Financial and Cost Accounting - ITM University

-
. . .
--
--
I T M
UNIVERSITY
ONLINE
- -
F i n a n c i a l a n d Cost A c c o u n t i n g
Table of Content
1.
eBook
Introduction to
Financial Accounting
1.1
Introduction
1.2
Meaning
1.3
Functions of Accounting
1.4
Branches of Accounting
1.5
Objectives of Financial Accounting
10
1.6
Bookkeeping
11
1. 7
Qualitative Characteristics of Accounting
1.8
Users of Accounting
1. 9
Basic Accounting Terms
16
1.10
Chapter Summary
19
2.
Accounting
and
6
Definition of Accounting
vs.
Accounting
Information
12
Information
Principles and Accounting
13
Equation
20
21
2. 1
Introduction
2.2
Generally Accepted
2.3
Accounting
2.4
Systems of Accounting
29
2.5
Systems of Bookkeeping
31
2.6
Accounting
32
2.7
Rules of Debit and
2.8
Chapter Summary
3.
Journal,
Accounting
P r i n c i p l e s (GAAP)
22
27
Standards
Equation
34
Credit
38
Ledger, and Trial
Balance
39
3. 1
Introduction
40
3.2
Journal
41
3.3
Rules of Debit and
3.4
Compound
3.5
Posting from Journal to Ledger
56
3.6
Trial
Balance
63
3.7
Chapter Summary
68
4.
Journal
Credit and
43
Their Implementation
Entries
51
Subsidiary Books
69
4. 1
Introduction
70
4.2
Recording
71
4.3
Cash Journal
4.4
Posting from Cash
4.5
Goods Journal
in S u b s i d i a r y Books
www.itmuniversityonline.org
72
78
Book
80
Page 2
Financial
a n d Cost A c c o u n t i n g
Table of Content
eBook
4.6
Bills Receivable and
4.7
Journal Proper
94
4.8
Chapter Summary
95
5.
Fixed
Assets and
Bills Payable Book
91
Depreciation
96
5.1
Introduction
97
5.2
Fixed Assets
98
5.3
Accounting
99
5.4
Methods of Calculating
5.5
Methods of Recording
5.6
Chapter Summary
6.
Concept of Depreciation
Depreciation
101
Depreciation
107
121
Final Accounts
122
6.1
Introduction
123
6.2
Meaning
124
6.3
Trading Account
124
6.4
Profit and
132
6.5
Ba la nee Sheet
138
6.6
Adjustment Entries of Final Accounts
142
6.7
Chapter Summary
155
7.
of Final Accounts
Loss Account
Corporate Financial Statements
156
7. 1
Introduction
157
7.2
Meaning
158
7.3
Income Statement
159
7.4
Balance Sheet
164
7.5
Interpretation of Financial
7.6
Chapter Summary
8.
and Types of Financial Statements
Statements
173
176
Cost Sheet
177
8.1
Introduction
178
8.2
Meaning
179
8.3
Elements of Cost
181
8.4
Cost Sheet
183
8.5
Chapter Summary
191
of Cost Accounting
Page 3
Table of Content
9.
eBook
Material and
Labor Costing
192
9.1
Introduction
193
9.2
Material Costing
194
9. 3
Materia
Management
203
9.4
Material
Management Techniques
204
9.5
Meaning
of Labor Costing
210
9.6
Labor Turnover
211
9.7
Methods of La bar Remuneration
212
9.8
Chapter Summary
224
and
Classification of Labor Cost
1 0 . Overheads
225
10.1
Introduction
226
10.2
Meaning
10.3
Classification of Overheads
227
10.4
Departmentalization of Overheads
231
10.5
Re-apportionment or Secondary Distribution of Overheads
235
10.6
Absorption of Factory Overhead
241
10.7
Over or Under-absorption of Overheads
243
10.8
Chapter Summary
245
and
Definition
227
Page 4
I n t r o d u c t i o n to
Financial
Accounting
0 1 . Introduction to Financial Accounting
eBook
1 . 1 Introduction
Business organizations
effectively
quick
in
efficiently.
calculations,
allotted
dealing
and
have a
if
You
you
Accounting
will
help
h e l p you analyze,
Financial
and
you
get
is
an
them
through
in
clear
your
which
understanding
business.
the everyday
As
they
of
have
finances
manager,
in a business,
to
then
activities
easily.
you
and
branch
financial
of
accounting
transactions.
categorizing
manner so
that even
common
that
deals
There
the
them
financial
people can
on
the
records
read
the
need
data
basis
to
and
be
It will
are
with
you will
financial
of
their
nature
summarized
in
is
very
lucid
the company's
be able to:
E x p l a i n the meaning
of fi n a n c i a l accounting
Define the term accounting
E x p l a i n the functions of accounting
Classify the branches of accounting
Discuss the objectives of accounting
Distinguish
List the qualitative characteristics of accounting
Explain the various qualitative characteristics of accounting
List the different users of accounting
Explain the
bookkeeping and
basic terminology used
also
recording,
infinite
understand
between
be
basis.
position quickly.
this chapter,
are
out by business enterprises.
After categorization,
After reading
also
would
subordinates on a daily
financial
and
if
you
handle
take appropriate action.
of
important.
financial
bookkeepers, owners and
summarizing
regularly
excel
important
transactions that are carried
Recording
to
have
the day-to-day activities
understand, and
accounting
classifying,
staff,
number of transactions,
should
want
the task of m a n a g i n g
with accounting
large
accounting
information
information
information
in accounting
Page 6
01.
Introduction to
Financial
1.2 Meaning and
Accounting
eBook
Definition of A c c o u n t i n g
Meaning of Accounting
Every
to
business
remember
monetary
all
is
various
generally
financial
these
transactions
expresses the
It
organization
out
transactions.
in
several
monetary
Therefore,
systematic
manner.
it
to
as
the
language
interested
parties,
of
so
is
transactions
important
Accounting
monetary transactions of a
referred
information
carries
business
business.
that
is
in
to
an
keep
can
efficient
a clear and
Accounting
they
and
take
it
is
difficult
record
of
system
crisp
all
that
manner.
communicates
appropriate
all
financial
decisions.
Definition of Accounting
According
to
accounting
manner
the
American
Institute
is "the art of recording,
and
in
terms
of
money,
of
Certified
Public
Accountants
classifying,
and
summarizing
transactions,
and
events
(AICPA),
in a significant
which
are,
in
part
at
least, of financial character, and interpreting the results thereof."
The above definition
h i g h l i g h t s the following functions of accounting:
Accounting
records and
Accounting
summarizes the results of the financial transactions.
Accounting
analyzes,
classifies monetary transactions in a systematic manner.
interprets,
and
communicates
the
financial
information
to
decision makers.
1 . 3 F u n c t i o n s of Accounting
The major functions of accounting
Recording and Classifying
Recording
and
accounting
various
refers
categories.
Similarly,
all
to
For
proper
accounts
parties for taking
the
systematic
example,
is done
and
in
the
is
all
books
fundamental
function
b u s i n e s s transactions can
of
any
be used
business related decisions.
arrangement
cash
transactions
known
and
of
recorded
are
posted
posted
transactions
in
the
cash
in the sales account.
as ' l ed g e r . ' This
interpretation of the data easy and
the
correctly maintained
sales transactions are classified
of classification
summarizing
of
Properly and
any time by the desired
Classification
Data
maintenance
system.
are as follows:
makes the
under
account.
The work
further tasks of
quick.
Page 7
01.
Introduction to Financial Accounting
eBook
Summarizing
This function
is concerned
is understandable and
income
statement,
properly and
can
with the summarization of classified
useful to the users.
and
balance
be interpreted
proper format and can
It
sheet.
is performed
Under
very easily.
be traced
by
data
in
such a way that
preparing
summarizing,
the
the trial
data
is
it
balance,
segregated
Elements of similar nature are arranged
in a
easily.
Analyzing and Interpreting

The financial
drawing
statements' data
inferences.
This
ratios are calculated
is
helps
presented
the
users
in a form,
in
which
is suitable for analyzing
decision-making.
Different
and
types of financial
to interpret the financial statements.
Communicating
It
is
the
transmission
stakeholders
of
relevant
data
for decision-making.
loss
account,
then
shared
cash
flow
externally
This
statement,
with
the
from
a company's
can
fund
be
in
flow
form
financial
of a
statement,
stakeholders
through
internally to the managers for decision-making
balance
trial
annual
statement
to
sheet,
balance
etc.
reports.
It
various
profit
The
is
also
and
data
is
shared
purpose.
Controlling
Accounting
action.
helps
helps
Thus,
in
it
in
Similarly,
the
weak
helps in controlling
creating
data to find
spotting
budgets
every
out the variances.
historical
areas
of
an
enterprise
the functional areas of an
year,
which
are
data
can
be
compared
compared
with
the
in detail
with
suggests
enterprise.
These variances are analyzed
accounting
and
the
Accounting
actual
also
accounting
to overcome them.
current
performance. Therefore, managers can take proper decisions and
remedial
data
to
analyze
control the expenses.
Evaluating
Accounting
helps
organization
organization
helps
as
gets
in fixing
in
evaluating
whole.
This
a continuous
the
profit
evaluation
feedback
and
is
on
loss
done
the
on
of
a
every
regular
improvement
department
basis;
process.
and
therefore,
Such
the
the
evaluation
the responsibility of each department.
Decision-Making
Accounting
decisions.
profitability
helps
For
the
people
example,
position,
it
internally
helps
which
can
the
be
as
well
banks
used
to
as
to
externally
decide
decide
to
the
whether
make
liquidity
to
give
certain
position
the
important
and
loan
to
Page 8
the
the
01.
Introduction to
company
or
not.
Financial
Another
decide whether to
Accounting
example
continue
the
is
of the
investment,
other company that w i l l give them
eBook
shareholders.
or
to
get
It
back
helps
the
the
funds
shareholders
and
invest
in
to
any
higher returns.
Forecasting
Accounting
data
helps
in
proper
forecasting,
which
enables
the
organization
to
take
effective future decisions.
1 . 4 Branches of Accounting
Different
needs,
Fig.
people
have
accounting
different
is
interests
classified
into
the
when
it
comes
following
to
three
accounting.
main
To
branches
fulfill
as
these
shown
in
process
of
1.4a.
Accounting
'
Financial
Cost
Management
Accounting
Accounting
Accounting
Fig.
1.4a:
Branches of Accounting
Financial
accounting
identifying,
measuring,
communicating
prime
is
objective
the
the
first
recording,
financial
of this
operations for a given
and
oldest
classifying,
transactions
branch
and
of accounting
branch
of
accounting.
summarizing,
events
is
to
to
It
analyzing,
an
entity
communicate
or
the
is
interpreting,
the
outsider.
results
of
and
The
business
period.
Cost Accounting
This
and
branch
reports
accounting
of accounting
for
records
ascertaining
the
and
cost
elements
controlling
in
costs.
detail
The
and
main
prepares
statements
objectives
of
are as follows:
To ascertain the cost of each activity,
To control and
To fix appropriate selling
To ascertain
product or process.
reduce costs.
price for products.
profit from each
product,
un i t , activity or process.
Page 9
cost
01.
eBook
To measure the efficiency of each department or profit center.
To assist in various decision-making
needs of managers.
Management Accounting
As
the
name
indicates,
this
branch
of accounting
assists
the
scheduling,
implementing, controlling, and decision-making
According
to
Chartered
"Management
concepts
assist
the
in
accounting
processing
management
making
Institute
of
is
the
and
in establishing
projected
plans for
decision
of
with
appropriate
economic
view
planning,
Accountants
reasonable
in
processes.
Management
application
historical
rational
of
management
(CIMA},
techniques
data
of
an
and
entity
to
economic objectives
towards
achieving
in
these
objectives."
Management
department
usually
accounting
managers
determine
the
helps
and
level
in
the
preparing
top
the
reports
management
of sales generated,
in
on
regular
basis
decision-making.
accounts
payable,
to
help
These
accounts
the
reports
receivables,
raw materials, etc.
In
addi t i on
to
these three
recent times-Social
Social
responsibility
created
in
an
by
human
branches of accounting,
two
more
Responsibility Accounting
and
Hu m a n
accounting
enterprise.
deals
Human
with
social
resource
costs
accounting
branches
have
Resource
incurred
measures
and
the
the
emerged
in
Accounting.
social
benefits
investments
made
resources by quantifying them.
1 . 5 Objectives of F i n a n c i a l Accounting
The three main objectives of financial accounting are as follows:
To have systematic record of financial transactions
The
first
business
nature
and
transactions
at
individual
foremost
one
place.
account.
It
objective
and
events,
This
also
of
accounting
and
to
systematic
helps
in
classify
record
the
is
to
and
have
group
helps
preparation
in
systematic
the
transactions
knowing
of
trial
record
the
and
of
Page
each
financial
statements.
all
of s i m i l a r
status
balance
of
10
To ascertain the
The
trial
trading
loss
results of economic activities
balance
and
made
and
profit
by
additional
and
the
loss
There
accounting
account.
organization
summary of a l l the assets,
To aid
eBook
This
during
information
a
liabilities, and
information
can
particular
capital owed
assist
help
period.
by the
in
the
preparation
to ascertain
The
the
balance
profit
sheet
is
of
or
a
business.
in rational decision-making
are
various
internal
users
of accounting
users
include
institutions,
information
in m a k i n g
the
and
and
external
information
present
so
on.
in the form
rational and
and
The
include
users
the
potential
objective
of a n n u a l
of
accounting
management
shareholders,
of
and
is
internal and
The
employees.
government,
accounting
reports to the
information.
to
The
creditors,
present
the
internal
external
financial
accounting
external users-to aid
them
sound decisions.
1 . 6 Bookkeeping vs. Accounting

Bookkeeping
as
synonyms
and
of each
cannot be used
The
major
Table
other.
are two different concepts,

In
true
sense,
but many
bookkeeping
is
people consider them
part
of
accountancy
and
interchangeably.
differences
between
bookkeeping
and
accountancy
are
as
mentioned
1.6a.
Sr. No.
1
accounting
Bookkeeping
Accounting
Bookkeeping is the art of recording
Accounting is the art of recording as well as
business transactions in a systematic
classifying and analyzmg of financial
manner.
transactions.
It is the primary stage, which
involves the
It starts when
bookkeeping ends.
recording of business transactions.
The only objective of bookkeeping is to
The basic objective of accountancy
record
calculate net results of the financial statement
monetary transactions.
and communicate
it
to the decision
is to
makers.
The lower-level employees perform the
Middle-level
task of bookkeeping.
accountancy.
Rules of accountancy are followed while
Along with the accountancy rules, concepts
recording the transactions.
and conventions are also followed.
Table
1.6a:
employees perform the task of
Bookkeeping vs. Accounting
Page
11
in
01.
eBook
1 . 7 Qualitative Characteristics of Accounting Information

Accounting
external
when
information
users
the
in
presented
making
accounting
rational
in
the
and
information,
form
correct
which
is
of
annual
decisions.
in
the
reports
This
form
of
helps
objective
annual
is
internal
and
satisfied
only
reports,
possesses
certain qualitative characteristics.
The five qualitative characteristics of accounting
Understandability
Relevance
Reliability
Comparability
Consistency
information are as follows:
Understandability
The
presented
Therefore,
to
accounting
accounting
maintain
policies,
accounting
information
uniformity
procedures,
information
as they are prepared
presented
and
should
in
be
easily
accounting,
and
standards
should
communicated
be
understandable
business
that
are
to
organizations
universally
understandable to
users
in
all
users.
follow
the
accepted.
the
same
The
sense
to them.
Relevance
Accounting
and
information
at the right time.
has
relevance
only
when
The information should
the decisions of the users by evaluating
it
is
available
be presented
the past,
present,
in
an
appropriate
in a manner that
it
form
influences
and future events.
Reliability
Accounting
unbiased.
information
As
information
when
it
is
users
could
that
make
lead
complete
is
communicated
decisions
to
based
inappropriate
from
all
on
to
this
the
and
should
information,
decisions.
perspectives
users
The
any
the
true
error-free
erroneous
information
shows
be
will
and
be
fair
or
biased
reliable
view
and
only
of
the
business.
Comparability
Other
than
being
users
should
firms.
Thus,
be
you
understandable,
capable
should
of
use
being
relevant,
compared
common
one year starting
from April 1 to March
be
instance
common.
For
in
India,
and
periods.
31.
reliable,
over
In
the
different
India,
the
information
periods
and
accounting
presented
with
period
different
taken
Further, the u n i t of measurement should
'rupees'
is
used
as
medium
of exchange
Page
to
also
while
12
is
in
America,
'dollars'
procedures,
and
is
an
exchange
standards
that are
medium.
laid
eBook
Similarly,
down
by
common
regulatory
accounting
authorities and
policies,
professional
bodies increase comparability.
Consistency
There are
accounts
many
in
the
accounting
methods,
help
the
period.
information and
all of them
same
accountant
presented
policies
and
There
or
methods and
to
numerous
on
the
the
be
followed
should
the
various
events
is chosen,
as
should
compare
are
depending
method
sense
conventions
users
transactions
them,
users of accounting
in
be
accounting.
methods
For
stock valuation
it should
asset or the
from
period
available
for
there
An
For
are
enterprise
nature of
this
rules,
year
of one
instance,
methods.
them.
Accounting
consistently
statements
alternative
type of an
consistently.
followed
financial
has
have to understand
to
with
treatment
numerous
may
business.
be followed consistently from one period
purpose,
practices,
year.
that
the
This
will
of
another
of
certain
depreciation
choose
any one of
However,
whatever
to another.
1 . 8 Users of A c c o u n t i n g Information
Accounting
and
information
external
of directors,
organization
institutions,
users.
The
managers,
and
is
internal
to
and
the
different
users
and
is
broadly
classified
users are within the organization and
supervisors,
include
creditors
useful
and
present
suppliers,
employees.
and
The external
potential
government
and
investors,
regulatory
as
internal
include the
users are outside the

lenders
and
authorities,
financial
customers,
and general p u b l i c .
board
Page
13
The different users of accounting
eBook
information are shown
in Fig.
1.Sa.
Users of Accountmg
Information
Fig.
Board of Directors,
The
board
Managers, and
of directors,
managers,
organization to identify
statements
and
evaluating
Supervisors
and
its strengths,
other
the
1.Sa: Users of Accounting Information
accounting
performance
of
supervisors study
weakness,
opportunities,
information
the
the financial
help
organization.
and
these
This
threats.
users
in
statements of the
in
turn,
The financial
analyzing
helps
them
and
make
appropriate decisions.
These
people
functions
like
information
towards
are
to
within
planning,
perform
growth,
to
the
organization
coordinating,
the
management
achieve
higher
and
are
involved
supervising,
functions
profitability,
and
and
in
controlling.
effectively,
to
various
to
management
Users
lead
the
create goodwill
and
require
organization
brand
name
for the organization.
Employees
Employees
rewarded
work
in
the
hard
form
in
of
organization grows and

the growth
how
they
is
and
to
the
the
Thus,
and
believe
promotions.
earns higher profits.
benefit from
related
organization
incentives
of the organization.
will
employees
an
This
their
will
organization's
Moreover,
organization.
work
only
will
when
statements to
the
Employees
bonus
the
are
one
Page
14
to
see
paid
stakeholders of the firm.
be
is directly related
look at the financial
performance.
of the
hard
happen
The employees' growth
employees
profitability
that
to
of the
01.
Introduction to
Present and
The
present
the
investors
to
entitled
the
to
to
in
Lenders and
and
long-term
the
organization.
the
eBook
financial
to
to
of
the
of the
the
other
if
the
institutions
of
aspects.
who
have a stake
investors
groups
organization.
investors,
and
potential
these
and
etc.
or
are
people
The
Further,
study
will
earns
the
those
present
there
organization
in
invest
profits
who
the
are
financial
investors
be an
higher
in
are
increase
profits
and
short-term
and
Institutions
institutions
the
repayment
the
Both
profitability
profits
individuals
debentures,
hand,
include
organizations
know
repayment,
other
the
process.
Financial
loans
statements
the
the
value
are
of shares,
the
dividends from
invests in the growth
study
shareholders
On
measure
investment
Lenders
or
the form
invest
statements
in
in
organization.
planning
Accounting
Potential Investors
the organization
of
Financial
liquidity
capacity
lenders
or
and
of the
and
the
banks
and
individuals.
solvency
These
position
organization.
financial
others
lend
people
of
If the
who
the
study
organization.
organization
institutions
the
will
be
is
fit
financial
They
also
enough
interested
in
for
lending
back to the company.
Suppliers and Creditors
The
suppliers
credit.
and
creditors
Accounting
position
of
the
supply
information
organization,
goods
enables
and
to
and
them
decide
other
to
the
materials
know
credit
the
limit
to
the
liquidity
and
organization
and
credit
on
profitability
policy
for
each
organization accordingly.
Government and
Regulatory Authorities
There
regulatory
India
are
various
(SEBI),
has m a d e
annual
tax departments, etc.

mandatory
reports
different
income
it
types
tax,
authorities
for all
at
regular
of
taxes
etc.
Thus,
listed
to
sales
Customers
or
are
end
users
Customers are concerned
on
survival
the
and
the
Securities
in financial statements.
their financial
departments
duty,
export
functioning
Exchange
of
of
the
duty,
Board
of
The SEBI
statements and
government
excise
organizations
duty,
and
levy
octroi,
to
frame
in the financial statements of the organizations.
users
who
purchase
for further
processing
with the regular supply of products, which
performance of an
tax
import
intermediate
resale.
the
interested
Various
tax,
economic policies they are interested
Public
like
companies to submit
regulate
Customers and General
India
that are
intervals.
like
in
organization.
If an
organization
is
or
is dependent
profitable and
Page
15
01.
expanding,
then
resources
will
there
also
will
be
increase.
connected
or dependent on
prosperity
and
the
small
organizations
Many
supply
small
and
to
smaller
the
public
of goods.
organizations
large organizations.
development
major decisions regarding
1.9
uninterrupted
eBook
Growth
organizations
take
the
Moreover,
are
directly
or
as
ancillary
of accounting
for
indirectly
of large organizations w i l l
working
help
the demand
units.
information
bring
Thus,
to
take
their purchases.
Basic Accounting Terms
Many
terms
meaning
are
specific
to
of commonly used
the
accounting
d i sc i p l i n e .
It
is
necessary
to
know
the
terms in accounting, which are as follows:
Business Entity /Business Enterprise/Organization

Business
entity
activities
with
with
the
name,
Tata Group,
means
as
specifically
purpose
per
the
of
law
identifiable
earning
or
Reliance Industries,
Act
and
profit.
organization,
The
prevailing
which
organization
within
the
is
carries
registered
country.
Some
on
with
or
licensed
examples
its
are
so o n .
Capital
It
is
the
investment
shareholders,
called
etc.
As
made
this
within
is
an
the
business
investment
organization
made
by
owners
as owner's capital or owned funds or net worth.
by
proprietors,
partners,
of organizations,
it
is also
For example, equity share capital.
Drawings
Drawings refer to the amount or goods withdrawn from the business
partners for their personal
to
the
business entity.
use.
Owners are
For example,
20
for his or her personal use is considered
required
lakh
to
pay
withdrawn
as drawings.
by its proprietors or
the amount of drawing
by
the
Finished
owner
of the
goods taken
back
business,
by the owner
for his or her personal use is also considered as drawings.
Goods
For
business
purchased
organizations,
for
manufacturing
producing
goods
a
refer
salable
to
the
product
business include raw materials,
items
or
that
for
finished
are
sold
re-selling
and
the
items
same.
which
are
Goods
for
products, etc.
Inventory
The value of items or goods lying
with a business organization
is termed
stock.
beginning
year
The
stock
available
at
the
of the
accounting
is
as inventory or
called
as
Page
opening
16
01.
Introduction to
stock and
stock.
stock that
Closing
example,
stock
closing
Financial
remains
of the
stock
2 0 1 3 , considering
on
April to
Closing
hand
current
March
eBook
at the end
year
31,
of accounting
becomes
2013,
will
the
which
Stock as on
1.9a:
the
2013
is termed
stock
of
opening
is shown
Opening
in
as closing
next
stock
Fig.
year.
on
For
April
1,
1.9a.
Stock as on
April
Example of Closing
year
opening
become
March as a financial year,
March 3 1 ,
Fig.
in
Accounting
1,
2013
Stock and Opening Stock
Assets
Assets are economic

fixed
assets
remain
in
and
the
organization
resources owned
current
assets.
organization
uses for
for
Fixed
enterprise.
assets
longer
its day-to-day
longer time. These assets can
by an
time.
are
be easily
assets
Current
business and
liquidated
Assets are classified
they
of
an
assets
will
or converted
organization
are
not
broadly as
the
remain
assets
in
the
that
will
that
the
firm
into cash w i t h i n
for a
a period
of one year.
Liabilities
Liabilities
are
obligations
refers to the amount to

Liability
liability
may
that
be
is
of
be
an
paid
short-term
paid
off within
enterprise
to an
towards
individual
liability
or
a year,
while
outsiders.
or entity,
long-term
which
liability.
long-term
liability
an
is outside the
Short-term
liability
for
is
the
entity
business.
liability
liability
that
is
is
the
paid
off after a year or more.
Transactions
Transaction
refers
measurable
in
something
to
terms
is also
performance
of
money.
termed
as
of
Any
an
act
action
transaction.
For
or
entering
into
of
business
deal
example,
ABC
an
or
Ltd.
agreement,
buying
or
purchased
which
selling
is
of
goods
from
They
need
suppliers worth 20,000.
Suppliers and Creditors
S u p p l i e r s are
to
know
on time.
the
those who
financial
provide
health
In these instances,
raw
materials to the organization
of the company so as to
on
credit.
decide whether they w i l l
be
suppliers become creditors for the organization.
Page
17
repaid
Revenues, Other Income, Income vs.
Revenue
is
services.
While other
like
the
interest,
amount
received
income
commission,
from the sale of goods.
or
discount,
Receipts
receivable
includes
the
rent,
from
amount
royalties,
the
sale
received
and
so
of goods or for
or
on.
receivable
It
providing
from
excludes
the
sources
income
Revenue p l u s other income is together termed as income or total
income. The actual amount received d u r i n g
Debtors and
eBook
the particular period
is called as receipt.
Receivables
Customers who have not
paid
the amount for sales immediately to the organization
and
agreed to pay on future date are known as 'debtors' in accounting terms. When an entity
draws a b i l l on debtors and
receives debtor's acceptance on the
bill,
then these debtors
become accounts receivables also called as bills receivables.
Page 18
eBook
1 . 1 0 Chapter Summary
Accounting
o
is:
The art of recording and classifying monetary transactions in a systematic

manner.
Summarizing the results of the transactions.
Analyzing, interpreting, and communicating financial information to decision

makers.
Accounting
includes the following three m a i n branches:
Cost Accounting
Management Accounting
Accounting
is
stakeholders.
form
the
language
of
business
and
it
serves
The purpose or objective of accounting
of a n n u a l
reports
is to
help
the
internal and
the
needs
information
external
of
different
presented
users to make
in the
rational
and sound decisions.
The
accounting
information
presented
in
the
form
of financial
statements
should
possess the following characteristics:
Understandability
Relevance
Reliability
Comparability
Consistency
Internal
users
managers,
External
within
the
organization
and
include
the
board
of
directors,
supervisors, and employees.
users are outside the organization
investors,
and
are
lenders
and
financial
institutions,
regulatory authorities, customers,
and
i n c l u d e the
creditors
and
present and
suppliers,
potential
government
public, etc.
Page 19
Accounting
Principles and
Accounting
Equation
Financial
02. Accounting
Equation
eBook
2 . 1 Introduction
Ms.
Celina
{1,50,000.
such as
period
She
boutique
started
keeping
of time she found

by
faults such as
furniture
further,
at
effect
is
she
records
expenses
consulted
as
price
she
purchased
of all
incurred,
deducting
followed for recording
the
activities
investment
required
related
furniture
to
made, etc.
she went through
chartered
than
entity;
equivalent
its
while
transactions
amount
recorded
in
the
cost;
from
that there were some
the transactions to avoid
exactly
accountant
her
for
business,
But after some
the accounting
records
the
she
cash
principles and
an
all
she
balance.
out
transactions
gave
The
only
you
will
Discuss accounting concepts and
List down the accounting
Explain the accounting
Discuss the rules of debit and credit
be
in the future.
standards,
accounting
point
and
of
how are
view.
be able to:
one
chartered
help you to answer all such questions.
After reading t h i s chapter,
some
standards that should
principles and
from
pointed
recorded
expenses
any confusion
books
who
but after one year she recorded
recording
the question arises, what are the accounting
chapter w i l l
the
the furniture at cost,
rather
business
accountant also explained
the
which
some a m b i g u i t y when
market
herself
Now,
the
i n i t i a l l y she recorded
considering
that
for
her.
investigate
the
purchase of furniture,
prepared
To
started
conventions
standards
equation
Page 2 1
This
02. Accounting
Equation
2 . 2 G e n e r a l l y Accepted A c c o u n t i n g
GAAP
includes
record
the
conduct
Each
demand
the
of
major
(SFAS)
from
In
GAAP
its
own
and
to be practiced
universally
to
to
principles are
are
followed
with
the
of one
Accounting
theory
country
Whereas
and
is
Statement
in
India,
body
of GAAP
in
or
Financial
(!CAI)
and
was
Due
to
Board
accounting
in
country.
For example,
up
of
of
authorities
set
to
set
difference
Accounting
the
is a
of another
Standard
frames
rules
accounting.
country.
which
the Accounting
Accountants of India
that
GAAP
regulatory
the
(FASB),
of
of
practices,
from
universally
conventions,
universally.
procedure
different
Board
accountants
includes
accounting
application
called
GAAP
accounting
Standard
by
accountants
local
professional
the
by
P r i n c i p l e s ( G AA P )
followed
language,
country,
control
time.
in
to
in
1973,
Standards
set
up
by
standards
by I n d i a n companies.
principles
accountants
are
pronouncements
time to
that
accounting
that
Institute of Chartered
Accounting
conduct
each
Financial
makes
the
has
implement,
USA,
of
associated
environment,
country
frame,
the
procedures
commonly
legislative
business
rules
transactions.
and
guidelines
the
eBook
can
record
the
maintain
bifurcated
classification is shown
be
defined
transactions.
the
uniformity
as accounting
in the following
as
the
As
mentioned
in
set
reporting
concepts and
of
rules,
above,
the
which
these
accounting
accounting
are
followed
rules
are
followed
information.
conventions.
by
These
The entire
diagram.
Page 22
Financial
02.
Accounting
Principles and
Accounting
Equation
eBook
Separate Entity
I
Money Measurem ent

I
Going Concern
I
r
Accounting
Accounting
Period
I
Concepts
Cost
Realization
I
Dual Aspect
Accounting
Principles
Matching
I
Conservatism
I
Consistency
I
Accounting
Conventions
'
Materiality
I
Full
Disclosure
I
Fig.
2.2.1
practices
are
known as accounting
Separate
performed
to
person
concept
from
Money
This
basis
of
states
that
pay
back
to
business
certain
assumptions
or
conditions
below.
enterprise
that of its owner or owners.
the owner.
business for his or her

required
the
concepts, w h i c h are explained
a certain amount into the business,

has
on
Entity Concept
accounting
separate
it
Principles
Accounting Concepts
Accounting
This
2.2a: Accounting
personal
It
it is considered
Similarly,
use,
it
be
means that when
regarded
as
an owner invests
as a liability for the business because
if the owner
is treated
should
as
withdraws any
liability
for owner;
money
and
from
the
the owner
is
to pay that amount back to the business.
Measurement Concept
concept
states
that
only
measured
in terms of money,
materials,
selling
finished
those
are recorded
goods,
transactions
are
in the
recorded
or
events
or
activities,
books of accounts.
in the accounting
So,
books.
which
can
purchasing
Whereas,
Page 23
be
raw
health
02. Accounting
related
factors of employees,
money,
are not recorded
which
are
Equation
important
in the accounting
but
eBook
cannot
be
measured
in
terms of
other words,
business
books.
Going Concern Concept

This concept says that
organization
change
runs
but
forever.
business
considering
allocated
throughout
this
its
agreement
follow this concept.

continuous
period
life
For
forever.
the
All
example,
which
is,
in
of
organization
end
after
in
on
exceptions to
to
the
transactions
depreciation
business
comes
life or
owner/owners
But there are some
business,
then
time
because
Another exception
losses,
has endless
of
operate
concept.
asset.
or
a
to
useful
life of the fixed
contractual
Over
continues
recorded
cover the
business organization
business
accounting
fixed
has
are
asset
endless
this concept
certain
may
period,
is
life
to
like,
any
does
not
if there are any unavoidable circumstances like
business
organization
can
cease
to
operate
at
the
management's discretion.
Accounting
This
Period Concept
concept
is
also
known
business organization
have
to
be
profit
Generally,
also
and
an
take
loss
and
life,
the
publish
their
to
and
of
12
According
accounting
study
appropriate
accounts
period
concept.
its
periodically,
accounting
prepare
accounting
to
and
periodicity
has endless
ascertained
organizations
prepare
as
months
quarterly
the
(three
at
But
months),
statements to study the periodic financial
health
though
of
business
the
followed.
concept,
or accounting
financial
Hence,
sheets
is
this
information
decisions.
balance
to
end
of
records
business
organizations
financial
business
half
year.
organizations
yearly
(six
months)
health of the organization.
Cost Concept
This
concept
cost
paid
if a
firm
books
has to
acts
that
all
to acquire it, and

buys
land
at
assets
record
as
,40
lakh
cost
but
to ,45
the transaction at ,40
basis
is
for
all
used
it is recorded
in
the
should
be
recorded
in
the
accounting
books
not at its market value at the time of recording.
its value got appreciated
acquiring
then
states
at
the
lakh, then,
lakh and
s u b s eq u e n t
of
books of accounting
and
recording
according
not at ,45
accounting
for further accounting
time
for
procedures
transaction
Furthermore,
assets.
This
like charging
the
For example,
to the cost concept,
lakh.
the
this
at
into
the
the firm
the cost also
means
that
depreciation,
not at the cost.
Page 24
the
and
Financial
02.
Accounting
Principles and
Accounting
Equation
eBook
Realization Concept
This concept
According
deals
the timing
to this concept,
considered
to
be
becomes legally
recorded
with
made
or
revenue
when
is
shou Id
so
sometimes
transferred
in which
not be considered
receive the
2012,
So,
according
the
to
parties,
transaction
Dual
the
cash
is
Mr.
revenue arises.
'Y' and
to
this
that
is,
Mr.
'Y'
concept,
a
is recorded
firm
from
seller to
advance
Revenue
to
revenue
on August
in
For example,
Mr.
is to
the
the
and
a sale is
the
to
at
on
on
time
2012
date.
of
a legal
lakh on August
September
10,
that
the
This is
only when
sells goods of 3
trade
and
or realized. The t i m i n g
recognized
on August
buyer
10,
2012.
because
both
Therefore,
this
2012.
Aspect Concept
another is credit.
then
and
be recognized
sometimes
payment
recognized
agreed
or
be
a firm
make
is
'Y'
10,
buyer,
should
is earned, occurred
received
agrees
and
it
in accounting.
when a sale is made;
This concept states that every business transaction or event

and
recognized
as the basis for the realization of revenues.
transaction or sometimes at a later date.
10,
only
being
liable to pay. This concept states that revenue
of cash flow
right to
of revenue
recognized
goods are
in the books in the period
because
period
there are
form
has been
of cash,
invested
is credited.
which
above
two
For example,
aspects of this
which
by
is
Mr.
if Mr.
transaction.
debited.
'Y',
who
'Y' starts the
Second,
example,
so according
here
and
cash
it
is
rise to
the
for
an
asset
and
is getting
business
as
this
in
amount
hence the same amount
to assets.
investment
lakh,
a capital
fundamental accounting
l i a b i l i t i e s are always equal

is
business
liability
the
one is debit
business with a capital of 1
is the owner of the business;
This d u a l aspect concept gives
states that capital
First,
has two effects;
made
Referring
by
Mr.
equation,
back to the
'Y'
is
capital,
The
primary
to the e q u a t i o n :
Assets =
Assets =
1,
The above equation
Liabilities+
00,000
is always balanced
Equities
0 +
1,
Capital
00,000
due to d u a l aspect concept.
Matching Concept
The
matching
concept
operates
motive of every business

cost
or
or expenses of the
loss d u r i n g
period,
in
association
is to earn
period
the
with
profit,
the
organization
and
with
periodicity
profit can
income
has
the
to
for that
match
concept.
be ascertained
period.
Thus,
the expenses
by
to
matching
arrive
of that
at
period
the income of that period.
Page 25
the
profit
with
02. Accounting
Equation
eBook
2.2. 2 Accounting Conventions
Other
that
part
of
form
accounting
the
principles
guidelines
for
is
accounting
preparing
conventions.
accounting
These
statements,
are
which
the
are
customs
explained
below.
Conservatism
This
concept
states,
that accounting
'anticipate
plays
it
safe
by
no
profit
but
preparing
provide
itself for the
the same t i m e it does not anticipate unexpected
Following
this concept,
provision
for
bad
the anticipated
and
statements at the cost
doubtful
for
and
possible
unexpected
losses.'
future
It
means
losses,
but
at
profits.
loss on debtors
debts,
all
the
is created
stocks
are
in
books by
recorded
in
providing
the
financial
price or market price, whichever is lower.
Consistency
According
another;
to
this
consistent
between different
balance method
forever.
accounting
accounting
accounting
for charging
disclosed
of an
should
For
should
be
example,
depreciation on fixed
not say that
If there is any effect on
adoption
practices
practices
periods.
This convention does
prohibited.
to
concept,
improved
not
followed
technique,
enable
is
one
the
to
comparison
adopting
techniques of accounting
then
period
reducing
then the same should
profit or on the financial
accounting
to
from
if a company
assets,
improved
vary
be used
should
be
position of the company due
note
to
that
effect
should
be
in the financial statements.
Materiality
According
and
to
this concept,
ignore the
an accountant should
insignificant details.
statements of an enterprise
decision-making
item
should
should
of the business.
be
regarded
knowledge of it would
The materiality
contain a l l
According
as
give
importance to only material details
concept
propounds that the financial
information that is vital and
can affect the
to American Accounting Association, "An
material
if
there
is
reason
influence the decision of an informed
to
believe
that
investor."
Full disclosure
According
to t h i s
disclose all
convention
ownership
the
is
and
concept,
information
followed
by
accounting
that can
most
management.
concepts
be
of use to the
joint-stock
Similarly,
should
all
be
honestly
prepared
and
should
stakeholders of the company.
companies
accounting
where
there
information,
is
that
diversity
is
in
This
the
important
Page 26
to
Financial
02. Accounting
the
users,
According
should
to
the
be
fully
disclosed
Companies
Act
in
the
1956,
financial statements in the prescribed
Equation
financial
all
eBook
statement
s
companies
are
or
annual
required
to
reports.
present
the
form.
2.3 A c c o u n t i n g S t a n d a r d s
Accounting
profession
standards
in
identifying,
information to users.
in
terminology,
are
standards are
accounting
body,
role.
The
revising
ASB
or
and
recording,
the
and
regulatory
and
of accounting
presentation
revised
guidelines
govern
communicating
standards
of financial
issued
that
results.
accounting
into
existence
standards
from
the
time
from
In
year
to
accounting
the
accounting
This
will
the uniformity
enable
correct
financial information.
authority.
in
the
is to bring
time to
India,
time
the
by the government,
Accounting
by the Institute of Chartered Accountants of India
came
standards issued
measuring,
and
exchange of economic and
Accounting
(ASB) constituted
policies
The ultimate aim
approach,
understanding and
written
1977
time.
At
and
it
has
present,
Standard
(!CAI)
been
there
performs this
32
and
accounting
by ASB.
Board
formulating
are
the
Page 27
02. Accounting
Following
is the list of 32 accounting
Equation
eBook
standards as on J u l y 1, 2 0 1 2 .
Number of the
Issued/Revised
Accounting
Title/Name of the Accounting Standard
Year
Standard
ASl
Issued 1979
Disclosure of accounting
AS2
Revised
1999
Valuation of inventories
AS3
Revised
1997
Cash flow statements
Revised
1995
Contingencies and events occurring after the balance
polrcies
sheet date
AS4
Revised
1997
Net profit or loss for the period,
ASS
changes in accounting
prior period items and
policies
AS6
Revised
AS7
Revised 2002
Accounting for construction contracts
Withdrawn 2003
Accounting for research and development
AS9
Issued 1985
Revenue recognition
ASlO
Issued
Accounting for fixed assets
ASll
Revised 2003
The effects of changes in foreign exchange rates
AS12
Issued 1991
Accounting for government grants
AS13
Issued
1993
Accounting for investments
AS14
Issued
1994
Accounting for amalgamations
ASlS
Revised 2005
Employee benefits
AS16
Issued 2000
Borrowing costs
AS17
Issued 2000
Segment reporting
AS18
Issued 2000
Related party disclosures
AS19
Issued 2001
Leases
AS20
Issued 2001
Earnings per share
AS21
Issued 2001
Consolidated financial statements
AS22
Issued 2001
Accounting for taxes on
Is.sued 2001
Accounting for investments in associates in consolidated
1994
Depreciation accounting
ASS
1985
AS23
income
ftnanctal statements
AS24
Issued 2002
Discontinuing operations
AS25
Issued 2002
Interim financial
AS26
Issued 2002
Intangible assets
AS27
Issued 2002
Financial
AS28
Issued 2002
Impairment of assets
AS29
Issued 2003
Provisions, contingent liebilrtres, and contingent assets
AS30
Issued 2008
Financial
instruments:
Recognition and
AS31
Issued 2008
Financial
instruments:
Presentation
AS32
Issued 2008
Financial
instruments:
Disclosures
reporting
reporting of interests in joint ventures
measurement
Note: AS30, AS31, and AS32 are not mandatory as on July 1, 2 0 1 2 .
Table
2.3a: Accounting Standards
Page 28
Financial
02. Accounting
Equation
eBook
2.4 Systems of A c c o u n t i n g
Broadly there are two systems of accounting
process. The following
diagram
that can
be used
to perform
the accounting
shows the two systems of accounting.
Systems of Accounting
Cash System
Fig.
Accrual System
2.4a: Systems of Accounting
Cash System of Accounting
Under
cash
this
system
payments
of accounting,
are
recorded
receipt or cash
payment,
accounting.
other
In
in
then
words,
transactions
the
such
books
of
which
involve
accounts.
transactions are
under
this
system
not
of
If
immediate
there
recorded
accounting
is
no
cash
receipt
immediate
under cash
no
entry
or
cash
system
is
made
of
for
payment or receipt d u e .
For
example,
hence
it
include
is
in
the
recorded
immediate
rent
paid
using
cash
10,000
cash
payment
transaction
system.
or
there
Whereas,
cash
receipt,
rent
hence
is
immediate
outstanding
it
is
not
cash
payment,
5,000
recorded
does
not
under
this
system.
Accrual System of Accounting
This
system
accounting,
receipt.
recorded
In
is
also
known
transactions
other
words,
as
are
the
mercantile
recorded
system
based
transactions
that
on
do
of
accounting.
the
not
amounts
involve
Under
due
for
immediate
this
system
payment
cash
effect
under accrual system of accounting.
Page 29
of
and
are
02. Accounting
If you
consider
the
transaction
So, t h i s transaction is recorded
Equation
'rent outstanding
5,000',
eBook
the
amount
is due
in
future.
using accrual system of accounting.
The following example will help you to understand the two systems of accounting.
Example:
an
The
books
of
amount of rent due
follows the cash

2011;
system
the transaction
X
is
paid,
close
that
on
was
of accounting,
will
the firm follows accrual
Ltd.
be recorded
December
supposed
no entry w i l l
31,
to
be
be
each
paid
year.
in
recorded
In
2011.
for
it will
record
Now
if the
is p a i d .
firm
an outstanding
in
However,
rent
in 2 0 1 1
and w i l l record a cash payment of rent in 2 0 1 2 .
2012,
rent outstanding
in 2 0 1 2 when actually the rent
system of accounting;
January
Page 30
Financial
02.
Accounting
Principles and
Accounting
Equation
eBook
2.5 Systems of Bookkeeping

As you
know,
bookkeeping
accounts.
There are two
explained
below.
deals with
recording
systems that can
the business transactions
be used
to
record
in the books of
the transactions,
which are
Systems of Bookkeeping
Single
Entry System
Fig.
Single
Double Entry System
2.Sa: Systems of Bookkeeping
Entry System
S i n g l e entry system
transactions,
system
of
accounts
hence
is an
it
is
incomplete d o u b l e entry system.
not considered
bookkeeping
are
in
maintained,
which
it
is
as
reliable
always
rule
system.
only
keeps a record
According
records of
incomplete
circumstances." A company that operates on very
It
double
to
of o n l y few
Kohler,
cash
entry,
and
"it
is a
personal
varying
with
small scale can follow this system of
bookkeeping.
Double
Double
reflects
Entry System
entry
the
system
dual
records
aspect
concept
effects of same amount-one

very
precise
and
transactions in the
the
reliable,
two-fold
of
accounting,
is debit and
so
most
effects
of
every
wherein,
the other is credit.
organizations
follow
transaction.
every
This
transaction
system
has
The double entry
system
this
recording
system
for
books of accounts.
two
Page 3 1
is
02. Accounting
2 . 6 Accounting
The
double
accounting
entry
Equation
eBook
Equation
system
of
bookkeeping
equation, which is given
can
easily
be
explained
with
the
help
of
below:
Assets = Equities
Assets
are
the
economic
the owner's capital

equation
and
resources
the
liabilities,
This equation
other
always
by
the
company,
which organization
whereas
equities
owes to others;
comprise
therefore,
this
is rewritten as follows:
Assets = Liabilities
In
owned
is based
words,
show
each
on d o u b l e entry
transaction
that amount
bookkeeping
recorded
of assets
using
is equal
to
following example w i l l help you to understand
Capital
system,
double
hence it is always balanced.
entry
the amount
accounting
of
bookkeeping
liabilities and
system
capital.
will
The
equation more clearly
Example 0 1 :
Transaction 0 1 :
Ms.
'X' started
Transaction 0 2 :
X Ltd.
X Ltd.
purchased
with capital o f , 5 , 0 0 , 0 0 0 .
furniture of , 1 , 0 0 , 0 0 0 on cash
basis.
Solution O 1:
In the first transaction, there are two aspects.
,5,00,000
paid
in
the
back to the
form
of cash.
Second,
it
First,
has
the business is receiving
capital
of , 5 , 0 0 , 0 0 0 ,
Capital and
to
be
Assets
Capital
(t)
5,00,000
Table 2.6a:
So,
has
Amount
Liabilities
(t)
01
which
owner.
Amount
Transaction
an asset of
Cash
5,00,000
Effects of Transaction 01
now the accounting equation will be:

Assets
Liabilities+
,5,00,000
,5,00,000
capital
0 + ,5,00,000
= ,5,00,000
Page 32
Financial
02.
Accounting
In
the
the
second
business
Principles and
transaction,
and
another
asset
asset
Accounting
of
of
1,00,000
1,00,000
Equation
in
in
the
the
eBook
form
form
of
of
cash
is
furniture
going
is
out
of
coming
in
the business.
Amount
Transaction
Capital and
Amount
Liabilities
Assets
(t')
No effect
02
(t')
0
Cash
(going
out)
Furniture
Table 2.6b:
Therefore, accounting
-1,00,000
+ 1,00,000
Effects of Transaction 02
equation for second
Assets ;
transaction
Liabilities+
is:
Capital
,1,00,000 - ,1,00,000 ; 0
0 ;
The net effect of both transactions will
be:
Assets Amount
Capital
+ Liabilities Amount
Transaction
(t')
(t')
01
5,00,000
5,00,000
02
1,00,000 - 1,00,000
Net effect
5,00,000
5,00,000
Table
You
can
see
assets and
in
2.6c:
Net Effect of Transaction 01 and 02
the above table that even the net effect of both
transactions equates the
equities.
Example 02:
'X' started
business with the following
transactions:
1.
Started
business with cash , 1 , 5 0 , 0 0 0
2.
Purchased
3.
Withdrew for personal use , 1 0 , 0 0 0
4.
Paid
5.
Borrowed from 'Y' ,5,000
goods on credit ,5,000
rent , 1 0 , 0 0 0
Show the above-mentioned
transactions in the accounting
equation.
Page 33
02. Accounting
Equation
eBook
Solution O 2:
Accounting
Transaction
1.
Particulars
Started
Equations
Liability
business
Capital
Cash:
1,50,000
with cash
1,50,000
Purchased
2.
Assets
goods
Creditors:
5,000
1,50,000
Cash:
on credit
1,50,000
Goods:
3.
Withdrew for
personal
Creditors:
5,000
1,40,000
Cash:
use
1,40,000
Goods:
Paid
4.
5,000
rent
Creditors:
5,000
1,30,000
5,000
Cash:
1,30,000
Goods:
5.
Borrowed from 'Y'
Creditors:
10,000
5,000
Cash:
1,30,000
1,35,000
Goods:
5,000
Table 2.6d: Solution of Example 02
2 . 7 Rules of Debit a n d Credit

The
rules
journals.
of debit
Two
and
credit
approaches
are a p p l i e d
are
commonly
accounting equation approach and
to
record
used
for
a transaction
rules
of
the other approach
debit
in
subsidiary
and
is termed
credit.
books
One
as golden
is
or
the
rules of
accounting.
2.7.1 Accounting
Equation Approach
In
the
this
approach,
modified
accounting
rules
of
debit
equation, which
Capital
and
credit
are
explained
with
reference
to
is as follows:
+ Liabilities + Income = Assets + Expenses
It can
be abbreviated
as,
C + L +
I =
A +
Page 34
the
Financial
02.
Accounting
Principles and
Accounting
Rules for recording
the transaction
The
(LHS)
the
left
hand
amount
side
on
left
using
elements
hand
side
accounting
of equation
(LHS)
Equation
are
equation approach
credit
components
eBook
of
elements,
the
equation
is:
so
is
any
decrease
debited
and
in
any
increase in the amount is credited.
Whereas,
increase
the
in
right
hand
side (RHS)
the amount on
right
elements of the equation are debit elements so,
hand
side
(RHS)
components of the equation
any
is debited
and any decrease in the amount is credited.
This can further be elaborated

Rule
If
On
1:
For Capital and
there
the
is
decrease
contrary,
if
in
through the following
rules:
Liabilities
capital
there
is
and/or
an
liabilities,
increase
in
the
then
capital
these
accounts
and/or
are
liabilities,
debited.
then
these
accounts are credited.
Rule
If
On
2:
For Income and Gains
there
the
is
decrease
contrary,
in
if there
is
the
an
income,
increase
then
in
the
its
related
income
income
then
its
account
related
is
debited.
income
account
is credited.
Rule 3:
If
For Assets
there
is
contrary,
Rule 4:
In
the
account
if
increase
in
the
assets,
then
its
related
there is decrease in the assets, then
For Expenses and

same
manner,
is debited.
i
f
its
asset
account
is
debited.
related asset account
On
the
is credited.
Losses
there
is
increase
On the contrary,
in
the
expenses,
then
its
related
if there is decrease in the expenses,
then
expense
its
related
expense account is credited.
Page 35
02. Accounting
Table 2.7a
Equation
eBook
briefs you about the rules of accounting equation approach.
LHS: C + L
RHS: A +
These are credit elements by
These are debit elements by nature.
Nature
nature.
If they
increase,
Credit them
If they increase,
Debit them
Effects
If they decrease,
Table
2 . 7 . 2 Golden
According
to
2.7. la:
Debit them
If they decrease,
Rules of Accounting
Credit them
Equation Approach
Rules of Accounting Approach
golden
rules
of
accounting,
three accounts, which are shown
the
activities
of
business
are
classified
into
in the following diagram.
Accounts
Personal Account
Real Account
N o m i n a l Account
Fig. 2 . 7 . 2 a : Classification of Accounts under Golden
Rules of Accounting
Personal Account
Personal
(like
Axis
any
includes
company),
all
and
natural
persons
representative
(like
people.
any
individual),
For
example,
any
Mr.
artificial
Mukesh
person
Ambani,
Bank, etc.
Rule of
are
account
personal
purchased
account
from
personal account,
is
debit
a supplier.
the
receiver a n d
credit
the
Here the supplier is a person,
giver.
For example,
so according
to the
goods
rule of
s u p p l i e r ' s account is credited as he or she is a giver.
Real Account
It
deals
and
with
all
types
machinery, etc.
of assets
like
furniture,
land,
cash,
debtors,
Rule for real account is debit what comes in,
bank
balance,
plant
credit what goes out.
Page 36
Financial
02.
Accounting
For
example,
according
to
Principles and
cash
the
20,000
rule
of
is
real
Accounting
paid
to
account,
the
Equation
supplier.
cash
is
going
eBook
Here
out
cash
of
the
is
real
business.
account,
Hence,
so
cash
account is credited.
Nominal Account
All
expenses,
account.
and
The
losses,
rule
of
income,
nominal
and
gains
account
is
of
the
debit
all
business
are
expenses
grouped
and
losses,
under
credit
nomina l
all
gains
income.
For example,
received
interest S,000
is an
is received;
income for the business,
'credit all g a i n s and
here interest
hence according
interest
to the rule of nominal account,
income,' interest received account is credited.
The rules of recording the transactions under golden

in the following
is a nominal account and
rules of accounting are summarized
table.
Personal A/ c
RealA/c
Nominal A/c
Natural, artificial,
All types of
All expenses,
and
assets-fixed,
losses, gains, and
representative
current, etc.
income
Scope
people
Examples
Rule
HUL, Axis Bank,
Furniture, cash,
Power, salary,
Ms.
stock,
sales,
Shikha
debtors,
Sharma, etc.
etc.
Debit: The
Debit:
receiver
comes
Credit: The giver
Credit: What
losses
goes out
Credit:
investment, etc.
What
in
Debit: All
expenses and
and
Table 2.7.2a: Golden
interest on
All gains
income
Rules of Accounting
Page 37
02. Accounting
Equation
eBook
2 . 8 Chapter S u m m a r y
Generally Accepted
Accounting
Principles (GAAP)
are followed
by accountants universally to record
Accounting
Principles
are
divided
into
includes the
rules of conduct that
the transactions.
Accounting
Concepts
and
Accounting
Conventions.
Accounting
going
concepts
concern
are
separate
concept,
accounting
concept, dual aspect concept, and
Conservatism,
entity
consistency,
concepts,
period
matching
materiality,
money
concept,
measurement
cost
concept,
concept,
realization
concept.
and
full
disclosure
are
the
accounting
conventions.
Accounting
Standards
in
are
written
accounting
profession
identifying,
accounting
information to users.
The basic accounting equation
There
are
two
approaches
for
The modified
accounting
debit
Capital + I n c o m e +
Under golden
Personal
Liabilities
account
with
all
Real account deals with all
Capital+
rules.
govern
the
communicating
the
Liabilities
One
is
the
accounting
rules of accounting.
Expenses
approach,
business activities are
categorized
as
nominal account.
natural,
artificial,
rule of personal account is debit the receiver,
credit
and
that
is:
real account, and
deals
and
guidelines
recording,
Assets=
is the golden
= Assets
rules of accounting
personal account,
equation
and
measuring,
is given as:
equation approach and the second
policies
and
representative
persons;
the
credit the giver.
types of assets fixed
as well as current assets;
the
rule
the
rule
of real account is debit what comes in, credit what goes out.
Nominal account takes care of all

pertaining
and
to the
nominal account
income, gains,
losses and
is debit a l l expenses and
expenses and
losses,
credit all
income.
Page 38
gains
J o u r n a l , Ledger,
and
Trial Balance
03. Journal, Ledger, and Trial
Balance
eBook
3 . 1 Introduction
Mr.
Piyush
kept
the
he could
After
started
records
years,
increased.
As
But
end
the
position,
This
suggested
Piyush
and
years
transactions
health and
business
usual
started
practice
year,
ago.
when
he
he
During
in
early
book.
On
stages
the
of
the
business,
basis of these
he
records,
profitability of h i s business.
to
grow,
recorded
started
all
the
number
business
ascertaining
of
transactions
transactions
the
profitability
in
the
and
also
book.
financial
lots of trouble and a m b i g u i t y .
of
huge
Mr.
that
them,
profitability
his
of the
friend,
summarized
the financial
his
because
accountant
ten
monetary
as
per
he faced
was
business
of all
understand
three
at
his
volume
Ramesh,
after
then
financial
it
of
and
recording
would
transactions.
detailed
the
have
position.
Now
him
Therefore,
Piyush
consulted
the
story.
Ramesh
transactions,
been
much
the
entire
if
he
easier
question
had
for
arises,
classified
him
how
to
to
them
ascertain
his
then
and
the
classify
and
classify,
and
summarize the transactions in terms of accounting.
In
accounting,
summarize
explained
the
there
are
standard
transactions;
techniques
namely,
which
journal,
are
ledger,
used
and
to
record,
trial
balance
which
in this chapter.
After reading
this chapter, you will
be able to:
and format of journal
Record the transactions
of ledger and
of trial balance
Prepare the trial balance on the basis of ledger accounts
in journal on the basis of accounting

how to post in
rules
ledger
Page 40
are
03. Journal,
Ledger, and Trial
Balance
eBook
3.2 Journal
Meaning
The
first
journal.
it
is
step
In
first
record.
place.
in
accounting
other words,
recorded
into
Transactions
The
process
when
recording
any
recorded
recording
the
monetary
the j o u r n a l ;
are
of
is
hence
on
the
monetary
transaction
the journal
regular
basis
transactions
and the entries made in j o u r n a l are called
transactions
in
takes
is
place
known
in
the
in
as
is
in
book
known
as
the organization
the
book
in
which
order
the journal
called
of o r i g i n a l
they
take
as journalizing
as journal entries.
Format of Journal
Following
is the format of a journal
book.
In the books of -----(Name of the Company)
(2)
Journal
Date
. . .
Particulars
L.
. . . . . . . . . (4) . . . . . . . .
(3) . . . . .
(Narration--------)
(1)
F.
Debit Amount
(5)
. . . . .
Credit Amount
(6) . . . . .
. . . . .
(7)
. . . . .
. . . . . . ( 8) . . . . . .
Total . . . . . .
Table 3.2a:
(9) . . . . . .
Format of Journal
Name of the Company
On
the
books
very
of' and
first
page
followed
transactions of ABC
If you
are
solving
of
by
Ltd.
in
the
journal,
name
of the
the journal,
problems,
and
the
to s i m p l y write 'In the books of
title
is
written
company.
then you
on
top
with
For example,
will
the
if you
write as, 'In the
name of the company
is
heading
are
'In
the
recording
the
books of ABC Ltd.'
not given,
then
you
need
.'
Journal
Below the name of the company 'Journal' is written.
Date
Date column
includes the date
which transaction
is being
on
which
the transaction
took
place and
not
the date on
recorded.
Page 4 1
Balance
eBook
Particulars
Under
the
particulars
accounts to
be debited
account which
line.
column,
and
is debited
two
aspects
credited
are
transactions,
recorded.
is written first and
The account which is debited
of
that
As a standard
is,
the
name
practice,
the
of
the
name
of
then the name of credit account on the next
includes the words ' D r . ' and
account which
is credited
starts with the prefix 'To.'

Example:
Rent A/c
Dr.
To cash
Here,
rent
account
is debited
and
cash
A/c
account
is credited.
You
need
to emphasize on
the style of writing.
After writing
brief
the entry,
summary
of the
narration
is given
transaction,
example narration will be 'Being
(denoted
which
is
by 8 in the format).
started
with
the
prefix
Narration
'Being;'
like
is the
in
this
rent p a i d . '
L. F.
L.
F.,
are
which stands for Ledger Folio,
prepared.
This column
is used
is the page number of ledger on which the accounts
only
in
the
real environment and
not d u r i n g
study or
practice.
Debit Amount
Under the debit amount column,

is written.
the
Referring
amount
of
rent
the amount
back to the above entry,

account
will
be
written
pertaining
to the account which
is debited
rent account debited to cash account;

in
debit
amount
column
in
front
of
here
'Rent
A/c. . . . . D r . '
Credit Amount
Credit amount
Refer
to
the
column
is
same entry
used
of
to
rent
write
account
the
amount
debited
to
of
the
cash
account
account,
which
here
the
is
credited.
amount of
cash account w i l l be written in credit amount column in front of 'To Cash A/c.'
Total
At the bottom of the
page,
the total of debit amount column and
credit amount column
is written.
Page 42
03. Journal,
Ledger, and Trial
Balance
eBook
3 . 3 Rules of Debit and Credit a n d T h e i r I m p l e m e n t a t i o n

Recall
the two
books
of
accounts;
accounting
3.3.1
rules of debit
they
and
are
credit,
which
accounting
are
used
equation
to
record
approach
the transaction
and
golden
in
the
rules
of
approach.
Accounting
Equation Approach
Under this approach the modified accounting

Capital
equation
is used, which
is:
+ Liabilities + Incomes= Assets + Expenses
It can be abbreviated
Table 3 . 3 . l a shows the rules of accounting
LHS: C +
as,
C +
L + I = A +
equation approach
in
RHS:
brief.
A +
These are credit elements
These are debit elements
by
by
Nature
nature.
If they
increase-Credit
nature.
If they
increase-Debit
them
them
If they decrease-Debit
If they decrease-Credit
them
them
Effects
Table 3 . 3 . l a :
The
steps
Rules of Debit and Credit Accounting
to journalize
transactions
by
using
the
Equation Approach
accounting
equation
approach
are
as
follows:
Step
1:
Identify the accounts involved
After
reading
There can
the
involved
to that transaction
been
accounts
paid
in
in
(one debit and
is called
the journal
discussed
'salaries
the
involved
be two or more than two accounts involved
accounts are
involved,
transaction,
in the transaction
entry
detail
cash
one credit)
as simple transaction,
is
in
termed
the
,50,000.'
as
later
In
this
of
the
transaction
in the transaction.
in the transaction,
and
compound
part
in
this
transaction
are
identified.
When only two
the entry
p e rt a i n i n g
when more t h a n two accounts are
entry.
Compound
chapter.
two
journal
Consider
accounts
are
the
entry
transaction,
involved
one
salaries account and other is cash account.
has
Page 43
is
03. J o u r n a l ,
Step
2:
Ledger, and Trial
Categorize
or
Balance
classify
eBook
the
accounts
involved
under
the
broad
components of accounting equation
After the accounts involved
in the transaction are identified,
them on the basis of accounting equation.

can
be
cash
capital,
,50,000,'
liability,
two
income,
asset
accounts are
it is necessary to categorize
On the basis of accounting equation, accounts
or expense.
involved
namely,
In
the
transaction,
salaries and
cash.
'salaries
paid
Out of these
in
two
accounts, salaries account is an expense and cash account is an asset.
Step
3:
Identify
the
direction
of
change
(increase
or
decrease)
in
each
component or account separately
After
categorizing
direction
the
the
of change
same
in
direction.
is,
directions,
'salaries
that
is,
because it is being
After
credit
either
increases
in
salaries
both
Sometimes
the
both
cash , 5 0 , 0 0 0 , '
is
both
increasing
it
is
time
move
increase
in
know
or
the
move
both
in
the
the opposite direction.
decreases
the accounts are

whereas
to
the components
components
another component
the
paid
in
cash
to the
direction
equation
approach
50,000,'
rule,
of change
the
accounting
equation
if expenses are
approach,
cash account w i l l be credited
in
as
salaries
which
each
briefed
cash
account,
in
account,
increasing,
be debited. The cash account, which
Step 5:
transaction,
the components
and
account
the
or
vice
moving
account
versa.
in
is
In
opposite
decreasing
paid.
of accounting
According
will
of the accounts.
is,
paid
in
Apply the rule of debit and credit for all the accounts
recognizing
' sa l a r i e s
involved
Sometimes both
one component
the example,
Step 4:
each
That
components decrease.
That
accounts
Table
which
debit
is an asset,
apply
3.3.la.
is
an
them.
rule
In
So
here
of
the
expense,
is decreasing.
is 'assets are credited
the
debit
example of
is
increasing.
salaries account
So as
per the rule of
if they are decreasing',
in this example.
Record the transaction in the journal
Finally, the transaction is recorded

For example, 'salaries paid
in the journal format.
in cash ,50,000' will be recorded
and
in the following
manner.
Page 44
the
03. Journal,
Ledger, and Trial
Balance
eBook
In the books of . . . . . .
Journal
Date
Debit Amount
Credit Amount
(')
(')
L. F.
Particulars
2012
Oct.
Salaries A/c . . . . . . . . . . . . . . . . . . . . . .
Dr.
50,000
To Cash A/c
(Being
50,000
salaries paid)
Total
Note: Assuming
50,000
the date of transaction
Table 3 . 3 . 1 b : Journal
is October 04,
Entry of Salaries
3.3.2 Golden
Rules of Accounting Approach
As
in
discussed
business
and
the
activities
previous
are
chapter,
classified
under
under
three
50,000
2012.
Paid
golden
in Cash ,50,000
rules
of
accounts-personal
accounting
account,
approach,
real
account,
nominal account.
Table
3.3.2a
accounting
will
help
you
to
recall
the
rules
of debit
and
credit
under golden
rules
approach.
Personal A/c
Scope
Examples
Real A/c
Nominal
N a t u r a l , artificial,
All types of
All expenses,
and
assets fixed,
losses, gains,
people
current, etc.
income
H UL, Axis Bank,
Furniture, cash,
Power, salary,
Ms.
stock, debtors,
sales,
etc.
investment, etc.
representative
Shikha
Sharma,
etc.
Debit:
Credit:
The receiver
The giver
Rule
Debit:
What
Debit:
All
expenses and
Credit:
losses
What
Credit:
and
Rules of Debit and Credit under Golden
and
interest on
comes in
goes out
Table 3 . 3 . 2 a :
A/c
All g a i n s
income
Rules of Accounting
Approach
Page 45
of
03. J o u r n a l ,
Ledger, and Trial
The steps to
record
Balance
eBook
the transactions under the golden
rules of accounting
approach are
as follows:
Under this approach the first step, that is,
Step 1 :
identify the accounts
involved
in the
transaction is same as in accounting equation approach.
Step 2:
After
Classify the accounts identified according to the types of accounts
identifying
the accounts involved
of accounts, that is,

'salaries
paid
account and
in
personal account,
cash
cash
50,000,'
account.
in
the transaction,
they
are classified
real account or nominal account.
you
know
that
Salaries account
is a
two
accounts
nominal
are
account
into
types
In the example,
involved-salaries
and
cash
account
is a
real account.
Step 3:
After
Apply the rule of debit and credit on the basis of type of accounts
classifying
particular
account
losses,
type
is
the
of
accounts
account
nominal
credit
all
is
applied.
account
gains and
involved,
and
the
For
rule
of
rule
of
debit
example,
in
nominal
incomes.' Whereas,
and
the
above
account
cash
credit
account
is
p e rt a i n i n g
transaction,
'debit
is a
all
real
to
the
salaries
expenses
account
and
and
the
rule applicable to the real account is 'debit what comes i n , credit what goes o u t . '
S t e p 4:
Determine the accounts to be debited and credited
Now that you

it
is time
account
and
to
have applied
determine
is an
losses,'
expense,
it
will
the rule of debit and credit according
the
accounts
so according
be debited.
Cash
to
to
be
debited
the
and
credited.
rule of nominal
is going
out
of the
to the type of account,

For example,
account,
business,
so
'debit all
as
salaries
expenses
per the
rule of
real account, 'credit what goes out,' it is credited.
Step 5:
Finally the transaction is recorded
After determining the accounts to be debited

journal
as
recorded
per
in
the
format.
journal
as
The
shown
and
transaction,
under
in journal
credited, the transaction is recorded
'salaries
accounting
paid
equation
in
cash
50,000,'
approach
will
(Refer
in
be
Table
3.3.lb).
You
can
approach
observe
and
here
golden
that,
under
both
rules of accounting
the
approaches,
approach,
that
the journal
is,
accounting
equation
entry of the transaction
remains the same.
Page 46
03. Journal,
Now
you
can
Ledger, and Trial
record
Balance
the other transactions.
eBook
Table
3.3.2b
will
help
you
in
recording
other transactions.
Sr. No.
1.
2.
3.
4.
5.
6.
7.
Accounts
Nature of
Debit or
Involved
Accounts
Credit
Transactions
Salary
paid
Interest received
Machinery sold
Machinery
Paid to
purchased
Ram
Received
from
Mahan
Cash withdrawn
by the
owner for personal use
Salary A/c
N o m i n a l A/c
Debit
Cash A/c
Real A/c
Credit
Cash A/c
Real A/c
Debit
Interest A/c
N o m i n a l A/c
Credit
Cash A/c
Real A/c
Debit
Machinery A/c
Real A/c
Credit
Machinery A/c
Real A/c
Debit
Cash A/c
Real A/c
Credit
Ram's A/c
Personal A/c
Debit
Cash A/c
Real A/c
Credit
Cash A/c
Real A/c
Debit
Mohan's A/c
Personal A/c
Credit
Drawings A/c
Personal A/c
Debit
Cash A/c
Real A/c
Credit
Table 3.3. 2b: Some Common Transactions
Page 47
the
03. J o u r n a l ,
Ledger, and Trial
Balance
eBook
3.3.3 Transactions Relating to Goods and Specific Asset
Given
below
is
list
of
transactions
different accounts that get affected
Sr.
No.
related
to
goods
and
assets,
which
explains
the
while recording different transactions.
Affected
Affected
Account 1
Account 2
Transaction Type
1.
Goods purchased
in cash
Purchase A/c
Cash A/c
2.
Goods purchased
from
Purchase A/c
Mohan's A/c
3.
Machinery purchased
from
Machinery A/c
Ravleen's A/c
4.
Machinery purchased
in cash
Machinery A/c
Cash A/c
5.
Goods sold
on cash
Cash A/c
Sales A/c
6.
Goods sold
to M e l v i n
Melvin's A/c
Sales A/c
7.
Furniture sold
in cash
Cash A/c
Furniture A/c
8.
Furniture sold
to Purnesh
Purnesh's A/c
Furniture A/c
9.
Goods returned
Mohan's A/c
Purchases Return
Mohan
Ravleen
to s u p p l i e r Mohan
A/c
10.
Goods returned
by customer Melvin
11.
Goods withdrawn
by proprietor for
Sales Return A/c
M e l v i n ' s A/c
Purchase A/c
Drawing's A/c
personal use
Table 3.3.3a:
According
to
transactions
return
t h i s analysis,
related
account,
to goods,
Transactions Relating to Goods
you
and
should
you
to
goods.
the
sales
not
can observe that,

They
return
are,
primarily
purchases
account.
Hence,
say that goods account
and Specific Asset
four accounts are affected
account,
in
the case
is affected;
name according to the type of transaction as shown
sales
you
account,
give
related
its specific
in Table 3.3.3b.
Goods are purchased
Purchases A/c
Goods are sold
Sales A/c
Goods are returned to the supplier
Purchases Returns A/c
Goods are returned from customer
Sales Returns A/c
purchases
of transactions
should
Table 3 . 3 . 3 b : Specific Terms for Goods" Accounts
in
Page 48
03. Journal,
Ledger, and Trial
Balance
eBook
Example 0 1 :
Given
below is a list of transactions related
to goods.
Record
On September 2,
2012,
goods of 50,000
On September 4,
2012,
goods purchased
On September 5,
2012,
goods worth 90,000
On September 6,
2 0 1 2 , goods worth 9,000 sold
On
September
7,
2012,
some
purchased
them
on cash from
of60,000 from
defective
sold
in the journal.
Harish
Brothers.
Sahara Traders.
for cash.
on credit to Sangeeta.
goods
worth
5,000
were
returned
to
Sahara Traders.
On September 9,
On September 10,
On
September
personal
2012,
Sangeeta
2012,
12,
returned
some of the goods of 3,000.
goods of 1 , 5 0 0 distributed as free samples.
2012,
goods
of
2,000
withdrawn
by
proprietor
use.
Page 49
for
03. J o u r n a l ,
Ledger, and Trial
Balance
eBook
Solution O 1:
In the books of
Journal
Date
2012
Sep.
Purchases A/c . . . . . . . . . . . . . . . . . . .
2
Credit
(")
(")
Dr.
50,000
To Cash A/c
(Being
Sep.
Debit
L.F.
Particulars
50,000
goods purchased
in cash)
Purchases A/c . . . . . . . . . . . . . . . . . . . .
Dr.
60,000
To Sahara Traders A/c

(Being
goods purchased
60,000
on credit
from Sahara Traders)

Sep.
Cash A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
90,000
To Sales A/c
(Being
Sep.
90,000
goods sold
in cash)
Sangeeta A/c . . . . . . . . . . . . . . . . . . . . .
Dr.
9,000
To Sales A/c
(Being
9,000
goods sold
on credit to
Sangeeta)
Sep.
Sahara Traders A/c . . . . . . . . . . . . . .
Dr.
5,000
To Purchases Returns A/c

(Goods
Sep.
returned
Sales returns A/c
5,000
to Sahara Traders)
.................
Dr.
3,000
To Sangeeta A/c
(Being
Sep.
10
goods returned
3,000
by Sangeeta)
Advertisement expenses A/c
. . . Dr.
1,500
To Purchases A/c
(Being
1,500
goods distributed
as free
samples)
Sep.
12
Drawings A/c . . . . . . . . . . . . . . . . .
Dr.
2,000
To Purchases A/c
(Being
2,000
goods withdrawn
proprietor for personal
by
use)
Total
2,20,500
2,20,500
Table 3.3.3c:
Solution of Example 01
Page 50
03. Journal,
Ledger, and Trial
Balance
eBook
3.4 C o m p o u n d J o u r n a l Entries
The journal entries discussed
one
transaction
other
is
or they
credited).
till
impact
But
several
simple
only
sometimes
particular account or of s i m i l a r
giving
now are s i m p l e journal entries
journal
two
accounts out
transactions
nature
entries;
may
be
such
on
of which
the
recorded
entries
(since they
one
same
are
is debited
date,
through
include only
relating
single entry
known
as
and
the
to
one
instead
compound
of
journal
entries.
Compound Journal Entry may be recorded
in the following three ways:
Several accounts may be debited and a particular account may be credited
For
example,
cash
received
from
Mohan
t5,000,
and
allowed
him
discount
of
tSOO.
The compound journal entry for this will be as follows:

Cash A/c
Dr.
5,000
Discount Allowed A/c
Dr.
500
To Mohan's A/c
5,500
One particular account may be debited and several accounts may be credited
For
and
example,
purchased
goods
of t40,000
Mr.
Pravin
by
paying
t25,000
in
cash
remaining on credit.
Purchases A/c
example,
Dr.
40,000
To Cash A/c
25,000
To Mr.
15,000
There may be several
For
from
Laxman
Pravin's A/c
accounts for debit as well as credit
purchased
an
existing
business
with
the
following
assets
liabilities:
Cash t5,000, Stock t l , 0 0 0 , Creditors t3,000, and
Capital t3,000.
Cash A/c
Dr.
5,000
Stock A/c
Dr.
1,000
To Creditors' A/c
3,000
To Capital A/c
3,000
Page 5 1
and
03. Journal,
Ledger, and Trial
Balance
eBook
Example 02:
Following
Record
are
them
the
transactions
of
Star
Trading
1,
for
the
month
of
October
2012.
in the journal.
Date
Oct.
H o u se
Transactions
2012
Started
business by depositing an amount of ,5,00,000
in the
bank account.
Oct.
2,
2012
Purchased
furniture worth ,80,000 from
H a r i Furniture on
credit.
Oct.
3,
2012
Goods purchased
on credit worth , 1 , 5 0 , 0 0 0 from Ashish
Traders.
Oct.
5,
2012
Cash ,60,000 withdrawn from
bank.
Oct.
9,
2012
Purchased
Oct.
12,
2012
Paid
by cheque to
Oct.
15,
2012
Sold
goods on credit to Sneha worth ,3,000.
Oct.
18,
2012
,9,000 cash withdrawn
Oct.
25,
2012
Received ,2,850 from Sneha and
stationery worth ,5,000.

Hari
Furniture ,80,000.
by the proprietor for personal use.
allowed
her a discount of
,150.
Oct.
30,
2012
Paid electricity
,12,000,
and
bill , 1 , 1 0 0 ,
telephone
b i l l ,900, salaries
rent , 1 8 , 0 0 0 .
.
Table 3.4a: Transactions under Example
02
Solution O 2:
In the books of
Journal
Date
L. F.
Particulars
Debit (t')
Credit (t')
2012
Oct.
Bank A/c . . . . . . . . . . . . . . . . . . - - - - - - - - - - - - - - - - - - - - -
Dr.
5,00,000
To Ca p i t a l A/c
(Being
capital
depositing
Oct.
introduced
the amount in
5,00,000
in
business by
bank)
Furniture A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To
(Being
Hari
Dr.
80,000
Furniture A/c
furniture purchased on credit
80,000
Page 52
03. Journal,
Ledger, and Trial
from
Oct.
Hari
Balance
eBook
Furniture)
Purchases A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
1,50,000
To Ashish Traders A/c

(Being
goods purchased
1,50,000
on credit from
Ashish Traders)
Oct.
Cash A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
60,000
To Bank A/c
(Being
Oct.
60,000
cash withdrawn from
bank)
Stationery A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
5,000
To Cash A/c
(Being
Oct.
12
Hari
5,000
purchased
stationery)
Furniture A/c . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
80,000
To Bank A/c
(Being
80,000
amount paid
to
Hari
Furniture by
cheque)
Oct.
15
Sneha A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
3,000
To Sales A/c
(Being
Oct.
18
3,000
goods sold
on credit)
Drawings A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
9,000
To Cash A/c
(Being
9,000
goods withdrawn
by the
proprietor for personal use)

Oct.
25
Cash A/c
.....................................
Discount allowed
A/c . . . . . . . . . . . . . . . . .
Dr.
2,850
Dr.
150
To Sneha A/c
(Being
cash
received
discount allowed
Oct.
30
3,000
from Sneha and
to her)
Electricity expenses A/c . . . . . . . . . . . . . . . . Dr.
1,100
Telephone expenses A/c . . . . . . . . . . . . .
Dr.
900
Salaries A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
12,000
Rent A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dr.
18,000
To Cash A/c
(Being
paid
32,000
in cash for various
expenses)
Total
9,22,000
Table 3.4b:
9,22,000
Page 53
Here
are
few
important
Balance
points
that
eBook
need
to
be
considered
while
journalizing
the
transactions:
Transactions can
If a cheque
is exchanged
is done through
When
be on cash
it
( i n c l u d e s bank account)
is called
as
or credit basis.
b a n k account,
because
payment
or receipt
bank account.
immediate
cash
or
cheque
is
exchanged,
then
the
transaction
is
called
as
cash/bank transaction.
If
immediate
it is termed
In
case
of
is written
cash
or
cheque
is
not
exchanged
credit
transaction,
in the journal
name
instead
of
creditor
of writing
Transactions are considered
or
debtor,
is
made
on
guarantee,
If
credit
is
not
may
mentioned
and
name
basis.'
of
debtor
or
creditor
to
No.
1.
l>
If credit basis is clearly mentioned.
l>
If
cash
or
credit
is
not
mentioned
and
name
of
debtor
or
creditor
given.
Transaction
Starting
u p of business
with capital in the form
Journal
Entry
Asset A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Capital A/c
of any asset
2.
Cash withdrawn
by
proprietor for his/her
Drawings A/c . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Cash A/c
personal use
3.
Goods withdrawn
by
proprietor for his/her
Drawings A/c . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Purchases A/c
personal use
4.
Sales return
by
customers (if sales are

on credit
5.
is
be credit transactions in the following cases:
Table 3.4c lists the different types of transactions and their journal entries.
Sr.
be,
not given.
Transactions are considered
is
case
to be cash transactions in the following cases:
l>
or
the
is cash or credit:
If the transaction contains the words 'on cash

cash
as
cash account or bank account.
)>
also
o
trade
as credit transaction.
T i p s to identify whether the transaction

o
and
Sales return A/c . . . . . . . . . . . . . . . . . . .
Dr.
To Debtor's (Name) A/c
basis)
Purchases return to
Creditor's (name) A/c . . . . . . . . . . . . . .
Dr.
Page 54
03. Journal,
Ledger, and Trial
Balance
eBook
suppliers (if purchases
To Purchases return A/c
are on credit basis)

Any expenses
6.
Expenses A/c . . . . . . . . . . . . . . . . . . . . . . . . . .
outstanding
To Outstanding expense A/c
Any expenses paid
7.
in
Advance expenses A/c . . . . . . . . . .
advance
Any
8.
Dr.
To Cash A/c
income not yet
Accrued
income A/c . . . . . . . . . . . . . . . .
Dr.
To Income A/c
received
Depreciation charged
9.
Dr.
on
Depreciation A/c . . . . . . . . . . . . . . . . . . . . .
asset
Dr.
To Fixed Asset A/c
(It is charged o n l y on
tangible fixed
10.
assets)
Any amount given as a
Name of loan's/Borrower's A/c . . . . . . . .
loan
11.
To Cash/Bank A/c
Any amount received as

a loan
12.
Cash/Bank A/c . . . . . . . . . . . . . . . . . . . . . . . .
like bank loan
Dr.
To Name of loan's/lender's A/c
Goods purchased on
Purchases A/c . . . . . . . . . . . . . . . . . . . . . . . . . .
credit
13.
Dr.
Dr.
To Creditor's (Name) A/c
Goods sold
on credit
Debtor's (Name) A/c . . . . . . . . . . . . . .
Dr.
To Sales A/c
14.
Goods purchased on
Purchases A/c . . . . . . . . . . . . . . . . . . . . . . . . . .
cash discount
To Cash A/c
To Discount received
15.
Goods sold
Dr.
on cash
discount
A/c
Cash A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
Discount allowed A/c . . . . . . . . . . . . .
Dr.
To Sales A/c
-
Table
Journalizing
next
by
step
is
is
the
first
posting
business
3.4c:
Journal
step
those
enterprise
in
accounting.
transactions
helps
Entries of
in
the
After
into
next
Different Transactions
journalizing
ledgers.
The
accounting
the
journal
process
transactions,
book
of
maintained
preparing
ledger accounts.
the
Page 55
the
03. J o u r n a l ,
Ledger, and Trial
Balance
eBook
3 . 5 Posting from J o u r n a l to Ledger

3.5.1
Meaning of Ledger
A Ledger
is
the
principle
detailed
information
the
balance
trial
shown
book of accounts,
about
and
particular
thereafter
for
account.
preparing
It
final
is
often
used
accounts.
as
The
base
format
It
provides
to
prepare
of ledger
Name of the A/c

Particulars
Date
J.F.
Amount
Table 3 . 5 . l a :
As shown
hand
in the above table,
side is referred
referred
sides
of
Date:
as credit
the
explained
name
as
side and
account,
date,
Amount
J.F.
Format of Ledger
is
in T shape-it
is abbreviated
is abbreviated
namely
Particulars
Date
the ledger account
as debit side and
'Cr.'
has two sides.
shortly as 'Dr.' The
as 'Cr.' There
particulars,
J.F.,
element.
posting
are
and
right
hand
four c o l u m n s on
amount
each
The
of
left
side
both
these
the
are
Date of transaction
of
of correspondent
credit
element
starts
If
with
the
is
on
prefix
the
'To.'
debit
If
then the name of correspondent debit element starts with
(Journal
been
Name
correspondent
credit side,
J.F.
is
below:
Particulars:
has
contains various accounts.
in Table 3.5. la.
'Dr.'
is
which
Folio):
Page
n u m b e r of the journal
book on
which
side,
posting
then
is
on
the
the
prefix 'By.'
particular transaction
recorded.
Amount: Amount recorded
in the journal
3 . 5 . 2 Rules for Posting in
book against the account
name.
Ledger
Open One Separate Account for Each Account Involved
Each
account
account.
credited
being
Hence,
in
debited
separate
the j o u r n a l entry.
name opened
or
credited
account
is
in
journal
opened
Note that there
for
should
is
each
not
posted
to
its
item/account
respective
being
debited
be two accounts with
or
the same
in the ledger.
ledger
Page 56
03. Journal,
For
Ledger, and Trial
example,
here
is
a journal
Balance
entry
eBook
passed
for
commencing
of
business
by
investing
cash 1 0 , 0 0 0 .
Cash A/c
Dr.
10,000
To Capital A/c
For the above journal entry,
10,000
cash A/c and
capital A/c will
be opened.
Posting for Debit Account Involved
The
account
respective
that
is
account
by
particular columns,
For
example,
debited.
So,
be written;
in
debited
writing
by using
the
in
the
the
journal
name
book
of
posted
account
on
credited
the
debit
against
side
this
of
that
account,
in
the prefix 'To.'
above
transaction
of
commencing
on the debit side of cash account,
and
is
amount of cash account
in
the
business,
particulars column,
is written
cash
account
is
'To Capital A/c' will
in the amount column.
Posting of Credit Account Involved
The
account
respective
that
is
credited
account
by
in particulars column
For example,
the
credit
in
writing
by using
the
the
the
journal
name
side
of
capital
the
end
it
of
debit
as,
all
difference
is called
the
side,
on
the
debited
credit
against
side
this
of
that
account,
account,
in
above, capital account is credited.
particulars
column,
'By
Cash
A/c'
will
be
So on
written;
in the amount column.
Ledger Account
credit amounts
side,
posted
account
in the same transaction discussed
After completing
out
of
is
prefix ' B y . '
and amount of capital account is written
Balancing
book
is
between
debit
credit entries
and
credit
for a
as,
is called
'By
as
balance;
and
balance
c/d.'
credit
particular
amounts.
known as balance of account.
as debit
month
it
the debit and
The
Similarly,
balance;
and
difference
If the debit
the difference
if
side
is shown
the
period,
credit
the difference
is
it
is
time to find
between
debit and
is greater than
in the credit
side
is
shown
side at the
greater
in
than
the debit
'To balance c/d.'
credit
Page 57
the
side
03. J o u r n a l ,
Ledger, and Trial
3 . 5 . 3 Important
Points to
Balance
Be Considered While Posting from
The ledger accounts are balanced
Usually
nominal
accounts
expenses
or
year, and
the balancing
Further,
incomes.
drawing
transferred
eBook
are
Nominal
not
balanced
accounts
is also
to Ledger:
periodically.
are
figure is transferred
account
Journal
balanced
closed
to
at
periodically;
at
the
profit and
year end,
they
end
of
are
the
related
to
accounting
loss account.
and
the
balancing
figure
is
to the capital account.
Example 03:
Journalize
the
following
transactions
and
post
them
into
ledgers
for
the
month
January 2 0 1 3 .
Date
Transactions
Jan.
14, 2 0 1 3
Deepak started
business with a capital of 1 , 0 0 , 0 0 0
Jan.
17, 2 0 1 3
Purchased goods from
Jan.
20, 2 0 1 3
Purchased
Jan.
25, 2 0 1 3
Received
Jan.
26, 2 0 1 3
Sold goods to Ram 1 2 , 0 0 0
Jan.
28, 2 0 1 3
Received
Laxman for 1 0 , 0 0 0
machinery 10,000
cheque from
cash from
Rohan 5,000
Ram t l l , 9 0 0 and
discount allowed
to
him for timely payment was 100

Jan.
29, 2 0 1 3
Received
cash from
Table 3.5.3a:
Rohan t l 0 , 0 0 0
Transactions under Example 03
Page 58
of
03. Journal,
Solution
Ledger, and Trial
Balance
eBook
03:
In the books of
Journal
Amount
Amount
('t')
('t')
(Debit)
(Credit)
L.
Date
Particulars
F.
2013
Jan.
14
Cash A/c . . . . . . . . . . . . . . . . . . . . . .
Dr.
1,00,000
To Capital A/c
(Being
Jan.
17
started
1,00,000
business with cash)
Purchase A/c . . . . . . . . . . . . . . .Dr.
10,000
To Laxman's A/c
(Being
Jan.
20
goods
10,000
purchased
on credit)
Machinery A/ c. . . . . . . . . . . . . . . . . . Dr.
10,000
To Cash A/c
(Being
10,000
machinery purchased
on
cash)
Jan.
25
B a n k A/c . . . . . . . . . . . . . . . . . . . Dr.
5,000
To Rohan's A/c
(Being
5,000
cheque received
from
Rohan)
Jan.
26
Ram's A/c. . . . . . . . . . . . . . . . . . . . . . . Dr.
12,000
To sales A/c
(Being
12,000
goods sold to Ram
on
credit)
Jan.
28
Cash A/c . . . . . . . . . . . . . . . . . . . . . . Dr.
11,900
Discount A/c . . . . . . . . . . . . . . . . . Dr.
100
To Ram's A/c
(Being
and
cash
received
discount allowed
12,000
from
to
Ram
him
tor r
100)
Jan.
29
Cash
A/c. . . . . . . . . . . . . . . . . . . . . . . . . . Dr.
10,000
To Rohan's A/c
(Being
cash
Total
received
from
Rohan)
10,000
1,S9,000
1,59,000
Table 3 . S . 3 b : Solution of Example 03
Page 59
Balance
eBook
Ledgers:
Cash A/c
'Dr.'
J.
Date
'Cr.'
Amount
F.
('!')
2013
J.
Amount
F.
('!')
Particulars
Date
Particulars
2013
Jan.
14
To Capital A/c
1,00,000
Jan.
20
By
Machinery
10,000
A/c
Jan.
Jan.
28
To Ram's A/c
1 1 , 900
Jan.
29
To
10,000
Rohan's A/c
31
By Balance c/d
1,11,900
1,21,900
Feb.
To
Balance b/d
1,21,900
1,11,900
Table 3.5.3c: Cash A/c
'Dr.'
J.
Date
Amount
Particulars
Date
F.
31
J.
Amount
F.
('!')
Particulars
('!')
2013
Jan.
'Cr.'
Capital A/c
2013
To Balance c/d
1,00,000
Jan.
14
By Cash A/c
1,00,000
1,00,000
1,00,000
Feb.
By Balance b/d
1,00,000
Table 3.S.3d: Capital A/c
Page 60
03. Journal,
Ledger, and Trial
'Dr/
Balance
Purchases A/ c
J.
Date
'Cr.'
Amount
Particulars
(t)
2013
J.
Amount
F.
(t)
Particulars
Date
F.
Jan.
eBook
2013
17
To Laxman's
10,000
Jan.
31
By Balance c/d
10,000
A/c
10,000
Feb.
To Balance b/d
10,000
Table 3 . S . 3 e :
Purchases A/c
Laxman's A/ c
'Dr/
J.
Date
Date
J.
Amount
F.
(f}
Particulars
(f)
2013
31
'Cr.'
Amount
Particulars
F.
Jan.
10,000
2013
To Balance c/d
10,000
Jan.
17
By
Purchase A/c
10,000
10,000
10,000
Feb.
Table 3.5.Jf:
By
Balance b/d
J.
Date
Laxman's A/c
'Cr.'
Amount
Date
Particulars
F.
J.
Amount
F.
(f)
Particulars
(f)
2013
2013
20
To Cash
10,000
Jan.
31
By
Balance c/d
10,000
Feb.
10,000
Machinery A/c
'Dr.'
Jan.
To
Balance b/d
10,000
10,000
10,000
.
Table 3 . 5 . J g :
Machinery A/c
Page 6 1
03. J o u r n a l ,
Ledger, and Trial
Balance
'Cr.'
Bank A/c
' D r. '
J.
Date
Amount
Date
Particulars
F.
J.
Amount
F.
(f)
Particulars
(f)
2013
Jan.
eBook
2013
25
To Rohan's A/c
5,000
Jan.
31
By
Balance c/d
5,000
5,000
Feb.
To Balance b/d
5,000
5,000
Table 3 . 5 . 3 h :
Rohan's A/c
'Dr.'
J.
Date
'Cr.'
Amount
Particulars
Date
F.
J.
Amount
F.
(f)
Particulars
(f)
2013
Jan.
Bank A/c
2013
31
To
Balance
15,000
c/d
Jan.
25
By Bank A/c
5,000
Jan.
29
By Cash A/c
10,000
15,000
15,000
Feb.
Table 3 . 5 . 3 i :
By Balance b/d
15,000
Rohan's A/c
Ram's A/c
'Dr.'
J.
Date
Date
J.
Amount
F.
('!')
Particulars
(f)
2013
26
'Cr.'
Amount
Particulars
F.
Jan.
2013
To Sales A/c
12,000
Jan.
28
By Cash
Jan.
28
By
11,900
Discount A/c
12,000
Table 3.5.3j:
A/c
100
12,000
Ram's A/c
Page 62
03. Journal,
Ledger, and Trial
Balance
'Dr.'
eBook
Sales A/c
Amount
J.
Date
Date
Particulars
2013
J.
Amount
F.
c,>
Particulars
c,>
F.
Jan.
'Cr.'
2013
31
To Balance
Jan.
12,000
By Ram's A/c
26
12,000
c/d
12,000
12,000
Feb.
By Balance b/d
12,000
Table 3.S.3k: Sales A/c
Discount Allowed A/ c
'Dr/
Amount
J.
Date
Particulars
Date
F.
J.
Amount
F.
('I')
Particulars
('I')
2013
Jan.
'Cr.'
2013
28
To Ram's A/c
Jan.
100
By
31
Balance c/d
100
100
Feb.
To Balance
100
100
b/d
Table 3 . 5 . 3 1 :
3 . 6 Trial
Discount Allowed A/c
Balance
Meaning
A
trial
balance
is
summary
of all
monthly,
quarterly
statement
ledger account
or
prepared
balances.
yearly.
trial
It
on
is
particular
usually
balance
thus
date,
prepared
at
prepared
which
contains
the
periodic
intervals
like
helps
in
checking
the
arithmetical accuracy of accounts.
In
accounting,
an
equivalent
recording
credit
account. Therefore,
and
is done on
every
the trial
the
entry
basis of double entry,

is
posted
balance so prepared
at
least
at
wherein,
two
every debit
places
with the help of closing
in
the
has
ledger
ledger balances
Page 63
03. Journal,
should
Ledger, and Trial
tally.
credit and
either in
It means that in a trial
if the debit total
recording,
Remember
that
arithmetically
tallying
an
amount
compensated
Therefore,
with
tallying
balance, total of debit should

then
be e q u a l to the total of
it is an arithmetical error
or balancing.
of
free
eBook
is not equal to the credit total,
posting
error
For example,
be
Balance
trial
balance
because
some
of 1 0 , 0 0 0
an
not
errors
item
of
guarantee
may
wrongly added
unrecorded
of the trial
is
be
on
the
the
adjusted
debit
same
that
in
accounts
other
side of a trial
amount
on
are
errors.
balance
the
debit
can
side.
balance means that the accounts are arithmetically correct
to a reasonable extent.
Trial
balance
also
aids
in
the
next
step
of
accounting,
which
is
the
preparation
of final accounts.
Steps in
1.
preparing trial
After
you
2.
recording
balance are as follows:
the
transactions
in
the j o u r n a l
and
posting
them
into
the
ledger;
need to balance the ledger account.
Then,
you
from
need
ledger
to
to
trial
transfer
the
balance
balance-debit
of
balance
each
on
and
every
debit
side
account
and
credit
individually
balance
on
credit side.
3.
Finally,
you
Format of Trial
need
to total the debit and
credit side of trial
balance.
Balance
In the books of
Trial
Balance as on
Particulars
Debit Amount
Credit Amount
Total
Table
In
the
particulars
respective
column
has
balancing
or the
debit
amount
column,
figures
the
3.6a: Trial
names
(from
credit amount column
balance,
then
it
is
of
ledger
Balance Format
individual
accounts)
according
written
in
debit
to
accounts
are
written
the case.
amount
are
in
written
the
For example,
column
whereas
and
debit
amount
if the account
credit
balance
is written in credit amount column.
their
Page 64
03. Journal,
Ledger, and Trial
Balance
eBook
Example 04:
On
the
basis
January 3 1 ,
Solution
of
ledgers
prepared
for
example
03,
prepare
trial
balance
as
2013.
04:
Trial
Balance as on January 3 1 ,
2013
Debit
Credit
(f)
(f)
Particulars
--
1,00,000
1,11,900
--
10,000
--
5,000
--
--
--
10,000
--
Rohan's A/c
--
15,000
Sales A/c
--
12,000
100
--
--
10,000
1,37,000
1,37,000
Capital A/c
Cash A/c
Purchases A/c
Bank A/c
Ram's A/c
Machinery A/c
Discount allowed A/c

Laxman's A/c
Total
.
Table 3.6b:
Page 65
on
03. Journal,
Ledger, and Trial
Balance
eBook
Example 05:
Following
Garments.
are
the
closing
You are required
balances
extracted
from
the
to prepare a trial balance as on
Particulars/Name of Ledger Account

Capital
Cash
ledger
accounts
December 3 1 ,
Stylish
2012.
(')
2,00,000
ba la nee
35,000
Bank balance
62,000
Discount received
3,700
Discount allowed
4,200
Purchases
6,40,000
Purchases returns
Sales
18,000
8,56,000
Sales returns
8,000
Debtors
1,80,000
Creditors
1,95,000
Stationery
6,300
Electricity
7,700
Drawings
15,000
Furniture
2,10,000
Rent
95,000
Salaries
60,000
Computer
35,000
Loan from
of
bank
1,00,000
Carriage inwards
2,800
Carriage outwards
3,600
Miscellaneous expenses
8,100
Table 3.6c:
Ledger Account Balances under Example 05
Page 66
03. Journal,
Solution
Ledger, and Trial
Balance
eBook
OS:
Trial
Balance as on
December 31,
2012
Debit
Credit
(")
(")
Particulars
Capital
Cash
2,00,000
balance
35,000
B a n k balance
62,000
Discount
received
3,700
Discount allowed
4,200
Purchases
6,40,000
Purchases returns
18,000
Sales
8,56,000
Sales returns
8, 000
Debtors
1,80,000
Creditors
1,95,000
Stationery
6, 300
Electricity
7,700
Drawings
15,000
Furniture
2,10,000
Rent
95,000
Salaries
60,000
Computer
35,000
Loan from
bank
1,00,000
Carriage inwards
2, 800
Carriage outwards
3,600
Miscellaneous expenses
8,100
Total
13 , 72 , 70 0
Table 3.6d:
13 , 72 , 7 0 0
Solution of Example OS
Page 67
Balance
eBook
Transactions are recorded and classified through journal and
Journal
entries
are
of
two
types-simple
journal
ledgers respectively.
entry
and
compound
journal entry.
Ledger account is a T-shape account h a v i n g two sides-debit and
Ledger is prepared for every account involved
For
balancing
the
ledger accounts,
forward
When
total,
the
debit
side
total
of
ledger
it is called as debit balance;
A trial
to next period.
account
side are matched
and
the
The term used for carrying
it
is
more
than
that
of the
credit
side
and when credit side total is more than the debit
it is known as credit balance.
balance
is
statement
prepared
summary of all ledger account balances.

like monthly, quarterly,
credit
is known as 'balance carried down' (Balance c/d).
side total,
in the transaction.
the debit and
balance of every ledger is transferred
credit.
half yearly,
on
particular
date,
which
contains
It is usually prepared at periodic intervals
yearly, etc.
Further, the accuracy of ledger balance can be checked through trial balance.
the
Page 68
Subsidiary
Books
Financial and
04.
Cost A c c o u n t i n g
Subsidiary Books
eBook
4 . 1 Introduction
When
business
purchases,
sales
starts,
returns,
there
are
purchases
nature becomes very tedious and

credit
purchases
transactions,
entries.
In
Therefore
total
and
this
to
After reading
10
sales
case,
clear
purchase,
transactions,
this
it
will
many
transactions
returns,
etc.
monotonous.
5
purchases
returns
be
confusion,
purchases returns,
that
are
carried
Recording
the
transactions
For example,
returns
transactions;
very
difficult
subsidiary
sales and
to
it
enter
books
are
like
sales,
of
similar
when Shree Limited
has 25
transactions,
will
out
have
every
40
credit
maximum
80
transaction
prepared,
which
different
individually.
helps
to
sales returns entries.
this chapter, you will be able to:
E x p l a i n the importance of each s u b s i d i a r y
Describe the process of recording
E x p l a i n the process of preparing a cash journal and
book
Describe the process of posting the journal entries in
E x p l a i n goods journal
E x p l a i n the process of preparation of b i l l s receivable and
E x p l a i n journal
transactions in various subsidiary books

petty cash
book
ledger accounts
bills payable journal
proper
www. itmu niversityonline.o rg
sales
Page 70
locate
04.
Subsidiary Books
eBook
4.2 Recording in Subsidiary Books

Meaning and
Recording
and
of all
delay
divided
Definition of Subsidiary
in
into
the
Books
business transactions
collecting
various
the
required
subsidiary
in
s i n g l e journal
information.
books.
These
For
this
books
creates
reason,
are
lot
of a m b i g u i t y
the
journal
to
record
meant
is
sub
specific
transactions of similar nature.
Subsidiary
a
books can
particular
be defined
category
as,
"Books of prime entry in which transactions of
recorded." They
are
are
also
termed
as
special
journals
or
day books.
The sub-divisions of journal are
represented
in Fig. 4.2a.
Journal
Journal Proper
Bills Journal
cash Journal
Tnple
Purchases
Sales
Columnar
Columnar
Returns
Returns
Cash Book
Cash Book
Journal
Journal
Double
Simple cash
Book
Bills Receivable
Bills Payable
Journal
Journal
Fig. 4.2a: Sub-Divisions of Journal
Subsidiary
books
There
three
are
journal and
transactions
are
categories
bills journal.
only),
triple columnar cash

cash
categorized
of
into
special
Cash journal
double
book
columnar
(for
bank,
two
books-special
proper
subsidiary
is divided
cash
cash
book
and
into
(for
proper
discount
journal
books-cash
s i m p l e cash
cash
and
and
related
book
journal,
(for cash
discount
proper.
goods
related
transactions),
transactions),
and
book (for petty transactions).
Page 7 1
petty
Financial and
04.
In
Subsidiary Books
the
goods
journal,
purchases
of
purchases
returns
assets
recorded
are
trade
eBook
you
items
need
or
to
goods.
transactions.
in
record
journal
all
This
Sales
or
proper.
credit
journal
also
purchases
While
transactions
of
includes
articles
bills journal
related
all
sales
other
includes
to
sales
and
returns
and
than
bills
goods
like
receivable
and
b i l l s payable journal.
4 . 3 Cash J o u r n a l
Cash
journal
maintained
affairs.
can
or
cash
in simple and
As mentioned
now
book
be
and
a cash
day-to-day
cash
transactions.
helps in controlling
book can
illustrated
transactions and can be classified
Simple Cash
all
standardized form
earlier,
explained
records
be classified
individually.
into the following
Cash
cash
the day-to-day
into four types.
j o ur na l
includes
business
These types
all
the
cash
books.
Book
A simple cash book, a l so known as single column cash book,
is just like a simple cash
ledger account. The format of the single column cash book is as follows:
Single Column Cash Book

Date
book
Particulars
J.F
Amount
Table 4.Ja:
Date
Simple Cash
Particulars
J.F.
Amount
Book Format
Example 0 1 :
Record the following
transactions in the simple cash book.
On May
1, 2 0 1 1 , opening
balance of cash is 4,000.
On May
12, 2 0 1 1 ,
On May 3 1 , 2 0 1 1 , salaries paid r3,000.
received
interest of 6,000.
Page 72
04.
Subsidiary Books
eBook
Solution 0 1 :
Simple Cash
'Dr.'
Book
'Cr.'
Amount
Date
Amount
L.F.
Particulars
Date
L.F.
Particulars
(')
(')
2011
2011
May 1
To balance b/d
May 12
To Interest
4,000
rece I ved A/ c
By salaries A/c
3,000
May 31
By balance c/d
7,000
6,000
2011
Jun.
May 31
10,000
1
To balance b/d
10,000
7,000
-
Table 4.3b:
As
the
cash
is
simple
not created.
respective
Cash
cash
Double column
Other elements
and
cash
the
book
other
received
or
cash
discount
received
side
recorded
paid,
of the
is
is
a cash
the
a cash
posted
in
account,
the
whereas
the
or g i v e n .
double
book with
discount
simple
column
two
column.
separate
cash
book
ledger
are
account
posted
discount
columns of amount-one
The
cash
column
Cash
received
cash
book,
and
while
book is as shown
Cash
'Dr.'
Discount
Particulars
is
column
meant
discount
cash
paid
is
meant
to
their
is the
cash
for writing
given
and
are
for
recording
the amount
recorded
discount
the
received
are
'Cr.'
Discount
Date
Table 4.3c:
in Table 4.3c.
Cash
Particulars
(t)
Double Column Cash
Cash
L.F.
(')
<'>
Book
Example 02:
the following transactions in the d o u b l e column cash
On J u l y
1,
2010,
cash
On J u l y 5,
2010,
sold
book.
balance " 1 0 , 0 0 0 .
goods to Mahesh at ., 2 , 0 0 0 .
of
on
Book
L.F.
(t)
Record
for
on the credit side of this book.
The format of d o u b l e c o l u m n cash
Date
as
Discount Column
cash
debit
itself works
Book
ledger accounts.
Book with
column
book
Simple Cash
Page 73
Financial and
04.
Subsidiary Books
On J u l y
10,
On
12,
July
eBook
2010,
received
2010,
1 , 5 0 0 from
purchased
settlement, on J u l y
14,
Mahesh
goods of 3,000
in full and final settlement.
from
Saniya
and
paid
2,200
in
full
2010.
Solution 02:
Cash Book
'Dr.'
Discount
L.
Cash
Particulars
Date
(t)
(t)
2010
Discount
Cash
F.
(t)
(f)
2010
To bal ance
b/d
10,000
Jul.
14
10
2,200
By balance
c/d
500
1,500
500
11,500
To Mahesh
800
By Saniya
Jul. 31
Jul.
L.
Particulars
Date
F.
Jul.
'Cr.'
9,300
11,500
800
2010
Aug.
To balance
b/d
9,300
Table 4.3d:
Double Column Cash
Book
Explanation to the Solution
In the above example, as cash

discount,
it
has
receivable
and
column
debit
same
or
way
b a l a n c ed ;
allowed
Triple
it
is
column
The
received,
cash
book
and
are
the debit
received
are
recorded
by
will
Posting
side
day.
or
The
2 0 1 0 from
difference
is
double
cash
book.
discount column
side
10,
received
from
simple
of credit
is
Mahesh
between
recorded
column
Here,
cash
the
posted
discount column
in
to
is
by g i v i n g
price
discount
the debit
posted
payable
discount
book
is
some
credit
done
column
or
side
in
the
is
not
side of discount
to the credit
side of
entry
is
cheque,
Discount Column
is
bank
cash
book
column.
entered
on
the
total
paid
the
Bank and
recorded
allowed
in
that
on J u l y
account.
column,
accepted
column.
done
on
price
the total of debit
Book with
cheque,
recorded
actual
side
received
discount
cash
the
account.
discount
Cash
as
been
is received
in
All
cash
with
cash
three
related
column.
Cash
side of the triple column
cash
on the credit
book.
made
the
be debited
on
entry
and
the
is
side of t h i s
credit
made on
discount
side
of the
the
received
debit
will
columns
of amount-cash
transactions,
received
book,
and
while
Similarly,
bank
as
cash
discount
cash
paid
side of the
and
bank
if a
paid
given
and
if a payment
column,
be credited.
such
column,
or
are
discount
is made
by
payment
column.
is
Discount
When the transaction
Page 74
has
04. Subsidiary Books
only
two
effects-one
as contra entry.
eBook
on
the
The following
bank
balance
and
Effect
Cash withdrawn from
Increase in cash
bank for office use
decrease in
in
bank
Increase in
in
received
balance and
Debit
it
is
called
Debit
balance
in
bank column
bank column and
credit in cash column
bank balance and
decrease in cash
Book
in cash column and
credit in
bank balance and
Increase in
bank, which were
balance-then
Treatment in Cash
bank balance
decrease in cash
Cheques deposited
cash
table shows the contra entry transactions.
Type of Transaction
Cash deposited
other on
Debit
balance
in
bank column and
credit in cash column
on earlier dates
.
Table 4.3e: Contra
The format of triple column cash
book is as shown
Cash
'Dr.'
L.
Discount
Cash
c,1
'Cr.'
Bank
Date
F.
in Table 4.3f.
Book
Partlculats
Date
Entry Transactions
(')
(')
L.
Discount
Cash
Bank
F.
c,1
c,1
c,1
Particulars
Table 4.3f: Triple Column Cash
Book Format
Example 03:
Record
the following transactions in a t r i p l e column cash
Jan.
1 - Cash Balance - ,5,000;
Jan.
2 - Rent paid
Jan.
3 - Cash sales - ,5,000
Jan.
10
book.
Bank Balance - ,6,000
by cheque - ,2,000
Received
from
Ram
by
cheque
,2,000
and
allowed
him
discount
of ,100
Jan.
15 - Cash purchase - ,2,000
Jan.
21 - Salary paid
Jan.
29 - Deposited
Jan.
30 - Paid to Mahesh - ,500 and
- ,5,000
in
bank - , 1 , 0 0 0
received
discount of ,100
Page 75
04.
Subsidiary Books
eBook
Solution 03:
Cash
Dr.
Disc.
L.
(f)
To
Cr.
Bank
(f)
(f)
5,000
Jan.
To Sales
Jan.
10
To
Jan.
29
To Cash
6,000
Jan.
2,000
1,000
5,000
100
Ram
By
Rent
Jan.
15
By
Purchases
Jan.
21
By Salary
Jan.
29
By
Bank
Jan.
30
By
Mahesh
By
Balance
Jan.
100
10,000
Petty Cash
small
amount,
cash
but
of
cash
cash
also
are
to record
maintained
transactions
petty
regular
them
maintained.
book
book
called
Petty cash
cash
cartage,
is
they
book is
cashier.
Petty
book
are
consuming
Bank
F.
(f)
(f)
(f)
31
2,000
2,000
5,000
1,000
100
500
1,500
7,000
100
10,000
9,000
c/d
Book
Book
amount
expenses
Cash
9,000
Table 4.3g: Triple Column Cash
cash
Disc.
Balance
b/d
Petty
L.
Partlculars
Date
F.
Jan.
Cash
Particulars
Date
Book
in
like
expenses.
nature.
in the m a i n
Petty cash
is
by
stationeries,
Petty
Hence,
cash
business
cash
cartage,
To avoid
maintained
by the
very
this
to
record
very
etc.
Such
cleaning,
transactions
becomes
it
book.
organizations
are
very
inconvenient
inconvenience,
petty cashier and
small
and
the
in
time
petty
not the chief
book is u s u a l l y maintained on the basis of Imprest System.
records
stationery,
the
petty
day-to-day
conveyance, etc.
cash
expenses
are some of the
format of a petty cash book is as shown
of the
business.
Postage,
petty cash expense examples.
The
in Table 4.3h.
Petty Cash
Book
Receipts
Payments
Cash
Total
Date
Particulars
Date
Book
Voucher
Exp.
Exp.
Exp.
Total
No.
Amount
Particulars
Amount
Folio
Table 4.3h:
Petty Cash
Book Format
Notes:
Voucher no.
and cash
Exp.
2,
1,
Exp.
Exp.
book folio are used
3, etc.
in
real environment.
represent name of petty expenses.
Page 76
04.
Subsidiary Books
eBook
Example 04:
On
January
Co.
1,
2013
there
was
balance of 1 0 , 0 0 0
in
the
petty cash
book of Mohan
During this month, the following transactions took place:
Jan.
2 - 1 5 , 0 0 0 withdrawn from
Jan.
3 - 400 spent on
Jan.
5 - 2,000 spent on cartage
Jan.
10
- 800
spent on
Jan.
15
- 500
spent on stationery
Jan.
20 - 500
spent on
postage
Jan.
29
spent on
local conveyance
- 100
bank for petty cash expenses
postage
local conveyance
Solution 04:
In the Books of Mohan

Petty Cash
& Co.
Book
Balance/
Account Head of Expenses
Withdrawal
Voucher
Total
Date
(f)
from Bank
No.
Postage
(f)
Cartage
Conveyance
Stationery
2013
Jan.
10,000
Jan. 2
15,000
Jan. 3
400
Jan. 5
Jan.
10
Jan.
15
400
2,000
2,000
800
800
500
Jan. 20
500
500
500
Jan. 29
100
25,000
900
2,000
900
100
500
4,300
Total
Expenses
4,300
Balance
c/d
20, 700
Table
4.3i: Solution 04 Petty Cash
Book
Page 77
&
Financial and
04.
Subsidiary Books
eBook
4.4 Posting from Cash Book

After
preparing
prepared.
and
This
bank.
discount
the
is
because
However,
received
cash
book,
no
the cash
separate
and
separate
book acts
discount
d i sc o u n t
ledgers
as
a book
account
allowed.
This
for
is
can
cash
and
as well
opened
be
to
bank
as an
post
explained
accounts
account
entries
from
the
are
for cash
related
to
following
example.
Example
05:
Post the entries of cash
book in
respective ledger accounts,
listed
in
Example 03.
Solution 05:
Dr.
Cr.
Sales A/c
Amount
Date
L.F.
Particulars
Amount
Date
Particulars
L.F.
(f)
(f)
Jan.
31
To Balance c/d
5,000
Jan.
By Cash
5,000
5,000
5,000
Feb.
Table 4.4a:
Dr.
By
Balance b/d
5,000
Sales A/c
Ram's A/c
Cr.
Amount
Date
Particulars
L.F.
Amount
Date
Particulars
(f)
Jan.
31
To
Balance c/d
2,100
(f)
Jan.
10
By
Bank
Jan.
10
By
Discount
2,100
2,000
100
2,100
Feb.
Table 4.4b:
L.F.
By
Balance b/d
2,100
Ram's A/c
Page 78
04.
Subsidiary Books
eBook
Dr.
Purchases
Cr.
A/ c
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(t)
Jan.
15
To cash
(t)
2,000
Jan.
31
By
Balance c/d
2,000
2,000
Feb.
To
Balance b/d
2,000
2,000
Table 4.4c:
Dr.
Purchases A/c
Cr.
Salary A/c
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(f)
Jan.
21
To cash
(f)
5,000
Jan.
31
By
Balance c/d
5,000
5,000
Feb.
To
Balance b/d
5,000
5,000
Table 4.4d:
Dr.
Salary A/c
Cr.
Mahesh's A/c
Amount
Date
Particulars
L.F.
Amount
Date
Particulars
(ti
Jan.
To Cash
L.F.
(ti
500
30
Jan.
By
Balance c/d
600
31
Jan.
To Discount
30
Received
100
600
Feb.
To Balance b/d
600
Table 4.4e:
600
Mahesh's A/ c
Page 79
04.
Subsidiary Books
eBook
Dr.
Cr.
Discount Received Account
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(
Jan.
Jan.
31
To Balance c/d
30
By
Mahesh
100
100
100
100
Feb.
Table 4.4f:
Dr.
Discount
By
Balance b/d
100
Received Account A/ c
Discount Allowed Account
Cr.
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
Jan.
10
To Ram
100
Jan.
31
By
Balance
100
c/d
100
Feb.
To Balance b/d
100
100
Table 4.4g:
Discount Allowed Account A/ c
4 . 5 Goods J o u r n a l
Purchases Journal
In the
purchases journal,
purchases
such
production and
purchased
as
all credit
purchases
sale.
on a cash
purchases of goods are
of
merchandise
The purchases journal
resale
is also called
basis, then they are recorded
The format of purchases journal
for
is as shown
recorded.
and/or
It
includes all trade
raw
materials
as purchases book.
in cash
If items are
books.
in Table 4.Sa.
Purchases Journal
Invoice
Date
Particulars
L.F.
Amount
No.
Purchases A/c
Table 4.Sa:
Dr.
Purchases Journal
for
Total
Format
Page 80
eBook
Purchases Returns Journal
If goods
is
that are purchased on credit are returned
recorded
in
the purchases returns journal.
to the supplier,
then that transaction
Purchases returns journal
is also
known as
purchases returns book.
Return of items other than trade goods are not recorded
book. Purchases
are
returns
termed as return outward
also
called
as
return
outward.
So,
this
book
can
in this
also
be
book or return outward journal.
The format of purchases returns journal is as shown in Table 4 . S b .
Invoice
Date
Particulars
L.F.
Amount
No.
Purchases Return A/c
Table 4.Sb:
Total
Cr.
Format
Example 06:
Record
the following transactions in the respective subsidiary books.
On J a n .
5, 2 0 1 1 ,
purchased
On J a n .
6, 2 0 1 1 ,
b o u g h t 70 Samsung speakers from
On Jan.
7,
functioning
On J a n .
9,
damaged
2011,
returned
50 iBall keyboards from H u b C o m p u t e r s @ '!'500 each.
10
iBall
keyboards to
Diamond
& Co.
@ '1'450 each.
H u b Computers as they were not
properly.
2011,
returned
five Samsung
speakers to Diamond
& Co.
as they were
in transit.
Page 8 1
04.
Subsidiary Books
eBook
Solution 06:
Purchases Journal
Amount
Invoice
L.F.
Particulars
Date
(t)
No.
2011
Jan.
Hub
50
Jan.
Computers
iBall
k e y b o a r d s @ 500
Diamond
25,000
& Co.
70 S a m s u n g
31,500
s p e a k e r s @ 450
Purchases A/ c
Dr.
Table 4.5c:
56,500
Purchases Journal
Invoice
Date
Amount
L.F.
Particulars
No.
(\')
2011
Jan.
H u b Computers
10
Jan.
iBall
k e y b o a r d s @ 500
Diamond
5,000
& Co.
5 Samsung
speakers@ 450
Cr.
Purchases return A/ c
Table 4.5d:
2,250
7,250
Purchase Returns Journal
Notes:
Invoice No.
and
L.F.
Total of purchase journal
Total
of purchases
are used
in
real environment.
is transferred
returns j o u r n a l
is
to purchases account debit side.
transferred
to
purchase
return account credit
side.
Page 82
04.
Subsidiary Books
eBook
Example 07:
Record
the
Siddhesh
On
following
transactions
in
purchases
book
and
purchases
returns
Enterprises and
post the transactions to the respective ledger accounts.
July
purchased
15,
2012,
slicers
100
at
the
rate
of t250
each
from
book
of
Shama
Traders.
On J u l y
18,
returned
2012,
10
slicers to Shama Traders as they were
damaged
in
transit.
On
July
20,
2012,
purchased
SO
juicers
at
the
rate
of
t200
each
from
Madan
25,
2012,
purchased
25
slicers
at
the
rate
of
tSOO
each
from
Madan
Brothers.
On
July
Brothers.
On J u l y
28,
returned
2012,
five more slicers to S h a m a Traders as they were found
to be defective.
Solution 07:
Purchases Book of Siddhesh
Enterprises
Amount
Invoice
Date
L.F.
Particulars
No.
2012
Shama Traders
Jul.
100 s l i c e r s @ t250 each
15
Madan
Jul.
20
25,000
Brothers
SO j u i c e r s @ t200 each
Madan
()
10,000
Brothers
Jul.
25
25 slicers @ tSOO each
Jul.
31
Total
12,500
Purchases A/c ( D r . )
Table 4.Se:
47,500
Purchases Book
Page 83
Financial and
04.
Subsidiary Books
eBook
Purchases Returns Book of Siddhesh
Enterprises
Invoice
Date
Amount
L.F.
Particulars
No.
(<')
2012
Jul.
18
Shama Traders
10, slicers @ ar2so each
Jul.
28
2,500
Shama Traders
5, slicers @ {250 each

Jul.
31
Total Purchase Returns A/c (Cr.)

Table 4.5f:
4.5.1
from
individual
purchases
personal
book and
accounts.
frequency of transactions,
the total of purchase
Example
At
Purchases Returns
purchases
the
3,750
Purchases Returns Book
Posting of Purchases Book and
Posting
1,250
end
of
returns book
the
week
Book
is done on
or
month,
the total of purchases book is debited
returns book is credited
a daily
basis
depending
upon
to the purchase returns A/c.
into i n d i v i d u a l
the
to the purchase A/c and
08:
Post the entries of Example 07
in the
ledger accounts.
Page 84
04.
Subsidiary Books
eBook
Solution 08:
Ledger in the Books of Siddhesh's Enterprises

Dr.
Cr.
Shama Traders A/c

Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(f)
(f)
2012
Jul.
18
2012
To
Purchase
Jul.
Returns
Jul.
28
To
31
To
By
Purchases
25,000
2,500
Purchases
Returns
Jul.
15
1,250
Balance c/d
21,250
25,000
25,000
Aug.
By
Balance
b/d
21,250
Table 4 . 5 . l a : Shama Traders A/c
Dr.
Cr.
Madan Traders A/ c
Amount
Date
Particulars
L.F.
Amount
Date
Particulars
(f)
(f)
2012
Jul.
31
L.F.
2012
To Balance c/d
22,500
Jul.
20
By
Purchases
10,000
Jul.
25
By
Purchases
12, 500
22,500
22,500
Aug.
Table 4 . 5 . l b :
By
Balance b/d
22,500
Madan Traders A/c
Page 85
04.
Subsidiary Books
eBook
Dr.
Cr.
Purchases A/ c
Amount
Date
Amount
L.F.
Particulars
Date
Particulars
L.F.
(f)
(f)
Jul.
2012
Jul.
31
To Purchases as
31
By
47,500
Balance
47,500
c/d
per Purchase
Book
47,500
Aug.
To Balance b/d
47,500
47,500
Table 4.5.lc:
Dr.
Purchase A/c
Purchases Returns
Cr.
A/ c
Amount
Date
Amount
L.F.
Particulars
Date
L.F.
Particulars
(f)
(f)
2012
Jul.
2012
31
To
Balance c/d
3,750
Ju I.
15
By
Purchase
Returns as per
3, 750
Purchase
Returns Book
3,750
3,750
Aug.
Table 4 . 5 . l d :
4 . 5. 2 Sales Journal and Sales
As
the
name
indicates,
sales of trade items and

are
recorded
called
in
cash
all
the
Purchases
By
Ba la nee
b/d
3, 750
Returns A/c
Returns Journal
sales
of trade
sales of non-trade
journal
and
journal
items
are
items are
proper
not
recorded
in
recorded
respectively.
The
sales journal.
in
sales journal;
cash
journal
is
as sales book.
Page 86
Cash
they
also
04.
Subsidiary Books
eBook
The format of sales journal
is as shown Table 4.S.2a.
Sales Journal
Invoice
Date
Amount
Particulars
L.F.
No.
(f)
Cr.
Sales A/c
Total
Table 4.S.2a: Sales Journal
Sales
Format
Returns Journal
Goods
sold
journal.
known
on
Sales
as
credit
basis,
returns
return
is
inward
items are not recorded
if
also
returned
called
journal
or
as
by
the
return
return
customers
inward,
inward
are
so
book.
recorded
sales
Sales
in
returns
returns
sales
journal
other
returns
is
than
also
trade
in sales returns journal.
The format of sales returns journal
is as shown
in Table 4 . S . 2 b .
Sales Returns Journal
Amount
Invoice
Date
Particulars
L.F.
No.
Sales returns A/c
(f)
Dr.
Total
Table 4 . S . 2 b : Sales Returns Journal
Format
Example 09:
Record
the following transactions in the respective subsidiary books.
On
February
4,
2011,
sold
five
iBall
keyboards
to
Ramesh
& Associates
550
each.
On
February 7,
On
February
2 0 1 1 , sold
10,
2011,
10 Samsung
Ramesh
speakers to Sargam Traders@ 550 each.
& Associates
returned
two
iBall
keyboards as they
were found to be damaged.
Page 87
Financial and
04.
Subsidiary Books
eBook
Solution 09:
Sales Journal
Date
Particulars
Invoice
No.
(f)
L.F.
2011
Feb.
Ramesh & Associates

5 iBall
Feb.
keyboards@ 550 each
2,750
Sargam Traders
10 S a m s u n g
s p e a k e r s @ 5 5 0 each
Sales A/c
5,500
Cr.
Table 4.S.2c:
8,250
Sales Journal
Sales Returns Journal
Date
Particulars
Invoice No.
(f)
L.F.
2011
Feb.
10
Ramesh & Associates

2 iBall keyboards@ 550 each
Sales
Returns A/ c
1, 1 0 0
Dr.
1,100
Table 4.S.2d: Sales Returns Journal
Posting
of Sales Journal
Respective debtor's account

of
sales journal
is
written
in
on
ledger
the
is
credit
debited
side
from
of sales
the
sales journal ,
account
in
the
daily.
ledger
The
total
periodically
(weekly or m o n t h l y ) .
Posting
Here,
daily
of Sales
the
Returns Journal
respective debtor's account
basis.
The
total
of
sales
returns account periodically
returns
is credited
journal
is
by
whom
written
the goods are
on
the
debit
returned
side
of the
(weekly or monthly).
Page 88
on
sales
Example
Post
the
eBook
10:
following
transactions
in
the
sales returns book (Sales book and
ledger
accounts
on
sales returns book are
the
basis
of
sales
not required to
On July
17,
2012,
sold
1 5 slicers at the
rate o f 3 2 5 each to
On J u l y
19,
2012,
sold
25 slicers at the
rate of 225 each to Shirish Trading.
On J u l y
22,
2012,
10 juicers at
rate 600 each to Sahani
On
July
25,
2012,
the rate of 280 each
and
and
be prepared).
sold
Rakesh
book
Brothers.
five toasters at the
Brothers.
Sahani
Brothers
returned
one
toaster
and
two juicers
as
they
were not functioning.
On
July
27,
2012,
Shirish
Trading
returned
five
slicers
as
they
were
found
to
be
defective.
Solution
10:
Ledger in the Books of Siddhesh

Dr.
Rakesh
Enterprises
Cr.
Brothers A/ c
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(\')
(\')
2012
Ju I.
2012
17
To Sales
4,875
Ju I.
31
By Balance c/d
4,875
4,875
Table 4.5.2e:
Dr.
Sahani
4,875
Rakesh
Brothers A/c
Cr.
Brothers A/ c
Amount
Date
Particulars
L.
F.
Amount
Date
Particulars
(\')
2012
Ju I.
F.
(\')
2012
22
To Sales
5,800
Jul.
25
By Sales Returns
1,160
Jul.
31
By
4,640
Balance c/d
5,800
2012
Aug.
L.
5,800
To Balance
1
4,640
b/d
Table 4.5.2f: Sahani
Brother's A/ c
Page 89
04.
Subsidiary Books
eBook
Dr.
Shirish Trading Account
Cr.
Amount
Date
Particulars
L.F.
Amount
Date
Particulars
L.F.
(\')
2012
Jul.
(\')
2012
19
To Sales
5,625
Jul.
27
By Sales Returns
1,125
By
4,500
2012
Jul.
31
Ba la nee c/d
5,625
2012
Aug.
To
1
5,625
Balance
4,500
b/d
Table 4 . 5 . 2 g : Shirish Trading
Dr.
Account
Sales A/c
Cr.
Amount
Date
Particulars
Amount
L.F.
Date
Particulars
L.F.
(\')
(\')
2012
Jul.
31
2012
To Balance c/d
16,300
Jul.
31
By Sales as per
Sales Book
16,300
2012
Aug.
Table 4.5.2h:
16,300
16,300
By
Balance b/d
16,300
Ledger A/c
Page 90
04.
Subsidiary Books
eBook
Dr.
Cr.
Sales Returns A/ c
Amount
Date
Particulars
L.F.
Amount
Date
Particulars
L.F.
(f)
(f)
2012
Jul.
2012
31
2,285
To Sales
31
Jul.
By
2,285
Balance c/d
Returns as
per Sales
Returns Book
2,285
2012
Aug.
2,285
To Balance
b/d
Table 4.5.2i:
4.6
Bills
When
2,285
Sales Returns A/c
B i l l s Receivable and B i l l s Payable Book

Receivable Journal
a
customer
transaction
journal
is
is
that
buys
recorded
it
gives
goods
in
the
the
on
bills
credit
and
accepts
receivable journal.
status of different
b i l l s that
the
One
are
bill
or
promissory
advantage
of
outstanding
bills
from
note,
the
receivable
debtors
on
various dates.
The format of bills receivable journal
Bills
is as shown
in Table 4.6a.
Receivable Journal
Party
Date of
Voucher
from
Date of
Due Date
Place of
Amount
Bill
of Bill
Payment
of Bill
Acceptor
Receipt
No.
whom
L.F.
Received
Table 4.6a:
B i l l s Receivable Journal
Format
Page 9 1
Financial and
04.
Subsidiary Books
Example
Record
11:
the following
On
eBook
July
transactions in the suitable subsidiary
2012,
6,
drew
bill
on
Mr.
Ram
at
two
book.
months
after the
date for 1000
in
fu 11 settlement.
On
10,
July
2012,
Mr.
Ganesh
sends
promissory
note
1500
for
payable
after
one month.
On
17,
July
2012,
Ms.
Priya
accepted
a bill
drawn
at
three
months after the date
for 900.
Solution
11:
Bills Receivable Journal

Party
Amount
Date of
Voucher
from
Receipt
No.
whom
Date of
Due Date
Acceptor
of Bill
Term
<'>
Received
2012
2012
Jul.
Mr.
Jul.
10
Mr. Ganesh
Jul.
17
Ms. Priya
Ram
2012
Jul. 6
2 months
Sep. 6
1,000
Mr. Ganesh
Jul.
10
1 month
Aug.
1,500
Ms.
Jul.
17
3 months
Oct.
Mr.
Ram
Priya
10
17
900
3,400
Total
.
Table 4.6b:
The total of bills receivable journal

The
respective
accounts
by debtors are credited
of
L.F.
of Bill
Bill
Bills Receivable Journal
is written on the debit side of b i l l s receivable account.
debtors
on
whom
purchases
goods
bills
have
been
drawn
and
accepted
daily.
Bills Payable Journal
When
the
business
enterprise
on
credit,
the
supplier
draw a bill on the business enterprise for the value of goods purchased
payment.
as
bills
journal.
that
is,
Such a bill drawn by the creditor of a firm and d u l y accepted
payable.
The
bills
The
transaction
payable
payable to
book
suppliers on
related
gives
the
various
to
such
status
bills
is
recorded
of different
dates-this
bills
creditor
by a firm
the
are
bill
is called
payable
outstanding,
is the advantage of m a i n t a i n i n g
payable j o u r n a l .
may
with the terms of
in
that
or
Page 92
bills
The
total
of
periodically
bills
payable journal
(weekly
been accepted
eBook
or
is
monthly).
written
The
to
the
respective
credit
ledger
side
of
of
bills
creditors
payable
whose
account
bills
have
by the company is d e b i t ed .
The format of bills payable is as shown in Table 4.6c.
Bills Payable Book

Date
Due
of
Date
Date of
Drawer
Payee
Amount
Payment
of B i l l
L.F.
Acceptance
Bill
Place of
of Bill
Table 4.6c:
Example
Record
Format
12:
the following transactions in the most appropriate subsidiary book.
On
October
2,
2012,
accepted
Mr.
John's
draft
for 2,000
Mr.
Anil's bill for \!'3,000
payable
three
months
after the date.
On October
12,
2012,
accepted
payable two months after
the date.
Solution
12:
Date of
Due
Amount
Date of
of Bill
Bill
(f)
Date
Drawer
Payee
Terms
Acceptance
of Bill
2012
2012
2013
Oct.
Mr. John
Mr.
John
Oct.
3 months
Jan.
Oct.
12
Mr. Anil
Mr.
Anil
Oct.
12
2 months
2012
Dec.
12
Total?
2,000
3,000
5,000
Table 4.6d :
Page 93
L.F.
Financial and
04.
Subsidiary Books
eBook
Important Points
B i l l s receivable is drawn on debtors and
The three parties to bill of exchange are drawer, drawee, and

o
b i l l s payable is drawn on creditors.
is a person who draws a b i l l or a person
Drawer:
payee.
to whom
payment
has to
be made.
o
is a person on whom a b i l l is drawn or a person who has to make a
Drawee:
payment.
o
is a
Payee:
can
person
be one and
Acceptance:
Due date:
The following
o
The
whom
payment
same-but not
payment to third
to
has to
be
made-payee
and
drawer
necessary as a drawer may ask to make the
person.
A bill becomes valid only when it is accepted
by the drawee.
This is a date on which bills become payable to the drawer.

points must be considered while posting
total
of
bills
receivable journal
receivable account and
is
items to the ledger:
transferred
to
the
debit
the total of the bills payable journal
side
of
bills
is transferred
to
the credit side of the b i l l s payable account.

o
Credit debtor's account when bills receivable is made.
Debit creditor's account when bills payable is made.
Prepare Voucher no.

are used
4.7
It
and
L. F columns even if they are not needed, since they
in the real environment.
J o u r n a l Proper
includes all the transactions that are not recorded
examples of transactions that are recorded

entries,
assets.
adjustment entries,
If
any
firm
is
not
in journal
transfer entries,
maintaining
bills
in any of the subsidiary
The
proper are opening entries, closing
rectification entries,
receivable
book
then transactions related to these books are also recorded
books.
and
and/or
purchase of fixed
bills
payable
in journal proper.
Page 94
book,
eBook
4.8 Chapter S u m m a r y
J o u r n a l can
All cash transactions of the business are recorded
Petty cash book records day-to-day petty expenses.
All
credit
be classified
purchases
of
into various subsidiary books.
goods
by
the
enterprise
in cash book.
are
recorded
in
the
purchases
book.
All credit sales of goods by the enterprise are recorded
The total of purchases
book,
purchases
return
book,
in the sales book.

sales
book,
and
sales
book are posted to t h e i r respective accounts.
All the miscellaneous entries are recorded
in journal proper.
Page 95
return
F i x e d Assets
and
Depreciation
Financial
05.
Fixed Assets and
Depreciation
eBook
5 . 1 Introduction
Mr.
Mahesh
purchased
computer and
than
is,
the
could
time,
purchased
price at which
'why did
computer
he
laptop.
had
the old
reasons
computer was
cost.
accounting
years,
off his computer,
the computer three
he
he got
years ago.
sold
a
off
lesser
price
Now the
point
to the
and
new
was
laptop,
used
for
you
will
less
etc.
the value of the computer went down as compared

terms,
this
is
known
as
depreciation,
which
be able to:
Explain the meaning
of fixed assets
Explain the meaning
of depreciation,
List the objectives and causes of providing
Discuss different methods of calculating depreciation
List the methods of recording
some
there was
in this chapter.
After reading this chapter,
the
off his computer after three years.' There
as compared
that period,
to
discussed
three
such as the computer was old
some other reasons,

In
sold
he sold
less efficient
for the computer during
origina l
he
purchased
for that
After
t25,000.
When
Due to this and

its
for
he get a lesser price when
be several
demand
amortization,
and depletion
depreciation
the depreciation
Page 97
is
05.
Fixed Assets and
Depreciation
eBook
5 . 2 Fixed Assets
Meaning
As
already
owned
discussed
by
convertible
fixed
company,
into cash.
assets and
Fixed
assets
which
are
not
is,
tangible
fixed
furniture,
touched
goodwill,
those
which
that
assets and
exists
assets
owned
are
concepts
of
provide
accounting,
benefits
for
assets
its
are
future
There are two types of assets that every
liquidated
which
basic
economic
resources
operations
business
and
normally
are
uses
current assets.
are
tangible fixed
that
in
have
within
useful
period
intangible fixed
physically,
include,
vehicle,
etc.
are
land
On
life of
of
one
assets.
known
and
the other
Fig. 5.2a shows broad
trademarks,
than
year.
Fixed
Fixed
as
hand,
brand
one accounting
assets
are
assets that can
tangible
building,
known as intangible fixed assets.
patents, copyright,
more
plant
fixed
fixed
and
of
period
two
be seen,
assets.
kinds
touched,
Examples
machinery,
assets which
cannot
Examples of intangible fixed
be
seen
name, etc.
Current Assets
Intangible
Fig. S.2a: Types of Assets
or
assets are
Assets
Tangible
of
computer,
categories of assets.
Rxed Assets
and
Page 98
05.
Fixed
Assets and
Depreciation
eBook
5 . 3 Accounting Concept of Depreciation

Meaning and
The
value
of
Definitions of Depreciation
fixed
This decrease
All
the
linked
a
fixed
reduces
the value of fixed
assets
except
of time
This useless
recovered
be
these fixed
part of the fixed
from
the
defined
as
All
due
to
assets
land
to the business income.
passage
also
in
assets
the
passage
is termed
depreciate.
The
assets
become
concept
cost
of that
of
and
their
so
depreciation
they
need
is the cost for the company and
portion
income.
of fixed
that
is
can
to
be
it
use.
terms.
also
revenue.
hence,
Therefore,
assets
constant
in accounting
assets to generate
useless and
revenue to ascertain the actual

the
time
as depreciation
businesses use fixed
assets
of
be
Over
replaced.
should
be
depreciation may
used
to
generate
the
business revenue.
In
other
due
to
words,
natural
depreciation
wear
and
is
tear,
the
decrease
obsolescence,
in
the
or
any
does not incorporate the actual
payment of money,
In
Chartered
the
words
measure
asset
and
the
of
of the
arising
market
Institute
of
wearing
out,
from
changes.
depreciation
life of the
use,
asset.
of
Depreciation
amount
in
each
Depreciation
time
is
or
or
that is,
assets,
similar
causes.
India,
as
period
to
the
is,
"a
of depreciable
through
charge
during
includes amortization
land,
Depreciation
depreciation
loss of value
obsolescence,
so
except
it is a non-cash expense.
of
other
allocated
accounting
of fixed
other
Accountants
consumption
effluxion
value
technology
fair
portion
expected
of assets whose
of
useful
useful
life
is predetermined."
According
to
Pickles,
"Depreciation
is
the
permanent
and
continuing
diminution
in the quality, quantity or value of an asset."
According
to
exhaustion
Spicer
of
the
and
Pegler,
effective
depreciation
life
of
an
may
asset
be
from
defined
any
as,
"the
cause
measure
during
period."
Page 99
of
given
05.
Fixed Assets and
Depreciation
Depreciation, Amortization, and
There
are
two
more
concepts,
eBook
Depletion
which
are
used
in
context
d i s t i n g u i s h a b l e from the term depreciation. This is shown
Depreciation
refers
to
gradual
of depreciation,
but
they
are
in the following table.
decrease
in
the
value of tangible
Depreciation
man-made fixed assets.
Amortization
simple
refers
to
writing
off intangible
depreciation
words,
charged
fixed
assets
intangible
on
or
in
assets.
Amortization
Intangible
assets
like
goodwill,
patents,
etc.
have
limited
life,
therefore their cost is written off over their entire life.
means
Depletion
Depletion
resources
such
removal
as
timber
of
an
available
reserves,
coal
but
irreplaceable
In
etc.
other
depletion is the fall in the value of tangible wasting

Table 5 . 3 . 2 a :
Objectives of Providing
Due to the use of fixed
which
asset
is termed
used
Depreciation, Amortization, and
words,
assets.
Depletion
Depreciation
assets and
as depreciation.
to generate the
passage of time, the value of fixed
In
other context,
revenue,
therefore it
depreciation
is charged
assets decreases,
is the cost of the
part of
as an expense to know
the
actual cost of production and profit.
On
balance
value of fixed
sheet,
fixed
assets
are
assets after deducting
always
shown
at
the depreciation.
their
net
Hence,
value.
Net
depreciation
value
is the
is provided
to
know the true financial position of the company.
As
already
mentioned,
depreciation
depreciation can be used
is
non-cash
to replace the old
expense,
so
the
amount
deducted
as
fixed asset with new one.
Causes of Depreciation
Wear and Tear
Due
to
the
plant and
constant
use
of fixed
assets,
they
get
worn
out
or
damaged.
For example,
machinery get worn out due to their constant use in the production
process.
Passage of Time
Even
if some fixed
example,
asse ts are
computers
d ec l i n e
not
in
in
value
use they
after
lose
some
their value with
period
of time
passage of time.
even
if they
are
use.
Page
100
For
not
in
Financial
05.
Fixed Assets and
Depreciation
eBook
Exhaustion
Some
and
fixed
assets,
stage
nothing
may
like
natural
come
where
resources,
such
get
resources
exhausted
would
get
due
to
continuous
completely
extraction
exhausted
leaving
behind.
Obsolescence
Due
to
continuous
technological
assets are discarded

old
fixed
assets
before they
with
the
computers are replaced
by
improvement
and
changing
become completely
new
one
is
useless.
considered
as
market
conditions,
fixed
The cost of replacement of
obsolescence.
laptops d u e to advanced technology used
in
For
example,
laptops.
Other Factors
In
add it ion
to
the
earthquakes, etc.,
aforementioned
may cause fixed
factors,
are
various
depreciation
for
which
it
methods
charging
is
being
of
method
used.
factors,
such
as
accidents,
fires,
assets to depreciate.
5.4 Methods of C a l c u l a t i n g
There
other
Depreciation
charging
depends
Different
depreciation
upon
the
methods
on
nature
of
fixed
assets.
of fixed
charging
asset
Selection
and
depreciation
the
are
of
purpose
discussed
below.
5.4.1
In
Straight Line Method
the
original
straight
cost
line
method
method,
estimated
life
of
difference
between
in terms of years.
of depreciation,
fixed
assets.
cost
and
equal
Depreciation
of the
asset
also
amount
under
and
its
known
is
this
scrap
as
fixed
charged
method
value
as
is
by
installment
depreciation
calculated
by
its estimated
method
during
the
dividing
the
life expressed
Scrap value is also known as residual value.
The formula for calculating the amount of depreciation u n d e r straight line method
Depreciation=
is:
Cost - R e s i d u a l v a l u e
Estimated life of assets
or
(in years)
Page 1 0 1
05.
Fixed Assets and
Depreciation
eBook
Example 0 1 :
Determine
asset
the
amount
is < 1 , 2 0 , 0 0 0 and
of
depreciation
the estimated
under
residual
straight
line
method,
value at the end
if
the
cost
of its estimated
of
the
life of 10
years is ,20,000.
Solution O 1:
Depreciation;
Therefore,
1,2
o,oo
o,ooo
10,000
amount of depreciation
every year from the amount fixed
5.4.2 Diminishing
Balance
is , 1 0 , 0 0 0 .
asset as depreciation.
Method
In t h i s method, depreciation is calculated

the
asset,
every
value of fixed
year.
asset given
this
method,
the
line
method.
Amount
diminishing
Book
amount
in
method, or fixed
value,
the
balance
of depreciation,
is also
as a fixed
which
of depreciation
balance method
It means the company will deduct ,10,000
is
a l so
rate percentage of the book value of
known
as
written
sheet at the opening

changes every
under
called
this
year,
method,
reducing
of an
down
value,
accounting
unlike
decreases
balance method,
in
case
is
year.
In
of straight
year-by-year.
written
the
down
The
value
percentage method.
Example 02:
Calculate
method,
the
amount
of
depreciation
for
if the cost of asset is ,80,000 and
first
four
years,
under
rate of depreciation
diminishing
balance
is 5/o.
Page
102
Financial
05.
Fixed
Assets and
Solution
Depreciation
eBook
02:
Calculation of Depreciation
Cost of the asset

Less:
80,000
Depreciation at the end of year 0 1 @
Written
Less:
Down Value at the b e g i n n i n g
5%
4,000
of year 02
76,000
Depreciation at the end of year 02 @ 5%
Written Down Value at the b e g i n n i n g

Less:
3,800
of year 03
72,200
Written
Less:
Down Value at the b e g i n n i n g
3,610
68,590
of year 04
3,430
Balance at the beginning
of year 05
65,610
Table 5.4.2a: Solution of Example 02
In the above example,
every year 5/o of the book value of the asset
At
year,
the
end
of the
This process will
first
depreciation
be continued
is
always
calculated
on
has
the
been deducted.
cost
of the
asset.
till the asset becomes obsolete or is sold off.
5.4.3 Sum of Years Digit Method
This
method
amount
of
remaining
is
variation
depreciation
life
of
the
goes
of the asset,
diminishing
on
including
balance
decreasing
the current
every
year
method,
year.
because
Under
is d i v i d ed
here
this
by the
too,
method,
sum
of all
the
the
digits
of life of the assets.
Formula to calculate the amount of depreciation is:
Depreclation
Remaining
life of an asset ( i n c l u d i n g c u r r e n t year)
S u m of a l l
(Cost
>
Scrap v a l u e )
d i g i t s of the life of assets (in years)
Example 03:
The cost of an asset

years.
Calculate
the
is 50,000,
amount
of
scrap
value
is 6,000 and
depreciation
of
the
asset
estimated
under
life of an asset
sum
of
years
of
method.
Page
103
is 4
digit
05.
Fixed Assets and
Depreciation
eBook
Solution 0 3 :
Depreciable value =
( 5 0 , 0 0 0 - 6,000)
Sum of all d i g i t of life of a s s e t =
Therefore,
= 44,000
4 + 3 + 2 +
1 =
10
depreciation chargeable every year i s :
Year 1
-x 44,000 = 17,600
10
Year 2
=
Year 3
3
10 x 44,000 = 13,200
Year 4
= 10 x 44,000
= 8.800
1
= - x 44000
10
'
= 4 400
'
Table 5.4.3a: Calculation of Deprec,at,on
According
asset
on.
to
the
including
above
the
current
As the estimated
and,
1, which
table,
at the end
year w i l l
be
life of the asset
is equal to
4,
is 4,
of year one
and
at
(Year
the end
1),
the
of year
the sum of all digits will
remaining
it
will
be
life of an
3,
and
be the sum of 4,
3,
so
2,
10.
5.4.4 Annuity Method
Unlike the various methods discussed

loss
of
interest.
earned
if
the
Therefore,
Here,
loss
amount
under
this
of
used
above,
interest
in
method,
means
purchasing
the
the annuity
the
depreciable
p l u s loss of interest on the book value of asset.

by
using
costing
Following
1.
the annuity
On
at
the
table.
given
This table
rate
of
the
method
interest
fixed
that
assets
amount
of the
takes
into account the
company
was
invested
asset
is
the
The amount of depreciation
shows the amount of depreciation
interest
and
for
are the j o u r n a l entries, which are passed
given
life
of
the
would
elsewhere.
original
for the
asset
in
under this method.
Dr.
To Bank A/c
2.
For Charging
Interest:
Asset A/c
Dr.
To Interest A/c
cost
is calculated
Purchase of Assets:
Asset A/c
have
Page
104
asset
years.
Financial
05.
Fixed
3.
Assets and
For Charging
Depreciation
eBook
Depreciation:
Depreciation A/c
Dr.
To Asset A/c
5.4.5 Sinking
The
basis
of
the
replacement.
fund
table.
Fund
Method
sinking
The
amount
This
table
amount
including
the
yearly
life
to
provide
amount
is
that
ready
is
of the asset,
invested
received
in
securities are sold
asset by
be
the
from
invested
at
these securities.
and
at
the
every
time
of
sinking
year
to
period.
securities
away
funds
calculated
should
some
from
liquid
easily
rate of interest within the given
depreciation
to replace the old
is
depreciation
the
the amount of interest
useful
used
of
of
method
shows
accumulate 1 at a given
Here,
fund
the
end
of
Therefore,
the funds
every
year
at the end
received
thereon
of
are
new ones.
5.4.6 Insurance Policy Method
Under
the
asset.
In
insurance
this
method,
particular asset.
be sufficient to
Fixed
year.
amount
policy
method
money
The amount
also,
is
funds
invested
of insurance
are
in
collected
taking
policy
up
for the
the
is decided
in
replacement
insurance
such
of the
policy
for
a manner that
it will
purchase new asset.
of
premium,
After the end
which
of a specific
is
equal
period,
to
the
the
amount
of depreciation,
insurance company
is
paid
pays the amount,
each
which
is sufficient to purchase new assets.
5.4.7
Production U n i t Method
In the
production
u n i t method,
Rate
of
depreciation
total
number of units
be expressed
is
directly
importance.
method.
is
calculated
to
in any u n i t
related
So,
to
this
depreciation
be
produced
but the
the
by
usage
method
is
is charged
dividing
during
the
at a fixed
depreciable
the entire
also
and
time
known
as
be
factor
usage
Formula to calculate the rate of depreciation
per u n i t of o u t p u t .
amount
life of an asset.
number of units should

factor
rate
constant.
is
of
by
the
Here output
can
Here depreciation
considered
method
asset
or
to
be
of
activity-based
per u n i t is:
.
Cost of asset - Residual v a l u e
Ra te o f d eprecta 1 ion per u n i1 ---------------
Estimated output d u r i n g t h e life of asset
less
Page
105
05.
Fixed Assets and
Depreciation
eBook
Example 04:
An asset costing ,80,000

This
asset
is
expected
has an estimated
to
generate
the
scrap value of ,1,000 over a period
output
of
4,00,000
units
of its life.
throughout
its
life.
Ascertain the rate of depreciation under production u n i t method.
Solution 04:
. ti
it
80,000 - 1 , 0 0 0
O 20
Ra t e of d epr ecta ion per u n i =
=
.
4,00,000
So,
rate of depreciation
5.4.8 Machine
Under
hour
the
Hour Method
machine
basis.
This
a p p l i c a b l e to all
dividing
per unit of output is ,0.20.
hour
method
plant and
depreciable
value
method,
is
depreciation
a l so
known
machineries,
of asset
by
as
calculated
service
aircraft, etc.
the
at
hour
fixed
rate
method.
time
(in
hours)
and
This
Rate of depreciation
estimated
The formula to calculate the rate of depreciation
Rate of depreciation per h o u r =
is
on
per
method
is
is calculated
by
asset
will
be
used.
per hour is:
Cost of asset - Residual value

Estimated time ( i n hours) Asset w i l l be used
Example 05:
On
the
basis
of following
information,
calculate
the
rate
of depreciation
under
machine
hour method.
If the cost of asset is ,40,000
Expected
Scrap value ,600
time 22,000
hours
Solution 0 5 :
40
Rate of depreciation per h o u r =
Therefore,
the rate of depreciation
5.4.9 Depletion
The
depletion
mines,
tend
etc.
ii.ioo
to deplete.
,1.
79
1.79
per hour.
Method
method
These
is
is
applicable
types of assets
In t h i s method,
do
only
not
to
exhaustive
depreciate,
but
assets
with
like
the
oil
reserves,
passage of time they
an estimate of total quantity of exhaustive assets that is
likely to be available is made.
coal
Page
106
Financial
05.
Fixed
The
Assets and
depreciation
estimated
Depreciation
under this
method
quantity of mineral
eBook
is calculated
likely to
by
dividing
be available from
the
cost
of asset
with
the
the exhaustive asset.
Here is the formula to calculate the rate of depreciation under the depletion method:
.
.
Rate of depreciation (per t o n n e e t c . ) =
5 . 4 . 1 0 Revaluation
The
end
its
Method
revaluation method
assets
like
i'.40,000
value
book
is
of the
treated
livestock,
and
as
the
revalued
loose tools will
aforementioned
method, and
5.5
year,
value are
depreciation on
Out
is the most appropriate method
loose tools, jigs,
of the accounting
book
Cost of asset
bl
.
f
.
Extracta
e q u a n t i t y o rrunera 1
etc.
Here,
the decrease
amount
be i'.2,400
There are two methods of recording
in
the
at
the
asset
value of t h i s
end
For
depreciation on the
is
asset
example,
of the
revalued
at
the
as compared
loose
accounting
tools
year.
So
to
with
here
(40,000 - 3 7 , 6 0 0 ) .
the
straight
the sum of years digit method
Methods of Recording
the concerned
of depreciation.
at i'.37,600
methods,
for charging
line
are most
method,
the
diminishing
balance
popular.
Depreciation
depreciation-when
an asset appears
in the
balance
sheet at its net value-and when asset appears in the balance sheet at its o r i g i n a l cost.
These two methods are explained

5.5.1
In
at
When an Asset Appears in the Balance Sheet at Its
this
the
method,
amount
its
below:
net
depreciation
of depreciation.
value,
depreciation
is
that
then
is,
account
is
Therefore,
the
value
transferred
to
debited
the
after
the
and
asset
asset
account
deducting
profit
the
and
the
loss
Net Value
account
appears
in
the
depreciation.
account.
is
credited
balance
This
Under
sheet
amount
this
Page
of
method,
following journal entries are m a d e :
with
107
05.
Fixed Assets and
1.
Depreciation
For Providing
eBook
Depreciation:
Depreciation A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Asset A/c
2.
For transfer of Depreciation to
Profit and
Loss A/c. . . . . . . . . . . . . . . . . . . . . . . . . .
P&L account:
Dr.
To Depreciation A/c
3.
When asset is sold:

Bank A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr
To Asset A/c
4.
For Profit or Loss on sale of asset:
a.
If Profit:
Asset A/c . . . . . . . . . . . . . . . . . . . . . . . . . .
To Profit and
b.
Dr.
Loss A/c
If Loss:
Profit and
Loss A/c . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Asset A/c
Table 5 . 5 . l a : Journal
Entries to Record the Depreciation When Asset Appears in

the Balance Sheet at Its Net Value
Example 06:
Pharma
Ltd.
20,000 on
balance
purchased
its
a machinery on June 30,
installation.
method.
Prepare
The firm
on
at a cost of s:'4,00,000 and
writes off depreciation
machinery
Books of accounts are closed
2009,
account
December 31
and
at
10%
depreciation
by using
account
for
the
spent
reducing
three
years.
every year.
Page 108
05.
Fixed Assets and
In
this
Depreciation
case,
for
the
asset
because
December 3 1 .
and
You
need
to
the
end
profit and
was
year,
purchased
So for the first year,
carry forward
on
brought forward
At
first
depreciation
on
June
is
30,
charged
2009,
for
and
six
the
months,
year
end
is
machinery was used only for six months;
then onwards for one year.
this example,
the
eBook
of
the very
the
balance of asset
the
first day of the accounting
from the previous accounting
every
in
year,
the
balance
in
next accounting
year;
the
year as
balance
has
in
been
year.
depreciation
account
is
transferred
to
loss account and depreciation account is closed.
Example 07:
Ram Traders purchased
the
company
company sold
purchased
a vehicle on J u n e 30,
purchased
another
vehicle
off the vehicle which was
new
vehicle
for 4 , 0 0 , 0 0 0 .
vehicle by the straight l i n e method and

You
are
ending
required
on
2006,
to
prepare,
2007,
2008,
the
and
2006,
costing
purchased
The
for 3 , 0 0 , 0 0 0 .
2,20,000.
on J u n e 30,
company charges
books are closed on
vehicle
2009.
and
notes
June
2006,
7. 5%
30,
1,
2007,
2009,
for 2 . 0 0 , 0 0 0 and
depreciation
on
accounts
should
form
for
the
three
part
the
Page
years
of your
answer.
the
December 31 of every year.
depreciation
Working
On
On January
110
05.
Fixed
Solution
Assets and
Depreciation
eBook
07:
In the books of Ram

'Dr.'
Vehicle A/c
Date
Particulars
J.F.
(f)
2006
Jun.
Traders
'Cr.'
Particulars
Date
J.F.
(f)
2006
30
To Bank A/c
3,00,000
Dec. 31
By Depreciation A/c
11,250
(for 6 months)
Dec. 31
By Balance c/d
2,BB, 750
3,00,000
2007
3,00,000
2007
Jan.
To Balance b/d
2,BB,750
Jan.
To Bank A/c
2,20,000
Dec. 31
By Depreciation A/c
39,000
(22,500 + 16,500)
Dec. 31
By Balance c/d
4,69,750
S,08,750
2008
Jan.
5,08,750
2008
1
To Balance b/d
4,69,750
Dec. 31
By Depreciation A/c
39,000
(22,500 + 16,500)
Dec. 31
4,30, 750
By Balance c/d
4,69,750
2009
Jan.
4,69,750
2009
1
Jun. 30
To Balance b/d
4,30,750
Jun.
To Bank A/c
4,00,000
Jun. 30
30
By Bank A/c
2,00,000
By Depreciation A/c
11,250
(for 6 months)
Jun.
30
By Profit & Loss A/c

(Loss)
Dec. 31
Wllf"klng
Note
32,500
By Depreciation A/c
31,500
( 1 6 , 5 0 0 + 15,000)
Dec. 31
By Balance c/d
5,55,500
8,30,750
8,30,750
Table 5 . 5 . l d : Vehicle A/c
Page
111
05.
Fixed Assets and
Depreciation
eBook
Depreciation A/ c
' D r. '
J,F,
Particulars
Date
(t)
'Cr.'
Particulars
Date
2006
J,F,
(t)
2006
Dec. 31
11,250
To Vehicle A/c
Dec. 31
11,250
11,250
11,250
2007
2007
Dec. 31
39,000
To Vehicle A/c
Dec. 31
39,000
39,000
2008
39,000
2008
Dec. 31
39,000
To Vehicle A/c
Dec. 31
39,000
39,000
2009
39,000
2009
Jun. 30
To Vehicle A/c
11,250
Dec. 31
To Vehicle A/c
31,500
Dec. 31
42, 750
42,750
42,750
-
Table 5 . 5 . l e :
Working
Note
1:
The calculation of profit/loss on
Cost (June 30,

Less:
Depreciation
Depreciation
is as follows:
3,00,000
(December 3 1 ,
2006)
11,250
2,88,750
(December 3 1 ,
2007)
22,500
1, 2008)
Depreciation
WDV (on January

Less:
2009,
1, 2007)
WDV (on January

Less:
sale of vehicle on J u n e 30,
2006)
WDV (on January

Less:
Deprec1at1on A/c
2,66,250
(December 3 1 ,
2008)
22,500
1, 2009)
Depreciation
2,43,750
(June 30,
2009)
11,250
WDV on the date of selling
2,32,500
Less:
2,00,000
Selling
price
Loss
32,500
-
Table 5.5.lf: Working
this
method,
depreciation
depreciation account
end
of
the
year
original cost and
is
not
is maintained
when
Note for Calculation of Profit/Loss on Sell of Vehicle
5.5.2 When Asset Appears in the

In
the
Balance Sheet at its Original Cost

directly
credited
to
the
asset
account.
Provision
to accumulate the balance of depreciation. And
balance
sheet
is
prepared,
the
asset
account
is
Page
at the
shown
provision for depreciation account appears on the liability side.
112
for
at
Financial
05.
Fixed
Assets and
Depreciation
eBook
Journal entries used u n d e r t h i s method are as follows:
For Providing
1.
Depreciation:
Depreciation A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Provision for depreciation A/c
2.
For transfer of Depreciation to P&L
Profit and
Loss A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
account:
Dr.
To Depreciation A/c
3.
When an asset is sold, the accumulated depreciation

for depreciation account
in the provision
on the asset sold, is transferred to asset
account:
Provision for depreciation A/c . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dr.
To Asset A/c
For profit and
loss on sale of asset same entries are passed as in aforementioned
method.
.
Table 5 . 5 . 2 a : Journal
Entries to
Record the
Deprec1at1on When Asset Appears m
the Balance Sheet at Its Cost
Example 08:
On
April
year,
the
1,
2007,
Ahuja
company
Ltd.
purchased
purchased
additional
machinery that was bought on April
1,
furniture for 2,00,000.

furniture
2007,
for 1 . 0 0 , 0 0 0 .
was sold
30, 2009, furniture purchased on J u l y 1, 2007 was sold
The
firm
every
provides
year.
depreciation
Prepare
on
furniture
furniture
account,
5%
provision
July
On
1 of the same
October
off for 1 , 4 0 , 0 0 0 .
On
1,
2008,
September
off at 6 0 , 0 0 0 .
p.a.
depreciation account for three accounting years ending
On
on
for
original
cost
depreciation
on
March
account
March 3 1 .
Page 1 1 3
31
and
05.
Fixed Assets and
Depreciation
eBook
Solution 08:
In the books of Ahuja Ltd.

'Dr.'
Furniture A/ c
Date
Particulars
J.F.
(f)
Date
2007
Apr.
Jul.
'Cr.'
Particulars
J.F.
2008
1
To Bank A/c
2,00,000
To Bank A/c
1,00,000
Mar.
31
By Balance c/d
3,00,000
3,00,000
2008
Apr.
(f)
3,00,000
2008
1
To Balance b/d
3,00,000
Oct.
By Bank A/c
Oct.
By Provision for
1,40,000
Depreciation A/c
Oct.
15,000

(Loss)
Working
Note
45,000
2009
Mar.
31
By Balance c/d
1,00,000
3,00,000
2009
Apr.
3,00,000
2009
1
To Balance b/d
1,00,000
Sep. 30
By Bank A/c
Sep. 30
By Provision for
60,000
Depreciation
11,250
(3,750 + 5,000 + 2,500)
Sep. 30

(Loss)
Working
Note
28,750
1,00,000
1,00,000
.
Table S . S . 2 b :
Furniture A/c
Page
114
05.
Fixed
Assets and
Depreciation
'Dr.'
eBook
Date
J.F.
Particulars
Particulars
Date
<'>
2008
Mar.
'Cr.'
Provision for Depreciation A/c
J.F.
31
13, 750
To Balance c/d
Mar.
13,750
By Depreciation A/c
31
(10,000
+ 3,750)
13,750
13,750
2008
Oct.
2008
1
15,000
To Furniture A/c
2009
Mar.
31
8,750
To Balance c/d
Apr.
By Balance b/d
Oct.
By Depreciation A/c
5,000
31
By Depreciation A/c
5,000
13,750
2009
Mar.
23,750
2009
23,750
2009
Sep. 30
11,250
To Furniture A/c
Apr.
Sep. 30
By Balance b/d
8,750
By Depreciation A/c
2,500
11,250
11,250
.
Table 5.S.2c:
'Dr.'
Prov1s1on for Deprec,at,on A/c
'Cr.'
Depreciation A/ c
Date
J.F.
Particulars
Particulars
Date
<'>
2008
Mar.
J.F.
<'>
2008
31
To Provision for
Mar.
31
13,750
13, 750
Depreciation A/c
13,750
2008
Oct.
<'>
2008
13,750
2009
1
To Provision for
Mar.
31
10,000
5,000
Depreciation A/c
2009
Mar.
31
To Provision for
5,000
Depreciation A/c
10,000
2009
Sep. 30
10,0000
2010
Mar. 31
To Provision for
2,500
2,500
Depreciation A/c
2,500
2,500
.
Table 5 . 5 . 2 d :
Deprec,ation A/c
Page
115
05.
Fixed Assets and
Working
Note
Depreciation
eBook
1:
Calculation of profit/loss on sale of furniture on Oct.
1, 2008:
Cost
t2,00,000
Less: Accumulated
depreciation till the date of selling
tlS,000
WDV
tl,85,000
Less: Selling
price
tl,40,000
'(45,000
Loss
Table 5.S.2e: Working
Working
Note
Note for Calculation of Profit/Loss on Sale of Furniture
2:
Calculation of profit/loss on sale of furniture on September 30,
2009:
Cost
tl,00,000
Less: Accumulated depreciation till the date of selling
<11,250
WDV
,88,750
Less: Selling price
,60,000
Loss
'(28,750
Table S.S.2f: Working
Note
In
this
problem,
is recorded
depreciation
Note:
it
the
depreciation,
year
5%
p.a.
of the formula,
but here
that
the
Follow the journal
that
is,
when
asset
has been used.
is straight line method,
is charged
because it has been mentioned
on original cost every year.
such as the formula given
is calculated
for straight
in the
line method
is
it is given in the form of percentage.
asset
opening date of accounting
of recording
is not necessary that every time the depreciation
different,
In
method
of depreciation
pattern
second
in the balance sheet at its original cost,
The method
that,
the
was
period
entries given
sold,
the
till the day
for the
depreciation
it
is
calculated
from
the
has been sold.
recording
of depreciation,
depending
upon
the method asked.
When any asset is sold,
To
know
o
profit or loss on
profit or loss, you
need
to do the following:
First deduct accumulated depreciation till the date of s e l l i n g

cost of asset, the resulted
its sale is calculated.
Then,
deduct the selling
figure is called
from
the original
as written down value (WDV).
price of asset from the written down value.
Page
116
Financial
05.
Fixed Assets and
If s e l l i n g
Depreciation
eBook
price is more than written down value, then it is a profit or else it is
a loss. This calculation
has to be shown
separately
(as working
notes),
after
preparing the accounts.
Change in the
Sometimes,
Method of Depreciation
a company may decide to c h a n g e the
due to some reasons.

the
asset
due
to
In
such cases,
change
in
the
method
the difference
method
of
of charging
between
depreciation
is
the depreciation
the written down

adjusted
to
values of
profit
and
loss
account. The following example w i l l help you to understand this concept more clearly.
Example 09:
On January
1,
installation.
On October 1, 2009, a new plant costing t60,000 was purchased.
2011,
plant
provided
depreciate
2009,
Shah
purchased
5%
the
p.a.
plant
on
on
Ltd.
purchased
January
1,
o r i g i n a l cost t i l l
@10/o
by
the
a plant for tB0,000
2009
was
sold
for
December 2 0 1 1 ;
diminishing
balance
and
spent t20,000 on
{65,000.
then
On July
Depreciation
Prepare
plant
machinery account from the year 2009 to 2 0 1 1 .
Page 1 1 7
1,
was
the company decided
method.
its
to
and
05.
Fixed Assets and
Depreciation
eBook
Solution 09:
In the books of Shah

'Dr.'
'Cr.'
Plant & Machinery A/c
Date
Particulars
J,F,
(f)
2009
Date
Particulars
J,F,
(f)
2009
Jan. 1
To Bank A/c
1,00,000
Dec. 31
(80,000 + 20,000)
Oct.
Ltd.
By Depreciation
5,750
(5,000 + 750)
To Bank A/c
60,000
Dec. 31
By Balance c/d
1,54,250
1,60,000
2010
Jan. 1
1,60,000
2010
To Balance b/d
1,54,250
Dec.
31
By Depreciation
(5,000 + 3,000)
Dec.
31
8,000
By Balance c/d
1,46,250
1,54,250
2011
Jan. 1
1,54,250
2011
To Balance b/d
1,46,250
Jul.
By Bank A/c
Jul.
By Depreciation A/c
Jul.
31
Dec. 31
2,500
By Prent & Loss A/c
(Loss)
Dec.
65,000
Working Note l
22,500
3,000
By Depreciation A/c
By Balance c/d
53,250
1,46,250
2012
Jan. 1
1,46,250
2012
53,250
To Balance b/d
Jan.
5,865

(Dep. Adjusted)
Working
Noh! 2
Dec.
31
By Depreciation A/c
Dec.
31
By Balance c/d
4,739
42,646
53,250
Table 5 . 5 . 2 9 :
Plant and
53,250
Machinery A/c
Page
118
Financial
05.
Fixed
Working
Assets and
Note
Depreciation
1:
Calculation of profit/loss of the plant sold
Cost (January
Less:
WDV
Less:
WDV
Less:
eBook
1,
on J u l y
1,
2009,
is as follows:
2009)
Depreciation
(on January
(on January
(December 3 1 ,
1,
Depreciation
2009)
5,000
2010)
95,000
(December 3 1 ,
1,
Depreciation
1,00,000
2010)
5,000
2011)
(July
1,
90,000
2009)
2,500
WDV on the date of s e l l i n g

Less:
Selling
87,500
price
65,000
Loss
22,500
Table 5 . 5 . 2 h : Working
Working
Note for Calculation of Profit/Loss on Sell of Plant
Note 2:
Calculation of difference between the amounts of WDV
is as follows:
Straight Line
Date and
Diminishing
Method
1.10.2009
Cost of plant
1.12.2009
WDV
1.12.2010
Depreciation
1.01.2011
WDV
1.12.2011
Depreciation
1.01.2011
WDV
So the difference is 5.865

Since the first plant,
Method
60,000
60,000
750
1,500
59,250
58,500
3,000
5,850
56,250
52,650
3,000
5,265
53,250
47,385
Depreciation
1.01.2010
Note:
Balance
Particulars
(53,250 - 4 7 , 3 8 5 )
which was purchased
before changing the method of depreciation,
on January
that asset
1,
2009, was sold off
has not been taken
into
consideration.
.
Table 5 . 5 . 2 , : Working
Note for Calculation of Difference between WDV Due to
Change in the Method of Depreciation
Page 1 1 9
05.
Fixed Assets and
Depreciation
eBook
The
most
important
thing
in
this
example
method of charging the depreciation,

change
which
in the method
is highlighted
of depreciation
in the table.
the accounts (see working
If o n l y the asset account

the
provision
If there
then
is
also
no
that,
the
new
company
is transferred
This has to
to the profit and
be shown as a working
changed
is asked
transaction,
loss account,
note
beneath
to
be
prepared
and
nothing
has
to
that
be
is,
there
charged
in
is
no
that
sale
year
is mentioned
be opened,
or
for
about
then the first
be used.
purchase
the
of an
assets,
Page
asset,
which
there in the business ( i n this example you can see this in the year 2 0 1 0 ) .
its
note 2 ) .
the depreciation on the fixed asset s h o u l d
depreciation
has
so, the difference in the value of plant d u e to
for depreciation or depreciation account to
method of recording
is
120
are
Financial
05.
Fixed Assets and
Depreciation
eBook
Assets
of
the
business
enterprise
are
broadly
classified
into
fixed
assets
and
current assets.
Fixed
assets
period.
Fixed
assets,
Intangible
assets.
those
which
Examples are land and
For example,
are
which
can
be
buildings,
seen
useful
life
of
more
than
which
For example,
cannot
or touched,
are
known
as
tangible
are
known
fixed
assets.
be
seen
or
touched,
business
is the
as
i n t a n g i b le
patents, goodwill, etc.
operations
prepaid expenses, short-term

Depreciation
accounting
plant and machinery, furniture, etc.
assets,
normal
one
furniture, goodwill, etc.
Current assets are those assets, which are meant to be converted

the
have
of the
enterprise.
Examples
are
into cash d u r i n g
bills
receivable,
investments, etc.
proportion of the value of the fixed
assets,
which
is decreased
or utilized d u r i n g an accounting year to generate revenue.
Depreciation
various
is a permanent and
reasons
like
wear
and
gradual decrease in the value of an asset due to
tear,
passage
of
time,
obsolescence
or
abnormal
the
methods,
factors, etc.
There
are
different
methods
of calculating
straight line method and d i m i n i s h i n g
depreciation.
Out
of all
balance method are most commonly used.
Page 1 2 1
F i n a l Accounts
I T M
Financial
06.
Final Accounts
eBook
6 . 1 Introduction
Siddhesh
and
one
prepared journal,
much
his
completed
is his profit and
transactional
requirements.
a trading,
year
ledger,
records,
and
his
and
business;
trial
he
recorded
all
balance accurately.
the transactions carefully
Now,
he wishes to
where he stands in terms of his f i n a n c i a l position.

but
He contacts
profit
in
loss
he
finds
his friend,
account,
information a v a i l a b l e with
it
difficult
to
arrange
a financial consultant,
and
balance
sheet,
that
the
information
final
how
He is sure about
who advises
is,
know
him
accounts,
as
to
per
prepare
using
him. This chapter provides you with the procedures to
his
the
prepare
the final accounts, which you can use in your business situation.
After reading t h i s chapter,
Explain
the
you
importance
will
of
be able to:
trading
account,
profit
and
loss
account,
and
balance
sheet
Prepare trading
Post
the
account,
elements
basis of accounting
from
profit and
trial
loss account,
balance to
rules taught in
respective
balance sheet
parts
of final
accounts,
on
previous chapters
List the different adjustment entries related
and
to fi n a l accounts
Page 1 2 3
the
06.
F i n a l Accounts
eBook
6 . 2 M e a n i n g of F i n a l Accounts
As you
the
know, organizations first
ledger,
balanced
the
which
sheet.
balanced
transactions,
preparation
profit
are
and
loss
These
account
accounts
is
at
end
profitability
balance
By
period.
of
is
of
in
business
Final accounts give them
With
balance
is
balance details,
helps
knowing
in
to
the
help
of these
used
as a
base for
trading
preparation
the
profitability
are the accounts that are
It is a documented
the
the journal then post them to
period.
Trial
further
owners
in
specific
the trial
which
accounts
prepared.
using
business
Final
position
the
prepared,
help
business.
of a particular financial
outsiders.
trial
the transactions
of final accounts.
positions of the
and
the
record
account and
of
balance
and
at
the end
source to convey the financial
position
the
management,
a summary of what
has
prepared
financial
owners
and
interested
been done financially
by the
organization.
6 . 3 Trading Account
Trading
account gives detailed
the organization.
By
and
large,
transactions in the trading

the
by
profits
them.
earned
It
is
or
the
the organizations that are
account.
losses
first
information on the purchases and
part
The trading
incurred
of the
because
income
into
sales of goods done
manufacturing,
record
by
all
account gives the organization a view of
of
the
manufacturing
statement
and
generally
and
the
reflects
sales
the
done
trading
resu It of the firm.
6.3.1
Format of Trading Account
Dr.
Cr.
Trading Account for the period ending . . .

Amount
Amount
Particulars
Particulars
(f)
To Opening
Less:
xxx
Stock
To Purchases
Returns
(f)
xxx
xxx
Less:
xxx
To Direct Expenses
xxx
By Gross Profit***
xxx
xxx
By Sales
Returns
By Closing
xxx
xxx
xxx
Stock
xxx
By Gross Loss***
xxx
xxx
.
Table
6 . 3 . l a : Trading Account Format
*** Only one figure out of gross profit or gross loss w i l l appear.
Page
124
Financial
06.
Final
Accounts
eBook
Items on the Debit Side

Opening
Trading
from
Stock
account
the
opening
starts
closing
with
stock
of
the opening
the
last
stock on
year's
the d e b i t
accounts.
side.
newly
Opening
started
stock
business
is taken
has
zero
stock.
Purchases
The
by
next
element
of trading
the organization
included
here.
purchased
assets
for
the
Purchases
account
is
purpose of
include
net
purchases.
reselling
both
cash
or
The
production,
and
credit
land
and
machinery,
building,
etc.
are
not
of
during
purchase
for regular business transactions are considered
like
amount
under
purchases
a financial
year
transactions.
purchases,
included
in
made
is
Assets
while fixed
purchases.
If
the
proprietor uses some of the goods for personal use, then the journal entry is:
Drawings A/c
Dr.
To Purchases A/c
Similarly,
if goods are distributed
affected, and
the entry
as free samples,
etc.,
then the purchase account is still
is:
Advertisement A/c
Dr.
To Purchases A/c
Purchases
These
are
Returns or
the
returns
purchases amount.
purchases
and
net
purchases m i n u s
Return Outwards
made
to
sellers
or
Amount of purchases
amount
of
purchases
suppliers.
returned
is
This
amount
is
deducted
to the s u p p l i e r is deducted
calculated.
So,
net
purchases
from
the
from gross
mean
gross
purchases returns.
Direct Wages
Direct wages paid
is a direct expense and
shows 'Salaries and

to
the
during
purchase
of
wages A/c',
the
goods
then
are
the construction of a building
debited
to trading
it is not taken
considered
account.
under trading
under
is not considered
direct
If the trial
account.
wages.
under trading
balance
Wages
While
l i n k ed
wages
account.
Page
125
paid
06.
F i n a l Accounts
eBook
Direct Expenses
Direct
from
all
expenses,
in
context
of
the stage of purchasing
expenses
direct
incurred
expenses.
fuel and gas,
Gross
If net
For
in
merchandise
business,
the goods till the final
converting
example,
raw
wages,
all
the
expenses
stage of production.
materials
carriage
include
into
or
the
freight
sellable
inward,
incurred
In other words,
product
factory
are
called
rent,
power,
octroi, etc.
Profit
sales
account
written
is
is
more
more
than
than
the
that
cost
of goods
of debit
on the debit side of trading
profit is then carried
forward
side,
sold
then
account
or
it
(as
is
if the
total
a gross
per
of credit
profit.
balancing
to the credit s i d e of profit and
Gross
side
of trading
profit
rule of ledger).
is always
This gross
loss account.
Items on the Credit Side

Sales
Major
credit
side
items
means the finished

sales,
and
account.
export
Sales
of
trading
account
goods or stock sold

of
goods
if
any.
assets is not to be included
in a period
It
returns are deducted
include
is
from
net
sales
of time.
mentioned
on
and
It
the
closing
stock.
Sales
sales,
credit
inc ludes cash

credit
the sales to derive the
side
of
net sales.
the
trading
Sale of fixed
here.
Sales Return or Return Inwards
It
includes
the
customers.
value
This
of
the
amount
is
defective
always
or
damaged
deducted
from
goods,
the
which
sales
were
value
to
returned
arrive
at
by
the
the
net
sales figure.
Closing Stock
It
is
generally
closing
goods.
is
stock.
assumed
This
At the end
termed
termed
as
is
that
all
the
practically
goods
not
possible.
of every accounting
closing
as opening
stock.
stock in
is next year's opening
This
have
year,
closing
the next year.
been
Every
sold
and
business
there
is
left
with
is
whatever goods that
stock
is
transferred
remain
to
Therefore technically,
the
no
opening
some
in
next
the
or
unsold
business
year
and
this year's closing
is
stock
stock.
Gross Loss
If
net
sales
account
is
are
more
greater
than
than
that
of
cost
credit
of
goods
side,
then
sold
it
is
or
a
if
total
gross
of
loss.
debit
Gross
side
loss
Page
of
trading
is
always
126
Financial
06.
Final
Accounts
eBook
written on the credit side of trading
account
(as
per
balancing
gross loss is carried forward to the debit side of profit and
rule of ledger).
Then,
this
loss account.
Other Items
Customs and
For
goods
Import Duty
that
have
been
imported
from
outside
the
country,
import
duty has to be p a i d . The amount of such duties is charged to trading
duty
and
custom
account.
Freight, Carriage, and Cartage
Freight,
of
the
carriage,
goods.
and
They
are
freight in or cartage
trading
account.
to be transferred
Gas,
But
gas,
taken
the
in are used,
debit
then
you
if the terms are used
Fuel, and
electricity,
side
will
of
the
have
incurred
trading
for
account.
to consider them
purchasing
If
the
terms
as a part of the
as freight out or cartage out,
then they are
Water
water,
taken as direct expenses.
Packing
to
as direct expenses
to the profit or loss account.
Electricity,
Since
cartage are considered
fuel
Hence,
etc.
are
directly
they are charged
related
to
to trading
manufacturing,
they
are
account.
Materials
Packing
materials
packing
materials
are
are
used
to
convert
charged
to
the
make the goods attractive or packing

are not considered
under trading
manufactured
trading
goods
account.
expenses incurred
into
Packing
sellable
goods.
expenses
after the product
These
incurred
has been
to
sold,
account.
Example 0 1 :
The
following
figures
profit or loss m a d e by
are
taken
from
the
trial
balance
of
Mr.
Siddhesh.
Calculate
him.
Amount
Particulars
(f)
Sales
1,00,000
Sales Returns
5,000
Purchases
20,000
Purchases Returns
Table 6 . 3 . l b :
5,000
Example 01
Page
127
the
06.
F i n a l Accounts
eBook
Solution O 1:
Method
01
Amount
Amount
('I')
('I')
Particulars
Sales
Less:
1,00,000
Sales Returns
5,000
Purchases
95,000
20,000
Purchases Returns
(15,000)
5,000
G r o s s Profit
80,000
Table 6 . 3 . l c : Solution in Vertical
Format
Solution O 1:
Method
02
Trading Account of Siddhesh for the Year Ending

Amount
Amount
Particulars
('I')
To Opening
Amount
Amount
('I')
('I')
Particulars
('I')
-
Stock
To Purchases
By Sales
Less:
20,000
1,00,000
Sales
5,000
95,000
Less:
Purchase
5,000
15,000
Returns
Returns
By Closing
By Gross Profit
(balancing
80,000
Stock
figure)
95,000
95,000
Table 6 . 3 . l d : Trading Account
Conclusions
From the above trading

hand
side
is
greater
account you
than
the
left
can
hand
have been the opposite, the balancing
draw the following

side
total,
figure w i l l
you
get
conclusions.
the
gross
Since the 'right
profit.
If
it
be gross loss.
Page 128
would
Financial
06.
F i na l
Accounts
eBook
Example 02:
Take example 01 as the base and
Value of unsold
the following
additional
information:
goods is '5,000
Solution 02:
In
this
case,
when
goods
have
not
been
sold,
the
cost
of goods
sold
will
be
calculated
as:
Cost of Goods Sold
= Net Purchases - Closing Stock

= 15,000 - 5,000
= 10,000
Gross Profit
Net Sales - Cost of Goods Sold
= 9 5 , 0 0 0 - 10,000
= 85,000
Example 03:
Calculate the gross profit, using
the following
information.
Amount
Particulars
(f)
Opening
Stock
10,000
Purchases
15,000
Purchases Returns
2,000
Sales
Sales
35,000
Returns
3,000
Expenses Incurred
Closing
on
Purchases
Stock
4,000
Table 6 . 3 . l e :
5,000
Example 03
Page
129
06.
F i n a l Accounts
eBook
Solution 0 3 :
Amount
Particulars
(t)
Credit side
Sales
Less:
35,000
Sales Returns
(A)
3,000
Net sales
32,000
Debit side
Opening
Less:
Add:
Less:
Add:
Less:
Stock
10,000
Purchases
Purchases
15,000
Returns
Expenses Incurred
Closing
2,000
on
Purchases
5,000
Stock
4,000
(B)
Debit Side
Balance
(C)
Gross Profit
24,000
8,000
.
Table
The following
formulas are used
6 . 3 . l f : Vertical format
in the calculations:
Gross Profit = Sales - Cost of Goods Sold
Cost of Goods Sold
Therefore,
Opening
Stock +
Purchases+
Direct Expenses - Closing
Stock
Gross Profit =
Sales - (Opening
Stock +
Purchases+
Direct Expenses - Closing
Stock)
Or Gross Profit =
(Sales + Closing
Stock)
- (Opening
Stock + Purchases+
Direct Expenses)
Page
130
Financial
06.
Final
Accounts
eBook
Example 04:
Prepare
trading
the following
account
of
Mr.
Pradeep
for
the
year
ending
December
31,
2012,
from
data.
Amount
Amount
Particulars
Particulars
(')
C'>
Purchases
15,000
Purchases Returns
2,000
Sales
30,000
Sales Returns
2,500
Wages
3,000
Carriage Charges
4,000
Stock on J a n .
1 2012
5,000
Stock on
31 2 0 1 2
7,000
Dec.
Table 6 . 3 . l g : Trading Account Example 04
Solution
04:
Trading Account for the Year Ending
Dr.
2012
Cr.
Amount
Amount
Particulars
Particulars
('!')
To o p e n i n g
stock
By Sales
5,000
To Purchases
15,000
Returns
Less:
('!')
30,000
L e s s : Returns
2,000
13,000
To Wages
3,000
To Carriage Charges
4,000
To Gross Profit
By Closing
2,500
27,500
Stock
7,000
9,500
34,500
34,500
Table 6.3. lh: Trading Account Solution 04
6.3.2 Closing
Closing
Entries
entries
are
These entries are
used
to
related
close
to
the
different
closure
accounts
of the trading
accounts related
to assets and
to the next year.
Therefore, elements related
The
method
of
closing
the
balance are to
be credited
to
it
be
closed,
account
will
be
is
to
be
credited
in
liabilities are not closed
accounts
is
trading
since
very
it
account
the
and
end
of the
profit
and
accounting
loss
year.
account.
because they are carried
The
forward
to the balance sheet are not closed.
simple;
order to close them.
credited,
and
at
has
will
the
accounts
For example,
a
debit
be
show
debit
if purchase account
balance.
debited.
which
Therefore,
Similarly,
if
purchase
sales
Page
has
account
131
06.
F i n a l Accounts
has
to
be closed,
eBook
sales account will
sales account will be debited
The closing
Trading
since
and trading account w i l l
entries are passed
Account..
be debited,
it
has
a credit
balance.
Therefore,
be credited.
in the journal proper.
Dr.
To Stoc k Account ( o p e n i n g )
To
Purchases Account
To Sales Returns Account

To Carriage Account
To Customs Duty Account
Sales Accou nt..
Dr.
Purchase returns Account..
Dr.
Stock Account
Dr.
(Closing)
To Trading Account
6.4 Profit a n d
Prof.
and
Carter
losses
losses
or
Trading
has defined
are
vice
collected
will
give
in
an
sale of goods.
other operating
account.
profit and
order
the
recorded
second
on
the
of
how
It o n l y focuses on
of
the
excess
bus iness
finding
of
gains
losses,
profit
credit
and
side
over
the
performed
in
income that are
not considered
terms
There are
in
trading
to the administrative staff)
loss
do
not
account;
profit
and
appear
in
whereas,
loss
trading
all
account.
account,
indirect
Profit
are
and
income
and
loss
recorded
or
gains
account
part of the income statement.
of
investments).
which
of
has
out gross profit or loss.
be other expenses (like salaries paid
other expenses and

side
ascertain
expenses, other expenses and
There may
debit
to
overview
income (like interest received on
All
loss account as, "An account into which a l l gains
versa."
account
purchase and
Loss Account
Page
132
is
on
are
the
Financial
06.
F i na l
6.4.1
Accounts
eBook
Format of Profit and
Loss Account
Profit and
Loss Account
for the Year Ending
Dr.
Cr.
Amount
Amount
Particulars
Particulars
('t')
('t')
By Gross
To Gross
A/c,
(Transferred
Loss b/d
(Transferred from
if there is
xxx
trading
trading A/c,
loss)
from
xxx
if there is
any profit)
To Salaries
To Rent and
Profit b/d
Rates
xxx
By Interest Received
xxx
xxx
By Discount
xxx
Received
By Commission
xxx
To Repairs
By Bad
xxx
To Bank Charges
xxx
Received
Debts
xxx
Recovered
By Net Loss (Balancing
To Audit Fees
xxx
To Carriage Outward
xxx
To Lighting
xxx
To Stationery
xxx
To Insurance
xxx
To Postage
xxx
To Discount Allowed
xxx
To Provision Allowed
xxx
To Provision
For Bad
xxx
figure)
xxx
Debts
xxx
To Depreciation
To Net Profit (balancing
xxx
figure)
xxx
Total
Table 6 . 4 . l a :
The
profit
trading
and
loss
account.
transferred
account
Gross
to the debit side.
Format of Profit and
starts
profit
xxx
Total
is
with
transfer
transferred
After a l l
entries,
of
to
Loss Account
gross
the
profit
credit
if the balancing
or
side
gross
and
loss
from
gross
loss
the
is
figure is on the debit side,
Page
133
06.
it
F i n a l Accounts
is
considered
considered
as
eBook
as
Net
Net
Profit.
Loss.
Income
trading account are entered
6.4.2 Explanation of the

Gross
The
the
and
balancing
expenses
in the profit and
figure
is
other than
on
the
credit
whatever
is
side,
recorded
it
is
in
the
on
the
loss account.
Elements given
in the
Format
Profit or Gross Loss
figure
credit
If
of gross
profit
of
and
side
profit
is
carried
loss
down
account.
from
Also,
appears on the debit side of the profit and
trading
there
account,
can
be
which
gross
appears
loss
possible,
which
loss account.
Salaries
Salaries
paid
to
the
charged
to profit and
employees
for
loss account.
services
rendered
Salaries paid
by
them
in
the
business
to the partners are also added
are
also
here.
Salaries Less Tax

Tax is deducted
case,
is
at source for certain employees earning
the gross salaries
deducted
authorities.
deducted
recorded
at
in
from
paid
source
For example,
source,
will
be
shown
if salary
then
profit and
are charged
total
paid
gross
to
as
till
it
is
after deducting
is ,2600.
tax deducted
a particular limit.
loss account and
liability
is ,2400
salary
loss account and
profit and
beyond
This total
and
gross
with
the
is
,200
salary
is recorded
(,200)
the amount that
deposited
tax
In t h i s
tax
the tax
of ,2600
as liability
is
in the
balance sheet.
Interest Paid or Interest Received

Interest
paid
recorded
on
since
third
it
is
on
short-term
debit
not
side of
directly
Commission
Paid and
can
be
to
income
the credit side of profit and
Commission
long-term
profit and
related
party w i l l create an
or
loss account.
the
sale or
providing
businesses.
business
Commission
It
an
expense
is an
and
so
expense of an
received),
goods.
should
indirect
Loans
which should
it
be
nature,
given
to
be recorded
the
on
loss account.
received
Received
or
paid;
side as well as on the debit side of profit and

for
is
purchase of the
(that is interest
Commission
either
loans
and
paid
commission
will
appear
is
on
w i l l appear on the credit side of the profit and
therefore,
it
loss account.
earned
the
for
debit
can
be
an
item
Commission
providing
side,
while
on
the
is paid
business
commission
to agents
to
other
received
loss account.
Page
credit
134
Financial
06.
F i na l
Accounts
eBook
Trade Expenses
It is an expense of miscellaneous
as
sundry
charged
expenses,
to profit and
nature and
miscellaneous
is usually of s m a l l amount.
expenses
or
petty
It
is also
known
They
expenses.
are
loss account.
Printing and Stationery
It
includes
ink,
pencil,
expenses
incurred
in
printing
of
bills,
paper and
other items of stationery.
invoices,
registers,
letters,
handbills,
It is an expense of indirect nature.
Advertisements
Advertisement
expense is
incurred
therefore they are a part of selling
Bad
Bad
to
attract
the
customers
and
to
increase
the
sales,
expenses.
Debts
debts
unpaid
spite
or partially
of
occurs
is the amount that
the
the
by the debtors.
The amount
is either completely
paid. The creditors try their best efforts for the collection,
efforts
when
is unpaid
if
it
is
debtors
t h a n the cost of bad
not
collected,
declare
it
insolvency
will
be
treated
or
cost
of
as
bad
collection
debts.
of
the
but when
This
debt
is
in
usually
greater
debt.
Depreciation
Depreciation
lapse,
in
in
the
value
obsolescence, exhaustion
and
accident.
the
value
computers,
and
they
value.
is
the
of
like
lose
decrease
the
assets
from
their
which
desktop
value
The depreciation
to
over
are
laptop.
time.
amount
of the
of
is charged
Also
old
In
Also
asset,
to
to
technology.
car
its
wear
technology c h a n g e
offices
due
desktops
damaged
profit and
in
For
and
tear,
time
leads to decrease
example,
upgrading
are
replaced
with
laptops
an
accident
may
lose
loss account.
It appears
on
its
the
debit side.
Discount Allowed
It
is
reduction
Discount
the
for
reduction from
given
for
the
Discount Received
price
is of three types;
buyer
quantity
in
and
of
prompt
the list
items
that
one
listed
in
cash,
price granted
of goods
by
the
is cash discount,
payment
purchased.
purchasing
is
The
in
other
seller
bulk.
type
of
Quantity
reduction
where discount
is
trade
by the supplier.
last
or
It
has a direct
is
d i sc o u n t
and
the
is given
discount,
discount
in
quoted
price.
by the seller to
where
discount
is
relationship with the
quantity
discount,
trade discount
which
are
Page
is
similar
135
06.
F i n a l Accounts
to each other.
and
Discount allowed
following
preparing
For
appears on
the debit
side of the
profit and
loss account
discount received appears on the credit side.
6.4.3 Accounting
The
eBook
the
transfer
are
Entries for the Preparation of Profit and

the
journal
profit and
of
entries
that
are
to
be
passed
Loss Account
in
the
journal
proper
for
loss account.
expenses,
losses,
etc.
appearing
on
the
debit
side
of
the
trial
balance
Profit and
Loss Account A/c
Dr.
To Salaries A/c
To Commission A/c
To
Rent A/c
To Advertisements A/c
To
Bad
Debts A/c
To
Discount A/c
To Interest Paid A/c

To
For
Trial
the
Printing
Transfer
of
and
Stationery A/c
Income,
Gains,
etc.,
Appearing
on
the
Credit
Side
of
Balance
Interest A/c
Dr.
Dividends Received
Discount Received
To
A/c
Dr.
A/c
Dr.
Profit and
Loss A/c
For transfer of net profit

Profit and
Loss A/c
Dr.
To Capital A/c
For transfer of net loss

Capital A/c
To
Profit and
Dr.
Loss A/c
Page
136
the
Financial
06.
Final
Accounts
eBook
Example 05:
By
using
the following
on
March 3 1 ,
information,
prepare a profit and
loss account for the year e n d i n g
2012.
Amount
Amount
Particulars
Particulars
c,>
Gross Profit
4,70,000
(')
Interest Paid
3,000
6,000
Salaries
8,000
General
Carriage Outwards
6,000
Miscellaneous Income
Freight Outwards
2,000
Reinvestment of Fixed Assets
40,000
Discount Allowed
1,500
Discount
1,000
Machinery Sold
12,000
Commission Allowed
4,000
(Book value 1 5 , 0 0 0 )
Commission Received
5,000
Interest
Rent
2,500
Dividend
Received
Received
Table 6.4.Ja:
Expenses
Received
4,500
8,000
7,000
Profit and
Loss Account Example
Page
137
06.
F i n a l Accounts
eBook
Solution 0 5 :
Dr.
Profit and
Loss Account for the year ending

(f)
Particulars
March 3 1 ,
2012
Cr.
(f)
Particulars
To Salaries
8,000
By Gross Profit b/d
To Carriage Outwards
6,000
By
To Freight Outwards
2,000
By Commission
To Discount Allowed
1,500
By
To Commission Allowed
4,000
By Interest Received
8,000
To Rent
2,500
By
7,000
To Int eres t Paid
3,000
To General
6,000
Expenses
To Loss on Sale on
4,70,000
Discount Received
1,000
Received
5,000
Miscellaneous Income
4,500
Divide nd
Received
3,000
Machinery
To Net Profit (transferred

to capital A/c in balance
sheet)
4,59,500
4,95,500
Table 6 . 4 . 3 b :
Working
of
side.
Sale amount 1 2 , 0 0 0
no
Profit and
Loss Account Example
Note:
Sale
is
4,95,500
machinery-only
profit
machinery
and
(only
loss
the
is
loss
not
account
profit
or
loss
(15,000
recorded
involved
on
sale
in
12,000)
the
while
of
3,000
profit and
journalizing
machinery
is
is
entered
loss account;
the
on
in
debit
because there
transaction
recorded
the
of
profit
sale
and
of
loss
account).
6 . 5 B a l a n c e Sheet
Meaning and Definition
'Trading' and
and
'profit and
the profit earned
profit
and
loss
investments
in
account
made,
loss' accounts give only the

the
like
share
business.
asset
capital,
record
of the expenses and
There are other aspects that do
purchase
reserves,
or sale,
etc.
long-term
These
and
aspects
not form a part of
short-term
are
income
covered
liabilities,
under
balance sheet.
Page
138
the
06.
Final
Accounts
eBook
Balance sheet is a statement of assets and

Palmer,
"The
l i a b i l i t ie s as on a particular date.
balance sheet is a statement at a given date
the trader's property and
possessions and on the other
According
balance
to
Freeman,
"A
sheet
and proprietorship of the business of an
American
Institute
of
Certified
list of balances of the asset and
Public
is
an
showing
According to
on
one side
side his liabilities."
itemised
list
of
assets,
liabilities
individual at a certain date."
Accountants
liability accounts.
defines
balance
sheet
This list depicts the
as,
"A
position
of assets and liabilities of a specific business at a specific point of time."
Balance
sheet
Liabilities side
has
two
is also
sides-liabilities
on
the
left
side
known as the sources of funds and
and
assets
the asset
on
side
the
right
is also
side.
known as
the application of funds.
Pro-forma of Balance Sheet

The
right
hand
side of the
balance
sheet
shows
the assets of the firm
and
the
left
side shows the liabilities of the firm.
Page
139
hand
06.
F i n a l Accounts
Given
eBook
below is the pro-forma of balance sheet.
Liabilities
(ll')
Assets
(ll')
Share Capital
xxx
Fixed Assets
Add:
xxx
Goodwill
xxx
Trademark
xxx
Patents
xxx
Land
xxx
Net Profit
Less:
Net
Loss
Less:
Drawings
Long-term
Loan
xxx
xxx
xxx
Liabilities
xxx
(Long-term)
Less:
Loan on
xxx
Mortgages
xx
Buildings
Plant and
Less:
Depreciation
xxx
Investment
xxx
Current Assets:
xxx
Stock
Bills Payable
xxx
Accrued
Bank Overdraft
xxx
Prepaid
Bank loan
xx
Machinery
Depreciation
Less:
Outstanding
in Advance
Expenses
(Short-term)
xx
xxx
xx
xxx
xxx
xxx
xxx
Income
xxx
Expenses
Sundry Debtors
xxx
Bills Receivables
xxx
Cash
xxx
in
Hand
xxx
Cash at Bank
xxx
Table 6 . S a :
xxx
Furniture
Current Liabilities:
Income Received
xx
Depreciation
xxx
Format of a Balance Sheet
Contents in a Balance Sheet

6.5.1
Items Shown on the Assets Side of the Balance Sheet
Assets are the economic

fixed,
investment, and
resources owned
by an
enterprise and
are
broadly classified
as
current assets.
Fixed Assets
Fixed
assets
rather than
are those assets that
are acquired
resale in the course of business.
intangible assets.
Tangible assets are those
with
Fixed
assets
the
purpose of use
assets are classified

that
can
be
seen,
in
the
business
into t a n g i b l e and
felt,
and
Page
touched;
140
Financial
06.
Final
Accounts
for example,
are
those
eBook
furniture,
assets
plant and
that
cannot
machinery,
be
seen
or
etc.
On
touched;
the other
for
hand,
example,
intangible
goodwill,
assets
copyrights,
patents, etc.
Depreciation
Depreciation is the reduction in the value of the assets due to wear and
usage,
the
change
assets.
in
technology,
fixed
accident,
percentage
is
etc.
charged
It
as
charged only on the tangible fixed assets and
is a permanent
depreciation
tear, continuous
decrease
every
in
year.
the
value of
Depreciation
is
not on i n ta n g i b l e assets.
Investments
When
the
organization
dividends,
interest,
investments
are
makes
use
commission,
shown
of
its
rent
separately,
surplus
etc.,
while
it
cash
is
to
known
short-term
get
as
returns
in
the
investment.
investments
are
form
of
Long-term
shown
in
the
current assets section.
Current Assets
Current assets are assets of the organization that

acquired
for the
with the intention of converting
regular
business.
It
business activities.
includes
cash,
finished goods, debtors,
bank
them
remain for less than a year.
into cash easily.
They are a part of the
balance,
stock of raw
bills receivable, short-term
normal operating
materials,
business towards outsiders.
individual
business.
term
term
entity
liabilities.
liabilities,
termed
outside
D e b ts
while
that
the
will
debts
be
that
paid
are
in
Liability
a time
settled
is
It
classified
period
over
work
in
cycle of the
progress and
prepaid expenses.
Balance Sheet
Liabilities are obligations of the

or
Current assets are used
investments, and
6.5.2 Items Shown on the Liabilities Side of the
They are
is the amount due to an

as
long-term
of one year are
long
period
(over
and
short
termed
short
one
year)
are
from
the
long-term liabilities.
Share Capital
Share
capital
shareholders.
includes
the
Drawings,
amount
of
money
raised
net profit or loss are adjusted
through
issue
of
shares
with the share capital.
Net profits
are added while losses and drawings are deducted from the share capital.
Page 1 4 1
06.
F i n a l Accounts
Long-term
eBook
Liability
It refers to the debts that are settled
in a longer time period
than
the current
term
liability
year.
All
liabilities
other than
includes long-term
loans and
liability
usually for a period
fall
under this
of more
category.
Long
loans on the mortgages.
Current Liability
It
is the
liability
that
is
payable,
outstanding
received.
These
are written
are
paid
off in
expenses,
shown
a year's time.
bank
as current
Current
overdrafts,
liabilities
in
liability
includes creditors,
short-term
the
balance
loans,
sheet,
and
and
bills
advances
the
elements
below the heading.
6 . 6 Adjustment Entries of F i n a l Accounts

There
are
trading
certain
account,
principle,
adjustments
profit
and
that
are
required
loss account,
and
to
be
balance
made
sheet.
the expenses for a period are to be matched with
get the true result of the business operation.
during
the
According
preparation
to
the
of
matching
income of the same period
Thus, certain adjustments have to
to
be made
to match expenses w i t h income.
Some
of
the
items
of
period are explained
adjustments
required
to
be
made
at
the
end
of
the
accounting
below.
Expenses Outstanding/ Due/ Accrued/Payable

B u s i n e s s expenses
accounting
year
like
but
salaries,
the
wages,
payment
is
rent,
yet
interest,
to
be
etc.,
made,
which
are
belong
termed
to
as
the
current
outstanding
expenses.
The entry for adjusting
any such outstanding
Expense A/c
Dr.
To Outstanding
For
paid
example,
till
expense i s :
salaries
Expenses A/c
worth
March 3 1 , that is,
r1s,ooo
belong
to
the date of preparing
the
month
of
March.
However,
it
the financial statements.
Page
142
is
not
Financial
06.
Final
Accounts
eBook
The adjustment entry for this would

Salaries A/c
Dr.
To Outstanding
Its treatment
15,000
Salaries A/c
15,000
in financial statements w i l l
Trading or Profit and
Add
be:
to
the
concerned
be as follows:
Loss A/c
expense
Balance Sheet
on
Shown on the liabilities side
the debit side

.
Table 6.6a: AdJustment Entry for Outstanding Salaries
Income Outstanding/ Due/ Accrued/Owing/ Receivable
Business
belong
income
like
interest
received,
to the current accounting
outstanding
rent
received,
commission
year but the amount
is not yet
received,
etc.,
which
received, are termed
as
income.
The entry for adjusting

Outstanding
any such an outstanding
Income A/c
income is:
Dr.
To Income A/c
For example,
interest worth '1' 1 , 5 0 0
that is, the date of preparing
the financial
The adjustment entry for this w i l l

Outstanding
for the month of March
in financial statements w i l l
to the concerned
till
March
1,500
To Interest A/c
Add
received
statements.
Dr.
Trading or Profit and
not
be:
Interest A/c
Its treatment
is
1,500
be as follows:
Loss A/c
income on the
Balance Sheet
Shown on the assets side
credit side
.
Table 6 . 6 b :
AdJustment Entry for Income Outstanding
Page
143
31,
06.
F i n a l Accounts
Prepaid
eBook
Expenses/ Paid
Business expenses
accounting
year
like
but
in Advance
salaries,
the
wages,
payment
is
rent,
made
in
insurance,
the
etc.,
current
which
year,
are
belong
termed
to the
as
next
prepaid
expenses.
The entry for adjusting a n y such a prepaid expense i s :

Prepaid
Expenses A/c
Dr.
To Expense A/c
For example,
an
insurance
the next accounting
premium
year is paid
in
worth ,3,000
for the
next q u a rt e r April
March of the current accounting year,
to June of
which ends on
March 3 1 .
The adjustment entry for this will be:

Prepaid Insu ranee A/c
Dr.
3,000
To Insurance A/c
3,000
Its treatment in financial statements will be as follows:
Trading or Profit and Loss A/c
Deduct from the concerned expense
Balance Sheet
Shown on the assets side
on the debit side

Table
6.6c: Adjustment Entry for Prepaid Insurance
Income Received in Advance
Business income
belong
to
the
like
interest
next accounting
are termed as income
received
received,
rent
received,
year but the amount
Income A/c
For example, the b u i l d i n g
received
received,
during
etc.,
which
the current year,
in advance.
The entry for adjusting any such income received
To Income Received
is
commission
in advance is:
Dr.
in Advance A/c
rent of ,5,000 of April for the next accounting year is received
in March of the current accounting year, which ends on March 3 1 .
Page
144
Financial
06.
Final Accounts
eBook
6.7 Chapter S u m m a r y
Trial
balance provides the foundation for the preparation of final accounts.
Income statement and
Income statement can further be classified
balance sheet together is termed as final accounts.

into trading
account and
profit and
loss
account.
Trading account shows the gross
Profit and
Balance sheet is prepared
Some
profit earned
during
loss account shows the net profit earned
adjustment
entries
to know the financial

are
done
at
the
end
a period.
during
a period.
position of a business entity.

of
financial
year,
while
preparing
final accounts.
There can
be hidden adjustments, which are presented
Every adjustment entry
in trial
has two effects-one is debit and
balance itself.
the other is credit.
Page 1 5 5
Corporate
Financial
Statements
Financial and
0 7 . Corporate F i n a n c i a l Statements
eBook
7 . 1 Introduction
In
the
final
previous chapter you
account
profit and
that
loss account;
a format is called
the
vertical
especially
Schedule
you
the
VI
of
learned
learned
had
two
how
to
and-liabilities and
which
external
Indian
most
This
Companies
accounts.
credit-in
The
case
of
There is another format,
use
format
Act,
and
final
to
report
contains
1956,
their
just
provides
the
side
Hence such
as
statements,
instead
guidelines
and
also called
financial
one
format of
trading
assets-in case of balance sheet.
companies
users.
prepare
sides-debit
as 'horizontal' form or 'T' form.
format,
to
have
of
two.
regarding
the
vertical format.
Till April
the
1,
companies were allowed
above-mentioned
However,
and
2011,
from April
according
mandatorily
to
1,
forms,
2011
revised
that
is,
to present their financial statements in any of
either
in
horizontal
Schedule VI of Indian
Schedule VI of the
present their financial
said
statements
form
or
Companies Act,
Act,
all
the
in the vertical
in
vertical
1956,
was amended
companies are
form
given
form.
required
to
u n d e r Schedule
VI of the Act.
Therefore,
it
is
very
important
for
you
presenting the financial statements, which
After reading this chapter, you
will
to
understand
has been discussed
Explain the m e a n i n g
Discuss the types of financial statements
Explain
Act,
new
vertical
format
in this chapter.
of financial statements
format
of
income
format
of
balance
statement
as
per
Schedule
VI
of I n d i a n
Companies
1956
Explain
the
sheet
as
per S c h e d u l e VI of I n d i a n
Companies Act,
1956
of
be able to:
the
the
Interpret the financial statements on the basis of vertical form
Page
157
07.
Corporate
Financial
Statements
eBook
7 . 2 M e a n i n g a n d Types of F i n a n c i a l Statements
Meaning of Financial Statements
Financial
statement
understanding
financial
and
is
Financial
are
collection
the
records
and
financial
that
presentation
aspect
show the
of
the
financial
of
data
business.
that
In
performance
helps
other
of a
in
words,
company
for
under study.
statements
company,
the
operations,
outsiders
logical
conveying
statements
the period
are
financial
know
the
funding decisions can
useful
for
statements
fundraising,
to
very
dividend
financial
the company
help
to
payment,
health
outline
as
the
investment,
of the
well
company
as
for the
future
etc.
so
strategies
Financial
that
readers.
For a
regarding
statements
proper
help
investment
and
be taken.
Types of Financial Statements
Broadly
stating,
there are four
k i n d s of financial
statements as explained
below.
Each of
the statements has its own objective.
Income Statement
Income statement
This
statement
the
particular
profitability
very
is also
discovers
period.
position
important
investment,
as
known as
the
The
of the
it
position
of
ultimate
company
affects
d i v id e n d ,
profit and
the
income
aim
for a
various
loss account or profit and
of
and
the
expenses
income
particular
important
of the
This
decisions
of
statement.
company
statement
period.
loss
is
to
profitability
the
during
know
the
position
company
such
is
as
etc.
Balance Sheet
As you
date.
know,
balance
It shows the
reflects
the
statement
period
position
financial
and
sheet
half
particular date (on the
sheet
yearly,
of
earnings
particular
appropriation
account.
is
the
liabilities on
company.
that,
yearly,
income
etc.)
The
a particular date,
main
statement
whereas
difference
is
which
sheet
ultimately
between
prepared
balance
particular
for
is
income
particular
prepared
for
Earnings
represent
period.
of
position of the company on a
last day of the year, etc.)
Statement of Retained
Retained
of assets and
position
balance
(quarterly,
shows the financial
the amount of
Statement
This
of
statement
profit
retained
in
the
ea r n i n g s
hands of a company at
is
also
shows the distribution
called
of net
profit
the
and
profit a v a i l a b l e ,
Page
158
end
loss
like
payment of d i v i d e n d ,
transfer to the
connection
income
between
statement is carried
forward
Statement of Changes in
Statement
cash
or
divided
In
is,
of changes
working
in
Financial
Changes in the
Changes in overall financial
you
position
two
capital
shows
balance
position
position of cash,
will
sheet.
The
balance
left
is the
in
this
sheet
the
changes
dates.
This
or
movement
statement
is
of the
further
three categories:
Changes in working
chapter,
balance
earnings
Position
financial
this
and
Statement of retained
to the balance sheet.
between
into the following
reserves, etc.
statement
the
capital
eBook
be
income statement and
but the way of presenting
flow statement
known as cash flow statement
position of the business
studying
two
balance sheet.
them
known as fund
basic and
You
important
have studied
financial
them in the
statements,
that
previous chapter
was different.
7 .3 Income Statement
Profit
loss
and
loss account
statement.
As
you
in
the
know,
vertical
income
company for a particular financial

Act,
form
is
called
statement
period.
as
shows
According
income
the
profitability
or
profit
position
to Schedule VI of I n d i a n
1956, the vertical format of income statement is explained
statement
and
of the
Companies
below.
Page
159
07.
Corporate
Financial
Statements
eBook
Name of the Company

Profit and
Loss Statement for the year ended

Figures as at
Flgu res as at
Note
the end of
the end of
No.
current flnanclal
previous
year
tlnanclal year
Part:lculars
I.
Revenue from Operations
II.
Other Income
III. Total Income ( I + II)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
IV. Expenses:
a.
Cost of Materials Consumed
xxxx
xxxx
b.
Purchases of Stock-in-trade
xxxx
xxxx
c.
Changes in
and finished goods)
xxxx
xxxx
d.
Employee Benefit
xxxx
xxxx
e.
Financial Cost
xxxx
xxxx
inventories ( W . I . P .
Stock-in-trade
1
Expenses
f.
Depreciation and Arnorttzatron
g.
Other Expenses
Expenses
Total Expenses (sum of 'a' to 'g')

V. Profit/(Loss)
Exceptional
Items
VII. Profit/(Loss)
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
before extraordinary items and
tax (V - VI)
VIII.
xxxx
xxxx
before exceptional and
extraordinary items and tax (III - IV)

VI.
xxxx
xxxx
Extraordinary
Items
IX. Profit Before Tax (PBT) (VII - VIII)

X. Tax Expenses:
a.
Current Tax
xxxx
xxxx
b.
Deferred Tax
xxxx
xxxx
xxxx
xxxx
liabilities attributable to the discontinuing operations
xxxx
xxxx
XIV. Tax of discontinuing operations
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
XI. Profit/(Loss) for the period from continuing

operations (IX - X)
XII.
Profit/(Loss) from discontinuing operations before
tax
XIII. Gain/(Loss) on disposal of assets/settlement
of
XV. Profit/(Loss) from discontinuing operations
(XII
+ XIII - XIV)
XVI. Profit or Loss for the Period (XI
XV)
XVII. Earnings Per Equity Share
a.
Basic
xxxx
xxxx
b.
Diluted
xxxx
xxxx
Table 7 .3a:
Format of Income Statement
Page
160
eBook
Note:
If there is a loss,
In case of manufacturing
in the brackets (loss).
companies,
revenue from
Revenue from operations (gross)
Less:
Revenue from operations (net)
In
case
In
banks
or
so instead
case
of
operations
is shown as:
Excise duty
of
interest,
it is written
financial
companies,
the
main
of revenue from operations,
financial
companies,
expenses
are
source
of
revenue
would
be
interest income is written.

not
classified
as
per
non-financial
companies.
I.
Revenue from
Operations
Revenue generated
from
non-finance companies,
which
is
included
While
net
their
here;
writing
core
this
the
the main
source of a company
is
recorded
u n d e r this
head.
For
revenue includes the income from sale of goods and/or services,
business.
includes
revenue
Income
income
from
from
from
other
operating
other activities
operations,
excise
duty
activities
than
selling
should
should
the
main
be deducted
also
be
product.
to arrive at
revenue from operations.
For finance companies,
revenue from operations includes income from
financial services depending

example,
in
case
of a
upon the nature of core services that companies deal
bank,
case of any consultancy
interest and
revenue
business,
from
it would
operations
includes
interest
be consultancy fees collected
in.
income,
from
other
and
For
in
its clients.
II. Other Income
Other
income
earned
other
from
words,
regularly
is
basically
includ es
activities other t h a n
any
income
grouped
that
under
all
non-operating
income,
the
main
(selling
cannot
other
be
business
categorized
income.
For
as
which
means
income
of products or services).
operating
example,
the
interest
revenue
but
income,
In
arises
dividend
income, etc.
IV.
Expenses
In income statement, the overall expenses of a business are categorized

a.
as follows:
This
other
includes
only
words,
consumable
raw
materials
materials
products
are
that
consumed
are
included
directly
under
to
produce
used
this
in
head.
the
sellable
manufacturing
If
company
products.
of
final
has
Page
In
or
packing
161
07.
Corporate
Financial
materials
or
materials,
any
Statements
other
then
eBook
materials,
those
should
other
be
than
the
considered
ones
as
mentioned
part
of
above
cost
of
as
raw
materials
consumed.
b.
Purchases of Stock-in-trade
Materials
that
are
included
under
purchased
the
head
further;
Changes in Inventories (W.I.P,
The gap
between opening
trade
and
more
than
other
the
closing
the
hand,
treated
d.
the
if
as a reduction
the
is
of
These
reselling
are
stock-in-trade
as it is.
FG, and Stock-in-trade)
then
stock
intention
stock-in-trade.
these are sold
of these
stock,
opening
of
with
stocks of Work-in-Process,
stocks
closing
company
purchases
materials are not processed
c.
by
three,
the
less
in expenses,
is
included
difference
than
which
finished
is
is written
here.
treated
closing
stock,
in
goods,
and
stock-in
If opening
as
stock
expenses.
then
the
On
is
the
difference
is
brackets.
Employees Benefit Cost
All
expenses
welfare
of
the
contribution
Option
related
to
the
employees
to
provident
Scheme),
etc.
All
compensation
are
fund,
included
given
here.
contribution
the details
to
regarding
to
For
the
example,
gratuity,
ESOP
employees
ESOP
should
or
salaries,
for
wages,
(Employees
be given,
in
the
Stock
detail,
in
the notes to the financial statements.
e.
Finance Cost
Cost
incurred
considered
by
the
as finance cost.
interest on working
f.
company
capital
to
raise
For example,
the
funds
interest on
required
for
debentures,
business,
interest on
is
loan,
loan, etc.
Depreciation and Amortization
As
you
have
deducted
as
intangible
already
studied
depreciation
fixed
assets
on
are
about
depreciation
tangible
fixed
recorded
assets
under
this
and
and
amortization,
amount
heading.
the
amount
of amortization
This
depreciation
of
or
amortization amount pertains to the current year.
g.
Other Expenses
Items
that
mentioned
are
regular
groups,
are
in
nature,
grouped
but
under
the
cannot
heading
be
categorized
other
under
expenses.
above
For example,
Page
162
07.
Corporate
Financial
consumption
of
Statements
stores,
rent,
eBook
advertisement,
insurance,
sales
expenses,
legal
expenses, etc.
VI.
Exceptional
Items
There are various

classified
losses
as operating
incurred
income
items that occur d u r i n g
on
expenses are
these
statement.
items are
For example,
the ordinary course of
termed
recorded
loss
on
as exceptional
under the
sale of old
items.
heading
fixed
business
All
but cannot
the expenses and
exceptional
assets or
be
items
investments,
in
the
loss
by
fire, etc.
VIII.
Extraordinary Items
These
are
items
processing,
or
gains
and
from
that
do
selling).
such
not
These
items
deducted
occur
losses
are
from
due to
natural calamities,
are
during
events take
recorded
profit
before
accidents,
the
ordinary
place
here,
course
occasionally.
needless
extraordinary
to
of
All
the
mention
items
and
attachment of property,
business
(buying,
expenses,
losses
that
expenses
and
For
example,
loss
tax.
profit from
insurance claim,
etc.
X. Tax
All
Expenses
taxes
payable
expenses
are
on
corporate
mainly
pertinent
income
to
payable for the current financial

expenses),
accounting
whereas,
books
of
if there
the
is
the
or
profit
income
tax
year are written

a difference
company
and
is
shown
under
department.
tax
Income
under current tax
between
according
the
to
tax
the
expenses.
expenses
( p o i n t 'a' u n d e r tax
expenses
income
tax
These
tax
according
rules,
to
then
the
that
difference is written as deferred tax (point 'b' u n d e r tax expenses).
XII.
Profit/(Loss) from
Sometimes
company
Discontinuing
ceases
its
Operations before Tax
operations
in
major
units,
which
company but differentiable in terms of operations or geography.

from such operations is shown separately u n d e r this
XIII. Gain/(Loss) on
the
were
Profit
or
part
loss
of the
earned
heading.
Disposal of Assets/Settlement of Liabilities Attributable to
Discontinuing Operations
Many times a company sells major assets to pay off its liabilities, any g a i n earned
incurred
thereon
is written under t h i s
or loss
heading.
Page
163
07. Corporate
Financial Statements
eBook
XIV. Tax of Discontinuing Operations
Any tax deductable from the
XVII.
Earnings Per
Earnings
per
equity
and
diluted
share,
EPS.
profit/(loss)
during
that
period.
share)
is calculated
shares
and
On
popularly
EPS
for the
shares
as
Earnings
per equity share.
(point 'a' under earning
period
the other
by dividing
equity
known
by the company
Basic
by d i v i d i n g
new
operations is shown under this head.
Equity Share
amount of profit earned

EPS
profit on d i sc o n t i n u i n g
by
hand,
the
diluted
profit/(loss)
that
total
may
come
Share
per equity
(point
period
into
(EPS).
shows
the
There two types of EPS-basic
number of equity
EPS
for the
Per
'b'
by
existence
share)
is calculated
shares outstanding
u n d e r earning
per equity
the total of existing

by
converting
equity
convertible
preference shares and convertible debentures.
7 . 4 Balance Sheet
As
you
know,
liabilities
on
balance
Companies Act,
sheet
particular d a y .
is
the
As
summary
per
the
that
shows
guidelines
given
the
book
under
value
Schedule
1956, the vertical format of balance sheet is explained
of assets
VI
of
Indian
below.
Page
and
164
eBook
Name of the Company

Balance Sheet as on
Figures as at
Figures as at
the end of
the end of
current
previous
reporting
reporting
period
period
Note
Particulars
No.
J.
EQUITY AND UABJUTJES
( 1 ) Shareholders' funds
a.
Share Capital
xxxx
xxxx
b.
Reserves and Surplus
xxxx
xxxx
c.
Money Received Against Share Warrants
xxxx
xxxx
xxxx
xxxx
(2) Share Application
Money Pending Allotment
(3) Non-current Liabilities
a.
Long-term Borrowings
xxxx
xxxx
b.
Deferred Tax Liabilities (Net)
xxxx
xxxx
c.
Other Long-term
xxxx
xxxx
d.
Long-term Provisions
xxxx
xxxx
xxxx
xxxx
Liabilities
( 4) Current Liabilities
a.
Short-term
Borrowings
b.
Trade Payables
xxxx
xxxx
c.
Other Current
xxxx
xxxx
d.
Short-term
xxxx
xxxx
xxxx
xxxx
Tangible Assets
xxxx
xxxx
Intangible Assets
xxxx
xxxx
Capital Work-in-progress
xxxx
xxxx
Intangible Assets under Development
xxxx
xxxx
Liabihttes
Provisions
TOTAL
JI. ASSETS
( 1 ) Non-current Assets
a.
Fixed Assets
I.
i i.
jj
i.
IV.
b.
Non-current Investments
xxxx
xxxx
c.
Deferred Tax Assets (Net)
xxxx
xxxx
d.
Long-term
xxxx
xxxx
e.
Other Non-current Assets
xxxx
xxxx
Loans and Advances
(2) Current Assets
a.
Current Investments
xxxx
xxxx
b.
Inventories
xxxx
xxxx
c.
Trade Receivables
xxxx
xxxx
Page 1 6 5
07.
Corporate
Financial
Statements
eBook
d.
Cash and cash Equivalents
xxxx
xxxx
e.
Short-term Loans and Advances
xxxx
xxxx
f.
Other Current Assets
xxxx
xxxx
xxxx
xxxx
TOTAL
Table 7 .4a:
As you
have
seen
in
the
two parts 'equity and
I.
EQUITY A N D
Equity
and
activities.
namely,
balance sheet format,
the
balance
sheet
has
been
liabilities' and 'assets', each of these are explained
bifurcated
in
below.
LIABILITIES
liabilities
are
In the vertical
shareholders'
liabilities, and
Format of Balance Sheet
the
form
funds
raised
by
the
of a balance sheet,
funds,
share
current liabilities.
application
company
these are
money
for
various
bifurcated
pending
Each of these is explained
its
business
in four categories
allotment,
non-current
below:
( 1) Shareholders' Funds
Shareholders'
the
funds
company.
are
the
Generally,
capital
equity
contributed
by
shareholders
the owners,
and
that
preference
is,
shareholders
shareholders
are
of
the
owners of the company.

(a)
Share Capital
This
is
the
shares
and
sheet,
share
first
the
at
on
preference
final
capital
issued,
item
figure
are
what
balance
shares
is
sheet.
in
the
t h e se
notes.
are
The
recorded
of shareholders'
given
price
under
funds
These
i s s u ed ,
amount
is
share
shown,
details
calls
collected
in
capital.
while
include,
arrears,
through
In
the
the
of
balance
details about
number
types
equity
of
shares
shares
issued
such as equity shares or preference shares, etc.
(b)
Reserves and
Surplus
Reserves
include
reserves,
capital
to
specific
such
as
premium
types
of
redemption
financing
reserves
reserves),
Surplus
all
are
due
created
created
reserves, etc.
activities
created
reserves
reserves
to
by
also
a company
such
as,
general
Other reserves that are created
included
revaluation
issuing
by
under
of
shares
assets
at
reserves
(known
premium
and
as
due
surplus;
revaluation
(known
as
share
reserves), etc.
means
statement,
particular
subtracted
the
which
year,
from
is
net
profit
added
then
the
to
retained
the
amount
the amount
or
of
earning
reserves.
of
If
surplus
reserves.
On
the
shown
a
is
in
the
company
shown
balance
in
has
profit
a
and
loss
negative
sheet,
net
Page
in
loss
any
and
amount
166
is
of
07.
Corporate
Financial
reserves
and
( c)
surplus
is
eBook
shown
and
details
are
given
in
the
notes
of
reserves
surplus.
Money
Share
Received
warrant
acquire
is
and
Statements
eq u i t y
shown
Against Share Warrants
is
an
instrument
shares
in
separately
warrants',
and
not
future.
under
included
that
Since
the
gives
it
the
right
is about
heading
the
its
equity
'money
under 'share capital'
to
shareholders
shares
received
until
the
in
to
future,
against
shares are
it
share
issued
to
the shareholders against such warrants.
(2) Share Application
Share a p p l i c a t i o n
against
which
apply
for
some
time
to
application
time
of
money
shares
shares
Money Pending Allotment
have
after
decide
not
the
is
the
allotment
yet
been
invitation
how
account
preparing
pending
to
allot
prepared
balance
includes the
issued.
from
the
to
sheet,
the
shares
which
the
This
money
usually
lying
happens
company,
and
to
applicants.
this
all
the
pending
amount
lying
then
amount
in
with
this
when
the
is
the company
investors
company
separate
transferred.
account
is
takes
share
At
shown
the
under
this heading.
(3)
Non-current Liabilities
Non-current
year
or
after
the
category
not
required
normal
liabilities are those,

normal
operating
of current
to
pay
operating
off
cycle
process of converting
to
make
sellable
following
four g r o u p s :
(a)
in
one
cash.
of
one
The
liabilities
liabilities.
liabilities.
For example,
them
after a period
accounting
non-current
processing
fixed
from
These
institutions,
security
into
words,
non-current
period
as
market.
simple
are
called
by
the
money
year).
In
settled
and
non-current
that
Thus,
year
or
are
not
within
fall
cycle
procures
receives
liabilities
do
liabilities
Operating
a company
finally
of one accounting
cash
that
of
the
materials
selling
categorized
are
period
means
raw
by
under
into
the
the
Borrowings
funding
borrows
are
the
Long-term
For
within
goods
goods
cycle.
liabilities
assets
finished
which are to be
debentures,
security are known
or
long-term
financial
include,
deposits,
are
etc.
different
sources
public
these
assets
known
Whereas,
etc.
as
any
sources
bank
When
loan,
a
secured
funds
as unsecured loans,
operating
for
longer duration
debentures,
company
loans,
raised
activities,
by
raises
for
the
for example,
loan
(more t h a n
from
funds
example,
company
company
financial
against
bank
without
public deposits, etc.
Page
167
any
loan,
any
07. Corporate
(b)
eBook
Deferred Tax Liability (Net)
As
explained
in
per accounting
When
tax
due
pays
be paid
to
income
statement,
income and
company
has to
any,
the
the
deferred
income calculated
less
tax
in
the
tax
on
current
is
the
the
difference
in
basis of income
year,
the
remaining
tax
between
accounting
income
and
as
rules.
amount
in the subsequent years. This future amount of tax
difference
tax
of
payable
taxable
income,
if
is
shown as deferred tax liability.
(c)
Other Long-term
Any
in
liability that is not mentioned
the
term
(d)
period
of
more
than
one
in
long-term
year,
is
borrowing
shown
under
and
the
has to
heading
be settled
other
long
liabilities.
Long-term
Many
Provisions
times
company,
amount
there
but
for
the
such
with
the
one
year
not
actual
are
are
amount
in
not
or
fixed,
this
expenses
then
amount
losses or expenses,
amount.
as
is
losses
losses,
incurs
called
utilized
future
future
company actually
are
Liabilities
Provisions
long-term
that
is
are
(within
provision for employees' provident fund,
as
known
keeps
to
aside
provision.
the
some
When
those provisions are adjusted
created
In
are
company
known
then
provisions.
shorter duration
the
that
for
other
a period
period
words,
of one
of more
these
year).
than
provisions
For example,
provision for gratuity, etc.
( 4) Current Liabilities
As
mentioned
accounting
earlier,
year
are
liabilities
called
as
that
are
current
required
liabilities.
to
be
These
settled
are
within
divided
into
period
of
following
one
four
categories:
(a)
Short-term
Loans
that
words,
year
or
Borrowing
are
loans
taken
that
within
are
for
short
required
normal
periods
to
be
operating
are
shown
settled
cycle
within
is
shown
under
a
this
period
as
head.
of one
short-term
given
b a n k overdraft
or
working
capital
loan.
in a note and only the final figure is shown
The
details
in the main
other
accounting
borrowing.
There are many occasions where a company takes a loan for a short
example,
In
of such
period,
loans are
balance sheet.
Page
for
168
07.
Corporate
(b)
Financial
Statements
eBook
Trade Payables
Liabilities for
as trade
buying
payables.
goods or services from
That
is,
trade
payables
suppliers on
credit
include the amount
basis are called

of creditors and
bills payables.
(c)
Other Current Liabilities
All
other current
shown
here.
interest
term
l i a b i l i t i e s that cannot
For
example,
payable,
outstanding
service tax,
borrowings
that
is
be
shown
expenses,
excise duty,
settled
under above two
within
unpaid
the
income
received
dividends,
current
headings are
etc.
in
advance,
A part of long
accounting
period
is
also
shown u n d e r t h i s h e a d i n g .
(d)
Short-term
Provisions
provision.
are
created
In
known
dividend,
Provisions
for
short
other words,
as
period
is
shown
under
provisions that are created
short-term
provisions.
part
balance
For
example,
the
head
short-term
to utilize within
provision
for
one
tax,
year
proposed
etc.
II. ASSETS
Assets
are
an
integral
of the
current assets and current assets.

(1)
sheet
and
are
These are explained
further
categorized
into
non
below:
Non-current Assets
Assets
that
are
not
converted
into
current assets. These are bifurcated

(a)
cash
within
period
of one
year
are
called
as
non
into the following five parts:
Fixed Assets
Assets
year,
that
are
are called
revenue during
their utility,
used
as fixed
the
are
company
assets.
period.
subject
further categorized
i.
by
to
All
for
long
period,
that
is,
more
than
one
These assets help the company to generate the
the fixed
depreciation
into the following
assets,
due
to the g r a d u a l
or amortization.
These
reduction of
fixed
assets are
four parts:
Tangible Assets
As
the
you
know,
heading
machinery,
tangibl e
sheet,
is
fixed
shown.
that
tangible assets.
furniture,
assets
the
assets
net
are
computer,
subject
details
be
seen
For example,
to
value of tangible
The
can
land
vehicles,
regarding
touched
and
office
depreciation
(cost
and
building,
except
land.
or
book
value,
under
plant and
equipments,
minus depreciation)
cost
come
In
etc.
All
balance
fixed
assets
depreciation
Page
169
07.
Corporate
Financial
Statements
charged,
eBook
value of assets
sold
off and
purchased,
etc.
are given
in the
note pertaining to fixed assets.
Intangible Assets
11.
Fixed
assets that cannot
assets.
For example,
rights,
etc.
shown
in
Like
the
be
copyright,
tangible
main
seen and
touched
goodwill,
assets, the
balance
sheet
patents,
net
and
are called
value
of
as
intangible
intellectual
intangible
other details
are
property
assets
shown
in
is
the
note.
iii.
Capital
Work-in-progress
Capital
work-in-progress
construction
the
and
completed
capital
not
part
refers
ready
of
for
use.
capital
work-in-progress
is
to
tangible
Under
assets
this
heading,
work-in-progress
not
ready
for
that
use.
is
are
the
shown
under
value
of
because
Depreciation
is
not
charged on them.
iv.
Intangible Assets under Development
I n t a n g i b l e assets that are under development and will be ready for use
in
the
near
development.
amortized
(b)
future
are
Similar
to
referred
tangible
to
as
assets,
intangible
these
assets
assets
are
under
also
not
since they are incomplete.
Non-current Investments
These are surplus funds

of
the
company
example,
the
for
the
amount
invested
long
of
in
other businesses
duration,
funds
that
invested
is,
in
for
including
more
eq u i t y
the subsidiaries
than
shares
one
or
year.
For
preference,
investment in government bonds or in debentures, etc.
( c)
Deferred Tax Assets
Due to the differences between accounting
income and
taxable income, when a
company pays more tax in the current year as compared to its tax liability, then
it
is
situation
of deferred
tax
assets.
a b l e to recover the extra amount paid
Under
by it,
such
situations
the
company
in the next year.
Page
170
is
Financial and
07.
Corporate
(d)
Financial
Long-term
Statements
eBook
Loans and Advances
Loans or advances given
by the company to outsiders,
i n d i v i d u a l s are the assets for the company,

borrowers.
are
Loans
recorded
given
under
advances given for

is doubtful should
(e)
by
the
this
company
heading.
purchasing
fixed
be mentioned
as it
for
is going
the
Some
period
examples
assets,
etc.
employees or a n y other
Any
to
of
be
paid
more
are
back
than
by the
one
security
year
deposits,
part of such advances that
in the note.
Other Non-current Assets
All
other
headings
non-current
are
assets
recorded
here.
revenue expenses
(which
are
one
for
more
than
that
cannot
Some
of the
are written
year),
etc.
be
examples
off every
Deferred
help to generate the revenue over a period

profit and
categorized
year),
revenue
of time.
loss account fully
are
are not debited
to
every year and
the part that is written off is debited
in
any
of
the
unamortized
trade
deferred
receivables
expenses
Deferred
in one year,
above
are
(which
those
which
revenue expenses
these are written off
to profit and
loss account.
(2) Current Assets
As
you
know,
operating
assets
cycle are called
are further classified

(a)
that
are
liquidated
as current assets.
within
period
In the vertical
of
one
year
or
balance sheet,
normal
current assets
as:
Current Investments
Surplus
funds
invested
recorded
here.
operating
cycle.
short-term)
in
short-term
Short-term
For
refers
example,
investment,
investment
to
amount
portion
of
balance
of
one
of
avenues
accounting
marketable
long-term
by
year
(also
investment
the
or
company
period
known
as
converted
of
are
one
trade
into
or
cash
during the year, etc.
( b)
Inventories
Inventories
accounting
goods,
include
period.
the
These
work-in-progress,
shown under inventories.
include
etc.
The
unsold
closing
unused
or
unused
balance
or
of
unsold
stock
raw
at
the
end
materials,
stock-in-trade
Needless to mention, details are given
of
finished
are
also
in the note and
the final figure is written in the balance sheet.
the
Page
171
07.
Corporate
( c)
Trade
Trade
Financial
eBook
Receivables
receivables
other words,
If
Statements
these
are the
trade
receivables
receivables
operating
cycle,
outstanding
under
this
more
than
period
heading
considered
six
are
then
for a
of goods
these
are
into
by
six
the details
sold
on
of debtors and
cash
mentioning,
All
services
within
recorded
of more than
itself
or
are the amount
converted
months.
good,
amount
one
here.
months
trade
be
secured
etc.
basis.
In
receivables.
or
within
trade
receivables
regarding
allowances for doubtful debts,
should
bills
year
Any
credit
one
receivables
shown
separately
outstanding
for
receivables that are
should
be shown clearly
in
the note.
(d)
Cash and
Cash
Cash
cash
and
cheque, etc.
are shown
to directors,
(f)
including
balance
fixed
of
cash,
bank
deposits with
be
notified clearly
balance,
short-term
bank
maturity
(which matures after
in the notes.
Loans and Advances
here.
time period
the
Fixed deposits or any other bank deposits
should
short-term
recorded
include
bank deposits
here.
Short-term
Any
equivalents
All
12 months)
(e)
Equivalents
loans and
advances given
by
the company
For example, amount of short-term
etc.
By
now,
it
must
that is less t h a n
be clear to
you
to
the
outsiders are
loans given to employees or

that
short-term
refers to the
12 months.
Other Current Assets
Any
other
assets
but
cannot
be
that
placed
are
liquidated
under
any
within
of the
period
above
of one
categories
are
year
(12
shown
months)
under the
head 'other current assets.'
Contingent Liabilities
This
is
an
balance
the
additional
sheet.
Contingent
balance sheet.
events.
element
of the
liabilities
These may
balance
are
become
Since these are not confirmed
sheet,
liabilities
that
liabilities on
liabilities,
For example,
court (if the company
etc.
are
does
not
not
appear
confirmed
on
in
the
the
main
date of
the occurrence or non-occurrence of
they are not shown
sheet-they are mentioned as a note.

loses the case),
which
b a n k guarantee,
in the m a i n
balance
litigation filed
Page
172
in the
eBook
7 .S Interpretation of F i n a n c i a l Statements
Interpretation
statements
Indian
of
from
financial
various
Companies Act,
comparing
understand
the
figures
statements
perspectives.
1956,
of two
enables
financial
means
The
analyzing
vertical
readers
periods.
to
or
format
interpret
The
understanding
given
the
following
under
financial
Schedule
financial
example
the
statements
will
help
you
it more clearly.
VI
Page 1 7 3
of
by
to
07.
Corporate
Financial
Statements
Example
01:
Following
is the income statement of Diamond
Diamond
eBook
Ltd. You are asked to interpret the same.
Ltd.
Income Statement for the Year
Ended
March 3 1 ,
2012
Note
2011-12
2010-11
No.
('J
('>
Particulars
I.
Revenue from Operations
II.
18,00,000
16,00,000
75,000
1,00,000
18,75,000
17,00,000
5,12,000
4,84,000
35,000
30,000
Other Income
III. Total Income (I
II)
JV. Expenses:
a.
b.
Changes in inventories
c.
Employee Benefit Expenses
2,49,000
2,35,000
d.
Financial Cost
1,25,000
1,10,000
e.
Depreciation and Amortization Expenses
f.
Other Expenses
45,000
40,000
4,15,000
3,30,000
13,81,000
12,29,000
4,94,000
4,71,000
4,94,000
4,71,000
(10,000)
4,84,000
4,71,000
1,45,000
1,41,000
20,000
15,000
3,19,000
3,15,000
attnbutable to the discontinuing operations
XIV. Tax of discontinuing operations
3,19,000
3,15,000
Total Expenses (sum of 'a' to 'f')

V. Profit/(Loss)
before exceptional and extraordinary
items and tax (III - IV)

VI.
Exceptional
Items
VII. Profit/(Loss)
before extraordinary items and tax
(V -VI)
VIII.
Extraordinary Items
IX. Profit Before Tax (PBT) (VII - VIII)

X. Tax Expenses:
a.
Current Tax
b.
Deferred Tax
XI. Profit/(Loss) for the period from continuing

operations (IX - X)
XII.
Profit/(Loss) from discontinuing operations before tax
XIII. Gain/(Loss) on disposal of assets/settlement of liabilities
xv. Profit/(Loss) from discontinuing operations ( X I I +
XIII- XIV)
XVI. Profit or Loss for the Period
( X I + XV)
XVII. Earning Per Equity Share

a.
Basic
3.19
3.15
b.
Diluted
3.19
3.15
Table 7.Sa:
Income Statement of Diamond
Ltd.
Page
174
eBook
Solution 0 1 :
The
interpretation of above income statement
of writing and the terms used
has
increased
by
below.
Try and
focus on the way
in writing.
In the current financial year (also referred

Ltd.
is given
12.5/o
and
to as FY),
amounted
to
revenue from operation of Diamond

After
,18,00,000.
including
income that is ,75,000, the total income of the company has increased
the
other
by ,1, 75,000 (by
10.29/o).
In
FY
the
2011-12,
previous
year,
total
which
is
expenses
mainly
of
the
because
company
of
have
increased
increase
25. 76%
in
the
by
over
12.37/o
amount
of
other
expenses.
During
the
current financial year,
account
of
amount
the
increased
exceptional
profit
before
to
period
company
Note:
tax
which
of
the
is,
2011-12,
there are
some expenses/losses on
amounted
to
,10,000.
company,
in
the
After
financial
considering
year
2011-12,
this
has
by 2. 76% (by , 1 3 , 0 0 0 ) .
As compared
of the
reflected
items,
that
previous
financial
has
increased
same changes in EPS
Percentages
used
year,
for
by
post
tax
1.27%
profit,
during
that
is,
current
profit
after
financial
tax
year.
for the
This
(Earnings Per Share) of the company.
interpretation
have
been
calculated
by
the
following
formula:
= Current y e a r ' s figure - Previous y e a r ' s fi g u r e
100
0
1
0
Previous y e a r ' s figure
has
Page 1 7 5
Financial and
07. Corporate
eBook
7 . 6 Chapter S u m m a ry
Financial
statement
conveying
is
collection
Financial statements can
be
broadly classified
Income Statement
Balance Sheet
Statement of Retained
Statement of Changes in
that
helps
in
understanding
and
format
is
Financial Position
properly;
also,
Financial
statements
loss and
single
into four categories:
Earnings
S c h e d u l e VI of the Companies Act,
Vertical
of data
the financial aspect of a business.
statement of profit and
logical
1956,
has prescribed
balance sheet.
column
format
and
helps
it makes the comparison of different

can
be
the vertical format for the
interpreted
by
in
arranging
the
figures
periods easy.
comparing
current
year
figures
that of previous years.
Page
176
with
Cost S h e e t
Financial and
08.
Cost Sheet
eBook
8 . 1 Introduction
Mr.
Arun
decided
to
arrangements for the

the
machinery,
received
a
great
price
of
start
had
cost
chocolates.
of the
price below 25
this
case,
chocolates
this
per
In
of
manufacturing
materials,
building.
labor,
Before
but
piece
Mr.
Shirish
should
had
be
he
had
to
you
will
cost
assuming
learn
sheet
all
the
his
would
started
25.
the
of
his
He
made
He also
all
this chapter,
Mr.
Arun
to
which
was
in
Define cost accounting
Identify various elements of cost
Prepare
condition
of
keeping
the
fix
selling
his profit.
help
him
to
estimate
cost
accounting
the
involved
and
also
price
of
are accurate.
understand
cost sheets
the
to ascertain the estimated
you will be able to:
he
Arun thought this as
steps to prepare a cost sheet.
After reading
the
purchased
manufacturing,
according
Now,
projections of the costs
concepts
etc.
Mr.
condition,
he yet had
fulfill
per piece without compromising
piece,
overheads,
he
below
the production and
addition,
chocolates.
S h i r i s h to export these chocolates.
not yet started
preparing
per
chapter,
Mr.
chocolates,
like
and
opportunity,
because he
In
land,
a proposal from
the
business
resources
plant,
business
Page
178
the
In
the
08. Cost Sheet
eBook
8 . 2 M e a n i n g of Cost Accounting
Trading
and
profit
organization
information
introduced
in
and
the
than
loss
past.
what
is
account
gives
Managers,
provided
by
an
who
overview
handle
these
cost
statements.
as a branch of financial accounting, which
of what
has
been
accounting,
need
Cost
accounting
done
by
much
was
the
more
therefore
later became a separate system on
its own.
Cost
accounting
is
records of the costs

determining
not
only
and
management
relating
accumulating
past-oriented,
future changes
for making
to the
but
it
tool
product,
the cost
also
that
process,
required
focuses
in the costs or expenses.
optimum
provides
on
management
operations
in a
the
the
with
or functions.
particular activity or
present
and
helps
in
detailed
It
helps
product.
It
predicting
in
is
the
Cost accounting acts as a tool for the managers
use of the resources and
for effective decision m a k i n g .
Objectives of Cost Accounting
The three main
important objectives of cost accounting are given
To Determine the Cost of the
Product
The total cost of the product and

accounting.
deciding
This
the s e l l i n g
To Provide
cost
selecting
wise.
in
the cost per u n i t can
the
making
and Control of Regular
helps in creating
the
important
be easily determined through cost
decisions
best
Variance
corrective actions can
long-term.
better
special
The
decision
order
is
plan.
useful data for the purpose of making
Evaluation
between
the
of
actual
valuation,
the
and
alternative
the
projects
standards
can
alternative plans
can
be
be
easily
found
done
out
and
be taken.
e n a b l e s the m a n a g e r to
results that
making.
a
inventory
Business Activities
To Provide Information for Long-term and Short-term
Cost accounting
like
price of the product, etc.
Planning
Cost accounting
and
helps
below:
are
For
short-term
long-term decision that can
derived
example,
decision
plan for the

from
taking
and
cost
Decision-making
immediate future as well as for the
accounting
decisions
deciding
Process
the
about
selling
helps
the
management
accepting
price
or
of the
rejecting
product
be taken t h r o u g h cost accounting.
Page
179
is
in
a
a
Financial and
08.
Cost Sheet
eBook
Functions of Cost Accounting
The functions of cost accounting are explained
below:
Ascertainment of Cost
The
basic
sheet
function
preparation
the selling
high,
which
is used
This technique is used
of products and
to ascertain
services.
the cost
Cost
price and
in various industries.
creates efficiency for the manager by
is u s u a l l y done by comparing
helping
in cost
reduction
the standards to the actual.
and
cost
If the variation
is
then the managers can take corrective measures.
Determination of Selling
Cost
the cost
Reduction of Cost
Cost accounting
This
is ascertaining
is one of the techniques,
price of a product.
Control and
control.
of accounting
accounting
helps
in getting
competition,
helps
in
Price
deciding
the total cost,
when
reducing
price
profit margin
prices of the
h e l p s the sellers in
the
at
which
is added
product are lowered
the price along
the
and
goods
selling
can
price
be
Since,
is decided.
by the competitors,
with maintaining
sold.
it
Due to
cost accounting
their profit margin.
Measuring and Improving the Performance
Cost
accounting
helps
in
various techniques for the

wise
comparison
taking
is
analyzing
and
classifying
the
performance improvement and
possible
due
decisions for the future and
to
cost
accounting,
decide on achieving
data.
It
helps
for reduction
which
can
help
in
in
suggesting
the cost.
the
Year
managers
the standards that are set.
Page
180
in
08. Cost Sheet
eBook
8 . 3 Elements of Cost
Fig. 8.3a depicts the different elements of cost.
ELEMENTS OF COST
Direct
Direct
Direct
Overheads
Fig. 8.3.a:
In
the
above
diagram,
other expenses.
Direct
Direct
of cost
are
classified
These elements are explained
as
in detail
material
cost,
labor cost,
and
below.
Materials
materials
of a product.
in
elements
Elements of Cost
textile
are the
that
can
be
directly
Such materials are a part of the finished
mills,
leather
however are
related
for example,
iron
because the
materials
used
to the final
n a i l s used
value
in
of
such
in
shoes,
cloth
product,
furniture,
items
is
so
used
but still
buttons used
less
that
it
product.
in
are
is
associated
with
manufacture
For example, cotton used
garments,
etc.
not considered
in garments,
pointless
the
to
Certain
materials
as direct materials,
etc.
This exclusion
measure
it.
is
Therefore,
such materials become a part of indirect materials.
Indirect
These
petty
Materials
materials
in
value
are not seen

for polishing,
cannot
be
directly
(For example,
in the finished
threads
product
part
of
in cloth,
physically
the
finished
pins used
in
product.
shirt
Either
packaging,
(For example, grease, oil,
they
are
etc.)
or they
sandpaper used
etc.)
too
Page
181
Financial and
08.
Cost Sheet
eBook
Direct Labor
Direct
labor
employees
finished
cost
who
Indirect
Labor
wages,
directly
These
salaries
engaged
wages
can
be
in
or
the
easily
paid
remuneration
process
linked
to
of
a
converting
particular
to
the
raw
workers
materials
product
or
or
into
process.
wages paid to a m a c h i n e operator is a direct labor cost.
Labor
that
product
the
are
goods.
For example,
is
is
or
not
directly
process
is
related
termed
as
to
the
manufacturing
indirect
labor.
For
and
cannot
example,
be
wages
linked
paid
to
to
any
cleaners,
maintenance workers or watchmen are indirect labor costs.
Other Direct Expenses

According
to
CIMA,
U.K.,
"direct
expenses
are
those
be easily charged
to or linked
which
can
be
units." These expenses are those
identified with and allocated to cost centres and
that can
expenses
with some particular process or product. They are
also known as chargeable expenses.
Other Indirect Expenses
All
indirect
indirect
cannot
costs,
other
expenses.
be added
than
They
indirect
cannot
up or charged
be
materials
related
to
anywhere else.
and
indirect
any
process
For example,
labor
or
are
any
termed
product
as
and
other
they
repairs made to machinery,
insurance paid, depreciation, etc.
Overheads
Overheads can
activity,
direct
are
be any form
directly
or
indirectly,
production expenses.
termed
production
separately
and
of expense
but
incurred
cannot
be
by the manufacturer for the
termed
They cannot
be allocated
overheads.
Overheads
as
manufacturing
overheads,
as
part
of
production
materials,
labor
or
to any of the heads therefore they

can
be
administrative
of
three
types
overheads,
namely
selling
and
distribution overheads.
Production or Manufacturing Overheads
Production
overheads.
indirect
or
manufacturing
These
overheads
materials,
maintenance
paid
indirect
for
the
depreciation for plant and
overheads
only
wages
plant and
focus
and
also
on
the
production
indirect
expenses.
machinery,
machinery used
are
known
power,
as
fuel,
in the production
factory
aspect
In
light,
overheads,
and
addition,
salary
to
they
it
works
include
includes
supervisors,
process, etc.
Page
182
08.
Cost Sheet
eBook
Administrative Overheads
It
is
the
aggregate
organization.
Examples
of
indirect
Administrative
of administrative
audit fees,
bank charges,
costs
related
overheads
overheads
postage,
are
are
to
also
administrative
known
office
stationery,
the
staff
as
general
salaries,
functions
or office
director's
of
the
overheads.
remuneration,
legal expenses, etc.
Selling and Distribution Overheads
It
is
the
aggregate
associated
bad
with
debts,
selling,
indirect
publicity,
advertisement
showrooms,
outwards,
of all
etc.
and
charges,
related
distribution
expenses,
Distribution
packaging
expenses
insurance,
marketing
of products.
market
overheads
to
research
include
activities,
Selling
is,
overheads
expenses,
warehousing
that
cost
include
expenses
expenses,
on
carriage
etc.
8.4 Cost Sheet

There are various types of expenses
indirect.
costs
In case of a firm
of
manufacturing
arrangement
classify
the
statement
of the
costs
on
and
product
is
known
as
to
CIMA,
cost
by a firm-some are direct while others are
that manufactures different

and
costs
incurred
recording
them
is
their classification
basis.
cost
This
sheet.
It
is
kinds of products,
big
very
classification
may
be
task.
Therefore,
important.
of
data
prepared
on
handling
Cost
and
actual
systematic
sheet
helps to
preparation
data
all the
or
of
the
estimated
data.
According
sheet
is
defined
as,
"a
statement
which
provides
for
the
assembly of the detailed cost of a cost centre or a cost unit."
Cost
sheet
divides
production
yearly
basis.
and
Cost
the
cost
information
of
sales.
It
of expenses
can
be
into
prepared
per u n i t at every stage can
prime
cost,
weekly,
works
monthly,
be easily calculated
which
cost,
cost
quarterly
Classification of Cost
Classification of cost is given below:

Direct materials +
Works cost = Prime cost

Cost of production
Direct labor +
Direct expenses
+ Factory overheads
= Works cost
on
helps managers
to analyze the change in the cost at every step and every process.
Prime cost =
or
of
+ Administration overheads
Page
183
Financial and
08.
Cost Sheet
Cost of s a l e s =
eBook
Cost of p r o d u c t i o n +
Total O v e r h e a d s =
Selling and distribution overheads
Indirect m a t e r i a l s +
Indirect l a b o r +
Indirect expenses
Format of a Cost Sheet
Here is a cost sheet format.
Cost Sheet of
(Company
Name) for the
Period
Units Produced
Particulars
.
.
Total
Cost Per
Cost
Unit
(f)
(f)
Opening stock of raw material
xxx
Add:
Purchase of raw materials
xxx
xx
Add:
Carriage inwards
xxx
xx
Add:
Octroi and customs duty
xxx
xx
xxx
xx
xxx
xx
Less:
Closing
stock of raw materials

Direct Materials
xx
Add:
Direct wages (Labor)
xxx
xx
Add:
Direct expenses
xxx
xx
Prime Cost
Add:
(consumables and others)
xxx
xx
Indirect wages/Unproductive wages
xxx
xx
Factory manager salary
xxx
Factory rent
xxx
xx
Factory power
xxx
xx
Factory insurance
xxx
xx
Depreciation on factory asset
xxx
xx
Repairs of machinery
xxx
xx
Foremen salary
xxx
xx
xxx
xx
Other factory/Works expenses
Add:
Less:
xx
Factory overheads:
Indirect material
Less:
xxx
Sale of scrap
Opening
Closing
stock of Work in Progress (WIP)

stock of Work in Progress (WIP)
Works Cost
xx
xxx
xx
xxx
xx
xxx
xx
xxx
xx
Page
184
08. Cost Sheet
eBook
Add: Office and administration overheads:
Office rent
xxx
xx
Printing and stationery
xxx
xx
Legal charges
xxx
xx
General charges
xxx
xx
A u d i t fees
xxx
xx
B a n k charges
xxx
xx
Office staff salaries
xxx
xx
Other office expenses
xxx
Cost of Production
Add:
Less:
Opening
Closing
xxx
stock of finished goods

stock of finished
goods
Cost of Goods Sold
xx
xx
xxx
xx
xxx
xx
xxx
xx
Add: Selling and distribution overheads:
Salesmen commissions
xxx
xx
Salesmen salaries
xxx
xx
Travelling expenses
xxx
xx
Packing expenses
xxx
xx
Warehouse expenses
xxx
xx
Advertisement
xxx
xx
Deliverymen expenses
xxx
xx
Sales tax
xxx
xx
Carriage outwards
xxx
xx
Depreciation on delivery van
xxx
xx
Other selling and distribution expenses
xxx
xx
xxx
xx
Cost of Sales
Add:
Profit
Sales
Table 8.4a:
xxx
xx
xxx
xx
Format of a Cost Sheet
Page 1 8 5
Financial and
08.
Cost Sheet
Example
eBook
01:
The following
year ended
information
March
31,
is
2012.
obtained
from
the
books
of accounts
of
M/s.
Darsh
for the
Prepare a cost sheet statement.
Particulars
(')
Sales for the year
9,00,000
Opening stock
Materials
Work in
15,000
progress
4,000
Raw materials purchased
1, 75,000
Direct wages
30,000
Direct expenses
7,000
Closing stock
Materials
5,000
Work in
6,000
progress
Other expenses:
Factory overheads @
50% of direct
Labor
Administration overheads
Selling
24,500
overheads @ 5% of sales
Units produced
1000
Table 8.4b:
Example 01
Page
186
08. Cost Sheet
eBook
Solution 0 1 :
M / s Darsh Ltd.
Cost Sheet for the Year Ended on
March 3 1 ,
2012
Units Produced
1000 units
CPU
Total Cost
(1000
Particulars
units)
(f)
Opening
stock of raw
(f)
(f)
15,000
materials
1,75,000
Materials purchased
1,90,000
Less:
Closing
5,000
stock
Direct wages
Direct expenses
Prime cost
Factory overhead
Add:
Less:
Opening
Closing
(50/o of direct wages)
work-in-progress
6,000
Administration overheads
Cost of Production
Less:
Opening
Closing
stock of finished goods

stock of finished
goods
Cost of goods sold

Add:
Selling overhead
( 5 % of sales)
Cost of sales
Profit
(balancing
185.00
30,000
30.00
7,000
7.00
2,22,000
222.00
15,000
15.00
2,37,000
237.00
4,000
work-in-progress
Works cost
Add:
1,85,000
(2,000)
2,35,000
235.00
24,500
24.50
2,59,500
259.50
NA
NA
NA
NA
2,59,500
259.50
45,000
45.00
3,04,500
304.50
5,95,500
figure)
Sales
9,00,000
595.
900.00
Table 8.4c: Solution 01
Page
so
187
Financial and
08.
Cost Sheet
Example
Swap nil
ended
eBook
02:
Limited
March 3 1 ,
manufactures two types of shoes, type A and

2012,
type B.
Costs for the year
were:
Amount
Particulars
c,>
Direct materials
15,00,000
Di reel wag es
12,00,000
Production
1,37,500
overheads
Table 8.4d:
Additional information
Example 02
is given as follows:
There was no stock at the b e g i n n i n g
Direct material
The direct wages for type 'B' shoes were 60% of those of type 'A' shoes.
Production overheads were the same per pair for type 'A' and type 'B'.
Administrative overheads for each type were 200% of direct wages.
Selling
Production
sold
Selling
in type 'A' shoes consists twice as much as that in type 'B' shoes.
cost was 5
and
during
per pair.
the
year was:
type 'B' 1 5 , 0 0 0
price
or at the end of the year.
for
type 'A'
type 'A'
pairs of which
was 300
per
12,500
pairs of which
12,000
pairs
14,000 u n i t s were sold.

pair and
for
type 'B'
was 150
for
type 'B'
per pair.
Prepare a statement showing
cost and
were
profit.
Page
188
08. Cost Sheet
eBook
Solution 02:
Cost Sheet of Swapnil
Limited for the Year E n d i n g
Particulars
March 3 1 ,
2012
Type A
Type B
(12500 Units)
( 1 5 , 0 0 0 Units)
12000 Units Sold
14,000 Units Sold
9,37,500
75.00
5,62,500
37.50
6,97,674
SS.Bl
S,02,326
33.49
16,35,174
130.81
10,64,826
70.99
62,500
5.00
75,000
5.00
Works Cost
16,97,674
135.81
11,39,826
75.99
Administrative Overheads
13,95,348
111.62
10,04,652
66.98
Cost of Production
30,93,022
247.44
21,44,478
142.97
Direct Materials cw.N.1J

Direct Wages (W.N.2)
Prime Cost
Production Overheads
(W.N.3)
Less:
Closing
1,23,721
stock
Cost of goods sold

Selling
29,69,301
247.44
20,01,508
142.97
60,000
5.00
70,000
5.00
30,29,301
252.44
20,71,508
147.96
5,70,699
47.56
28,492
2.04
36,00,000
300.00
21,00,000
150.00
and distribution cost
Cost of Sales
Profit
Sales
1,42,970
Table 8.4e: Solution 02
Working
Notes:
1) Adjustment for materials

Suppose type B materials cost
Then type A material cost
per p a i r =
per p a i r =
2x
Then total cost of materials is given as , 1 5 , 0 0 , 0 0 0
12,500(2x) + 1 5 , 0 0 0 ( x ) = '1' 1 5 , 0 0 , 0 0 0
25,000x +
15,000x = ,15,00,000
x = 37.5
37.5
Materials cost
per pair for A =
Materials cost
per pair for B = ,37.5
2 = ,75
2) Adjustment for wages

Wages for type A be x per u n i t therefore, wages for type B i s 0 . 6 0 x
per u n i t
Total wages given as , 1 2 , 0 0 , 0 0 0
Page
189
Financial and
08.
Cost Sheet
eBook
Therefore,
12,500x +
1 5 , 0 0 0 (0.6x)
; ,12,00,000
x ; ,55.814
Per unit wages for type A is , 5 5 . 8 1
And
3)
per u n i t wages for type
B is ,33.49
Adjustment entries for production overheads
Production overheads per u n i t was the same

Let us assume
12500x +
to be
it
'x'
15000x ; , 1 , 3 7 , 5 0 0
x ; 5
Production overheads for A ;
12500
5 ; ,62,500
Production overheads for B ;
15000
5 ; ,75,000
Note:
You
may get different amount due to rounding
Points to be remembered
finished
In closing
stock, and
stock should
For adjustments
in
and
closing
i n c l u d e them
stock adjustment,
the closing
preparation of cost sheet are as follows:
Always check with the o p e n i n g

and
in
off.
stock of raw materials,
work in
process
in the preparation of cost sheet.
the 'per unit' column
should
be valued at cost of production
Cost of Goods Sold,
you
should
always remain
blank and
per unit.
only consider the quantity of
goods sold.
For the cost

and
per u n i t column calculations,
always check the quantity manufactured
quantity s o l d .
Page
190
08. Cost Sheet
eBook
Cost
accounting
summarization,
It
provides
is
one
of
the
accumulation,
information
to
branches
Cost
thing
sheet
that
includes
apportionment, absorption, and
financial
and
as the amount of expenditure (actual

specified
of accounting
or
management
notional)
control of costs.
accounting.
incurred
on,
classification,
Cost
is
defined
or attributable to,
or activity.
is a statement,
which
provides for the assembly of the detailed
cost of
a cost center or a cost unit. The various d i v i s i o n s of cost are:

o
Prime cost =
Direct material
Overheads=
Indirect m a t e r i a l +
Works cost = Prime cost
Cost of production
Cost of sa l e s =
Direct l a b o r +
Indirect l a b o r +
Indirect expenses
Production overheads
= Works cost + Administration overheads
Cost of p r o d u ct i o n +
Direct expenses
Selling
and distribution overheads
Page
191
Material and
Labor Costing
Financial and
09.
Labor Costing
Material and
eBook
9 . 1 Introduction
Mr.
Patel
workers
went
started
and
by,
he
lead
to
business
the quantity
started
manufacturing
This
unit
an
of
manufacturing
manufactured
getting
more
s u c h that
increase
by
orders
him
and
his production
in
the
number
goods.
was
in
had
of
At
the
less,
span
initial
due
of
10
almost tripled
laborers
and
to
stages,
less
years
than
the
he
demand.
he
what
had
few
As time
expanded
his
it was i n i t i a l l y .
materials
required
for
manufacturing.
He
soon
realized
that
he
was
terms of delivery time and
facing
quantity.
difficulty
in
managing
He also observed
orders
from
the
suppliers
in
a decline in the productivity of the
workers.
To
investigate
materials and
this
decline,
labors.
them efficiently.
That
he
is,
carried
out
research
After reading this chapter, you
will
to
manage
labor by m a n a g i n g
be able to:
and
of material management
List different techniques of material management
Classify the labor cost
Explain
methods of material costing
of labor costing
of
labor
turnover
and
different methods
of measuring
turnover
the
in this chapter.
meaning
how
how to control the cost of materials and
Both these issues are discussed
the
regarding
List different methods of labor remuneration
Page
193
labor
09.
Material
and
Labor Costing
eBook
9 . 2 Material Costing
Meaning of Material Costing
The
used
term
for
material
specific jobs
electric
motors
stores,
spare
classified
textile
refers
direct
milk
all
types of commodities
(customized
per
parts,
into
mills,
as
to
manufacturing
customer's
tools
and
materials
used
in
requirement).
other
and
dairy
uses any of these
as materials cost.
Materials costs can
handling
determining
charges,
etc.,
etc.;
materials,
it
the
such
includes
as
raw
materials.
can
material
materials,
such
as
be
pay
costing
is
or
pumps,
consumable
are
primarily
cotton
used
identified
materials such as spare
has to
process
manufacturing
easily
in
parts,
in
final
tools,
to as indirect materials.
some costs,
be invoice price, freight,
and
production
Materials
Materials
which
Whereas,
in
in final products are referred
When a company
material
It
materials.
production,
products are known as direct materials.

etc., which cannot be identified
orders
maintenance
indirect
used
which
storage and
the
method
or
is
known
carrying
cost,
technique
of
the cost of materials.
Methods of Material Costing
A company
generally
needs to
make the
specific product or for a specific job.

are different,
to
determine
which
the
The
creates a m b i g u i t y
price
of
materials
in
to
purchases
of materials
times
for a
prices of materials purchased
at different times
inventory valuation.
is very
be
charged
to
methods available to determine materials cost are shown
at different
Hence,
the
it
p r o d u ct i o n .
in the following
important
The
various
figure.
Page
194
09.
Material
and
Labor Costing
eBook
Based on Market Place
Replacement Price Method
Realizable Price Method
Based on National Pnce
Standard
Price Method
Inflated Price Method
Re-use Price Method
Based on Cost Pnce
Specific Price Method
First In First Out (FIFO) Method
Last In Last Out (LIFO) Method
Base Stock Method
Based on Average Pnce
Simple Average Price Method
Periodic Simple Average Price Method
Moving Simple Average Price Method
Weighted Average Price Method
Periodic Weighted Average Price Method
Moving Weighted Average Price Method
Fig. g,2a:
Out
of these,
FIFO
and
methods are discussed
First In
method
first
are
which
In
values
issued
case
are
inventory
price
charged
replaced
two
methods
that
are
based
on
average
price.
These
Method
Therefore,
of falling
already
materials are
the
first.
are
in t h i s chapter.
First Out ( F I F O )
This
price.
LIFO
Methods of Material Costing
by
in
by
following
FIFO
method
of materials,
to
the
this
production
new materials,
situation takes place in case of increasing
the
the
principle
that
materials are
method
will
be
is
valued
most
high
in
the
materials
received
at
latest
purchase
suitable
since
materials
price,
replacement cost will
be
whereas,
less.
if
th ose
The opposite
materials' price.
Page
195
09.
Material
The
and
following
Labor Costing
table
briefs
you
eBook
about
the
advantages
and
disadvantages
of
the
FIFO
method.
Advantages
Simple to understand
and
Disadvantages
easy to
If price of material changes, the
operate.
comparison of jobs with each other does

not fulfill any
Material cost is the actual cost charged

to the
product.
This method
rising
Closing
stock is an
indicator of current
market
price as possible.
In case of falling
method
material
critical errors
is efficient.
01:
Following
are the details of receipts and
ledger using
the
stores
department
of
prices as the current

be understated.
using
Disadvantages of FIFO
the FIFO method.
Method
issues of materials for the month
Jewels
Ltd.
You
are
required
to
of July
prepare
2013,
store's
FIFO method.
Date
Particulars
July 1
Opening
July 7
Issued
J u l y 10
Purchased
J u l y 17
Issued
20 units
J u l y 20
Issued
SO units
J u l y 22
Received
J u l y 25
Issued
.
Table 9 . 2 b :
balance
150 u n i t s @ , 1 5 each
60 units
40 u n i t s @ ,12 each
80 u n i t s @ , 1 4 . 5 0 each
SO units
.
to
in the material costs that
are determined
Example
by
material
Frequent price fluctuations may lead
prices, this
Table 9.2a: Advantages and
provided
is not useful in case of
production cost may
purpose.
Details of Materials Receipts and
Issues
Page
196
09.
Material and
Labor Costing
eBook
Solution 0 1 :
Stores Ledger of Jewels Ltd.

Date
Receipts
Qty.
Issues
Rate
Amount
(t)
('J
Qty.
Balance
Rate
Amount
(t)
(t)
Qty.
Rate
Amount
(t)
(t)
2013
July
July 7
July
60
10
40
15
900
480
12
150
15
2,250
90
15
1,350
15
1,350
12
480
15
1,050
12
480
15
300
12
480
15
300
40
12
480
80
14.50
1, 1 6 0
12
120
14.50
1, 1 6 0
{ 90
40
July
17
20
15
300
{ 70
40
J u l y 20
50
15
750
{ 20
40
J u l y 22
80
14.50
1,160
{ 20
J u l y 25
{ 20
30
15
300
12
360
{ 10
80
Table 9.2c: Solution of Example 01
Last In
First Out (LIFO)
As the name implies,

'materials
received
are received
This
method
charged
to
provided
prices
closing
of
under t h i s method,
last
are
last is charged
is
more
last
are
stock is valued
first.'
materials are valued

In
other words,
the
by following
price of the
the rule that,

materials
that
for the first issues.
be
purchase
materials
issued
suitable
production w i l l
the
Method
in
times
h i g h and
was
falling
made
or
of
rising
prices.
This
is
because
the
material
close to the current market value of the material,

recently.
fluctuating
This
method
substantially.
may
not
Under
be
the
suitable
LIFO
method,
at earlier price.
Page
when
197
09.
Material
and
Labor Costing
The advantages and
eBook
disadvantages of this method
are as follows:
Disadvantages
Advantages
Easy to understand and
execute
Due to frequent changes in the price

fluctuations in cost of materials will vary
Material cost represents current prices .
Closing
stock is valued
therefore,
shown
unrealized
at earlier prices;
profit w i l l
not
in each j o b .
be
prices,
production is charged
low cost of
to the production.
in the income statement
In case of falling
T h i s method
stabilizes the price
Since the closing

earlier prices,
fluctuations over a period of changing
stock is valued
at
current assets w i l l be
undervalued
in the balance sheet.
This method
is also subject to critical
price levels.
In case of rising
method
material
prices,
this
error in case of frequent price
is efficient.
fluctuations.
.
Table 9.2d: Advantages and
Example
Disadvantages of LIFO
Method
02:
Consider the
same details given
under
Example
01
and
prepare the
store's
ledger using
LIFO method.
Page
198
09.
Material
and
Labor Costing
eBook
Solution 02:
Stores Ledger of Jewels Ltd.

Receipts
Date
Issues
Amount
Rate
Balance
Amount
Rate
Qty.
Qty.
('J
(t)
Rate
Amount
(t)
(t)
Qty.
(t)
(t)
2013
July
July 7
July
60
10
40
15
900
480
12
150
15
2,250
90
15
1,350
15
1,350
12
480
15
1,350
20
12
240
60
15
900
15
900
14.50
1, 1 6 0
15
900
14.50
435
{ 90
40
July
17
20
J u l y 20
J u l y 22
80
14.50
12
300
20
12
240
30
15
450
1,160
{ 90
{ 60
80
J u l y 25
14.50
50
725
{ 60
30
Table 9.2e:
Explanation to the Solution of Examples 01 and 02
You
can
see
materials
each
and
is
in
Example 01
c h a r g ed .
For
that at
example,
because these materials were
the time of i s s u i n g
on
July
17,
received
first
unless earlier materials stock is not over,
On the other hand,
in
materials is charged.
of ,12
Example 02,
For example,
2013,
in
the
20
stores.
because these materials were
17,
received
The
price of earlier
were
technique
2013,
last
in
the materials the
issued
used
at
is,
,15
'until
price of latest
20 materials were issued at a price

the
store.
of materials is received, the price of those materials is used
materials
the
new materials were not i s s u e d . '
at the time of issuing

on July
materials,
Therefore,
if any
new
to issue the materials.
Page
199
lot
09.
Material and
Average
Price
Labor Costing
Method
As the name implies,

price.
The
materials
average
by
eBook
using
in this method,
price
the
method
simple
materials that are issued
of
an
average
enterprise
price
are valued
calculates
method
and
the
the
at an average
value
weighted
for
issue
average
of
price
method.
Simple Average
Under
this
Price
method,
Method
materials,
Average price is calculated
which
are
issued,
are
valued
at
the
average
price.
by the following formula:
I s s u e P r i c e = U nit price of materials in stock

N u m b e r of purchases
T h i s method
is appropriate under the following circumstances:
Quantity of materials received
It is not feasible to ascertain each issue of materials.
Purchase price is quite stable.
Example
From
is uniform.
03:
the transactions extracted
from
the stores
record
for December,
you
are
required
to prepare the store's ledger by using the simple average method.
Date
Particulars
Dec.
1, 2 0 1 2
Purchased
130 u n i t s @ ,10 each
Dec.
5, 2 0 1 2
Purchased
1 2 0 u n i t s @ , 1 1 each
Dec. 7, 2 0 1 2
Issued
Dec.
11,
2012
Purchased
Dec.
15,
2012
Issued
Dec.
20,
2012
Purchased
120 u n i t s @ , 1 3 each
Dec.
25,
2012
Purchased
1 2 0 u n i t s @ ,14 each
Dec.
28,
2012
Issued
1 5 0 units
Dec. 30,
2012
Issued
120 units
Table 9.2f:
160 units
1 2 0 u n i t s @ , 1 2 each
1 5 0 units
Details of Material
Receipts and Issues
Page 200
09.
Material
and
Labor Costing
eBook
Solution 03:
Stores Ledger
Receipts
Date
Issues
Amount
Rate
Balance
Amount
Rate
Qty.
Qty.
('J
(t)
Rate
Amount
(t)
(t)
Qty.
(t)
(t)
2012
Dec.
130
10.00
1,300
130
Dec.
120
11.00
1,320
250
2,620
Dec.
90
940
Dec.
11
210
2,380
Dec.
15
60
655
Dec.
20
120
13.00
1,560
180
2,215
Dec.
25
120
14.00
1,680
300
3,895
Dec.
28
150
13.00
1,950
150
1,945
Dec.
30
120
13.50
1,620
30
325
10.50
160
120
12.00
1,680
1,440
150
11.50
1,725
10
1,300
Table 9.2g:
Working
Issue
Solution of Example
03
Notes:
price
is calculated
by
using
the
formula
given
in
the
explanation.
Calculations for
issue price are as follows:

10 + 1 1
Issue price (Dec.
7,
2012)
10.50
2
11+12
Issue price (Dec.
15,
2012)
11.50
12+13+14
Issue price (Dec.
28,
2012)
= 13
3
= 13+14 =
Issue price (Dec.
30,
13.50
2012)
2
Weighted Average
This
method
is
Price
more
Method
appropriate
in
cases
suggests weights are given to the quantities.

as the total
cost
of materials divided
by
of
price
fluctuations.
Here,
as
the
In this method, the issue price is calculated
the total
quantity
of materials
in
stock
prior to
the issue.
name
Page 2 0 1
09.
Material and
Labor Costing
eBook
Mathematically,
Weighted Average P r i c e = V a l u e of materials in stock

Q u a n t i t i e s in stock
When
purchases
are
previous
quantity
previous
cost
balance
of
quantity.
to
to
the
materials
The
cost
is
made,
the
cost
is
the
latest
of
at
balance
purchased
the
arrived
arrived
closing
current
at,
by
by
of
quantity.
purchases.
subtracting
subtracting
materials
The
When
the
the
cost
obtained
by
adding
the
is
obtained
by
adding
the
issues
issued
current
is
are
quantity
issue
cost
made,
the
closing
from
the
previous
from
the
previous
cost.
Example
From
the
04:
transactions
prepare the stores
extracted
ledger by u s i n g
from
the
stores
the weighted
record
for
December,
you
have
average method.
Date
Particulars
Dec.
1,
2012
Opening
Dec.
5,
2012
Purchased
Dec.
7,
2012
Issued
Dec.
11,
2012
Purchased
Dec.
15,
2012
Issued
80 units
Dec.
18,
2012
Issued
70
Dec.
22,
2012
Purchased
Dec.
23,
2012
Issued
65
units
Dec.
25,
2012
Issued
55
units
Dec.
26,
2012
Purchased
Dec.
27,
2012
Issued
Dec.
29,
2012
Purchased
Dec.
30,
2012
Issued
Table 9.2h:
balance
100 u n i t s @ 30 each
150 u n i t s @ 32 each
200 units
150 u n i t s @ 32 each
units
200 u n i t s @ 33 each
300 u n i t s @ 33 each
160 units
100 u n i t s @ 34 each
190 units
Details of Material
Receipts and
Issues
Page 202
to
Financial and
09.
Labor Costing
Material
and
eBook
Solution 04:
Stores Ledger
Receipts
Date
Issues
Amount
Rate
Balance
Amount
Rate
Qty.
Qty.
('J
(t)
Rate
Amount
(t)
(t)
Qty.
(t)
(t)
2012
Dec.
Dec.
Dec.
Dec.
11
Dec.
15
80
31.80
Dec.
18
70
31.80
Dec.
22
Dec.
23
65
32.76
Dec.
25
55
32.76
Dec.
26
Dec.
27
Dec.
29
Dec.
30
150
32.00
32.00
200
250
31.20
7,800
31.20
so
31.20
1,560
200
31.80
6,360
2,544
120
31.80
3,816
2,226
so
31.80
1,590
250
32.76
8, 1 9 0
2,129
185
32.76
6,061
1,802
130
32.76
4,259
430
32.93
14, 1 6 0
270
32.93
8,891
370
33.22
12,291
180
33.22
5,980
supplied
with
6,240
6,600
33.00
9,900
160
100
3,000
4,800
33.00
300
30.00
4,800
200
150
100
34.00
32.93
5,269
3,400
190
32.33
6,312
Table 9 . 2 i : Solution of Example 04
9 . 3 Material M a n a g e m e n t
Meaning and
Material
flow
of
buying
Definition of Material
management
materials
and
planning,
at
storage
procuring,
is
right
of
process
time.
This
materials.
storing;
in
and
Management
which
helps
In
the
simple
providing
an
organization
organization
words,
the
right
in
material
material,
is
meeting
its
objectives
management
in
the
adequate
deals
right quantity,
of
with
and
at the right time for a specific industrial activity.
Efficient
transport
material
to
then selling
the
management
enterprise,
includes
all
development
the
of
steps,
the
right
materials
from
into
purchase
finished
of materials,
products,
the products in the market.
Page 203
and
09.
Material
and
Labor Costing
In the words of International

(IFPMM),
"material
organization
to
eBook
Federation of Purchasing and
management
plan
and
control
is
all
total
types
Material
concept
of materials,
Management
having
its
its supply,
definite
and
its
flow
from raw stage to finished stage so as to deliver the product to customer as per
his requirements in time."
Important Decisions under Material
The
important
decisions
that
Management
managers
have
to
take
decisions
that
regarding
material
management
are as follows:
Quality and Cost of Materials
Quality
and
concerning
quality
the
of
cost
product.
getting
two
materials.
materials.
market,
materials
are
An
The
material
may
lead
Materials
should
purpose.
low
The
be procured
materials
be
high
materials for the
business
enterprise
can
to
of
important
has
will
be
available
costs,
quality
lowest
to
purchased
in
which
may
finalize
different
may
affect
the
the
specifications
based
on
qualities.
increase
the
management
quality
the
of
these
the
should
be
as
per
standards
finished
set
to
the
take
desired
specifications.
cost
price or of the highest quality does
materials
for
Purchase
total
has
of
high
of
the
In
quality
finished
product.
Thus,
not always serve the
by
the
enterprise
and
at the lowest possible cost for that q u a l i t y .
Quantity of Stock
The
next
stock,
important
which
maintained
raw
needs
in
the
need
should
not
capital,
to
be
loss
to
be
to
kept
in
in
interest
be
taken
maintained
quantity,
components,
stored
of
be
required
materials and
spares
decision
the
then
materials
If the
required
capital,
is
about
the
production can come to a halt.
quantities
increase
in
Conversely,
because
carrying
that
of
quantity
company.
quantity.
stock
the
the
materials that are frequently
excessive
on
by
regarding
required
materials
costs,
result
and
in
not
Other than
for m a c h i n e s
materials and
may
is
of
and
components
blockage
deterioration
of
of the
materials due to weather and other conditions.
9 . 4 Material
Management Techniques
To economize the cost

t ec h n i q u e s
have
dynamic
to
learning
two
been
adjust
to
involved
in
material,
implemented
changing
techniques
of
efficient and
effective material
by most organizations.
demand
material
and
production.
management-stock
management
These techniques
In
this
levels
chapter,
and
need
you
will
Economic
Quantity ( E O Q ) .
to
Page 204
be
be
Order
Financial and
09.
Labor Costing
Material and
eBook
9.4.1 Stock Levels

Purchase department of a company
the
quantity
of
materials
purchase department
to
should
different stock levels used
be
is responsible to place the material orders.
ordered
set o p t i m a l
is
very
stock
important
levels.
decision.
The following
Deciding
Therefore,
diagram
the
shows you
in material management.
Re-order
Level
Maximum
Level
Minimum
Danger
Level
Level
Fig 9 . 4 . l a :
1.
Different Stock Levels
Re-order Level
This
is
when
the
the
level
at
which
available
fresh
quantity
of
orders
for
materials
places a new order. This level is calculated

Re-order level = Maximum
2.
Minimum
Minimum
the
Stock
stock
is
reached
are
to
placed.
this
In
level,
other words,
the
company
by:
re-order period
x Maximum usage
Level
level
organization.
materials
refers to
This
level
is
minimum
also
quantity of materials to
known
as
safety
or
buffer
be maintained
stock.
In
case
emergency such as sudden increase in demand, this stock can be used.

M i n i m u m stock level is calculated
M i n i m u m level= Reorder level - (Average
consumption
Average period)
Page 205
in
of
09.
Material and
3.
Maximum
Labor Costing
eBook
Stock Level
Maximum
stock
company.
Th is
level
is
the
shows
level
the
maximum
beyond
increase. This level is calculated
which
quantity
stock
of
materials
should
not
be
held
by
the
permitted
to
Maximum level= (Reorder level+ Reorder q u a n t i t y ) ( M i n i m u m consumption x M i n i m u m reorder period)
4.
Average Stock
Average
stock
Level
level
represents
the
average
quantity
of
materials
held
by
the
organization. This level is calculated as:
Average stock
5.
level= (Minimum
stock
level+ Maximum
stock
level)
Danger Level
When
In
stock level
other words,
and
goes
this
emergency
below the m i n i m u m
is the
materials
level
need
at which
to
be
level,
it
is
referred
stock has dropped
issued.
It
is
to as danger level.
to
calculated
its
minimum
by
the
following
formula:
Danger level = Average consumption
Example
x Lead time for emergency purchases
05:
Ascertain the various stock levels using
the data given below:
M i n i m u m u sa g e :
Maximum usage:
Re-order q u a n t i t y :
Re-order period
Lead time for emergency purchases:
100 u n i t s
200 units
3,000 units
20 to 30 days
level
10 days
Page 206
Financial and
09.
Labor Costing
Material
and
eBook
Solution OS:
1.
Re-order Level
Re-order level
Maximum
= 30 days
2.
Minimum
re-order period
x 200
Maximum usage
= 6,000 units
Level
M i n i m u m level= Reorder level - (Average consumption x Average period)
= 6,000 units - ( 1 5 0 units x 25 d a y s ) = 2 , 2 5 0 units
Where,
Average consumption
Average period
3.
Maximum
(20
+ 30)
(100
+ 200)
+ 2 =
1 5 0 units
+ 2 = 25 days
Level
Maximum level= (Reorder level+ Reorder q u a n t i t y ) ( M i n i m u m consumption x M i n i m u m reorder period)
= (6,000 u n i t s + 3,000 u n i t s ) - ( 1 0 0 units x 20 d a y s ) = 7,000 units
4.
Average Stock
Level
Average stock level= ( M i n i m u m stock level+ Maximum stock level)
= (2,250
S.
u n i t s + 7,000 u n i t s ) = 4 , 6 2 5 u n i t s
Danger Level
Danger level
= Average consumption
=
150 units
10 d a y s =
Lead
1,500
time for emergency
purchases
units
9.4.2 Economic Order Quantity (EOQ)
One of the
of placing
important decisions that the

purchase
order
is,
technique that helps in taking
When an order is placed,
Carrying
cost
is
'what quantity
of
material
needs to take at the t i m e
should
be
ordered?'
EOQ
is the
this decision.
two important costs are associated with the order:
the cost
h a n d l i n g , cost of insuring
to be constant
purchase department
of holding
inventory,
the
inventory
such
warehouse rent, etc.
as
inventory
Carrying
storage and
cost is assumed
per u n i t of inventory.
Page 207
09.
Material
and
Ordering
Labor Costing
cost
placement and
is
the
order
eBook
cost
incurred
preparation
are
while
the
placing
an
order.
Costs
two examples of ordering
of
cost.
tender
Ordering
cost is assumed to be constant irrespective of the size of the order.
S u m of carrying cost and
If large quantities are

to
h i g h ordering
order
quantity
level?'
EOQ
purchased,
costs.
(that
helps
cost is the total cost of placing
carrying
The decision
is,
to
h e l p of the following
ordering
optimum
calculate
that
costs are
needs to
quantity)
this
so
optimum
high,
whereas small
be taken
that
total
quantity.
the order.
here
costs
This
is,
'what
are
can
quantities
be
at
should
lowest
illustrated
lead
be the
possible
with
the
graph.
Total Cost
(TC)
J.
Carrying
Lowest
Cost (CJ
Total Cost
Cost
Ordering
Cost (C
)
0
.1.
Q. (EOQ)
Quantity ( Q)
Fig. 9.4.2a:
You
can see
units
to
ordered.
ordered
When
be
In
and
these
represented
The point,
other
in
and
two
ordering
words,
ordering
carrying
cost
costs
is
are
cost
varies
cost
inversely
added,
is
inversely
directly
related
the
cost varies directly with
sum
with
related
with
the
to
number of
the
number
of
units
to
be
the
number
of
units
to
be
number of
represents
the
total
units
cost
of
to
be
order,
ordered.
which
is
by total cost curve.
at which the carrying
represents the
So,
Economic Order Quantity
in the above graph that the carrying

ordered
lowest
possible
the above g r a p h ,
to be ordered.
point
cost curve and
total
Q*
cost and
it
ordering
is the
cost curve
intersect each other,
point of economic order quantity.
represents the optimum
number of units,
that
is,
Because at point Q* the total cost is m i n i m u m .
Page 208
EOQ
Financial and
09.
Labor Costing
Material
and
eBook
EOQ Calculation
The formula
used
to calculate EOQ
is:
E O Q = 20
Where,
A = Annual consumption of materials in units

O = Ordering
C =
Carrying
cost per order

cost per u n i t per annum
EOQ computation
is subject to the following
assumptions:
Annual consumption of materials is constant and
The cost of materials or finished
The materials ordered are received
Ordering
cost
constant and
EOQ
per
order
(0)
known.
goods is constant during
and
the year.
immediately without any time lag.

carrying
cost
per
unit
per
annum
(C)
are
also
known.
No safety stock is maintained.
calculation
also
which are calculated
helps
to
ascertain
the
number
of
orders
to
be
placed
in
year,
as:
N u m b e r of orders to be placed in a y e a r = EQ
Needless to mention,
EOQ
is calculated with
help of the given formula.
Example 06:
L.alit
Enterprises
estimated
the
cost
placed
at
of
purchases
25,000
placing
units.
one
raw
materials at 100
The carrying
order
is
200.
costs
per u n i t .
are
Compute
10
the
Their a n n u a l
percent
EOQ
and
consumption
of average
number
inventory
of
orders
in a year.
Solution 06:
Details given
in this example are:
A = Annual consumption of materials = 2 5 , 0 0 0

O = Ordering
C =
Carrying
units
cost per o r d e r = 200

cost per u n i t per annum
= 10
(that is,
10/o of 100)
Page 209
is
and
to
be
09.
Material
EOQ
and
eBook
2 x 2 5 , 0 0 0 x 200 _
000
it
----- - 1 ,
urns
20
Labor Costing
10
Thus,
on
the
materials,
basis
of
EOQ
the total cost
calculation,
(carrying
when
Lalit
be placed
in a year
on
comprising
1,000 units of materials,
9.5
the
Meaning
basis
of
of
EOQ,
Labor
order
1,000
units
of
25,000
EOQ
Therefore,
will
+ ordering cost) w i l l be m i n i m u m .
cost
A
N u m b e r of orders to
Enterprises
Lalit
; 25 orders
1,000
Enterprises
should
place
25
orders,
each
in a year.
Costing
and
Classification
of
Labor
Cost
Meaning of Labor Costing
Labor
is
the
effectively.
h u ma n
most
sensitive
According
to
contribution
constant
control,
using the human
means
Martz,
to
of
Curry
production,
measurement
production
and
is
and
an
Frank,
and
therefore
"Labor
important
analysis."
It
Cost,
cost
should
utilized
representing
factor
represents
be
the
which
the
requires
amount
paid
for
resources.
Labor cost includes the following
benefits:
Monetary Benefits to Workers

It
includes
the
basic wage,
aforesaid
contribution
pension,
situation,
to
employer's
Employees'
State
daily allowance,
contribution
Insurance
to
Scheme,
travelling
provident
production
allowance
fund,
and
paid
in
employer's
profit
bonus,
retirement gratuity, etc.
Perquisites,
It
dearness allowance,
includes
Fringe Benefits, and

subsidized
transport facility,
canteen
Labor
food,
Related Costs
subsidized
free or subsidized education facility,
housing
facility,
medical
facility,
etc.
Page 2 1 0
09.
Material
and
Labor Costing
eBook
Classification of Labor Cost

Labor cost is divided
into the following
two groups:
Direct Labor Cost

It
includes the wages that are
the
manufacturing
wages
paid
to
process,
machine
paid
to the
either
operators
labors and
manually
and
or
by
assemblers.
those who are directly engaged

operating
Direct
machines.
labor
cost
is
For
in
example,
part
of
prime
cost.
Indirect
Labor Cost
It consists of the
wages that
production
process.
product
service,
or
These
for
inspectors, supervisors,
are
costs
paid
are
example,
etc.
to
not
wages
the
labors that
identifiable
paid
to
Indirect labor cost
are
with
not
the
workers
directly
production
supporting
the
involved
of any
direct
in
the
specific
workers,
is a part of overheads.
9.6 L a b o r Turnover
Meaning
Labor turnover
P.
K.
Jain,
is
the
loss
"Labor
of employment
turnover
may
or
be
workforce
defined
as
in
an
the
organization.
rate
of
change
composition of labor force in an organization." H i g h e r labor turnover

unstable
labor
force.
So,
an
organization's
effort
should
be
According
directed
in
to
the
represents an
to
keep
labor
turnover at m i n i m a l .
Measurement of Labor Turnover
There are various methods that can

it
is
data
important to use one method

on
year-on-year
measuring
consistently
Given
below
to ascertain the
labor turnover.
But
to allow the comparison of labor turnover
are
some
of
the
important
methods
of
labor turnover.
Separation
This
basis.
be incorporated
Method
method
organization
of
measurement
considers
total
numbers
of
employees
leaving
in a particular period to the average number of employees.
Employees leaving ( n u m b e r of separations) in a period

Lab or tu mover :::
100
Average number of workers employed
Page 2 1 1
the
09.
Material and
Labor Costing
eBook
Replacement/Net Labor Turnover Method
Under this
method,
labor turnover
is calculated
average number of workers in a given

o n l y the actual
period.
by
dividing
number of
replacements
by
Thus, this method takes into consideration
number of replacement d u r i n g a period.
N u m b e r of workers replaced in a period

La bor tu r n o v e r =
x 100
This
is the
most appropriate method
status of stability and
instability among
Flux or Separation cum
As
the
name
separation
labor
implies,
method
turnover.
labor turnover as
it gives the correct
the workforce.
Replacement Method
this
and
The
of calculating
method
replacement
result
can
be
takes
into
method.
same
for
account
This
both
managed organization as well as poorly m a n a g ed
both
method
the
the
gives
organization,
methods,
deceptive
that
is,
that
result
is,
of
properly
organization.
N u m b e r of separations+ N u m b e r of replacements x
La bor turnover=100
9 . 7 Methods of Labor Remuneration

Remuneration
earned
by
an
employees.
is
the
employee.
However,
since the method
that
the employee and
Therefore,
total
it
monetary
All
is
firms
time,
it
to
it
promotes
increases
have
decide
the
a
form
proper
upon
the
of wages,
salary,
remuneration
best
method
not
and
system
of
bonus,
for
their
remuneration,
be acceptable to
vice versa.
the wage payment system
that
in
from the employer's perspective may
situation for both employer and

pattern
should
difficult
is good
benefits
employee.
goodwill
productivity
selected
and
and
should
In other words,
satisfaction
efficiency.
among
The
methods of labor remuneration that are discussed
be such that it would

it should
be designed
employees
following
be a w i n - w i n
diagram
and
at
shows
in
the
such
same
different
in t h i s chapter.
Page 2 1 2
09.
Material
and
Labor Costing
Fig. 9.7a:
9 . 7. 1
The
the
Time
eBook
Different Methods of Labor Remuneration
Rate System
general
feature
of a l l
basis of time wages,
the
that
time
is,
rate
Time
methods
is
that,
It
is
broadly classified
Rate.
the
workers
are
paid
into
only
on
the following
three levels.
Ordinary
The
an
wages
Level
under this
organization,
method
irrespective
are calculated
of the
output.
according
The
to
the
wages are
time
paid
spent
in
either on
a factory or
hourly,
weekly or m o n t h l y basis.
Page 2 1 3
daily,
09.
Material
and
Labor Costing
The total earnings are calculated
Total earnings
For example,
based
Hours worked
if a worker works SO
then the worker w i l l
High
eBook
be paid 5 0 0 .
on following formula:
Rate per hour
hours and
industry.
performance.
worked
Due
Wages,
multiplied
expected
extra
per hour,
premium.
by
to
higher
under
the
rates,
this
rate.
component
is
the time
permanent
rate
also,
standards
and
is divided
the
pay
component d e p e n d s upon the merit
to
workers
method
Here,
to the wages
are
are
of
prevailing
expected
calculated
to
in the locality
give
high
according
performance
are
set
to
to
quality
the
time
ensure
the
Level
Under this system,
and
compared
productivity from workers.
Graduated
work,
is 10
Level
the
fixed
upon
For overtime work, workers are paid
Under this system, a higher rate is fixed

or
the wage rate agreed
variable wages are

be
paid
to
the
the variable component.
added
worker.
is
into fixed and

based
on
the
variable components.
nature
rating of the worker and

to
The
obtain
wages
The following
the
paid
total
to
job.
The
the cost of living
wages,
each
of the
known
as
The fixed
variable
index. The
measured
worker differs depending
table shows the advantages and
day
upon
disadvantages of
time rate system.
Advantages
Easy to understand and
Disadvantages
execute.
Workers are not entitled to any

monetary
T h i s method
helps in
improving the
production. Thus, there is no distinction
q u a l i t y of a product as the worker w i l l
made between efficient employees and
not get higher wages by
inefficient employees.
h i g h e r quantity
in
producing
lesser time.
incentives to increase
T h i s method
h i g h l y skilled
can
and
be applied
unskilled
to
both,
workers.
There w i l l
be a lot of idle time,
supervision
are paid
is not kept.
according
not work and
Workers are ensured

minimum
of getting
if strict
Since workers
to time, they may
remain
idle when
not
supervised.
standard wage.
Table 9 . 7 . l a : Advantages and
Disadvantages of Time
Rate System
Page 214
09.
Material
and
9.7.2 Piece
this
system,
wages
under this
method
wages
method
by the wage
watchword
of this
are
paid
rate as
system
is
on
the
according
output
to
produced
the quantity
agreed
upon
between the
"produce
more
and
earn
worker.
produced
worker and
more." The
by
on
the job,
the employer.
formula
The
used
The
for this
is:
For example,
then
if a worker
Straight
Units produced
produces
the worker will
be
are straight piece rate and
Under
based
are calculated
Wages=
unit,
eBook
Rate System
Under
multiplied
Labor Costing
paid
100
u n i t s and
1,000.
Two
Rate
per u n i t
the wage
important
rate agreed
methods of
upon
piece
is 10
rate
per
system
differential piece rate.
Piece Rate System
this
method,
considering
the
wages
time
are
taken
in
paid
on
the
performing
basis
the
of
fixed
work.
The
number
of
following
output
formula
without
used
to
calculate the amount of wages under this system:
Wages=
Thus,
under
that is,
this
system,
the
per u n i t of output,
Differential
This system
N u m b e r of units
workers
per article,
are
paid
per job,
Rate
on
the
per u n i t
basis
of quantity
of work
done,
per unit of commodity, etc.
Piece Rate System
is devised
inefficient employees.
that are fixed
of the worker.
to
give
more
benefits to efficient employees and
The unique feature of t h i s system
according
to efficiency.
For example,
These
is the
rates are applied
if the slab is fixed
to motivate the
several slabs of time

according
rate
to the efficiency
as:
Up to 8 5 % - N o r m a l time rate
86% to 9 5 % - 1 1 0 %
95% to
time rate ( 1 0 % above
rate)
1 0 0 % - 1 2 0 % time rate ( 2 0 % above normal
Above 1 0 0 % - 1 3 0 % time rate ( 3 0 % above
Based
normal
on
efficiency
efficiency
level
of
level of a worker is
worker w i l l be paid
110
each
90
normal
worker,
percent,
rate)
rate)
wages
so according
are
ascertained.
For
example,
to the above-mentioned
slabs the
percent time rate.
if
Page 2 1 5
09.
Material
Thus,
the
and
Labor Costing
calculation
time rate system,

devised
by
modified
F.
W.
of wages
and
differential
Taylor
rate
system
Two
high
level
(father of scientific management
Piece
of work
rates are
rate
and
they are
more
Rate. This system of labor
in
the
or
less
for
or
used
the
piece
under
rate
is
decided
this system-low
performance-which
if
workers
paid
are
unable
remuneration was
U.S.A.)
and
later
is
based
on
rate for
above
the
to
complete
their
work
scientific
below
standard
standards.
time,
within
time
In
other
standard
at
time,
if
high
then
in t h i s system are as follows:
120/o or 1 1 0 % of piece rate when performance is at or above standard.
Differential
method
is
an
Piece
Rate System
improvement
piece rates are used,
following
motion
words,
paid
80/o or 90% of piece rate when performance is below standard.
three
it was
performance
they are
the
and
This
to
at low rate.
Differentials to be applied
Merrick
similar
Rate System
workers complete their work within or less than the standard

rate;
is
by Merrick.
standard
study.
under
that is, Time worked
Taylor's Differential
eBook
over
instead
the
of two.
Taylor's
Each
differential
labor
is paid
piece
rate
according
system.
Here
to efficiency.
The
table shows the rates a p p l i c a b l e :
Efficiency
Piece Rate Applicable
Normal
Up to 83/o
Above 83% and
Above
up to
piece rate
10% above the normal piece rate
100%
30% above normal piece rate
100%
.
Table 9.7.2a:
Merrick D1fferent1al
Piece
Rates
Example 07:
The standard
at
10
and
worker B =
time
factory
to
produce one
working
16 units, and
hours
unit
per
worker C =
1.
S tra ig ht
2.
Taylor's differential
3.
Merrick's differential
is
30 minutes.
day
is
17 units.
hours.
The
normal
Output
of
rate
per
worker
hour
=
is fixed
15
Calculate the wages under:
piece rate system

piece rate system
(Apply the
rates as 80% and
120/o)
piece rate system
Page 2 1 6
units,
09.
Material
and
Labor Costing
eBook
Solution 07:
Standard number of u n i t s per day of 8 hours w i l l

1 unit requires 30 minutes,
so in
be:
1 hour 2 units will be produced.
Therefore, in 8 hours 16 units w i l l be produced.
Normal piece rate is:

Given rate is,
1 h o u r = tlO
In 1 hour 2 units are produced, so normal piece rate is ,5 (that is ,10 for 2 units)
Now,
we can
calculate
the
wages of the
three
workers
under the
three
different
piece
rate systems.
1.
Straight piece rate system
Wages = Units produced

Wages of A =
15 units x ,5 = t75
Wages of B =
16 units x ts = t80
Wages of
2.
x Normal piece rate
17 units x t s = ,85
Taylor's differential
Standard
is 120
Thus,
units
piece rate system
per day are
16 units.
The lower rate is 80
percent and
higher rate
percent.
workers
piece rate and
producing
less than
workers producing
16
units will
be
paid
16 units or more will
80
percent of the
be paid
120
normal
percent of the
normal piece rate. Therefore,
3.
Wages of A =
15 units x
(80/o of t5) = ,60
Wages of B =
16 units x ( 1 2 0 % of t5)
Wages of C =
17 units x (120/o ot es) = , 1 0 2
= ,96
Merrick's differential piece rate system
Standard units per day is 16 units

The efficiency level is calculated
by u s i n g the following formula:
U n i t s produced
100
S t a n d a r d units
Page 2 1 7
09.
Material
and
Labor Costing
eBook
Wages of Worker A
Worker A produced
Based
15 units;
on this efficiency
piece rate (efficiency

Wages=
level
the efficiency level is 93. 75%

the
rate applicable to worker A is
level 83% to
10/o above normal
100/o)
15 units x ( 1 1 0 % of 5)
W a g e s = 82.5
Wages of Worker B
Worker B produced
Based
16 u n i t s ;
on t h i s efficiency
level
piece rate (effi cien cy level

Wages=
the efficiency level is

the
100%
83% to
10/o above normal
100/o)
16 units x ( 1 1 0 % of 5)
Wages= t88
Wages of Worker C
Worker B produced
Based
17 units;
on this efficiency
piece rate (efficiency

=
level
level
the efficiency level is

the
106.25%
83% to
30/o above normal
100/o)
17 units x ( 1 3 0 % of 5)
= 110.5
9. 7 .3 Combination of Time and
It
is
and
divided
bonus
into
three
system,
and
Efficiency System and
main
Piece Rates
wage
Bedaux
schemes-Emerson's
Scheme.
Gantt Task and
In
this chapter,
efficiency
only two
Bonus System-are studied
system,
Gantt
task
methods-Emerson's
in detail.
Page 2 1 8
Financial and
09.
Labor Costing
Material
and
eBook
Emerson's Efficiency System

Under this system,
given
to
them
workers are assured
increases
bonus depending
with
the
on the efficiency
level
of getting
of
standard
efficiency.
d a i l y wages;
Different
Below 66/o
Normal time rate (No bonus)
Above 66% and
Normal time rate +
up to
(Bonus varies from
100/o
Normal time rate +
100%
each
The efficiency u n d e r this method
Bonus
0 . 0 1 % to 20%)
Bonus
is calculated
Production
Gantt Task and

this
standard.
are
paid
with the help of the following
formula:
based
100
en
Basis
Actual production
d
d
d
.
x 100
Stan ar
pro uction
Bonus System
system,
If the
bonus of 20
bonus for
efficiency; Standard tim: allowed x
. .
Percentage efficiency;
Under
1%
Emerson's Eff1c1ency Rates
Time ta
On
Basis of Time
Percentage
including
1 % increase in efficiency)
.
Table 9.7 .3a:
On The
bonus
Rate Applicable
(Bonus 20% of basic wages +
rates,
the
level, are as follows:
Efficiency
Above
time
and
worker
production
on
piece
is
paid
or output
rate.
The
at
time
of the
piece
rate
rate
if
worker
is
is fixed
in
the
production
above
standard,
is
below
then
such a manner that
it
the
the
wages
includes a
percent.
set
Page 2 1 9
09.
Material
and
The following
Labor Costing
eBook
table shows the wage
payment structure under this system.
Performance
Earnings
Output below standard
Time rate (guaranteed)
Output at standard
Wages of time rate + 20/o
Output above standard
H i g h piece rate on worker's output
Table 9.7.3b: Wage
Example
The
10,
in
bonus of time rate
Payment Structure under Gantt and
Bonus System
08:
standard
while the
6 hours,
time to
rate
produce
per unit
worker B in
10
20
units
is fixed
hours,
is
at 7
and
hours.
per u n i t .
worker C in
three workers under the Gantt Task and
The
normal
In a day,
8 hours.
rate
per
hour
is
fixed
at
worker A completes the job
Calculate the wages of these
Bonus System.
Solution 08:
Wages of Worker A
Worker
performs
worker will
the
be paid
task
in
less
than
the
standard
time
of
hours.
Therefore,
the
allotted.
Therefore,
the
piece rate.
Wages = Units produced

Wages of A = 20 units
Normal
piece rate
x 7
= 140
Wages of Worker B
Worker
performs
worker will
Wages =
be paid
the
10
in
more
than
the
standard
time
at time rate.
Hours worked
Wages of A =
task
hours
Normal time rate
x 10
= 100
Wages of Worker C
Worker C performs the task
in
paid at the time rate p l u s 20%
the
standard
time allotted.
Therefore,
the
worker w i l l
b o n u s on the time rate.
Page 220
be
Financial and
09.
Labor Costing
Material and
Wages
Hours worked
eBook
x Normal time r a t e +
Wages of worker A = 8 hours
x 10
20/o
+ 20% (8
(hours worked
hours
x normal time rate)
x 10)
= 96
9.7.4 Premium
Under
the
standard
Bonus Scheme
time
rate
level;
whereas
production
is
shared
both,
by,
system,
beyond
in
the
the
employer
piece
rate
standard
will
benefit
system,
level.
In
it
the
employer as well as worker.
is
if the
the
production
workers
premium
bonus
who
is
will
system,
Categories of p r e m i u m
beyond
gain,
gains
the
if
the
will
be
bonus schemes are
as follows:
Halsey Scheme
Halsey-Weir Scheme
Rowan
Birth Scheme
Acceleration
Scheme
Out of these,
Bonus Scheme
Halsey Scheme and
Rowan Scheme are discussed
in this chapter.
Halsey Scheme
Under this
the job
in
rate and
In
scheme,
less time,
a standard
then
time
it
may
vary
scheme are calculated
to
complete a job.
the worker gets wages
a bonus for the time saved.
practice,
is fixed
from
using
33.33
The
bonus
percent
to
If the worker completes
for the actual time worked

is usually
66.66
50
at the t i m e
percent of the time saved.
percent.
The
wages
under
this
the following formula:
Total e a r n i n g s = {Time taken x Time r a t e ) + ! {Time saved x Time rate)
Example 09:
A small
24
furniture
hours.
The
manufacturer decides that
rate
per
hour
is
fixed
at
the
SO.
standard
The
bonus
time
will
to
be
complete
paid
at
one
the
chair
rate
percent of the time saved.
The time taken
by different workers to complete one chair is as follows:
Worker A:
18
Hours
Worker
B:
20
hours
Worker C:
16
hours
Calculate the wages of these three workers u n d e r the Halsey Premium
Plan.
Page 2 2 1
of
is
50
09.
Material
and
Labor Costing
eBook
Solution 09:
The wages u n d e r the Halsey Premium
Pl an are calculated using the following formula:
Total ea r n i n g s = (Time taken x Time r a t e ) + (Time saved x Time rate)
In t h i s case, time rate = t50 per hour

Time allotted or taken = 24 hours
Time saved
by different workers is:
A = 24 hours - 18 hours = 6 hours

B = 24 hours - 20 hours = 4 hours
C = 24 hours - 16 hours = 8 hours
Wages of Worker A
(18
50) + (6
50) = 900 +
150 = t l , 0 5 0
Wages of Worker B
1
(20
50) +
(4
50) = 1,000 +
100 = t l , 1 0 0
Wages of Worker C
1
(16
50) +
(8
50) = 800 + 200 = t l , 0 0 0
R o w a n Plan
This
method
is
similar
to
the
Halsey
calculation of the bonus is different.
premium
plan
in
Bonus is paid only
terms
of
time
if the time taken
saved,
but
is less than the
standard time.
The formula used to calculate b o n u s under Rowan plan is:

Time saved
Bonus=
.
x Bas re wage
Time allowed
The formula used for the calculation of wages under the Rowan Plan i s :
Total e a r n i n g = (Time taken
Time rate)+
Time saved
(Time taken
Time rate)
Time allowed
the
Page 222
09.
Material and
Labor Costing
eBook
9.7.5 Group Bonus Scheme
Certain
this
operations
case,
workers
in
an
organization
forming
wages depends u p o n the

following
a group
are
done
collectively
are considered
by
as a joint
basis of joint output produced
number
u n i t and
of workers.
the calculation
by a g r o u p . This method
In
of
has the
advantages:
It helps in encouraging
It eliminates excessive wastage of t i m e.
It increases the level of output.
The main group
teamwork among
workers.
bonus schemes are as follows:
Priestman's Production
Rucker Plan
Scanlon
Towne Gain Sharing
Bonus Scheme
Plan
Plan
9.7.6 Other Incentive Schemes
Other incentive schemes are categorized as follows:

Indirect
It
Monetary Incentives
includes
of the
the
profit
sharing
profit would
employee
the form
organization,
Indirect
part
with
schemes.
Profit
the employees or workers.
of the
These schemes
business
help
in
with
the
motivating
sharing
means
Co-partnership
owner and
the
profit
the employees and
that
part
means that
is
shared
in
workers of an
which directly maximizes the output of the organization.
Non-monetary
These types of incentives

functions.
co-partnership
be shared
shares
of shares.
and
Such
Incentives
are
linked
benefits are provided
Subsidized
Pensions
Subsidized
General welfare-sports,
to
the
conditions of employment
in the following
rather than
to job
forms:
or free canteen facility
or free medical facility
recreational facilities,
housing facilities to employees, etc.
Page 223
09.
Material and
Labor Costing
eBook
9 . 8 Chapter S u m m a ry
Material
tax,
cost
is
the
cost
of
materials,
excise duty, containers, carrying
which
and
includes
invoice
price,
freight,
storage cost, etc.
Stock levels technique includes:

o
Minimum
level
Maximum
Re-order level
Average stock level
Danger level
level
The formula for calculating
Labor cost
represents
EOQ
is:
the wages
EOQ = 20
paid
to
the
workers for
producing
the goods
services.
Labor cost is classified
into direct
Methods of calculating
labor turnover are:
sales
Separation method
Replacement method
Flux method
labor cost and
Labor remuneration methods discussed

o
Time rate
Piece rate
Combination of time and
Premium
Grau p bonus
Other incentive schemes
indirect labor cost.
in this chapter are:
piece rate
bonus
Page 224
and
Overheads
I T M
Financial and
10.
Overheads
eBook
1 0 . 1 Introduction
In a business, there are various expenses that are incurred for day-to-day activities.
necessary
from
to allocate them
an accounting
expenses
function,
like
to different
point of view.
overheads,
which
Departmental
cannot
are difficult to apportion.
this chapter,
expenses are easy to allocate,
easily
related
to
any
process,
belong,
whereas
product
or
for apportionment
in this chapter.
you will be able to:
E x p l a i n the concept of overheads
Classify overheads according
Explain
how
be
to where they
The various methods that are used
of such overheads will be discussed
After reading
functions or departments,
It is
factory
to functions, elements, and
overheads
are
distributed
to
behavior
production
and
service
departments
Explain
used
how service department costs are re-apportioned
and
the various methods
for this purpose
E x p l a i n the term absorption of factory overheads and
E x p l a i n the concept of over and
examine its various methods
under-absorption of overheads
Page 226
10.
Overheads
eBook
10.2 Meaning and

Institute
of
Cost
"The aggregate
and
Definition
Management
of indirect material
Accountants
costs,
(ICMA)
indirect wages
defined
overheads
as,
(indirect labor costs),
and indirect expenses."
Overheads,
identified,
and
which are also known as convenience costs,
or
above
production.
related
the
This
to a specific
prime
is
the
cost
and
reason
product or service.
constitute
why
overheads
They
major
need
are expenses that are not easily

include all
proportion
in
proper analysis
the expenses over

the
for
total
cost
cost
of
calculation
and control.
1 0 . 3 Classification of Overheads
Overheads are classified
as shown
in Fig.
10.Ja.
Overheads
Fig.
10.3.1
1 0 . J a : Overheads Classification
Function-wise Classification
Under this classification, overheads are categorized

overheads, administration overheads, and
selling
as per the functions,
and
namely, factory
distribution overheads.
Page 227
Financial and
10.
Overheads
eBook
Factory Overheads
Factory overheads are

include
and
lubricating
machinery,
related
to manufacturing.
oil, c o n s u m a b l e stores, factory rent,

light,
machinery (used
to activities relating
fuel,
power,
wages
of
repairs and
workers,
Factory overheads
maintenance of plant
depreciation
of
plant
and
in production), etc.
Administration Overheads
It
is
the
aggregate
organization.
of
indirect
Administration
Administration
overheads
costs
related
overheads
include
are
office
fees, bank charges, postage, stationery,
Selling and
to
also
staff
the
administrative
known
as general
salaries,
director's
or office
10.3.2
Under
with selling,
debts,
showrooms,
outwards,
overheads.
audit
etc.
activities, that is,
publicity, and distribution of the products. Selling overheads
advertisement
Distribution
expenses,
overheads
market
include
research
expenses,
warehousing
expenses
expenses,
carriage
Element-wise Classification
this
Indirect
classification,
as
overheads
are
broken
down
into
indirect
materials,
indirect
indirect expenses.
Materials
Materials that cannot

indirect
be
linked
materials.
or absorbed
Lubricating
oil,
by any of the cost centers or cost units are

grease,
gas,
consumable
stores,
etc.
are all
examples of indirect materials They do not form a major portion of the final product,
they
are
necessary
in
making
the
shirt comprise indirect materials;

shirt,
on
packaging charges, insurance, etc.
labor, and
called
the
Distribution Overheads
cost associated
bad
of
remuneration,
It is the aggregate of all the indirect expenses related to the marketing
include
functions
but
is
necessary
in
the
product complete.
though
Threads that
are
used
to
but
stitch a
it may not form a major portion of the stitched
production.
Similarly,
oil
and
grease
used
for
the
proper
functioning of machinery comprise indirect materials.
Indirect Labor
Labor
which
is
manufacturing
manager and
indirectly
process
is
supervisor,
related
known
and
to
as
wages
the
production
indirect
paid
to
labor.
the
activities
Salaries
staff for
or
paid
cleaning
which
to
the
are
all
supports
maintenance
examples
indirect labor.
the
Page 228
of
10.
Overheads
Indirect
All
eBook
Expenses
expenses
that
cannot
be
nor
indirect
labor
heat,
light,
materials
cost
expenses
are
Expenses
that are
They are incurred
10.3.3
not
directly
cost
charged
are
maintenance,
classified
to
called
rates,
under direct
product
indirect
taxes,
and
are
expenses.
insurance,
expenses are
neither
indirect
Examples of
training
known
as
indirect
expenses,
indirect
etc.
expenses.
for benefit of more t h a n one product or activity or job.
Behavior-wise Classification
Behavior-wise classification
has three categories,
which are explained
in detail
below:
Fixed Cost
Chartered
"the
cost
Institute
which
of
Management
accrues
in
certain l i m i ts , tends to be
Fixed
costs are unaffected
period.
of
These costs
passage
month
cost.
will
of
time.
still
relation
have to
Table
fixed
not on
example,
pay
an
fixed
can
shows
overheads.
be
in
(CIMA)
passage
of
defines
time
and
fixed
cost
which,
as,
within
by fluctuations in the level of activity."
the
(on
they do
not change in a given time
basis of quantity
MTNL
rent
and
for
user
the
land
who
does
services.
and
produced
not
This
building,
but
make
fixed
on
any
basis
calls
rental
machinery),
the
is
for
the
rent and
fixed
rates,
10.3.3a
increase
the
by the units produced
incurred
For
to
unaffected
Other examples are depreciation
bank charges,
it
are
Accountants
the
Though
the units
concluded
relation
the
total
produced,
that
the
between
fixed
there
increase
ove rhead
is a decrease
overhead
cost
per
in
the
remains
units and
the
same
in the overheads
unit
decreases
with
change
in
per
irrespective
per u n i t .
the
increase
Overheads Per Unit

Total
Fixed Overheads
(Fixed)
Produced
(f)
(f)
1000
5000
5.00
2000
5000
2.50
3000
5000
1.67
4000
5000
1.25
5000
5000
1.00
Table
10.3.3a:
of the
Therefore,
units produced.
Units
unit
Fixed Cost
Page 229
in
the
Financial and
10.
Overheads
eBook
Variable Cost
defines variable
CIMA
the
level
of
maintenance,
increases
activity."
etc.
as
cost as,
per
cost
increase
in
relationship of variable cost and
It
is
the
cost
materials
that
are
requirement for raw
which
of
per
the
tends
variable
unit
costs
remains
units
of
to
are
the
output.
follow
fuel,
same,
The
(in
short-term)
power,
but
table
the
total
repairs
variable
10.3.3b
and
costs
explains
the
units of output.
changes with
variable
cost
Examples
Overheads
the
"a
cost.
the change
When
materials also
in
the
the
units
number
increases and
of
produced.
units
For example,
produced
direct
increases,
the
so the cost of the direct materials w ill
also increase accordingly. Therefore, variable cost has a direct relationship with the units
produced.
Table
the
1 0 . 3 . 3 b explains the relationship
total
remains
variable
the
to
t6,000
cost.
same,
When
which
is
the
units
there
increase in the units produced,
is
increase in the units and the change in
increase
whereas,
t6;
S i m i l a rl y ,
t12,000.
between
the
from
total
change
variable
in
but the cost per unit,
1,000
the
to
overheads
total
variable
per
unit
increases
costs
from
with
an
remains the same.
Total Variable
Overheads Per
Overheads
Unit (Variable)
(or)
(or)
Units
cost
2,000,
1000
6000
2000
12000
3000
18000
4000
24000
5000
30000
Table
1 0 . 3 . 3 b : Variable Cost
Semi-variable Cost
Semi-variable
as,
"a
cost
affected
by
and
because
is
also
containing,
fluctuations
variable costs.
plant
cost
known
both,
in
as
semi-fixed
fixed
level
and
cost.
variable
of activity."
It
CIMA
defines
elements
semi-variable
which
involves features of,
Examples of semi-variable costs are telephone expenses,
machinery,
it contains
etc.
both fixed
customer for keeping
telephone
and
is
also
an
example
variable components.
the connection
bill
live.
of
The fixed
is
thus
partly
both, fixed
and
depreciation of
semi-variable
cost
cost
is
levied
costs
on the
The customer needs to pay a variable amount
Page 230
10.
on
Overheads
monthly
eBook
basis
depending
on
the
calls
that
he
or
she
makes-this
is
the
variable
cost.
The following table gives the detailed explanation.
Fixed
Rent
Usage
Variable
(Per Month)
Total Rent
= ,o.s)
(Per Min.
(In Min.)
(')
Zero
500
500
10
500
20
500
20
x 0.5
10
500
+ 10 = 5 1 0
30
500
30
x 0. 5 =
15
500
+ 15 = 5 1 5
40
500
40
x 0.5
= 20
500
+ 20 = 520
Table
When a customer,
Mr.
usage
is zero minutes,
usage
is 5 minutes,
minutes
variable
is done
added
0.5
per
part the
in
the
Kumar,
rent
minute,
which
next stages,
to fixed
is
10
x 0.5
= 2.5
500
+ 2.5 = 502.5
500 +
5.00
takes the connection and
but the fixed
rent
5 x 0.5
500
sos
5 =
10.3.Jc: Semi-variable Cost
the fixed
total
rent that he
remains to
is
equal
where usage
cost to get the total
is
has to pay
not
use the telephone,
is still 500.
Next,
to
2.5,
therefore
is equal
multiplied
adding
to 5 0 2 . 5 .
the
fixed
Similarly,
his
when the
be 500 while the variable component
+ 2 . 5 , which
500
does
and
is
the
calculation
by 0. 5 to get the variable cost and
rent.
1 0 . 4 D e p a r t m e n t a l i z a t i o n of Overheads
An
organization
department
certain
production
basis
of
the
functions,
given a separate task.
to
the
with
related
the costs
activities.
cannot
appropriate
departments-production
allocated
the
expenses that
the overheads directly

is
and
on
Allocation of the expenses to the
of estimations
two
divided
is created
departments.
Similarly,
is
and
to
that
the
are
Primary
be allocated
service.
The
secondary
easily
production
to
distribution
department
should
Manufacturing
production
or
There are expenses
related
departments.
products
activities
the
is
is
related
is an
while
generally
the
to specific
is
on
basis
divided
allocated
into
with
service department
and
process
Every
important task.
be d i v i d e d
department
production
the
processes.
of
which
back
up
distribution
Page 2 3 1
the
and
Financial and
10.
Overheads
eBook
departmentalization
is the
process of allocation and
the apportionment of overheads
to the different departments.
Allocation of Overheads
It
refers
to
According
centre
the
to
identification
CIMA,
of overheads with
is,
allocation
"The
a particular d e p a rt m e n t or cost
allotment
or cost unit." Allocation of overheads with
is important for cost control and

workers,
depreciation
and
decision m a k i n g .
insurance
of
plant
of
whole
item
of
cost
to
cost
a specific cost center or department
Examples are wages linked
and
center.
equipment
linked
to
to indirect
manufacturing,
etc.
Apportionment of Overheads
CIMA
defines
proportions
apportionment
of
the
as,
common
"The
allotment
items
of
cost
of
two
on
or
more
estimated
cost
basis
centres
of
of
benefit
received."
In other words, there are certain overheads,

department.
So,
the
process
of
which cannot be identifiable to a particular
distributing
common
overheads
to
cost
centers
departments is known as apportionment.
Basis of Apportionment of Overheads
Following are some of the basis of apportionment of overhead
Basis
items:
Overhead
Floor area occupied
Rent,
rates and
taxes,
insurance
and depreciation of b u i l d i n g s ,
lighting and
Number of employees
heating, etc.
Expenses related with employees

like canteen, transport, payroll,
time keeping, etc.
Capital value
Insurance and depreciation of plant

and machinery
Value of materials
Expenses related to materials like

material handling expenses
Horsepower of m a c h i n e s
Power expenses
.
Table
10.4a:
Basis of Apportionment of Overheads
Page 232
or
10.
Overheads
eBook
Example 0 1 :
STL
Ltd.
has
three
departments ( 5 1 and
production
52).
departments
(Pl,
The various costs d u r i n g
P2,
and
P3)
and
two
service
the month
of December 2 0 1 2 are as
Expenses
(t')
below:
(t')
Expenses
Rent
10,000
8,000
Power
5,000
Depreciation of plant
4,000
Light
2,000
Employees welfare
3,000
Maintenance of b u i l d i n g
6,000
Supervision
15,000
Table
The
Repairs to plant
information given
below will
10.4b:
Expenses
help you decide the basis of apportionment:
Pl
Details
N u m b e r of employees
P2
P3
51
52
27
18
24
15
21
2000
500
1500
500
1000
Horsepower of machines
25
10
20
N u m b e r of light
20
15
20
1,00,000
80,000
1,20,000
Area
(Sq.
meters)
Value of plant
points
()
Table
10.4c:
10
15
Information for Apportionment
Prepare a departmental distribution summary statement.
Page 233
10.
Overheads
eBook
Solution 0 1 :
Item of
Basis of
Total
Expenditure
Distribution
Amount
(f)
Rent
Service Dept.
Production Dept.
Pl
P2
P3
51
52
(f)
(f)
(f)
(f)
(f)
Area
(Sq.
meters)
10,000
3,636
910
2,727
5,000
2,273
909
1,818
2,000
500
375
500
250
375
15,000
3,857
2,571
3,429
2,143
3,000
8,000
2,667
2,133
3,200
4,000
1,333
1,067
1,600
3,000
771
514
686
429
600
6,000
2,182
545
1,636
546
1,091
53,000
17,219
9,024
15,596
4,277
6,884
909
1,818
4:1:3:1:2
H.P of
Power
machines
5:2:4
Light
No. of points
4:3:4:2:3
Supervision
No. of
employees
9:6:8:5:7
Repairs to
plant
Value of plant
5:4:6
Depreciation
of
Value of plant
plant
5:4:6
Employees
No. of
welfare
employees
9:6:8:5:7
Maintenance of
building
Area
(Sq.
meters)
4:1:3:1:2
Total
Table
Note:
10.4d:
Departmental
Amounts are rounded
Distribution Summary Statement
off in some places to adjust the totals.
Page 234
10.
Overheads
10.S
eBook
Re-apportionment
or
Secondary
Distribution
of
Overheads
In
primary distribution, the overheads are allocated
and
of
service departments of the organization.
service
process
departments
of
between
apportionment
or
the
and
apportioned
The next step
production
redistribution
known
production
is to apportion the total cost
departments
is
between
as
on
certain
secondary
basis.
This
distribution
of
overheads.
For
example,
departments.
to
the
if
Then,
production
production
service
the
expenses of the
departments
department
department
or
on
based
the
on
supplies
service
the
value
materials
department
to
need
to
number of requisitions
of
materials
received
three
be
re-apportioned
received
by
production
each
from
production
department.
Basis of Re-apportionment of Overheads
Following are some of the basis of re-apportionment of overhead
Basis
Canteen, welfare,
Value of materials requisitioned
Stores and
Technical estimates
Tool room
Power consumed
Power house
Table
10.Sa:
items:
Cost Centers
N u m b e r of employees
time office
internal transport
Basis of Re-apportionment of Overheads
Methods of Re-apportionment of
Overheads
Reciprocal Services
Direct Redistribution
Step Method
Method
Fig.
10.Sa:
Method
Methods of Re-apportionment of Overheads
each
Page 2 3 5
Financial and
10.
Overheads
eBook
The explanation for the above diagram

10.5.1
Under
Direct Redistribution Method
this
production
provided
method,
service
departments.
This
department
method
overheads
does
not
are
take
directly
into
apportioned
consideration
the
to
the
services
by one service department to another.
Example
Sandoz
is as follows:
02:
Limited
has
three
production
departments
and
two
service
departments.
expenses for these departments as per primary distribution summary are given
Amount
Amount
(t')
(t')
The
below:
Production Dept.
Pl
5,00,000
P2
10,00,000
P3
15,00,000
30,00,000
Service Dept.
Stores
60,000
Time keeping
40,000
1,00,000
Total
Table
10.5.la:
31,00,000
Primary Distribution Summary
Additional information for production departments:
Pl
P2
Pl
(t')
(t')
(t')
Details
No.
of employees
Value of the materials

Table
1 0 . 5 . l b : Additional
25
15
40
10,000
15,000
5,000
Information for Production
Prepare secondary distribution summary statement using
Department
direct redistribution method.
Page 236
10.
Overheads
eBook
Solution 02:
Production Dept.
Basis of
Costs
Total Cost
Apportionment
As
Pl
P2
P3
(t')
(t')
(t')
per primary
distribution
summary
30,00,000
5,00,000
10,00,000
15,00,000
40,000
12,500
7,500
20,000
2:3:1
60,000
20,000
30,000
10,000
Total
31,00,000
5,32,500
10,37,500
15,30,000
No.
of
employees
Time
keeping
5:3:8
Value of
materials
Stores
Table
1 0 . 5 . 2 Step
Under
this
the
production
cost
to
department
Overhead
of
cost
and
that
departments.
Solution 02
Method
method,
departments
10.5.lc:
service
which
that
of
they
This
to
the
department
is
arranged
In
that
partly
maximum
the
the
the
to
to
services
of
the
sequence
number
begins with
departments
(both
the apportionment of the
the
least
provided
number
by
one
of
other
service
department to another.
of
of other departments.
other
ends with
services
order
number
apportioned
provides
considers
in
other words,
process continues and
department
method
are
services.
services
service
service).
This
provide
provides
that
service
departments
Page 237
10.
Overheads
Example
eBook
03:
Sudha
Limited
(Time
keeping
has two
and
production departments (A and
Stores).
the expenses for a certain
The
departmental
B)
and
distribution
two services departments
summary
given
below
period.
Production
Amount
Amount
Dept.
('!')
('!')
20,000
15,000
35,000
Service Dept.
Stores
2,000
Time keeping
9,000
11,000
Total
Table
Additional information
10.5.2a:
46,000
Distribution Summary
related to these departments is as follows:
Details
Production
No.
of employees
No.
of stores
requisitions
Dept.
Dept.
Stores
Time keeping
20
15
10
3
.
Table
Service
1 0 . 5 . 2 b : Additional
Information
Page 238
shows
10.
Overheads
eBook
Solution 03:
Apportion the Cost of Service Departments to Other Departments

Using Step Method
As per Primary
Dept.
Distribution
(')
(')
<'>
Summary
(')
Time keeping
9,000 ( 4 : 3 : 2 )
(-)
9000
(-)
4000
Stores
2,000
2,000
(5:3)
20,000
4,000
2,500
26,500
15,000
3,000
1,500
19,500
Total
46,000
Table
Working
10.S.2c:
46,000
Apportionment of the Cost of Service
Departments
Note:
Basis of Apportionment
Time
keeping
is on the basis of number of employees
Apportionment for time keeping
(A:B:Stores).
is 2 0 : 1 5 : 1 0
Stores are on the basis of number of store requisitions

Apportionment for stores
10.5.3
Under
is
(A:B).
5 : 3.
Reciprocal Service Method
this
addition
to
method,
providing
accurate method
reciprocal
different
service
services to
departments
provide
production departments.
because it gives importance to
services
to
each
This is considered
inter-service transfers.
other,
as the most
Redistribution on
basis may be done with the following two methods:
Repeated distribution method
Simultaneous equation method
in
Page 239
Financial and
10.
Overheads
Repeated
eBook
Distribution
T h i s is considered
of the
service
to be the easiest method
department
other service and

process
Method
(as
production
continues
until
per
primary
departments
the
to follow.
Under t h i s method, the overheads
distribution
based
undistributed
on
summary)
some
overheads
are
predefined
of
reapportioned
percentages.
service
department
to
This
get
exhausted or become negligible.
Simultaneous Equation
Under
this
method,
simultaneous
Method
the
equations.
overheads
Then,
the
of
service
overheads
departments
collected
from
are
the
determined
service
are reapportioned to the production departments based on some defined
Example
Siddharth
using
departments
percentages.
04:
Ltd.
departments
(X
has
three
and
Y).
production
departments
The departmental
(A,
distribution
B,
and
C)
and
summary given
two
below
services
shows the
expenses for a certain period.
Amount
Amount
(')
(")
Production Dept.
20,000
10,000
6,000
36,000
Service
Dept.
7,500
12,000
19,500
Total
Table
10.5.3a:
55,500
Details of Expenses
Page 240
10.
Overheads
eBook
The expenses of service departments are allocated as below:
Dept.
25%
25/o
30%
20%
25%
30/o
30%
15%
Table
Prepare
expenses
secondary
of
the
10.5.Jb:
distribution
service
Allocation of Expenses
summary
departments
to
statement
the
showing
production
the
apportionment
departments
using
of
repeated
distribution method.
Solution 04:
Secondary Distribution Summary of Siddharth

Production Department
Ltd.
Service Department
Particulars
A
As
per summary
20,000
10,000
6,000
1,875
1,875
2,250
Service dept. Y
3,375
4,050
4,050
Service dept.
(-)
7,500
12,000
7,500
1,500
2,025
(-)
405
60
(-) 405
60
12
506
506
608
Service dept.
101
122
122
Service dept.
15
15
18
Service dept. Y
25,875
16,572
13,052
1 0 . 5 . J c : Secondary
13,500
2,025
Service dept.
Table
(-)
(-)
(-)
12
Distribution Summary
Note:
You
may get different amount due to r o u n d i n g
off.
1 0 . 6 Absorption of Factory Overheads

After re-apportionment of service department overheads to the production departments,
the next step
is the charging
of the overheads to cost units, which
is known as overhead
absorption or recovery.
The
Institute
absorption
as,
of
Cost
"The
and
Management
allotment
of
overhead
Accountants
to
cost
(U.K.)
units."
The
defines
aim
of
overhead
overhead
Page 2 4 1
Financial and
10.
Overheads
absorption
is
to
eBook
allocate
an
equitable
percentage
of the
total
factory
overhead
to
each
u n i t of production.
Methods of Absorption
Important methods used
in the absorption of overheads are given below:
Rate/Unit of production
Direct wages
Direct material cost
Prime cost
Direct
Machine hours
labor hours
Rate/Unit of Production
This
method
method,
the
is
considered
overheads
to
of
the
be
the
simplest
department
and
are
most
divided
direct
by
the
method.
number
Under
of
cost
this
units
produced.
Direct Wages
Under this
method,
is ascertained
estimated
in percentage.
factory overheads are divided
It is calculated
Estimated
Overhead
absorption
by direct wages and
rate
as under:
overhead
cost x
rate=
100
Estimated
direct wages
Direct Material Cost
Under
this
material
method,
and
a rate
total
factory
is ascertained
overheads
in
are
percentage.
divided
by
This method
the
is
total
rarely
cost
used
of
as
direct
it
has a
number of limitations.
Prime Cost
Under
this
method,
overheads
of
department
are
divided
by
the
prime
cost
of
department expressing the result as a percentage.
Page 242
that
10.
Overheads
Direct Labor
Direct
labor
eBook
Hour
rate
estimated
is
defined
overhead
as,
cost
"A
rate
calculated
attributable
to
by
cost
dividing
centre
the
by
budgeted
the
or
appropriate
number of direct labor hours."
Rate=
Overhead to be Absorbed
Labor Hours of Production
Machine
Machine
Hours
hour
estimated
rate
is
defined
overheads or
as,
"A
rate
labour and
calculated
overhead
by
cost
dividing
the
attributable
budgeted
to
a machine
or
or
group of similar machines by the appropriate number of machine hours."
Estimated overheads
M a c h i n e hour rate=
Anticipated m a c h i n e hours
1 0 . 7 Over or Under-absorption of Overheads

When
overheads
are
overheads
absorbed
Therefore,
the
absorbed
may
difference
not
the
overheads
incurred,
it
is
the
between
the
production
absorbed
known
are
less
as
on
be
amount of overheads incurred
If
based
is called
in
the
same
the
predetermined
as
amount
the
of
amount
overheads
rate,
of
the
amount
overheads
absorbed
and
of
incurred.
the
actual
as 'over or under-absorption of overheads.'
production
'over-absorption.'
than
some
actual
are
more
Similarly,
overheads
if
the
than
the
actual
overheads
incurred,
it
is
overheads
absorbed
known
as
in
the
'under
absorption.'
Over
or
under-absorbed
overheads
may
be
disposed
by
any
one
of
the
following
methods:
Carry
Forward to the Next
According
to
overhead
reserve
accounting
this
period
method,
or
Period's Account
the
over or
suspense
under-absorbed
account
and
that
overheads
are
is
forward
carried
transferred
to
the
for absorption.
Page 243
to
an
next
Financial and
10.
Overheads
eBook
Write-off to Costing
Profit and
Loss Account
Under this method, the balance is transferred

absorbed account, and
then it is transferred to costing
Use of Supplementary Rate
According
process',
to this method,
'finished
to the production overhead
goods'
loss account.
Method
over or under-absorbed
and
profit and
over or under
'factory
Supplementary rates are calculated
cost
of
overheads are adjusted
sales'
based on following
Monetary value in each account
Direct material cost in each account
Labor hours and
by
way
of
with 'work in
supplementary
factors:
machine hours in each account
Page 244
rates.

Financial and Cost Accounting - ITM University

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial and Cost Accounting - ITM University

Uploaded by

Copyright:

Available Formats

-

Objectives of Financial Accounting

Qualitative Characteristics of Accounting

Basic Accounting Terms

Principles and Accounting

Rules of Debit and

Ledger, and Trial

Rules of Debit and

Posting from Journal to Ledger

Posting from Cash

Bills Receivable and

Bills Payable Book

Adjustment Entries of Final Accounts

Corporate Financial Statements

and Types of Financial Statements

Methods of La bar Remuneration

Classification of Labor Cost

Re-apportionment or Secondary Distribution of Overheads

Absorption of Factory Overhead

Over or Under-absorption of Overheads

0 1 . Introduction to Financial Accounting

Define the term accounting

E x p l a i n the functions of accounting

Classify the branches of accounting

Discuss the objectives of accounting

List the qualitative characteristics of accounting

Explain the various qualitative characteristics of accounting

List the different users of accounting

basic terminology used

out by business enterprises.

take appropriate action.

bookkeepers, owners and

transactions that are carried

the day-to-day activities

1.2 Meaning and

is "the art of recording,

least, of financial character, and interpreting the results thereof."

The above definition

h i g h l i g h t s the following functions of accounting:

summarizes the results of the financial transactions.

classifies monetary transactions in a systematic manner.

parties for taking

business related decisions.

in the sales account.

as ' l ed g e r . ' This

interpretation of the data easy and

sales transactions are classified

any time by the desired

Introduction to Financial Accounting

with the summarization of classified

useful to the users.

proper format and can

such a way that

Elements of similar nature are arranged

Analyzing and Interpreting

ratios are calculated

is suitable for analyzing

to interpret the financial statements.

internally to the managers for decision-making

out the variances.

the functional areas of an

These variances are analyzed

performance. Therefore, managers can take proper decisions and