PAGE NO. 1.5-1.

USERS OF AN ACCOUNTING INFORMATION AND THEIR NEEDS . The users of accounting information include present and potential investors, management, employees, lenders, suppliers and other trade creditors, customers, government and their agencies and the public. These users use accounting information in order to satisfy some of their varied needs for information. Some of the users and their needs for information are shown below: Users 1. Short-term Creditors [For example, suppliers of raw-materials/goods, suppliers of short-term loans] Long-term Creditors [For example, suppliers of long-term loans] Present Investors [For example, equity share holders] Potential Investors [For example, those who want to invest] Management Need for Information Short-term creditors need information to determine whether the amount owing to them will be paid when due and whether they should extend, maintain or restrict the flow of credit to an individual enterprise. Long-term creditors need information to determine whether their principals and the interest thereof will be paid when due and whether they should extend, maintain or restrict the flow of credit to an enterprise. Present investors need information to judge prospects for their investment and to determine whether they should buy, hold or sell the shares. Potential investors need information to judge prospects of an enterprise and to determine whether they should buy the shares. Management needs information to review the firms (a) short-term solvency, (b) long-term solvency, (c) activity (viz. effective utilisation of its resources), (d) profitability in relation to turnover, (e) profitability in relation to investments and to decide upon the course of action to be taken in future. Employees and their representative groups are interested in information about the stability and profitability of the employers. They are also interested in information which enables them to assess the ability of the enterprise to pay remuneration, retirement benefits and to provide employment opportunities. Tax authorities need information to assess the tax liabilities of an enterprise. Customers have an interest in information about the continuation of an enterprise, especially when they have established a long term involvement with, or are dependent on, the enterprise. Government and their agencies are interested in the allocation of resources and, therefore, the activities

2.

3.

4.

5.

6.

Employees

7. 8.

Tax Authorities Customers

9.

Government and their agencies

10.

Public

of enterprise. They also require information in order to regulate the activities of enterprise, determine taxation policies and as the basis for the national income and similar statistics. Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people, they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about trends and recent developments in the prosperity of the enterprise and the range of its activities. While all the information needs of these users cannot be made by financial statements, there are some needs which are common to all users. The information contents of the financial statements which meet information needs of the investors or providers of risk capital will also meet most of the needs of other users.

PRIMARY OBJECTIVES OF ACCOUNTING The main objectives of accounting are as follows: Primary Objectives of Accounting

To maintain To calculate the To ascertain the accounting records results of operations financial position

To communicate the information to the users

Let us discuss these objectives one by one. 1. To maintain accounting records Written records are always better than oral records, since written records can be used by different persons for different decisionmaking purposes and serve as evidence of transactions. Nowadays, the volume of transactions is so large, a human memory cannot absorb each and every transaction. Accounting is done to keep a systematic record of (i) financial transactions, (ii) assets and (iii) liabilities. 2. To calculate the results Of Operations To measure the financial performance of an enterprise, the results of operations are ascertained by preparing an Income Statement (also called Profit & Loss Account) which shows the matching of current costs with current revenues during a particular accounting period. A systematic record of incomes and expenses facilitates the preparation of the Income Statement. 3. To ascertain the financial position To evaluate the financial strength and weakness of an enterprise, the financial position is ascertained by preparing a Position

Statement (also called Balance Sheet) which shows resources (assets) owned by an enterprise and the sources of financing those resources. A businessman wants to know what the business owes to others and what it owns, and what happened to his capital whether the capital has increased, decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a Position Statement (also known as Balance Sheet) which answers all these questions. 4. To communicate the information to the users Accounting communicates information to internal users and external users. The internal users include all the organizational participants at all levels of management (i.e. top, middle and lower). Top level management requires information for planning, middle level management requires information for controlling the operations. For internal use, the information is usually provided in the form of reports, for instance Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, Whether to Retain or Replace an Equipment Decision Reports, Project Appraisal Report, and the like. Since the external users (e.g. Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of an enterprise. TYPES OF ACCOUNTING INFORMATION Accounting information may be classified in number of ways on the basis of purpose of accounting information, on the basis of measurement criteria and so on. The various types of accounting information are given below: 1. Accounting Information relating to financial transactions and events. Financial PositionInformation about financial position is primarily provided in a balance sheet. The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. (a) Information about the economic resources controlled by the enterprise and its capacity in the past to alter these resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in the future. (b) Information about financial structure is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the enterprise; it is also useful in predicting how successful the enterprise is likely to be in raising further finance. (c) Information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. Liquidity refers to the availability of cash in the near future to meet financial commitments over this period. Solvency refers to the availability of cash over the longer term to meet financial commitments as they fall due. Financial PerformanceInformation about financial performance is primarily provided in a Statement of Profit and Loss (also known as Income Statement). Information about the performance of an enterprise, in particular its profitability, is required in order to assess potential changes in the economic resources that it is likely to control in the future. Information about variability of performance is important in this respect. Information about performance is useful in predicting the capacity of the enterprise

to generate cash flows from its existing resource base. It is also useful in forming judgements about the effectiveness with which the enterprise might employ additional resources. Cash FlowsInformation about cash flows is provided in the financial statements by means of a cash flow statement. Information concerning cash flows of an enterprise is useful in order to evaluate its investing, financial and operating activities during the reporting period. This information is useful in providing the users with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. Such information may further be classified as follows: (i) on the basis of Historical Cost (ii) on the basis of Current Cost (iii) on the basis of Realizable Value (iv) on the basis of Present Value 2. Accounting information relating to cost of a product, operation or function. 3. Accounting information relating to planning and controlling the activities of enterprise for internal reporting. Such information may further be classified as follows: (a) Information relating to Finance Area (b) Information relating to Production Area (c) Information relating to Marketing Area (d) Information relating to Personnel Area (e) Information relating to Other Areas (such as Research & Development) 4. Accounting information relating to Social Effects of business decisions. 5. Accounting information relating to Environment and Ecology. 6. Accounting information relating to Human Resources.

PAGE 2.7-2.10

ACCOUNTING STANDARDS Accounting as a language of business communicates the financial performance and position of an enterprise to various interested parties by means of financial statements which have to exhibit a true and fair view of financial results and its state of affairs. Like any other language, accounting has its own complicated set of rules. The basic conventions or rules used in preparing financial statements had evolved over many years as a product of the collective experience of practising accountants. As a result a wide variety of accounting methods were used by different companies. It was, then, felt that there should be some standardised set of rules and accounting principles to reduce or eliminate confusing variations in the methods used to prepare financial statements. However, such accounting rules should have a reasonable degree of flexibility in view of specific circumstances of an enterprise and also in line with the changes in the economic environment, social needs, legal requirements and technological developments. In order to suggest rules and criteria of accounting measurements several accounting standard setting bodies were established in developed and developing countries. The setting of accounting standards is a social decision. Standards place restrictions on behaviour and therefore they must be accepted by affected parties. Meaning of Accounting Standard An accounting standard is a selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. Standards conform to applicable laws, customs, usage and business environment. So there is no universally acceptable set of standards. Objective of Accounting Standard The main objective of accounting standards is to harmonise the diverse accounting policies and practices at present in use in India. However, harmonisation does not mean that accounting standards should become very rigid. In fact, harmonisation of accounting standards do permit flexibility to make the necessary adjustments to suit their purpose. Significance of Accounting Standard The adoption and application of accounting standards ensures uniformity, comparability and qualitative improvement in the preparation and presentation of financial statements. The accounting standards seek to describe the accounting principles, the valuation techniques and the methods of applying the accounting principles in the preparation and presentation of financial statements so that they may give a true and fair view. The ostensible purpose of the standard setting bodies is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in companies economic performance. Advantages of setting Accounting Standards 1. Reduction in VariationsStandards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements. 2. Disclosure Beyond that Required by LawThere are certain areas where important information is not statutorily required to be disclosed. Standards may call for disclosure

beyond that required by law. 3. Facilitates ComparisonThe application of accounting standards would, to a limited extent, facilitate comparison of financial statements of companies situated in different parts of the world and also of different companies situated in the same country. However, it should be noted in this respect that differences in the institutions, traditions and legal systems from one country to another give rise to differences in accounting standards practised in different countries. Arguments against setting Accounts Standards However there are some arguments against setting accounting standards: 1. Restriction on Choice of Alternative TreatmentsAlternative solutions to certain accounting problems may each have arguments to recommend them. A standard which insists on one particular solution may be unduly restrictive. This can sometimes be avoided either by allowing a permitted choice between different accounting treatments, or by defining closely the circumstances where different treatments may be appropriate. 2. RigidityThere may be a trend towards rigidity in applying the accounting standards. Michael Alexander, Director of Research and Technical Activities at the Financial Accounting Standards Board (FASB) said, the demand for standards comes largely from an insatiable appetite for rules. The reliance on judgment in technical accounting matters seems to have gone. 3. Cannot Override the StatuteAccounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes. DEVELOPMENT OF ACCOUNTING STANDARDS Prior to the 1970s, few academics paid much attention to the standard-setting process in accounting. Beginning in the 1970s, however, it became clear that standard setting was a fascinating process that had become intertwined with the economic self-interests of affected parties. Currently, standard-setting boards or committees are active in a number of countries, including the United States, United Kingdom, Australia, Canada, New Zealand, the Netherlands, Japan and India. At International level In 1972 International Accounting Standards Committee (IASC), was formed for developing International Accounting Standards (IASs). The IASC comprises the professional accountancy bodies of over 75 countries (including The Institute of Chartered Accountants of India). During these three decades the IASC has issued 40 IASs through a due process involving the worldwide accountancy profession, the preparers and users of financial statements and the national standard-setting bodies. However the IASs are not accepted worldwide. In 1978, another professional body, the International Federation of Accountants (IFAC) was established. ACCOUNTING STANDARDS BOARD OF INDIA Formation of the Accounting Standards Board The institute of Chartered Accountants of India, recognising the need to harmonise the diverse accounting policies and practices at present in use in India, constituted an Accounting Standards Board (ASB) on April 21, 1977. Scope and function of Accounting Standards Board The main function of ASB is to formulate accounting standards so that such standards may be established by the Council of the Institute in India. While formulating the accounting standards, ASB

will take into consideration the applicable law, customs, usages and business environment. The Institute is one of the members of the International Accounting Standards Committee (IASC) and has agreed to support the objectives of IASC. While formulating the accounting standards, ASB will give due consideration to International Accounting Standards issued by IASC and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India. The accounting standards will be issued under the authority of the Council. ASB has also been entrusted with the responsibility of propagating the accounting standards and of persuading the concerned parties to adopt them in the preparation and presentation of financial statements. ASB will issue guidance notes on the accounting standards and give clarifications on issues arising therefrom. ASB will also review the accounting standards at periodical intervals. Procedure for issuing Accounting Standards Broadly, the following procedure will be adopted for formulating Accounting Standards: Step 1 To determine the broad areas in which accounting standards need to be formulated and the priority in regard to the selection thereof. Step 2 To hold a dialogue with the representatives of the government, public sector undertakings, industry and other organizations for ascertaining their views. Step 3 On the basis of the work of the study groups and the dialogue with the representatives, to prepare and issue the exposure of draft of the proposed standard for comments by members of the Institute and the public at large. Step 4 To finalise the draft of the proposed standard after talcing into consideration the comments received. Step 5 To submit the final draft of the proposed standard to the Council of the Institute. The Council of the Institute will consider the final draft of the proposed standard, and if found necessary, modify the same in consultation with ASB. The accounting standard on the relevant subject will then be issued under the authority of the Council. Accounting Standards issued so far In India. The Council of the Institute of .Characterd Accountants of India has so far issued twenty nitme accounting standards. Some of these standards are mandatory. These accounting standards are mandatory in the sense that these are binding on the members of the Institute. These standards are as follows: No.
Title Recommendatory or Mandatory AS -1 AS - 2 AS - 3 AS - 4 AS - 5 AS - 6 AS - 7 AS - 8 AS - 9 Disclosure of Accounting Policies Valuation of Inventories (Revised) Cash Flow Statement Contingencies and Events Occurring After the Balance Sheet Date (Revised) Prior Period and Extra-ordinary items and Changes in Accounting Policies (Revised) Depreciation Accounting (Revised) Accounting for Construction Contracts(Revised) Accounting for Research and Development Revenue Recognition Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Withdrawn and included in AS-26 Mandatory Mandatory from accounting period beginning on or after 1.4.93 1.4.99 1.4.2001 1.4.95 1.1.96 1.4.95 1.4.03

1.4.93

AS-10 AS -11 AS -12 AS-13 AS-14 AS-15 AS-16 AS-17 AS-18 AS-19 AS-20 AS-21 AS-22 AS-23 AS-24 AS-25 AS-26 AS-27 AS-28 AS-29

Accounting for Fixed Assets Accounting for the Effects of Changes in Foreign Exchange Rates (Revised) Accounting for Government Grants Accounting for Investments Accounting for Amalgamations Accounting for Retirement Benefits in the Financial Statements of Employers Borrowing Costs Segment Reporting Related Parties Disclosures Leases Earning Per Share Consolidated Financial Statements Accounting for Taxes on Income Accounting for Investments in Associates in Consolidated Financial Statements Discontinuing Operations Interim Financial Reporting Intangible Assets Financial Reporting of Interests in Joint Venture Impairment of Assets Provision, Contingent Liabilities and Contingent Assets

Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory Mandatory

1.4.93 1.4.04 1.4.94 1.4.95 1.4.95 1.4.95 1.4.2000 1.4.2001 1.4.2001 1.4.2001 1.4.2001 1.4.2001 1.4.2001 1.4.2002 1.4.2004 1.4.2002 1.4.2003 1.4.2004 1.4.2004 1.4.2004

PAGE 3.1-3.4

ACCOUNTING EQUATION Meaning of Accounting Equation An accounting equation is a statement of equality between the resources and the sources which finance the resources and is expressed as under: Resources = Sources of Finance | Resources mean the assets. The assets refer to the tangible objects (e.g. Land & Building, Plant & Machinery, Furniture, Investments, Stock, Debtors, Bank Balance, Cash Balance) or intangible rights (e.g. Patents, Trademarks, Copyright) owned by an enterprise and carrying probable future benefits. Sources of finance mean Equities and includes Internal Sources (or Internal Equity) (i.e., capital) and External Sources (or External Equity) (i.e. liabilities). Capital refers to the amount invested in an enterprise by its owners. Liabilities are the financial obligations of an enterprise other than the owners funds. Thus, the aforesaid accounting equation may be expressed as follows: [ Total Assets = Total Equities ] or Assets = Internal Equity + External Equity or Assets = Capital + Liabilities Since, the liability holders have a definite and prior claim against the assets, the capital is also called as a residual of assets over liabilities and may be expressed as follows:. Capital = Assets - Liabilities This equation is fundamental in the sense that it gives foundation to the double entry book keeping. This equation holds good for all transactions and events and at all periods of time since every transaction and event has two aspects. PROCEDURE FOR DEVELOPING AN ACCOUNTING EQUATION An accounting equation may be developed by taking the steps given below in Exhibit 3.1. Exhibit 3.1 Steps Involved in Developing an Accounting Equation Step 1 Ascertain the variables (i.e. Assets, Liabilities or Capital) of an equation affected by a transaction. Step 2 Find out the effect {in terms of increase or decrease) of a transaction on the variables of an equation. Step 3 Show the effect on the appropriate side of an equation and ensure that the total of right hand side is equal to the total of left hand side. 1. Show the accounting equation on the basis of the following transactions and prepare the balance sheet: (a) Shri Ram commenced business with Rs 50,000. (b) Paid rent in advance Rs 2,000. (c) Purchased a typewriter for Rs 7,000. (d) Bought furniture from M/s Mohan Furnitures on credit for Rs 3,000. (e) Purchased goods from Sohan for cash Rs 35,000.

(f) Sold goods to Shyam for cash Rs 40,000 (costing Rs 30,000). (g) Bought goods from Ramesh for Rs 30,000. (h) Sold goods to Shyam costing Rs 30,000 for Rs 50,000. (i) Purchased household goods for Rs 15,000 giving Rs 5,000 in cash and the balance through a loan. (j) Goods destroyed by fire (Cost Rs 500, Sale Price Rs 600). (k) Paid half the amount owed to Mohan Furniture. (1) Paid cash Rs 500 for loan and Rs 300 for Interest, (m) Withdrew goods for personal use (cost Rs 500, sale price Rs 600). (n) Received Rs 49,500 from Shyam in full settlement, (o) Paid Rs 29,700 to Ramesh in full settlement, (p) Paid salary Rs 500 and salary outstanding Rs 100. (q) Charged depreciation of Rs 300 on furniture and Rs 100 on typewriter, (r) Accrued Interest Rs 500. (s) Commission received in advance Rs 1,000.

SOLUTION : Accounting Equation: Assets = : Liabilities + Capital S.No. Transactions (a) (b) Shri Ram commenced business with cash Paid Rent-in-advance New Equation Purchased a typewriter Assets = Rs. 50,000 = (-)2,000 (+) 2,000 = 50,000 = (-)7,000 (+)7,000 = 50,000 = (+)3,000 = 53,000 = (-)35,000 (+)35,000 = 53,000 = (-)30,000 (+)40,000 63,000 (+)30,000 93,000 (-)30,000 (+)50,000 1,13,000 Liabilities + Rs. 0+ 0+ 0+ 0+ 0+ 3,000 + 3,000 + 0+ 3,000 + Capital Rs. 50,000 0 50,000 0 50,000 0 50,000 0 50,000

(c)

(d)

(e)

New Equation Bought furniture from M/s Mohan Furnitures on credit New Equation Purchased goods for cash New Equation Sold goods for cash Rs. 40,000 (costing Rs 30,000) New Equation Bought goods from Ramesh New Equation Sold goods to Shyam for Rs. 50,000 (costing Rs 30,000) New Equation

(f)

(g) (h)

0+ 3,000 + 30,000 + 33,000 +

10,000 60,000 0 60,000

0+ 33,000 +

20,000 80,000

(i)

(j)

(k)

(l)

(m)

(n)

Purchased household goods for Rs 15,000 giving Rs. 5,000 In cash and balance through loan New Equation Goods destroyed by fire (cost Rs 500, sale price Rs 600) New Equation Paid half the amount owed to M/s Mohan Furniture New Equation Paid cash Rs 500 for loan and Rs 300 for interest New Equation Withdrew goods for personal use (cost Rs 500, sale price Rs 600) New Equation Received Rs 49,500 from Shyam in full settlement

(-)5 000 = 1,08,000 = B500 = 1,07,500 = (-)1,500 = 1,06,000 = (-)800 = 1,05,200 = (-)500 = 1,04,700 = (+)49,500 (-)50,000 = 1,04,200 =

10,000 + 43,000 + 0+ 43,000 + (-)1,500 + 41,500 + (-) 500 + 41,000 + 0+ 41,000 +

(-)15,000 65,000 (-)50 64,500 0 64,500 (-)300 64,200 (-)500 63,700

(o)

(p)

(q)

(r) (s)

New Equation Paid Rs 29,700 to Ramesh in full settlement (-)29,700 = New Equation 74,500 = Paid salary Rs 500 and salary outstanding Rs 100 (-)500 = New Equation 74,000 = Charged depreciation Rs 300 on furniture and Rs 100 on typewriter 8300 8100 = New Equation 73,600 = Accrued Interest Rs 500 500 = New Equation 74,100 = Commission received in advance 1,000 = New Equation 75,100 = Balance Sheet of Shri Ram as at..,

0+ 41,000 + (-)30,000 + 11,000 + (-)100 + 11,100 +

(-)500 63,200 300 63,500 (-)600 62,900

0+ 11,100 + 0+ 11,100 + 1,000 + 12,100 +

(-) 400 62,500 500 63,000 0 63,000

Liabilities + Capital Creditor for furniture Creditor for household goods Outstanding salary Commission received in advance Capital

Rs Assets 1,500 9,500 100 1,000 63,000 75,100 Cash Stock Prepaid Rent Accrued Interest Furniture Typewriter

Rs 59,000 4,000 2,000 500 2,700 6,900 75,100

Working Note: Calculation of Cash in hand and Stock in hand at the end Transaction Cash in Hand Increase Rs 50,000 2,000 7,000 35,000 40,000 30,000 30,000 5,000 500 1,500 800 500 49,500 29,700 500 1,000 1,40,500 81,500 59,000 65,000 61,000 4,000 Stock in Decrease Rs Hand Increase Rs Decrease Rs

(a) (b) (c) (d) (e) (f) (g) (h) (i) (i) (k) (1) (m) (n) (o) (P) (r) Net Increase

35,000 30,000

PAGE 4.1-4.2

JOURNALISING, POSTING AND BALANCING 1, MEANING OF AN ACCOUNT An account is a summary of the relevant transactions at one place relating to a particular head. It records not only the amount of transaction but also their effect and direction. TRADITIONAL CLASSIFICATION OF ACCOUNTS The classification of accounts according to the Traditional Approach is given below in Exhibit 4.1: Exhibit 4.1 Classification of Accounts according to the Traditional Approach
Types of Accounts Meaning (a) Personal Accounts These accounts relate to natural persons, artificial persons and representative persons. These accounts relate to the tangible or intangible real assets. These accounts relate to expenses, losses, profits and gains. Examples NaturalRams A/c ArtificialRam & Cos A/c RepresentativeOutstanding Salary A/c TangibleLand A/c IntangibleGoodwill A/c ExpensesPurchases A/c LossLoss by Fire A/c Profits & GainsSales A/c Discount Received A/c

(b) (c)

Real Accounts Nominal Accounts

ACCOUNTING EQUATION BASED CLASSIFICATION OF ACCOUNTS The classification of accounts according to Accounting Equation Approach is given in Exhibit 4.2: Exhibit 4.2 Classification of Accounts according to the Accounting Equation Approach
Types of Accounts Meaning (a) (b) These accounts relate to tangible or intangible real assets. Liabilities These accounts relate to the financial Accounts obligations of an enterprise, towards outsiders. Capital Accounts These accounts relate to owners of an enterprise. Revenue Accounts These accounts relate to the amount charged for goods sold or services rendered or permitting others to use enterprise resources yielding interest, royalty or dividend. Expenses Accounts These accounts relate to the amount incurred or lost in the process of earning revenue. Assets Accounts Examples Land A/c, Building A/c, Cash A/c, Goodwill, Patents. Trade Creditors, Outstanding Expenses, Bank Overdraft, Long-term Loans. Capital A/c, Drawings A/c Sales A/c, Discount Received Ac Dividend Received A/c Royalty Received A/c, Interest Received A/c.

(c) (d)

(e)

Purchases A/c, Discount Allowed A/c, Royalty Paid A/c, Interest Payable A/c, Loss by Fire A/c.

Exhibit 4.3 Conmparision of Traditional Classification and Accounting Equation Based Classification of Accounts
Traditional Classification of Accounts 1. Personal Accounts (other than those relating to owner having debit balnces (other than those relating to owner) having credit balances those relating to owner 2. Real Accounts 3.Nominal Accounts relating to Revenue relating to expenses Equation Based Classification of Accounts Assets Accounts Liabilities Accounts

Capital Accounts Assets Account Revenue Accounts Expenses Accounts

PAGE 4.5-4.6

MEANING AND FORMAT OF A JOURNAL Meaning of Journal A Journal is a book in which transactions are recorded in the order in which they occur, i.e., in chronological order. A journal is called a book of prime entry (also called a book of original entry) because all business transactions are entered first in this book. The process of recording a transaction in the journal is called Journalising. An entry made in the journal is called a Journal Entry. Format of a Journal The format of a journal is shown as follows: Journal Date Particulars LF. Debit Amount Rs Credit Amount Rs (a) Date columnUnder this column, the date on which the transaction is entered is recorded. The year and month is written once, till they change. (b) Particular columnUnder this column, first the names of the accounts to be debited, then the names of the accounts to be credited and lastly, the narration (i.e. a brief explanation of the transaction) are entered. (c) LF. that is, Ledger Folio columnUnder this column, the ledger page number containing the relevant account is entered at the time of posting. (d) Debit amount columnUnder this column, the amount to be debited is entered. (e) Credit amount columnUnder this column, the amount to be credited is entered. Note: Except the LF. column, all other columns are recorded at the time of journalising. The LF. column is recorded at the time of posting. MEANING OF JOURNALISING The process of recording a transaction in the journal is called journalising. The various steps to be followed in journalising business transactions are given below in Exhibit 4.6: Exhibit 4.6 Steps in Journalising Step 1 Ascertain what accounts are involved in a transaction. Step 2 Ascertain what is the nature of the accounts involved. Step 3 Ascertain which rule of debit and credit is applicable for each of the accounts involved. Step 4 Ascertain which account is to be debited and which is to be credited. Step 5 Record the date of transaction in the Date column. Step 6 Write the name of the account to be debited, very close to the left hand side (i.e. the line demarcating the Date column and the Particulars column) along with the abbreviation Dr1 on the same line against the name of the account in the Particulars column and the amount to be debited in the Debit Amount column against the name of the account. Step 7 Write the name of the account to be credited in the next line preceded by the word to at a few spaces towards right in the Particulars column and

the amount to be credited in the Credit Amount column against the name of the account. Step 8 Write Narration (i.e. a brief description of the transaction) within brackets in the next line in the Particulars column. Step 9 Draw a line across the entire Particulars column to separate one journal entry from the other.

PAGE 4.12-4.14

Meaning of a Ledger A Ledger is a principal book which contains all the accounts (Assets Accounts, Liabilities Accounts. Capital Accounts, Revenue Accounts, Expenses Accounts) to which the transactions recorded in the books of original entry are transferred. As the ledger is the ultimate destination of all transactions, the ledger is called the Book of Final Entry. It is considered as a permanent record and is more frequently referred to. It may be noted that an account is a formal record of all transactions relating to a change in a particular item. Form of a Ledger A ledger may be kept in the form of bound books, loose leaf sheets, punched cards sheets, floppy diskettes (in case computer is used) or any other such device. Utility of a Ledger The main utilities of a ledger are summarised as under: It provides complete information about all accounts in one book. It enables to ascertain what are the main items of revenues. It enables to ascertain what are the main items of expenses. It enables to ascertain which are the assets and of what values. It enables to ascertain which are the liabilities and of what amounts. It facilitates the preparation of Final Accounts. Format of a Ledger Account A ledger account can be prepared in any one of the following two forms: Form 1 ................(Name of the Account)................ Ledger Folio No................
Dr. Date Particulars Folio Amount Date Rs Particulars Folio Cr. Amount Rs

Form 2 ..(Name of the Account)..

Ledger Folio No.., Date Particulars Folio Debit Amount Rs Credit Amount Rs Balance Dr/Cr

DISTINCTION BETWEEN JOURNAL AND LEDGER Journal differs from the Ledger in the following respects:
Basis of Distinction 1. Nature of Book 2. Basis for Preparation 3. Stage of Recording 4. Object 5. Format Journal It is book of original or prime entry. It is prepared on the basis of source documents of transactions. Recording in the journal in the first stage. It is prepared to record all transactions in chronological order. In Journal, there are five column 1. Date 2. Particulars 3. Ledger Folio 4. Debit Amount 5. Credit Amount Journal is not balanced. Ledger It is book of final or secondary entry. It is prepared on the basis of journal. Recording in the ledger is the second stage. It is prepared to know the net effect of various transactions affecting a particular account. In ledger there are identical four column on debit side and credit side. 1. Date 2. Particulars 3. Folio 4. Amount

6. Balancing 7. Narration 8. Name of the Process of recording entries 9. Basis of Preparation of Final Accounts

All ledger accounts (except nominal account) are balanced in the ledger. Narration is written for each entry. No narration is given. The process of recording in The process of recording in the ledger is journal is called Journalising. called Posting. Journal directly does not serve as basis Ledger serves the basis for the preparation of for the preparation of final accounts. final accounts.

Meaning of Posting Posting is the process of transferring the transactions recorded in the books of original entry in the concerned accounts opened in the ledger. It may be done daily, weekly, fortnightly or monthly according to the convenience and requirements of the business. Necessity of Posting It is necessary to post all journal entries into various accounts in the ledger because posting helps us to know the net effect of various transactions during a given period on a particular account. Procedure of Posting The procedure of posting is given as follows in Exhibits 4.7 and 4.8. Exhibit 4.7 Procedure for Posting of an Account which has been Debited in a Transaction Step 1 with the help of an Index, open that page on which the concerned account appears. Step 2 Enter the date of the transaction, in the Date column on the debit side. Step 3 Step 4 Record the name of the account credited in the Journal, in the Particulars column on the debit side as To ... (name of the account credited)... Record the page number of the Journal in the Folio column on the debit side and in the journal, write the page number of the ledger on which a particular account appears in the Ledger Folio column. Enter the relevant amount in the Amount column on the debit side. Exhibit 4.8 Procedure for Posting of an Account which has been Credited in a Transaction Step 1 With the help of an Index, open that page on which the concerned account appears.

Step 2 Enter the date of the transaction, in the Date column on the credit side. Step 3 Record the name of the account debited in the Journal in the Particulars column on the credit side as By......(name of the account debited)...... Step 4 Record the page number of the Journal in the Folio column on the credit side and in the journal, write the page number of the ledger on which a particular account appears in the ledger Folio column. Step 5 Enter the relevant amount in the Amount column on the credit side.

Note: When a Three Column Cash Book is prepared, both Cash Account and Bank Account are not opened in the ledger since, in such a case the Cash Book itself serves the purpose of Cash Account and Bank Account. This is a case where the book of original entry itself serves the purpose of a ledger. Illustration 6. On 1.4.20X1 Mohan, a customer, paid cash Rs. 950 on account of Rs. 1,000. Journalise and post it into the ledger. Solution: Journal Folio 2
Date 2001 April 1 Particulars Cash A/c To Mohan (Being cash received from Mohan on account) Dr. 59 950 950 LF. Dr. (Rs) Cr. (Rs)

Ledger

Dr. Accounts
Date Particulars

Cash Account
Folio Amount Date Rs

Folio 5 Cr Date
Particulars Folio Amount Rs

Particulars Folio 2001

April 1 Dr. Date Particulars To Mohan

Rs
2

Date Particulars
950

Folio

Rs

Mohans Account Folio Rs Date 2001 April 1 Particulars By Cash A/c Folio 2

Folio 9 Cr. Rs 950

PAGE 5.1-5.11

SUBSIDIARY BOOKS I CASH BOOK Need for Subdivision OF THE JOURNAL When the number of transactions is large, it is practically impossible to record all the transactions through one journal because of the following limitations of Journal: 1. The system of recording all transactions in a journal requires (a) writing down of the name of the account involved as many times as the transactions occur; and (b) an individual posting of each account debited and credited and hence, involves the repetitive journalising and posting labour. 2. Such a system does not provide the information on a prompt basis. 3. Such a system does not facilitate the installation of an internal check system since, the journal can be handled by only one person. 4. The journal becomes bulky and voluminous. To overcome the shortcomings of the use of the journal only as a book of original entry, the journal is subdivided into special journals. The journal is subdivided in such a way that a separate book is used for each category of transactions which are repetitive in nature and are sufficiently large in number. MEANING OF SPECIAL JOURNALS (OR SUBSIDIARY BOOKS) Special journals refer to the journals meant for specific transactions of similar nature. Special journals are also known as subsidiary books or day books. The proforma and number of special journals vary according to the requirements of each enterprise. In any large business, the following special journals are generally used: Exhibit 5.1 Specific Transactins to be Recorded in Special Journals
Name of the Special Journal I. Cash Journals (a) Simple Cash Book (b) Cash Book with Bank Column (c) Cash Book with Bank & Discount Column (d) Petty Cash Book II. Goods Journals (a) Purchases Book (b) Sales Book (c) Sales Returns Book (or Return Inwards book) (d) Purchase Returns Book (or Return Outwards Book) III. Bills Journal (a) Bills Receivable Book (b) Bills Payable Book IV. Journal Proper Specific Transactions to be Recorded Cash transactions Cash and Bank transactions Cash, Bank and Discount transactions Petty Cash transactions Credit purchases ot goods Credit Sales of goods Goods returned by those customers to whom goods were sold on credit Goods returned to those suppliers from whom goods were purchased on credit Bills Receivable drawn Bills Payable accepted Transactions not covered elsewhere

Advantages of Special Journal (or Subsidiary Books) The advantages of using special journals are as under: 1. Facilitates Division Of Work The accounting work can be divided among many persons. 2. Permits the Installation of Internal Check System The accounting workcan

be divided in such a manner that the work of one person is automatically checked by another person. With the use of internal check, the possibility of occurrence of error/ fraud may be avoided. 3. Permits the Use Of Specialised Skill The accounting work requiring specialised skill may be assigned to a person possessing the required skill. With the use of a specialised skill, prompt, economical and more accurate supply of accounting information may be obtained. 4. Time and Labour Saving in Journalising and Posting For instance, when a Sales Book is kept, the name of the Sales Account will not be required to be written down in the Journal as many times as the sales transactions and at the same time, Sales Account will not be required to be posted again and again since only a periodic total of Sales Book is posted to the Sales Account. MEANING AND TYPES OF CASH BOOK Meaning A Cash Book is a special journal which is used for recording all cash receipts and cash payments. Cash Bookboth a Journal and a Ledger The Cash Book is a book of original entry (or prime entry) since transactions are recorded for the first time from the source documents. The Cash Book is a ledger in the sense that it is designed in the form of a Cash Account and records Cash receipts on the debit side and cash payments on the credit side. Thus, the Cash Book is both a journal and a ledger. Types of Cash Book The various types of Cash Book from the point of view of uses may be as follows: Types of Cash Books Single column book Cash book with discount column Cash book with bank and discount | Petty cash book column Single-Column Cash Book Single Column Cash Book has one amount column on each side. All cash receipts are recorded on the debit side and all cash payments on the credit side. In fact, this book is nothing but a Cash Account. Hence, there is no need to open this account in the ledger. Format of a Single Column Cash Book The format of Single Column Cash Book is given below: Dr. Single-column Cash Book Cr.
Date Particulars LF. Amount Rs Date Particulars LF. Amount Rs

Illstration 1. Enter the following transactions in Single-column Cash Book. Date Particulars 1 5 8 10 16 21 25 31 31 20X1 Jan. 1 Cash in Hand.......................................................... 5 Paid to R. Bansal................................................... Discount allowed by him........................................ 8 Purchased goods from Goyal & Co. for cash....... 10 Received from R. Kansal....................................... Discount allowed.................................................... 16 Sold goods to Garg & Co. for cash..................... 21 Paid to S. Ansal..................................................... Discount received................................................... 25 Paid wages............................................................. 31 Paid to X & Co. in full settlement of his account which shows a credit balance of Rs 400............. 31 Purchased furniture................................................
Dr. Date Particulars LF. Amount Rs Cash Book Date Particulars LF.

Rs

1,700 I300 10 400 980 20 400 295 5 50 390 200

Cr. Amount Rs

20X1 Jan. 1 To Balance b/d 10 To R. Kansal 15 To Sales A/c

1,700 980 400

20X1 Jan. 5 8 21 25 31

By R. Bansal By Purchases By S. Ansal By Wages A/c By X & Co. By Furniture By Balance C/d

3,080 20X1 Fen/1 To Balance b/d 1,445

300 400 295 50 390 200 1,445 3,080

SHADE DISCOUNT P is a reduction granted by a supplier from the list price of goods or services on business fOnsiderations (such as quantity bought, trade practices, etc.,) other than for prompt payment. list Price is the selling price as printed on the product or in the List/ Catalogue of products. ExampleIf 10 Gold Rings are sold at the list price of Rs 20,000 each subject to trade discount of 10%. In this case trade discount will be calculated as under: 10 Gold Rings @ Rs 20,000 Rs 2,00,000 Less: Trade Discount @ 10% Rs 20,000 Amount Payable as per Invoice Rs 1,80,000

CASH DISCOUNT A reduction granted by a supplier from the invoice price in consideration of immediate payment or payment within a stipulated period. ExampleIf in the above example, terms of payment are 2%, 30 Days, it means buyer will get 2% cash discount if he makes payment within 30 days. In case the pirchaser makes the payment within 30 days, the cash discount will be calculated as under: Amount Payable as per Invoice Rs 1,80,000 Rs 3,600 Cash Discount @ 2% Cash paid within 30 days Rs 1,76,400 Distinction between Trade Discount and Cash Discount Trade Discount differs from Cash Discount in the following respects:
Basis of Distinction 1. Meaning Trade Discount It is a reduction granted by a supplier from the list price of goods or services on business considerations (such as quantity bought, trade practices etc.) other than for prompt payment. It is allowed to promote the sales or as a trade practice. It is allowed on purchase of goods. It is shown by way of deduction in the invoice itself. Trade Discount Account is not opened in the ledger. It may vary with the quantity purchased. Cash Discount A reduction granted by a supplier from the invoice price in consideration of immediate payment or payment within a stipulated period.

2. 3. 4. 5.

Purpose Time when allowed Disclosure in the Invoice Ledger Account 6. Variation

It is allowed to encourage the prompt paymt. It is allowed on immediate payment or payment within a specified period. It is not shorn in the invoice. Cash Discount Account is opened in the ledger. It may vary with the period within which the payment is made.

Example: Ram sold Goods of the list price of Rs 1,00,000 to Shyam subject to Trade Discount of 10% and Cash Discount of 5% if payment is made immediately. Shyam made the payment immediately. In this case, discount will be calculated as under: Rs A. List Price 1,00,000 B. Less: Trade Discount @ 10% 10,000 C. Amount of Invoice 90,000 4,500 D. Less: Cash Discount @ 5% E. Net Amount Paid 85,500 Distinction between Commission and Discount Commission : The term commission may be defined as remuneration of an employee or agent relating to services performed in connection with sales, purchases, collections or other types of business transactions and usually based on a percentage of the amounts involved. The various examples of commission include the following: (a) Commission paid to selling or buying agents. (b) Commission paid to brokers and bankers for services rendered. (c) Commission paid to property dealers for assistance in renting out properties or for services in connection with purchase/sale of properties. (d) Commission to export-import agents in foreign trade.

Discount

The term discount is used to express one of the following situations:

(a) An allowance given for the settlement of a debt before it is due, that is, cash discount. (b) An allowance given to the wholesalers or bulk buyers on the list price or retail price, known as trade discount. (c) The excess of par or face value of shares or debentures over the amount paid by subscriber, that is, discount on issue of shares or debentures. (d) The amount charged by a bank on discounting of a bill of exchange.

Discount earned is accounted for as an income in the books of the beneficiary and discount allowed is accounted for as expenses or deferred revenue expenditure in the books of the party availing of such facility. Cash Book with Discount Column Meaning of Cash Book with Discount Column Cash Book with Discount Column has two amount columns (one for cash and another for Discount) on each side. All cash receipts and cash discount allowed are recorded on the debit side and all cash payments and discount received are recorded on the credit side. Format of Cash Book with Discount Column The format of cash book with discount column is given below: Dr. Cash Book with Discount Column Cr.
Date Particulars LF. Discount Rs Cash Date Rs. Particulars LF. Discount Rs Cash Rs

Illustration 2. Prepare a Two-column Cash Book from the following transactions of Shri RK Gupta: Date 20X1 Jan. 1 6 10 11 12 Particulars Cash in hand........................................................................ Cash purchases........................................................................ Wages paid ........................................................................ Cash Sales ........................................................................ Cash received from Suresh and................................... allowed him discount................................................................ Cash paid to Munna.............................................................. and discount received......................... Cash paid to Radhey................................................................ Purchased goods for cash ..................................................... Rs 4,000 2,000 40 6,000 1,980 20 2,470 30 400 2,070

19 27 28

Solution: Dr.
Date
20X1 Jan. 1 To Balance b/d To Sales A/c To Suresh

Two-column Cash Book of Shri R K Gupta

Particulars LF. Discount
Rs

Cr.
LF. Discount
Rs

Cash Date
Rs. 20X1 Jan. 6 4,000 10

Particulars

Cash
Rs

By Purchases A/c By Wages A/c By Munna By Radhey By Purchases A/c By Bal. c/d

2,000

11

20

6,000 1,980

19 27 28 31

30

40 2,470 400 2,070 5,000 11,980

20 20X1 Feb. 1

11,980

30

To Bal. b/d

5,000

Three-column Cash Book : Three Column Cash Book has three amount columns (One

for Cash, one for Bank and one for Discount) on each side. All cash receipts, deposits into book and discount allowed are recorded on debit side and all cash payments, withdrawals from bank and discount received are recorded on the credit side. In fact, a three-column cash book serves the purpose of Cash Account and Bank Account. Hence, there is no need to open these two accounts in the ledger. Format of Three-Column Cash Book Its format is shown below: Dr. Three-columr Cash Book Cr.
Date Psiticulars LF. Discouunt Rs. Cash Rs. Bank Date Rs. Particulars LF. Discount Cash Rs. Bank Rs.

Posting from Main Cash Book The various items appearing on the debit side and credit side are posted as under:
Posting of items appearing on debit side (a) All the receipts appearing on the debit side are posied to the credit of the respective ledger accounts in the ledger by writing By Cash/ Bank A/c in the particulars column since cash/cheque has been received in respect of them. Posting of items appearing on credit side
(a) All the payments appearing on the credit side are posted to the debit of the respective ledger accounts in the ledger by writing To Cash/Bank A/c in the particulars column since cash/cheque has been paid in respect of them.

(b) An individual entry in the discount allowed column is posted to the credit of the respective personal accounts in the ledger by writing By Discount Allowed A/c in the particulars column. (c) The total of discount allowed column on the debit side is posted to the debit of the Discount Allowed A/d in the ledger by writing To Sundries as per Cash Book in the particulars column.

(a) An individual entry in the discount received column is posted to the debit of the respective personal accounts in the ledger by writing To Discount Received A/c in the particulars column. (c) The total of discount received column on the credit side is posted to the credit of the Discount Received A/d in the ledger by writing By Sundries as per Cash book in the particulars column.

Notes:
(i) Cash Account is not opened in the ledger since the Cash Column in the Cash Book serves the purpose of a Cash Account, (ii) In case of a Cash Book with Bank Column, Bank Account is not opened in the ledger since the Bank Column in the Cash Book serves the purpose of a Bank Account. (iii) In case of Cash Book with Discount Column, Discount Allowed Account and Discount Received Account are opened in the ledger since the Cash Book does not serve the purpose of Discount Account, (iv) In case of Cash Book with Discount Column, Discount Columns are merely totalled and never balanced, (v) Posting in the Discount Allowed Account and Discount Received Account are made only for the totals and not for the individual transactions. (vi) All Contra entries (i.e., entries of which debit and credit aspects are simultaneously recorded in the Cash Book e.g. cash deposited into the Bank or Cash withdrawn from the Bank) are ignored while posting from Cash Book to the Ledger since both the aspects (Debit and Credit) are recorded in the Cash Book itself. These entries are marked with letter C in Ledger Folio Column, (vii) Whenever cheques/drafts received are not deposited immediately into the bank, then all such receipts should be first recorded on the debit side in cash column and subsequently, when these are deposited into the bank, the same should be recorded both on credit side in Cash Column and on debit side in Bank Column. (viii) Unless otherwise indicated, it is presumed that the cheque received has been deposited on the very same day.

Illustration 3. Prepare a Three-column Cash Book of M/s Tulsian & Co. from the following particulars: 20X1 Jan. 1 2 3 4 5 6 7 8 9 Cash in hand Rs 50,000, Bank Overdraft Rs 20,000. Paid into bank Rs 10,000. Bought goods from Hari for Rs 200 for cash. Bought goods for Rs 2,000 paid cheque for them, discount allowed 1%. Sold goods to Mohan for cash Rs 1,175. Received a cheque from Shyam to whom goods were sold for Rs 800. Discount allowed 12.5%. Shyams cheque deposited into bank. Purchased an old typewriter for Rs 200. Spent Rs 50 on its repairs. Bank notified that Shyams cheque has been returned dishonoured and debited the account in respect of charges Rs 10.

10 Received a money order for Rs 25 from Hari. 11 Shyam settled his account by means of a cheque for Rs 820, Rs 20 being for interest charged. 12 Withdrew from bank Rs 10,000. 18 Discounted a B/E for Rs 1,000 at 1% through bank. 20 Honoured our own acceptance by cheque Rs 5,000. 22 Withdrew for personal use Rs 1,000. 24 Paid trade expenses Rs 2,000. 25 Withdrew from bank for private expenses Rs 1,500. 26 Purchased machinery from Rajiv for Rs 5,000 and paid him by means of a bank draft purchased for Rs 5,005. 27 Issued cheque to Ram Saran for cash purchase of furniture Rs 1,575. 28 Received a cheque for commission Rs 500 from R. & Co. and deposited into bank. 29 Ramesh who owed us Rs 500 became bankrupt and paid us 50 paise in the rupee. 30 Received payment of a loan of Rs 5,000 and deposited Rs 3,000 out of it into bank. 31 Paid rent to landlord Mohan by a cheque of Rs 220. 31 Interest allowed by bank Rs 30. 31 Half-yearly bank charges Rs 50. [See page 5.9 for Solution] PETTY CASH BOOK Meaning of Petty Cash Book Petty Cash Book is the book which is used for the purposes of recording the payment of petty cash expenses. Meaning of Petty Cashier Petty Cashier is the person who is authorised to make payments of petty cash expenses and to record them in petty cash book. Features of Petty Cash Book The main features of petty cash book are as follows: 1. The amount of cash received from the main cashier is recorded on the left hand side column. 2. The payments of petty cash expenses are recorded on the right hand side in the respective columns. 3. It can never show a credit balance because the cash payments can never exceed the cash receipts. 4. Its balance represents unspent petty cash in hand. 5. Recording is done on the basis of internal as well as external vouchers. Whenever external vouchers are not received, (e.g. in case of auto-rickshaw charges, coolie charges, postage stamps etc.), internal vouchers are prepared and got verified by an authorised person. 6. All the columns of expenses are totalled periodically and such periodic totals are individually posted to the debit side of the respective expenses accounts in the ledgers by writing To Sundries as per Petty Cash Book in the particulars column. 7. Petty Cash Book is both a book of original entry as well as a book of final entry. In other words, it serves the purpose of both journal and ledger. It is a journal in the

sense that all petty cash payments are recorded in it for the first time from the source documents. It is a ledger in the sense that it serves the purpose of Petty Cash Account in which cash receipts from main cashier are recorded on the debit side and cash payments are recorded on the credit side. Hence, there is no need to open Petty Cash Account in the ledger.

Similarities between Main Cash Book and Petty Cash Book

1. Both are books of original entry. In other works, both serve the purpose of journal. Both are journal in the sense that the transactions are recorded in it for the first time from the source documents. 2. Both are books of final entry. In other words, both serve the purpose of ledger. Both are ledger in the sense that main cash book serves the purpose of Main Cash Account and Bank Account (only in case of three column cash book) and petty cash book serves the purpose of Petty Cash Account.

Differences between Main Cash Book and Petty Cash Book

1. In the main cash book all cash receipts are recorded whereas in the petty cash book only Cash Receipts from Main Cashier are recorded. 2. In the main cash book all cash payments except payments of petty cash expenses, are recorded whereas in the petty cash book only payments of petty cash expenses are recorded.

Imprest vs. Non-Imprest System of Petty Cash Book Meaning of Imprest or Float imprest or Float is the amount which the main cashier hands over to the petty cashier in order to meet the petty cash expenses of a given period. Petty Cash book may be maintained on imprest system on non-imprest system. (a) Imprest System of Petty CashUnder imprest system. The Chief Cashier makes the reimbursement of the amount spent by the Petty Cashier and the Petty Cashier again has the same amount of petty cash at the end as in the beginning. (b) Non-imprest System of Petty CashUnder non-imprest system, the Chief Cashier may hand over the cash to the Petty Cashier equal to/more than/less than the amount spent by the petty cashier. The Petty cashier may or may not have the same closing balance of petty cash as opening balance. Features of Imprest System of Petty Cash 1. Estimation by Chief Cashier The Chief Cashier estimates the total petty cash expenses for a particular fixed period. 2. Advances by Chief Cashier The Chief Cashier advances the estimated amount to the petty cashier in the beginning of the period. 3. Submission of Petty Cash Book by Petty Cashier The Petty Cashier submits the petty cash book alongwith supporting vouchers to the chief cashier at the end of the period. 4. Examination of Petty Cash Bank by Chief Cashier The chief Cashier examines the petty cash book. 5. Reimbursement Of Amount Spent The Chief Cashier makes the reimbursement of the amount spent by the Petty Cashier. 6. Availability Of Same Amount Of Petty Cash The Petty Cashier again has the same amount of petty cash in the beginning of new period. Advantages of Imprest System Petty Cash

The Advantages of imprest system of petty cash are as follows: 1. Control Over Mistakes The choices of mistakes are reduced since the chief cashier regularly examines the petty cash book. 2. Control over Petty Expenses Petty expenses are kept within the limits of imprest since the petty cashier can never spend more than the available petty cash. 3. Control Over Fraud Misappropriation if any, is always kept within the limits of imprest. Format of Petty Cash Book The format of Petty Cash Book may be designed according to the requirements of the business. However, the simplest form is given below: Petty Cash Book Receipts
Date Parti- Cash culars Book Folio Total Date Particulars Voucher No.

Payments
Post- ConveStaff age yance WelTele- Travefare gram lling Entertainment Rs Rs Rs Cartage Printing & Stationery Miscellaneous Items Total

Rs

Rs

Rs

Rs

Rs

Advantages of Petty Cash Book The advantages of petty cash book are as follows: 1. Saving Of Chief Cashiers Time The time of chief cashier is saved when petty expenses are recorded in petty cash book. 2. Saving Of Labour in Posting There is saving in labour in positing because of the following two reasons: (a) limited number of accounts are opened for heads of petty expenses only, (b) periodical totals (say monthly) of each column of expenses are posted to the debit of the respective ledger accounts. 3. Control Over Mistakes The chances of mistakes are reduced since the chief cashier regularly examines the petty cash book. 4. Control Over Petty Expenses Petty expenses are kept within the limits of imprest since the petty cashier can never spend more than the available petty cash. 5. Control Over Fraud Misappropriation if any, is always kept within the limits of imprest. 6. Benefits Of Specialisation The benefits of specialisation are available since recording of cash transactions is divided between main cash book and petty cash book. Posting from Petty Cash Book All the heads of expenses (including miscella neous are totalled periodically (usually monthly) and such periodic totals are individually posted to the debit side of the concerned ledger accounts in the ledger by writing To Sundries as

per Petty Cash Book in the particulars column. The ledger folio number is written under every total amount of expense to indicate that the entry has been posted in the ledger. In the folio column of the ledger account, the page number of the petty cash book is written. Illustration 10. From the following particulars, prepare Petty Cash Book on imprest system of Shri Lakshman & Co. for the month of January, 20X1. Date 20X1 Jan. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Particulars Rs

Opening Balance (on imprest system)............................................ Paid for stamps................................................................................... Paid cleaners wages............................................................................ Paid for fare....................................................................................... Paid for office tea etc....................................................................... Paid for Repairs of Cycle................................................................. Paid for advertisement...................................................................... Drew imprest from head cashier Paid for cartage.................................................................................. Paid for travelling expenses............................................................. Paid for telegram sent......................................................................... Paid for entertainment to travelling salesmen................................ Paid for Repairs of Cycles................................................................ Paid for printing bill............................................................................ Paid for stationery........................:...................................................... Drew imprest from head cashier

100 12 15 16 15 10 30 10 25 15 20 10 5 3

Solution : See page 5.13 & 5.14

PAGE 6.1-5.13

SUBSIDIARY BOOKS H -OTHER BOOKS PURCHASES BOOK.., Meaning Purchases book (also known as invoice book/bought book) is one of the subsidiary books which is used for the purpose of recording the purchase of merchandise (i.e., the goods in which the enterprise deals in) on credit. It records neither the cash purchases of the merchandise nor the purchase of any asset other than the merchandise. Sources of Recording The entries in the purchases book are made on the basis of purchase invoices (or Inward Invoices) received from the suppliers with the amounts net of trade discount/ quantitiy discount. Trade discount is a reduction granted by the supplier from the list price of goods or services on business considerations (such as quantity bought, trade practice etc.) other than for prompt payment. Contents Usually, the following information is provided in this book: 1. Date of Purchase, 2. Purchase Invoice Number 3. Name of the Supplier, 4. Page No. of the ledger on which suppliers account appears, and 5. Amount of purchase invoice net of trade discount (if any). Note: Recording of the particulars of items purchased is considered unnecessary because the details are available in the purchase invoices the serial number of which are given in the Purchases Book. Format (The simplest format of a purchases book is shown below: Purchases Book Date Purchase Name of Supplier L.F. Invoice No. Details Rs P. Amount Rs P.

Posting The individual entries and the total of the book are posted into the ledger as shown below: 6.2 Financial Accounting Posting of Individual Amount Individual amounts are daily posted to the credit of Suppliers Accounts by writing By Purchases A/c in the particulars column. Posting of Periodic Total Periodic total is posted to the debit of Purchases Account by writing To Sundries as per Purchases Book in the particulars column.

Illustration 1. From the following transactions, prepare the Purchases Book of Jindal & Co., a saree dealer and post the transactions recorded in the Purchases Book to Ledger: Date Invoice No. 03-01-20X1 401 08-01-20X1 800 15-01-20X1 355 30-01-20X1 420 Solution: Purchases Book Date Purchase Invoice No. 20X1 Jan. 3 401 Jan. 15 355 Jan. 31 Name of Supplier L.F. Amount Rs Particulars Purchased on credit from Goyal Mills, Surat 55 polyster sarees @ Rs 100 Purchased for cash from Garg Mills, Kota 50 kota sarees Rs 40 Purchased on credit form Mittal Mills, Bangalore 10 silk sarees @ Rs 260 Purchased on credit from Bansa and & Co. 2 typewriters @ Rs 3,500

Goyal Mills, Surat Mittal Mills, Bangalore Purchases Account (Debit)

5,500.00 2,600.00 8,100.00

Note: Cash purchase of Kota sarees will be recorded in f/?e Cash Book and credit puchase of typewriters will be recorded in the General Joumai (or Joumai Proper) since, in the purctms book, only the credit purchases of merchandise (i.e. the goods in which the firm deals in) are recxded. Ledger of Jindal and Co. Dr. Goyal Mills, Surat Cr.
Date Particulars Folio Amount Rs Date 20X1 Jan. 3 Dr. Date Particulars Folio Particulars Folic Amount Rs 5,500.00 Cr. Folic Amount Rs 2,600.00 Cr. Particulars Folic Amount Rs

By Purchases A/c

Mittal Mills Bangalore Amount Rs Date 20X1 Jan. 15 Particulars

By Purchases A/c

Dr. Date 20X1 Jan. 8 Jan. 31 Particulars Folio

Purchase Account Amount Rs 2,000.00 8,100.00 Date

To Cash A/c To Sundries as per Purchases Book

SALES BOOK Sales book (also known as day book/sales journal) is one of the subsidiary books which is used for the purpose of recording the sale of merchandise on credit. It records neither the cash sales of the merchandise nor sale of any asset other than merchandise. Sources of Recording The entries in the sales book are on the basis of the sales invoices (or outward invoices) issued to the customers with the amounts net of trade discount/quantity discount. Contents Usually, the following information is provided in the book: 1. Date of Sales, 2. Sales Invoice Number. 3. Name of the Customer, 4. Page number of the Ledger on which the Customers Account appears, and 5, Amount of Sales invoice net of trade discount (if any). (i) In case the firm deals in taxable goods, one additional column may be added to record the sales tax recovered from the customer. (ii) Recording of the particulars of items sold is considered unnecessary because the details are 00Bble in the sales invoices the serial number of which are given in the sales book. The simplest format of sales book is shown below:
Sales Book Date Sales Name of Customer L.F. Invoice No. Details Rs P. Amount Rs P.

Posting The individual entries and the total of the book are posted into the ledger as under: Posting of Individual Amount Posting of Periodic Total

Individual amounts are daily posted to Periodic total is posted to the credit of the the debit of the Customers Accounts by Sales Account by writing By Sundries as per Sales Book in the particulars column. writing To Sates A/c1 in the particulars column. Illustration 2. From the following transactions, prepare the Sales Book of Jindal and Co., a saree dealer, and post them to Ledger: Date Invoice No. Particulars 04-01-20X1 101 Sold on credit to Goyal & Co., Rohtak 20 polyster sarees @ Rs 125 09-01-20X1 102 Sold for cash to Garg & Co., Bhiwani 20 kota sarees @ Rs 50 16-01-20X1 103 Sold on credit to Mittal & Co., Hissar 5 silk sarees @ Rs 325 30-01-20X1 Sold on credit to Mohan 2 old Typewriters @ Rs. 500

Solution:
Sales Book Date Sales Invoice No. 20X1 Jan. 4 101 Jan. 16 103 Jan. 31 Name of Customer L.F. Amount Rs

Goyal & Co., Rohtak Mittal & Co., Hissar Sales Account (Credit)

2,500.00 1,625.00 4,125.00

Note: Cash Sale of kota sarees will be recorded in the Cash Book and Credit Sale of typewriters will be recorded in the General Journal (or Journal Proper) since in the Sales Book, only the credit sates of merchandise (i.e. the goods in which the firm deals in) are recorded.
Dr. Date 20X1 Jan. 4 Dr. Date 20X1 Jan. 16 Dr. Date Particulars Folio Particulars Folio Particulars Ledger of Jindal & Co. Goyal & Co., Rohtak Folio Amount Rs 2,500.00 Mital & Co., Hissar Amount Rs 1,625.00 Sales Account Amount Rs Date 20X1 Jan. 9 31 Particulars Folic Cr. Amount Rs 1,000.00 4,125.00 Date Particulars Folic Cr. Amount Rs Date Particulars Folic Cr. Amount Rs

To Sales A/c

To Sales A/c

By Cash A/c By Sundries as per Sales Book

PURCHASE RETURNS BOOK Meaning Purchase Returns Book (also known as Return Outwards Book/Journal) is one of the subsidiary books which is used for the purpose of recording the returns of merchandise purchased on credit. It records neither the return of goods purchased on cash basis nor the return of any asset other than the merchandise. Source of Recording The entries in the purchase returns book are usually, made on the basis of debit notes issued to the suppliers. Note: A debit note is prepared by the purchaser and contains the date of return, name of the supplier to whom the goods have been returned, details of the goods returned, reasons for returning the goods. Each debit note is serially numbered.

Contents y, the following information is provided in this book: (a) Date of return, (b) Debit Note number, (c) Name of the Supplier, (d) Page number of the Ledger on which Suppliers A/c appears, and Amount of goods returned to the Supplier. If some trade discount had been received at the time of original purchase and some expenses on purchase (e.g. cartage) had been charged by the supplier, the appropriate adjustment should be pa.de so as to arrive at the correct value of goods returned. Format The simplest format of Purchase Returns Book is shown below: Purchase Returns Book
Date Debit Note No. Name of Supplier . L.F. Rs Details P. Amount Rs P.

Posting The individual entries and the periodic total of the book are posted into the ledger as under: Posting of Individual Amount Individual amounts are daily posted to the debit of liers Accounts by writing To Purchase A/c in the particulars column. Posting of Periodic Total Periodic total is posted to the debit of Purchase Returns Account by writing By Sundries as per Purchase Returns Book, in the particulars book.

Illustration 3. From the following transactions, prepare the Purchases Returns Book of Jindal & Co., a saree dealer and post them to Ledger: Date Debit Note No. 04-01-20X1 101 09-01-20X1 102 16-01-20X1 103 30-01-20X1 Particulars Returned to Goyal Mills, Surat5 polyster sarees @ Rs 100. Garg Mills, Kotaaccepted the returns of goods (which were purchased for cash) from us5 kota sarees Rs 40. Returned to Mittal Mills, Bangalore5 silk sarees @ Rs 260. Returned one typewriter (being defective) @ Rs 3,500 to Bansal & Co.

Purchase Returns Book

Date Debit Note No. Name of Supplier L.F. Amount Rs

20X1 Jan. 4 101 Jan. 16 103 Jan. 31

Goyal Mills, Surat Mittal Mills, Bangalore Purchase Returns Account (Credit)

500.00 1,300.00 1,800.00

Note : Return of kota sarees will be recorded in the Cash Book and the return of typewriter will be in the General Journal (or Journal Pmner) sinne in the Purchase Returns Rnnk only the return of merchandise purchased on credit, are recorded.
Dr. Date 20X1 Jan. 4 Dr. Date 20X1 Jan. 16 Dr. Date Particulars Particulars Folio Particulars Ledger of Jindal & Co. Goyal Mills, Surat Folio Amount Rs Date Particulars Folic Cr. Amount Rs

To Purchase Returns A/c

500.00 Mittal Mills, Bangalore Amount Rs Date Particulars Folic Cr. Amount Rs

To Purchase Returns A/c

1,300.00 Purchase Returns Account Folio Amount Rs Date 20X1 Jan. 9 31 Particulars Folic Cr. Amount Rs 200.00

By Cash A/c By Sundries as per Purchase Returns Book

1,800.00

SALES RETURNS BOOK Meaning Sales Returns Book (also known as Return Inwards Book/Journal) is one of the subsidiary books which is used for the purposes of recording the return of merchandise sold on credit. It records neither the return of merchandise sold on cash basis nor the return of any asset other than the merchandise. Source of Recording The entries in the sales returns book are usually, on the basis of credit notes issued to the customers. Note: A credit note is prepared by the seller and contains the date of return of goods, the name of the customer who has returned the goods, details of goods received back and the amount of such

goods. Each credit note is serially numbered. Contents Usually, the following information is provided in this book: 1. Date of return, 2. Credit Note number, 3. Name of the Customer, 4. Page number of ledger on which Customers A/c appears, and 5. Amount of goods returned by the Customer. Note: If some trade discount had been allowed and/or some expenses on sales (e.g. cartage) had been charged from the customer, the appropriate adjustment should be made so as to arrive at the correct value of goods returned. Format The simplest format of Sales Returns Book is shown below: Sales Returns Book
Date Credit Note No. Name of Customer L.F. Rs Details P. Amount Rs P.

Posting The individual entries and the periodic total are posted into the ledger as under:
Posting of Individual Amount Individual amounts are daily posted to the credit of Customers Accounts by writing By Sales Returns A/c in particulars column. Posting of Periodic Total Periodic Total is posted to the credit of Sales Returns Account by writing To Sundries as per Sales Returns Book in particulars column.

Illustration 4. From the following transactions, prepare the Sales Returns Account of Jindal & Co. a saree dealer and post them to the Ledger: Date Credit Note No. 05-01-20X1 201 10-01-20X1 202 17-01-20X1 203 31-01-20X1 Particulars Goyal & Co., Rohtak, returned to us2 polyster sarees @ Rs 125. Accepted return of goods (which were sold for cash) from Garg & Co. Bhiwani, 2 kota sarees Rs 50. Mittal & Co., Hissar returned to us2 silk sarees Rs 325. Mohan returned to us1 old typewriter Rs 500

Solution: Sales Returns Books

Date Credit Note No. Name of Customer L.F. Amount Rs

20X1 Jan. 5 201 Jan. 17 203 Jan. 31

Goyal & Co., Rohtak Mittal & Co., Hissar Sales Returns Account (Debit)

250.00 650.00 900.00

Note: Return of kota sarees will be recorded in the Cash Book and return of typewriter will be recorded in the General Journal (or Journal Proper) since in the Sales Returns Book, only the returns of merchandise purchased on credit are recorded.
Dr. Date Particulars Ledger of Jindal & Co. Goyal & Co., Rohtak Folio Amount Rs Date Particulars Folic Cr. Amount Rs

20X1 Jan. 5 Dr. Date Particulars Folio Mittal & Co., Hissar Amount Rs Date

By Sales Returns A/c

250.00 Cr

Particulars

Folic

Amount Rs

20X1 Jan. 17 Dr. Date Particulars Folio

By Sales Returns A/c

650.00 Cr. Folic Amount Rs

Sales Returns Account Amount Rs Date Particulars

20X1 Jan. 10 31

To Cash A/c To Sundries as per Sales Returns Book

100.00

900.00

STINCTION BETWEEN DEBIT NOTE AND CREDIT NOTE Basis of Distinction 1. Meaning Debit Note A debit note is prepared by the purchaser and contains the date of return, name of the supplier to whom the goods have been returned, details of the goods returned, reasons for returning the goods. It is prepared by purchaser. (a) Date of return (b) Name of supplier to Credit Note A credit note isprepared by the seller and contains the date of return of goods, the name of the customer who has returned the goods, details of goods received back and the amount of such goods.

2.. Who prepares? 3. Contents

It is prepared by seller. (a) Date of Return (b) Name of Customer who returned

whom returned (c) Details of Goods returned (d) Reasons for returning goods 4. Source Document It is used as source document for recording in Purchase Return Book. 5. Why Prepared? It is prepared to debit suppliers account.

(c) Details of goods returned (d) Reason for returning goods It is used as source document for recording in Sales Return Book. It is prepared to give credit to customer.

BILLS RECEIVABLE BOOK Meaning Bills Receivable Book is one of the subsidiary books which is used for the purposes of recording the details of bills receivable in favour of a person who is maintaining the Bills Receivable Book. Posting Individual amounts are daily posted to the credit of the accounts of individual debtors from whom the bills are received. Periodic total (normally monthly total) is posted to the debit ot Bills Receivable Account in the ledger by writing To Sundries as per B/R Book. Format The simplest format of a Bills Receivable Book is given on next page. BILLS PAYABLE BOOK Meaning Bills Payable Book is one of the subsidiary books which is used for the purposes of recording the details of bills payable accepted by the person who is maintaining the Bills Payable Book. Posting Individual amounts are daily posted to the debit of the accounts of individual creditors to whom acceptances have been given. The periodic total (normally monthly total) is posted to the credit of Bills Payable Account in the ledger by writing By Sundries as per B/P Book. Format The simplest format of a Bills Payable Book is given on previous page. JOURNAL PROPER Journal Proper is a residuary book in which those transactions are recorded which cannot be recorded in any other subsidiary book such as (a) Cash Book, (b) Purchases Book, (c) Sales Book, (d) Purchases Returns Book, (e) Sales Returns Book, (f) Bills Receivable Book, and (g) Bills Payable Book. The various examples of transactions entered in a Journal Proper are given below: 1. Opening Entry An Opening Entry is passed in the journal for bringing the balances of various assets, liabilities and capital appearing in the Balance Sheet of the previous accounting period, in the books of current accounting period. 2. Closing Entries Closing Entries are passed in the journal for closing the nominal accounts by transferring them to the Trading and Profit and Loss Account. These are needed at the end of the accounting year, when the final accounts are prepared. 3. Transfer Entries Transfer Entries are passed in the journal for transferring an amount from one account to another account, i.e. Transfer of Total Drawings from Drawings A/c to Capital A/c.

4. Adjusting Entries Adjusting Entries are passed in the journal to bring into the books of accounts certain unrecorded items like closing stock, depreciation on fixed assets, Outstanding and prepaid items. These are needed at the time of preparing the final accounts. 5. Rectifying Entries Rectifying Entries are passed in the journal to rectify the various errors committed while posting, totalling, balancing etc. 6. Miscellaneous Entries include the following: (a) Capital brought in kind. If the proprietor of the business brings in his capital contribution in kind and not in cash, such transaction can be recorded only in the Journal Proper and not in the Cash Book since this transaction does not involve any cash inflow. (b) Credit Purchases of Assets (other than Stock-in-trade) (e.g., Purchases of land, building, plant and machinery, furniture and fixture, investments). Such transactions can neither be recorded in the Purchase Book (since no goods have been purchased) nor can be recorded in the Cash Book (since this transaction does not involve any cash outflow). (c) Credit Sales of Assets (other than Stock-in-trade) (e.g. Sales of fixed assets, investments). Such transaction can neither be recorded in the Sales Book (since no goods have been sold) nor can be recorded in the Cash Book (since this transaction does not involve any cash inflow). (d) Return of Assets (other than Stock-in-trade) which were sold on credit. Such transactions cannot be recorded in the Return Inwards Book since no goods have been returned. (e) Return of Assets (other than Stock-in-trade) which were bought on credit. Such transactions cannot be recorded in the Return Outwards book since no goods have been returned. (f) Endorsement of Bills Receivable to a creditor. (g) Dishonour of Bills Receivables (not discounted with bank), (h) Cancellation of Bills Payable. (i) Abnormal Loss of Stock-in-trade/other assets by theft, accident, fire, etc. (j) Writing-off Bad Debts. (k) Withdrawal of goods by the owner for his personal use.
DISTINCTION BETWEEN OPENING ENTRY AND CLOSING ENTRY Basis of Distinction 1. Why passed? Opening Entry An Opening Entry is passed in the journal for bringing the balances of various assets, liabilities and capital appearing in the Balance Sheet of the previous accounting period, in the books of current accounting period. It is passed in the beginning of current accounting period. Closing Entry Closing Entries are passed in the journal for closing the nominal accounts by transferring them to the Trading and Profit and Loss Account.

2. When passed?

These are needed at the end oi the accounting year, when the final accounts are prepared.

the

Illustration 5. From the following transactions of the month of April 20X1, prepare Journal Proper of Jindal & Co., saree dealer, who also maintains Purchases Book

Sales Book, Returns Books and Cash Book: Date 1 3 5 6 8 10 12 14 16 18 20 21 22 24 Transaction Purchased on credit from Goyal Mills, Surat 25 polyster sarees @ Rs 100 Purchased on credit from Bansal & Co., 2 typewriters @ Rs 3,500 Sold on credit to Goyal & Co., 5 polyster sarees @ Rs 125 Returned one typewriter (being defective) @ Rs 3,500 to Bansal & Co. Sold on credit two old typewriters to Murli @ Rs 500 Sold for cash to Garg & Co. 20 kota sarees @ Rs 50. Returned to Goyal Mills, Surat 5 polyster sarees @ Rs 100 Murli returned one old typewriter @ Rs 500 Purchased for cash from Kansal & Co., 2 chairs @ Rs 3,700 Returned one chair (being defective) @ Rs 3,700 Sold two old chairs for cash to Manohar @ Rs 500 Manohar returned one old chair @ Rs 500 Goyal & Co. became insolvent and paid only 80 paise in a rupee in full final settlement. Mr. B.K. Jindal (Proprietor of Jindal & Co.) took away 2 silk sarees (costing Rs 350 each sale price Rs 700 each) from the shop and presented to her wife on her 25th birthday. A cheque of Rs 3,500 received from Mittal & Co., a customer, endorsed in favour of Bansal & Co., a creditor On 30-4-20X1, the bank informed that this cheque was dishonoured Rent due to landlord, Ram Rs 1,000 Salaries rlno tn omnlnupp Rhvam Rs 1,000 Solution:
Journal Proper of M/s Jindal & Co.

25

30 30

Date Particulars 20X1 April 3 Typewriters A/c Dr. To Bansal & Co. (Being 2 typewriters purchased on credit from Bansal & Co.) 6 Bansal & Co. Dr. To Typewriters A/c (Being 1 typewriter returned to Bansal & Co.) 8 Murli Dr. To Typewriters A/c (Being 2 typewriters sold on credit to Murli) 14 Typewriters A/c Dr. To Murli (Being 1 typewriter returned by Murli) 22 Bad Debts A/c Dr. To Goyal & Co.

LF.

Dr. (Rs) Cr. (Rs) 7,000 7,000

3,500 3,500 1,000 1,000 500 500 125 125

24

25

30

30

30

(Being 20% of the dues from Goyal & Co. written-off as bad on their insolvency) Drawings A/c Dr. To Purchases A/c (Being 2 silk sarees, costing Rs 350 each, taken away by the proprietor for personal use) Bansal & Co. Dr. To Mittal & Co. (Being a cheque received form Mittal & Co. endorsed in favour of Bansal & Co.) Mittal & Co. Dr. To Bansal & Co. (Being a cheque (endorsed) dishonoured) Rent A/c Dr. To Outstanding Rent A/c (Being rent due to landlord) Salaries A/c Dr. To Outstanding Salaries A/c (Being salaries due to employee)

700 700

3,500 3,500

3,500 3,500 1,000 1,000 1,000 1,000

Note : The other transactions have not been recorded in the Journal Proper due to reasons mentioned below: Transaction Purchases of polyester sarees Sales of polyester sarees Cash sale of kota sarees Return of polyester sarees Purchases of chairs Returns of chairs to Kansal & Co. Sale of old chairs Return of old chairs Receipts of cash from Goyal & Co. Reason To be recorded in Purchases Book To be recorded in Sales Book To be recorded in Cash Book To be recorded in Purchase Returns Book To be recorded in Cash Book To be recorded in Cash Book To be recorded in Cash Book To be recorded in Cash Book To be recorded in Cash Book

Page 7.4-7.5

Illustration 1. From the following information, prepare the Trading Account for the year ending on 31 March 20X2: Opening Stock Rs 1,50,000, Cash Sales Rs 60,000, Credit Sales Rs 12,00,000, Returns Outwards Rs 10,000, Wages & Salaries Rs 4,000, Carriage Inward Rs 2,000, Freight Inward Rs 3,000, Cartage Inward Rs 1,000, Cash Purchases Rs 50,000, Credit Purchases Rs 10,00,000, Returns Inward Rs 20,000, Closing Stock as on 31.3.20X2 Rs 90,000 but its market value is Rs 84,000. Solution:
Dr. Particulars Trading Account for the year ending 31st March, 20X2 Rs Particulars Sales Cash Sales Credit Sales Total Sales Less: Return Inward Closing Stock 60,000 12,00,000 12,60,000 20,000 12,40,000 84,000 Cr. Rs

To Opening Stock 1,50,000 By To Purchases Cash Purchases 50,000 Credit Purchases 10,00,000 Total Purchases 10,50,000 Less: Return Outwards 10,000 10,40,000 By To Freight Inward 3,000 To Cartage Inward 2,000 To Carriage Inward 1,000 To Wages & Salaries 4,000 To Gross Profit tfd. to P & L A/c 1,24,000 13,24,000

13,24,000

Ifstration 2. From the following information, prepare the Trading Account for the year ding on 31st March 20X2. Adjusted Purchases Rs 11,06,000, Sales Rs 12,40,000, Closing Stock Rs 84,000, Freight |4 Cartage Inwards Rs 6,000, Wages Rs 4,000, Freight & Cartage Outwards Rs 3,000 Solution :
Dr. Trading Account for the year ending 31st March, 20X2 Particulars Adjusted Purchases To Freight and Cartage Inwards To Wages To Gross Profit t/f to P & L A/c Rs 11,06,000 6,000 4,000 1,24,000 12,40,000 By Sales Particulars Cr. Rs 12,40,000

12,40,000

(i) Adjusted Purchases = Net Purchases + Opening Stock - Ctosing Stock (ii) Closing Stock has not been shown on the credit of Trading Account since it has already been adjusted while calculating adjusted purchases. (iii) Freight & Cartage Outwards are indirect expenses and hence not debited to Trading Account.

Illustration 3. From the following information, prepare the Trading Account for

the year Bng on 31st March 20X2. Cost of Goods Sold Rs 11,16,000, Sales Rs 12,40,000, Closing Stock Rs 84,000. Solution :
Dr. Trading Account for the year ending 31st March, 20X2 Particulars Cost of Goods Sold Gross Profit t/f to P & L A/c Rs 11,16,000 1,24,000 12,40,000 By Sales Particulars Cr. Rs 12,40,000 12,40,000

Notes :
(i) Cosf of Goods Sold ~ Opening Stock + Purchases + Direct Expenses - Closing Stock (ii) Closing Stock has not been shown on the credit of Trading Account since it has already been adjusted while calculating Cost of Goods sold.

BOOK -II : SN-PAGES NO. 23-30

It should be noted that accounting is a man-made art designed to help man in achieving certain objectives. The accounting principles, therefore, cannot be derived from or proven by laws of nature. They are rather in the category of conventions or rules developed by man from experience to fulfill the essential and useful needs and proposes in establishing reliable financial and operating information control for business entities. In this respect, they are similar to principles of commercial and other social disciplines. ACCOUNTING PRINCIPLES AND THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA In order to bring uniformity in terminology, approach and presentation of accounting results, the Institute of Chartered Accountants of India established on 22nd April, 1977, an Accounting Standards Board (ASB). The main function of the ASB is to formulate accounting standards so that such standards will be established by the Council of the Institute of Chartered Accountants. While formulating the accounting standards, the ASB will give due consideration to the International Accounting Standards and try to integrate them to the extent possible. It will also take into consideration the applicable laws, customs, usages and the business environments prevailing in India. TO THE STATEMENTS OF ACCOUNTING STANDARDS1 (REVISED 2004) The following are the specific features of the Preface to the Statements of Accounting Standards (Revised 2004), issued by the Council of the Institute of Chartered Accountants of India. With the issuance of this revised Preface, the Preface to the. Statements of Accounting Standards, issued in January 1979, stands superseded. I. Formation of the Accounting Standards Board (1) The Institute of Chartered Accountants of India (ICAI), recognising the need to harmonise the diverse accounting policies and practices in use in India, constituted the Accounting Standards Board (ASB) on 21st April, 1977. (2) The composition of the ASB is fairly broad-based and ensures participation of all interest-groups in the standard-setting process. Apart from the elected members of the Council of the ICAI nominated on the ASB, the following are represented on the ASB: (i) Nominee of the Central Government representing the Department of Company Affairs on the Council of the ICAI (ii) Nominee of the Central Government representing the Office of the Comptroller and Auditor General of India on the Council of the ICAI (iii) Nominee of the Central Government representing the Central Board of Direct Taxes on the Council of the ICAI (iv) Representative of the Institute of Cost and Works Accountants of India (v) Representative of the Institute of Company Secretaries of India (vi) Representatives of Industry Associations 1 from Associated Chambers of Commerce and Industry (ASSOCHAM), 1 from Confederation of Indian Industry (CM) and 1 from Federation of Indian Chambers of Commerce and Industry (FICCI) (vii) Representative of Reserve Bank of India (viii) Representative of Securities and Exchange Board of India (ix) Representative of Controller General of Accounts

(x) Representative of Central Board of Excise and Customs (xi) Representatives of Academic Institutions (1 from Universities and 1 from Indian Institutes of Management) (xii) Representative of Financial Institutions (xiii) Eminent professionals co-opted by the ICAI (they may be in practice or in industry, government, education, etc.) (xiv) Chairman of the Research Committee and the Chairman of the Expert Advisory Committee of the ICAI, if they are not otherwise members of the Accounting Standards Board (xv) Representative(s) of any other body, as considered appropriate by the ICAI

2. OBJECTIVES AND FUNCTIONS OF THE ACCOUNTING STANDARDS BOARD The following are the objectives of the Accounting Standards Board:
(i) To conceive of and suggest areas in which Accounting Standards need to be developed. (ii) To formulate Accounting Standards with a view to assisting the Council of the ICAI in evolving and establishing Accounting Standards in India. (iii) To examine how far the relevant International Accounting Standard/ International Financial Reporting Standard can be adapted while formulating the Accounting Standard and to adapt the same. (iv) To review, at regular intervals, the Accounting Standards from the point of view of acceptance or changed conditions, and, if necessary, revise the same, (v) To provide, from time to time, interpretations and guidance on Accounting Standards. (vi) To carry out such other functions relating to Accounting Standards. The Accounting Standards are issued under the authority of the Council of the ICAI. The ASB has also been entrusted with the responsibility of propagating the Accounting Standards and of persuading the concerned parties to adopt them in the preparation ind presentation of financial statements. The ASB will provide interpretations and guidance in issues arising from Accounting Standards. The ASB will also review the Accounting 5tandards at periodical intervals and, if necessary, revise the same.

3. GENERAL PURPOSE FINANCIAL STATEMENTS (1) For discharging its functions, the ASB will keep in view the purposes and imitations of financial statements and the attest function of the auditors. The ASB will numerate and describe the basic concept to which accounting principles should be riented and state the accounting principles to which the practices and procedures should onform. (2) The ASB will clarify the terms commonly used in financial statements and iggest improvements in the terminology wherever necessary. The ASB will examine le various current alternative practices in vogue and endeavour to eliminate or reduce Iternatives within the bounds of rationality. (3) Accounting Standards are designed to apply to the general purpose financial atements and other financial reporting, which are subject to the attest function of the embers of the ICAI. Accounting Standards apply in respect of any enterprise (whether ganised in corporate, co-operative or other forms) engaged in commercial, industrial business activities, irrespective of whether it is profit oriented or it is established for charitable or religious purposes. Accounting Standards will not, however, apply to enterprises only carrying on the activities which are not of commercial, industrial or business nature

(e.g., an activity of collecting donations and giving them to flood affected people). Exclusion of an enterprise from the applicability of the Accounting Standards would be permissible only if no part of the activity of such enterprise is commercial, industrial or business in nature. Even if a very small proportion of the activities of an enterprise is considered to be commercial, industrial or business in nature, the Accounting Standards would apply to all its activities including- those which are not commercial, industrial or business in nature. (4) The term General Purpose Financial Statements includes balance sheet, statement of profit and loss, a cash flow statement (wherever applicable) and statements and explanatory notes which form part thereof, issued for the use of various stakeholders, Governments and their agencies and the public. References to financial statements in the Preface and in the standards issued from time to time will be construed to refer to General Purpose Financial Statements. (5) Responsibility for the preparation of financial statements and for adequate disclosure is that of the management of the enterprise. The auditors responsibility is to form his opinion and report on such financial statements. 4. Scope of Accounting Standards (1) Efforts will be made to issue Accounting Standards which are in conformity with the provisions of the applicable laws, customs, usages and business environment in India. However, if a particular Accounting Standard is found to be not in conformity with law, the provisions of the said law will prevail and the financial statements should be prepared in conformity with such law. (2) The Accounting Standards by their very nature cannot and dc not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditors report thereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements. (3) The Accounting Standards are intended to apply only to items which are material. Any limitations with regard to the applicability of a specific Accounting Standard will be made clear by the ICAI from time to time. The date from which a particular Standard will come into effect, as well as the class of enterprises to which it will apply, will also be specified by the ICAI. However, no standard will have retroactive application, unless otherwise stated. 5. Procedure for Issuing An Acounting Standard Broadly, tne following procedure islidopted for forrmulating Accounting Standards: (1) The ASB determines the broad areas in which Accounting Standards need to be formulated and the priority in regard to the selection thereof. (2) In the preparation of Accounting Standards, the ASB will be assisted by Study Groups constituted to consider specific subjects. In the formation of Study Groups, provision will be made for wide participation by the members of the Institute and others. (3) The draft of the proposed standard will normally include the following: (a) Objective of the Standard, (b) Scope of the Standard, (c) Definitions of the terms used in the Standard, (d) Recognition and measurement principles, wherever applicable,

(e) Presentation and disclosure requirements. (4) The ASB will consider the preliminary draft prepared by the Study Group and if any revision of the draft is required on the basis of deliberations, the ASB will make the same or refer the same to the Study Grodp. (5) The ASB will circulate the draft of the Accounting Standard to the Council members of the ICAI and the following specified bodies for their comments: (i) Department of Company Affairs (DCA) (ii) Comptroller and Auditor General of India (C&AG) (iii) Central Board of Direct Taxes (CBDT) (iv) The Institute of Cost and Works Accountants of India (ICWAI) (v) The Institute of Company Secretaries of India (ICSI) (vi) Associated Chambers of Commerce and Industry (ASSOCHAM), Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI) (vii) Reserve Bank of India (RBI) (viii) Securities and Exchange Board of India (SEBI) (ix) Standing Conference of Public Enterprises (SCOPE) (x) Indian Banks Association (IBA) (xi) Any other body considered relevant by the ASB keeping in view the nature of the Accounting Standard. (6) The ASB will hold a meeting with the representatives of specified bodies to ascertain their views on the draft of the proposed Accounting Standard. On the basis of comments received and discussion with the representatives of specified bodies, the ASB will finalise the Exposure Draft of the proposed Accounting Standard. (7) The Exposure Draft of the proposed Standard will be issued for comments by the members of the Institute and the public. The Exposure Draft will specifically be sent to specified bodies (as listed above), stock exchanges, and other interest groups, as appropriate. (8) After taking into consideration the comments received, the draft of the proposed Standard will be finalised by the ASB and submitted to the Council of the ICAI. (9) The Council of the ICAI will consider the final draft of the proposed Standard, and if found necessary, modify the same in consultation with the ASB. The Accounting Standard on the relevant subject will then be issued by the ICAI. (10) For a substantive revision of an Accounting Standard, the procedure followed for formulation of a new Accounting Standard, as detailed above, will be followed. (11) Subsequent to issuance of an Accounting Standard, some aspect(s) may require revision which are not substantive in nature. For this purpose, the ICAI may make limited revision to an Accounting Standard. The procedure followed for the limited revision will substantially be the same as that to be followed for formulation of an Accounting Standard, ensuring that sufficient opportunity is given to various interest groups and general public to react to the proposal for limited revision.

6. COMPLIANCE WITH THE ACCOUNTING STANDARDS (1) The Accounting Standards will be mandatory from the respective date(s) mentioned in the Accounting standards(s). The mandatory status of an Accounting Standard implies that while discharging their attest functions, it will be the duty of the members of the Institute to examine whether the Accounting Standard is complied within

the presentation of financial statements covered by their audit. In the event of any deviation from the Accounting Standard, it will be their duty to make adequate disclosures in their audit reports so that the users of financial statements may be aware of such deviation. (2) Ensuring compliance with the Accounting Standards while preparing the financial statements is the responsibility of the management of the enterprise. Statutes governing certain enterprises require of the enterprises that the financial statements should be prepared in compliance with the Accounting Standards, e.g., the Companies Act, 1956 (section 211), and the Insurance Regulatory and Development Authority (Preparation of Financial Statements and. Auditors Report of Insurance Companies) Regulations, 2000. (3) Financial Statements cannot be described as complying with the Accounting Standards unless they comply with all the requirements of each applicable Standard. Issue of Accounting Standards. The ASB has so far issued twentynine definitive standards. The standards are as under:
No. AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS AS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Title Mandatory from accounting period beginning on or after

(Revised) (Revised) (Revised) (Revised) (Revised)

(Revised 2003)

Disclosure of Accounting Policies 1.4.1991 Valuation of Inventories 1.4.1999 Cash Flow Statements 1.4.2001* Contingencies and Events 1.4.1995 occurring after Balance Sheet Date Prior Period and Extraordinary Items and 1.4.1996 Changes in Accounting Policies Depreciation Accounting 1.4.1995 Accounting for Construction Contracts 1.4.2003 Accounting for Research and Development 1.4.1991* Revenue Recognition 1.4.1991 Accounting for Fixed Assets 1.4.1991 Accounting for the Effect of Changes in 1.4.2004 Foreign Exchange Rates Accounting for Government Grants 1.4.1995 Accounting for Investments 1.4.1995 Accounting for Amalgamations 1.4.1994 Accounting for Retirement Benefits in 1.4.1995 the Financial Statements of Employers Borrowing Costs 1.4.2000 Segment Reporting 1.4.2001 Related Party Disclosures 1.4.2001 Leases 1.4.2001 Consolidated Financial Statements 1.4.2001 Earnings per share 1.4.2001 Accounting for Taxes on Income 1.4.2001 Accounting for Investments in 1.4.2002 Consolidated Finance Statements Discontinuing Operations 1.4.2004 Interim Financial Reporting 1.4.2002 Intangible Assets 1.4.2003 Financial Reporting of Interest in Joint Ventures 1.4.2002* Impairment of Assets 1.4.2004* Provisions, Contingent Liabilities and Contingent Assets 1.4.2004

* discontinued w.e.f. 1.4.2003 since subject is covered by AS 26 : Intangible Assets. * mandatory (/) for enterprises whose debt or securities are listed on a recognised stock exchange in India and (ii) all other commercial or industrial enterprises whose turnover for the accounting period exceeds Rs 50 crores.

Besides the above twentynine Accounting Standards, the ASB had issued the Accounting Terminology and also prepared a Framework for the Preparation and Presentation oF Financial Statements. It has also specified, in consultation with the RBI, modifications with which the Accounting Standards will be applicable to bank and other financial institutions. ASB also carries out the task of revising the Accounting Standards, issue of clarification and guidance notes. In March 2004, ASB issued clarifications interpreting applicability of AS 9, AS 17, AS 18, AS 21, AS 23, and AS 25. An exposure draft the revise AS 15 Employee Benefits was issued in September 2004 on which the comments were to be received by October 30, 2004. The revised AS 15 has already been issued. A Guidance Note on ESOP has also be issued. ASB is thus on the move. Its efforts are directed at establishing accounting standards which will be adopted by management of different enterprises and will definitely result in the improvement of quality of presentation of financial statements in our country. AS: 1 Disclosure of Accounting Policies The main features of the Standard AS: 1 announced by the ASB, regarding Diserosure of Accounting Policies, are as follows: (l) Fundamental Accounting Assumptions (i) Certain fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. (ii) Fundamental accounting assumptions are: (a) Going concern The enterprise is normally viewed as a going concern, i.e., as continuing in operation for the foreseeable future. It is assumed that the enterprises has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations. (b) Consistency It is assumed that accounting policies are consistent from one period to another. (c) Accrual Revenue and costs are accrued, i.e., recognised as they are earned or incurred (and not as money is received or paid), and recorded in the financial statements of the periods to which they relate (the considerations affecting the process of matching costs with revenues under the accrual assumption are not dealt within this statement). In case any of the above fundamental accounting assumptions is not followed, the fact should be disclosed in the financial statements together with reasons. ( (2) Accounting Policies (i) Accounting policies refer to the specific accounting principles and methods of applying those principles adopted by enterprises in the preparation and presentation of financial statements. There is no single list of accounting policies which are applicable to all circumstances. The different circumstances in which the enterprises operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those principles acceptable. The choice of appropriate accounting principle in the specific circumstances of each enterprise calls for considerable judgement by the management of the enterprise. (ii) The following are the examples of the areas in which different accounting policies may be adopted by different enterprises: (a) Methods of depreciation, depletion and

(iii)

(iv) (v)

(vi)

amortisation, (b) Treatment of expenditure during the construction, (c) Conversion or translation of foreign currency items, (d) Valuation of inventories, (e) Treatment of goodwill. (f) Valuation of investments, (g) Treatment of retirement benefits, (h) Recognition of profit on long-term contracts. (i) Valuation of fixed assets. (j) Treatment of contingent liabilities. The above list of example is not intended to be exhaustive. The primary consideration in the selection of accounting policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policy, should represent a true and fair view of the state of affairs of the enterprise, as at the balance sheet date and of the period ended on that date. For this purpose, the major considerations governing the selection of and application of accounting policies are: (a) Prudence Uncertainties inevitable surround many transactions. This should be recognised by exercising prudence in preparing financial statements. Prudence does not, however, justify the creation of secret or hidden reserves. (b) Substance over form Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form. (c) Materiality Financial statements should disclose all items which are material enough to affect evaluation or decisions. To ensure proper understanding of financial statements, all significant accounting policies adopted in the preparation should be disclosed. The disclosure of the significant accounting policies as such should form a part of the financial statements and the significant accounting policies should normally be disclosed at one place. Any change in the accounting policy which has a material effect in the current period or which is reasonably expected to have a material effect in the later periods should be disclosed. In the case of a change in the accounting policy which has a material effect in the current period, the amount by which an item, in the financial statement is affected by such a change, should be disclosed, to the extent ascertainable. Where such an amount is not ascertainable wholly or in part, the fact should be indicated.

Difference between fundamental accounting presumptions and accounting policies It is clear from whatever has been stated above that IASC has made distinctions between Fundamental Accounting Assumptions and Accounting Policies. The distinctions are as follows: 1. Fundamental accounting presumptions are assumed to have been used and accepted in the preparation of financial statements while no such presumption can be made in respect of accounting policies. 2. In case of fundamental accounting assumptions, the management has no discretion. They have to be necessarily followed. However, in the case of accounting policies, the management may make a choice. It should use its judgement in selecting and applying such policies which are best suited to the business. 3. In case the fundamental assumptions are not followed, the fact has to be disclosed together with reasons. In case of accounting policies, disclosure has to be made about the policy which has been followed by the management. In case the policy is changed in subsequent years, the reasons for change and the resulting financial consequences have also to be disclosed.

BOOK -II : SN-PAGES NO. 196-201

Illustration 7.27. The following is the Trial Balance of Shri Om, as on 31st March, 1999. You are requested to prepare the Trading and Profit and Loss Account for the year ended 31 st March, 1999 and Balance Sheet as on that date after making the necessary adjustments: Particulars Sundry Debtors Sundry Creditors Outstanding Liability for Expenses Wages Carriage Outwards Carriage Inwards General Expenses Cash Discounts Bad Debts Motor Car Printing and Stationery Furniture and Fittings Advertisement Insurance Salesmens Commission Postage and Telephone Salaries Rates and Taxes Drawings Capital Account Purchases Sales Stock on 1.4.99 Cash at Bank Cash in Hand Debit Rs 5,00,000 55,000 1,00,000 1,10,000 50,000 70,000 20,000 10.000 2.40,000 15,000 1,10,000 85,000 45,000 87,500 57,500 1,60,000 25,000 20,000 ....... 15,50,000 ....... 2,50,000 60,000 10,500 36,30,500 The following adjustments are to be made:
(1) Stock on 31st March, 1999 was valued at Rs 7,25,000. (2) A Provision for Bad and Doubtful Debts is to be created to the extent of 5 per cent on Sundry Debtors. (3) Depreciate: Furniture and Fittings by 10% Motor Car by 20% (4) Shri Om had withdrawn goods worth Rs 25,000 during the year. (5) Sales include goods worth Rs 75,000 sent out to Shanti & Company on approval and remaining unsold on 31 st March, 1999. The cost of the goods was Rs 50,000. (6) The Salesmen are entitled to a Commission of 5% on total sales. (7) Debtors include Rs 25,000 bad debts.

Credit Rs 2,00,000 ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... ....... 14,43,000 ....... 19,87,500 ....... ....... ...... 36,30,500

(8) Printing and Stationery expenses of Rs 55,000 relating to 1997-98 had not been provided in that year but was paid in this year by debiting outstanding liabilities. (9) Purchases include purchase of Furniture worth Rs 50,000.

Solution: Shri Om TRADING AND PROFIT AND LOSS ACCOUNT for the year ended 31st March, 1999
Particulars To Opening Stock To Purchases Less: Drawings Amount Rs Particulars By Sales Less: Goods sent on Approval By Closing Stock Add: Stock on approval (at cost) 19,87,500 75,000 7,25,000 50.000 19,12,500 Amount Rs

2,50,000 15,50,000 25,000 15,25,000 Less: Furniture 50.000 14,75,000 To Wages 1,00,000 To Carriage Inwards 50,000 To Gross Profit c/d 8.12.500 26,87,500 To Salaries 1,60,000 To Rates and Taxes 25,000 To Postage and Telephone 57,500 To Insurance 45,000 To Printing and Stationery 15,000 To General Expenses 70,000 To Depreciation: Furniture (11,000+ 5,000) 16,000 Motor Car 48,000 To Salesmens Commission 95,625 (5%on Rs 19,12,500) To Advertisement 85,000 To Carriage Outwards 1,10,000 To Bad Debts 10,000 Add: Addl. Bad Debts 25,000 Add: Prov. for Bad Debts (5% on Rs 4,00,000: 20,000 55,000 See W.N. 3) To Cash Discount 20,000 To Net Profit 10.375 8,12,500

7,75,000

By Gross Profit b/d

26,87,500 8.12,500

8,12,500

Liabilities Capital as on 1.4.98 Add: Net Profit Less: Drawings (20,000 + 25.000)

Shri Om Balance Sheet as on 31.3.1991 Amount Assets Rs Rs 14,43,000 10,375 14,53,375 45,000 14,08,375 Furniture & Fittings Additions during the yr. Less: Depn. Motor Car Less: Depn. Rs 1,10,000 50.000 1,60,000 16.000 2,40,000 48,000

Amount Rs

1,44,000 1,92,000

Less: Printing & Stationery Closing Stock of last year 55,000 13,53,375 (7,25,000 + 50,000) Sundry Creditors 2,00,000 Sundry Debtors Salesmens Commission Less: Goods sent on Outstanding 8,125 approval (Rs 95,625 - Rs 87,530) Less: Addl. Bad debts Less: Provision for doubtful debts 5% on 4,00,000 Cash at Bank Cash in Hand 15,61,500

7,75,000 5,00,000 75.000 4,25,000 25.000 4,00,000

20.000

3,80,000 60,000 10,500 15,61,500

Working Notes :
1. Both Sales and Sundry Debtors have been reduced by Rs 75,000 representing invoice value of goods sent on approval. Rs 50,000 have been added to the closing stock being the cost of goods sent on approval. 2. Last years short provision for Printing and Stationery has not been charged to the current years Profit & Loss Account. It is preferable to charge it directly to in Capital Account. 3. Sundry Debtors = Rs 5,00,000 - (Rs 75,000 Goods on Approval + Rs 25,000 1 Debt) = Rs 4,00,000.

Illustration 7.28 : The Trial Balance of Jagfay Corporation, New Delhi, as on 30.9.1999 is as below: Particulars Capita! Account (including Rs 5,000) (Introduced on 1.4.1999) Stock as on 1.10.1998 Finished Goods Work-in-progress Raw Materials Purchase of Raw Material Machinery Sales Carriage Inwards Carriage Outwards Rent (including Rs 450 for the factory premises) Rebates and Discounts allowed Fire Insurance (for machinery) Sundry Debtors Sundry Creditors Reserve for Bad and Doubtful Debts Printing and Stationery Miscellaneous Expenses Advertisement Amount Rs 22,500 3,500 7,000 3.000

13,500 70,500 22,500 1,26,225 750 450 1,350 105 210 18,900 5,100 60 180 840 4,500

Drawings of Proprietor Office Salaries Manufacturing Wages Furniture and Fixtures Factory Power and Fuel Cash in hand Balance with Bank of Bikaner Ltd., Delhi (Dr.) Adjustments

1,800 5,400 6,000 2,250 300 600 3,750

(i) Provide for interest @ 10% per annum on Capital. (No interest on drawings need be provided.) (ii) A motor car purchased on 1.4.1999 for Rs 6,000 has been included in Purchases. (iii) Provide depreciation: Machinery @ 10% p.a., Motor Car@ 20% p.a., Furniture and Fixtures @ 10% p.a. (iv) Provision for unrealised rent in respect of a portion of the office sublet at Rs 50 per month from 1.4.1999 has to be made. (v) Sundry Debtors include bad debts of Rs 400 which must be written off. (vi) Provision for Bad and Doubtful Debts as on 30.9.1999 should be maintained at 10% of the Debtors. (vii) A sum of Rs 2,000 transferred from the Current Account with Bank of Bikaner Ltd., to Fixed Deposit Account on 1.2.1999 has been passed through books. Make suitable adjustments and provide for accrued interest @ 6% p.a. (viii) Stock as on 30.9.1999. Finished Goods Rs 5,000, Raw Materials Rs 1,000, Work-in-progress Rs 5,500.

Prepare the Manufacturing, Trading and Profit and Loss Account for the year ended 30.9.1999 and Balance Sheet as on that date after making the necessary adjustments (Journal entries are not required.) Solution: Messrs Jagfay Corporation, New Delhi MANUFACTURING ACCOUNT for the year ended 30.9.1999
Particulars To Work-in-progress To Materials used: Opening Stock Purchases Amount Rs Particulars 7,000 By Cost of Manufactured goods transferred to Trading Account By Workrin-progress at end 66,500 750 300 6,000 450 81,210 81,210 Amount Rs

Less: Closing Stock To Carriage Inwards To Factory Power and Fuel To Manufacturing Wages To Factory Rent To Fire Insurance for Machinery210

3,000 64.500 67,500 1.000

75,710 5,500

TRADING AND-PROFIT AND LOSS ACCOUNT

for the year ended 30.9.1999 Particulars To Opening Stock: Finished Goods To Cost of Goods transferred from Manufacturing A/c To Gross Profit c/d To Office Salaries To Rent To Advertisement To Carriage Outwards To Rebates and Discounts To Bad Debts written off Add: New provision for bad debts Less: Old provision for bad debts To Printing and Stationery To Miscellaneous Expenses To Depreciation written off To Interest on Capital To Net Profit transferred to Capital A/c Amount Rs Particulars By Sales 3,500 By Closing Stock: Finished Goods 75,710 52.015 1.31.225 5,400 By Gross Profit b/d 900 By Rent Receivable 4,500 By Interest receivable 450 (on fixed deposit for Rs 2,000 105 for 8 months @ 6% p.a.) 400 1.850 2,250 60 2,190 180 840 3,075 2,000 32,755 52,395 52,395 Amount Rs 1,26,225 5,000

1.31.225 52,015 300

80

BALANCE SHEET as on 30.9.1999

Particulars Capital Account: Balance 22,500 Amount Rs Particulars Machinery: As per last Balance Sheet Less: Depreciation Motor Car: Cost 55,455 Less: Depreciation 5,100 Furniture & Fixtures: as per last Balance Sheet Less: Depreciation Closing Stock: Finished Goods Work-in-progress Raw Materials Amount Rs

Add: Profit for the year 32,75 Interest 2,00 57,25. Less: Drawings l,809 Sundry Creditors

22,500 2,250 6,000 600

20,250

5,400

2,250 225 5,000 5,500 1,000

2,025

11,500

Sundry Debtors Less: Bad debts written off Less: Provision for bad and doubtful debts Interest Accrued Rent Receivable Bank Balance: Fixed Deposit with Bank of Bikaner Ltd. Balance with Bank of Bikaner Ltd. Cash in Hand 60,555

18,900 400 18,500 1.850 16,650 80 300

2,000 1,750 600 60,555