UNIT 2: BASICS OF

FINANCIAL
ACCOUNTING
SHILPA RAJAGOPAL
ASSISTANT PROFESSOR
CHRIST (DEEMED TO BE UNIVERSITY)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

► Generally Accepted Accounting Principles (GAAP) includes accounting conventions, rules, procedures and
accounting standards, accepted accounting practices both promulgated and non-promulgated.
► GAAP are those principles, which have substantial authoritative support.
► In order to maintain uniformity and consistency in accounting records, certain rules or principles have been
developed which are generally accepted by the accounting profession the ICAI. These rules are called by
different names such as principles, concepts, conventions, postulates, assumptions and modifying principles.
► The term ‘principles’ has been defined by AICPA as “A general law or rule adopted or professed as a guide
to action, a settled ground or basis of conduct or practice”.
► The word “generally” means in a general manner i.e., pertaining to many persons or cases or occasions. Thus,
GAAP refers to the rules or guidelines adopted for recording and reporting of business transactions in order
to bring uniformity in the preparation and the presentation of financial statements.
 Basic Accounting Concepts
► Accounting system is based on certain assumptions or concepts. These assumptions
constitute the foundation of accounting process. No concern can prepare financial
statements and accounts without considering these assumptions. Although there is no
authoritative list of assumptions, some major assumptions are as follows.
∙ Accounting entity Concept
∙ Money measurement Concept
∙ Going concern Concept
∙ Accounting period Concept
∙ Historical cost Concept
∙ Dual aspect Concept
∙ Revenue recognition/Realization Concept
 Basic Accounting Concepts
► (1) Accounting entity concept:
► “The concept or assumptions that business has a separate entity or existence
apart from the owners is an entity”
► This concept assumes that the entity of business is distinct from the its
owners.
► Moreover business is treated as a unit or entity separate from the persons who
control and associate with it.
► So accounts which are prepared and maintained for business entity are distinct
from all categories of persons associated with it.
 Basic Accounting Concepts
► (2) Money Measurement concept :
► “Under money measurement concept, only transactions expressed in terms of money are recorded in the books
of accounts.”
► Money is common denominator in terms of which all transactions can be expressed in a better manner. Hence
under the concept of monetary expression or money measurement concept only those transactions which can
be expressed in terms of money are recorded in the books of account.
► This facilitates in recording various kinds of economic activities on a uniform basis. For instance, plant,
furniture, land etc which are generally expressed in terms of quantity, area etc are recorded in terms of money
value.
► A transaction or an event which is not measurable in terms of money cannot be recorded in the books of
account. For instance dismissal of worker, strikes etc are very important events, but do not find their place in
the books of account. This concept suffers from the following limitations.
(1) It does not consider the changes in the value of money.
(2) Human resources cannot be recorded in the books of accounts, although it is greatest asset of a concern.
 Basic Accounting Concepts
► (3) Going concern concept:
► “The concept that the business will continue for a fairly long period is a going concern
concept”.
► Under this concept it is assumed that the business concern will continue to exist for a fairly
long period.
► There is no intention to shut down the particular business concern in the near future.
► However this concept does not imply a permanent existence of the business.
► But this indicates stability and continuity of a business for a long period to carry out its
plan.
 Basic Accounting Concepts
► (4) Accounting period concept:
► “The period of interval for which accounts are prepared and presented for ascertaining the
result of business is an accounting concept.”
► The going concern concept implies that the business has a long period of life.
► But however the owners and others who are interested in the business cannot wait for such
an indefinite period to know its results.
► Moreover such belated computation of financial position of a business will not serve its
very purpose.
► Hence the accountants specify an accounting period (say 12 months, 6months, 3months,etc
) for preparing financial statements.
 Basic Accounting Concepts
► (5) Historical/ Cost concept:
► “Accounting based on the actual cost of a transaction is the principle of
historical cost.”
► Under this principle all the transactions should be recorded at their requisition
cost.
► The cost of acquisition is the cost of purchasing the assets and includes
expenses incurred in bringing them to the intended condition and location of
use.
► However this concept does not mean that the assets are always shown at cost
but will be reduced by decrease in value known as depreciation.
 Basic Accounting Concepts
► (6) Dual aspect:
► “The concept of double aspects in every transaction is a duality concept.”
► According to this concept every transaction has two aspects.
► In case there is a debit then there is corresponding credit of the amount.
► Accounting equation is developed on the strength of dual aspect concept.
► For instance when there is an increase in one asset there is a corresponding decrease in
other assets or increase in liabilities.
► Thus assets and liabilities are equal at all the times
i.e. [Asset = Capital +liabilities]
► The system of recording transactions with its dual concept is known as double entry system.
 Basic Accounting Concepts
► (7) Revenue recognition
► Unless money has been realized (either cash has been realized or a
legal obligation to pay has been assumed by the customer) no sale
can be said to have taken place and no profit or income can be said
to have arisen.
 Basic Accounting Concepts
► (8) Accrual Concept
► Normally all transactions are settled in cash , but even if cash settlement has
not taken place, it is proper to bring the transactions or the event concerned
into the business books during the particular accounting period as it relates to
that period.
► For eg: Rent accrued from the last month. Rent for the last month of the
accounting period may be paid only in the next accounting period, but still as
the event is related to the current period it will be considered as accrued and
debited in the current period itself.
 Basic Accounting Concepts

The International Accounting Standards

Committee (IASC) of which the Institute
of Chartered Accountants of India (ICAI)
is an associate member, treats Going
concern, Consistency and Accrual as the
fundamental accounting assumptions.
 Accounting Conventions

► Conventions are the customs or practices, which were

following for a long period.
► They are the practices or traditions, which guide the
accountant while preparing the accounting statements.
► In order to make the message contained in the financial
statements (Profit and Loss Account & Balance Sheet) clear
and meaningful the following conventions are used
 Accounting Conventions

(1) Conservatism
► Financial Statements are usually drawn up on the assumption that “anticipate
no profit but provide for all possible losses”
► i.e., showing a position better than what it is, is not permitted (which is called
as Window-dressing).
► It is also not permitted to show a position substantially worse than what it is.
► In other words, secret reserves are not permitted. It is based on this convention
that the inventory is valued at “cost or market price whichever is less”
 Accounting Conventions

► (2)Consistency
► The accounting practices should remain the same from one year to
another.
► For instance, it would not be proper to value stock-in-trade
according to one method one year and another method next year.
► If a change is required, the change& its effect should be stated
clearly.
 Accounting Conventions

(3)Materiality/Disclosure
► This convention suggests that the accountant should attach importance to
material details and ignore insignificant details.
► The accountant should regard an item as ‘material’ if there is reason to believe
that knowledge of it would influence the decision of the informed investor.
► For e.g., while sending each debtor a statement of his account, complete
details up to paise have to be given.
► Good accounting practices demands that all significant matters or information
should be disclosed.
 The Process of Accounting

► Accounting is the art of recording, classifying, and summerising the financial

transactions and interpreting the results therefore. Thus accounting cycle involves
the following stages:
1. Recording of Transactions. This is done in the book termed as ‘Journal’.
2. Classifying the Transactions. This is done in the book termed as ‘Ledger’.
3. Summerising the Transactions. This includes preparation of the trial balance,
profit and loss account and balance sheet of the business.
4. Interpreting the Result. This involves computation of various accounting ratios,
etc., to know about the liquidity, solvency and profitability of business.
 Types of Expenditure
► Expenditure incurred in connection with the purchase, receipt of a fixed asset, e.g, the carriage and
cartage charges paid to bring the machinery to the factory; repairs to the second hand machinery
purchased; installation charges, etc. are added to the respective cost of the asset.
► Similarly, the cost of financing a fixed asset (i.e., interest paid on loans to purchase a fixed asset) is
added to its cost only for the period upto the time the asset is put to use.
► In short, cost incurred for or associated with assets that benefit several accounting periods, is called
capital expenditure.
 Types of Expenditure
❖ Capital Expenditure
► It means an expenditure which is incurred for the purpose of long term
advantages.
► It is the money which is spent on the purchase of permanent fixed assets for
use in the business and not for immediate resale.
► It is the money spent on the permanent improvement or addition or substitution
or extension of an asset to increase the earning capacity of the business
enterprise.
► There are 3 types of expenditure :
► (i) Tangible Assets such as plant and machinery, furniture, fixtures, etc.
► (ii) Intangible assets like goodwill, patents, trade marks, copyrights, etc.
► (iii) Investment in shares and debentures of other company for a long duration.
 Types of Expenditure
❖ Revenue Expenditure
► An expenditure that arises out of and in the course of operations of business enterprise is termed as
revenue expenditure.
► Costs incurred for items which provide economic benefits only during the current accounting period,
are called revenue expenditure. It may be termed as an expense’.
► The following are the examples of revenue expenditures
o (i) Expenses incurred in normal course of running the business, e.g., administration expenses,
selling expenses, manufacturing cost, printing and stationery charges, depreciation charges,
interest on loans, etc.
o (ii) Expenditure incurred to maintain the business, e.g., money spent on repairs, cost of stores
consumed, etc.
o (iii) Cost of goods purchased for resale.
 Types of Expenditure
► Deferred Revenue Expenditure
► It is the class of revenue expenditure which is incurred during a particular period, but is applicable in
whole or in part to future periods.
► It is that amount of revenue expenditure, which is incurred during an accounting period, involves
large amount and is likely to give benefit for a number of years.
► The portion which is unexpired is treated as temporary capital expenditure.
► For example, a business incurring a huge amount of advertisement expenditure which is likely to
give benefit over a number of years.
► Similarly, the expenditure of Rs. 30,000 on dismantling, removing and reinstalling the plant to shift it
to a more suitable locality is deferred revenue expenditure.
 Depreciation
► The term depreciation refers to an accounting method used to allocate the cost of a tangible or
physical asset over its useful life or life expectancy.
► Depreciation represents how much of an asset's value has been used.
► CHARACTERISTICS OF DEPRECIATION
► Depreciation refers to a permanent and gradual decrease in the value of a fixed asset. The
depreciation is calculated only in respect of fixed assets. It does not mean the decrease in the value
of current assets.
► Depreciation is a continuous process. It continues till the end of useful life of the asset
► Depreciation is charged against the revenue of the period. The true income of a business cannot be
ascertained without charging depreciation

.
 Depreciation
► Depreciation is a process of allocation of expired cost of an asset. It is not the basis for measuring
the decrease in the market value of an asset.
► Depreciation is bound to happen. All fixed assets with certain exceptions like land, antiques
etc., lose value although the process may be gradual.
► The term depreciation is used only in respect of tangible fixed assets. It is not used in case of
wasting and fictitious assets such as depletion of natural resources and amortisation of goodwill.
► The depreciation does not include maintenance cost of the asset. It is the process of allocation of
the cost of an asset over its useful life. Repairs and maintenance charges are separately charged
against the profits of the business
 Causes of Depreciation
► Physical wear and tear : Tangible fixed assets (like building, machinery) are worn or torn out on
account of constant use of an asset, strain, weathering out, lack of adequate maintenance,
improper handling, etc. All fixed asset are bound to loose value on account of wear and tear.
► Effluxion of time: There are certain assets which decrease in the value with the passage of time. It
is especially true in case of certain intangible assets like leasehold properties, copyrights, patents,
etc. The term amortization is used in respect of fall in the value of such assets.
► Obsolescence: Certain fixed assets lose value on account of obsolescence which is caused by new
inventions, technological improvements, loss of demand due to change in fashion, tastes or habits
of consumers. It reduces the existing economic life of an asset.
► Depletion : Depletion is the decrease in the value of wasting assets such as mines, querries, oil
wells, etc. Such assets get exhausted on account of continuous extraction.
► Accidents: The asset losses its values if it meets with an accident. An accident means breakdown of
an asset which decreases the value of an asset.
 Meaning of Depreciation Accounting
► Depreciation Accounting is the systematic distribution of cost over the estimated useful life of an
asset
► American Institute of Certified Public Accountants (AICPA) defines Depreciation Accounting as, "a
system of accounting which aims to distribute the cost of other basic values of the tangible capital
assets less salvage (if any) over the estimated useful life of the asset (which may be group of
assets) in a systematic and rational manner. It is the process of allocation and not of valuation”.
► It is not concerned with the measurement of market value of an asset.
► It is a system of accounting which distributes the cost of an asset over the useful life of an asset.
► It is just the process of allocation of cost of an asset and charged against the profits of the
enterprise. It is not a provision of funds or cash for replacement of an asset at the end of its useful
life.
 Need for Depreciation Accounting
► To ascertain the profits
► To ascertain the correct financial position:
► To provide funds for replacement of assets
► To keep proper account of cost of production
► Incidental Benefits
 Methods of Providing Depreciation
► Uniform Charge Method
SLM Method or Fixed Instalment Method
► Declining Charge Depreciation Method
Diminishing Balance Method or Diminishing Returns Method
 UNIFORM CHARGE METHODS

► Depreciation is charged uniformly every year for those assets which are productive on a uniform
basis.
(i) Fixed Instalment Method or Straight Line Method
► According to this method, a fixed proportion of the original cost of the asset is written off each year
so that value of the asset is reduced to its residual value at the end of its estimated economic useful
life.
► The same amount of depreciation is charged every year throughout the life of the asset.
► Depreciation is charged on a uniform basis every year till the asset is written off.
Amount of Depreciation = Original Cost of the Fixed Asset - Estimated Scrap Value
Life of the Asset in Number of Years

Percentage of Depreciation = Depreciation ×100

Original Cost of Asset
 UNIFORM CHARGE METHODS

► For example, a machine is acquired at a cost of Rs. 1,00,000. Its estimated useful life is 5 years.
Installation expenses amounted to Rs. 10,000. Its scrap will realise Rs. 10,000. Its amount of
depreciation will be calculated as under :

Depreciation = (1,00,000+10,000) - 10,000 = Rs. 20,000 over 5 years.

The rate of depreciation is the reciprocal of the estimated useful life. This may be presented as.

Rate of Depreciation = 20,000 × 100 = 18%.

1,10,000
 UNIFORM CHARGE METHODS
Advantages
► It is simple and easy method.
► The value of the asset can be written off, i.e., the value can be reduced
► This method is suitable where assets get depreciated with the passage of time, e.g., patents
leasehold, etc.
► It is useful for assets with relatively uniform periodic usage.
Disadvantages
► This method tend to report an increasing rate on investment since the asset is taken.
► It does not take into account the effective utilization of the asset. The same amount of depreciation
is charged irrespective of rate of use of the asset.
► Even though the asset is used uniformly from period to period, the total charge for the use of the
asset keeps on increasing every year. It is because cost of repairs rises when the asset gets older,
though same amount of depreciation is charged every year.
 DECLINING CHARGES DEPRECIATION METHOD

► In case of these methods, the amount charged for depreciation decreases for each subsequent
year of the life of the asset. This method is suitable where
❑ The receipts from the asset declines as the asset gets older;
❑ It is believed that the depreciation should be charged according to the expected earnings from the
use of the asset. The following methods fall in this category
Diminishing Balance Method or Diminishing Returns Method
 DECLINING CHARGES DEPRECIATION METHOD

► Diminishing Balance Method/ Reducing Balance Method

► The depreciation is charged at a fixed rate on the reducing balance (i.e., cost less depreciation)
every year. This method is also known as 'Reducing Balance Method’.
► Under this method, the depreciation is of depreciation charged in each period. It is not fixed but
goes on decreasing gradually every year.
► Thus, the amount of depreciation is higher in earlier periods and lower in subsequent periods when
repairs and maintainence cost of the asset increases.
► Rate of Depreciation = 1 – n Net Residual Value

Cost of Acquisition

where, n = economic life of the asset (in years).

 DECLINING CHARGES DEPRECIATION METHOD

► For example, if the cost of the asset is Rs. 10,000, residual value is Rs. 1,000 and the economic life
of the asset is 3 years, what is rate of depreciation?
Depreciation Rate = 1-3 1,000
10,000

= 53.6%.
 DECLINING CHARGES DEPRECIATION METHOD

► Let us assume that a company buys an asset at a cost of Rs. 10,000. It decides to depreciate the
asset at the cost of 20% per annum based on the WDV (Written Down Value) method.

Year WDV at the end of the year Annual Depreciation Accumulated Depreciation
0 10,000 - -
1 8000 2000 2000
2 6400 1600 3600
3 5120 1280 4880
4 4096 1024 5904
5 3276 820 6724
6 2620 656 7380
7 2096 524 7904
8 1676 420 8324
9 1340 336 8660
10 1072 268 8928
 DECLINING CHARGES DEPRECIATION METHOD

Advantages
► It equalises the burden on profit and loss account in respect of repairs and depreciation put
together. It is because as the asset gets older, the amount of depreciation goes on decreasing while
the expenses of repairs go on increasing so that the total charge to profit and loss account over the
years remains almost equal.
► This method reduces the impact of tax on profit during the earlier years of the life of the asset by
charging higher amount of depreciation. As it is believed that money saved today is better than
money saved tomorrow’.
► This method is recognized by income tax authorities.
Disadvantages
► It is difficult to determine the appropriate rate of depreciation.
► The value of the asset can not be reduced to zero and some balance will always be left at the end
of useful life of an asset.
 Straight Line Method v/s Declining Balance Method

Straight Line Method Declining Balance Method

• Amount of • It remains the same throughout the life of • It goes on decreasing every year. The
Depreciation the asset. amount of depreciation is more during
earlier years as compared to the latter years.

• The book value of the asset cannot be

• Book Value • The book value of the asset can be reduced reduced to zero.
to zero.
• The total charge to profit and loss account
• The total charge to • The total charge to profit and loss account remains constant year after year, since in
profit and loss account to profit and loss account is more in later earlier years, amount of depreciation is gets
years because the amount of repairs goes on older, while the amount of depreciation more
increasing as the asset remains constant. and the amount of repairs is less and in later
years, the amount of depreciation is less and
the amount of repairs is more.

• It is easy to calculate the rate of • It is difficult to calculate the rate of

• Calculation Difficulty depreciation depreciation
 Classifications of Account
► Classification of Accounts According to Traditional Approach
1. Personal Accounts
► Accounts related to individuals, banks, financial institutions, firm, companies, cooperative societies are
known as personal accounts. The personal accounts are related to natural persons, artificial persons and
representative persons. It may be classified into the following three categories:
❑ (a) Natural Personal Accounts : It represents human beings. Accounts of individuals (natural persons) such
as Ram’s A/c, Sunil's A/c are natural personal accounts.
❑ (b) Artificial Personal Accounts: This type of account represents legal entities that are not considered human
beings by law. Accounts of firms, companies, banks, cooperative societies financial institutions are artificial
personal accounts such as Ram and Co's A/c, Reliance Industries Ltd., Friends Club, etc.
❑ (c) Representative Personal Accounts: This account represents accounts of both natural and artificial
entities. The transactions in this account either belong to the previous year or the coming year. The
accounts related to outstanding expenses, prepaid expenses, income received in advance (unearned
income), accrued income are representative personal accounts. For example Rent outstanding, Insurance
prepaid,Commission received in advance, etc
 Rules of Debit and Credit

1. Personal Account
► Includes the accounts of persons with whom the business deals.
► Examples: - Debtors, Creditors, proprietor etc.
Rule:

Debit the receiver

Credit the giver
 Rules of Debit and Credit

2. Real Account
► Includes the accounts which relate to such things which can be touched,
felt, measured etc. examples of such accounts are cash account, buildings
account, furniture account, stock account etc.
► Rule:

Debit what Comes In

Credit what Goes Out
 Rules of Debit and Credit

3. Nominal Account
► These accounts are opened in the books to simply explain the
nature of the transactions. They do not really exist. For example,
salary, rent, commission etc.
► Rule:

Debit All Expenses and Losses

Credit All Gains and Incomes
 Classifications of Account
► Classification of Accounts According to Accounting Equation
1. Assets Accounts
It relates to tangible or intangible assets.
For examples, plant account, machinery account, goodwill account, etc.

2. Liabilities Accounts
These accounts represent the financial obligations of the enterprise towards outsiders.
For example, trade creditors, bills payable, long-term loans, bank overdraft, etc.

3. Capital Accounts
These accounts relates to owners of an enterprise.
For example: Capital A/c, Drawings A/c. Capital is the amount due by the enterprise to the
owners. Drawings relates to amount withdrawn by the owners out of business resources for
personal use.
 Classifications of Account

4. Revenue Accounts

These accounts relate to amount earned by the enterprise by rendering goods and services.
For example: sales account, discount received account, interest earned account, etc.

5. Expense Accounts

These accounts relate to the amount lost or incurred in the process of earning revenue.
For Purchases account, Discount allowed account, Loss by theft account, etc.
 Rules of Debit and Credit
► 1. Assets Accounts Debit the Increase, Credit the Decrease

2. Liabilities Accounts Debit the Decrease, Credit the Increase

3. Capital Accounts Debit the Decrease, Credit the Increase

4. Revenue Accounts Debit the Decrease, Credit the Increase

5. Expense Accounts Debit the Increase, Credit the Decrease

 JOURNAL MEANING

► A Journal is a book in which transactions are recorded in chronological order.

► A Journal is a book of prime entry (original entry) because all the transactions are first recorded in
this book.
► The word journal comes from the French word 'Jour' meaning 'day’.
► It is written up from the various source documents.
► The entry passed in the journal is called 'Journal Entry’.
► The process of writing up the book of Journal is called 'Journalizing'.
 FORMAT OF JOURNAL

Date Particulars L.F Debit Amount Credit Amount

(Rs.) (Rs.)
 FORMAT OF JOURNAL
► Date Column
In the date column, date is written on which transaction took place.
It should be kept in mind that journal records transactions in the order in which they occur, i.e., chronological
order, therefore, transactions must be recorded date wise.
The year and month is written once, till they change.
► Particulars Column

In this column, the names of the accounts to be debited and then the names of the accounts to be credited is
written 'Narration' is also written which appear as parenthesis (in bracket).
It is a brief explanation of the transaction to be entered. It is written at the end of each journal entry.
 FORMAT OF JOURNAL
► L.F. (Ledger Folio Column)

Under this column, the page number of the ledger will be entered on which the relevant account appears.
► Debit Amount Column

Under this column, the amount to be debited is written.

► Credit Amount Column

Under this column, the amount to be credited is written.

 PROBLEM
From the following transactions, identify the aspects and mention the accounting aspects.
1) Rahul commenced business with a capital of Rs. 500000
2) Deposited Rs.100000 into Canara Bank
3) Purchased goods worth Rs.25500 for cash
4) Goods bought from Mohan Rs. 45200
5) Sold goods for cash Rs.12000
6) Sold goods to Ram Kumar Rs.15500
7) Paid electrical charges Rs.5400
8) Purchased furniture for office use Rs.2500
9) Amount withdrawn from bank Rs.40000
10) Paid to Mohan Rs.15000
11) Received cash from Ram Kumar Rs.5500
 SOLUTION
Sl.no. Transactions Accounts identified Types of Account Effect: Debit/ Credit

1) Rahul commenced business Cash A/c Real A/c Debit- receiving benefit
with a capital of Rs. 500000 Capital A/c Real A/c Credit- giving benefit
2) Deposited Rs.100000 into Canara Bank A/c Real A/c Debit- receiving benefit
Canara Bank Cash A/c Real A/c Credit- giving benefit
3) Purchased goods worth Purchase A/c Nominal A/c Debit- receiving benefit
Rs.25500 for cash Cash A/c Real A/c Credit- giving benefit
4) Goods bought from Mohan Rs. Purchase A/c Nominal A/c Debit- receiving benefit
45200 Mohan A/c Personal A/c Credit- giving benefit
5) Sold goods for cash Rs.12000 Cash A/c Real A/c Debit- receiving benefit
Sales A/c Nominal A/c Credit- giving benefit
6) Sold goods to Ram Kumar Ram Kumar A/c Personal A/c Debit- receiving benefit
Rs.15500 Sales A/c Nominal A/c Credit- giving benefit
7) Paid electrical charges Rs.5400 Electrical charges A/c Nominal A/c Debit- receiving benefit
Cash A/c Real A/c Credit- giving benefit
 SOLUTION (Contd..)

Sl.no. Transactions Accounts identified Types of Effect: Debit/ Credit

Account

8) Purchased furniture for office use Purchase A/c Real A/c Debit- receiving benefit
Rs.2500 Cash A/c Real A/c Credit- giving benefit

9) Amount withdrawn from bank Cash A/c Real A/c Debit- receiving benefit
Rs.40000 Bank A/c Personal A/c Credit- giving benefit

10) Paid to Mohan Rs.15000 Mohan A/c Personal A/c Debit- receiving benefit
Cash A/c Real A/c Credit- giving benefit

11) Received cash from Ram Kumar Cash A/c Real A/c Debit- receiving benefit
Rs.5500 Ram Kumar A/c Personal A/c Credit- giving benefit
 PROBLEM 2
The following are the transactions of Mr. Kumar during the month of July 2011
1 Capital introduced by Mr. Kumar Rs.10000
2 Furniture purchased for cash Rs. 500
7 Purchased goods for cash Rs. 3000
11 Sold goods to Raman for cash Rs. 1500
15 Paid electricity charges Rs.150
 SOLUTION
Journal Entries in the books of Mr. Kumar
Date Particulars L.F Debit Credit
01/07/2011 Cash A/c Dr 10000
To Kumar’s Capital A/c 10000
(Being capital introduced by Kumar)

02/07/2011 Furniture A/c Dr 500 500

To Cash A/c
(Being furniture purchased for cash)

07/07/2011 Purchases A/c Dr 3000 3000

To Cash A/c
(Being cash purchased made)

11/07/2011 Cash A/c Dr 1500 1500

To sales A/c
(Being cash sales made)

15/07/2011 Electricity charges A/c Dr 150 150

To cash A/c
(Being electricity charges paid)
 PROBLEM 3
Mr. Kiran gives the following information. You are required to journalise them in his books.

March Rs.

1 Commenced business with cash 2,60,000

3 Opened an account with a bank and deposited 25000
8 Purchased goods for cash 50000
10 Purchased furniture for cash 1500
13 Sold goods for cash 12000
15 Sold goods to Kumar 8000
 SOLUTION 3
In the books of Mr. Kiran
Date Particulars L.F Debit Credit
01/03/2000 Cash A/c Dr 26000
To Kiranr’s Capital A/c 26000
(Being capital introduced by Kiran)
03/03/2000 Bank A/c Dr 25000
To Cash A/c 25000
(Being cash deposited into bank)
08/03/2000 Purchases A/c Dr 50000
To Cash A/c 50000
(Being purchases made)
10/03/2000 Furniture A/c Dr 1500
To Cash A/c 1500
(Being furniture purchased for cash)
13/03/2000 Cash A/c Dr 12000
To Sales A/c 12000
(Being goods sold for cash)
15/03/2000 Kumar A/c Dr 8000
To Sales A/c 8000
(Being goods sold to Kumar on credit)
 PROBLEM 4
Mr. Narayanan, running a business, gives the following transactions during the month of February 2011
10 Cash invested into business Rs.145000
18 Sold goods to Ganesh Rs. 14000
20 Purchased goods from Daniel Rs 33000
23 Ganesh settled his account Rs 13500
26 Paid to Daniel Rs 32000 and settled the account
Journalise the above transactions
 In the books of Mr. Narayanan
Date Particulars L.F Debit Credit
10/02/2011 Cash A/c Dr 145000
To Narayanan’s Capital A/c 145000
(Being capital introduced by Narayanan)

18/02/2011 Ganesh A/c Dr 14000

To Sales A/c 14000
(Being goods sold to Ganesh on credit)

20/02/2011 Purchases A/c Dr 33000

To Daniel A/c 33000
(Being goods purchased on credit from Daniel)

23/02/2011 Cash A/c Dr 13500

Discount Allowed Dr 500 14000
To Ganesh A/c
(Being cash received from Ganesh and allowed discount)

26/02/2011 Daniel A/c Dr 33000

To cash A/c 32000
To Discount Received 1000
(Being cash paid to Daniel in full settlement)
 PROBLEMS 5
2008 March 1 Commenced business by depositing Rs.20000 in a bank account in the name of
the company in exchange of 2000 shares of Rs. 10 each in the company
4 Paid two months rent in advance for a shop Rs.4000
5 Purchased equipment for cash Rs.2500
7 Purchased goods on credit Rs.2500
10 Consultancy fees received in cash Rs.10000
14 Paid cash for an advertisement Rs.2000
17 Received Rs. 10,200 for marketing project (consultancy)
25 Billed customers for work done on credit Rs. 20,000
26 Paid salaries Rs. 2000
28 Paid electricity charges Rs. 150
29 Received partial payment from customers billed on March 25, Rs. 10000
30 Declared and paid a dividend, Rs. 1500
 PROBLEM- 6
► From the following transactions of Juneja, final out the nature of accounts and also state which account
should be debited and to be credited.
(i) Started business with cash
(ii) Purchased Machinery
(iii) Purchased goods on credit from ‘Shyam’
► (iv) Sold goods for cash
(v) Purchased goods for cash
(vi) Deposited into bank
(vii) Purchased goods from Sudhir
(viii) Withdrew cash for personal use
(ix) Sold goods to Ram
 PROBLEM-6 (Contd)
(x) Paid Rent
(xi) Received commission
(xii) Sold goods to Surekha
(xiii) Received cash from Ram
(xiv) Borrowed money from XYZ
(xv) Paid interest on loan
(xvi) Outstanding salary
(xvii) Amount paid to Sudir
(xviii) Received cash from Surekha
(xix) Goods withdrawn for personal use
(xx) Interest allowed by bank
 FORMAT OF LEDGER

Dr
Cr
Date Particulars J.F Amount Date Particulars J.F Amount
 PROBLEM 7
Journalise the following transactions and post them into ledger accounts and prepare the Trial balance as on
31.01.2008 in the books of Karthik
Date Particulars Amount
01.01.2008 Karthik commenced business with a capital 100000
05.01.2008 Goods sold for cash 80000
07.01.2008 Commission received 14000
10.01.2008 Interest received 6000
12.01.2008 Purchased goods for cash 70000
15.01.2008 Rent paid 30000
20.01.2008 Salaries paid 40000
22.01.2008 Karthik withdrew cash for personal use 30000
25.01.2008 Purchased furniture for cash 20000
27.01.2008 Printing and stationary expenses paid 10000
 Journal entries in the books of Mr. Karthik
Date Particulars L.F Debit Credit
01.01.2008 Cash A/c Dr 100000
To Karthik’s Capital A/c 100000
(Being capital introduced by Karthik)
05.01.2008 Cash A/c Dr 80000
To Sales A/c 80000
(Being goods sold for cash)
07.01.2008 Cash A/c Dr 14000
To Commission A/c 14000
(Being commission received in cash)
10.01.2008 Cash A/c Dr 6000
To Interest received A/c 6000
(Being interest received in cash)
12.01.2008 Purchases A/c Dr 70000
To Cash A/c 70000
(Being purchases made)
15.01.2008 Rent A/c Dr 30000
To Cash A/c 30000
(Being rent paid in cash)
 PROBLEM 7

Salaries A/c Dr 40000

To Cash A/c 40000
(Being salaries paid in cash)
Drawings A/c Dr 30000
To cash A/c 30000
(Being cash withdrawn for personal use)
Furniture A/c Dr 20000
To Cash A/c 20000
(Being furniture purchased for cash)
Printing and Stationary A/c Dr 10000
To Cash A/c 10000
(Being Printing and Stationary expenses paid)
 SOLUTION 7 (LEDGER)
Karthik’s Capital Account
Date Particulars J.F Amount Date Particulars J.F Amount
31.01.2008 To balance carrydown 100000 01.01.2008 By cash 100000

TOTAL 100000 TOTAL 100000

By balance brought
down 100000
Sales Account

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

31.01.2008 To balance carrydown 80000 05.01.2008 By cash 80000

TOTAL 80000 TOTAL 80000

By balance brought
down 100000
 SOLUTION 7 (LEDGER)
Commission Account

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

31.01.2008 To balance carrydown 14000 05.01.2008 By cash 14000

TOTAL 14000 TOTAL 14000

By balance brought
down 14000

Interest Account

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

31.01.2008 To balance carrydown 6000 05.01.2008 By cash 6000

TOTAL 6000 TOTAL 6000

By balance brought
down 6000
 SOLUTION 7 (LEDGER)
► Cash Account

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

1.01.2008 To Karthik’s Capital 100000 12.01.2008 By purchase 70000
5.01.2008 To Sales 80000 15.01.2008 By rent 30000
7.01.2008 To commission 20.01.2008 By salaries 40000
received 14000 22.01.2008 By drawings 30000
10.01.2008 To interest received 6000 25.01.2008 By furniture 20000
27.01.2008 By printing and
stationary 10000

TOTAL 200000 TOTAL 200000

 SOLUTION 7 (TRIAL BALANCE)
► Trial Balance of Mr Karthik as on 31.1.2008
Particulars Debit Credit
Capital 1,00,000
Sales 80,000
Commission received 14,000
Interest received 6,000
Purchases 70,000
Rent 30,000
Salaries 40,000
Drawings 30,000
Furniture 20,000
Printing & Stationary 10,000
Total 2,00,000 2,00,000
 PROBLEM 8
► Journalise the following transactions and prepare the ledger accounts and also prepare a Trial Balance in the
books of Mr.X

Date Particulars Amount

01.01.09 X’s commencement of business with cash 1,20,000
04.01 Sold goods Ram for Cash 40,000
08.01 Purchased goods for cash 30,000
10.01 Rent paid 20,000
12.01 Furniture purchased for cash 40,000
14.01 Commission received 10,000
18.01 Salaries paid 30,000
24.01 Telephone charges paid 10,000
25.01 Travelling expenses paid 10,000
 SOLUTION 8
► Trial Balance of Mr. X as on 31.1.2009
Particulars Debit Credit
Capital 1,20,000
Sales 40,000
Purchases 30,000
Rent 20,000
Furniture 40,000
Commission received 10,000
Salaries 30,000
Telephone charges 10,000
Travelling Expenses 10,000
Cash 30,000
Total 1,70,000 1,70,000
 PROBLEM 9
► Mr Ram furnishes the following particulars. Pass journal entries and prepare the necessary ledger accounts
and also prepare a trial balance as on 31st January 2005
Date Particulars Amount
01.01.2005 Ram started the business with cash 80000
04.01 Loan borrowed from Ramesh 20000
05.01 Sold goods to Ramya for cash 50000
07.01 Purchase goods for cash 40000
08.01 Rent paid 20000
10.01 Salaries paid 30000
15.01 Loan repaid to Ramesh 20000
20.01 Machinery purchased for cash 20000
25.01 Adv expenses paid 10000
27.01 Postage expenses paid 10000
 SOLUTION 9
► Trial Balance of Mr. Ram as on 31.1.2005
Particulars Debit Credit
Capital 80,000
Sales 50,000
Purchases 40,000
Rent 20,000
Salaries 30,000
Machinery 20,000
Advertising Expenses 10,000
Postage expenses 10,000
Total 1,30,000 1,30,000