract of Pass Book. This is
when the customer will pass the entry in the Cash Book. So, again
there is a time gap in passing entries in the two books.
4) Interest and other expenses charged by bank
As in the above case, if the bank charges any interest or any expenses
to a customer, the bank recovers the amount from the customer’s bank
a/c and passes the entry in the Pass Book. The customer comes to
know of these expenses only when he get the bank pass book. So, he
will enter the interest or expenses in his Cash Book when he comes to
know. Therefore, again there is a time gap in passing the entries in the
two books.
5) Direct payments by the bank
Payments like telephone bills, electricity bills or loan installments,
where standing instructions are given by the customer to the bank to
make the payment directly are not known to the customer, till he
receives the advice from the bank, or till he checks the Pass book.
6) Direct collections by the bank on behalf of the customer
Direct receipts like interest on fixed deposits, dividend etc. are directly
sent to the banker of the customer on due dates. The bank sees that

93
such receipts are received before due dates. In such case the bank
credits the customer’s account but the customer comes to know only
on receiving the warrant.
7) Direct payment into bank by the customer
A customer may pay directly into the bank account of a trader for which
a credit is given by the bank in the Pass book but there is no intimation
to the customer, and hence no recording is done in the Cash book
8) Dishonour of bills receivable discounted with the bank
If a bank is not able to receive payment on bills discounted by it, it will
debit the customer’s account together with any charges that it may
have incurred. The customer will therefore may the entry only when he
checks the pass book.
9) Bills collected by the bank on behalf of the customer
If the goods are sold and amount is receivable from the client, and the
bank is able to collect the amount, it will credit the customer’s account.
The customer will make the entry in the Cash book only on checking
the Cash book.
10)Errors
If an error is committed by the bank or by the accountant of the account
holder, then error will cause differences in the balances in the two
books.
If none of the above mentioned circumstances exist, then the
balances must agree. The reconciliation should be done daily or
monthly depending upon the number of transactions. The advantages
of such reconciliation are:
1) Errors that may have been committed either in the Pass book or in
the Cash book are exposed
2) An undue delay in the clearance of cheques will be shown
3) A regular reconciliation will discourage the accountant and also the
bank clerks to commit frauds.
A specimen form of Bank Reconciliation Statement is shown in Fig.7.2

94
 Fig.7.2
Bank Reconciliation Statement
Name of the trader/ firm/company
Bank Reconciliation Statement
As on …………….
Particulars Details Amount
Balance as per Pass Book
Add :- 1)___________________________
2)___________________________
3)___________________________
Total
Less:- 1)___________________________
2)___________________________
3)___________________________
Total

Balance as per Cash Book

Points to remember:
1) Debit balance of Cash book is Simple balance
2) Credit balance of Cash book is Overdraft
3) Debit balance of Pass book is Overdraft
4) Credit balance of Cash book is Simple balance
Illustration
On 31st Dec.2002 the Cash Book of Mr. Pandey showed a debit
balance of Rs.8250. On comparing his Cash Book with that of Pass
Book he finds the following points:
1) A cheque of Rs.2100 issued on 29 th Dec.2002 has not been
presented and cashed upto 31st Dec.2002
2) A cheque of Rs.6140 was deposited into bank but not credited.
3) Bank charges of Rs.36 and bank interest of Rs.540 appearing in the
Pass book are not yet recorded in the cash book
4) A standing instruction for payment of LIC Premium amounting to
Rs.570 had not been entered in the cash book
5) A cheque of Rs.150 deposited and credited by bank but entered as
Rs.50 in the Cash book

95
Prepare the Bank Reconciliation Statement to find out the balance as
per the pass book as on 31st Dec.2002
Solution:
In the books of Mr. Pandey
Bank Reconciliation Statement
As on 31st December 2002
Particulars Details Amount
Balance as per Cash Book as on 31st 8250
Dec.2002
Add :- 1)Cheque issued but bot presented 2100
2) Interest credited by bank but not 540
entered in cash book
3) Cheque deposited & credited in 100
bank but wrongly recorded in +2740
cash book
+10990
Less:- 1)Cheque deposited but not 6140
Credited
2) Bank charges debited by bank 36
but not entered in cash book
3) LIC Premium paid but not 570
entered in Cash book -6746
Balance as per Pass Book as on 31st 4244
Dec.2002

Illustration
From the following information, prepare a Bank Reconciliation
Statement as on 31st March 2003 for Mr.Prakash
1) Bank Overdraft as per Cash Book on 31st March 2003 is Rs.115500
2) Interest debited by bank but not credited by us Rs.12250
3) Cheque issued before 31st March 2003 but not yet presented to
bank Rs.32000
4) Dividend received from State Govt. directly by bank but not debited
by us Rs.2500

96
5) Draft deposited in the bank Rs.7500 but not credited till 31 st March
2003
6) Bills for collection credited by bank but no advice received by
Prakash Rs.42400
7) Amount wrongly debited to company account by the bank for which
no details are available Rs.2600
Solution:

In the books of Mr.Prakash

Bank Reconciliation Statement
As on 31st March 2003
Particulars Details Amount
Overdraft as per Cash Book 115500
as on 31/03/2003
Add :- 1) Interest charged by the bank 12250
2) Draft deposited in bank but not 7500
yet credited
3) Wrong debit by bank 2600 + 22350
137850
Less:- 1) Cheque issued but not presented 32000
2) Dividend received but not yet 2500
recorded in Cash book
3)Bills for collection credited in bank 42400
not entered in Cash Book 76900
Overdraft as per Pass Book 60950
as on 31/03/2003

Illustration
Mr. Pritesh’s Pass Book showed a credit balance of Rs.12620 on 31 st
October 2001. From the following particulars prepare a Bank
Reconciliation Statement showing the balance as per Cash Book as on
31st October 2001.

97
1) Out of the cheques of Rs.16200 deposited into bank till 31 st October
2001, cheques worth Rs.7550 were realised upto 31 st October 2001
2) Cheques issued prior to 31st October 2001 but presented after that
date amounted toRs.6420
3) Pass Book shows a bill receivable of Rs.8500 has been collected
by bank for which no entry is made in the cash book.
4) Bank paid Rs.500 for Annual subscription for book, for which no
entry is made in the cash book
5) Bank charges of Rs.75 were wrongly recorded as Rs.175 in cash
book.
6) Interest credited by bank Rs.1230 does not appear in cash book.
Solution:

In the books of Mr.Pritesh

Bank Reconciliation Statement
As on 31st October 2001
Particulars Details Amount
Bank balance as per Bank Pass book 12620
As on 31/10/2001
Add :- 1) Cheques deposited into bank but 8650
not collected & credited before
31st October 2001
2) Subscription paid by bank debited 500
in pass book not entered in cash
book +9150
21770
Less:- 1) Cheque issued but not presented 6420
for payment
2) Bills receivable collected and 8500
credited by bank not entered in
cash book
3) Bank charges wrongly credited 100
in Cash Book
4) Interest credited by bank but not 1230

98
 entered in cash book -16250
Bank balance as per Cash Book 5520
as on 31/10/2001

Questions
(1) What is a Bank account? Explain the importance of opening a bank
account.
(2) What are the different types of writing a cheque? Why is it
important to cross a cheque?
(3) What is endorsement of a cheque?
(4) What is a Bank Reconciliation Statement?
(5) What are the reasons for differences in balances of Cash Book and
Pass Book?
(6) From the following particulars of Mr. Shashank, prepare a Bank
Reconciliation Statement as on 31st July 2001
1) Bank Balance as per Cash Book as on 31 st July 2001 is Rs.7620
(Debit)
2) Cheque of Rs.2350 deposited into the bank on 29/07/2001 is
credited by bank on 02/08/2001
3) Cheque issued but not presented for payment is Rs.4630
4) Bank commission charged by bank Rs.75 and interest charged
Rs.420 entered in the Pass Book
5) Cheque issued to Mr. Ashish of Rs.1400 was wrongly recorded
twice in the cash book
6) Receipts side of Cash Book Bank column was overcast by
Rs.200

(7) From the following particulars of Mr. Damle prepare a Bank

Reconciliation Statement as on 31st January 2002
1) The Bank Overdraft as per Pass Book as on 31 st Jan. 2002
Rs.9310
2) Interest on overdraft for 3 months Rs.365 is debited in the Pass
book

99
 3) Bank charges of Rs.36 for the above period is also debited in
the Pass book
4) Cheques issued but not presented for payment before 31 st
Jan.2002 Rs.6940
5) Cheques paid into the bank but not cashed prior to 31 st
Jan.2002 amounted to Rs.4820
6) A cheque of Rs.850 received from Mr. Mantri and deposited into
the bank in January was dishonoured but advice for non-
payment was received from the bank on 2nd Feb.2002

(8) From the following particulars of M/s Gaikwad & Co. prepare a
Bank Reconciliation Statement as on 31st May 2002
1) Cash book showed an overdraft of Rs.13750 as on 31 st May
2002
2) Cheques amounting to Rs.11500 paid into the bank on 27 th May
2002 but credited by the bank on 1st June 2002
3) Interest charged by the bank on overdraft amounted to Rs.725
appears in the Pass Book
4) Bank charges of Rs.75 were entered in the Cash book as
Rs.750
5) Bank paid final call of Rs.7500 on the shares but there was no
entry in the Cash book

(9) The Bank Pass Book of Mr.Chauhan showed a credit balance of

Rs.12235 as on 30th Sept.2003. You are requested to prepare a
Bank Reconciliation Statement from the following information
furnished to you.
1) Out of the cheques of Rs.7500 deposited in the bank upto 30 th
Sept.2003 a cheque of Rs.2400 was collected by bank on 4 th
October 2003

100
 2) Cheques issued but not cashed prior to 30 th September 2003
amounted to Rs.3560
3) Bank credited Rs.270 for interest which appears in the Pass
book only
4) Interest on investments collected by bank Rs.1500 is credited in
Pass Book only
5) Receipts side of the bank column of the Cash book was
overcast by Rs.250
6) Bank charges Rs.25 debited in the Pass book but not entered in
Cash book
7) A cheque of Rs.1750 collected and credited by bank, was
recorded as Rs.1150 in the cash book

(10) The Cash Book and Pass Book extract of Mr.Pandit are given
below for the month of Oct.2003. Prepare a Bank Reconciliation
Statement as on 31st Oct.2003
Cash Book ( Bank Column )
Date Particulars Amount Date Particulars Amount
1. To Balance b/d 3550 3. By Mr.Kulkarni 1230
4. To Mr.Patil 1750 6. By Mr.Joshi 550
9. To Mandar Tech. 3750 15. By Purchases 2500
17. To Mrs.Shah 750 21. By Mr.Pawar 500
25. To Mr.Deshpande 1900 26. By Mr.Kale 2170
29. To Mandar Tech. 2100 29. By Mr.Joshi 550
31. By Balance c/d 6300
13800 13800
Pass Book
Date Particulars Amount Date Particulars Amount
5. To Mr.Kulkarni 1230 1. By Balance b/d 3550
8. To Mr.Joshi 550 5. By Bank Interest 175
15. To Purchases 2500 7. By Mr.Patil 1750
17. To Bank Comm. 35 12. By Mandar Tech 3750
23. To Mr.Pawar 500 19. By Mrs.Shah 1750
27. To Mr.Kale 2170 28. By Mr.Deshpande 1900
31. To Mr.Joshi 550

101
31. To Balance c/d 5340
12875 12875

(11) Fill in the blanks

a) Interest on overdraft is _______________ in the cash book
b) Interest allowed by the bank is _____________ in the pass book
and it is ______________ in the cash book
c) Normally cash book shows _____________ balance and pass
book shows a _______________ balance
d) A cheque issued to a creditor is ____________ in the cash book
and on presentation for payment is _____________ in the pass
book
e) An ___________ cheque is issued so that no person other than
the payee receives the payment, in case the cheque is lost or
stolen.

(12) State whether the following statements are true or false with
explanation
a) When “& Co.” is written in case of a crossed cheque, it is called
as special crossing.
b) Interest allowed by bank is credited in the pass book and it is
debited in the cash book.
c) Endorsement means giving instructions to the bank to pay the
cheque to a particular person who is the bearer of that cheque
d) A Slip book is used by the account holder to withdraw cash from
the bank or to make payments to their clients.
e) A Bank Reconciliation Statement is prepared to resolve the
differences between Bank Pass Book and Cash Book.
f) When there is an overdraft, cash book shows a credit balance
and pass book shows a debit balance.
g) Credit balance of Pass book is Overdraft

102
 (VIII) Trial Balance

After posting all the accounts in the ledger at the end of the year,
the ledger accounts are closed and their balances are calculated. A
separate statement is prepared to show all debit and credit
balances. Such a statement is known as the Trial Balance. After the
ledger accounts are closed, final accounts have to be prepared to
find out the profit or loss the business is having. We have learnt in
the earlier chapters the Double entry system of accounting. It states

103
 that for every debit there is a corresponding credit entry. So for
every single transaction there is a debit and a credit effect.
Therefore the total of all debits and total of all credits should be the
same.
When we prepare a Trial balance, all the debit balances and all the
credit balances are written down in that statement. If there is a
difference between the total of debits and the total of credits then
trial balance will not agree. So, Trial balance is a statement which
finds out whether the total debits are equal to total credits or not.
Trial balance records the names of all ledger accounts and their
balances at the end of the period under consideration.
Once the trial balance tally i.e. total debits are equal to total credits
then Final accounts are prepared. When the trial balance tallies, it
can be said with confidence that the books of accounts maintained
are free from clerical errors. Other errors like principal errors and
compensating errors may still remain. We are going to study the
types of errors in the next chapter. Once the trial balance agrees it
means that each transaction is given a debit and credit effect of
same amount.
The way in which a trial balance is prepared is shown in Fig.8.1

Fig.8.1
Trial Balance as on ……………….
Sr. Particulars L.F. Debit Credit
No. Balance Balance

Total

104
 Objectives of preparing the Trial Balance
1) Financial Statements are normally prepared on the basis of agreed
trial balances.
2) Trial balance enables to establish whether the posting and other
accounting processes have been correctly carried out or not, and
that there are no arithmetical errors.
3) Trial balance serves as a summary of what is contained in the
ledger. The ledger can be referred only when some details are
required.

Illustration
From the following balances prepare the Trial Balance of Mr.Kiran as
on 31st March 2003
Name of the Account Amount (Rs.)
1) Capital Account 100000
2) Cash Account 7500
3) Bank Account 12500
4) Purchases Account 27000
5) Sales Account 32000
6) Salary Account 8000

Solution :
In the books of Mr.Kiran
Trial Balance as on 31st March 2003
Sr. Particulars L.F. Debit Credit
No. Balance Balance
1) Capital Account 50000
2) Cash Account 7500
3) Bank Account 29500
4) Purchases Account 27000
5) Sales Account 32000
6) Salary Account 18000

105
 Total 82000 82000

From the above illustration the following points may be noted:

1) A trial balance is prepared as on a particular date which should be
mentioned at the top
2) In the Particulars column, the name of the ledger account is written
3) In the fourth column, the total of the debit side of the account
concerned or the debit balance is written
4) In the last column, the total of the credit side of the account
concerned or the credit balance is written
5) The last two columns are totaled, which should tally with each other.
6) We can say, that a debit balance is either an asset or expenses and
7) A credit balance shows the income earned or a liability or capital i.e.
the amount invested by the proprietor

Limitations of a Trial Balance

When a trial balance agrees it does not always mean that all the books
of accounts are correct and accurate. There may still be some errors in
the account books even when the trial balance agrees. They may be of
the following types:
1) A wrong amount has been entered on debit side as well as credit
side.
2) An entry has not been posted in the ledger.
3) An entry is posted twice in the ledger
4) A wrong account has been mentioned in the journal.
5) A transaction has not been entered at all in the journal

Illustration
From the following ledger account balances prepare a Trial Balance of
Mr.Kamat as on 31st December 2003
Name of Account Amount (Rs.)
1) Mr.Kamat Capital A/c 150000
2) Cash Account 2750
3) Bank Account 22450

106
4) Land & Building 102500
5) Opening Stock 20000
6) Purchases 48000
7) Sales 96200
8) Carriage Inward 4800
9) Carriage Outward 1250
10) Salary 24000
11) Vehicle expenses 12000
12) Commission received 22000
13) Miscellaneous expenses 6000
14) Sundry Creditors 18250
15) Sundry Debtors 14450
16) Vehicle 28250

Solution
In the books of Mr.Kamat
Trial Balance as on 31st December 2003
Sr. Particulars L.F. Debit Credit
No. Balance Balance
1 Mr.Kamat Capital Account 150000
2 Cash Account 2750
3 Bank Account 22450
4 Land & Building 102500
5 Opening Stock 20000
6 Purchases 48000
7 Sales 96200
8 Carriage Inward 4800
9 Carriage Outward 1250

107
10 Salary 24000
11 Vehicle expenses 12000
12 Commission received 22000
13 Miscellaneous expenses 6000
14 Sundry Creditors 18250
15 Sundry Debtors 14450
16 Vehicles 28250
Total 286450 286450

Illustration
Following are the ledger balances in the books of Mr.Ashwin as on 31 st
July 2002. Prepare trial balance from the following information
Name of the Account Amount (Rs.)
1) Opening Stock 35000
2) Capital 350000
3) Drawings 12000
4) Sales 270000
5) Purchases 110000
6) Returns Inward 8000
7) Investments 40000
8) Carriage Inward 4700
9) Returns Outward 5000
10) Import Duty 2500
11) Wages 32400
12) Power charges 4800
13) Discount received 3000
14) Salary 41300
15) Printing & Stationery 5100
16) Postage 200
17) Plant & Machinery 215000
18) Furniture 28000
19) Interest received 4000
20) Cash at Bank 3500
21) Land & Building 126000

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22) Cash in Hand 700
23) Creditors 37000

Solution
In the books of Mr.Ashwin
Trial balance as on 31st July 2002
Sr. Particulars L.F. Debit Credit
No. Balance Balance
1 Opening Stock 22500
2 Capital 200000
3 Drawings 18000
4 Sales 358246
5 Purchases 276516
6 Return Inward 5624
7 Investments 25000
8 Carriage Inward 2540
9 Return Outward 6476
10 Rates & Taxes 5240
11 Wages 9600
12 Electricity charges 12456
13 Discount received 3250
14 Salary 37560
15 Printing & Stationery 2404
16 Postage 256
17 Plant & Machinery 126000
18 Furniture 32474
19 Interest received 17421
20 Cash at bank 12417
21 Land & Building 46000
22 Cash in hand 6450
23 Creditors 55644
Total 641037 641037

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Illustration
Following is the Trial balance prepared by the accountant of Mr. Kumar
as on 31st March 1999. However as the Trial balance is not tallied, you
are required to prepare the Trial balance
Trial Balance as on 31st March 1999
Sr. Particulars LF Debit Credit
No. Balance Balance
1. Plant & Machinery 52000
2. Sales 412000
3. Purchases 196460
4. Carriage Inward 2760
5. Carriage Outward 4820
6. Salaries 36200
7. Purchases Returns 2410
8. Sales Returns 7420
9. Wages 18400
10. Printing & Stationery 7200
11. Debtors 48600
12. Creditors 26700
13. Discount Received 3250
14. Discount Allowed 5670
15. Furniture 36400
16. Loan to Mr. Arvind 18000
17. Goodwill 40000
18. Capital 75000
19. Cash in hand 4200
20. Cash at bank 12730
21. Bank Overdraft 36500
22. Land & Building 60000
23. Advertising 5000
Total 459580 652140

Solution:
In the books of Mr.Kumar
Trial Balance as on 31st March 1999
Sr. Particulars LF Debit Credit
No. Balance Balance
1. Plant & Machinery 52000
2. Sales 412000
3. Purchases 196460
4. Carriage Inward 2760
5. Carriage Outward 4820
6. Salaries 36200
7. Purchases Returns 2410

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 8. Sales Returns 7420
9. Wages 18400
10. Printing & Stationery 7200
11. Debtors 48600
12. Creditors 26700
13. Discount Received 3250
14. Discount Allowed 5670
15. Furniture 36400
16. Loan to Mr. Arvind 18000
17. Goodwill 40000
18. Capital 75000
19. Cash in hand 4200
20. Cash at bank 12730
21. Bank Overdraft 36500
22. Land & Building 60000
23. Advertising 5000
Total 555860 555860

Questions
(1) What is a Trial balance? What are its objectives?
(2) When is a trial balance prepared? What are its limitations?
(3) Explain with an example, the preparation of a trial balance and its
importance?
(4) From the following information of Mr.Datta as on 30 th April 2002
prepare Trial balance
Name of the account Amount (Rs.)
1) Datta’s Capital Account 120000
2) Cash in hand 7500
3) Cash at bank 12450
4) Debtors 31650
5) Creditors 9500
6) Land & Building 60000
7) Plant & Machinery 37500
8) Loan from Mr.Dange 14500
9) Salaries 28500
10)Electricity expenses 5420
11) Sales 76480
12)Purchases 48260
13)Interest paid on loan 1740

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 14)Bills payable 12540
(5) Following are the ledger balances in the books of Mrs.Azad as on
30th Sept.2001. Prepare Trial balance from the following
information:
Name of the Account Amount (Rs.)
1) Opening Stock 22540
2) Mrs.Azad Capital Account 100000
3) Purchases 126476
4) Sales 212550
5) Return Inward 11450
6) Return Outward 8756
7) Carriage Inward 7540
8) Carriage Outward 5420
9) Debtors 55450
10) Creditors 40250
11) Investments 42500
12) Cash in hand 1250
13) Bank Overdraft 12450
14) Machinery 50500
15) Salary 36000
16) Rent & Taxes 12000
17) Interest on bank overdraft 1754
18) Reserve for doubtful debts 2500
19) Other Income 3494
20) Electricity charges 7120

(6) Following are the ledger balances in the books of Mr.Suresh as on

31stOct.2003. Prepare Trial balance from the following information:

Name of the Account Amount (Rs.)

1) Mr.Suresh Capital Account 200000
2) Cash in hand 12450
3) Cash at bank 67653
4) Patents 25000

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 5) Discount Received 25420
6) Sales 745875
7) Furniture & Fixtures 56420
8) Goodwill 40000
9) Commission received 27500
10) Purchases 552600
11) Land & Building 144000
12) Telephone expenses 32777
13) Insurance on Mr.Suresh’s life policy 7875
14) Salary 36000

(7) Following is the Trial Balance in the books of Mr. Preetam Singh as
on 31st March 2003 prepared by their accountant. Mr. Preetam
Singh thinks that though the Trial Balance agrees, it is not correct.
The accountant says that, now that the Trial Balance agrees, it
means that there is no mistake and the Trial balance is correct.
Verify the following Trial balance, and comment on whether Mr.
Preetam Singh is correct in his assessment. If you think that the
Trial balance is not correct, then prepare a Trial balance again and
find out the mistakes.

In the books of Mr.Preetam Singh

Trial Balance as on 31st March 2003
Sr. Particulars L.F. Debit Credit
No. Balance Balance
1) Mr.Preetam Singh Capital Account 150000
2) Drawings 12000
3) Land & Building 75000
4) Cash in hand 7450
5) Bank Overdraft 39685
6) Opening Stock 25000
7) Debtors 34650
8) Creditors 29920
9) Carriage Inward 7450

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10) Sales 193310
11) Salary 36500
12) Vehicle expenses 12000
13) Commission Paid 18600
14) Carriage Outward 2540
15) Interest received from bank 4250
16) Reserve for Bad debts 3465
17) Investments 54000
18) Purchases 99640
19) Bills Payable 13300
Total 384830 384830

(8) Fill in the blanks

a) From _______________ Trial balance, Final accounts are
prepared.
b) A Trial balance helps to check _____________ of the books of
accounts.
c) The balance of Sales Account is shown on ____________ side
in a trial balance
d) Difference in the Trial balance is transferred temporarily to
___________ account.
e) Carriage Inward is shown on _____________ side in a Trial
Balance.

(9) State whether the following statements are true or false

a) Trial balance is prepared only at the year ending.
b) Suspense Account shows a nil balance after all the errors are
rectified.
c) Suspense Account always appears in the Trial balance
d) Closing Stock appears in the Trial balance on the credit side.
e) Gross Trial balance records the balance of the ledger accounts.
f) When a trial balance agrees it means that all the books of
accounts are correct and accurate.

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(10) State whether the following accounts show a debit balance or a
credit balance.
a) Furniture Account
b) Bank Overdraft Account
c) Printing & Stationery Account
d) Bad Debts Account
e) Bills Payable Account
f) Returns Inward Account
g) Suspense Account
h) Charity Account
i) Drawings Account
j) Sales Account
k) Commission received Account

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 (IX) Rectification of Errors
We have seen that after preparing ledger accounts, the balances of
ledger accounts are written in Trial Balance. Here the debit and credit
balances are separately written and totaled. If the two totals do not
agree, then it means that there have been some errors. If Trial balance
agrees, then it means that the total of debits and the total of credits is
same and that there are no clerical errors. Here we should not that
there will be no clerical errors. But there may be some other errors that
are committed and gone unnoticed. So, when the trial balance agrees,
then it does not always mean that the books of accounts are absolutely
correct. Trial balance is just a statement, which helps in finding out the
errors quickly and easily and also helps in preparation of Final
Accounts and Balance Sheet.
In accounting errors are classified in two broad types:
1) Errors of Principle
2) Clerical Errors
Under Clerical errors, errors are again classified as
i) Errors of Omission
ii) Errors of Commission
iii) Compensating Errors

1) Errors of Principle
These errors are committed when a transaction is recorded in
contravention of the basic principles of accounting. If an asset is
recorded as expenditure, then the Trial balance will agree, since both
the asset and expense are shown on the debit side. But the name of
the account recorded in the trial balance will not be correct. This means
that when a Capital expenditure is recorded as a Revenue expenditure
or vise-versa, then an error of principle will be committed. Here Trial
balance will not be able to find out this error since it will agree.
Capital expenditure is the expense, the benefit of which is
received for a long time and not restricted to a small period, normally a
year. Revenue expenditure is that expense the benefit of which is

116
received for a short period normally a year. Example of Capital
expenditure is an asset like Building, Plant, Machinery etc. and
example of Revenue expenditure is any expense like salary, vehicle
expenses, electricity, etc.
These types of errors do not affect the Trial balance. But they
will certainly have an effect on the Profit and Loss Account and
Balance Sheet. The accountant because of his incapacity to
understand whether a certain expense is of a Capital nature or revenue
nature normally commits these types of errors. The accountant may
also sometimes commit these types of errors purposefully. These
errors are difficult to locate easily unless all the entries are checked in
detail personally.
2) Clerical Errors
Clerical errors are the errors committed by the accountant in the
ordinary course of the accounting work. These errors are of three
types:

i) Errors of Omission
These errors take place when transactions are not recorded at all in the
books of accounts. If a transaction is completely or partially omitted
from the books of accounts, it is a case of error of omission. Since a
transaction is not recorded at all, there is no debit and no credit effect
or there is a debit and credit effect of equal amount. If therefore an
error of omission is committed, the trial balance will still agree. This
error is therefore difficult to be located.
For example A purchased goods of Rs.12000 from B has not been
recorded. In this case Purchases A/c is not debited by Rs.12000 and
B’s A/c is not credited by Rs.12000. Both the effects are not given and
therefore the Trial balance agrees.
ii) Errors of Commission
If an amount is recorded in the wrong account or written on the wrong
side of the account then it is a case of errors of commission. Some
errors of commission affect the trial balance while some errors do not

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affect the trial balance. Errors of Commission may be committed in the
following ways:
1) Transaction is recorded in the wrong ledger account or book
2) Amount is posted to the wrong account
3) Amount is posted to the wrong side of the correct account
4) Double posting is done in the same account
5) Wrong amount is posted in the account
6) Mistake is done while taking the totals of the column called as
Casting error
7) Error is committed in carrying forward the totals
iii) Compensating Errors
The word compensating means adjusting one for another. If the effect
of the errors committed cancels out, the errors will be called
compensating errors. So another error is committed which cancels out
the earlier error. So when two or more errors are committed in such a
way that total debits equals total credits, it is a compensating error. In
this case the Trial balance remains tallied. If these two or more errors
are between two nominal accounts or two real accounts then, they will
even not affect the Profit & loss account. But out of compensating
errors, one error is in the nominal account and the other error is in the
real account, then they affect the Profit or Loss.

Rectification of Errors
Once we have found out that errors have been committed in the books
of accounts, then such errors should be corrected. Correction of these
errors is called as Rectification of Errors. Errors should never be
corrected by overwriting. If errors are located, then correction should
be done by passing a suitable rectification entry. All rectification entries
are to be passed in the Journal Proper. Normally a rectification entry is
passed at the end of the year. An error can be detected at any one of
the stages :
1) Before preparation of Trial Balance
2) After Trial balance is prepared but before Final accounts are drawn
3) After Final accounts are drawn i.e. in the next accounting period

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1) Before preparation of Trial Balance
This is the stage when even the trial balance is not prepared i.e. the
ledger accounts are not finalised. So an error is detected almost
immediately after the error is committed. These errors are errors that
affect one side of an account or affect more than one account in such a
way that it is not possible to pass a rectification entry. When a
transaction is recorded partially i.e. only one effect is given and the
other effect is omitted, then only the rectification effect should be given.
Example - Rs.500 was paid to Anand in Cash and effect was not given
to Anand’s A/c. Then Anand’s A/c only should be debited by the entry
“To Omission of posting Rs.500”.
In the same example if Rs.500 paid to Anand was posted as Rs.150
paid to Anand, then Anand’s a/c was under recorded by Rs.350 and
therefore Anand’s A/c should be debited by the entry “To Mistake in
posting Rs.350”.
Example – Amount of Rs.5000 was received from Aamir has been
entered on the debit side of his account and cash account has been
correctly written. Now instead of crediting Aamir’s A/c it has been
debited with the same amount. For correcting this entry, the
rectification entry should be passed in Aamir’s A/c on the credit side as
“By Posting on wrong side Rs.10000”
Example – Opening Balance of Bank A/c of Rs.10000 was not
transferred and no balance was taken in the books. So only balance
has to be transferred to this year from last year. So the entry will be “To
Omission of Opening Balance Rs.10000”
Example – Printing & Stationery A/c was posted twice with Rs.450
whereas purchase of stationery was done only once. So Printing &
Stationery A/c was debited with Rs.900 instead of Rs.450. So Rs.450
should be credited to rectify the mistake. So the entry for rectification
will be “By Double posting Rs.450”
We have now seen a few examples of cases in which passing a
journal entry for rectification of error is not possible. Now we will see a
few cases in which a journal entry should be passed for rectification of
errors.

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Example – Rs.5000 is received from B in cash has been credited to C’s
A/c. the error is that credit is given to the wrong account. So now C’s
A/c should be debited and B’s A/c should be credited to rectify the
error.
Wrong Entry:
Cash A/c ………………….Dr. 5000
To C’s A/c 5000
Correct Entry:
Cash A/c ………………….Dr. 5000
To B’s A/c 5000
Rectifying Entry:
C’s A/c ……………………Dr. 5000
To B’s A/c 5000
Illustration:
The following errors were found in the books of Mr.Pramod. Pass the
necessary entries to correct them.
(1) Salary of Rs.8800 paid to accountant is debited to this personal
account
(2) Repairs on building of Rs.5000 debited to Building A/c
(3) Machinery of Rs.17000 purchased has been charged to Purchases
A/c
(4) Rs.1000 received from Mr.Preetam is shown as received from
Mr.Pritesh
(5) Stationery of Rs.500 purchased for personal use by proprietor is
shown under Stationery A/c
Solution:
In the books of Mr.Pramod
Journal (Proper)
Date Particulars L.F. Debit Credit
1) Salaries A/c …………………….Dr. 8800
To Accountant’s (Personal) A/c 8800
(Being correction of wrong entry
to personal account)
2) Repairs A/c ………………..Dr. 5000
To Building A/c 5000

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 (Being correction of wrong debit
to building A/c instead of repairs
A/c)
3) Machinery A/c …………….Dr. 17000
To Purchases A/c 17000
( Being wrong debit to Purchases
A/c instead of Machinery A/c
corrected)
4) Mr.Pritesh A/c ……………..Dr. 1000
To Mr.Preetam A/c 1000
(Being wrong credit to Pritesh’s
A/c corrected )
5) Drawings A/c …………………..Dr. 500
To Stationery A/c 500
(Being wrong debit to Stationery
A/c instead of Drawings A/c
corrected)

2) After Trial balance is prepared but before Final accounts are drawn
At the end of the year, Trial balance is prepared. If the Trial balance is
agreed, it is assumed that the books of accounts are arithmetically
correct and final accounts are prepared from such Trial balance.
Sometimes the Trial balance is prepared in such a way that it agrees. If
there is some difference between the totals of debit column and credit
column then such difference is transferred to a separate account called
as “Suspense Account”. The Suspense account will be debited if the
total of the credit column exceeds the total of debit column of trial
balance. Suspense account will be credited if the total of the debit
column exceeds the total of the credit column of Trial balance. If there
is a suspense account shown, then it means that there are some
errors, which could not be located, and therefore the trial balance is not
true and correct. If at a later stage some errors are found out, then
such errors shall be rectified by passing a journal entry giving one
effect to the Suspense A/c.
It can now be said that each and every error detected at this stage can
only be corrected by a journal entry. All errors for which a journal entry
was not possible in the earlier stage, but were not found out were

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transferred to Suspense A/c. So now at this stage, a journal entry is a
must to negate the effect shown in Suspense A/c.

Illustration
Following are the errors committed in the books of OmPrakash. Rectify
the same and show the Suspense A/c. The Trial balance had excess
credit side by Rs.1100.
(1) An amount of Rs.2000 received from ShriPrakash in this month
entered in the next month.
(2) The total of Returns Inward Book has been shown short by Rs.750
(3) Rs.5000 was paid for preparation of furniture but shown as Wages
(4) A Purchase of Rs.1000 has been posted to Creditors A/c as Rs.100
(5) A sale of Rs.1250 to Dinesh was wrongly credited to his account
(6) A cheque of Rs.500 received from Shaikh had been dishonoured
and was passed to the debit of Sundries A/c
(7) Goods of Rs.1250 were returned by Pradeep and were taken into
stock, but no entry was made in the books.

Solution:
In the books of OmPrakash
Journal
Date Particulars L.F. Debit Credit
1) Bank A/c ………………Dr. 2000
To ShriPrakash A/c 2000
(Being entry on wrong date
reversed)
2) Returns Inward A/c …….Dr. 750
To Suspense A/c 750
(Being the mistake in the returns
inward book corrected)
3) Furniture A/c ……………..Dr. 5000
To Wages A/c 5000
(Being amount paid for furniture
should be capitalized and not
shown under Wages A/c)
4) Suspense A/c …………..Dr. 900

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 To Creditors A/c 900
(Being creditors a/c credited short
by Rs.900 corrected)
5) Dinesh’s A/c ……………..Dr. 1250
To Suspense A/c 1250
(Being mistake of crediting
Dinesh’s A/c instead of debiting
corrected)
6) Shaikh’s A/c ……………..Dr. 500
To Sundries A/c 500
(Being cheque of Shaikh
dishonoured which was earlier
debited to Sundries A/c)
7) Returns Inward A/c ……Dr. 1250
To Pradeep’s A/c 1250
(Being correction of omission to
record return of goods)

Suspense A/c
Date Particulars LF Amt Date Particulars LF Amt
1) To Difference 1100 1) By Returns 750
in Trial Bal. Inward
2) To Creditors 900 2) By Dinesh a/c 1250
Total 2000 Total 2000

3) After Final accounts are drawn i.e. in the next accounting period
We have so far discussed rectification of errors before preparation of
Trial balance or before preparation of Final Accounts. It means that the
rectification entries were done in the same year in which the errors had
taken place. If errors are committed and could not be found out till the
finalization of accounts, then the balance is transferred to a separate
account called as Suspense A/c. This Suspense A/c is carried forward
to the next year. If the error is found out in the next trading year, then

123
how will the rectification entry be passed? The rectification of error
should be done in such a way that it will not affect the Profit & Loss for
that year. This entry should be passed in accordance with the
Accounting Standard – 5 “Prior Period and Extraordinary Items and
Changes in Accounting Policies” which states that such prior period
items should be separately disclosed alongwith their impact on current
profit and loss.

Illustration
Mr.Ameya prepared his books of accounts for the period ended 31 st
March 2001. The Trial balance had a difference of Rs.2376 debit side
in excess of credit side which was shown under Suspense A/c and
carried forward to the next year. In the year 2002 the errors were
located as follows:
1) A sale of Rs.2674 was entered in the Sales book as Rs.2764 and
posted to the credit of the customer.
2) Cash received from Arun of Rs.2500 was posted to debit of Varun
3) Goods of Rs.7560 were dispatched to Amit before 31 st March 2001
but no invoice was made out.
4) While carrying forward the total in Purchases A/c to the next page,
Rs.142250 was written as Rs.124250
5) The total of Returns Inward Book of Rs.760 for the month of
Jan.2001 was not posted in the ledger account
6) A return of goods to a creditor of Rs.3120 was entered in the
Returns Inward book, but the creditor’s a/c was correctly posted.

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Date Particulars L.F. Debit Credit
1) Profit & Loss Adjustment A/c .Dr. 90
Customer’s A/c………………Dr. 5438
To Suspense A/c 5528
(Being correction of error by
which sales a/c was over
credited and customer’s a/c
was credited instead of
debiting)
2) Suspense A/c …………………Dr. 5000
To Arun’s A/c 2500
To Varun’s A/c 2500
(Being removal of wrong debit to
Varun and crediting Arun’s
A/c)
3) Amit’s A/c ……………………..Dr. 7560
To Profit & loss adjustment A/c 7560
(Being rectification of error from
non-preparation of invoice
on delivery of goods)

Date Particulars L.F. Debit Credit

4) Suspense A/c …………………Dr. 18000
To Profit & loss adjustment A/c 18000
(Being correction of wrong carry
forward of balance to next
page)
5) Profit & loss adjustment A/c ….Dr. 760
To Suspense A/c 760
(Being rectification of error of
omission to enter total of
returns inward book in
ledger)
6) Suspense A/c …………………Dr. 6240
To Profit & loss adjustment A/c 6240
(Being correction of error where
Returns Inward was debited
instead of crediting Returns
outward a/c)

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Note: In the above example the rectification entries have been passed
to Profit & Loss Adjustment A/c. In case an error is detected in the next
year to the year in which the error is committed then rectification entry
should be passed after considering the recommendations of
Accounting Standard – 5. The rectification entry should not have an
impact on the Profit or loss of the current year. So, a separate account
called as Profit & Loss Adjustment A/c is opened and all the entries,
which are going to have an impact on the Profit or Loss, are posted to
this account. The Net Profit is calculated for the current year and then
the balance of Profit & loss adjustment A/c is transferred to Profit &
Loss Account.

Questions
(1) What is an error? Why is rectification of error necessary?
(2) What are the different types of errors? Explain each error briefly.
(3) Explain
Errors of Omission
Compensating Errors
Errors of Principle
(4) What is Rectification of errors? Explain the stages when errors are
rectified and how?
(5) When is a Suspense A/c created and why?
(6) Rectify the following errors in the books of Mr.Ashish
1) A cheque of Rs.2000 issued to Anand was posted on the credit
side of Anand’s A/c
2) Cash received from Arvind was recorded in the bank column of
the Cash Book
3) Goods returned to Salil of Rs.1250 were recorded in the return
inward book
4) Sales book was overcast by Rs.4000

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 5) Amount paid to Mohan Rs.1200 was recorded in Madan’s A/c
(7) Rectify the following errors
1) Salary paid Rs.6500 was posted to the Salaries A/c as Rs.5600
2) A Sale of Rs.11200 has been posted to debtors a/c as Rs.12100
3) Commission received Rs.4600 was debited to Commission A/c
4) Purchase of a vehicle of Rs.15000 was shown as Vehicle
expense under the head Vehicle expenses A/c
5) A balance of Carriage outward of Rs.1700 was not taken in the
trial balance
6) The amount of Rs.15100 in the Sales book was not carried
forward from one page to the next page
(8) The Trial Balance of Mr.Kale showed a difference of Rs.1230, the
credits being short than debits. This difference was transferred to
Suspense A/c. Afterwards the following errors were discovered.
Rectify these errors and prepare Suspense A/c.
1) Goods purchased from Mr.Gore of Rs.4500 were posted on the
debit side of Mr.Hirwe’s A/c
2) A cheque of Rs.5000 received from Mr.Pitre was returned and
dishonoured. But the entry for dishonour was not passed.
3) A sale of machine on credit to Mr.Mali for Rs.12000 was not
entered in the books at all.
4) Freight paid on a machine Rs.1200 was posted to the Freight
account as Rs.2100. The firm has a practice of writing off
depreciation @ 10 %
5) Purchase account was overcast by Rs.7500
6) Rs.1500 due from Mr.Mihir was omitted to be taken to the trial
balance.
(9) The trial balance of Thakur & Co. did not agree. The difference was
put in the suspense account and the following trial balance was
drafted.
Trial Balance as on 31st March 2003
Sr.No. Particulars Debit Credit
1) Capital Account 45000
2) Drawings Account 6500
3) Purchases 92750

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 4) Sales 107200
5) Salaries & Wages 12250
6) Furniture & Fittings 17500
7) Sundry Debtors 30250
8) Sundry Creditors 21250
9) Stationery 1250
10) Cash at Bank 2300
11) Cash in hand 5700
12) Bills Receivable 15750
13) Bills Payable 9000
14) Rent & Rates 3200
15) Suspense Account 5000
Total 187450 187450

On scrutiny the following errors were subsequently detected:

1) Goods drawn by Mr.Thakur the proprietor, for personal use of
Rs.1500 have not at all been recorded
2) Goods sold to Karim for Rs.1250 on credit was debited to Rahim’s
A/c for Rs.250 only
3) Wages paid for fittings Rs.500 were debited to Salaries & wages a/c
4) Goods purchased from Amar for Rs.2500 on credit were wrongly
debited to Ajay’s A/c
5) Bill received from Anwar who is a debtor for Rs.500 was debited to
Akshay’s A/c
6) A credit sale of Rs.1500 was recorded in Purchase day book and a
credit purchase of Rs.2000 was entered in Sales day book
You are required to pass the rectification entries and prepare the new
trial balance as on 31st March 2003

(10) Fill in the blanks

a) Rectification entries are passed at the __________ of the year
b) ____________ errors are the errors committed by the
accountant in the ordinary course of the accounting work.
c) ____________ may be committed in case amount is posted to
the wrong account.
d) All rectification entries are to be passed in the ______________.
e) The Suspense account will be ____________ if the total of the
credit column exceeds the total of debit column of trial balance.

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 f) If the effect of the errors committed cancels out, the errors will
be called ______________ errors.

(11) True or False

a) Some errors do not require journal entries for its rectification
b) Errors of Principle are committed when a transaction is recorded
in contravention of the basic principles of accounting.
c) If an error of omission is committed, the trial balance still agrees
and rectification entries need not be passed.
d) Rectification of errors can be done by cancelling the entry, by
cutting it from the book.
e) All types of errors always affect either side of the trial balance.
f) If wrong amount is posted in the account it is a case of error of
commission.
g) The treated of rectification of error remains the same
irrespective of whenever the error is detected.

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 (X) Bills of Exchange & Promissory Notes

Often most of the dealings in the field of trade and commerce are
carried on with the help of negotiable instruments. Negotiable
instruments are written promises to pay a definite sum of money.
Such promises can be passed on from one person to another. Bills
of Exchange and Promissory Notes both are a type of negotiable
instruments. We will now try to learn these negotiable instruments
which will help us to use them in our trade and business.

Bills of Exchange
“A bill of exchange is an instrument in writing containing an
unconditional order signed by the maker, directing a certain person to
pay a certain sum of money only to, or to the order of, a certain person
or to the bearer of the instrument.” When goods are sold on credit, the
purchaser of goods makes a promise to pay the amount on a certain
date. All the details are entered in this negotiable instrument. When
such a written promise is made in proper form and is properly stamped,
it becomes a Bill of Exchange. When a Bill of Exchange is accepted, it
is supposed that the buyer has discharged his debt and that the seller
has received the payment. This is because the banks accept written
promises and banks advance money against them.
It means that if an order is made in writing by one person on
another directing him to pay a certain sum of money unconditionally to

130
a certain person or according to his instructions or to the bearer, and
when this order is accepted by the person to whom order is made, it
becomes a Bill of Exchange.
A specimen of a properly drawn Bill of Exchange is shown in Fig.10.1
The following points should be noted
1) A Bill of Exchange must be in writing.
2) It must be dated
3) It must contain an order to pay a certain sum of money
4) The money must be payable to a definite person or to his order or
to the bearer
5) The draft must be accepted for payment by the party on whom the
order is made
Fig.10.1
Specimen of a Bill of Exchange

Rs. 5,000.00 Patna

01st December 2001
Stamp

Six months after date pay M/s Kumar & Sons or order the sum
of Rs.Five Thousand for the value received.
Signed
Mr.Ganesh Iyer
To
Mr.Kiran Kanani
Mumbai

The party, which make the order, is known as the drawer. The party,
which accepts the order, is known as the acceptor and the party to
whom the amount has to be paid is known as the payee. In the above
example, Mr.Ganesh Iyer is the drawer, Mr.Kiran Kanani is the acceptor
and M/s Kumar & Sons is the payee. It should be noted that, the
drawer and the payee could be the same person. A Bill of Exchange
can be passed on to another person by endorsement. Endorsement is
done in exactly the same way as it is done in the case of a cheque.

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Promissory Notes
A promissory note is an instrument in writing not being a bank note or a
currency note containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money only to, or to the order of, a
certain person. It means that when a person gives a promise in writing
to pay a certain sum of money unconditionally to another person or to
any person as directed by him, it is a promissory note. The
characteristics of a promissory note are:
1) It must be in writing
2) It must contain a clear promise to pay. Mere acknowledgement of
debt is not a promise.
3) The promise to pay must be unconditional.
4) The promisor or maker must sign the promissory note
5) The maker must be a certain person
6) The payee (the person to whom payment is promised) must also be
certain
7) The sum payable must be certain
8) Payment must be in legal tender money only
9) It should not be made payable to bearer
10)It should be properly stamped.

A specimen of a Promissory note is shown inFig.10.2

Fig.10.2
Specimen of a Promissory Note

Rs. 2,000.00 Kolkata

01st March 2000
Stamp

Three months after we promise to pay M/s Sushil & Sons or order
the sum of Rs.Two Thousand for the value received.

Ratan & Sons.

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In the above example, Ratan & sons are the promisors and M/s Sushil
& Sons are the payee

Distinction between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange
1. There are two parties – the 1. There are three parties –
maker (debtor) and the payee drawer, drawee and payee. Any
(creditor) two out of above three can be the
same person. Drawer is the maker
who orders the drawee to pay the
bill to a person called payee or to
his order. When the drawee
accepts the bill, he is called the
acceptor.
2.It cannot be made payable to 2. The drawer and payee or
the maker himself drawee and payee may be the
same person.
3. It contains an unconditional 3. There is an unconditional order
promise by the maker to pay to to the drawee to pay according to
the payee or his order the drawer’s directions.
4. It is presented for payment 4. It must be accepted by the
without any prior acceptance by drawee or some one else on his
the maker. behalf before it can be presented
for payment.
5. The liability of the maker is 5. The liability of the drawer is
primary and absolute secondary and conditional.
6. The maker stands in immediate 6. The maker or drawer stands in
relation with the payee immediate relation with the
acceptor and not the payee.
7. It cannot be drawn payable to 7. It can be drawn payable to
bearer. bearer.
8. In case of dishonour no notice 8. If it is dishonoured, due notice
is required to be given. of dishonour is to be given by the

133
 holder to the drawer and the
immediate endorsers.

9. In case of dishonour of 9. In case of dishonour of Foreign

Promissory note no protest is bills of exchange, it must be
necessary protested by the law of the country
where they are drawn

Record of Bills of Exchange and Promissory Notes

A person who receives a promissory note or accepts a Bill of Exchange
will treat it as an asset. The name given to it is Bills Receivable. The
party which issues a promissory note or accepts a Bill of Exchange
creates a liability for himself and treat it as a liability. The name given to
it is Bills Payable.
Entries to be passed in the books are as follows:
1) On receipt of Bill or Note
Bills Receivable A/c ………….Dr.
To Party A/c
2) The person who receives the bill has three options:
(i) If the bill is held till maturity
No entry until the date of maturity
(ii) If the bill is endorsed over to a creditor.
Creditor’s A/c ………………Dr.
To Bills Receivable A/c
(iii) If the bill is discounted with the bank
Bank A/c …………………..Dr.
Discount A/c ………………Dr.
To Bills Receivable A/c
3) On maturity
(i) If the bill is honoured
Cash / Bank Account …………...Dr.
To Bills Receivable Account
(ii) If the bill is dishonoured, the bill will not be paid.
If the bill was kept till maturity

134
 Party A/c ……………………….Dr.
To Bills Receivable Account
If the bill was endorsed in favour of a creditor
Party A/c ……………………….Dr.
To Creditor’s A/c
If the bill was dishonoured with the bank
Party A/c ………………………. Dr.
To Bank Account
In case of dishonour, the party that gave the bill has to be debited. The
credit entry is in Bills Receivable A/c or Creditor’s A/c or Bank A/c.

Date of maturity is always calculated by adding three days of grace.

Thus if a bill dated 1st January is for 3 months after date, the date of
maturity is 4th March i.e.1st March plus 3 days of grace. If the due date
falls on a holiday, the due date will be the previous day. For example a
bill falling due on 15th August will have to be paid on 14th August.

Noting Charges
In case of dishonour, it is necessary that the fact of dishonour and the
causes of dishonour should be established. If the acceptor can prove
that the bill was not properly presented to him for payment, he may
escape liability. In order to remove any doubt that the bill was properly
presented for payment and to establish beyond doubt that the bill was,
in fact, dishonoured it is preferable to get it “noted.” The noting must be
recorded within a reasonable time after the dishonour and must contain
the fact of dishonour, the date of dishonour, reasons given for such
dishonour and the noting charges. Therefore, if there is dishonour, or
fear of dishonour, the bill will be given to a public official known as
“Notary Public”. These persons present the bills for payment and if the
money is received, they will hand over the money to the original party.
If it is dishonoured, they will note the details required and give it back.
For this service they charge a small fee called as “noting charges”. The
amount of noting charges is recoverable from the party, which is
responsible for dishonour.

135
Renewal of Bill
The acceptor of the bill or maker of a Promissory note is not in a
position to pay the amount on maturity. In such case, he on his own
motion approaches the holder with a request for extension of time. In
such a case a new bill will be drawn and the old bill will be cancelled. If
this happens entries should be passed for cancellation of the old bill.
These entries are the same as they are passed for dishonour of bill.
When the new bill is received entries for the receipt of the bill will be
passed. The amount of new bill includes the interest for the period for
which the new bill is accepted.

Illustration
Satish sold goods to Sanjay on 1 st January 2000 for Rs.12000. Sanjay
immediately accepted a three month’s bill. On due date Sanjay
requested that the bill be renewed for a fresh period of one month.
Satish agreed if interest at 12 % was paid immediately in cash. Sanjay
accepted the offer. He met the second bill on due date. Give Journal
entries and Ledger accounts in the books of Satish.

Solution:

In the books of Satish

Journal
Date Particulars LF Debit Credit
2000
1st Jan. Sanjay’s A/c ………………Dr. 12000
To Sales A/c 12000
(Being goods sold to Sanjay)
Bills Receivable A/c ………Dr. 12000
To Sanjay’s A/c 12000
(Being bill accepted for 3
months)
4th April Sanjay’s A/c ………………Dr. 12000

136
 To Bills Receivable A/c 12000
(Being Sanjay’s acceptance
cancelled and bill renewed)
Sanjay’s A/c ………………Dr. 120
To Interest A/c 120
(Being interest @ 12% on one
month due from Sanjay)
Bills Receivable A/c ………..Dr. 12000
Cash A/c…………………….Dr. 120
To Sanjay’s A/c 12120
(Being new bill accepted for 1
month and interest paid in
cash)
7th May Cash A/c …………………….Dr. 12000
To Bills Receivable A/c 12000
(Being cash received on
maturity of second bill from
Sanjay)

Ledger
Sanjay’s A/c
Date Particulars LF Amount Date Particulars LF Amount
2000 2000
1 /1 To Sales 12000 1 /1 By Bills 12000
4 /4 To Bills 12000 Receivable
Receivable 4 /4 By Cash 120
To Interest 120 By Bills 12000
Receivable
24120 24120

Bills Receivable A/c

Date Particulars LF Amount Date Particulars LF Amount
2000 2000
1 /1 To Sanjay 12000 4 /4 By Sanjay 12000
4 /4 To Sanjay 12000 7 /5 By Cash 12000
24000 24000
Sales A/c
Date Particulars LF Amount Date Particulars LF Amount
2000 2000
1 /1 By Sanjay 12000
Interest A/c

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Date Particulars LF Amount Date Particulars LF Amount
2000 2000
4 /4 By Sanjay 120
Cash A/c
Date Particulars LF Amount Date Particulars LF Amount
2000 2000
4 /4 To Sanjay 120
7 /5 To Bills 12000
Receivable

Accommodation Bills
Bills of Exchange or Promissory notes are meant to finance actual
trade requirements. It means when actual purchase or sale of goods
takes place, then these negotiable instruments are utilised. But this bill
can also we used to raise finance from bank without actual purchase or
sale of goods.
For example, A is in need of funds for 3 months. In that case he may
persuade B who is his friend to accept his bill. This Bill of Exchange is
taken by A to the bank and gets it discounted. So, now A can use this
amount for three months. After three months, A will send that amount to
B who accepts the bill. Thus A can use the money for 3 months. If both
A and B are in need of money, the same method can be used by both
of them. When bills are used for such a purpose, they are known as
Accommodation bills.
Entries are made in the same manner as done for regular bills in the
books of both the parties. The only point to be remembered is that a
party bears the discount in the proportion in which it shares the
proceeds. If both parties share the proceeds equally, each will have to
bear the discount equally. If one party gets one-third of the proceeds, it
will have to bear one-third of the discount.

Insolvency
When the acceptor of a Bill of Exchange or the maker of a Promissory
note is unable to pay his liabilities, he is said to be insolvent. Therefore,
when a person becomes insolvent, entry for dishonour must be
passed. Usually, the estate of the insolvent is able to make partial

138
payment, which is expressed as “so many paise in a rupee recovered.”
The remaining amount will be irrecoverable and therefore should be
written off as bad debt. In the books of drawee of the bill, the amount
not ultimately paid by him due to insolvency should be credited to
deficiency account.

Illustration
Abhay and Baban were friends who were in need of funds. On 1 st Oct.
2000 Abhay accepted Baban’s bill for Rs.40,000.00 for 3 months.
Baban got it discounted at 9% and remitted ½ of the proceeds to
Abhay. On the due date Baban was not able to honour the bill. Instead
he accepted Abhay’s bill for Rs.25,000.00 for one month. Abhay got it
discounted for Rs.22,820.00. Out of this Rs.2,000.00 was sent to
Baban. Baban got insolvent and only 40% of the amount due could be
recovered from his estate. Enter Journal entries in the books of both
the parties.

Solution:
In the books of Abhay
Date Particulars LF Debit Credit
2000
01/10 Baban’s A/c …………….Dr. 40000
To Bills Payable A/c 40000
(Being Baban’s bill accepted)
Bank A/c …………………….Dr. 19550
Discount A/c ………………...Dr. 450
To Baban’s A/c 20000
(Being ½ proceeds after
discounting recd from Baban)
2001
04/01 Bills Receivable A/c ………Dr. 25000
To Baban’s A/c 25000
(Being acceptance received
from Baban for amount due)
Bank A/c …………………….Dr. 22820

139
 Discount A/c ………………..Dr. 2180
To Bills Receivable A/c 25000
(Being bill discounted)
Bills Payable A/c ……………Dr. 40000
To Bank A/c 40000
(Being acceptance due met)
Baban’s A/c …………….Dr. 4102
To Bank A/c 2000
To Discount A/c 2102
(Being amount remitted to
Baban after discounting)
07/02 Baban’s A/c …………….Dr. 25000
To Bank A/c 25000
(Being acceptance dishonoured
by Baban due to insolvency)
Bank A/c ……………………Dr. 11641
Bad Debts A/c ………………Dr. 17461
To Baban’s A/c 29102
(Being amount received and
balance written off as bad
debts)

Note: Rs.22,820.00 is realised by discounting the bill

Baban gets Rs.22,000 i.e.Rs.20,000.00 due to Abhay but not remitted
and Rs.2,000.00 given by Abhay afterwards ). So for calculation of
discount to be borne by Baban
(Rs.2,180.00 X Rs.22,000.00) = Rs.2,102.00
Rs.22,820.00)
Baban’s A/c
Date Particulars LF Amount Date Particulars LF Amount
2000 2000
1/10 To Bills 40000 1/10 By Bank 19550
Payable By Discount 450
2001 2001
4/01 To Bank 2000 4/01 By Bills 25000
To Discount 2102 Receivable
4/02 To Bank 25000 4/01 By Bank 11641
By Bad 17461
debts a/c
69102 69102

140
 In the books of Baban
Date Particulars LF Debit Credit
2000
01/10 Bills Receivable A/c ………Dr. 40000
To Abhay’s A/c 40000
(Being acceptance received )
Bank A/c …………………….Dr. 39100
Discount A/c ………………Dr. 900
To Bills Receivable A/c 40000
(Being bill discounted at 9% pa)
Abhay’s A/c …………………Dr. 20000
To Bank A/c 19550
To Discount A/c 450
(Being ½ proceeds remitted)
2001
04/01 Abhay’s A/c ……………….Dr. 25000
To Bills Payable 25000
(Being acceptance given to
Abhay being amount due)
Bank A/c ……………………Dr. 2000
Discount A/c ………………..Dr. 2102
To Abhay’s A/c 4102
(Being amount received from
Abhay and discount credited)
Bills Payable A/c ……………Dr. 25000
To Abhay’s A/c 25000
(Being bill dishonoured
because of insolvency)
Abhay’s A/c ……………….Dr. 29102
To Bank A/c 11641
To Deficiency A/c 17461
(Being amount paid and bal.
credited to Deficiency A/c)

Bills sent for collection

When a person receives a Bill of Exchange, he may keep the bill with
himself till maturity or may ask the bank to hold the bill for him till
maturity and collect it on due date. This bill is not discounted, but just
forwarded to the bank with instructions to collect it on due date. So, the
bank does not actually give the amount to the person till due date.
Such bill sent to the bank are known as “Bill sent for collection.” The
entry to be made is

141
 Bills of Collection A/c ………………Dr.
To Bills Receivable A/c
On maturity, if the amount is realised, the entry will be
Bank A/c ……………………………Dr.
To Bills for Collection A/c
On maturity, if the bill is dishonoured, the entry will be
Party A/c (from whom the bill was received) ..Dr.
To Bills for Collection A/c
Bills for collection is an asset, and therefore at the time of closing of
accounts, Bills for Collection will be shown on the asset side being bills
yet to be collected by the bank.

Bills Receivable Book and Bills Payable Book

Bills receivable and Bills payable books are journals which record the
details of bills receivable and bills payable respectively. When any bill
transaction takes place, the same is entered in the Day book. Postings
of individual debtors and creditors accounts are made from the Day
books. Total of bills received or accepted are posted periodically to Bills
Receivable A/c and Bills Payable A/c.
These books are maintained when there are many bills and each bill
fall due on different dates. So it becomes very easy to keep a track of
all the bills at a time. Also it is possible from these books to trace the
details of the outstanding bills and to identify the reasons for not
honouring the bills.
The specimen extracts of Bills Receivable book and Bills Payable book
are given in Fig.10.3 and Fig.10.4

Fig.10.3
Bills Receivable Book
Date V. No. Party Acceptor Date Due Place of Amount L.F. Mode of

of from of Date payment disposal

142
receipt whom Bill
received

Fig.10.4
Bills Payable Book
Date of Drawer Payee Date of Due Place of Amount L.F. Mode of
acceptance Bill Date payment disposal

Illustration
The following bills were accepted on 01st January 2001 for 4 months
1) By B, Rs.10000 and by C, Rs.15000 in favour of A
2) By A, Rs.20000 and by C, Rs.5000 in favour of B
3) By A, Rs.10000 and by B, Rs.20000 in favour of C
All bills were discounted on 4 th January at 18% p.a. and the three
parties shared the proceeds equally. On the due date C became
insolvent and later, 30 paise in a rupee were recovered from his estate.
Record the transactions in the books of A
Solution:
In the Books of A
Journal
Date Particulars LF Debit Credit
2001
01/01 Bills Receivable A/c ………Dr. 25000
To B A/c 10000
To C A/c 15000
(Being acceptance received
from B & C)
01/01 B A/c ……………………….Dr. 20000
C A/c ………………………..Dr. 10000
To Bills Payable 30000
(Being acceptance issued in
favour of B & C)
01/01 C A/c ……………………..Dr. 15000
To B A/c 15000
(Being net amount of
acceptances between B & C)

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 04/01 Bank A/c …………………..Dr. 23500
Discount A/c ………………Dr. 1500
To Bills Receivable A/c 25000
(Being bills discounted
@18%p.a.)
04/01 Bank A/c …………………..Dr. 1567
Discount A/c ………………Dr. 100
To C A/c 1667
(Being amount received from C
to make proceeds & discount
equal)
04/01 B A/c ……………………..Dr. 1667
To C A/c 1667
(Being amount to be paid by C
to B, to make proceeds equal)
04/05 Bills Payable A/c …………Dr. 30000
To Bank A/c 30000
(Being payment of
acceptances)
04/05 C A/c …………………….Dr. 20000
To Bank A/c 15000
To B A/c 5000
(Being entry on dishonour by
C)
04/05 B A/c ………………………Dr. 9333
Bank A/c …………………..Dr. 8000
Bad debts A/c ………………Dr. 9333
To C A/c 26666
(Being 30 paise recovered from
C & half the loss borne by B
and balance written off as bad
debt)
04/05 Bank A/c ……………………Dr. 1000
To B A/c 1000
(Being amount due from B
received )

Notes:
Calculation of Each one’s share of proceeds and discount
Total A B C
Total Bills Received 80000 25000 25000 30000
4800 1500 1500 1800
(-) Discount
Balance 75200 23500 23500 28200

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 Procee Disc.
ds
Equal share of
A 25067 1600
B 25067 1600
C 25067 1600
Additional amount receivable 1567 1567 -3134
Equal Share 25067 25067 25066
Additional discount to be debited 100 100 -200
(Dr.) (Dr.) (Cr.)

Questions:
(1) What is a Bill of Exchange? What should be taken care of when
giving a Bill of Exchange?
(2) What is a Promissory note? Explain the important points to be
considered in a Promissory note.
(3) Distinguish between a Bill of Exchange and Promissory Note.
(4) What do you understand by the term negotiability?
(5) What are noting charges? Who bears the noting charges?
(6) What is an Accommodation bill? What is the difference between
Accommodation bill and a simple Bill of Exchange?
(7) A sold goods worth Rs.25000 to B. B immediately accepted the bill
on 1st July 2002 payable after 3 months. A discounted the bill @ 18
% p.a. on the same day. On the due date B failed to discharge the
bill. Later on B became insolvent and on 15 th October only 25%
could be realised from B’s estate. Journalise the following
transactions in the books of A and show ledger account of B
(8) Arun sold goods to Amit on 1 st April 1999 for Rs.25000. Amit
immediately accepted a bill for 2 months. On due date Amit
requested that the bill be renewed for a fresh period of three
months. Arun agreed if interest at 18 % p.a. was paid immediately
in cash. Amit accepted the offer. He met the second bill on due

145
 date. Give Journal entries and Ledger accounts in the books of
Arun.
(9) A draws on B a bill of exchange of Rs.15000 on 1 st October 2000 for
3 months. B accepts the bill and sends it to A, who gets it
discounted for Rs.14400. A immediately remits Rs.4800 to B. On
the due date, A being unable to remit the amount due, accepts a bill
for Rs.21000 for 3 months which is discounted by B for Rs.20,055.
B sends Rs.3370 to A. Before maturity of the bill A becomes
insolvent, his estate paying 50 paise in a rupee. Give the Journal
entries in the books of A & B. Also show A’s account in the books of
B.
(10) P draws on R a bill for Rs.60000 on 1 st July 2000 for 2 months.
R accepts the bill and sends it to P who gets it discounted for
Rs.58800. P immediately remits Rs.19600 to R. On the due date, P
being unable to remit the amount due accepts a bill for Rs.84000 for
2 months which is discounted by R for Rs.82200. R sends
Rs.14800 to P out of the proceeds. Before maturity P becomes
insolvent and only 50 paise in a rupee were recovered from his
estate. Pass the journal entries in the books of A & B and also show
their accounts in the ledger of each other.

(11) Fill in the blanks

a) Bills of Exchange and Promissory Notes both are a type of
__________________.
b) In _______________ there is an unconditional order to the
drawee to pay according to the drawer’s directions.
c) When the acceptor of a Bill of Exchange or the maker of a
Promissory note is unable to pay his liabilities, he is said to be
__________________.
d) The party, which make the order, is known as the ___________.
e) A person who accepts a Bill of Exchange will treat it as
______________ and record it in _______________ account.

(12) True or False

146
a) When a Bill of Exchange & a Promissory note is issued
simultaneously it is called as Accommodation bill.
b) Bills for collection is an asset, and therefore at the time of closing of
accounts, Bills for Collection will be shown on the asset side being
bills yet to be collected by the bank.
c) A Bill of Exchange can be endorsed but a promissory note cannot
be endorsed.
d) When a Bill of Exchange is accepted Bill Receivable A/c is debited
e) A Promissory Note shall be in writing but the amount need not be
fixed.

(XI) Depreciation

Depreciation
In any firm or company, in the running of the business, fixed assets
play an important part. You will not find any business running without
the use of fixed assets. Fixed assets are assets, which are used for a
long period of time. Some of the examples of fixed assets are Land &
Building, Plant & Machinery, Furniture & Fixtures, Vehicles, Loose
tools, etc. The value of these fixed assets reduces due to different
reasons, and this reduction is called as depreciation. Depreciation
means fall in the quality, quantity or value of an asset. The net result of
depreciation is that the asset depreciates year by year and finally
becomes useless. The factors of the depreciation are:-
1) Wear and tear due to actual use
2) Efflux of time i.e. passage of time will cause a fall in the value of an
asset even if it is not used
3) Obsolescence i.e. a permanent change in demand may render the
asset useless
4) Accident; and
5) Fall in market price
The value of current asset also depreciates, but the term depreciation
is used only in respect of fixed assets and not current assets. The

147
value of current assets is recorded in the Balance Sheet at cost or
market price whichever is less. Therefore, current assets are
automatically recorded at reduced prices.
Depreciation is not an actual expenditure and not visible till the year-
end. But it is very important to provide depreciation on fixed assets for
the following reasons: -
1) To enable to ascertain the correct figures of profit or loss together
with showing the correct financial position; and
2) To force the firm to retain funds equal to the cost of the asset so
that, new asset can be purchased by scrapping the old asset after
the end of its life.

Methods of providing depreciation:

1) Straight Line Method
2) Reducing Balance Method
3) Sum of Digit Method
4) Annuity Method
5) Sinking Fund Method
6) Machine Hour Method
7) Depletion Method

1) Straight Line Method

Under this method, an equal amount is written off each year during the
working life of the asset, which reduces the cost of the asset to nil and
the end of the life of the asset. This is a very simple method and
preferably used in case of leases, patents and copyrights, etc. which
have a definite life. So the amount to be written off every year is arrived
at as under:
Depreciation = Cost minus Estimated Scrap Value
Estimated Life

2) Reducing Balance Method

Under this method, the rate of depreciation is fixed which is applied
every year on the depreciated value of the asset till the end of the life.

148
This method is also called as Written Down Method. This method is
commonly used for Plant & Machinery, Furniture & Fixtures, Vehicles,
etc. Under this method, the annual charge of depreciation goes on
decreasing year to year, since the rate is applied on the reduced value.
The advantage of this method is that the total charge to revenue is
uniform when the depreciation is high, repairs are negligible and as the
repairs increase the burden of depreciation gets lesser and lesser. This
method is preferred to Straight Line method because it tends to be
more accurate than the earlier method. Also, the value of the asset
under this method never becomes zero. This method is also very
simple to operate.

Illustration
A purchases machinery of Rs.48000 on 01 st October 2001 and spends
Rs.2000 on its installation. Depreciation is written off at the rate of 10%
p.a. The books are closed every year on 31 st March. On 31St March
2004 the machine is sold for Rs.35000. Show Machinery A/c under
Straight Line Method and Reducing Balance Method.
Solution
In the books of A
Machinery A/c
Dr. Cr.
Date Particulars Straight Reducing Date Particulars Straight Reducing
Line Balance Line Balance
Method Method Method Method
2001 2002
1/10 To Bank 48000 48000 31/3 By Depre. 2500 2500
1/10 To Bank 2000 2000 31/3 By Bal.c/d 47500 47500
Installation
50000 50000 50000 50000
2002 2003
1/4 To Bal.b/d 47500 47500 31/3 By Depre. 5000 4750
31/3 By Bal. C/d 42500 42750
47500 47500 47500 47500
2003 2004
1/4 To Bal. b/d 42500 42750 31/3 By Depre. 5000 4275
31/3 By Bank 35000 35000
Sale
proceeds
31/3 By P&L A/c 2500 3475
Loss

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 transferred
42500 42750 42500 42750

3) Sum of Digit Method

Under this method, the amount of depreciation to be written off is
calculated by the formula:
Remaining Life of the asset X Cost of the asset
Sum of all digits of the life of the
asset in years

So this method is a variation of the Reduced Balance Method.

Illustration:
Suppose the life of the asset of Rs.100000 is 10 years. The sum of all
the digits from 1 to 10 is 55. Therefore, depreciation to be provided for
the first year will be:
10 x 100000 = Rs.18182
55
In the second year, the depreciation will be:
9 x 100000 = Rs.16364
55
The calculation for each year will be done in the same way. The
advantages of this method are the same as those of the Reducing
Balance Method.

4) Annuity Method
This is a method of depreciation, which takes into account the interest
lost on the acquisition of an asset. The earlier methods did not take
interest component into account while making the calculations of
depreciation. Interest is calculated on the book value of the asset at the
current rate and debited to the Asset A/c and credited to the Interest

150
A/c. The amount of depreciation to be annually provided in the
accounts is ascertained from the Annuity Tables.
This method is eminently suitable for writing off the amounts paid for
long leases, which involve a considerable capital outlay. This method is
not practicable to adopt for writing off depreciation on Plant &
Machinery on account of frequent changes in the value of such an
asset, which would necessitate the recalculation of the amount of
depreciation to be written off annually.
Illustration:
A lease is purchased on 1 st January 1997 for 3 years at the cost of
Rs.50000. It is proposed to depreciate the lease by Annuity method by
charging 10 % interest. The books are closed every year on 31 st
December. Show the Lease account for 3 years and relevant entries in
Profit & Loss A/c

Solution:
A reference to the annuity table shows that to depreciate Re.1 by
annuity method over 3 years charging 10% interest, one must write off
a sum of Re.0.402115. To write off Rs.50000 one requires to write off
every year Rs.50000 x 0.402115 = Rs.20106
Lease Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
1997 1997
1/1 To Bank 50000 31/12 By Depreciation 20106
31/12 To Interest 5000 31/12 By Balance c/d 34894
(on Rs.50000)
55000 55000
1998 1998
1/1 To Balance b/d 34894 31/12 By Depreciation 20106
31/12 To Interest 3489 31/12 By Balance c/d 18277
(on Rs.34894)
38383 38383
1999 1999
1/1 To Balance b/d 18277 31/12 By Depreciation 20106
31/12 To Interest 1829
(on Rs.18277)
20106 20106

151
 Profit & Loss Account (Extract)
Date Particulars Amount Date Particulars Amount
1997 1997
31/12 To Depreciation 20106 31/12 By Interest 5000
1998 1998
31/12 To Depreciation 20106 31/12 By Interest 3489
1999 1999
31/12 To Depreciation 20106 31/12 By Interest 1829

5) Sinking Fund Method

When the life of an asset comes to an end, it is time to replace the
asset. If a large sum of money is required for replacement of an asset,
it may not be possible for the proprietor to raise ready cash to buy the
new asset. To safeguard this position, the amount annually provided for
depreciation is placed to the credit of a fund called as Sinking Fund or
Depreciation Fund. An equivalent amount is invested at the same time
in readily saleable securities mostly government securities. The
amount of these securities keeps on accumulating. When the life of the
asset expires, these securities are sold and a new asset is purchased.
The book value of old asset is transferred to Sinking Fund A/c. Any
amount received on sale of old asset and profit or loss on sale of
securities is transferred to Sinking Fund A/c. This Sinking Fund A/c is
closed off by transfer of balance to Profit & Loss A/c or General
Reserve.
The amount to be set apart annually by way of depreciation is
ascertained from Sinking Fund Table. They readily show the amount
which must be invested each year to accumulate to Re.1 at a given
rate of interest within the stated period.

6) Machine Hour Method

Under this method, depreciation is calculated by estimating the total
number of hours that a machine will work during its whole life. This

152
estimation depends upon the economic and technological conditions.
For this method to be used, it is necessary to maintain accurate record
of actual running hours of each machine.
Illustration:
The effective life of a machine is 50000 hours. If the cost of the
machine is Rs.250000, the hourly deprecation rate is
250000 = Rs.5
50000
The depreciation of one year in which machine runs for 5000 hours will
be
5000 x Rs.5 = Rs.25000

7) Depletion Method
This method is used in case of mines, quarries, etc. when the quantity
of product available there is estimated. Depreciation is calculated per
tonne of output. Annual depreciation will be the quantity extracted
multiplied by the rate per tonne.
Illustration:
A mine is purchased for Rs.5000000 and it is estimated that the total
quantity of coal is 250000 tonnes. So, depreciation per tonne will be
5000000 = Rs.20
250000
If the output in the year is 80000 tonnes, then depreciation to be written
off in that year will be
80000 x Rs.20 = Rs.1600000

Questions
(1) What is depreciation? What are the factors that affect the value of
an asset?
(2) What is the importance of depreciation? Why is depreciation not
levied on current assets?

153
(3) Explain different methods of calculation of depreciation.
(4) Explain Reducing Balance Method with suitable example.
(5) What is the difference between Annuity Method and Sinking Fund
Method?

(6) On 1st April 1996, a firm purchases machinery worth Rs.250000. On

1st October 1997, it buys additional machinery worth Rs.50000. The
accounts are closed every year on 31 st March. The rate of
depreciation on machinery is 20%. Show Machinery Account for 4
years under Reducing Balance Method.

(7) A company purchased on 1st July 1995 machinery costing

Rs.100000. It purchased further machinery on 1 st October 1996
costing Rs.30000. On 1st April 1998 one-third of the machinery
which was installed on 1st October 1996 was sold for Rs.8000. the
books of accounts are closed on 31 st March every year. The rate of
depreciation on machinery is 10%. Show how Machinery Account
would appear for 4 years ended 31 st March 1999 under Straight
Line Method.

(8) A firm purchases a 5 year lease for Rs.150000. It decides to write

off depreciation on the Annuity method, assuming the rate of
interest to be 10% p.a. The Annuity table show that a sum of
Rs.39,570 should be written off every year. Show Lease Account
and Profit and Loss Account for 5 years.

(9) A machine is purchased on 1st April 1997 for Rs.150000. The

machinery is to be replaced at the end of 5 years for which purpose
a sinking fund is established. It is expected that securities will earn
10% interest. Sinking Fund table show that Re.0.163797 invested
each year will produce Re.1 at the end of 5 years at 10%. The
accounts are closed every year on 31 st March. At the end of the
period, the securities are realised at their book value. New

154
 machinery is installed on 1st April 2002 at a cost of Rs.180000.
Show the necessary ledger accounts for all the years.

(10) A mine estimated to contain 2000000 tonnes of minerals is

leased at a cost of Rs.5000000 and was expected to be worked for
10 years. During the first year, production was 90000 tonnes. State
the amount of depreciation under any three methods of
depreciation.

(11) Fill in the blanks

a) The term depreciation is used in respect of ____________
assets.
b) Under _________________ method, the rate of depreciation is
fixed which is applied every year on the depreciated value of the
asset till the end of the life.
c) The method of depreciation, which takes into account the
interest lost on the acquisition of an asset is _______________.
d) Under Sinking Fund Method the book value of old asset is
transferred to _____________ account.
e) Depreciation means the fall in the ______________,
______________ and _______________ of an asset.
f) Depreciation is shown on _____________ side of Profit & Loss
Account.

(XII) Final Accounts

The main reason for maintaining books of accounts is to accumulate

accounting data in a manner that the amount of profit or loss suffered

155
during the period can be determined. Revenue Account and Profit and
Loss Account are the statements, which calculate the profit or loss of
the business, which are prepared at the close of the year. It is
accompanied by Balance Sheet displaying assets and liabilities of the
business at the close of the year. Revenue Account is sometimes
prepared in separate statements called as Trading, Manufacturing
Account and Profit and Loss Account. After the Profit and Loss Account
is prepared, the account displays the manner in which the profit has
appropriated among different persons to whom it belonged. This
information is contained in a separate account called as Profit and Loss
Appropriation Account.

Preparation of Final Accounts

The principal function of final statements of account is to exhibit truly
and fairly the profitability and the financial position of the business to
which they relate. The basic principles that should be kept in mind
while preparing final accounts are: -
1) A distinction should be made between capital and revenue for both
income and expenditure.
2) Income and expenses for the period under consideration should be
separated from those of another period.
3) The personal transactions of income and expenses of proprietors
should be shown separately. Final accounts are prepared with an
intention to show the profitability of the business and not the
proprietor of that business. Therefore, the two should not be shown
together.
4) Every information that is material for the preparation of final
accounts should be disclosed.
5) It should be seen that the effect of transactions, which fall in the
concerned period is there on the profitability of the business and
that, no other items are included in the final statements.
Now in the next part of the chapter we shall understand the different
items that are to be considered under each statement of Trading
Account, Profit and Loss Account and Balance Sheet.

156
Trading Account
Final statements are prepared to ascertain the net profit or loss at the
end of the period. But before calculating net profit, it is necessary to
find out the gross profit or loss. Gross Profit is the difference between
the selling price and the cost price of the goods sold. The gross profit is
calculated in Trading A/c and is the balancing figure. If the credit side is
more than debit side it is gross profit and if the debit side is more than
the credit side then it is gross loss. This gross profit or gross loss is
transferred to Profit and Loss Account. The Trading A/c appears as
follows:
Trading Account for the year ending
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock By Sales
To Purchases (-) Return Inwards
(-) Return Outwards
To Wages By Closing Stock
To Carriage Inward
To Power charges
To Import duty & octroi
To Freight charges
To Gross Profit To Gross Loss
transferred to Profit & transferred to Profit &
Loss Account Loss Account

Few Items in Trading Account:

1) Opening Stock
Opening Stock is the closing stock of last year. Closing stock of last
year becomes the opening stock of the current year. It is the first item
in the Trading A/c shown on debit side. Opening Stock is the stock of
finished goods but in manufacturing concerns, it includes opening stock
of raw materials, work in progress and finished goods and is shown
separately.
2) Purchases and Purchase returns

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Purchase of goods or materials is shown under Purchases on debit
side of the Trading A/c. However, purchase of assets are not included
in purchases a/c. when these goods or materials are returned back
then they are Purchase returns also called as Return Outwards. This
amount is deducted from total Purchases. If there are many purchase
returns then a separate book known as Return Outwards book is
maintained.
3) Wages
It means remuneration paid to direct workers and called as direct
wages. These workers are engaged in production of goods and
therefore written on debit side of Trading Account. Indirect wages are
paid to other persons employed and written in Profit & Loss A/c.
4) Carriage or Freight Inwards
These are the expenses incurred to bring the goods or materials from
the godown or place of purchase and make them available for use.
They are written on debit side of Trading A/c. however, if carriage or
freight charges are incurred on any asset, then it should be added to
the cost of asset and not debited to Trading A/c.
5) Power and Fuel
Fuel used for manufacturing process like, use of boiler or electricity
consumed on manufacturing, then all the expenses are written on debit
side of Trading A/c.
6) Factory expenses
All factory expenses like, electricity consumed for providing light in
factory premises or for running of machines or fans, rent paid for
factory premises, payment of municipal taxes of factory, water charges
etc. should be debited to Trading A/c. The above expenses shall be
apportioned or grouped as
(i) cost of materials consumed;
(ii) manufacturing wages; and
(iii) other manufacturing expenses
7) Sales and Sales returns
All sale of goods are included in Sales A/c and written on credit side of
Trading A/c. However, sale of assets are not included in the above

158
account. When goods sold to a customer are return by him because of
any defect in those goods or for any other reason, they are called as
Sales returns or Returns Inward. Sales Returns account show a debit
balance. They are reduced from total Sales and net sales amount is
entered. If there are many sales returns then a separate book is
maintained for recording these returns, which is called as Sales
Returns Book.
8) Closing Stock
Closing stock is the stock of finished goods unsold, at the end of the
year. Closing Stock is shown on the credit side of Trading A/c. The
other effect of Closing stock is that it is shown on asset side of the
Balance Sheet. To correctly ascertain the gross profit, the closing stock
must be properly taken and valued. To ascertain the value of closing
stock, it is necessary to make a complete quantitative inventory of all
items. The valuation principle is cost or market price whichever is less.
Closing Stock can be of three types of items; finished goods, work-in-
progress and raw materials and stores. The valuation principle applies
to all the three types of goods.
9) Sales Tax
Sales Tax is an indirect tax in the sense that it is collected by the seller
from the customers and deposited with the government as per the
requirements of Sales Tax Act. Sales Tax is generally deducted from
gross sales and sales tax liability is shown as current liability in the
Balance Sheet.

Illustration
The following is the information gathered from the books of Mr.Maniram
for the year ended 31st March 2002. Prepare Trading A/c from the
following information.
Particulars Amount
1) Stock on 01st April 2001 10000
2) Purchases 44700
3) Purchase Returns 1270
4) Sales 65800

159
5) Sales Returns 5210
6) Wages 4600
7) Carriage Inward 1200
8) Power and lighting 7560
9) Stock on 31st March 2002 12700

Solution:
In the books of Mr.Maniram
Trading Account for the year ended 31st March 2002
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock 10000 By Sales 65800
To Purchases 44700 (-) Sales 5210 60590
(-) Purchase 1270 43430 Returns
Returns By Closing Stock 12700
To Wages 4600
To Carriage Inward 1200
To Power & lighting 7560
To Gross Profit 6500
transferred to
Profit & Loss A/c
73290 73290

Profit and Loss Account

This account is prepared to calculate the net profit or loss of the
business. All indirect expenses and indirect incomes are written in this
account. Gross profit or gross loss is transferred to this account from
Trading A/c. This forms the first item of Profit and loss account. After all
the expenses and losses and incomes and gains are recorded, Profit
and Loss A/c is closed. The difference between income and expenses
is net profit or net loss. If the credit side is more than the debit side the
difference is net profit and if the debit side is more than the credit side
the difference is net loss. The Profit and Loss A/c appears as follows:
Profit & Loss Account for the year ending
Dr. Cr.
Particulars Amount Particulars Amount
To Gross Loss By Gross Profit

160
To Salaries By Discount
To Rent, rates & taxes By Interest
To Postage & Telegram By Commission
To Printing & Stationery By Rent
To Office expenses By Sundry Incomes
To Insurance By Net Loss transferred
To Audit Fees to Capital A/c
To Taxes
To Interest
To Depreciation
To Bad debts
To Net Profit
transferred to
Capital A/c

The above list of items is only illustrative and not exhaustive. There are
many other items, which are included in Profit & Loss A/c but not
shown in the above table. These are some of the few important items,
which always form part of Profit & loss A/c
It is important to understand which expenses are to be written in Profit
& loss A/c and which are not to be written. If you are able to distinguish
between these expenses correctly then it is easy to form Profit & Loss
Account. Assets and Personal expenses are not written in this account,
but only revenue expenses and losses, that too only those relating to
the current year are debited.
It is better to write all the items in a specific format, which would help
the user to understand Profit & Loss A/c clearly. Therefore items
should be according to various functions like administrative, selling and
distribution and financing.

Few other Items to be considered:

1) Income Tax
Income tax is an expense in the case of companies, but is a personal
expenditure for proprietors. It is therefore debited to Capital A/c and not
Profit & Loss A/c. The tax is calculated on the income of the proprietor
or partnership firm before considering such tax. So income tax is not an
allowable expenditure.
2) Discount received and allowed

161
Discount is of two types :- 1) Trade discount and 2) Cash discount. We
have seen the difference between the two and their treatment in the
earlier chapter. Discount received is in the mature of interest received
and discount allowed is in the nature of interest paid. Therefore,
discount received being a gain is credited to Profit & Loss A/c while
discount allowed being a loss is debited to Profit & Loss A/c.
3) Drawings
Drawings are withdrawals by the proprietor or partners of a partnership
firm for their personal use. Drawings are not expenses for the firm, and
therefore should not be debited to Profit & Loss A/c. Drawings are
debited to Capital A/c.
4) Bad Debts
When some amount is receivable from a customer, he becomes our
debtor. When he does not pay the amount due and the said amount is
not recoverable, it is said to be bad debts. It is a loss to the firm and
therefore should be debited to Profit & Loss A/c. the entry to be passed
is
Bad Debts A/c ……………..Dr.
To Debtor’s A/c (Name)
If afterwards the amount is recovered, it should be treated as a gain
and should be credited to Bad debts Recovered A/c and not to Party
A/c. It is finally entered on the credit side of Profit & Loss A/c. When it
is feared that some amount due from customers will not be recovered,
then such loss should be recognised early by reducing the current
year’s profit and writing the amount in a special account called as
“Provision for Bad and Doubtful Debts”. The entry is
Profit & Loss A/c ………………………..Dr.
To Provision for Bad and Doubtful debts A/c
The account of the customer is not affected till the amount is actually
written off as bad debts.
5) Depreciation
Depreciation is an item of loss. Depreciation is to be written on the
debit side of Profit and Loss A/c. If Manufacturing A/c is prepared,

162
depreciation on assets used for factory are transferred to debit side of
Manufacturing A/c.

Illustration:
From the following information of Mr.Kedarnath for the year ended 31 st
March 1999, prepare Trading and Profit & Loss A/c.
Opening Stock 8000 Office expenses 4200
Purchases 40500 Wages 5400
Return Inwards 1500 Printing & Stationery 1600
Sales 76820 Postage & Telegram 840
Return Outwards 3420 Vehicle expenses 2560
Carriage Outward 2100 Interest paid on loan 400
Carriage Inward 800 Rent paid 7400
Discount received 2860 Salaries 6290
Discount allowed 4210 Closing Stock 10000
Solution:
In the books of Mr.Kedarnath
Trading Account for the year ended 31st March 1999
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock 8000 By Sales 76820
To Purchases 40500 (-) Return 1500 75320
(-) Return 3420 36080 Inwards
Outwards By Closing Stock 10000
To Carriage Inward 800
To Wages 5400
To Gross Profit tr.to 35040
Profit & Loss A/c
Total 85320 Total 85320

Profit & Loss Account for the year ended 31st March 1999
Dr. Cr.
Particulars Amount Particulars Amount
To Carriage Outward 2100 By Gross Profit 35040
To Discount Allowed 4210 transferred from
To Office expenses 4200 Trading A/c
To Printing & Stationery 1600 By Discount Received 2860
To Postage & Telegram 840
To Vehicle expenses 2560
To Interest paid on loan 400
To Rent paid 7400
To Salaries 6290

163
To Net Profit transferred 8300
to Capital A/c
Total 37900 Total 37900

Balance Sheet
Balance Sheet is defined as a statement, which sets out the assets and
liabilities of a firm or an institution as at a certain date. So, it not an
account but is a statement, which shows the financial position of the
business on a particular date. Balance sheet records the Assets and
liabilities of the business. Assets are recorded on the right hand side
and liabilities & capital on the left hand side. All personal and real
accounts appear in the Balance Sheet. Since even a single transaction
will make a difference to some of the assets or liabilities, the balance
sheet is true only at a particular point of time. So from the balance
sheet we can infer that
Total Assets = Capital + Liabilities, or
Capital = Total Assets – Liabilities
The specimen Balance Sheet is shown below:
Balance Sheet of XYZ as on
Liabilities Amount Assets Amount
Capital Goodwill
(-) Drawings Fixed Assets
Land & Building
Loans Plant & Machinery
Current Liabilities Current Assets
Outstanding expenses Cash in hand & bank
Creditors Debtors
Bills Payable Bills Receivable
Bank Overdraft Closing Stock
Prepaid expenses
Investments

Some of the characteristics of a Balance Sheet are as follows:

1) It is prepared at a particular date and not for the period of time.
2) It is prepared only after preparation of Profit & loss A/c. It cannot on
its own show the real financial position of the business.

164
3) Since Capital always equals the difference between assets and
liabilities, the total of both the sides of balance sheet must be equal.
If the total is not the same, then it is certain that there is some error
in the books of accounts.
4) The Assets are classified into three types 1) Fixed Assets, 2)
Current Assets and 3) Fictitious Assets depending upon the nature
of the asset. Assets, which remain in the business for a long period
of time, are classified as fixed assets. Assets, which are kept in the
business for a short period which is not more than a year, are liquid
assets and therefore classified as current assets. Cash is the most
liquid asset. Assets, which can be quickly and easily be converted
into cash, are called as liquid assets. Fictitious Assets as the name
suggests are not real assets but they are expenses of the business
of unusual nature.
Illustration
Following is the Trial balance of Mr.Vikas for the year ended 31 st March
2000. Prepare his Trading and Profit & Loss A/c and Balance sheet
Trial Balance
Particulars Debit Credit
Stock as on 01st April 1999 15000
Purchases 78600
Return Inwards 4650
Carriage Inward 7640
Sales 148600
Return Outwards 2480
Salary 12600
Printing & Stationery 5890
Plant & Machinery 170000
Debtors 14200
Creditors 31500
Capital 150000
Cash in hand & at bank 24000
Total 332580 332580
Note:
Stock as on 31st March 2000 is valued at 25000

Solution:
In the books of Mr.Vikas

165
 Trading and Profit & Loss A/c for the year ended 31 st March 2000
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock 15000 By Sales 148600
To Purchases 78600 (-) Returns 4650 143950
(-) Returns 2480 76120 By Closing Stock 25000
To Carriage Inward 7640
To Gross Profit c/d 70190
168950 168950
To Salary 12600 By Gross Profit b/d 70190
To Printing & Stationery 5890
To Net profit transferred 51700
to Capital A/c
Total 70190 Total 70190

Balance Sheet as at 31st March 2000

Liabilities Amount Assets Amount
Capital 150000 Plant & Machinery 170000
Net Profit 51700 Debtors 14200
Closing Stock 25000
Creditors 31500 Cash in hand & at bank 24000

Total 233200 Total 233200

Illustration
Following is the Trial balance of Mr.XYZ for the year ended 31 st March
2001. Prepare Final Accounts
Trial Balance
Particulars Debit Credit
Stock as on 01st April 2000 17500
Purchases 180730
Return Inwards 7990
Carriage Inward 4500
Carriage Outward 1280
Sales 259600
Return Outwards 3820
Salary 36400
Advertising 5000
Printing & Stationery 7620

166
Insurance 6210
Plant & Machinery 80000
Land & Building 62000
Debtors 48000
Creditors 48740
Capital 100000
Commission received 47450
Interest received 10200
Rent paid 24000
Cash in hand 5500
Bank balance 18600
Interest paid on bank overdraft 1680
Total 488410 488410
Adjustments:
1) Closing Stock is valued at Rs.12300
2) Depreciation provided @ 10% on Plant & Machinery
3) Provide 5% on Debtors for doubtful debts
4) Outstanding salary is Rs.3600
Solution:
In the books of Mr.XYZ
Trading and Profit & Loss A/c for the year ended 31 st March 2001
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock 17500 By Sales 259600
To Purchases 180730 (-) Returns 7990 251610
(-) Returns 3820 176910 By Closing Stock 12300
To Carriage Inward 4500
To Gross Profit c/d 65000
263910 263910

To Salary 36400 By Gross Profit b/d 65000

(+) Outstanding 3600 40000 By Commission recd. 47450
To Printing & Stationery 7620 By Interest received 10200
To Insurance 6210
To Advertising 5000
To Carriage Outward 1280
To Rent Paid 24000
To Interest on bank OD 1680
To R.D.D. 2400
To Depreciation on
Plant & Machinery 8000
To Net profit transferred 26460
to Capital A/c
Total 122650 Total 122650

167
 Balance Sheet as at 31st March 2001
Liabilities Amount Assets Amount
Capital 100000 Land & Building 62000
(+) Net Profit 26460 126460 Plant & Machinery
80000
Bank Overdraft 18600 (-) Depre @ 10% 8000 72000
Creditors 48740 Debtors 48000
Salary Outstanding 3600 (-) RDD @ 5% 2400 45600
Closing Stock 12300
Cash in hand 5500

Total 197400 Total 197400

Illustration
Following is the Trial balance of Mr.Kumar for the year ended 31 st
March 2002. Prepare Final Accounts
Trial Balance
Particulars Debit Credit
12 % Investments 35000
Stock as on 01st April 2001 30400
Purchases 98700
Sales 207600
Carriage Inward 2900
Carriage Outward 5600
Salary 19600
Vehicle expenses 8400
Printing & Stationery 6870
Insurance on machinery 8420
Plant & Machinery 70000
Furniture & Fixtures 18000
Vehicles 25000
Debtors 36000
Creditors 46700
Capital 125000
Commission received 5400
Loan 16000
Rent paid 12000
Cash in hand 2500

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Bank balance 24000
Interest on bank 2690
Total 403390 403390

Adjustments:
1) Closing Stock is valued at Rs.22420
2) Depreciation provided @ 10% on Plant & Machinery, @ 5% on
Vehicles and @ 2.5% on Furniture & fixtures
3) Provide 5% on Debtors for doubtful debts
4) Outstanding salary is Rs.4800
5) Investment are purchased on 01/10/2001
6) Provide interest on loan at 18% p.a.

Solution:
In the books of Mr.Kumar
Trading and Profit & Loss A/c for the year ended 31st March 2002
Particulars Amount Particulars Amount
To Opening Stock 30400 By Sales 207600
To Purchases 98700 (-) Returns 207600
(-) Returns 98700 By Closing Stock 22420

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To Carriage Inward 2900
To Gross Profit c/d 98020
230020 230020

To Salary 19600 By Gross Profit b/d 98020

(+) Outstanding 4800 24400 By Commission recd. 5400
To Printing & Stationery 6870 By Interest on bank 2690
To Insurance on machinery 8420 By O/s Interest on 2100
Investments
To Carriage Outward 5600
To Rent Paid 12000
To Vehicle expenses 8400
To R.D.D. 1800
To Outstanding Int.on loan 2880
To Depreciation on
Furniture & fixtures 450
Plant & Machinery 7000
Vehicles 1250
To Net profit transferred 29140
to Capital A/c
Total 108210 Total 108210

Balance Sheet as at 31st March 2002

Liabilities Amount Assets Amount
Capital 125000 Furniture & Fix. 18000
(+) Net Profit 29140 154140 (-) Depre @ 2.5% 450 17550

Plant & Mach. 70000

Creditors 46700 (-) Depre @ 10% 7000 63000
Salary Outstanding 4800 Debtors 36000
Loan 16000 (-) RDD @ 5% 1800 34200
(+) O/s Int.on loan 2880 18880 Vehicles 25000
(-)Depre @5% 1250 23750
Closing Stock 22420
Cash in hand 2500
Cash at bank 24000
12 % Investments 35000
O/s Int. on Investment 2100
Total 224520 Total 224520
Notes:

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Interest on Investment is outstanding at 12 % p.a. for 6 months, since
investment is done on 01/10/2001. Therefore
Rs.35000 X 12 X 1 = Rs.2100
100 2
Illustration
Following is the Trial balance of Mr.Sudesh for the year ended 31 st
March 1999. Prepare Final Accounts
Trial Balance
Particulars Debit Credit
Building 65000
Stock as on 01st April 1998 27800
Purchases 249800
Purchase Returns 3210
Sales 419600
Sales Returns 7860
Wages 20600
Carriage Outward 7450
Salary for 11 months 27500
Vehicle expenses 16540
Repairs & Maintenance 7640
Printing & Stationery 7920
R.D.D. 7500
Insurance on machinery 3250
Plant & Machinery 49800
Loose Tools 12800
Vehicles 36500
Debtors 58000
Creditors 46650
Capital 150000
Commission received 3860
Loan 40000
Rent paid 36000
Cash in hand 4770
Bank balance 32860
Interest on bank 1270
Total 672090 672090
Adjustments:
1) Closing Stock is valued at Rs.40200
2) Depreciation provided @ 10% on Building, 10% on Plant &
Machinery @ 20% on Vehicles and 25% on Loose tools
3) Provide 5% on Debtors for doubtful debts
4) Insurance prepaid Rs.1200
5) Goods distributed as free samples Rs.10000

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6) Provide interest on loan at 12% p.a.
7) Goods of Rs. 4200 purchased & recd on 31/3/1999 and included in
closing stock but the entry is not passed in the purchase book
8) Commission is accrued and due Rs.840
9) Manager is to be given 5% commission on Sales
10) Wages are outstanding Rs.3600
Solution:
In the books of Mr.Sudesh
Trading and Profit & Loss A/c for the year ended 31 st March 1999
Particulars Amount Particulars Amount
To Opening Stock 27800 By Sales 419600
To Purchases 249800 (-) Returns 7860 411740
(-) Returns 3210 By Free samples 10000
(+) Unrecorded purc. 4200 250790 By Closing Stock 40200
To Wages 20600
(+) Outstanding 3600 24200
To Gross Profit c/d 159150
461940 461940
To Salary 27500 By Gross Profit b/d 159150
(+) Outstanding 2500 30000 By Comm. recd. 3860
To Printing & Stationery 7920 (+) Accured & due 840 4700
To Insurance 3250 By Interest on bank 1270
(-) Prepaid 1200 2050 By RDD 7500
To Carriage Outward 7450 (-) RDD New 2900 4600
To Repairs & Maintenance 7640
To Rent Paid 36000
To Vehicle expenses 16540
To Free Samples 10000
To Outstanding Int.on loan 4800
To Manager's Commission 20587
To Depreciation on
Building 6500
Loose Tools 3200
Plant & Machinery 4980
Vehicles 7300
To Net profit transferred 4753
to Capital A/c
Total 169720 Total 169720

Balance Sheet as at 31st March 1999

Liabilities Amount Assets Amount
Capital 150000 Building 65000
(+) Net Profit 4753 154753 (-) Depre @10 % 6500 58500
Loose Tools 12800
Creditors 46650 (-) Depre @25% 3200 9600

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(+) Unrecorded 4200 50850 Plant & 49800
purchases Machinery
(-) Depre @ 10% 4980 44820
Loan 40000 Debtors 58000
(+) O/s Int.on loan 4800 44800 (-) RDD @ 5% 2900 55100
Vehicles 36500
Outstanding wages 3600 (-) Depre @ 20% 7300 29200
Outstanding Salary 2500 Closing Stock 40200
Outstanding Manager's 20587 Cash in hand 4770
Comm.
Cash at bank 32860
Prepaid Insurance 1200
Comm.Accrued & Due 840
Total 277090 Total 277090

Questions:
(1) What do you understand by Final Accounts?
(2) Which statements are prepared at the time of preparation of Final
Accounts?
(3) What is a Balance Sheet? What are the items included in Balance
Sheet?
(4) How are assets classified at the time of preparation of Final
Accounts?
(5) What is a Trading Account? Explain a few items that are included in
trading account.
(6) State the financial statements or accounts in which the following
items will appear while preparing final accounts.
1) Printing & Stationery
2) Drawings
3) Commission received
4) Bad debts
5) Returns Inwards
6) Sales
7) Closing Stock
8) Goodwill
9) Outstanding expenses
10)Carriage Inwards

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 11) Electricity expenses
12)Creditors
13)Income Tax
14)Patents & Copyrights
15)Prepaid expenses
(7) Following is the Trial balance of Mr.Kishan as on 31 st March 2003.
Prepare Final Accounts
Trial balance
Particulars Debit Credit
Capital 75000
Carriage Outward 5200
Purchases 84000
Purchase Returns 2840
Wages 12400
Debtors 42100
Creditors 36860
Plant & Machinery 48000
Electricity expenses 8760
Salary 27900
Furniture & fixtures 16000
Stock as on 01st April 2002 8400
Rent paid 18000
Cash in hand 5700
Bank balance 14680
Interest on bank 1280
General expenses 6210
Sales 187800
Sales Returns 6430
Total 303780 303780

Adjustments:
1) Closing Stock is valued at Rs.10400
2) Depreciation is provided on Plant & Machinery @ 15% and
Furniture & Fixtures @ 10 %
3) Write off Rs.2100 as doubtful debts from Debtors

(8) Following if the Trial Balance of Mr.P for the year ended 31-03-2000
Trial Balance
Particulars Debit Credit
Capital 90000
Bills Payable 9300
Return Outwards 3800

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Sales 105800
Creditors 20400
Commission 1800
Outstanding expenses 3700
Discount received 500
Plant & Machinery 34300
Return Inwards 3300
Purchases 55300
Patents 6800
Insurance 2900
Opening Stock 22100
Miscellaneous expenses 1600
Wages 22300
Discount Allowed 1400
Loose tools 3800
Furniture & fixture 2500
Repairs & Maintenance 1700
Debtors 30000
Postage & Telegram 400
Royalties on Production 1800
Royalties on Sales 2000
Cash 400
Salary 22300
Bills Receivable 20400
Total 235300 235300

Adjustments:
(i) Closing Stock is valued at Rs.24900
(ii) Depreciate Plant & Machinery at 10 %, Furniture at 10 % and
Patents at 20 %
(iii) Loose Tools are revalued at Rs.3500
(iv) Commission received in advance is Rs.800
(v) Insurance includes Rs.1800 paid on life policy of Mr.P
(vi) Postage includes unused stamps of Rs.50
(vii) Goods of Rs.1500 were distributed as free samples.
Prepare Final Accounts from the above information.

(9) Following is the Trial Balance of Mr.Bhandari for the year ended 31 st
March 1998. Prepare Final Accounts.
Trial Balance
Particulars Debit Credit
Loan on mortgage of machinery 25000

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Creditors 15000
Sales 126800
Capital 100000
Outstanding expenses 5300
Opening Stock 10500
Debtors 13000
Repairs to machinery 1400
Purchases 51000
Carriage Inward 2000
Machinery 30000
Installation cost of machinery 5000
Vehicles 30000
Vehicle expenses 5800
Vehicle Repairs & Taxes 4700
Furniture 10000
Salaries 15200
Wages 18400
Cash 600
Commission 3700
Prepaid expenses 1300
Rent & Taxes 4700
Bad Debts 1200
Land & Buildings 63600
Total 272100 272100

Adjustments:
(i) Closing Stock is valued at Rs.18500
(ii) Depreciate Machinery at 10%, Furniture at 5% and Vehicles at
20%
(iii) A part of the building is sub-let and its rent of Rs.5000 is
receivable
(iv) 6 Months interest is due on loan @ 12 % p.a.
(v) Goods of Rs.2400 were stolen from the godown but no entry is
passed till now.
(vi) Goods of Rs.4000 were distributed as free samples
(vii) Provide 5% on debtors for doubtful debts.
(10) Following is the Trial Balance of Mr. Mahajan for the year ended
31st March 2000. Prepare Final Accounts
Trial Balance
Particulars Debit Credit
Sales 95300
Interest on Investments 400

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Capital 90000
Creditors 20100
Depreciation fund on : Machinery 2000
Furniture 1800
General Reserve 18000
Carriage Inward 1900
10 % Investments ( Face value Rs.15000 18900
purchased on 01/10/1999 )
Debtors 30500
Purchases 41300
Suspense A/c 3400
Wages 14000
Salaries 9800
Machinery 20000
Furniture 10000
Bad Debts 3200
Opening Stock 21300
Drawings 14000
Office expenses 2300
Rent & Taxes 4500
Stationery 2200
Godown expenses 1900
Cash 1200
Electricity charges 4300
Bills Receivable 22900
Total 227600 227600

Adjustments:
(i) Closing Stock is valued at Rs.32000
(ii) Commission of Rs.2500 is earned but not received
(iii) Salary includes an advance to worker Rs.1500
(iv) Depreciate Plant & Machinery at 10% and Furniture at 20%
(v) Transfer Rs.4000 to General Reserve
(vi) Outstanding wages are Rs.2100 and Outstanding rent is
Rs.1000
(vii) Provide 5% on debtors for doubtful debts

(11) Fill in the blanks

a) _______________ shows financial position of the business on a
particular date.

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 b) Discount received is transferred to ____________ side of
___________ account but discount allowed is transferred to
___________ side of ____________ account.
c) Personal and Real accounts are transferred to _____________.
d) Capital expenditure is shown on ___________ side of
______________.
e) Capital = _____________ - _______________.

(12) State whether the following statements are true or false

a) Prepaid expenses is an asset.
b) Selling expenses are transferred to Trading Account.
c) Direct expenses are transferred to Trading Account and indirect
expenses are transferred to Profit & Loss Account.
d) Drawings is a nominal account
e) Depreciation is a reduction in the value of an asset and therefor
shown on liabilities side of Balance Sheet
f) Manufacturing Account is sometimes prepared in place of Profit
& Loss Account.
g) All nominal accounts are transferred to Trading Account.

(13) State in which financial statements or accounts, the following

items are posted
a) Interest allowed
b) Taxes paid in advance
c) Prepaid Insurance
d) Income Tax
e) Outstanding Wages
f) Sundries
g) Loose Tools
h) Bank Overdraft
i) Printing & Stationery
j) Purchases
k) Reserve for doubtful debts

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 l) Commission received

(14) Classify the following assets into Fixed assets, Current assets
and fictitious assets
a) Furniture & Fixtures
b) Debtors
c) Goodwill
d) Building
e) Patents & Copyrights
f) Preliminary expenses
g) Vehicles
h) Stock in trade
i) Premises
j) Cash
k) Bills Receivable
l) Bank balance

(XIII) Management Accounting

Accounting has been a function of organised society throughout

history. Accounting means the recording, calculating, reporting and
interpreting all the financial statements of an entity. The branches of
accounting are financial accounting and management accounting.
Financial Accounting revolves around maintenance of books of
accounts, recording all the financial events in an organisation and
using these statements for further analysis. Management Accounting
uses the same data that is gathered for financial accounting, but also
takes data from other sources and applies certain techniques for
providing information to the managers to help them in their work of

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planning, decision making and control. The emergence of Management
Accounting is basically from Cost Accounting. This is another branch of
accounting. The distinction between these different terms of accounting
is not clear cut. All these terms are related to each other at some or the
other point.
Management cannot avoid decision making. Even to decide not to do
anything in a particular situation is a decision and requires almost the
same inputs. A good management decision must be both effective and
efficient. Cost accounting is the source that provides knowledge to take
effective and efficient decisions for cost control, ascertainment of
profitability and reporting. So, Cost accounting is the process of
accounting for cost. This process begins with recording of income and
expenditure and ends with preparation of statistical data. The primary
objective of cost accounting includes controlling cost, stimulating cost
consciousness, ascertaining product unit cost and determining profit or
loss for various processes, products, services and inventory valuation.
Cost Accounting helps to give cost information in such a way that
management is given a clear indication of their economic performance
and the direction in which they must move in order to improve their
economic efficiency. The analysis by cost accountant of the financial
information of the entity is very good for the management. The Cost
accountant presents the data in such a way that it immediately attracts
the attention of the management towards the area where corrective
action is called for. The data is basically presented in statistical terms,
which helps the management in comparing the current years
performance with earlier years or with other entities in the same field or
with the industry as a whole.
Management accounting is nowhere been defined. But management
accounting can be explained as, the process of identification,
measurement, accumulation, analysis, preparation, interpretation and
communication of information by the management to plan evaluate and
control within an organisation and to assure use of accountability for its
resources. Management accounting involves application of appropriate
techniques and concepts, which help management in establishing a

180
plan for reasonable economic objectives. The data used in
management accountancy should serve the purpose that it is intended
for. A management accountant accumulates and analyses the available
data and presents it in relation to specific problems, decisions and day-
to-day task of management. He reviews all the decisions and analyses
from management’s point of view to determine how these decisions
and analysis contribute to overall organisational objective. The scope
of management accounting is broader than the scope of cost
accounting. In cost accounting, the emphasis is on cost. Management
accountancy uses the information available through financial
accounting and cost accounting in addition to other modern
management techniques for efficient operation of a company.
There is a growing awareness that simply providing managers with
information is not sufficient. Managers have difficulties interpreting
accounting information due to lack of knowledge of accountancy. It is
said that accountancy is a science, but it is not a perfect science. There
are no fixed theories. The dimensions of accountancy go on increasing
with the development of new techniques. All the three branches of
accountancy i.e. Financial Accounting, Management Accounting and
Cost Accounting are interrelated are in no way independent of each
other. A change in single transaction changes all the information
gathered under all these different methods. So, the management
should be well equipped to handle all the branches of accountancy so
as to take appropriate and correct decisions for the benefit of the
organisation. Manager or a management accountant should have basic
knowledge of financial accounting, then only he can make further
calculations under management accounting. In this book, we have
made an attempt to explain the basics of financial accounting, and thus
make the base of accountancy strong.
The tasks of management accounting vary from enterprise to
enterprise, according to the organisational structure and requirements
set by top management. Some of the principle tasks of management
accounting are:

181
1) Planning – short term, medium and long term plan – prepare three
to five year outline budgets – administer annual budgets – develop
cost and other financial information system to monitor
achievements in realising plans.
2) Control – measure the results of costs, sales, etc. – prepare cost,
sales and budget reports – give reports to managers for analysis –
follow up reports with advice
3) Decision making – provide information for decisions – provide
advice and participate in the decision process where multi-function
management is acceptable.
4) Performance evaluation – to compare performances & procedures
of various departments, personnel and top management with each
other and also periodically – circulate, explain and follow up
performance reports
5) Capital projects – participate in planning capital programmes
regarding raising and timing of capital funds – reconcile the capital
programme with corporate plans – prepare detailed cash-flow
budgets for capital funding and expenditure – monitor the progress
of actual expenses and receipts against budget.
6) Other roles – management accountants may take additional tasks –
e.g. economic and strategic reviews or management objective
programmes.
Financial and Management Accounting
Financial Accounting and Management Accounting both deal with
economic events. Both deal with revenues and expenses, assets,
liabilities and cash flow. The information required for each of them is in
quantification terms. The basic difference between the two is that the
results of both the statements are intended for different audiences.
Financial Accounting is concerned with the provision of
information to investors, suppliers, lenders, government etc. All these
people are external to the organisation. In financial accounting costs
are usually classified by their nature i.e. salary, material, conveyance,
advertisement, repairs, telephone, electricity, fuels etc. or by the
function of the expense i.e. cost of goods sold, administrative expenses

182
etc. Financial Accounting provides general purpose financial
statements. They tend to concentrate almost exclusively on the results
of past decisions, although their preparation does involve judgements
about the future by management.
Management Accounting uses more sophisticated cost
classifications, based on behaviour of costs i.e. costs that change
when activity levels vary, or based on controllability of costs i.e.
differentiating between managerial responsibilities for costs, or based
on variability of costs i.e. depending upon the decisions that managers
take. Management accounting provides reports, which are specifically
designed for a particular user or a particular decision. So the reports
generated under management accounting are tailor made with
reference to specific situation. The reports generated under financial
accounting are of standard format and are not changed frequently
except for a major change. Management Accounting concentrates on
what is likely to happen in the future, although their analysis of the
future is largely based on the past. It exists to serve managers in the
differing functional areas of enterprises. Management Accounting
obviously applies to business firms seeking to maximise profits and
achieve other economic goals.

Objectives of Management Accounting

1) Management accounting should be related to the planning functions
of the managers. This involves goal identification, planning for
optimal resource flows and their measurement.
2) Management accounting should be related to organizational
problem areas. This includes
(i) relating the structure of the firm to its goals
(ii) installing and maintaining an effective communication and
reporting system
(iii) measuring existing resource uses, discovering exceptional
performance and identifying casual factors of such
exceptions.

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3) Management accounting should be related to the management
control function. This includes
(i) determining economic characteristics of appropriate
performance areas which are significant in terms of overall
goals
(ii) helping to motivate individual performances through a
realistic communication of performance information in
relation to goals
(iii) highlighting performance measures indicating goals within
identifiable performance and responsibility areas
4) To help development of management systems relating to various
functions, products, projects or other operations. This involves
(i) measurement of relevant cost input and revenue or statistical
measures of output
(ii) communication of appropriate data, of essentially economic
character to critical personnel on a timely basis.

There are number of branches of management like personnel,

marketing, quality, production, purchase etc. In fact each function of
any commercial organisation requires different management
technique. However irrespective of the branch of management the
cost involved will always remain a major point. If a decision is to be
taken whether continuing a particular management function is worth
while or not one has to take into economic aspect in to
consideration. Therefore student of management ought to have
basic knowledge of book keeping and accountancy. The student
who desires to make career in financial management not only shall
have proficiency in accountancy but also ought to know the
management accountancy.

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Management Accounting though of recent origin is very complicated
subject. The subject is evolving and tries to address the ever-
changing economic and financial situations. However I must add
that what sound foundation is to a building, basic concepts of book-
keeping and accountancy are to management accounting. If one
lacks the basic knowledge more often he is likely to make wrong
assessments. His decisions based on wrong interpretations are
likely to be very costly for any commercial establishment. Since this
book on concepts and basic accountancy is meant for first year
students of management, I have added this chapter in this book so
as to make them aware of the object and usefulness of
management accounting. As you master the subject of
accountancy, understanding management accounting will be easier.
Hence my advice to student is “learn the basics thoroughly and then
move forward.”

185