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Definition and Explanation of Cash Book:

Learning Objectives:

1. Define and explain cash book. 2. How a cash book is balanced. 3. Prepare a format of the simple cash book.

Cash book is a book of original entry in which transactions relating only to cash receipts and payments are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash book. The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial balance and the balance sheet.

Vouchers:
For Every entry made in the cash book there must be a proper voucher. Vouchers are documents containing evidence of payment and receipts. When money is received generally a printed receipt is issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts are called debit vouchers, and they support the entries appearing on the debit side of the cash book. Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the number of the vouchers are noted against the respective entries. A column is provided on either side of the cash book for this purpose.

Balancing Cash Book:


The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side by "To balance brought down" to start the next period. As one cannot pay more than what he actually receives, the cash book recording cash only can never show a credit balance.

Format:
The following is the simple format of a cash book:

Date

Particulars

L.F.

Amount

Date

Particulars

L.F.

Amount

Single Column Cash Book:


Learning Objectives:

1. Define and explain single column cash book. 2. Prepare a single column cash book.

Definition and Explanation:


Single column cash book records only cash receipts and payments. It has only one money column on each of the debit and credit sides of the cash book. All the cash receipts are entered on the debit side and the cash payments on the credit side. While writing a single column cash book the following points should be kept in mind:

1. The pages of the cash book are vertically divided into two equal parts. The left hand 2. 3. 4. 5. 6.
side is for recording receipts and the right hand side is for recording payments. Being the cash book with the balance brought forward from the preceding period or with what we start. It appears at the top of the left side as "To Balance" or "To Capital" in case of a new business. Record the transactions in order of date. If any amount of cash is received on an account, the name of that account is entered in the particulars column by the word "To" on the left hand side of the cash book. If any amount is paid on account, the name of the account is written in the particulars column by the word "By" on the right hand side of the cash book. It should be balanced at the end of a given period.

Posting:
The balance at the beginning of the period is not posted but other entries appearing on the debit side of the cash book are posted to the credit of the respective accounts in the ledger, and the entries appearing on the credit side of the cash book are posted to the debit of the proper accounts in the ledger.

Format of the Single Column Cash Book:

Following is the format of the single column cash book: Date Particulars L.F. Amount Date Particulars L.F. Amount

Example:
Write the following transactions in the simple cash book and post into the ledger: 1991 Jan. 1 Cash in hand " 6 Purchased goods for cash 15,000 2,000 3,000 1,000 4,000 60 1,000 2,000

" 16 Received from Akbar " 18 Paid to Babar " 20 Cash sales " 25 Paid for stationary " 30 Paid for salaries " 31 Purchased office furniture

Solution:
Cash Book Date 1991 Jan. 1 To Balance b/d 16 To Akbar 20 To sales a/c 15,000 3,000 4,000 Jan. 6 By Purchases a/c 18 By Babar 25 By stationary 30 By Salaries a/c 2,000 1,000 60 1,000 Particulars L.F. Amount Date Particulars L.F. Amount

31 By Furniture a/c 22,000 By Balance c/d

2,000 15,940

To Balance b/d

15,940 22,000

Two Column Cash Book/Double Column Cash Book:


Learning Objectives:

1. Define and explain a two/double column cash book. 2. Prepare a two column cash book. 3. What is the difference between a single column cash book and a double column cash
book?

Definition and Explanation:


A double column cash book or two column cash book is one which consists of two separate columns on the debit side as well as credit side for recording cash and discount. In many concerns it is customary for the trader to allow or to receive small allowance off or against the dues. These allowances are made for prompt settlement of accounts. In certain business almost all receipts or payments are accompanied by such discounts and in order to avoid unnecessary postings separate columns in the cash book are introduced to record the discounts received or allowed. These discount columns are memorandum columns only. They do not form the discount account. The discount column on the debit side of the cash book will record discounts allowed and that on the credit side discounts received.

Posting:
The cash columns will be posted in the same way as single column cash book. But as regards discount column, each item of discount allowed (Dr. side of the cash book) will be posted to the credit of the respective personal accounts. Similarly each item of discount received will be posted to the debit of the respective personal account. Total of the discount column on the debit side of the cash book will be posted to the debit side of the discount account in the ledger and the total of discount column on the credit side of the cash book on the credit side of the discount account. The discount columns are not balanced like cash column of the tow column cash book.

Format of the Double Column Cash Book:


Debit Side Credit Side

Date

Particulars

V.N. L.F. Discount

Cash

Date

Particulars

V.N. L.F. Discount

Cash

Example of Two Column Cash Book:


From the following transactions write up a two column cash book and post into ledger: 1991 Jan. 1 Cash in hand $2,000 " 7 " 12 " 15 " 20 " 25 " 27 " 28 " 31 Received from Riaz & Co. $200; discount allowed $10 Cash sales $1,000 Paid Zahoor Sons $500; discount received $15 Purchased goods for cash $300 Received from Salman $500; discount allowed $15 Paid Hussan & Sons $300. Bought furniture for cash $100 Paid rent $100

Solution: Cash Book


Debit Side
Date 1991 Jan.1 To " 7 To " 12 To " 25 To Particulars V.N. L.F. Discount Cash Date 1991 Jan.5 By " 20 By " 27 By " 28 " 31 By By By Particulars

Credit Side
V.N. L.F. Discount Cash

Balance b/d Riaz & Co. Sales a/c Salman

10 15

2,000 200 1,000 500

Zahoor & Sons purchase a/c Hussan&Sons Furniture a/c Rent a/c Balance c/d

15

500 300 300 100 100 2,400

1991 Feb1 To Balance b/d

25

3,700

15

3,700

2,400

Three Column Cash Book:


Learning Objectives:

1. Define and explain a three column cash book/treble column cash book. 2. Prepare a three column cash book. 3. What is the difference between a single column cash book, a double column cash
book and a three column cash book?

Definition and Explanation:


A three column cash book or treble column cash book is one in which there are three columns on each side - debit and credit side. One is used to record cash transactions, the second is used to record bank transactions and third is used to record discount received and paid. When a trader keeps a bank account it becomes necessary to record the amounts deposited into bank and withdrawals from it. Fir this purpose one additional column is added on each side of the cash book. One of the main advantages of a three column cash book is that it is very helpful to businessmen, since it reveals the cash and bank deposits at a glance

Writing a Three column Cash Book:


Opening Balance:
Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the cash book and bank columns. If the opening balance is credit balance (overdraft) then it will be put in the credit side of the cash book in the bank column.

Cheque/Check or Cash Received:


If a cheque is received from any person and is paid into the bank on the same date it will appear on the debit side of the cash book as "To a Person". The amount will be shown in the bank column. If the cheque received is not deposited into the bank on the same date then the amount will appear in the cash column. Cash received will be recorded in the usual manner in the cash column.

Payment By Cheque/Check or Cash:

When we make payment by cheque, this will appear on the credit side "By a person" and the amount in the bank column. If the payment is made in cash it will be recorded in usual manner in the cash column.

Contra Entries:
If an amount is entered on the debit side of the cash book, and the exact amount is again entered on the credit side of the same account, it is called "contra entry". Similarly an amount entered on the credit side of an account also may have a contra entry on the debit side of the same account. Contra entries are passed when:

1. Cash is deposited into bank by office: It is payment from cash and receipt in
bank. Therefore, enter on credit side, cash column "By Bank" and on debit side bank column "To Cash". The reason for making two entries is to comply with the principle of double entry which in such transactions is completed and therefore, no posting of these items is necessary. Such entries are marked in the cash book with the letter "C" in the folio column 2. Cheque/Check is drawn for office use: It is payment by bank and receipt in cash. Therefore, enter on the debit side, cash column "To Bank" and on credit side, bank column "By Cash".

Bank Charges and Bank Interest Allowed:


Bank charges appear on the credit side, bank column "Bank Charges." Bank interest allowed appear on the debit side, bank column "To Interest".

Posting:
The method of posting three column cash book into the ledger is as follows:

1. The opening balance of cash in hand and cash at bank are not posted. 2. Contra Entries marked with "C" are not posted. 3. All other items on the debit side will be posted to the credit of respective accounts in
the ledger and all other items on the credit side will be posted to the debit of the respective accounts. 4. As regards discounts the total of the discount allowed will be posted to the debit of the discount account in the ledger and total of the discount received to the credit side of the discount account.

Format of the Three Column Cash Book:


Debit Side
Date Particulars V.N. L.F. DisCash count Bank Date Particulars

Credit Side
V.N. L.F. Discount Cash Bank

Example of Three Column Cash Book:


On January 1, 1991 Noorani Stores cash book showed debit balance of cash $1,550 and bank $13,575. During the month of January following business was transacted. 1991 Jan.1 Purchased office typewriter for cash $750; cash sales $315 " " " " " 4 6 8 Deposited cash $500 Received from A. Hussan a cheque for $2,550 in part payment of his account Paid by cheque for merchandise purchased worth $1,005 Deposited into bank the cheque received from A. Hussan.

10 Received from Hayat Khan a cheque for $775 in full settlement of his account and allowed him discount $15. 12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited in the bank. 16 Paid Salman $915 by cheque, discount received $5 27 Paid to Gulzar Ahmad by cheque $650 30 Paid salaries by cheque $1,750 Deposited into bank the cheque of Hayat Khan. Drew from bank for office use $250.

" " " "

" 31
" 31

You are required to enter the above transactions in three column cash book and balance it.

Solution: Noorani Stores Cash Book


Debit Side Credit Side

Date

Particulars

V.N. L.F.

DisCash count

Date

Particulars

V.N. L.F.

DisCash count

1991 Jan.1 To " 1 To " 3 To " 4 " 8 To " 10 To " 12 To " 31 To " 31 To To

Balance b/d Sales a/c Cash a/c A Hussan Cash Hayat Khan Sales a/c Cash Bank

C C 15 C C

1991 1,550 13,575 Jan.1 By " 3 By 1,315 " 6 500 By " 8 2,550 By " 16 2,550 " 27 By 775 " 30 By 1,500 " 31 By 775 " 31 By 250 By By

Office Equip. Bank Purchases a/c Bank Salman Gulzar Salaries a/c Bank Cash Balanced c/d

C C 5

750 500 1,005 2,550 915 650 1,750 775 250 1,865 14,330

C C

15 1991 Feb.1 To Balance b/d

6,440 18,900

6,440 18,900

1,865 14,330

Bank Reconciliation Statement:


Learning Objectives:

1. Define and explain bank reconciliation statement. 2. What are the reasons of disagreement of the balances of cash book and bank
statement.

3. Prepare the format of the statement. 4. Prepare bank reconciliation statement.

1. 2. 3. 4. 5.

Definition and explanation Causes of disagreement between cash book balance and bank statement balance How to prepare a bank reconciliation statement Example1 Example 2

Definition and Explanation:


From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer's account in the banks ledger. But the bank

balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the apparently conflicting balance do really agree.

Causes of Disagreement Between Bank statement and Cash book:


Usually the reasons for the disagreement are:

1. That our banker might have allowed interest which have not yet been entered in our 2. 3. 4. 5. 6.
cash book. That our banker might have debited our account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book. That some of the cheque which we drew and for which we credited our bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement. That some cheques or drafts which we have paid into bank for collection and for which we debited our bank account, were not realised within the due date of closing and therefore, not credited by the bank. The banker might have credited our account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book. That cheques dishonoured might have been debited in the bank statement but have not been given effect to in our books.

How to Prepare a Bank Reconciliation Statement:


To prepare the bank reconciliation statement, the following rules may be useful for the students:

1. Check the cash book receipts and payments against the bank statement. 2. Items not ticked on either side of the cash book will represent those which have not
yet passed through the bank statement.

3. Make a list of these items. 4. Items not ticked on either side of the bank statement will represent those which
have not yet been passed through the cash book. 5. Make a list of these items. 6. Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book. 7. Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways: (i) First method (Starting with the cash book balance) (ii) Second method (Starting with the bank statement balance)

First Method (Starting With the Cash Book Balance):


(a) If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement. (b) If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.

Second Method (Starting With the Bank Statement Balance):


(a) If the bank statement balance is a debit balance (an overdraft), deduct from it all
cheques, drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on the bank but not yet presented for payment. The new balance will then be agree with the balance of the cash book.

(b) If the bank statement balance is a credit balance (in favor of the depositor), add to it
all cheques, drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with the balance of the cash book.

Alternatively:
Cash book shows debit Cash book shows credit balance i.e., bank balance i.e., bank statement shows credit statement shows debit balance balance CB to BS Cheques issued but not presented in the bank Cheques paid into bank but not collected and credited by the bank Credit, if any in the bank statement Debit, if any in the bank statement Add BS to CB Less CB to BS Less BS to CB Add

Information

Less

Add

Add

Less

Add

Less

Less

Add

less

Add

Add

Less

Example 1:
On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was $1,401 and the balance as shown by the bank statement was 2,253. On checking the bank statement with the cash book it was found that a cheque for $116 paid in on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31 December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons $29, Bashir & Co. $801, MA Jalil $6, Khalid Bros., $132. Prepare a statement recording the two balances:

Solution:
Bank Reconciliation Statement on 31st December 1991

First Method: Balance as per cash book - Dr. Less cheques paid in but not collected 1,401 116

1,285 Add cheques drawn but not presented: Rashid & Sons Bashir & Co. MA Jalil Khalid Bros. 29 801 6 132 968

Balance as per bank statement - Cr.

2,253

Second Method: Balance as per bank statement - Cr. Less cheques drawn but not presented 2,253 968

1,285 Add cheques paid in but not collected 116

Balance as per cash book - Dr.

1,401

Example 2:
On 31st March, 1991 the bank statement showed the credit balance of $10,500. Cheque amounting to $2,750 were deposited into the bank but only cheque of $750 had not been cleared up to 31st March. Cheques amounting to $3,500 were issued, but cheque for $1,200 had not been presented for payment in the bank up to 31st March. Bank had given the debit of $35 for sundry charges and also bank had received directly from customers $800 and dividend of $130 up to 31st March. Find out the balance as per cash book.

Solution:
Bank Reconciliation Statement as on 31st March, 1991 Balance as per bank statement - Cr. Add cheques deposited but not credited 10,500 750

11,250 Less cheques issued but not presented 1,200

10,050 Add bank charges made by the bank 35

10,085 Less omission in cash book ($800 + $130) 930

Balance as per cash book

9,155

Format of the Petty Cash Book:

The following is the simple format of a petty cash book:

Example:
Enter the following transactions in the columnar petty cash book of a cashier who was given $100 on 1st March, 1991 on the imprest system:1991 March 2 " 2 " 3 " 3 " 8 " 12 " 18 " 23 " 25 " 26 " 28 " 29 " 30 " 31

Paid for postage stamps Paid for stationary Paid for cartage Paid for postage stamps Paid for paper Paid for cartage Paid for trips to office peons Paid for ink and nibs Paid for Tiffin to office peons Paid for train fair Paid for bus fair Envelops and letter heads Printing address on above Taxi fare to manager

8 10 4 6 1 6 2 4 6 5 4 6 4 10

Solution:
Amount Date Received $ 1991 $100 March1 " 2 " 2 " 3 " 3 " 3 " 12 " 18 " 23 " 25 " 26 " 28 " 29 " 30 " 31 " 31 100 Particulars To By By By By By By By By By By By By By By By Cash Postage Stationary Cartage Postage Paper Cartage Tip to peon Ink & nibs Tiffin to Peon train fair bus fair Envelops et. printing Taxi fair balance c/d V.N. Total Postage Printing and Stationary Cartage Traveling Expenses Misc.

8 10 4 6 1 6 2 4 6 5 4 6 4 10 24 100

8 10 6 1 6 4 5 4 6 4 2 6 4

10 10 19 8

14

25

24 76

April 1 To Balance b/d " 1 To Cash

Purchases Day Book:


Learning Objectives:

1. Define and explain purchases day book. 2. What are the ruling and posting of the purchases book? 3. Prepare a purchases day book.

Definition and Explanation:


Purchases book or purchases day book is a book of original entry maintained to record credit purchases. You must note that cash purchases will not be entered in purchases day book because entries in respect of cash purchases must have been entered in the cash book. At the end of each month, the purchases book is totaled. The total shows the total amount of goods purchased on credit. Purchases book is written up daily from the invoices received. The invoices are consecutively numbered. The invoice of each number is noted in the purchases book.

Ruling:
It is not ruled like the ordinary journal. The first column in this book is for date. In the second column, the name of the supplier or the seller, quantity of each article bought, description of the article, rate etc., are recorded. Sometimes a separate column to record the details of the transactions is added in the purchases day book. The third column is for invoice number. The fourth column is for ledger folio. The last column gives the total amount to the supplier.

Posting:
The total of the purchases book is posted to the debit of purchases account. Names of the suppliers appear in the purchases book. These parties have supplied the goods. They are, therefore, credited with the amount appearing against their respective names. The double entry will thus be completed.

Format:
The following is the format of purchases day book: Date Particulars Inv.No. L.F. Amount

Example:

From the following transactions of a trader prepare the purchases day book and post it into ledger:1991 January 5 " " " 15 25 30 Purchased goods from Rasool & Co. Purchased goods from Iqbal Bros. Purchased goods from More & Co. Purchased goods from Maqbool & Co. $ 2,400 6,000 1,500 3,000

Solution: Purchases Day Book


Date
1991 Jan. 5 Rasool & Co. Iqbal Bros. More & Co. Maqbool & Co.

Particulars

Inv.No.

L.F.

Amount
$ 2,400 6,000 1,500 3,000

Purchases Returns Book:

Definition and Explanation:


Purchases returns book is a book in which the goods returned to suppliers are recorded. It is also called returns outward book or purchases returns day book. Goods may be returned because they are of the wrong kind or not up to sample or because they are damaged etc. The ruling of this book is absolutely the same as of purchases day book. The book and entries are made therein just the same as those made in the purchases day book.

Posting:
The total of the purchases returns or returns outwards book is credited to returns outward account or purchases return account (being the goods sent out). Individual suppliers to whom goods are returned are debited (because they receive the goods).

Debit Note:

When the goods are returned to the suppliers, an intimation is sent to them through what is known as a debit note. These debit notes serve as vouchers for these entries. A debit note is a statement sent by a businessman to another person, showing the amount debited to the account of the later. Debit notes are usually serially numbered and are prepared in the same form as that of the invoice.

Form of the Debit Note:


Debit Note
Messrs Rehman & Sons Standard Road Multan Lahore, March 19, 1991.

To goods returned: 10 shirts at $12 10 pairs trousers at $20 Goods returned as per R/R No.........dated.......

120 200

E & O. E

320 For Good Luck & Co. Partner

Format of Purchases Returns Book:


The following is the format of purchases Returns book: Date Particulars D/N L.F. Amount

Example:
From the following transactions of a trader prepare the purchases returns day book and post it into ledger:1991 January 8 " 20 Karim & Sons Fazal Din & Co. $ 135 150

"

31

Saeed Bros.

250

Solution: Purchases Day Book


Date
1991 Jan. 8 " 20 " 31 Karim & Sons Fazal Din & Co. Saeed Bros.

Particulars

D/N

L.F.

Amount
$ 135 150 250 535

Purchases Returns Account


1991 Jan. 31 By Purchases as per P.R.B. $ 535

Sales Day Book:

Definition and Explanation:


A sales book is also known as sales day book is a book of original entry in which are recorded the details of credit sales made by a businessman. Total of sales book shows the total credit sales of goods during the period concerned. Usually the sales book is totaled every month. The sales day book is written up daily from the copies of invoices sent out.

Posting:
The total of the sales book is credited to sales account. Customers whose names appear in the sales book are debited with the amount appearing against their names. Double entry is thus completed.

Format of Sales Day Book:


The following is the format of sales day book: Date Particulars Inv. No. L.F. Amount

Example:
From the following transactions of a trader prepare the sales day book of M. Amin and post it into ledger:1991 January 5 " " " 10 20 31 Sold goods to ideal college Sold goods to Ahmad & Co. Credit sales to Karim Bakhish Sold goods to cheap stores $ 200 100 400 100

Solution: Purchases Day Book


Date
1991 Jan. 5 " 10 " 20 " 31 Idea college Ahmad & Co. Karim Bakhish Cheap stores

Particulars

D/N

L.F.

Amount
$ 200 100 400 100 800

Sales Account
1991 Jan. 31 By Sundries as per s/Book $ 800

Sales Returns Book:


Learning Objectives:

1. Define and explain sales return book. 2. What is a credit note? 3. Prepare a sales returns book and post into ledger.

Definition and Explanation:


Sales returns book is also called returns inwards book. It is used for recording goods returned to us by our customers. The ruling of this books is exactly as for sales day book.

Posting:
The of the returns inwards book or sales returns book is debited to returns inwards account or sales returns account. The customers who have returned the goods are credited with the amount shown against their names.

Credit Note:
Customers who return goods should be sent a credit note. It is a statement sent by a business to another person showing the amount credited to the account of the later. Credit notes are serially numbered and are similar in form to the invoices. These are usually printed in red ink. Credit notes issued to customers are vouchers for the entries appearing in the sales returns book.

Form of Credit Note:


Messrs Ideal Traders, Peshawar Cr. in account with Messrs Good luck & Co.. Lahore By 100 shirt at $2 Goods returned as per I/No.........Dated....... Dollars two hundred only E. & O. E. Lahore, March 19, 1991 200

For Good luck & Co. Partner

Format of Sales Returns Book:


The following is the format of sales returns book: Date Particulars C/N L.F. Amount

Example:
From the following transactions of a trader prepare the sales returns book and post it into ledger:1991 January 8 " " 20 31 Goods returned by Parker & Co. Goods returned by Ideal Traders $52 Allowance granted to Riaz & Co.., for short delivery $ 40 52 100

Solution: Sales Returns Book


Date
1991 Jan. 8 " 20 " 31 Parker & Co. Ideal Traders Riaz & Co.

Particulars

D/N

L.F.

Amount
$ 40 52 100

192

Bills Receivable Book:


Learning Objectives:

1. Define and explain bills receivable book. 2. Prepare a bills receivable book and post into ledger.

Definition and Explanation:

Bills receivable book is used to record the bills received from debtors. When a bill is received, details of it are recorded in the bills receivable book.

Posting:
In the ledger the account of the person from whom each bill is received is credited with the amount of that bill and the periodical total of the book is posted to the debit of bills receivable account. the bills receivable book is ruled according to the requirements of a particular account.

Format of Bills Receivable Book:


The following is the format of bills receivable book:

(1) Bills Receivable Book


No. of Bills Date From whom received Drawer Acceptor Where payable Term Due date L.F. Amount Remarks

(2) Bills Receivable Book


Date From whom received Term Due date L.F. Amount

Example:
From the following transactions of a trader prepare the bills receivable book and post it into ledger:1991 January 5 Drew a bill on Abdullah & Co. at 2 m/d for $700.

" " "

10 20 30

Acceptance received from Rahim Bakhish at 3 m/d for $ 1,000. A. Riaz gives his acceptance at 3 m/d for $800. Bill at 2 m/d for $100 is drawn on Bashir.

Solution: Bills Receivable Book


Date
1991 Jan. 5 " 10 " 20 " 30 Abdullah & Co. Rahim Bakhish A. Riaz Bashir

Particulars

Term
2 m/d 3 m/d 3 m/d 2m/d

Due Date

L.F.

Amount
$ 700 1,000 800 100

March 8 April 13 " 21 March 3

2,600

Bills Payable Book:


Learning Objectives:

1. Define and explain bills payable book. 2. Prepare a bills payable book and post into ledger.

Definition and Explanation:


Bills payable book is used to record bill accepted by us. When a bill drawn by our creditor is accepted particulars of the same are recorded in this book.

Posting:
In the ledger, the account of each person whose bill has been accepted is debited with the amount of the bill. The monthly total of the bills accepted is credited to the bills payable account ledger.

Format of Bills Receivable Book:


The following is the ruling and format of bills payable book:

(1) Bills Payable Book


Date To whom given Drawer Payee Where payable Term Due date L.F. Amount Remarks

(2) Bills Payable Book


Date To whom given Term Due date L.F. Amount

Example:
From the following transactions of a trader prepare the bills payable book and post it into ledger:1991 January 5 " " 20 30 Accepted a bill at 3 m/d for $200 drawn by Rahmat & Co. gave acceptance at 2 m/d for $500 to Kamal. Acceptance at 1 m/d for $ 500 given to Feroz & Co.

Solution: Bills Payable Book


Date
1991 Jan. 5 " 20 " 30 Rahmat & Co. Kamal Feroz & Co.

Particulars

Term
3 m/d 2 m/d 1 m/d

Due Date
April 8 March 23 " 30

L.F.

Amount
$ 200 500 500

1,200

Journal Proper:
Learning Objectives:

1. Define and explain journal proper. 2. When a journal proper is used?

Definition and Explanation:

ournal proper is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books are recorded. It is also called miscellaneous journal. The form and procedure for maintaining this journal is the same that of simple journal.

The use of journal proper is confined to record the following transactions:-

1. 2. 3. 4. 5. 6. 7.

Opening entries Closing entries Transfer entries Adjustment entries Rectification entries Entries for which there is no special journal Entries for rare transactions

Opening Entries:
When a businessman wants to open the book for a new year, it is necessary to Journalise the various assets and liabilities before the new accounts are opened in the ledger. The journal entries so passed are called "opening entries". Suppose a businessman opens a new set of books on January 1, 1991 with cash in hand $100, debtors $200, stock in trade $320, machinery $700, furniture $150, bank loan $300, capital $1,070 the respective opening entry in the journal will be: Cash Sundry debtors Stock in trade Machinery Furniture & fitting To Sundry creditors To Bank loan 100 200 320 700 200 150 300

To Capital

1,070

(Being the incorporation of assets and liabilities at this date)

Closing Entries:
When the books are balanced at the close of the accounting period with a view to paper final accounts it is necessary that balance of all the income and expenses accounts must be transferred to trading and profit and loss account. The process of transferring balances to the trading and profit and loss account at the end of year is called closing the books and entries passed at that time are called closing entries. For example on 31st December, 1991 the balance in expenses accounts are: Salary $500; rent $200; Stationary $50; legal charges $100; and income accounts are: commission received $50. These balance will be recorded in profit and loss account though the following closing entries: Profit and loss account To Salary To Rent To Stationary To Legal charges
(Being the closing entry)

850 500 200 50 100

Commission received account To Profit and loss account


(Being the closing entry)

50 50

Transfer Entries:
When accounts are transferred from one account to another for combination of allied items, it is necessary to pass transfer entry. For example, Drawings $500 is transferred from the drawings account to the capital account to find out the net capital. The transfer entry will be passed as follows: Capital Account To Drawings account
(Being the transfer entry)

500 500

Adjusting Entries:

Modification of the accounts at the end of an accounting period is called adjustments. If there be any event affecting the related period of accounts but left out of the books, the same should be incorporated in the books before the preparation of the final accounts. This is done by means of adjusting entries through the journal proper. For example at the end of the year it is found that rent $50 is outstanding. It is not recorded in the books. It will be taken into account by means of adjusting entry which is as follows: Rent account To Outstanding rent account
(Being outstanding rent recorded)

50 50

Rectification Entries:
When an error is detected in the books, the same is rectified through an entry in the journal proper; thus is called rectification entry. For example, it was detected that an expenditure of $ 100 on repair to building was charged to building account. It is corrected through the following entry in the journal proper: Building repair account To Building account 100 100

Entries of Which There is No Special Journal:


When a trader cannot record the entries in the above mentioned sub-journals, the same are entered in the journal proper. The common transactions which cannot be recorded in any of the book of original entry are: y y y y y Distribution of goods as free sample. Distribution of goods as charity. Goods destroyed by fire. Goods stolen away by employees. Exchange of one asset for another asset etc.

Entries for Rare Transactions:


In a business it may happen sometimes that transactions are usually rare. Journal proper is used for such rare transactions.

Pro-forma profit and loss account and balance sheet of a sole trader

(Name of business)
Trading and Profit and Loss Account for the year ended (date)

Sales

Less Cost of Goods Sold Opening stock Add Purchases

Less Closing stock

Gross Profit Less Expenses (list here)

Net Profit

Balance Sheet as at (date)


Cost Accumulated Depreciation Fixed Assets Net Book Value

Current Assets Stock Debtors Prepayments Bank balance Cash

Less Current Liabilities Creditors Accruals

Net current assets Total net assets

Capital Opening balance Add Net Profit

Less Drawings

Profit and Loss Account:


Learning Objectives:

1. Define and explain profit and loss account. 2. Prepare the format of profit and loss account (account form and statement form). 3. Prepare closing journal entries profit and loss account.

Definition and Explanation:


Profit and loss account is the account whereby a trader determines the net result of his business transactions. It is the account which reveals the net profit (or net loss) of the trader. The profit and loss account is opened with gross profit transferred from the trading account (or with gross loss which will be debited to profit and loss account). After this all expenses and losses (which have not been dealt in the trading account) are transferred to the debit side of the profit and loss account. If there are any incomes or gains, these will be credited to the profit and loss account. The excess of the gain over the losses is called the net profit and that of the loss over the gain is called the net loss. The account is closed by transferring the net profit or loss to capital account of the trader.

Format of the Profit and Loss Account:


Profit and Loss Account For the year ended ..............

To Gross Loss To Salaries To Rent To Rent and Rates To Discount Allowed To Commission Allowed To Insurance To Bank Charges To Legal Charges To Repairs To Advertising To Trade Expenses To Office Expenses To Bad Debts To Traveling Expenses To Etc., Etc.

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx ex. xxxx xxxx xxxx xxxx

By Gross Profit By Interest Received By Discount Received By Commission Received By Other Receipts By Etc., Etc.

xxxx xxxx xxxx xxxx xxxx xxxx

By Net Loss (transferred to capital account of the trader)

xxxx

To Net Profit (transferred to capital account of the trader)

xxxx

Closing Entries for Profit and Loss Account:


The following usual entries are passed at the end of each trading period.

1. Transferring all expenses or losses:


Profit and loss account To Each of the various expenses or losses
(This entry will close the expenses accounts)

2. Transferring all items of gains etc:


Various nominal accounts (representing gains) To Profit and loss account
(This entry will close all the remaining nominal accounts)

3. Transferring net gain to capital account:


Profit and loss account To Capital account
(This entry closes the P & L account)

4. Transferring net loss to capital account:


Capital account To Profit and loss account
(This entry closes the P & L account)

Profit and Loss Account in Statement Form/Income Statement:


Trading and profit and loss account/income statement may be prepared either in account form (T form) or in report form (statement form). Trading and profit and loss account in both the forms give the same information. The account or T form is traditional and is used widely but in recent years many business houses prefer to present the profit and loss account/income statement in the report form.

Format of Profit and Loss Account/Income Statement in Statement Form:


Trading and Profit and Loss Account/Income Statement For the year ended 31st December, 199-----

Income From Sales: Sales Less: Sales returns Sales discount ---------------------

Net Sales

------

Cost of Goods Sold: Merchandise is stock on 1st January Purchases Less: Purchases returns ----------------

Net purchases

------

Cost of goods available for sale Less merchandise in stock on 31st December

-----------

Cost of goods sold

------

GROSS PROFIT

------

Operating Expenses: Selling Expenses: Sales salaries Advertising expenses Insurance expense - selling Store supplies expenses Sundry selling expenses Total selling expenses -----General Expenses: --------------------------

Office salaries Taxes Insurance expenses general Office supplies expenses Sundry general expenses

--------------------------

Total general expenses

------

Total operating expenses

------

Net profit from operations Other Income: Rent income Other Expenses: Interest expenses -----------

------

------

NET PROFIT

------

Explanation of Certain Items of Income Statement:


Income from sales: The total of all charges to customers for goods sold, both for cash and on credit, is reported in this section. Sales returns and allowances and sales discounts are deducted from the gross amount to yield net sales. Cost of Goods Sold: Cost of goods sold refers to the cost price of goods which have been sold during a given period of time. In order to calculate the cost of goods sold we should deduct from the total cost of goods purchased the cost of goods at the end of the year. This can be explained with the help of following formula/equation:

(Opening stock + Cost of goods purchased) - Closing stock = Cost of goods sold Gross Profit: The excess of the net income from sales over the cost of goods sold is also called gross profit on sales, trading profit or gross margin. It is as gross because all other

expenses for the period must be deducted from it to obtain the net profit or net income of the business. Operating Expenses: The operating expenses also called operating costs of a business may be classified under any desired number of headings and sub-headings. In small retail business it is usually satisfactory to classify operating expenses as selling or general.

1. Expenses that are incurred directly in connection with the sale of goods are known as
selling expenses. selling expenses include salaries or the salesmen, store supplies used, depreciation of the store equipment, and advertising. 2. Expenses incurred in the general administration of the business are known as administrative expenses or general expenses. Examples of general expenses are office salaries, depreciation of equipment, and office supplied used. Net Profit from Operations: The excess of gross profit on sales over total operating expenses is called net profit or net profit from operations. If operating expenses should exceed gross profit, the excess is designated as net loss or net loss from operations. Other Income: Minor sources of income are classified as other income or non-operating income. In a merchandising business this category often include income from interest, rent, dividends and gains from the sale of fixed assets. Other Expenses: Expenses that cannot be associated definitely with the operations are identified as other expenses or non-operating expenses. Interest expense that results from financing activities and losses incurred in the disposal of fixed assets are examples of items reported in this section. The two categories of non-operating items, other income and other expenses, are offset against each other on the profit and loss account. If the total of other income exceeds the total other expenses, the excess is added to net profit from operations; if the reverse is true, the difference is subtracted from net profit from operations. Net Profit: The final figure on the profit and loss account is labeled as net profit (or net loss) or net profit carried to balance sheet. It is the net increase in capital from profit making activities.

Examples of Trading and Profit and Loss Account and Balance Sheet:
Learning Objectives:

1. Prepare trading and profit and loss account and balance sheet.

Example 1:

From the following balances extracted from the books of X & Co., prepare a trading and profit and loss account and balance sheet on 31st December, 1991. $ Stock on 1st January Bills receivables Purchases Wages Insurance Sundry debtors Carriage inwards Commission (Dr.) Interest on capital Stationary Returns inwards 11,000 4,500 39,000 2,800 700 30,000 800 800 700 450 1,300 Returns outwards Trade expenses Office fixtures Cash in hand Cash at bank Tent and taxes Carriage outwards Sales Bills payable Creditors Capital $ 500 200 1,000 500 4,750 1,100 1,450 60,000 3,000 19,650 17,900

The stock on 21st December, 1991 was valued at $25,000.

Solution:
X & Co. Trading and Profit and Loss Account For the year ended 31st December, 1991 To Opening stock To Purchases Less returns o/w 39,000 500 38,500 To Carriage inwards To Wages 800 2,800 11,000
|By

Sales

60,000 1,300 58,700

Less returns i/w

By Closing stock

25,000

| |

To Gross profit c/d

30,600

| |

83,700

| |

83,700

To Stationary To Rent and rates To Carriage outwards To Insurance To Trade expenses To Commission To Interest on capital To Net profit transferred to capital a/c

450 1,100 1,450 700 200 800 700

By Gross profit b/d

30,600

| | |

25,200
|

30,600

| |

30,600

X & Co. Balance Sheet As at 31st December, 1991 Liabilities Creditors Bills payable Capital Add Net profit 17,900 25,200 $ 19,650 3,000
| |Cash |Cash

Assets in hand at bank debtors

$ 500 4,750 30,000 4,500

|Sundry |Bill

receivable

43,100

|Stock |Office |

25,000 equipment 1,000

65,750

65,750

Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December 31, 19 .... Cash Sundry debtors Bill receivable Opening stock Building Furniture and fittings Investment (Temporary) Plant and Machinery Bills payable Sundry creditors Habib's capital Habib's drawings Sales Sales discount Purchases Freight in Purchase discount 400 30,000 1,000 500 1,000 100,000 13,000 10,000 8,500 45,000 50,000 10,000 5,000 15,500 9,000 20,000 78,200

Sales salary expenses Advertising expenses Miscellaneous sales expenses Office salary expenses Misc. general expenses Interest income Interest expenses

5,000 4,000 500 8,000 1,000 1,000 800

2,08,700

2,08,700

Closing stock on December 31, 19 ... was $10,000 Required: Prepare income statement/trading and profit and loss account and balance sheet from the above trial balance in report form.

Solution:
Habib-ur-Rehman Income Statement/Profit and Loss Account For the year ended December 31, 19..... Gross sales Less: Sales discount 100,000 400

Net Sales

99,600

Cost of Goods Sold: Opening stock Purchases Add: Freight in 30,000 1,000 45,000

31,000 Less purchase discount 500

Net purchases

30,500

Cost of goods available fort sale Less closing stock

75,500 10,000

Cost of goods sold

65,500

Gross profit

34,100

Operating Expenses: Selling Expenses: Sales salary expenses Advertising expenses Misc. selling expenses 5,000 4,000 500 9,500 General Expense: Office salaries expenses Misc. general expenses 8,000 1,000 9,000

Total operating expenses

18,500

Net profit from operations

15,600

Other Expenses and Incomes: Interest income Interest expenses 1,000 800

Net increase

200

Net income

15,800

Habib-ur-Rehman Balance Sheet As at December 31, 19..... ASSETS Current Assets: Cash Sundry debtors Bills receivable Stock on Dec. 31, 19 .. Investment 13,000 10,000 8,500 10,000 5,000

Total Current Assets Fixed Assets: Buildings Plant and Machinery Furniture and fittings 50,000 15,500 10,000

46,500

Total Fixed Assets

75,500

Total Assets

122,000

LIABILITIES: Current Liabilities: Sundry creditors Bills payable 20,000 9,000

Total Current Liabilities Fixed Liabilities: Habib's capital Net income for the year 78,200 15,800

29,000

94,000 Less: Drawings 1,000 93,000

Total Liabilities and Capital

122,000

Balance Sheet:
Learning Objectives:

1. Define and explain balance sheet. 2. How is a balance sheet prepared? 3. What are the objectives of preparing a balance sheet?

Definition and Explanation:


A balance sheet is a statement drawn up at the end of each trading period stating therein all the assets and liabilities of a business arranged in the customary order to exhibit the true and correct state of affairs of the concern as on a given date. A balance sheet is prepared from a trial balance after the balances of nominal accounts are transferred to the trading account or to the profit and loss account. The remaining balances of personal or real accounts represent either assets or liabilities at the closing date. These assets ant liabilities are shown in the balance sheet in a classified form - the assets being shown on the right side and the liabilities on the left hand side.

Grouping and Marshalling:


In a balance sheet assets and liabilities should be properly grouped and classified under appropriate headings. The individual balance of each debtor's and creditor's account need not be shown. Debtors and creditors should be shown in total. The grouping together of dissimilar assets will make the balance sheet misleading. The term marshalling means the order in which assets and liabilities are stated on the balance sheet as the balance sheet exhibits the financial position of a concern even to a non technical observer. It is of great importance that the different assets and liabilities should be arranged in the balance sheet on certain principles. The balance sheet is generally marshaled in three ways:

1. The Order of Liquidity or Realizability:


According to this method assets are entered up in the balance sheet following the order in which they can be converted into cash and the liabilities in the order in which they can be paid off. The following is a format of a balance sheet based on this order: Balance Sheet as at .......... Liabilities Rs. Assets Rs.

Bills Payable Loans Trade Creditors Capital

Cash in hand Cash at Bank Investments Bills Receivables Debtors Stock (Closing) Stores Furniture & Fixtures Plant & Machinery Land & Buildings

2. The Order of Permanence:


This method is the reverse of the first method. Under this method the assets are stated according to their permanency i.e., permanent assets are shown first and less permanent are shown one after another. Similarly the fixed liabilities are stated first and the floating liabilities follow. The following is a specimen of a balance sheet based on this order: Balance Sheet as at .......... Liabilities Capital Trade Creditors Loans Bills Payable Rs. Assets Land & Buildings Plant & Machinery Furniture & Fixtures Stores Stock (Closing) Debtors Bills Receivables Investments Cash at Bank Cash in hand Rs.

3. Mixed Order of Arrangement:


This method is the combination of the first two methods. Under this method the assets are arranged in order of realisability and liabilities are arranged in order of permanence. The first method is adopted by sol proprietors, firms and partnership concerns. The second method is adopted by companies and the third method is adopted by banking concerns.

Objectives of the Balance Sheet:

The function of the correctly prepared balance sheet is to exhibit the true and correct view of the state of affairs of any concern. In a balance sheet as the assets and liabilities are shown in details after being properly valued, a trader can judge the position of his business from it.

Classification of Assets:
The properties and possessions of a business are called assets and they are classified into the following classes:

Fixed assets:
Fixed assets are assets which are acquired not for sale but for permanent use in the business e.g., land and buildings, plant and machinery, furniture etc. These assets help the business to be carried on.

Current Assets Or Circulating Assets or Floating Assets:


Current assets denote those assets which are held for sale or to be converted into cash after some time e.g., sundry debtors. bills receivables, stock of goods etc.

Liquid Assets:
Liquid assets are those assets which are with us in cash or easily converted into cash e.g., cash in hand, cash at bank, investments etc.

Wasting Assets:
The assets that depreciate through "wear and tear", whose values expire with lapse of time or that become exhausted through working are known as wasting assets. This is a subclass of fixed assets e.g., plant machinery, mines etc.

Intangible or Fictitious Assets:


There are assets which have no physical existence. Which can neither be seen with eyes not touched with hands. These are called intangible assets or fictitious assets. They do not represent any thing valuable. They include debit balance of profit and loss account, goodwill etc.

Contingent Assets:
A contingent asset is one which comes into existence upon the happening of a certain event. If that event happens the asset becomes available, otherwise not. For example uncalled capital of a limited company.

Outstanding Assets:

Expenses paid in advance i.e., prepaid expenses, and income earned but not received are known as outstanding assets.

Classification of Liabilities:
The liabilities of a business are classified as follows:

Fixed Liabilities:
These are the liabilities which are payable immediately or in the near future. These liabilities are payable after a long period. Long term loans, capital of the proprietor are the examples of such kind of liabilities.

Current Liabilities:
These are the liabilities which are payable immediately or in the near future, such as creditors, bank loans etc.

Contingent Liabilities:
Contingent liabilities are those liabilities which arise only on the happening of some event. The event may or may not happen. Thus a contingent liability may or may not involve the payment of money. Examples of contingent liabilities are:

1. Liabilities on bills discounted: In case the bill is dishonored by the acceptor, the
holder may be called upon to pay the amount to the discounter.

2. Liability under guarantee: In case the debtor fails to fulfill his obligation, the man
who has given a guarantee or surety have to make good the loss to the creditor. 3. Liability in respect of a pending suit: A suit pending against a person in a court is a contingent liability because if the decision of the court goes against him, he may thereby become liable to pay compensation. Contingent liabilities are not recorded in the books not they are included in the balance sheet. They are simply referred to by way of foot notes on the balance sheet.

Outstanding Liabilities:
Outstanding expenses and unearned income are examples of outstanding liabilities.

Classification of Capital:
The surplus or excess of assets over liabilities is called the capital or the proprietor. Capital may be classified as follows on the basis of the capital fund invested:

Trading Capital:

The portion of the funds of a concern which is represented by the fixed and floating assets is called the trading capital

Fixed Capital:
The portion of the funds of a concern which is represented by the fixed assets is called fixed capital.

Circulating Capital:
The portion of the funds of a concern which is represented by the floating or circulating assets is called the circulating or floating capital.

Working capital:
It is the amount which remains for the working of the business after the liabilities for acquiring the fixed assets have been discharged. The excess of the floating assets over the floating liabilities is also called the working capital.

Loan Capital:
The debentures and other fixed loans are sometimes called loan capital.

Watered Capital:
It is represented by fictitious assets.

Valuation of Assets:
In order to exhibit a true financial position of a business , assets are to be valued carefully. The basis upon which the various assets are valued depends to some extent on the nature of the business and the objects for which the assets are held. The following principles, however, will serve as a valuable guide in this respect:

Fixed Assets:
Fixed assets are valued on the method "going concern." Valuation of the fixed assets must be ascertained from their capacity to earn revenue and that is shy they should be valued for the purpose of the balance sheet at cost price less depreciation which is an estimated loss arising out of the use of the fixed assets in course of the business.

Floating Assets:
Floating assets are valued on the principle of the "cost or market price whichever is less." They are valued at a figure which they are likely to realize when converted into cash and as such they are valued at cost price or market price if the same is below the cost price at the date of valuation. It is never valued at a price exceeding the cost even if the market price is in excess of the cost price at the date of such valuation.

Vertical or Report Form of Balance Sheet


ASSETS

Current Assets: Cash-in-hand Cash at bank Debtors (Accounts receivable) Bills receivable (Notes receivable) Stock in trade (Inventory) -----------------------------------------

Total Current Assets

---------

Fixed Assets: Furniture and fittings Buildings Plant and machinery Land ---------------------------------

Total Fixed Assets

---------

Total Assets

---------

Liabilities:

Current Liabilities: Creditors (Accounts payable) ---------

Bills payable (Notes payable) Bank overdraft

-----------------

Total Current Liabilities

---------

Fixed Liabilities: Long terms loans Owner's capital Add net income for the year -------------------------

---------

Total Liabilities and Capital

---------