Financial and Management accounting

Bridge course

Meaning, Definition, Features, Scope& Objective of accounting, GAAP, Basic

terminology of accounting, Books of original entry, Journal, Ledger, Trial balance, Final
accounts, Classification of capital and revenue transaction, depreciation, final account
without adjustment
Introduction to accounting
Business entities and other organisations carry on activities which involve exchange of money or
money’s worth or economic resources. Where the volume of these activities are large in number
it is necessary that these are recorded for the purpose of taking important decisions as to whether
the activities are viable, gainful and are to be continued or not. Information about the business
and other organisations is required not only to the proprietors and managers of business and other
organisations but also to various other interested users such as the government, investors,
customers, employees and researchers.

Meaning and Definition of Accounting.

Accounting is the systematic process of identifying, measuring, recording, classifying,
summarizing, interpreting and communicating financial information. Accounting gives
information on:
(i) the resources available
(ii) how the available resources have been employed and
(iii) the results achieved by their use.
The profit earned or loss incurred during the accounting period, value and nature of assets,
liabilities and capital can be ascertained from the information recorded in accounts.
Features, Scope& Objective of accounting

Objectives of Accounting
Following are the objectives of accounting:
(i) To keep a systematic record of financial transactions and events
(ii) To ascertain the profit or loss of the business enterprise
(iii) To ascertain the financial position or status of the enterprise
(iv) To provide information to various stakeholders for their requirements
(v) To protect the properties of an enterprise and
(vi) To ascertain the solvency and liquidity position of an enterprise

Importance of Accounting

Accounting is a basic necessity for all enterprises. Importance of accounting is enumerated as

below:
(i) Systematic records
All the transactions of an enterprise which are financial in nature are recorded in a systematic way
in the books of accounts. The records are classified under common heads and summaries are
prepared.
(ii) Preparation of financial statements
Results of business operations and the financial position of the concern can be ascertained from
accounting periodically through the preparation of financial statements namely, income statement
or trading and profit and loss account and balance sheet. This helps in distribution of profits to
the owners and to provide funds for future growth of the business.
(iii) Assessment of progress
Analysis and interpretation of financial data can be done to assess the progress made in different
areas and to identify the areas of weaknesses. Management is provided with a complete picture of
the liquidity, profitability and solvency of the business.
(iv) Aid to decision making
Management of a firm has to make routine and strategic decisions while discharging its functions.
Accounting provides the relevant data to make appropriate decisions. Future policies and
programmes can be planned by the management based on the accounting data provided.
(v) Satisfies legal requirements
Various legal requirements like maintenance of Provident Fund (PF) for employees, Employees
State Insurance (ESI) contributions, Tax Deducted at Source (TDS), filing of tax returns are
properly fulfilled with the help of accounting. Preparation of accounts and financial statements as
per the legal requirements is also facilitated.
(vi) Information to interested groups
Accounting supplies appropriate information to different interested groups like owners,
management,creditors, employees, financial institutions, tax authorities and the government.
(vii) Legal evidence
Accounting records are generally accepted as evidence in courts of law and other legal authorities
in the settlement of disputes.
(viii) Computation of tax
Accounting records are the basic source for computation and settlement of income tax and other
taxes.
(ix) Settlement during merger
When two or more business units decide to merger, accounting records provide information for
deciding the terms of merger and any compensation payable as a consequence of merger.

Basic Accounting terminologies

Transaction An activity which involves transfer of money or money’s worth (goods,

services, ideas) from one person to another.
Cash transaction It is a transaction which involves immediate cash receipt or immediate cash
payment.
Credit transaction It is a transaction in which cash is not received or paid immediately, but will
be received or paid later.
Account It is the basic unit for measurement in accounting. It is used for identifying a
person, or an item in accounting. An account is opened individually for a
person, asset, expense, income, etc. In ledger, an account is a summary of
transactions under a head.
Capital It is the amount invested by the owner or proprietor in an organisation.
Drawings It is the amount of cash or value of goods, assets, etc., withdrawn from the
business by the owner for the personal use of the owner.
Voucher Any written or printed document in support of a business transaction is called
a voucher. Examples: cash receipt, invoice, cash memo, bank pay-in- slip, etc.
Invoice It is a statement prepared by a seller of goods to be sent to the buyer. It shows
details of quantity, price, value, etc. of the goods and any discount given,
finally showing the net amount payable by the buyer.
Goods It includes articles, things or commodities in which a business is dealing with.
Example: Furniture will be goods for those who deal in furniture.
Purchases Buying of goods with the intention of resale is called purchases.
Purchases returns When goods bought are returned to the suppliers, it is known as purchases
or returns outward returns or returns outward.
Sales When goods meant for resale are sold, it is called sales.
Sales returns or When goods sold are returned by the customers, it is called as sales returns or
returns inward returns inward.
Stock Unsold goods lying in a business on a particular date are known as stock.
Income It is the amount receivable or realised from sale of goods and earnings from
interest, dividend, commission, etc.
Expense It is the amount incurred in order to produce and sell the goods and services.
Solvency Solvency is the capability of a person or an enterprise to pay the debts.
Insolvency Insolvency is the incapability of a person or an enterprise to pay the debts.
Asset Any physical thing or right owned that has a monetary value is called asset.
Liability It refers to the financial obligation of the business.
Debtor A person who receives a benefit without giving money or money’s worth
immediately, but liable to pay in future or in due course of time.
Creditor A person who gives a benefit without receiving money or money’s worth
immediately but to claim in future.

Book-keeping-An introduction

The first tstep in the accounting process is identifying and recording of transactions in the books
of accounts. This is necessary for any business as the transactions happening in a business entity
must be recorded so that the information is available for further analysis.
Book-keeping forms the base for the preparation of financial statements and interpretation which
are the important functions of accounting. In a broad sense, accounting includes book-keeping
also. In a small business, the entire accounting work may be performed by a single accountant. In
a large firm, there may be a separate person or department for book-keeping work.
2.1.1 Meaning of book-keeping
Book-keeping is the process of recording financial transactions in the books of accounts. It is the
primary stage in the accounting process. It includes recording the transactions and classifying the
same under proper heads. Book-keeping work is of routine nature. Transactions may be recorded
in the accounting note books and ledgers or may be recorded in a computer.
2.1.2 Definition of book-keeping
“Book-keeping is an art of recording business dealings in a set of books”. - J.R.Batliboi.
“Book-keeping is the science and art of recording correctly in the books of account all those
business transactions of money or money’s worth”. -R.N.Carter.

Book-keeping Vs. Accounting

S. No Basis of Book-keeping Accounting

distinction
1 Scope It is concerned with It is concerned with recording,
recording and classifying classifying, summarising,
the business transactions. analysing and interpreting the
financial data.
2 Stage Book-keeping is the Apart from the primary stage, it
primary stage in includes secondary stage of
accounting. It is the base analysis and interpretation.
for accounting.
3 Nature of job It is routine and clerical in It is analytical in nature.
nature.
4 Knowledge It requires basic It requires thorough knowledge
required knowledge of the of accounting principles,
principles of journalising procedures and practices.
and posting.
5 Skill required Analytical skill is not It requires analytical skill.
required for book-
keeping.

Accounting Principles
Accounting principles provide the basic framework within which the accounting records and
accounting reports are to be prepared. Accounting standards have been issued by national and
international regulatory authorities to ensure uniformity of accounting procedure and accounting
results. These accounting standards and GAAPs provide the theoretical base of accounting.
Accounting principles may be accounting concepts or accounting conventions. Accounting
concepts are the basic assumptions whereas conventions are the guidelines based upon practice or
usage.
Accounting concepts are the basic assumptions or conditions upon which accounting has been
laid. Accounting concepts are the results of broad consensus. The word concept means a notion
or abstraction which is generally accepted. Accounting concepts provide unifying structure to the
accounting process and accounting reports.
The word convention refers to traditions or usage. The accounting conventions are the usage or
practices which are followed as a guide to the preparation of accounting statements.
The utility of these accounting conventions have been recognised by regulatory authorities of
accountancy in making financial statements more realistic, reliable, and useful to all concerned
parties.
The important accounting concepts and conventions are discussed below:
(i) Business entity concept
This concept implies that a business unit is separate and distinct from the owner or owners, that
is, the persons who supply capital to it.
Based on this concept, accounts are prepared from the point of view of the business and not from
the owner’s point of view. Hence, the business is liable to the owner for the capital contributed by
him/her.
According to this concept, only business transactions are recorded in the books of accounts.
Personal transactions of the owners are not recorded. But, their transactions with the business
such as capital contributed to the business or cash withdrawn from the business for the personal
use will be recorded in the books of accounts. It implies that the business itself owns assets and
owes liabilities.
(ii) Money measurement concept
This concept implies that only those transactions, which can be expressed in terms of money, are
recorded in the accounts. Since, money serves as the medium of exchange transactions expressed
in money are recorded and the ruling currency of a country is the measuring unit for accounting.
Transactions which do not involve money will not be recorded in the books of accounts. For
example, working conditions in the work place, strike by employees, efficiency of the management,
etc. will not be recorded in the books, as they cannot be expressed in terms of money.
It helps in understanding of the state of affairs of the business as money serves as a common
measure by means of which heterogeneous facts about the business are recorded. For example,
if a business has 5 computers, 2 tables and 3 chairs, the assets cannot be added to give useful
information, unless, they are expressed in monetary terms ` 1,00,000 for computers, ` 10,000 for
tables and ` 1,500 for chairs.
(iii) Going concern concept
It is the basic assumption that business is a going concern and will continue its operations for a
foreseeable future. Going concern concept influences accounting practices in relation to valuation
of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and prepaid
expenses and accrued and unearned revenues. For example, assets are generally valued at historical
cost. Any increase or decrease in the value of assets in the short period is ignored.
(iv) Cost concept
An asset is recorded in the books on the basis of the historical cost, that is, the acquisition cost.
Cost of acquisition will be the base for all further accounting. It does not mean that the asset will
always be shown at cost. It is recorded at cost at the time of its purchase, but is systematically
reduced in its book value by charging depreciation.
The cost concept has the following limitations:
a) In an inflationary situation, when prices of commodities increase, valuing the assets at
historical cost may not represent the true position of the business.
b) The results of business units established at different dates are not comparable if assets
are recorded on historical basis.
c) Assets which do not have acquisition cost such as human resources are not recognised
under this concept.
(v) Dual aspect concept
According to this concept, every transaction or event has two aspects, i.e., dual effect.
For example, when Arun starts a business with cash ` 5,00,000, on the one hand, the business gets
cash of ` 5,00,000 and on the other hand, a liability arises, that is, the business has to pay Arun a
sum of ` 5,00,000.
This is the concept which recognises the fact that for every debit, there is a corresponding and
equal credit. This is the basis of the entire system of double entry book-keeping.
From this concept arises the basic accounting equation, that is,
Capital + Liabilities = Assets
(vi) Periodicity concept
This concept deals with preparing accounts for a particular period. As the proprietors, investors,
creditors, employees and the government are interested in knowing the performance of the
business unit periodically, it becomes necessary to select a particular period, normally one year for
measuring performance. Hence, financial statements are prepared after every accounting period
and not at the end of its life.
This concept helps the business in distribution of income to the owners and comparing and
evaluating performance of different periods.
(vii) Matching concept
According to this concept, revenues during an accounting period are matched with expenses
incurred during that period to earn the revenue during that period. This concept is based on accrual
concept and periodicity concept. Periodicity concept fixes the time frame for measuring
performance and determining financial status.
All expenses paid during the period are not considered, but only the expenses related to the
accounting period are considered.
On the basis of this concept, adjustments are made for outstanding and prepaid expenses and
accrued and unearned revenues. Also due provisions are made for depreciation of the fixed assets,
bad debt, etc., relating to the accounting period. Thus, it matches the revenues earned during an
accounting period with the expenses incurred during that period to earn the revenues before
sharing any profit or loss.
(viii) Realisation concept
According to realisation concept, any change in value of an asset is to be recorded only when the
business realises it. When assets are recorded at historical value, any change in value is to be
accounted only when it realises.
(ix) Objective evidence concept
Objective evidence concept requires that all accounting transactions recorded should be based on
objective evidence. The objective evidence includes documentary evidence like cash receipts,
invoices, etc. It ensures authenticity, accuracy and reliability of transactions entered in the books
of accounts.
(x) Accrual concept
According to accrual concept, the effects of the transactions are recognised on mercantile basis,
i.e., when they occur and not when cash is paid or received. Revenue is recognised when it is
earned and expenses are recognised when they are incurred. All expenses and revenues related to
the accounting period are to be considered irrespective of the fact that whether revenues are
received in cash or not and whether expenses are paid in cash or not. For example, i) Credit sale
is recognised as sale though the amount has not been received immediately. ii) Rent for the month
of March-2018 has not been paid and if the accounting period is 1.4.2017 to 31.3.2018, it will still
be recorded as an expense for the accounting year 2017-2018 because it had become due.
(xi) Convention of consistency
The consistency convention implies that the accounting policies must be followed consistently
from one accounting period to another. The results of different years will be comparable only
when same accounting policies are followed from year to year. For example, if a firm follows the
straight line method of charging depreciation since its purchase or construction, the method
should be followed without any change. However, it does not mean that changes are not possible.
Change in accounting policy can be incorporated in the following circumstances:
(a) To comply with the provisions of law
(b) To comply with accounting standards issued and
(c) To reflect true and fair view of state of affairs of the business.
(xii) Convention of full disclosure
It implies that the accounts must be prepared honestly and all material information should be
disclosed in the accounting statement. This is important because the management is different from
the owners in most of the organisations. The disclosure should be full, fair and adequate so that
the users of the financial statements can make correct assessment about the financial position and
performance of the business unit.
(xiii) Convention of materiality
According to this convention, financial statements should disclose all material items which might
influence the decisions of the users of financial statements. Hence, any item which is not significant
and is not relevant to the users need not be disclosed in the financial statements. This principle is
basically an exception to the full disclosure principle. The term materiality is subjective in nature.
Materiality depends on the amount involved in the transaction, size of the business, nature of
information, requirements of the person making decision, etc. An item material to one person may
be immaterial to another person.
(xiv) Convention of conservatism or prudence
It is a policy of caution or playing safe. While recording the business transactions one has to
anticipate no income but provide for all possible losses.
For example, the closing stock in the factory is valued at ` 35,000 at cost price and ` 25,000 at its
realisable price. But while recording in the books the value of ` 25,000 will be considered being
the lower of the two. According to realisation concept, any increase in value is not to be accounted
unless it has materialised. The conservatism convention puts further restriction on it. Any
unrealised gain is not to be anticipated but provision can be made against all possible losses.
Double entry system
Double entry system of book keeping is a scientific and complete system of recording the financial
transactions of an organisation. According to this system, every transaction has a twofold effect.
That is, there are two aspects involved, namely, receiving aspect and giving aspect. It is denoted
by debit (Dr.) and credit (Cr.). The basic principle of double entry system is that for every debit
there must be an equivalent and corresponding credit. Debit denotes an increase in assets or
expenses or a decrease in liabilities, income or capital. Credit denotes an increase in liabilities,
income or capital or a decrease in assets or expenses.
Principles of double entry system
 Following are the principles of double entry system:
(i) In every business transaction, there are two aspects.
(ii) The two aspects involved are the benefit or value receiving aspect and benefit or value
giving aspect.
(iii) These two aspects involve minimum two accounts; at least one debit and at least one
credit.
(iv) For every debit, there is a corresponding and equivalent credit. If one account is
debited the other account must be credited.

Accounting rules

Golden rules of double entry system

Personal account Debit the receiver Credit the giver

Real account Debit what comes in Credit what goes out

Nominal account Debit all expenses and losses Credit all incomes and gains

Format of Journal

Date Particulars L.F. Debit ` Credit `

 Account Type Comments

Plant & Machinery A/c Real Tangible asset

Investments A/c Real Intangible asset

Purchases A/c Nominal Expense for business

Creditor’s A/c Personal Related to persons*

Accrued Income A/c Personal Related to persons*

Equipment A/c Real Tangible asset

Loan Taken A/c Personal Related to persons*

Outstanding Expense A/c Personal Related to persons*

Bank A/c Personal Related to persons*

Capital A/c Personal Related to persons*

Loose Tools A/c Real Tangible asset

Sales A/c Nominal Income for business

Goodwill A/c Real Intangible asset

Drawings A/c Personal Related to the owner

Payment of Expense A/c Nominal Reduction of expense

Prepaid Expense A/c Personal Related to persons*

Debtor’s A/c Personal Related to persons*

Bad Debts Written Off A/c Nominal Loss for business

Bad Debts Recovered A/c Nominal Gain for business

Income Received in Advance

Personal Related to persons*
A/c
 Cash A/c Real Tangible asset

Discount Received A/c Nominal Gain for business

Discount Allowed A/c Nominal Loss for business

Petty Cash A/c Real Tangible asset

Carriage Inwards A/c Nominal Expense for business

Depreciation A/c Nominal Non-cash Expense

Leasehold Property A/c Real Asset for the business

Interest on Drawings A/c Nominal Income for business

Interest on Capital A/c Nominal Expense for business

Trademark A/c Real Intangible asset

Bank Overdraft A/c Personal Related to persons*

Furniture A/c Real Tangible asset

Interest Paid A/c Nominal Expense for business

Bills Payable A/c Personal Related to persons*

Bills Receivable A/c Personal Related to persons*

Example
Mrs Jeya is a sole proprietor having a provisions store. Following are the transactions
during the month of January, 2023. Journalise them.
Jan. `
1 Commenced business with cash 80,000
2 Deposited cash with bank 40,000
3 Purchased goods by paying cash 5,000
4 Purchased goods from Lipton & Co. on credit 10,000
5 Sold goods to Joy and received cash 11,000
6 Paid salaries by cash 5,000
7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan.
8 Bought furniture by cash 4,000
9 Paid electricity charges by cash 1,000
10 Bank paid insurance premium as per standing instructions 300

In the books of Jeyaseeli

Journal entries

Date Particulars L.F. Debit ` Credit `

Cash A/c Dr. 80,000 80,000
2023
To Jeyaseeli’s Capital A/c
Jan. 1
(Jeyaseeli commenced business with cash)
Bank A/c Dr. 40,000 40,000
2 To Cash A/c
(Deposited cash into bank)
Purchases A/c Dr. 5,000 5,000
3 To Cash A/c
(Goods purchased by cash)
Purchases A/c Dr. 10,000 10,000
4 To Lipton & Co. A/c
(Goods purchased on credit)
Cash A/c Dr. 11,000 11,000
5 To Sales A/c
(Cash sales made)
Salaries A/c Dr. 5,000 5,000
6 To Cash A/c
(Salaries paid)
Lipton & Co. A/c Dr. 10,000 10,000
7 To Bank A/c
(Payment made by cheque)
Furniture A/c Dr. 4,000 4,000
8 To Cash A/c
(Furniture bought for cash)
Electricity charges A/c Dr. 1,000 1,000
9 To Cash A/c
(Electricity charges paid)
Insurance premium A/c Dr. 300 300
10 To Bank A/c
(Insurance premium paid)
Example
Ananth is a trader dealing in textiles. For the following transactions, pass journal
entries for the month of January, 2018.
Jan. ` 1 Commenced business with cash 70,000
2 Purchased goods from X and Co. on credit 30,000
3 Cash deposited into bank 40,000
4 Bought a building from L and Co. on credit 95,000
5 Cash withdrawn from bank for office use 5,000
6 Cash withdrawn from bank for personal use of Ananthu 4,000
7 Towels given as charities 3,000
8 Shirts taken over by Ananth for personal use 12,000
9 Sarees distributed as free samples 3,000
10 Goods (table clothes) used for office use 200

Solution :

Date Particulars L.F. Debit ` Credit `

2018 Cash A/c Dr. 70,000
Jan. 1 To Ananth’s capital A/c 70,000
(Commenced business with cash)
2 Purchases A/c Dr. 30,000
To X and Co. A/c 30,000
(Credit purchases made)
3 Bank A/c Dr. 40,000
To Cash A/c 40,000
(Cash deposited into bank)
4 Buildings A/c Dr. 95,000
To L and Co. A/c 95,000
(Building bought on credit)
5 Cash A/c Dr. 5,000
To Bank A/c 5,000
(Cash withdrawn from bank for office use)
6 Drawings A/c Dr. 4,000
To Bank A/c 4,000
(Cash withdrawn from bank for personal use)
7 Charities A/c Dr. 3,000
To Purchases A/c 3,000
(Goods given for charities)
8 Drawings A/c Dr. 12,000
To Purchases A/c 12,000
 (Goods taken over for personal use)

9 Sales promotion A/c Dr. 3,000

To Purchases A/c 3,000
(Goods distributed as free samples)
10 Office expenses A/c Dr. 200
To Purchases A/c 200
(Goods used for office use)

Enter the following transactions in the journal of Manohar who is dealing in textiles:
2023
March `
1 Manohar started business with cash 60,000
Commenced business with goods 40,000
2 Purchased furniture for cash 10,000
3 Goods sold to Z on credit for ` 20,000
8 Bill received from Z is discounted with the bank for ` 19,000
3 Bought goods for cash 25,000
6 Bought goods from Kamalesh on credit 15,000
8 Sold goods for cash 28,000
10 Sold goods to Hari on credit 10,000
14 Purchased goods from Arul on credit 70,000
16 Returned goods to Arul 10,000
16 Sold goods to Chandar on credit 30,000
17 Chandar returned goods worth 6,000
17 Paid Kamalesh 12,000
18 Depreciation on furniture ` 800
18 Paid rent 500
19 Withdrew from bank for personal use 800
25 Received from Hari 8,000
28 Lunch provided at free of cost to a charity 1,000
Solution:
Date Particulars L.F. Debit ` Credit `
2018 Cash A/c Dr. 60,000
Jan. 1 To Manohar’s capital A/c 60,000
(Commenced business with cash)
2018 Stock A/c Dr. 40,000
Jan. 1 To Manohar’s capital A/c 40,000
(Commenced business with Stock)
2018 Furniture A/c Dr. 10,000
Jan. 2 To Cash A/c 10,000
(Being furniture purchased by cash)
2018 M/s Z A/c Dr. 20,000
Jan. 3 To Sales A/c 20,000
(Credit sales made)
2018 Bank A/c Dr. 19,000
Jan. 8 Discount A/c Dr. 1,000
To Bills Receivable A/c 20,000
(Bill receivable discounted by bank

2018 Purchases A/c Dr. 25,000

Jan. 3 To Cash. A/c 25,000
(Being cash purchase made)
2018 Purchases A/c Dr. 15,000
Jan. 6 To Kamalesh. A/c 15,000
(Being cash purchase made)
2018 Cash A/c Dr. 28,000
Jan. 8 To Sales A/c 28,000
(Being cash sales made)
2018 Hari A/c Dr. 10,000
Jan. 10 To Sales A/c 10,000
(Goods sold to hari for credit)
2018 Purchases A/c Dr. 70,000
Jan. 14 To Arul. A/c 70,000
(Being credit purchase made)
2018 Arul A/c Dr 10,000
Jan. 16 To Purchase Return 10,000
(Being goods purchased returned)
2018 Chandar A/c Dr 30,000
Jan. 16 To Sales A/c 30,000
(Goods sold to Chandar for credit)
2018 Sales Return A/c Dr 6,000
Jan. 17 To Chandar A/c 6,000
(Goods returned from Chandar)
2018 Kamalesh A/c Dr. 12,000
Jan. 17 To Cash A/c 12,000
(Paid to Kamalesh)
2018 Depreciation A/c Dr 400
Jan. 18 To Furniture 400
(Being furniture depreciated)

2018 Rent A/c Dr. 500

Jan. 25 To Cash A/c 500
(Being rent paid)
2018 Drawing A/c Dr Dr. 800
Jan. 28 To Bank A/c 800
 (Being withdrew from bank for personal use)

2018 Cash A/c Dr 8000

Jan. 19 To Hari A/c 8000
2018 Charity A/c Dr 1,000 1,000
Jan. 19 To Cash

Distinction between journal and ledger

Ledger account is a summary statement of all the transactions relating to a person, asset,
liability, expense or income which has taken place during a given period of time and it
shows their net effect. From the transactions recorded in the journal, the ledger account is
prepared. Ledger is known as principal book of accounts. It is a book which contains all
sets of accounts, namely, personal, real and nominal accounts. Accountwise balance can be
determined from the ledger. The ledger accounts are prepared based on journal entries
passed.

Format of ledger account

Dr. Name of the ledger account Cr.

Date Particula J.F. Amount ` Date Particula J.F. Amount `
rs rs

Following are the differences between journal and ledger:

Basis Journal Ledger
1. Recording As and when transactions take place In ledger, entries may be posted either on the
entries are made in journal. same day or at the end of a specified period
such as weekly or fortnightly especially when
subsidiary books are maintained.
2. Stage of Recording in the journal is the first Recording in the ledger is the second stage,
recording stage which is done on the basis of entries made in
the journal.
3. Order of Entries are made in the chronological Entries are made accountwise.
recording order, i.e., datewise in the order of
occurrence.
4. Process The process of recording in journal is The process of recording in the ledger is
called journalising called posting.
5. Facilitating Amount from the journal does not Ledger balances serve as the basis for
preparation of serve as the basis for preparing trial preparing trial balance.
trial balance balance.
6. Basis of Entries in the journal are made on the Posting is done in ledger on the basis of
entries basis of source documents. journal entries.
7. Net Net position of an account cannot be Net position of an account can be ascertained
position ascertained from journal. from ledger account.

The rules for determining the balance is as follows:

Total of debit > Total of credit = Debit balance (By balance c/d and To balance
b/d)
Total of credit > Total of debit = Credit balance (To balance c/d and By balance
b/d)
Total of debit = Total of credit = Nil balance

Example

Pass journal entries for the following transactions and post them in the ledger accounts.
2017
June 1 Basu started business with cash ` 50,000
4 Purchased furniture by paying cash for ` 6,000
7 Purchased machinery on credit from Harish ` 10,000
10 Bought goods for cash ` 4,000
18 Paid insurance premium ` 100
Solution

Date Particulars L.F. Debit ` Credit `

2017 Cash A/c Dr. 50,000 50,000
June 1 To Basu’s capital A/c
(Started business with cash)
4 Furniture A/c Dr. 6,000 6,000
To Cash A/c
(Furniture bought for cash)
7 Machinery A/c Dr. 10,000 10,000
To Harish A/c
(Machinery bought on credit from Harish)
10 Purchases A/c Dr. 4,000 4,000
To Cash A/c
(Goods bought for cash)
18 Insurance premium A/c Dr. 100 100
To Cash A/c
 (Insurance premium paid)

Solution

Dr. Cash account A/c Cr.

Date Particulars J.F ` Date Particulars J.F. `
.
2017 To Basu’s capital A/c 50,000 2017 By Furniture A/c 6,000
June 1 June 4 By Purchases A/c 4,000
10 By Insurance premium 100
18 A/c

Basu Capital A/c

Date Particulars J.F. Amt` Date Particulars J.F. Amt

2017 By Cash A/c
June 1 50,000

Furniture A/c

Date Particulars J.F. Amt` Date Particulars J.F. Amt

2017 To Cash A/c 6,000

Machinery account

Date Particulars J.F. Amt` Date Particulars J.F. Amt

2017 To Harish A/c 10,000

Harish A/c

Date Particulars J.F. Amt` Date Particulars J.F. Amt

 2017 By Machinery A/c 10,000
June 7

Purchase A/c

Date Particulars J.F. Amt` Date Particulars J.F. Amt

2017 To CashA/c 4,000

Insurance Premium

Date Particulars J.F. Amt` Date Particulars J.F. Amt

2017 To Cash A/c 100

Balancing of ledger accounts

After posting the transactions, the business person is interested to know the position of various
accounts. For this purpose, the accounts are balanced at the end of the accounting period or
after a certain period to ascertain the net balance in each account. Balancing means that the debit
side and credit side amounts are totalled and the difference between the total of the two sides is
placed in the amount column as ‘Balance c/d’ on the side having lesser total, so that the total of
both debit and credit columns are equal. When the total of the debit side is more than the total
of credit side the difference is debit balance and is placed on the credit side as ‘By Balance c/d’.
If the credit side total is more than the total of debit side, the difference is credit balance and is
placed on the debit side as ‘To Balance c/d’.

9. Journalise the following transactions in the books of Vasu and post them to ledger accounts.
2017
Nov
1 Cash in hand ` 1,00,000; Cash at bank: ` 30,000
2 Vasu sold goods to Jothi for ` 25,000 against a cheque and deposited the same
in the bank
4 Received as commission ` 5,000
8 Bank paid ` 15,000 directly for insurance premium of Vasu.
15 Cash deposited into bank ` 30,000
20 Cash withdrawn from bank for personal use ` 45,000.
 Trail Balance

st
Thmizhanban started book selling business on 1 January, 2018. Following are the
transactions took place in his business for the month of January, 2018. Pass journal
entries and prepare ledger accounts.
2018
Jan. 1 Started business with cash ` 3,00,000
2 Opened bank account by depositing ` 2,00,000
5 Goods bought from Tamilnadu Textbook Corporation for cash ` 10,000
15 Sold goods to MM Traders for cash ` 5,000
22 Purchased goods from X and Co. for ` 15,000 and the payment is made through net
banking.
25 Sold goods to Y and Co. for ` 30,000 and the payment is received through NEFT

Solution
In the books of Thamizhanban
Journal entries
Date Particulars L.F. Debit` Credit`
2018 Cash A/c Dr. 3,00,000 3,00,000
Jan. 1 To Thamizhanban’s
capital A/c
(Started business with
cash)
2 Bank A/c Dr. 2,00,000 2,00,000
To Cash A/c
(Cash deposited with
the bank)
5 Purchases A/c Dr. 10,000 10,000
To Cash A/c
(Goods purchased for
cash)
15 Cash A/c Dr. 5,000 5,000
To Sales A/c
(Goods sold for cash)
22 Purchases A/c Dr. 15,000 15,000
To Bank A/c
(Goods purchased and
payment made through
net banking)
25 Bank A/c Dr. 30,000 30,000
To Sales A/c
(Goods sold and the
payment is received
through NEFT)
 Trial balance

Definition of trial balance

“A trial balance is a statement, prepared with the debit and credit balances of the
ledger accounts to test the arithmetical accuracy of the books”.

Trial balance is a statement containing the debit and credit balances of all ledger
accounts on a particular date. It is arranged in the form of debit and credit columns
placed side by side and prepared with the object of checking the arithmetical accuracy of
entries made in the books of accounts and to facilitate preparation of financial
statements.

Specimen of a trial balance

Trial balance of _______ as on ______
S.No. Particulars L.F. Debit ` Credit `
1 Cash in hand xxx
2 Cash at bank xxx
3 Bills receivable xxx
4 Sundry debtors xxx
5 Opening stock xxx
6 Plant and Machinery xxx
7 Land and Building (Premises) xxx
8 Furniture and Fixtures xxx
9 Vehicles xxx
10 Goodwill xxx
11 Investment xxx
12 Drawings xxx
13 Purchases xxx
14 Sales returns xxx
15 Carriage inwards xxx
16 Carriage outwards xxx
17 Rent paid xxx
18 Commission paid xxx
19 Interest paid xxx
 20 Bad debts xxx
21 Insurance premium xxx
22 General expenses xxx
23 Sundry expenses xxx
24 Electricity charges xxx
25 Selling expenses xxx
26 Travelling expenses xxx
27 Wages xxx
28 Sales xxx
29 Purchases returns xxx
30 Capital xxx
31 Bank loan xxx
32 Sundry creditors xxx
33 Bills payable xxx
34 Bank overdraft xxx
35 Rent received xxx
36 Interest received xxx
37 Provision for bad debts xxx
Total xxx xxx

Illustration 5
The following trial balance has certain errors. Redraft it.
Trial balance as on 31st March, 2017
Name of account Debit balance ` Credit balance `
Building 60,000 72,800
Machinery 17,000 5,600
Returns outward 2,600 1,04,000
Bad debts 2,000 60,000
Cash 400 2,600
Discount received 3,000
Bank overdraft 10,000
Creditors 50,000
Purchases 1,00,000
Capital
Fixtures
Sales
Debtors
Interest received
Total 2,45,000 2,45,000
Solution
Redrafted Trial balance as on 31st March, 2017
Name of account Debit balance ` Credit balance `
Building 60,000 2,600
Machinery 17,000 3,000
Returns outward 2,000 10,000
Bad debts 400 50,000
Cash 1,00,000 72,800
Discount received 5,600 1,04,000
Bank overdraft 60,000 2,600
Creditors
Purchases
Capital
Fixtures
Sales
Debtors
Interest received
Total 2,45,000 2,45,000

FINAL ACCOUNTS

Business entities raise funds, acquire assets and incur various expenses for the purpose of
carrying on business operations and earning income from such operations. These
transactions are first recorded in the journal and then classified under common heads in
the ledger. Preparation of trial balance from ledger balances helps to verify the
arithmetical accuracy of entries made in the books of accounts, but it is not the end in
itself. The business entities are interested in knowing periodically the results of business
operations carried on and the financial soundness of the business. In other words, they
want to know the profitability and the financial position of the business. These can be
ascertained by preparing the final accounts or financial statements. The final accounts are
usually prepared at the end of the accounting period on the basis of balances of ledger
accounts shown by the trial balance.
Differences between trial balance and balance sheet
The following are the differences between trial balance and balance sheet:
Basis Trial balance Balance sheet

1. Nature Trial balance is a list of Balance sheet is a statement showing the

ledger balances on a position of assets and liabilities on a
particular date. particular date.

2. Purpose Trial balance is prepared to Balance sheet is prepared to ascertain the

check the arithmetical financial position of a business.
accuracy of the accounting
entries made.

3. Contents It is a summary of balances It is a statement showing the closing

of all accounts – personal, balances of only personal and real
real and nominal accounts. accounts.

4. Format The trial balance contains The items are grouped as assets and
columns for debit balances liabilities.
and credit balances.

5. Stage It is prepared before the It is prepared after preparing trial balance

preparation of final and trading and profit and loss account.
accounts.

6. Period It can be prepared It is generally prepared at the end of the

periodically, say at the end accounting period.
of the month, quarterly, half
yearly, etc.

7. Order Balances shown in the trial Balances shown in the balance sheet
balance need not be in order. must be in order.

8. Compulsion Preparation of trial balance Preparation of the balance sheet is

is not compulsory. compulsory in certain cases.
Format of trading account
Dr. Trading account for the year ended . . . Cr.
Particulars ` ` Particulars ` `

To Opening stock xxx xxx By Sales xxx xxx

To Purchases xxx xxx Less: Sales returns xxx xxx
Less: Purchases returns xxx By Closing stock xxx
To Direct expenses: xxx By Gross loss c/d*
Carriage/Freight inwards xxx
Wages xxx
Dock charges xxx
Octroi xxx
Royalty xxx
Import duty xxx
To Cost of goods
manufactured
To Gross profit c/d*
xxx xxx
Format of profit and loss account

Dr. Profit and loss account for the year ended ……. Cr.
Particulars ` Particulars `
To Gross loss b/d xxx By Gross profit b/d xxx
To Office and administrative expenses: xxx By Indirect incomes: xxx
Salaries xxx Rent earned xxx
Rent, rates and taxes xxx Discount received xxx
Printing and stationery xxx Commission earned xxx
Postage xxx Interest on drawings xxx
Legal charges xxx Interest on investments xxx
Audit fees xxx Dividend on shares xxx
Establishment expenses xxx Bad debts recovered xxx
Trade expenses xxx Profit on sale of fixed assets xxx
General travelling expenses xxx Apprenticeship premium xxx
Lighting xxx Miscellaneous receipts xxx
Insurance premium By Net loss*
(transferred to capital account)
To Selling and distribution expenses: xxx
Carriage outwards xxx
Advertisement xxx
Commission xxx
Brokerage xxx
Bad debts or provision for bad debts xxx
Export duty xxx
Packing charges
To Other expenses and losses: xxx Xxx
Repairs xxx
Depreciation xxx
Interest charges xxx
Discount allowed xxx
Provision for discount on debtors xxx
Bank charges xxx
Interest on capital xxx
Donation and charity xxx
Loss on sale of fixed assets xxx
Abnormal loss due to fire, theft xxx
etc. not covered by insurance xxx
Miscellaneous expenses xxx
To Net profit*
(transferred to capital account)
Total XX XXX
X
Balance sheet of ... as on...
From the following balances of Niruban, prepare balance sheet as on 31st December,
2017.
Particulars Dr. ` Cr. `

Plant and machinery 8,00,000

Land and building 6,00,000
Furniture 1,50,000
Cash in hand 20,000

Bank overdraft 1,80,000

Debtors and Creditors 3,20,000 2,40,000
Bills receivable and Bills payable 1,00,000 60,000
Closing stock 4,00,000
Investments (short-term) 80,000
Capital 15,00,000
Drawings 1,30,000
Net Profit 6,20,000
26,00,000 26,00,000

In the books of Niruban

Balance sheet as on 31st December, 2017
Liabilities ` ` Assets ` `
Capital 15,00,000 Land and building 6,00,000
Add: Net profit 6,20,000 Plant and machinery 8,00,000
21,20,000 Furniture 1,50,000
Less: Drawings 1,30,000 19,90,000 Investments (short-term) 80,000
Creditors 2,40,000 Stock in trade 4,00,000
Bills payable 60,000 Debtors 3,20,000
Bank overdraft 1,80,000 Bills receivable 1,00,000
Cash in hand 20,000
24,70,000 24,70,000
From the following trial balance of Sharan, prepare trading and profit and loss account for the
year ending 31st December, 2017 and balance sheet as on that date. The closing stock on 31st
December, 2017 was valued at ` 2,50,000.

Debit Balances ` Credit Balances `

Stock (1-1-2017) 2,00,000 Sundry creditors 12,000

Purchases 7,50,000 Purchases returns 30,000
Carriage inwards 75,000 Sales 10,20,000
Wages 3,65,000 Commission received 53,000
Salaries 1,20,000 Capital 33,00,000
Repairs 12,000
Rent and taxes 2,80,000
Cash in hand 97,000
Land 21,50,000
Drawings 1,66,000
Bank deposits 2,00,000
44,15,000 44,15,000

In the books of Sharan Dr. Trading and profit and loss account for the year
ending 31st December, 2017 Cr.
Particulars ` ` Particulars ` `

To Opening stock 2,00,000 By Sales 10,20,000

To Purchases 7,50,000 By Stock (closing) 2,50,000
Less: Purchases returns 30,000 7,20,000 By Gross loss c/d 90,000
To Carriage inwards 75,000
To Wages 3,65,000
13,60,000 13,60,000

To Gross loss b/d 90,000 By Commission received 53,000

To Salaries 1,20,000 By Net loss 4,49,000
To Repairs 12,000 (transferred to capital
To Rent and taxes 2,80,000 account)

5,02,000 5,02,000
 Balance sheet as on 31st December, 2017
Liabilities ` ` Assets ` `

Capital 33,00,000 Land 21,50,000

Less: Net loss 4,49,000 Stock in trade 2,50,000
28,51,000 Bank deposits 2,00,000
Cash in hand
Less: Drawings 1,66,000 26,85,000 97,000
Sundry creditors 12,000
26,97,000 26,97,000

Prepare trading and profit and loss account and balance sheet in the books of Deri, a trader,
from the following balances as on March 31, 2018.
Debit Balances ` Credit Balances `

Stock 10,000 Sales 1,22,500

Cash 2,500 Creditors 5,000
Bank 5,000 Bills payable 2,000
Freight inwards 750 Capital 1,00,000
Purchases 95,000
Drawings 4,500
Wages 27,500
Machinery 50,000
Debtors 13,500
Postage (office) 150
Sundry expenses 850
Rent paid 2,500
Furniture 17,250
2,29,500 2,29,500
 CAPITAL AND REVENUE TRANSACTIONS

The main objective of accounting of business transactions is to ascertain the results of

operations and the financial position of the business concern. The transactions carried on
may yield benefit only for the current accounting period or they may yield benefit for
more than one accounting period. According to matching principle, the expenses
incurred in the current accounting period must be matched with the revenues earned
during that period.

Classification of expenditure

Capital expenditure
It is an expenditure incurred during an accounting period, the benefits of which will be available
for more than one accounting period. It includes any expenditure resulting in the acquisition of
any fixed asset or contributes to the revenue earning capacity of the business. It is non- recurring
in nature.
Examples
• Cost of acquisition of land and building.
• Cost of acquisition of office equipment, computer and air-conditioner.
• Cost of acquisition of plant and machinery including installation charges and trial run.
Revenue expenditure
The expenditure incurred for day to day running of the business or for maintaining the earning
capacity of the business is known as revenue expenditure. It is recurring in nature. It is incurred
to generate revenue for a particular accounting period. The revenue expenditure may be incurred
in relation with revenue or in relation with a particular accounting period. For example, cost of
purchases is a revenue expenditure related to sales revenue. Rent and salaries are related to a
particular accounting period.
Examples
• Purchase of goods for resale.
• Administrative, selling and distribution expenses.
• Manufacturing expenses.

Deferred revenue expenditure

An expenditure, which is revenue expenditure in nature, the benefit of which is to be
derived over a subsequent period or periods is known as deferred revenue expenditure.
The benefit usually accrues for a period of two or more years. It is for the time being,
deferred from being charged against income. It is charged against income over a period
of certain years.
Examples
• Considerable amount spent on advertising
• Major repairs to plant and machinery

Capital receipt
Receipt which is not revenue in nature is called capital receipt. It is non-recurring in nature. The
amount received is normally substantial. It is shown on the liabilities side of the balance sheet.
Examples
• Proceeds from issue of shares and debentures
• Long term loan raised from bank and other financial institutions
• Proceeds of sale of fixed assets
• Proceeds of sale of long-term investments
• Receipt of special donations

Revenue receipt
Receipts which are obtained in the normal course of business are called revenue
receipts. It is recurring in nature. The amount received is generally small.
Examples
• Proceeds from sale of goods
• Interest on investments received
• Rent received
• Dividend from investment in shares.
State whether the following are capital, revenue or deferred revenue expenditure.
(i) Carriage of ` 1,000 spent on machinery purchased and installed.
(ii) Office rent paid ` 2,000.
(iii) Wages of ` 5,000 paid to machine operators.
(iv) Hire charges for the use of motor vehicle, hired for five years, but paid yearly.
Solution
(i) Carriage of ` 1,000 spent on machinery purchased and installed is capital expenditure.
(ii) Office rent paid ` 2,000 is revenue expenditure.
(iii) Wages of ` 5,000 paid to machine operators is revenue expenditure.
(iv) Hire charges for the use of motor vehicle, hired for five