Accountancy 11th Standarad

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The Coordination Committee formed by GR No. Abhyas - 2116/(Pra.Kra.43/16) SD - 4

Dated 25.4.2016 has given approval to prescribe this textbook in its meeting held on
20.06.2019 and it has been decided to implement it from the educational year 2019-20.
Book - Keeping
and
Accountancy
STANDARD ELEVEN
Maharashtra State Bureau of Textbook Production

and Curriculum Research, Pune - 411 004
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PREFACE
It’s great pleasure to introduce the Text Book of Book keeping
& Accountancy as per revised syllabus for Std XI from the academic
year 2019-20.
A student in the commerce stream studies various subjects, which covers
business, management, finance, economics, costing, accounting etc. Book,
keeping & Accountancy is one of the most important subjects in commerce,
which deals exclusively with the accounting part of different business
organizations.
As students are learning this subject first time in their academic career,
due care has been taken to put the subject matter in a simple manner. As far
as possible the content is designed in such a way that students will be able to
understand the basic principles of Book-keeping & Accountancy. The contents
are supported with charts, diagrams, tables etc. The exercise given at the end
of each topic contains different types of questions to test conceptual clarity and
accuracy. Students are given ample opportunity to solve practical problems
which are based on application. Q.R. code is given on title which will help to
get more knowledge and clarity about the contents.
This book introduces the basic concepts of topic like meaning and
objectives of Book Keeping, accounting terms, concepts and conventions,
classification of accounts, rules of accounts, various source documents,
Journal, Ledger upto preparation of Final Accounts. We have also introduced
some new concepts and trends followed in actual practice in this book e.g.
GST, NEFT, RTGS, Debit card, Credit card e.wallet etc. We have also included
so many activities for the students to gain practical knowledge.
We are greatful to the subject committee members, study group members,
translators, reviewers, quality reviewers and all those who have taken efforts
in designing this textbook.
We hope the textbook will be well received by academicians and students.
Pune (Dr. Sunil Magar)

Date : 20 June 2019, Director
Indian Solar Year : 30 Jyeshtha 1941
Maharashtra State Bureau of Textbook
Production and Curriculum Research, Pune.

Book-keeping and Accountancy

Competency Statements
Standard XI
Unit
Topic Competency Statements
No.
1
• Students understand the meaning, features and the importance
Introduction to of accounting.
• Students understand basic accounting concepts &
Book- Keeping and Terminologies
Accountancy
• Students can Analyse the role and benefits of book- keeping.
• Students will be able to know the latest accounting standards.
• Students understand fundamental principles of Double Entry

Meaning and System.
2 Fundamental of • Students understand classification and types of Accounts.
Double Entry • Students are able to apply the golden rules to prepare
Book-Keeping classification tables.
• Students can prepare a statement of analysis of transaction and
accounting equations system.
• Students are able to prepare accounting documents.
• Students can get ability to analyse the effects of each
transaction.
3
Journal
• Students become familiar with the standard form and
arrangement of Journal entries.
• Students can calculate GST on purchase of goods.
• Students can calculate GST on sale of goods.
• Students are able to pass Journal Entries correctly.
• Students are able to post recording from Books of original

entry to Ledger.
4 Ledger
• Students learn the balancing of various ledger accounts
• Students are able to prepare Trial Balance
• Students understand the meaning & need of Subsidiary

Books.
• Students know the actual recording of transactions in special
Journal.
Subsidiary • Students can classify cash & credit transactions.
5
Books • Students are able to prepare & balance different types of
Cash Book.
• Students learn to give accounting treatment for banking
transactions & contra entries.
• Students can prepare various Subsidiary Books.

• Students can prepare specimen of different Bank Documents.

• Students will understand the difference between Cash Book
Bank and Pass Book
6 Reconciliation • Students will know the reasons behind the differences in Cash
Statement Book balance and Pass Book balance
• Students can prepare Bank Reconciliation Statement
competently
• Students understand the Concept, Methods and Importance
of Depreciation.
• Students understand the difference between Fixed Assets and
Current Assets.
7 Depreciation • Students are able to calculate the amount of Depreciation
of different fixed assets.
• Students are able to differentiate the amount of depreciation
by Straight Line Method and Written Down Value Method.
• Students will know the meaning and effects of Rectification of
Errors.
• Students will know the different Types of Errors and there
Examples
Rectification of
8
Errors • Students are able to detect the errors and rectify them.
• Students will learn the meaning and need of Suspense A/c.
• Students know how to prepare Suspense A/c.
• Students understand the Meaning, Objectives and Importance

Final Accounts of Final Accounts.
9 of a Proprietary • Students are able to understand the effects of Adjustments
Concern
• Students use the skills in preparing Trading Accounts, Profit
& Loss Account and Balance Sheet with competency.
• Students are able to understand the meaning and importance

of Single Entry System.
Single Entry • Students can distinguish between single entry & double entry
10 System system.
• Students are able to prepare Opening & Closing Statements of
affairs & statement of Profit or Loss of sole trading concern
competently.

Index
Sr. No. Chapter Name Page No.
1 Introduction to Book- Keeping and Accountancy 1 - 18

Meaning and Fundamentals of Double Entry
2 19 - 43
Book-Keeping
3 Journal 44 - 88
4 Ledger 89 - 121
5 Subsidiary Books 122 - 177
6 Bank Reconciliation Statement 178 - 211
7 Depreciation 212 - 247
8 Rectification of Errors 248 - 270
9 Final Accounts of a Proprietary Concern 271 - 332
10 Single Entry System 333 - 362
11 Answer Key 363 - 380

1 Introduction to Book-keeping and Accountancy
Contents
1.1 Meaning, Definition and Objectives

1.2 Importance of Book-keeping.
1.3 Difference between Book-keeping and Accountancy.
1.4 Meaning and Definition of Accountancy
1.5 Basis of Accounting System.
1.6 Qualitative characteristics of accounting information
1.7 Basic Accounting Terminologies.
1.8 Accounting Concepts, Conventions and Principles.
1.9 Accounting Standards (AS) and IFRS
o Students understand the meaning, features and the importance of accounting.

o Students understand basic accounting concepts and terminologies.
o Students can analyse the role and benefits of Book-Keeping.
o Students will be able to know the latest accounting standards.
Introduction :
Book-keeping is related with recording of business transactions. Business enterprise and other
organizations deal in activities which involve exchange of money or money’s worth. All these activities
are recorded for the purpose of taking important decisions as to whether the activities are feasible,
profitable and are to be continued or not. Information about the business and other organizations is
required not only by the proprietors and managers of business and other organisations but also to
various other stakeholders such as the government, investors, customers, employees and researchers.
Evolution of Accounting :
In India, during Chandragupta Maurya’s regime, Minister Kautilya wrote a book named
‘Arthashastra’, where in some references can be traced regarding the way of maintaining accounting
records. Afterwards it was called as “Deshi Nama”.
In the earlier time of civilisation, accounting was done by agents who managed the properties of
wealthy people. They prepared accounts periodically for the owners of property. The records of debit
and credit were found in the 12th century itself.
In the year 1494, Luca De Bargo Pacioli, an Italian merchant introduced Double-Entry Book-
keeping system. Due to the industrial revolution in the 18th and 19th centuries, large scale operations
were carried on and Joint Stock Companies emerged as an important form of organisation which

involved separation of ownership from management. Hence, to safeguard the interest of owners and
investors, the business establishments required detailed information about business which paved the
way for development of comprehensive financial accounting information system.
In the 20th century, the need for analysis of financial information for managerial decision making
caused emergence of Management Accounting as a separate branch of Accounting.
Though accounting was individual centric in the initial stage of evolution of accounting, it has
gradually developed into Social Responsibility Accounting in the 21st century. This is due to the
vast growth in business activities as a result of development in various fields. Thus, accounting has
become inevitable in the modern world for business.
1.1 Meaning and Definition:

In simple words, the ‘Book-keeping’ means recording of the business transactions in the books
of accounts in a systematic way. All the monetary transactions are recorded datewise for accurate
business results from such records at the end of accounting year.
Book-keeping is an art or science of systematic recording, classifying and summarising the
financial transactions of business for a particular period, generally one year.
Definition of Book-Keeping
Richard E. Strahelm : “The art of analyzing and recording business transactions, reporting
results of business operations through periodic statements and interpreting such results for purposes
of effective control of future operations.”
J. R. Batliboi : “Book-keeping is an art of recording business dealings in a set of books.”
Nocth Cott: “Book-keeping is an art of recording in the books of accounts the monetary aspects
of commercial or financial transactions.”
R.N. Carter : “Book-keeping is the science and art of correctly recording in the books of
accounts, all those business transactions that results in transfer or money or money’s worth.”
Features of Book-keeping:
1) It is the method of recording day to day business transactions.
2) Only financial transactions are recorded.
3) All records are prepared for a specific period which are useful for future references.
4) Records of transactions are based on rules and regulations.
5) It is an art of recording business transactions scientifically.
Objectives of Book-keeping:
1) The main objective of book-keeping is to keep a complete and accurate record of all the financial
transactions in a systematic, orderly and logical manner.
2) All the business transactions are to be recorded date wise and account wise.

3) Book-keeping serves as a permanent record of the monetary transacitons of an enterprise

business and it can be produced as an evidence, whenever and wherever required.
4) To know the profit or loss of the business during the financial year.
5) To know the total assets and liabilities of the enterprise.
6) To know what the businessman owes to others and what others owe to him.
7) Businessman comes to know the current year’s progress over previous year and compares its
financial results with other business enterprise in similar line.
1.2 Importance of Book-keeping:

The importance of Book-keeping is as follows:
1) Record : It is not possible for anyone to remember all transactions. But Book-keeping maintains
records of all the transactions permanently and systematically in the books of accounts.
2) Financial Information: Book-keeping is useful to get information related to Profit, Loss,
Assets, Liabilities, Investments and Stock, etc, at any given time.
3) Decision Making: Book-keeping provides financial information to the businessman for decision
making.
4) Controlling: Book-keeping enables the executives of the business to control the activities of the
business.
5) Evidence: Businessman needs financial evidence to be produced in the Court of law in case of
any disputes.
6) Tax Liability: Book-keeping is useful to find out the tax liabilities e.g. : Income Tax, Property
Tax, GST, etc.
Utility of Book-keeping:
1) Owner: The businessman can find out Profit, Losses, Assets and Liabilities of an enterprise at
any time.
2) Management: Management of an enterprise can plan, take decisions and control overall
business activities.
3) Investors: Investors can take proper decisions whether to invest or not.
4) Customer: Customer can easily understand financial position of the business. He can be assured
about supply of goods.
5) Government: Government can easily find out different types of taxes due from various sources.
6) Lenders: Money Lenders can find financial standing of the enterprise for decision to lend money
or not.
7) Development: Business enterprise can achieve the business growth with the help of accounting.

1.3 Difference between Book-Keeping and Accountancy

Point Book-keeping Accountancy
Meaning It is concerned with recording It is related with recording, classifying,
and classifying the business summarising, analyzing and interpreting
transactions. the financial data.
Stage Book-keeping is the primary stage Apart from the primary stage, it
in accounting. It is the base for includes secondary stage of analysis and
accounting interpretation.
Objectives The objective of Book Keeping The objective of accounting is to prepare
is to keep the records of all the financial statement and further
financial transactions in proper and communicate the information to the
systematic manner. relevant authorities.
Responsibility Junior staff is responsible for Senior staff is responsible for keeping
keeping records. accounts.
Outcomes Book-keeping basically results in The results of Accountancy is Profit and

Journal and Ledger. Loss A/c and Balance sheet.
Period Book-keeping gives day to day Accountancy gives details of entire year.
details.
Analysis The process of Book Keeping does Accountant uses Book Keeping
not require any analysis information to analyse and interpret the
data and then compiles it into reports.
Decision Management cannot take a decision Depending on the data provided by the
Making based on the data provided by book- accountants, the management can take
keeping. critical business decisions.
Skill required Analytical skill is not required for It requires analytical skill.
book-keeping.
1.4 Meaning and Definition of Accountancy:

Book-keeping is a part of Accounting. It is the primary stage in accounting. It is the process of
recording transactions in the books of accounts. Accounting is part of Accountancy. Accountancy is
the practice of recording, classifying, and reporting of business transactions for a business. Accounting
principles are the basic norms and assumptions developed and established as the basis for accounting
system. These principles are adopted by the accountants universally.
Definitions:
1) “Accountancy refers to the entire body of the theory and process of accounting.” By Kohler.
2) Prof. Robert N. Anthony has defined accounting as “Nearly every business enterprise has
an accounting system. It is a means of collecting,summarizing, analyzing and reporting in
monetary terms information about the business transactions.”

1.5 Basis (Methods) of Accounting System

Basis of Accounting:
There are mainly three basis or methods of accounting in common usage, namely
(i) Cash basis
(ii) Accrual or Mercantile basis
(iii) Mixed or Hybrid basis.
(i) Cash basis :
Under the cash basis of accounting, actual cash receipts and actual cash payments are recorded.
In this basis, revenue is recognised when cash is received and expenses are recognised when cash is
paid. e.g. (i) Any income received, (ii) Any expense paid. Such a method of accounting is usually
followed by professionals such as Doctors, Lawyers, Chartered Accountant (CA) and Not for Profit
Organisations.
(ii) Accrual or Mercantile basis
Under accrual basis of accounting, the revenue whether received or not, but has been earned or
accrued during the accounting period and expenses incurred whether paid or not are recorded. In other
words, revenue is recognised when it is earned or accrued and expenses are recognised when these are
incurred. e.g. (i) Any income earned whether received or not, (ii) Any expense incurred whether paid
or not.
(iii) Mixed or Hybrid basis
It is a combination of cash basis and accrual basis of accounting. Under mixed basis of accounting,
both cash basis and accrual basis are followed. Revenues and assets are generally recorded on cash
basis whereas expenses are generally taken on accrual basis. The laws in India prohibits the use of this
method.
1.6 Qualitative characteristics of accounting information
Accounting means the numerical qualitative presentation of business transactions of financial
nature. While recording accounting information in the books of accounts, we must observe the
following qualitative characteristics of accounting.
1. Reliability of Accounting
Information.
2. Relevance of Accounting
Information.
Qualitative Characteristics of
Accounting Information
3. Understandability of
Accounting Information
4. Comparability of
Accounting Informaiton.

1. Reliability of the Accounting Information: Reliability is described as one of the

two primary qualities (relevance and reliability) that make accounting information useful
for decision-making : Reliable information is required to form judgements about the earning
potential and financial position of a business firm. Reliability differs from item to item.
Some items of information presented in an annual report may be more reliable than others.
For example, information regarding plant and machinery may be less reliable than certain
information about current assets because of differences in uncertainty of realization.
2. Relevance of the Accounting Information : Relevant accounting information must
be capable of making a difference in a decision by helping users to form predictions about the
outcomes of past, present and future events or to confirm or correct expectations. The accounting
information related by the books of accounts and financial reports must be relevant. Accounting
information should not include unnecessary and irrelevant information. All the information is
said to be relevant which would have changed the outcomes of the business if disclosed i.e. All
useful and related information must find a place in the books of accounts and the information
must have timelessness, dedicative and feedback value.
3. Understandability of the Accounting Information: Understandability is the quality
of information that enables users to perceive its significance. The benefits of information may
be increased by making it more understandable and hence useful to a wider circle of users.
Thus, understandable financial accounting information presents data that can be understood by
users of the information and is expressed in a form and with terminology adapted to the user's
range of understanding.
4. Comparability of the Accounting Information: In making decision, the decision-
maker will make comparisons among alternatives, which is facilitated by financial information.
Comparability implies to have like things reported in a similar fashion and unlike things reported
differently.
Information, if comparable, will assist the decision-maker to determine relative financial
strengths and weaknesses and prospects for the future, between two or more firms or between
periods in a single firm.
1.7 Basic Accounting Terminologies
In order to have better understanding of accounting, it is necessary to know the meanings
of certain basic terms used in accounting. Accounting is a versatile system which serves a large
number of purposes in the modern business world. Hence, the following terminologies need to
be understood.
Types of Transactions
Transactions
Monetary Non-Monetary
Transactions Transactions
Cash Credit Barter

Transactions Transactions Transactions

1.7.1 Transactions
Exchange of goods and services between two persons or parties for money or money's
worth is known as Transactions.
(a) Monetary Transactions:
The transaction which involves an exchange of money or money’s worth directly or
indirectly is called monetary transactions. Only monetary transactions are recorded in the books
of accounts.
1) Cash Transactions : A business transaction in which cash is paid or received
immediately is known as cash transaction.
e.g i) Purchase of goods for cash at ` 15,000/-
ii) Payment of salary at ` 5,000/-
2) Credit Transactions: A credit transaction is one in which cash is not paid or received
immediately at the time of a transaction but it is paid or received at a later date.
e.g i) Goods sold on credit to Mr. Aman at ` 8,000/-
ii) Sold machinery to Mr. Amarsingh on credit at ` 20,000/-
(b) Non-Monetary Transactions:
The transaction which does not involve an exchange of money or money’s worth directly
or indirectly are called Non-monetary transactions. An exchange of one thing against another
thing is called as Barter transactions.
1) Entry: Recording of a business transaction in the proper form or method in the
books of accounts is called an entry.
2) Narration: A brief explanation of the business transaction for which an entry is
passed is called as a narration. It is always given in a bracket below the journal
entry and it usually starts with the word "Being" or "For".
3) Goods: The term ‘goods’ refers to merchandise, commodities, articles or things in
which a trader trades. These are purchased or manufactured for the purpose of sale
and to earn profit.
e.g i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer
like Bajaj Auto, Hero Motors.
1.7.2 Capital and Drawings:
a) Capital : The total amount invested into the business by the owner is called capital.
Excess of assets over the liabilities is also called as capital. The equation for this is :
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to
the owner at the time of closure of the business.
b) Drawings : The amount of cash or value of goods, assets, etc., withdrawn from the
business by the owner for personal use called as drawings.
E.g. : A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile
bills etc, from the business.

1.7.3 Debtors and Creditors:

a) Debtor : A person who has to pay to the business for getting goods and services on credit is
known as debtor. A debtor is a person who owes money to the business.
b) Creditor: A person to whom business has to pay for getting goods or services on credit is
known as creditor. A creditor is a person to whom business owes money.
c) Bad Debts : An irrecoverable amount from a debtor is known as "Bad Debts". It is a revenue
loss to the business.
1.7.4 Expenditure and Types of Expenditure
Expenditure: An amount spent by the business for any consideration received by business is called
expenditure.
i) Capital Expenditure : This expenditure is incurred to acquire fixed asset or to increase the
value of fixed asset. It gives the benefit for a long period of time and it is non-recurring in
nature.
E.g. : Purchase of Machinery, extension of building, purchase of computer etc.
ii) Revenue Expenditure : Revenue expenditure is an expenditure from which no future benefit
is expected but having immediate or short term benefit may be less than one year. It does not
increase profit earning capacity of an organization. These are normal day to day operating
expenses of a business organization and appear on the debit side of Trading A/c or Profit and
Loss A/c.
E.g. : Rent paid, Salary paid, Wages paid etc.
iii) Deferred Revenue Expenditure: An expenditure which is basically revenue in nature but
benefit of which is not exhausted within one year is called as Deferred Revenue Expenditure.
Such expenditure is written off over number of years. Such written off amount is shown on
debit side of profit and loss a/c and unwritten amount is shown on asset side of the Balance
Sheet.
E.g. : Heavy expenditure on advertising , heavy legal expenses.
1.7.5 Cash Discount and Trade Discount :
Discount is a concession or allowance given by the seller to purchaser.
There are two types of discounts.
i) Trade Discount : It is an allowance given on catalogue price or list price of goods. This discount
is allowed at the time of purchase/sale of goods. Value of goods purchased/sold recorded is net
value payable i.e after deduction of amount of trade discount allowed. If goods of ` 1000/- are
sold at 5% trade discount, the value of goods that will be recorded will be ` 950/- both by the
purchaser and the seller and not ` 1000/-. Hence, trade discount does not appear in the books of
accounts separately.
ii) Cash Discount: It is the amount deducted from the final amount due at the time of receipt. It is
the concession given for encouraging prompt payment. It is given either for the spot payment or
for payment within a specific period. Cash discount is calculated after deducting trade discount,
since it is loss to the seller and gain to the buyer, cash discount appears in the books of accounts.

1.7.6 Solvent and Insolvent:

i) Solvent: If a person’s assets are more than his liabilities, or equal to his liabilities, he is called
as a solvent person. Solvent person is financially sound and is in a position to pay off all his
debts.
E.g. : A person’s total assets have been calculated to ` 50,00,000/- and his total debts were
` 30,00,000/- since his position is sound he is able to pay off his debts therefore he is called
Solvent.
ii) Insolvent: A person whose liabilities are more than his assets is an insolvent person. Such
person’s liabilities are more than his assets.
E.g. : A person’s total assets or property have been calculated to ` 20,00,000/- and his total debts
were ` 50,00,000/- and if he is not in a position to get any amount from any sources and if the
court is so satisfied then he will be declared as an insolvent person.
Accounting Year:
It is the period of 12 months for which accounts are maintained and closed by the proprietor.
Earlier the proprietors were following any accounting year i.e. calendar year , or financial year or any
other year as per tradition. But now for income tax purpose an accounting year starts on 1st April and
end on 31st March. At the end of accounting year a proprietor has to prepare Trading account, Profit
and Loss account and Balance Sheet to find out the financial position of the business.
Student Activity:
Collect some Advertisement relating to discount and stick it in the note books.
Trading Concern and Not for Profit Concerns.

i) Trading Concern: A business concern established with an object of earning profit by selling
goods is known as Trading concern. It is also called as commercial organization or profit making
organization.
ii) Not for Profit Concern: It is an organization not established for making profit but for rendering
services to the society. An organization may be formed for promoting a useful object like art,
science, sports, culture, charity, profession etc.
e.g Schools, Hospitals, Sports Club etc.
1.7.8 Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business which
contributes to its superior earning capacity over a normal return on investment. It may arise from such
attributes as favourable locations, the ability and skill of its employees and management, quality of its
products and services, customer satisfaction etc.
u Goodwill is the reputation of business expressed in terms of money.
u Goodwill is an intangible asset
1.7.9 Profit or Loss
a) Profit : When the selling price of goods is more than the cost price it is a profit. Profit increases
the capital of the business.
e.g. If goods are sold for ` 50,000/- and all expenses during the period amounted to
` 30,000/- then the profit is ` 20,000/-

b) Loss : When cost price of goods is more than its selling price it is a loss. Loss decreases the
capital of business
e.g If goods are sold for ` 50,000/- and all expenses during the period amounted to
` 60,000/, then the loss will be ` 10,000/-
c) Income: It is revenue arising as a result of business transactions. It is the amount receivable or
realised from services provided and earnings from interest, dividend, commission, etc.
d) Revenue: It is income that a business has from its normal business activities usually from the
sale of goods and services to customer.
1.7.10 Assets, Liabilities, Net Worth:

i) Assets : Any physical thing or right owned that has a monetary value is called as an asset. The
ownership of the Asset must be with business unit. E.g Land, Goodwill, Patents, Computers etc.
ii) Types of Assets:
a) Fixed Assets/Non current Assets : The assets which give long term benefit to the business
are known as fixed assets e.g Land and Building, Plant & Machinery, Goodwill etc. These
assets may be tangible or intangible.
b) Current Assets : Assets which are held in the business for the operating year and can be
converted into cash very easily are called as current assets. e.g Debtors, Bills Receivable
Cash in Hand, Cash at Bank, Stock etc.
c) Fictitious Assets : These assets are not represented by tangible possession or property.
They are imaginary assets but do not have any realisable value. e.g Deferred revenue
expense like advertisement paid for 4 years.
iii) Liabilities: Amount payable by the business to others is known as liability. It is a debt or amount
due from the business to others for the benefit received by the business unit. e.g Loan taken,
Creditors, Bank Overdraft, Outstanding Expenses etc.
iv) Types of Liabilities:

a) Fixed Liabilities : One of the major source of funds in the business is fixed liabilities.
It may be in the form of capital, secured loans, long term loans from banks and from
financial institutions etc.
b) Current Liabilities: Short term liabilities payable within a year are called current
liabilities. Current liabilities arise in the regular current operations of the business. These
liabilities are not normally secured. E.g. Creditors, Bills Payable etc.
v) Net worth or Owners Equity or Capital:
The amount or funds provided by the proprietor in the business is called as “Capital” as well as
the excess of assets over liabilities of the business is also known as “Capital” or “Net Worth”.
Net worth includes Capital and Reserves. Capital can be in the form of cash or in kind.
Net worth = Owner’s Equity = Capital

OR
Owner’s Equity (Capital)= Total Equity(Assets) – Creditors Equity(Liabilities)
10

e.g a) If the Capital of the business is ` 4,00,000 and Creditors ` 2,00,000 then
Total Equity(Assets) = Liabilities + Capital
` 6,00,000 = 2,00,000 + 4,00,000
b) It total assets are ` 1,50,000 and outside liabilities are ` 50,000 the Creditors Equity
(liabilities)
Creditors Equity (liabilities) = Assets – Capital
` 50,000 = ` 1,50,000 - ` 1,00,000
c) If total assets of the business are ` 5,00,000 and Outside liabilities are ` 2,00,000 the
Owner’s Equity(Capital)
Owner’s Equity (Capital) = Assets - Liabilities
` 3,00,000 = ` 5,00,000 – ` 2,00,000
Contingent Liabilities:
A liability which may arise in future depends on happening or non-happening of certain event is
called as contingent liability. As it is not confirmed or perfect liability, it does not affect the financial
position of the business and therefore, it is not shown on the liability side of the Balance Sheet. But it
is shown by way of foot note to Balance Sheet simply as information.
e.g. A worker makes a claim for compensation of ` 5,000/- against the business and the decision
is pending in the court. It may be a future liability for business on happening of an event i.e “Court
Verdict”
1.8 Accounting Concepts, Conventions and Principles

Meaning and Importance of Accounting Concepts
Accounting is means of communicating the results of business operations to various parties
interested in or connected with the business viz., the owners, creditors, investors, banks and financial
institutions, Government and other agencies. Hence, it is rightly called as the language of business.
Accounting is not only associated with business, but also with everybody, who is interested in
keeping an account of the monetary transactions. Generally the term 'accounting' refers to financial
accounting. Book-keeping and Accountancy is an art of recording, classifying and summarizing
transactions of business cocern in a systematic manner.
Importance of Accounting Concepts:

1) Reliable financial statements.
2) Uniformity in presentation.
3) Generally acceptable basis of measurement.
4) Proper information to all.
5) Valid and appropriate assumptions.
11

Some of the important concepts are as follows :

1) Business Entity: 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.
e.g. Half of the building is used for business office and other half of the building is used for the
residence of the proprietor. It the total rent of the building is ` 50,000/- then only ` 25,000/- will
deducted as drawings from proprietor’s capital.
2) Money Measurement: This concept implies that only those transactions, which can be
expressed in terms of money, are recorded in the books of 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 ` 1,50,000/- for
computers, `15,000/- for tables and ` 2,500/- for chairs.
3) 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.
e.g. : Furniture is purchased for ` 3,00,000/- and same cost has been recorded in the books. In
case the market value goes to ` 1,00,000/- or ` 1,50,000/- It will not be considered.
4) Consistency Concept: Any policy adopted for accounting should be continuous or consistent
throughout the business and it need not be changed generally unless and until circumstances
demand. However, it does not stop any improvement of new techniques. But that should be
disclosed with a note.
e.g. : A company adopts fixed installment method for charging depreciation on fixed asset from
the beginning till the end of estimated life of asset.
5) Conservatism: While recording the business transactions we have to anticipate no profit but
provide for all possible losses. It encourages the certain secret reserves by making excess
provision to prevent losses. The income statement may show lower income and the Balance
Sheet overstates the liabilities and understates the assets. This policy of recording is asking the
accountant ‘to play safe’ while writing the accounts.
12

e.g. : The closing stock in the factory is valued at ` 25,000/- at cost price and ` 35,000/- at its
market price. But while recording in the books the value of ` 25,000/- will be considered being
the lowest of all.
6) Going Concern: It is the basic assumption that business is a going concern and will continue
its operations for 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.
7) Realization: Income is recorded only when it is realized i.e. either it is received or earned.
Revenues are recorded only when sale are affected or the services are rendered. Sales revenues
are considered as recognized when sales are affected during the accounting period irrespective
of the fact whether cash is received or not.
e.g. : A company gets an order for sale of goods ` 1,00,000/- in May 2017. Goods of only
` 60,000/- are sold and delivered in June 2017. Cash is received for ` 60,000/- in Sept, 2017.
As per the principle of realization, sale is to be recorded in June 2017.
8) Accrual: Income is recorded when it accrues(earned) and expenses are recorded when they
accrue(become payable). All expenses and revenues related to the accounting period are to be
considered irrespective of the fact the revenues are received in cash or not or expenses are paid
in cash or not.
e.g. : A company invested ` 100,000/- with a bank for one year on 1stOct 2015, Bank has to pay
interest at 10% p.a on its maturity i.e 30th Sept, 2016.
9) Dual Aspect : According to this concept, every transaction or event has two aspects, i.e., dual
effect. For example, when Akshay starts a business with cash ` 5,00,000/- , on 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 Akshay a sum of ` 5,00,000/-. This is the concept which recognizes 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 the basic accounting equation, arises that is,
Capital + Liabilities = Assets.
10) Disclosure: The accounts must disclose all material information. The accounting reports should
disclose full and fair information to the related parties. The financial position and performance
should be disclosed very honestly to all the users. The financial position means the Balance
Sheet of the business and financial performance means business results in terms of profits or
losses and income and expenses in profit and loss account.
All the information disclosed should be relevant, reliable, comparable and understood by all the
concerned authorities.
11) 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.
13

12) 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.
Student Activity:
1) Give examples of economic and non-economic activities
2) Prepare a list of Assets and Liabilities that you find in your house.
1.9 Accounting Standards (AS) and IFRS

Accounting Standards provide the framework and norms to be followed in accounting so that
the financial statements of different enterprises become comparable. It is necessary to standardise
the accounting principles to ensure consistency, comparability, adequacy and reliability of financial
reporting.
In the words of Kohler : “Accounting standards are codes of conduct imposed by customs,
laws or professional bodies for the benefit of public accountants and accountants generally”.
Thus, Accounting Standards are written policy documents issued by the expert accounting body or
by government or other regulatory body covering the aspects of recognition, measurement, treatment,
presentation and disclosure of accounting transactions and events in the financial statements.
Need for accounting standards :

The need for accounting standards is as follows:
i) To promote better understanding of financial statements.
ii) To help accountants to follow uniform procedures and practices.
iii) To facilitate meaningful comparison of financial statements of two or more entities.
iv) To enhance reliability of financial statements.
v) To meet the legal requirements effectively.
International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) are issued by the International Accounting
Standard Board (IASB). IFRS is a set of International Accounting Standards stating how particular
types of transactions and other events should be reported in financial statements. IFRS are issued to
develop Accounting Standards that would be acceptable worldwide and to improve financial reporting
internationally.
14

Accounting Standards in India

In India, Standards of Accounting is issued by the Institute of Chartered Accountants of India
(ICAI). The Council of the Institute of Chartered Accountants of India constituted Accounting
Standards Board (ASB) on 21st April, 1977 recognising the need for Accounting Standards in India.
ASB. Formulates Accounting Standards so that such standards may be established by the Council of
the Institute in India. The ASB will consider the applicable law, custom, usage, business environment
and the International Accounting Standards while framing Accounting Standards (AS) in India.
Due to globalisation, the accounts prepared in India must be compatible with accounts prepared in
other countries. This has resulted in the existing AS being converged with the IFRS. This convergence
has resulted in what is known as Ind AS. Ind AS are basically the International Accounting Standards
which have been modified in accordance with Indian accounting practices, customs and traditions.
Presently, all big companies have to follow Ind AS rules, but smaller business units are allowed to
continue using AS. In future, it is expected that all business entities in India will migrate to Ind AS.
Some Accounting Standards (AS): The Council of the Institute of Chartered Accountants of
India has so far issued thirty one accounting standards. Some of these Accounting Standards are
explained below
1) AS-1 Disclosure of Accounting Policies (1-4-1991 for Companies and 1-4-1993 for
others)
According to this standard the accounting policies followed in the preparation and presentation
of financial statements should form a part of the financial statements and normally be disclosed
in one place.
2) AS-2 Valuation of Inventories (1-4-1999)
According to this standard inventories in general should be valued at lower of historical cost and
net realizable cost.
3) AS-3 Cash Flow Statements (1-4-2001)

According to this standard a cash flow statement is prepared and presented for the period for
which the profit and loss account is prepared.
4) AS-6 Depreciation Accounting (1-4-1995)

According to this standard the depreciation amount of an asset should be allocated on a systematic
basis for each accounting period during the useful life of an asset.
5) AS-8 Accounting for Research and Development (1-4-1991 for Companies and 1-4-
1993 for others)
According to this standard, the amount of research and development costs should be charged as
an expense of the period in which they are actually incurred.
6) AS-9 Revenue Recognition(1-4-1991 for Companies and 1-4-1993 for others)

This standard deals with the basis required for recognition of revenue items in the Profit and
Loss Account of an enterprise. It lays down conditions to recognize revenues that arise from the
various transactions of an enterprise.
15

7) AS-10 Accounting for Fixed Assets(1-4-1991 for Companies and 1-4-1993 for others)
According to this standard, the cost of fixed assets should comprise of the original cost and any
attributable cost of bringing the asset to its working conditions for its intended use. The fixed
assets should be eliminated from the financial statement on disposal or when no further benefit
is expected from their use.
8) As-12 Accounting for Government Grants(1-4-1994)
According to this, standard, government grants should be recognized when there is an assurance
that the enterprise will comply with the conditions attached to them.
9) As-13 Accounting for Investments (1-4-1995)
According to this standard, an enterprise should disclose the current and long term investments
distinction in its financial statements. Current investments should be carried in the financial
statements at the lower cost or fair value. However long term investments should always be
carried in the financial statements at the cost price.
10) AS-22 Accounting for Taxes on Income (1-4-2001)
According to this standard, tax expenses for the period comprising current tax and deferred tax
should be included in the determination of the net profit or loss for the period.
Student Activity:
Visit icai.org website Refer under Resources, Accounting Standards and Ind AS.
ppppppppppppp EXERCISE ppppppppppppp

Q.1 Answer in One Sentence:
1) What is Book-keeping ?
2) What is meant by Goods?
3) What is Capital?
4) What is Drawings?
5) What is Goodwill?
Q.2 Give the word term or phrase which can substitute each of the following statements:
1) Recording of business transactions.
2) Amount invested in business by the proprietor.
3) A person to whom amount is payable.
4) Exchange between two persons.
5) Excess of expenses over income
6) A person whose assets are sufficient enough to meet business obligations.
7) Book-keeping is providing all required financial information to the businessman.
8) Property of any description owned by Proprietor.
9) Assets which remain in the business for only for short time and can be converted into cash
very easily.
10) Allowance is given on catalogue price of goods
16

Q.3 Select the most appropriate alternatives from those given below and rewrite the
statements.
1) Surplus of income over expenses is ______________.
a) Profit b) Deficit c) Loss d) Financial Statements
2) In ____________ basis of accounting, actual cash receipts and actual cash payments are
recorded.
a) Accrual b) Hybrid c) Cash d) Mercantile
3) Amount which is not recoverable from customer is known as ______________.
a) Bad Debts b) Debts c) Debtors d) Doubtful debts
4) Accounts must be honestly prepared and they must disclose all material information is
known as _________.
a) Entity Concepts b) Dual Aspect Concept c) Disclosure Concept d) Cost Concept
5) A commodity in which a trader deals is known as _______________.
a) Goods b) Income c) Property d) Expenditure
6) _________ means a reputation of a business valued in terms of money.
a) Trademark b) Assets c) Patents d) Goodwill
7) Cash flow statement is prepared and presented for the period for which the profit and loss
account is prepared.
a) AS-3 b) AS-10 c) AS-6 d) AS-2
8) The immediate recognition of loss is supported by principle of __________.
a) Conservatism b) Objective c) Matching d) Consistency
9) Brief explanation of an entry is called as _________.
a) Folio b) Narration c) Posting d) Journalising
10) An act of exchange of things or services between the two parties is termed as______.
a) Ledger b) Transfer c) Transaction d) Business
Q.4 State whether the following statements are true or false with reasons :
1) Book-keeping and accounting are one and the same thing.
2) Conservatism means to follow safe side.
3) The double entry system is based on “Dual Aspect” concept.
4) Bank overdraft is an asset of the business.
5) Solvent person is a person whose assets are more than his liabilities.
6) Cash discount does not appear in the books of accounts.
7) A transaction is concerned with money or money’s worth
8) Accounting is the language of business.
9) In civilization, accounting was done by owners.
10) Book-keeping is useful to find out all tax liabilities.
17

Answer : True : 2, 3, 5, 7, 8, 10 False : 1, 4, 6, 9

Q.5 Do you agree or disagree with the following statements :
1) Accounting is useful only to the owner.
2) Book-keeping is an art, science and profession.
3) Bills Payable is an asset of the business.
4) In Book-keeping and Accountancy only non monetary transactions are recorded.
5) Totalling of Journal or Ledger is called as casting.
Q.6 Complete the following sentences :

1) Revenue arising as a result of business transactions is known as ………………
2) Excess of gross profit over operating expenses is …………………
3) An expenditure which is basically revenue in nature but benefit of which is not exhausted
within one year is called as ………………
4) The amount deducted by the seller from the list price of goods at the time of sale is
…………
5) A person to whom business owes money for the goods or services is known as …………
j j j
18

Meaning and Fundamentals of

2 Double Entry Book-keeping
Contents
2.1 Meaning and Definition of Double entry Book-keeping System
2.2 Methods of Recording Accounting Information (Indian, Single, Double)
2.3 Advantages of Double entry Book-keeping system.
2.4 Classification of Accounts.
2.5 Golden Rules of Debit and Credit (Traditional Approach)
2.6 Modern Approach of Rules of Accounts.
2.7 Illustrations.
2.8 Accounting Equations
o Students understand the Fundamental Principles of Double Entry System.

o Students understand the Classification and Types of Accounts.
o Students are able to apply the golden rules to classification tables.
o Students can prepare a statement of analysis of transactions and accounting equations
system
2.1 Meaning and Definition of Double Entry Book-Keeping:

Double Entry Book-keeping System is the most scientific
method of recording all monetary transactions in the books of
accounts. This system owes its origin to Italian Merchant “LUCA
D. BARGO PACIOLI” on 10th November 1494 and this day is
celebrated as International Accounting Day. This system of Book-
keeping is based on the fact that there are two aspects of every
business transactions. Every business transaction involves two
persons or accounts or parties where in one is the receiver of the
benefit and the other is the giver of the benefit. If something comes
into the business, something goes out from the business. Recording
of two aspects of monetary transactions in the Books of Account
in terms of Debit (Dr.) and Credit (Cr.) is called as "Double Entry"
System of Book-keeping. LUCA D. BARGO PACIOLI
According to modern approach, every business transaction is concerned with Assets, Liabilities,
Capital, Expenses and Income. Whenever there is an increase in assets and expenses it is debited and
decrease in assets and expenses are credited.
19

2.2 Methods of Recording accounting information:
Recording of Accounting information
Indian System English System
Single Entry System Double Entry System
1) Indian System:
Indian system maintains, records in Indian languages, such as Marathi, Hindi, Urdu, Gujrati etc.
It is called Mahajani Deshinama system. In this system transactions are recorded or maintained
in long books, known as Bahi-Khata and Kird. This system of accounting is not based on
Double Entry system of accounting. Thus, is not a scientific accounting system. Even today this
system is used in India for small business organization.
2) English System:
A) Single Entry System:
This system of accounting records only Cash book and Personal accounts. It is unscientific
method and also known as an incomplete recording system, because it changes with the
convenience of business for recording transactions. This system of accounting does not
provide accurate information about the financial position of business and it is suitable for
small business.
B) Double Entry System:

Double Entry System is the most scientific method of recording all business transactions
in the books of accounts. Under this system double or two fold effects of each transaction
is recorded.
According to Double Entry Book-keeping System, one account is to be debited and
another account is to be credited with equal amount.
Every debit has an equal and corresponding credit of the same amount is the basic
principle of Double Entry System.

20

Important Elements of Double Entry Book-keeping System:
Definition of Double Entry System

Definition of Double Entry System is as follows-
“Every business transaction has a two fold effect and that it affects two accounts in opposite directions
and if a complete record is to be made of each such transaction it would be necessary to debit one
account and credit another account. It is this recording of two fold effect of every transaction that has
given rise to the term Double Entry.” – J.R. Batliboi.
Principles of Double Entry Book-keeping System:
1) In every business transaction there must be minimum two effects i.e debit and credit.
2) Two Accounts means one is the Receiver of the benefit and other is the Giver of the benefit.
3) If one account is debited other account must be credited.
4) Every debit has a equal and corresponding credit of the same amount.
2.3 Advantages of Double Entry Book-keeping System:
1) Complete Record:
Under this system all business transactions are recorded. This method is scientific and records
both the aspects of each transaction.
2) Accuracy:
In this system both aspects are recorded in the books of accounts so it gives complete accuracy
in accounting work. It also checks arithmetical accuracy.
3) Business Results:
All expenses, losses, income, gains, liabilities, assets, debtors and creditors all these transactions
are recorded, therefore it helps to find out accurate business results of particular accounting
period.
4) Common Acceptance:
It is widely accepted since it follows universal accounting principles. Double Entry System is
accepted by financial institutions, government authorities etc.
21

Conventional Accounting System (Traditional):

Conventional Accounting System is based on practicability. Accounting convention means rules
which by common agreement are used in accounting. However, there is no clear information of rules
between concepts and convention.
Indian system of accounting is the example of conventional accounting. This system does not
follow principles of double entry system. It is incomplete system of recording the business transactions.
2.4 Classification of Accounts :-
Meaning of Account:
An account is a summarized record of transactions relating to a particular person, asset, liability,
particular head of expense or income recorded at one place. In day to day business activity large
number of business transactions takes place. It affects the several accounts. At the end of certain
period of time, it is necessary for the businessman to balance the accounts to find out the information.
like total capital, total liabilities and assets , total incomes and expenses etc. of the business.
Definition of Account:
“An account is summarized record of transactions affecting one person, one kind of property or one
class of gain or loss.” – G.R.Batliboi
“An account is a ledger record in a summarized form of all the transactions that have taken place with
the particular person or thing specified.” – Carter
Classification of
Accounts
Personal Impersonal
Accounts Accounts
Natural Artificial Representative Real Nominal

Personal Personal Personal Account Accounts
Account Account Account
1. Sunita's A/c 1. Pune Municipal 1. Outstanding
2. Ashok's A/c Corporation A/c Expenses A/c Tangible Intangible
3. Suha's A/c 2. Radhika Sports Real Real
2. Prepaid Ex-
Account Account
Club A/c penses A/c
3. Bank of India A/c 1. Computer A/c 1. Goodwill A/c
3. Income re-
2. Cash A/c 2. Patent A/c
ceived in Ad-
vance A/c 3. Machinery A/c 3. Copyrights A/c
Expenses Income
and Losses and Gains
1. Stationary A/c 1. Interest Re-
2. Purchase A/c ceived A/c
2. Discount Re-
3. Advertisement A/c
ceived A/c
3. Sales A/c
22

Each type of accounts is explained below with examples-

1)Personal Accounts :
This account represents a person and group of persons with whom business deals. These accounts
are classified into following three categories:-
a) Natural Person's Account:
Accounts relating to individual human beings. for e.g. Rajesh’s A/c, Sumit's A/c, Sushma's
A/c, Vaibhav’s A/c etc.
b) Artificial Person's Account:
Artificial persons means includes accounts of organizations, associations which are
created by law, for
E.g. Bank of Maharashtra A/c, ABC & Co A/c, Recreation Club A/c.
c) Representative Personal Account:
These Accounts represent a certain person or group of person in business dealing. Accounts
relating to outstanding and prepaid items are called representative personal account
E.g. Outstanding Rent A/c, Income received in advance A/c, Prepaid Wages A/c etc.
2) Impersonal Account:
Impersonal Accounts are classified into following two categories;-
1.Real Accounts:
This account represents assets and properties owned by the business. The following are the types
of Real Account.
a) Tangible Real Account:
Tangible real account means the Assets and properties, which can be seen, touched and
felt. e.g. Machinery A/c, Motor Car A/c, Stock of Goods A/c etc.
b) Intangible Real Account:
Intangible Real account means assets which cannot be seen, touched, or felt but they can
be measured in terms of money e.g. Goodwill A/c, Patents A/c, Trademark A/c, Copyright
A/c etc.
2. Nominal Accounts:
The account of expenses, losses, income and gains are called as Nominal accounts e.g. Wages
A/c, Stationery A/c, Salary A/c, Depreciation A/c Commission Received A/c, Discount Received
A/c etc.
Debit and Credit
1) Debit (Dr.):
Left hand side of an Account is called Debit (Dr) side.
2) Credit (Cr):
Right hand side of an Account is called Credit (Cr) side.
23

2.5 Golden Rules of Debit and Credit (Traditional Approach):
Golden Rules of Debit and Credit for different Accounts
Personal Accounts Real Accounts Nominal Accounts

u Debit the receiver u Debit what comes in u Debit all expenses
u Credit the giver u Credit what goes out and losses
u Credit all incomes
and gains
I) From the following transactions find out
1) Two aspects 2) Two accounts 3) Classify the accounts
1) Commenced business with Cash ` 20,000.
2) Purchased goods on credit from Ajay ` 10,000.
3) Cash Sales ` 7,000.
4) Received commission ` 500.
5) Paid Rent ` 800.
Solution :
1) Two Aspects
Sr. No. Aspect I Aspect II
1) Cash comes in Proprietor is giver
2) Purchases is an expenditure Ajay is giver
3) Cash comes in Sales is an income
4) Cash comes in Commission received is an income
5) Rent is an expenses Cash goes out
2) Two Aspects and Two Accounts.

Sr. No. Two aspects Two accounts
1 Cash comes in. Cash A/c -------------
Business Proprietor is giver ------------- Capital A/c
2 Purchases is an expense. Purchases A/c -----------
Ajay is giver ------------- Ajay A/c
3 Cash comes in. Cash A/c -----------
Sales is an income ------------- Sales A/c
4 Cash comes in. Cash A/c ---------------
Commission is an income ------------- Commission A/c
5 Rent is an expense. Rent A/c ---------
Cash goes out ------------- Cash A/c
24

3) Two Aspects, Two Accounts and Classify the Accounts.

Sr.
Two aspects Two accounts Classification
No.
1. Cash comes in Cash A/c Real A/c
Proprietor (Capital) is the giver Capital A/c Personal A/c
2. Purchases is an expense Purchases A/c Nominal A/c
Ajay is giver Ajay A/c Personal A/c
3. Cash comes in Cash A/c Real A/c
Sales is an income Sales A/c Nominal A/c
4 Cash comes in Cash A/c Real A/c
Commission is an income Commission A/c Nominal A/c
5 Rent is an expense Rent A/c Nominal A/c
Cash goes out Cash A/c Real A/c
Activity- 1
From the following transactions find out
1) Two Aspects 2) Two Accounts
3) Classify the Accounts and Fill the following Tables
1) Started business with Cash ` 50,000.
2) Purchased Machinery on credit from Avinash` 20,000.
3) Purchased goods ` 5,000 from Rahul on cash.
4) Sold goods to Aniket` 6,000 on credit.
5) Paid Salary ` 1,000.
6) Sold old Tables for ` 3,000.
Solution:
1) Two Aspects
Sr. No. Aspect I Aspect II
1
2
3
4
5
6
25

2) Two Aspects and Two Accounts.

Sr. No. Two aspects Two accounts
1.
2.
3.
4
5
6

3) Two Aspects, Two Accounts and Classify the Accounts.
Sr. No. Two aspects Two accounts Classification

1.
2.
3.
4
5
6
Analysis of transaction by applying rules of Debit and Credit

(Traditional Approach)
Sr. Transaction Two aspects/ Accounts Classification Rules Ap- Account to Account
No. Effects Involved of Accounts plied be Debited be Cred-
ited
1 Commenced busi- 1) Cash 1) Cash 1) Real A/c 1) Debit Cash A/c ---
ness with Cash comes into A/c what ---
`50,000 the busi- Comes in Capital A/c
ness 2) Capital 2) Personal 2) Credit the
2) Proprietor A/c A/c giver
is giver of
the capital
2 Advertisement 1) Advertise- 1) Adver- 1) Nominal 1) Debit all Advertise- ---
paid ` 5,000 to ment is an tisement A/c expenses ment A/c
Imran expenses A/c --- Cash A/c
2) Cash goes 2) Cash 2) Real A/c 2) Credit
out A/c what goes
out
26

3 Deposited cash 1) Bank of 1) Bank 1) Personal 1) Debit the Bank of ---

into the Bank of India is of India A/c receiver India ---
India ` 10,000 Cash A/c
receiver A/c 2) Real A/c 2) Credit
2) Cash goes 2) Cash what goes
out A/c out
4 Purchased Goods 1) Purchase 1) Purchas- 1) Nominal 1) Debit all Purchase ---
from Sunil is an ex- es A/c A/c expenses A/c
`13,000
pense --- Sunil’s A/c
2) Sunil’s 2) Personal 2) Credit the
2) Sunil is A/c A/c giver
giver
5 Sold goods for 1) Cash 1) Cash 1) Real A/c 1) Debit Cash A/c ---
cash ` 12,000 comes in A/c 2) Nominal what
2) Sales is an 2) Sales A/c comes in --- Sales A/c
income A/c 2) Credit all
income
6 Received Com- 1) Cash 1) Cash 1) Real A/c 1) Debit Cash A/c ---
mission` 4,500 comes in 2) Com- 2) Nominal what ---
2) Com- mission A/c comes in Commis-
sion A/c
mission A/c 2) Credit all
received is income
an income

Note: 1) Transaction number 2: Advertisement paid to Imran, here Imran`s Account is not affected.
The nature of expense is only to be considered.
2) Transaction number 4: This is considered as credit sale, because name of the person is
given and sale for cash is not given.
Activity: 02 Fill the following table.
(Traditional Approach)
Sr. Transaction Two Accounts Classification Rules Account Account

No. Aspects/ Involved of Accounts Applied to be to be
Effects Debited Credited
1. Commenced
business with Cash
` 90,000
2. Deposited cash into
Dena Bank
` 9,000
3. Withdrew cash for
Personal use ` 1,500
27

4 Purchased goods
from Mandar `
12,000
5 Paid salary `2,900
6. Received Interest
`4,000
2.6 Classifictation of Accounts (Modern approach)
Classification of Accounts
Assets A/c Liabilities A/c Capital A/c Revenues and Expenses and
Gains A/c Losses A/c
1. Machinery A/c 1. Creditors A/c 1. Aditya’s Capital
2. Building A/c 2. Bank overdraft A/c 1. Commission re- 1. Wages A/c
A/c 2. Girish's Capital ceived A/c 2. Audit Fees A/c
3. Goodwill A/c
3. Bank loan A/c A/c 2. Dividend received 3. Loss by fire A/c
4. Furniture A/c
3. M/s. Harilal Trad- A/c 4. Printing & Sta-
4. Outstanding Ex-
penses A/c ers A/c 3. Rent received A/c tionery A/c
4. M/s. Sharma 4. Interest received
Traders A/c A/c
In the given chart different types of accounts have been summarized. All accounts are divided into five
categories for the purpose of recording the transaction.
Namely - 1) Assets 2) Liabilities 3) Capital
4) Expenses/Losses 5) Revenues/Gains
Two fundamental rules to be followed to record the changes in these accounts:
1) For recording changes in Assets / Expenses / Losses.
I) Increase in asset is debited and decrease in asset is credited.
II) Increase in expenses/losses is debited and decrease in expenses/ losses is credited.
2) For recording changes in liabilities and capital / revenues / Gains.
I) Increase in liabilities is credited and decrease in liabilities is debited.
II) Increase in capital is credited and decrease in capital is debited.
III) Increase in revenues/gains is credited and decrease is revenue/gains is debited.
28

Analysis of transaction by applying rules of Debit and Credit (Modern Approach)

Sr. Transaction Two As- Accounts Categories Rules Account to Account to
No. pects/ Involved Applied be Debited be
Effects Credited
1. Sanjay Com- 1) Cash 1) Cash A/c 1)Assets 1) Increase Cash A/c ---
menced busi- comes in 2) Capital A/c in asset ---
ness with cash business A/c 2)Capital 2) Increase Capital A/c
`70,000 2) Propri- A/c in Cap-
etor is ital
giver of
the cap-
ital
2. Rent paid 1) Rent is 1) Rent A/c 1) Expense 1) Increase Rent A/c ---
cash. `5,000 to an ex- A/c in ex- ---
Amol. penses pense
2) Cash 2)Cash A/c 2) Asset 2) Decrease Cash A/c
goes out A/c in Asset
3. Withdrew cash 1) Cash 1) Cash A/c 1) Asset 1) Increase Cash A/c ---
from Bank comes in A/c in Asset --
`10,000 for 2) Bank is 2) Bank 2) Asset 2) Decrease Bank A/c
office use. giver A/c A/c in Asset
4. Paid wife's 1) Drawing 1)Drawings 1) Capital 1) Decrease Drawings ---
mobile bill is the re- A/c A/c in Capi- A/c
`4200. ceiver of tal A/c
benefit
2) Cash 2)Cash A/c 2)Asset A/c 2) Decrease Cash A/c
goes out. in Asset
5. Purchased 1) Purchase 1)Purchas- 1) Expense 1) Increase Purchase ---
Goods from is an ex- es A/c A/c in ex- A/c
Sunil `13,000 pense pense ---
2) Sunil is 2)Sunil’s 2) Liability 2) Increase Sunil’s A/c
giver A/c A/c in Liabil-
ity
6. Received 1) Cash 1) Cash A/c 1) Asset 1) Increase Cash A/c ---
Commission comes in A/c in Asset ---
`4,500 2) Commis- 2) Com- 2) Com- 2) Increase Commis-
sion re- mission mission in rev- sion A/c
ceived is A/c A/c enue/
income gains
29

Activity: 03 : Fill the following table.

(Modern Approach)
Sr. Transaction Two Accounts Catego- Rules Account Account
No. Aspects/ Involved ries Applied to be Deb- to be
Effects ited Credited
1. Rajesh Commenced
business with Cash
` 80,000
2. Paid Telephone bill
(Office) ` 5,000
3. Goods purchased for
cash ` 8,000.
4. Sold goods to Manoj
worth ` 6,000
5. Purchased Machinery
from Suresh on credit
` 15,000
6. Received Rent
` 2,500

2.7 Illustration–I:
State the types of two accounts involved in the following transaction.
1) Commenced business with Cash `70,000.
(i) Cash A/c
(ii) Capital A/c
2) Deposited Cash into Bank of India `10,000.
(i) Bank of India A/c
(ii) Cash A/c
3) Withdrew Cash from Bank of India for Office use `5,500.
(i) Cash A/c
(ii) Bank of India A/c
4) Purchased goods for Cash `5,000.
(i) Purchases A/c
(ii) Cash A/c
5) Purchased goods on credit from Kiran Stores `6,000
(i) Purchase A/c
(ii) Kiran Stores A/c
6) Sold goods for Cash `3,000.
(i) Cash A/c
(ii) Sales A/c
7) Sold goods to Rohini `9,000.
(i) Rohini A/c
(ii) Sales A/c
8) Received Dividend `4,500.
(i) Cash A/c
(ii) Dividend A/c
9) Paid Audit fees `1,000.
(i) Audit fees A/c
(ii) Cash A/c
30

Illustration – 2
Classify the following accounts into Personal, Real and Nominal accounts.
1) Stationery A/c 2) Mahesh's A/c
3) Machinery A/c 4) Capital A/c
5) Loss by Fire A/c 6) Pune Municipal Corp. A/c
7) Building A/c 8) Bank of Maharashtra A/c
9) Copyright A/c 10) Repairs A/c
11) Laptop A/c 12) Wages A/c
Solution :
Personal Account Real Account Nominal Account
Mahesh's A/c Machinery A/c Stationery A/c
Capital A/c Building A/c Loss by fire A/c
Pune Municipal Corp. A/c Copyright A/c Repairs A/c
Bank of Maharashtra A/c Laptop A/c Wages A/c
Illustration – 3
Classify the following accounts under Personal, Real and Nominal Accounts.
1) Cash A/c 2) Outstanding Salary A/c 3) Rohit's A/c
4) Furniture A/c 5) Life Insurance Corp. A/c 6) Goodwill A/c
7) Prepaid Insurance A/c 8) Trademark A/c 9) Commission A/c
10) Loan A/c 11) Drawings A/c 12) Interest A/c
Solution :
Personal Account Real Account Nominal Account
Outstanding Salary A/c Cash A/c Commission A/c
Rohit's A/c Furniture A/c Interest A/c
Life Insurance Corp. A/c Goodwill A/c
Prepaid Insurance A/c Trademark A/c
Loan A/c
Drawings A/c
Illustration – 4
Classify the following accounts under Assets, Liabilities, Income and Expenditure.
1) Prepaid Rent 2) Salary A/c 3) Bank Loan A/c
4) Motor Car A/c 5) Rent Payable A/c 6) Bad Debts A/c
7) Copyright A/c 8) Interest Received A/c 9) Dividend Received A/c
10) Premises A/c 11) Insurance Premium A/c 12) Audit Fees A/c
31

Solution :
Assets Liabilities Income/Gains Expenditure/Loss
Prepaid Rent A/c Bank Loan A/c Interest Received A/c Salary A/c
Motor Car A/c Rent Payable A/c Dividend Received A/c Bad debts A/c
Copy Right A/c Insurance Premium A/c
Premises A/c Audit Fees A/c
Illustration – 5
Classify the following accounts into Assets, Liabilities, Income, Expenditure and Capital.
1) Land and Building 2) Interest Received 3) Computer
4) Sundry Creditors 5) Bills Receivables 6) Discount Allowed
7) Sundry Debtors 8) Goodwill 9) Freight
10) Discount Received 11) Bills Payable 12) Amit`s Capital
13) Interest on Fixed deposit. 14) Bank Overdraft 15) Live Stock
16) Printing & Stationery 17) Cash at Bank 18) Rent Received
19) Repairs & Maintenance 20) Carriage 21) Outstanding Rent
22) Commission Received 23) Bank Loan 24) Electricity Bill
25) Copyright
Solution :
Assets Liabilities Income/Gains Expenditure/Loss Capital
Land & Building Sundry Creditors Interest Received Discount Allowed Amit`s Capital
Computer Bills Payable Discount Freight

Received
Bills Receivable Bank Overdraft Interest on Fixed Repairs &
deposit. Maintenance
Sundry Debtors Outstanding Rent Rent Received Carriage
Goodwill Bank Loan Commission Printing and
Received Stationary
Live Stock Electricity Bill
Cash at Bank
Copyright

32

2.8 Accounting Equations:

Accounting equation signifies that assets of a business are always equal to the total of its
liabilities and capital.
The equation is expressed as follows-
Assets = Liabilities + Capital
The fundamental equation gives the foundation to the Double Entry Book-keeping system.
Following are the equations-
Capital = Total Assets – Outsider’s Liabilities
Assets = Capital + Outsiders Liabilities
Assets = Liabilities
Example:-
1. Rahul started business with Cash `50,000.
The accounting equation will be-
Assets = Capital + Liabilities
Cash = Capital + Liabilities
`50,000 = `50,000 + 0
`50,000 = `50,000
2. Rahul purchased Machinery from H.P. Co. on credit of `10,000.

Cash + Machinery = Capital + Sundry Creditors
`50,000 + `10,000 = `50,000 + `10,000
`60,000 = `60,000
3. Rahul purchased goods `20,000.

Cash + Machinery + Stock = Capital+ Sundry Creditors
Old Bal.`50,000+ `10,000 + 0 = `50,000 + `10,000
New Transaction `30,000 + `10,000 + `20,000 = `50,000 + `10,000
New Balance. `30,000 + `10,000 + `20,000 = `50,000 + `10,000
`60,000 = `60,000
33

Illustration–1:
Show the accounting equation for the following transactions.
1) Rohit Sharma started business with cash `50,000.
2) Purchased goods from Dhoni on credit `10,000
3) Sold goods to Virat on credit `20,000.
4) Received Dividend `500.
5) Paid for Advertisement `500
Solution :
Transaction Assets = Liabilities + Capital
(`) (`) (`)
1 Rohit Sharma started business with 50,000 = 0 + 50,000
cash ` 50,000
50,000 = 0 + 50,000
2 Purchased goods from Dhoni on (+) 10,000 = 10,000 + 0

credit ` 10,000
60,000 = 10,000 + 50,000
3 Sold goods to Virat on credit `20,000. (-) 20,000
(+) 20,000 = 0 + 0
60,000 = 10,000 + 50,000
4 Received Dividend ` 500 (+) 500 = 0 + (+)500
60,500 = 10,000 + 50,500

5 Paid for Advertisement ` 500 (-) 500 = 0 + (-) 500
Total 60,000 = 10,000 + 50,000
Illustration– 2:
Give the accounting equation for the following transactions-
1) Rupali commenced business with bank balance ` 25,000.
2) Purchased Machinery for cash ` 5,000.
3) Bought goods from Swara worth ` 3,000 on credit.
4) Paid for Salaries ` 3,000.
5) Received Interest ` 200.
34

Solution :
Transaction Assets (`) = Liabilities (`) + Capital (`)
1) Rupali commenced business with 25,000 = 0 + 25,000
bank balance `25,000.
25,000 = 0 + 25,000
2) Purchased Machinery for cash `5,000 (+) 5,000
(-) 5,000 = 0 + 0
25,000 = 0 + 25,000
3) Bought goods from Swara worth (+) 3,000
`3,000 on credit = 3,000 + 0
28,000 = 3,000 + 25,000
4) Paid for Salaries `3,000 (-) 3,000 = 0 + (-)3,000
25,000 = 3,000 + 22,000
5) Received Interest `200 (+) 200 = 0 + (+) 200
Total 25,200 = 3,000 + 22,200
Illustration– 3:
1) Arjun started business with Cash `90,000.
2) Purchased Motor Car on credit from Honda Co. for `30,000.
3) Purchased goods from Karan worth `10,000 on credit.
4) Goods destroyed by fire `1,000.
5) Depreciation on Motor Car for 1 year is `1,000.
6) Goods sold for cash `5,000.
1) Arjun started business with Cash 90,000 = 0 + 90,000
`90,000
90,000 = 0 + 90,000
2) Purchased Motor Car on credit from (+) 30,000 = 30,000 + 0
Honda Co. for `30,000.
1,20,000 = 30,000 + 90,000
3) Purchased goods from Karan worth (+) 10,000 = 10,000 + 0
`10,000 on credit.
1,30,000 = 40,000 + 90,000
4) Goods destroyed by fire `1,000. (-) 1,000 = 0 + (-)1,000
1,29,000 = 40,000 + 89,000
35

5) Depreciation on Motor car for 1 year (-) 1,000 = 0 + (-) 1,000

is `1,000.
6) Goods sold for cash `5,000 1,28,000 = 40,000 + 88,000
(-)5,000 0 0
(+)5,000
Total 1,28,000 = 40,000 + 88,000
Illustration– 4:
1) Nima started business with cash `60,000
2) Deposited cash into Bank of India `2000
3) Additional capital brought by Nima `7,000
4) Purchased goods from Varma worth `10,000
5) Sold goods to Karma `7,000
6) Paid Carriage `5,000
7) Received Interest `200.
Solution :
1) Nima started business with cash 60,000 = 0 + 60,000
`60,000.
60,000 = 0 + 60,000
2) Deposited cash into Bank of India (-) 2,000 = 0 + 0

`2000. (+)2,000
60,000 = 0 + 60,000
3) Additional capital brought by Nima (+) 7,000 = 0 + (+) 7,000

` 7,000.
67,000 = + 67,000
4) Purchased goods from Varma worth (+) 10,000 = (+) 10,000
`10,000.
77,000 = 10,000 + 67,000
5) Sold goods to Karma ` 7,000. (-) 7,000
(+)7,000
77,000 = 10,000 + 67,000
6) Paid Carriage `5,000. (-) 5,000 = 0 + (-) 5,000
72,000 = 10,000 + 62,000
7) Received Interest `200. (+) 200 = 0 + (+) 200
Total 72,200 = 10,000 + 62,200
36

Illustration– 5:
Show the accounting equation for the following transactions-
1) Mr. Mehta started business with `80,000
2) Purchased goods on credit from Ashwin `12,000.
3) Purchased Furniture from S.M Furniture Mart on credit `6,000
4) Sold goods to Anand worth `10,000.
5) Withdrew cash for personal use `2,500
6) Sold goods costing `12,000 at profit of `2,000.
Solution :
1) Mr. Mehta started business with 80,000 = 0 + 80,000
`80,000.
80,000 = 0 + 80,000
2) Purchased goods on credit from (+) 12,000 (+) 12,000 + 0

Ashwin `12,000.
92,000 = 12,000 + 80,000
3) Purchased Furniture from S.M (+) 6,000 = (+) 6,000 + 0

Furniture Mart on credit `6,000.
98,000 = 18,000 + 80,000
4) Sold goods to Anand worth `10,000. (-) 10,000 = 0 + 0

(+)10,000
98,000 = 18,000 + 80,000
5) Withdraw cash for personal use (-) 2,500 = 0 + (-) 2,500

`2,500
95.500 = 18,000 + 77,500
6) Sold goods costing `12,000 at a profit (-) 12,000 = 0 + (+) 2,000

of `2,000. (+)14,000
Total 97,500 = 18,000 + 79,500
Activity : 04
Show the accounting equation for the following transactions and fill the table.
1) Mr. Manohar started business with ` 75,000.
2) Purchase Stationery ` 1,000
3) Bought goods ` 6,000 from Mohan.
4) Sold goods to Radha ` 10,000.
5) Purchase Mobile For business ` 2,000.
6) Sold goods costing ` 20,000 at a profit of ` 5,000.
7) Paid salary ` 2,500.
37

Transaction Assets = Liabilities + Capital
Activity: 05
In your college there are some basic rules and regulations to be followed by everyone.
What will happen if the rules are broken? What will happen if there are no such rules?

Q.1 Answer in one sentence only.
1) What is Double Entry System?
2) What is an Account?
3) State the meaning of Single Entry System.
4) What is Personal Account?
5) State the rule of Nominal Account.
6) Give two examples of intangible assets?
7) State the meaning of Real Account.
8) Give two examples of income and gains.
9) State the rule of Personal Account.
10) How many methods of recording accounting information are there?
38

Q.2 Write one word / term or phrase which can substitute each of the following statement.
1) Method of Accounting which records both aspect of transaction.
2) Right hand side of an account.
3) Name of the account which is debited when proprietor uses business money for personal
use.
4) Accounts of Assets and Properties.
5) Accounts of Expenses and Losses and Incomes and Gains.
6) Left hand side of an account.
7) The Assets which cannot be seen, touched or felt.
8) Person who invented the Double Entry System.
9) Incomplete system of recording business transactions.
10) Scientific system of recording business transactions.
Q.3 Select the most appropriate alternatives from those given below and rewrite the
statements.
1) International Accounting day is observed on . . . . . . . . . . . . . .

a) 10th November b) 12th November
c) 10th December d) 15th December
2) Conventional system of accounting is . . . . . . . . . . . . . .
a) English entry system b) Double entry system
c) Indian system d) None of these
3) Every debit has corresponding . . . . . . . . . . . . . .
a) Debit b) Credit c) Right hand side d) None of these
4) Radha`s Account is a type of . . . . . . . . . . . . . account.
a) Nominal b) Personal c) Real d) Expenses
5) Machinery Account is . . . . . . . . . . . . . account.
a) Nominal b) Income c) Personal d) Real
6) Goodwill is . . . . . . . . . . . . . . asset.
a) Tangible b) Current c) an intangible d) None of these
7) Prepaid expenses is . . . . . . . . . . . . account.
a) Real b) Personal c) Nominal d) Income
39

8) Debit the receiver, Credit the . . . . . . . . . . . . . .

a) Goes out b) Giver c) Income and gains d) Comes in
9) Debit what comes in, Credit what . . . . . . . . . . . . . .
a) Giver b) Expenses and losses
c) Goes out d) Income and gains
10) Debit all . . . . . . . . . . . . . . and Credit all income and gains.
a) Giver b) Expenses and losses c) Goes out d) None of these
Q.4 State whether the following statements are True or False with reasons.
1) Outstanding expense is nominal account.
2) Capital account is a real account.
3) Every debit has equal and corresponding credit.
4) Discount received is a nominal account.
5) Drawings account is a nominal account.
6) Outstanding salary is a nominal account.
7) Loan account is personal account.
8) Goodwill account is a real account.
9) Trade discount account is a nominal account.
10) Personal transactions of proprietor are recorded in the books of account of business.
11) Motor car account is a Real Account.
12) The rule of Nominal Account in Debit the receiver and Credit the giver.
13) Bank loan account is a Nominal account.
14) Assets = Capital + Liabilities
15) Trademark account is a personal account.
Q.5 Fill in the blanks.
1) Increase in asset is debited and decrease in asset is . . . . . . . . . . .

2) Assets = Liabilities + . . . . . . . . . . .
3) Increase in capital is credited and decrease in capital is . . . . . . . . . . .
4) Scientific and complete system of recording is known as . . . . . . . .
5) Debit all expenses and losses, Credit all . . . . . . . . . . .
6) Land and Building account is . . . . . . . . . . . account.
7) Cash Book and Personal Accounts are only maintained under . . . . . . . system.
40

8) Debit what comes in and credit what goes out is the rule of . . . . . . . . account.
9) Travelling expenses account is . . . . . . . . . . .type of Account.
10) Every transaction has . . . . . . . . . . . effect.
11) . . . . . . . . . . . accounts are accounts of properties and assets.
12) Laptop account is a . . . . . . . . . . . account.
Q.6 Classify the following accounts under the types of Personal, Real and Nominal account.
1) Mr. Rohit’s capital A/c 2) Loose Tools A/c
3) Drawing A/c 4) Cartage A/c
5) Prepaid Rent A/c 6) Copyright A/c
7) Patent A/c 8) Outstanding Income A/c
9) Prepaid Expenses A/c 10) Commission Received A/c
11) Freight A/c 12) Plant and Machinery A/c
13) Sundry Income A/c 14) Live Stock A/c
15) Goods distributed as free sample A/c 16) Radhika`s A/c
17) Outstanding Wages A/c 18) Loss on Sale of Furniture A/c
19) Bank of Maharashtra A/c 20) Loan A/c
21) Computer A/c 22) Legal Expenses A/c
23) Fixed Deposit A/c 24) Income Receivable A/c
25) Audit Fees A/c 26) Trademark A/c
27) Loss by fire A/c 28) Motor Car A/c
29) Income tax A/c 30) GST A/c (Goods and Service Tax)
31) Siddhivinayak Trust A/c 32) Offfice Equipment A/c
33) Stock of Stationery A/c 34) Indian Railways A/c
35) Income Received in Advance A/c 36) Dividend on Investment Advance A/c
37) Discount A/c 38) Raj & company A/c
39) Repairs A/c 40) Royalty A/c
41

Q.7 Complete the following Accounting equation table.

1. Started business with
? = ? + 50,000
Cash ` 50,000
2. Purchased goods of
? = ? + ?
` 10,000
3. Goods stolen ` 1,000 ? = ? + ?
4. Sold goods for cash
? = ? + ?
` 5,000
5. Loan taken from
? = ? + ?
Bank ` 7,000
Q.8 Give necessary transactions for the following effect of increase and decrease in Assets,
Capital and Liabilities.
1) Increase in Assets
Decrease in Assets
2) Increase in Capital
Decrease in Assets
3) Decrease in Liabilities
Decrease in Assets
4) Decrease in Assets
Decrease in Capital
PRACTICAL PROBLEMS
Q. 1 Prepare a chart showing Analysis of the following transactions in a Tabular form according
to Traditional Approach:
1. Rajasaheb started business with cash ` 85,000.
2. Goods Purchased for cash ` 5,000.
3. Sold goods on credit worth ` 6,000.
4. Cash deposited into Bank of Maharashtra ` 12,000.
5. Interest received ` 700 from Radhika.
6. Paid Rent ` 2,000 to landlord.
7. Bought goods on credit from Birajmohan `7 ,000.
8. Withdrew cash from bank ` 1,000 for office use.
9. Purchased computer ` 9,000 for cash.
10. Paid Mobile bill (office) ` 500.
11. Sold old Mobile ` 2,000.
12. Received Rent ` 1,000 from tenant.
42

Q. 2 Prepare Chart showing Analysis of the following transaction in a Tabular form ac-
cording to Modern Approach.
1. Mr. Meghraj started business with cash ` 30,000.
2. Deposited cash into Bank of India ` 2,000.
3. Withdrew cash ` 1,000 for personal use.
4. Purchased goods on credit from Nilesh ` 2,000.
5. Cash purchases ` 3,000.
6. Paid Wages ` 400.
7. Purchase a chair for office use ` 3.200.
8. Sold goods to Mohan worth ` 1,200.
9. Withdrew Cash for Office use ` 3,000.
10. Sold old furniture ` 9,000.
11. Received Dividend of ` 1,000.
12. Paid for Printing bill book ` 200.
Q.3 Give the accounting equation for the following transactions:
1. Mr. Vaibhav started business with Cash ` 1,00,000.
2. Purchased goods on credit from Rita Stores ` 9,000.
3. Purchase Laptop for office use ` 10,000.
4. Sold goods to Rina on credit ` 12,000.
5. Received Interest ` 2,500
6. Paid Telephone bill ` 1,300.
Q. 4 Give the accounting equation for the following transactions.
1. Mr. Swaraj commenced business with Bank balance ` 1,10,000.
2. Purchased Furniture on credit from S.M Furniture Mart ` 25,000.
3. Bought goods on credit from Yuvraj ` 15,000.
4. Purchased Machinery ` 10,000.
5. Paid Electricity bill ` 3,500.
6. Goods destroyed by fire ` 1,500.
Q. 5 Show accounting equation for the following transactions:
1. Rohit started business with cash ` 50,000.
2. Bought goods on credit from Manoj ` 6,000.
3. Cash purchases ` 5,000.
4. Paid wages ` 3,000 to Casual labour.
5. Sold goods to Santosh ` 7,000 on credit.
6. Received Commission ` 1,000 from Vaishali.
j j j
43

3 Journal
Contents
3.1 Meaning, Importance and Utility of Accounting Documents.

3.2 Meaning, Definition, Importance and Utility of Journal.
3.3 Specimen of Journal.
3.4 Recording of Journal entries with GST.
o Students are able to prepare accounting documents

o Students can get ability to analyse the effect of each transactions.
o Students become familiar with the standard form and arrangement of Journal entries.
o Students can calculate GST on purchase of goods.
o Students can calculate GST on sale of goods.
o Students are able to prepare Journal Entries correctly.
3.1 Introduction:
Book Keeping records all day to day business transactions on the basis of supporting documents.
The word ‘document means a piece of paper which provides detailed information as a legal nature .
Document is a legal proof for recording every transaction e.g. when we purchase computer for cash
`30,000 we get the cash memo , this cash memo is a source document. The person or accountant first
ensure the reliability and legal proof of the transactions recorded in the books of accounts .Every
entry in books of accounts is supported by the relevant documentary evidence .These papers are called
‘Accounting documents’ . The accounting documents are the base for entering business transactions
into the books of accounts
Importance and utility of Accounting documents
1. Documents are necessary for recording all transactions into the books of accounts.
2. The accounting transactions are recorded in proper mode and computer based.
3. Accounting documents are stored in physical files or in software.
4. Accounting documents are legal evidence for court matters.
5. Accounting documents are required for charity commissioner's office.
6. Accounting documents are required for payments of state government and local
body authority.
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The most important Accounting Documents for recording transactions in Journal are as follows :
VOUCHER :
Voucher is a document that supports a payment made by the businessmen . It is a legal evidence
that certain sum of money has been paid to a specific person or party. There are different types of
vouchers prepared by the businessmen e.g. Cash voucher, Bank voucher, Purchase vouchers, Sales
Vouchers, Travel bills, Wages bill, Salaries bill etc.
There are two types of vouchers internal voucher and external voucher.
Internal vouchers: The internal vouchers are documents prepared internally by an organisation.
The voucher which is created by the business itself and signed by the payee is called as an internal
voucher. It is prepared when we cannot get receipt as proof for such a transactions. e.g. Taxi fare, Bus
fare, Auto fare etc.
External voucher: These vouchers are documents generated from outside the business. It is
a document received from an outside agency regarding the business transactions. e.g. Tax Invoice
received from the seller for the purchase of goods or stationary, Receipt of electricity bills paid, Debit
Note, Credit Note, Cash memo etc.
Journal voucher: Journal voucher is basic/original voucher on the basis of which the transactions
should be Journalised in journal book.
Specimen of Journal voucher
Journal voucher
Name of the firm

Voucher no. : Transaction no. : Date :
Name of debit account :
Name of credit account :
Particulars Amount (`)
Amount In words `
Approved by Authorised by Sign
Cash voucher
Meaning: The evidence of cash payments and cash receipts is called cash voucher. When the
amount is spent in cash ,one should prepare a voucher. If any document from the payee is obtained
then that itself can be treated as a voucher it may be prepared for the payment and external document
may be attached to the same. It is a document on the basis of which entries will be made in the Cash
Book.
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CASH VOUCHER
Nakul & Company
Voucher no. : Bandra Road, Mumbai Date :
G.S.T. I.N. No. :
Pay to
on account of
Debit account
Total ` only
Amount `
Prepared by Passed by Receiver sign

TAX INVOICE
Meaning of Tax Invoice :Tax Invoice is a document prepared by the seller to inform the buyer
about the quantity supplied, rates and terms of payment at which goods are supplied trade discount if
any allowed, CGST and SGST and the total amount payable by him. It is 'purchase invoice' or inward
invoice for the buyer and ‘sales invoice’ or outward invoice for the seller. Entries in the Purchase
Books are made on the basis of the purchase invoices received. Entries in the Sales Book are made on
the basis of sales invoices. Tax invoice is sent by the seller to the buyer when goods are supplied by
him.
Specimen of Tax Invoice
Tax invoice
Sunil General Stores
Cash bill No.: Shop no. 5 Laxmi road, Pune
G.S.T. I.N. No. : Date:
Name : (Customer Name)
Address :
Sr. Particulars HSN Rate Qty Taxable CGST SGST Total

No. No. amount % % Amount (`)
Rupees (in words) Bank Details :

Bank Name :
Branck IFSC Code :
A/c No. :
E & O.E. Signature
46

CREDIT MEMO
A Credit Memo is also known as an Invoice or bill . When goods are purchased on credit basis
a seller prepares the credit memo (sales Invoice or tax Invoice) and sends it to the customer along
with the articles .When same memo is issued to the buyer it is called ‘Inward Invoice’ and the same is
treated as ‘Outward Invoice’ by the seller. Therefore a credit memo is a statement given by the seller
to the customer providing the details of goods sold for which certain amount becomes due from the
customer. In the Purchase Book and the Sales Book entries are made on the basis of an invoice
RECEIPT:
Meaning : In modern business to increase the profit the businessmen sells goods on credit but
the payment will be made on future date . At the time of making payment the receiver is required to
acknowledge the payment for this purpose a document is prepared called as receipt .On the basis of
this document entries will be made in the Cash Book.
RECEIPT
Balaji and Sons Receipt no-------------
Somwar Peth, NASIK Date----------------
G.S.T.I.N. No. :---------------
Received with thanks from M/s--------------------------------------------------------------------------------
a sum of `-------------------------------------------------------------by cash/cheque/D.D./NEFT/R.T.G.S.
No.------------------------------------Dated----------------------Drawn on------------------------------------
in part/full payment of bill No.-------------------------------------------
`
STAMP
Subject to realisation of cheque ReceiversSignature
CHEQUE
While dealing with business transactions businessmen use different types of cheques to make
payments and for sending money from one place to another. Cheque book facility is given by the bank
to its account holders who maintains a certain minimum balance.
A cheque is an order issued by the account holder to his banker to pay on demand a stated sum
of money to or to the order of specified person or to the bearer. The printed cheque book is issued by
the Bank to the Account holder as per his requirement.
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Definition of Cheque
“A cheque is a written unconditional order signed by the Account holder directing a specific
Banker to pay on demand certain sum of money only to a person named there in or to the bearer”.
Parties to a Cheque
There are three parties to cheque
(a) The Drawer: The person who draws a cheque is called as drawer.
(b) The Drawee: The bank on whom the cheque is drawn is called a drawee. The drawee is
always the bank.
(c) The Payee: The person in whose favour a cheque is issued is called as a payee.
Contents of Cheque
1) Name of the Bank and address of the branch.
2) The date of issuing cheque.
3) Name of the payee.
4) Amount in words and figures.
5) Name and signature of account holder.
6) Cheque number.
7) MICR number.
8) IFSC code.
9) Account number.
Types of Cheques
A cheque may be
1) Bearer cheque 2) Order cheque 3) Crossed cheque
1) Bearer Cheque: Any person who can get the payment of the cheque at the counter of the bank
is called as a bearer cheque. Any person who holds the cheque and is physically present at the
counter and signs the same in front of the banker can get the amount of cheque.
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Specimen of a Bearer Cheque
DD MM YY
Pay________________________________________________________________OR BEARER
RUPESS _____________________________________________________________________
A/C NO. `
State Bank of India,

M.G. Road, Mumbai.
IFSC No. SBIN1234001. Signature
“ 123456” 4110150351: 00796411
2) Order cheque : When a cheque is drawn payable to a specific person or order is called as an
order cheque.The payment of order cheque is made by the bank to the person's name mentioned
therein or to any other person ordered by him. When the word Bearer is struck off it becomes
an Order Cheque.
Specimen of an Order Cheque
DD MM YY
Pay________________________________________________________________OR BEARER
RUPESS _______________________________________________________
A/C NO. `

M.G. Road, Mumbai.
“ 123456” 4110150351: 00796411
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3) a) Crossed Cheque: For the safe interest of the account holder and the drawee drawing two
parallel, transverse lines on the face of the cheque is called as a crossed cheque. Crossed cheque
has to be deposited into bank account and payment is made only through the bank. The effect
of this cheque is that the payment of cheque is received by the right person.
Specimen of a Crossed Cheque
DD MM YY
Pay________________________________________________________________OR BEARER
RUPESS _______________________________________________________________________
`
A/C NO.
M.G. Road, Mumbai.
“ 123456” 4110150351: 00796411
3) b) Crossed Account Payee Cheque: A crossed account payee cheque is similar to the crossed
cheque. In this type of cheque specific person/ organisation deposited cheque into the bank and
the amount is credited to his specific account only. When two parallel lines across the cheque
are drawn with the word “Account payee” only it is called as a crossed account payee cheque.
Specimen of a Crossed Account Payee Cheque
ee
ay
/cp DD MM YY
A
Pay________________________________________________________________OR BEARER
RUPESS _______________________________________________________________________
A/C NO. `

M.G. Road, Mumbai.
“ 123456” 4110150351: 00796411
50

3.2 Meaning, Definition, Importance and Utility of Journal

Introduction :
Everyday businessmen performs large number of transactions. These transactions cannot be
remembered at a glance. Therefore these transactions must be recorded in different types of books.
He keeps different accounting records. The number of books depends upon the size and nature of
business and volume of transactions but important books of accounts which must be maintained
by every businessmen are Journal and Ledger. Journal is a book employed to classify or sort out
transaction in a form convenient for their subsequent entries in Ledger Journal keeps record of daily
financial transaction . It is also known as Book of Original Entry. When the Journal transactions are
recorded in the Journal it becomes Journal entry .Journal entries consist of the name of debit and
name of credit involved in the financial transaction with a brief narration. Journal is a book in which
the business transactions are first recorded in a chronological order i.e. Date wise in the order in
which they take place.
Generally the different types of Books of Accounts are maintained by a businessman for
recording the business transactions. He maintain primary books and secondary books, Primary books
includes Journal proper and special Journal which includes Purchases Books ,Sales Book, Purchase
Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book and Secondary Book
includes Journal Ledger.
3.2.1 Meaning:
The word “Journal” is derived from the French word “JOUR” which means a “Day”. Therefore
journal means a “daily record”. A journal contains a daily record of business transactions and hence
it has been named so, as soon as a transaction takes place its debit and credit aspects are analyzed
and first of all recorded chronologically i.e. In the order of their occurrence(taking place). Journal is
a book of original entry or primary entry.
Definition :
1) According to L.C.Cropper “A journal is a book, employed to classify or sort out transactions
in a form convenient for their subsequent entry in the Ledger”
2) According to a Dictionary for Accountant written by Eric Kohler
“ A Journal is the book of original entry are recorded transaction not provided for in specialised
journals”.
3.2.2 Importance and utility of Journal:

Journal is an important book in Book-keeping. All business organisations, keep the Journal. The
importance and utility is as follows:-
1) This is the principal book of account. It includes all types of accounts of business
2) It shows all necessary information regarding transactions.
3) The Journal has date wise record of all the transactions with details about accounts it
helps to understand the events when its took place.
4) The Journal is subsidiary book in which all the day to day transactions are recorded first
in chronological order in debit and credit form and with the amount of each transaction.
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5) Accounting procedure is followed on the basis of accounting documents.

6) The narration provides a brief explanation about the transactions .It helps to increase the
clarity of every transactions.
7) It helps to find and prevent errors.
8) It helps to check arithmetical accuracy of the transactions.
9) It helps in preparation of Final Accounts.
3.3 Specimen/ Format/ Ruling/ Proforma of Journal is given below-
Journal of -----------------------------------------------------------------------------
Date Particulars L.F. Debit Credit

Amount Amount
` `
Year Name of the account debited Dr.
Month/ To Name of account credited
Date (Being.......................................)
Explanation of columns:
1) Date: In this column of Journal records of the year, month and date of every transaction is
written. The year should be written at the top and below that the month and date should be
written.
2) Particulars: In particular column the Journal entry is passed in three parts
i) Debit A/c : It records the name of the account to be debited
ii) Credit A/c : It records the name of the account to be credited
This is decided by applying the rules of Debit and Credit. The account to be debited is
always written first. The word “Dr” is written in front of debited account just near L.F.
Column. The account to be credited is written on the next line beginning with the word
“To” after leaving short space just near date column. Narration is to be written just below
the journal entry.
iii) “Narration is a brief explanation of the Journal Entry”. It is written in the bracket and
begins with word, ‘Being’
3) Ledger Folio Number : It means page number of the ledger.
The transaction entered in the journal are posted to the Ledger. In this column the page number
should be recorded against each and every account at the time of posting in ledger. The Folio
number may be written in ‘red ink’ to distinguish them from the amount
4) Debit Amount: In this column the amount of debit account is written.
5) Credit Amount : In this column the amount of credit account is written
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Casting of Journal: At the end of each page of Journal, the total of debit amount and credit
amount column is taken to check arithmetical accuracy of the transaction. The totals of both the
columns must be equal.
After recording Journal Entries, at the end of each page the total of amount columns is carried
forward to the next page by writing the words Total c/f in particulars column. The next page will
begin with the total brought forward from previous page, by writing the words Total b/f, on the last
page of journal ‘Grand Total’ is casting.
Journalising:
The process of entering or recording the transaction in a Journal is called as journalising.
Steps for Journalising:
1) Find out the accounts involved in a particular transaction.
2) Find out the types of account involved.
3) Apply the rules of debit and credit for each of the accounts involved.
4) Find out the account to be debited and the account to be credited.
5) Record the date of the transaction in the “Date column”.
6) The name of the account to be debited is to be written in “Particulars” column. On first
it is written close to the date column and name of the account to be credited is written on
the next line after leaving short space from the date column.
7) The word ‘Dr.’ is written against the name of the account debited and the name of the
account to be credited is preceded by the word ‘To’.
8) Write the amount of transaction in debit column and credit column.
9) A brief explanation of the entry is given in the bracket just below the entry.
10) After each Journal entry a line is to be drawn in particulars column only to keep the
entries of the transactions distinctly separate from each other.
11) L.F.(Ledger Folio) The page number on which the particular account is opened in the
Ledger is stated under the L.F. Column to facilitate easy reference.
How transaction travels
Source documents
Transactions
Ascertain two accounts
Classification of accounts
Ascertain two effects
A/c to be debited and A/c to be credited
Journal
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3.3.1 GST:
GST stands for Goods and Service Tax. Before GST every State had variety of taxes levied
at different stages of trading. Taxes that existed before were Excise Duty, Custom Duty, VAT,
Entertainment Tax, Central Sales Tax, Service Tax, Octroi etc. All these taxes are included under
GST, that is why GST is One nation, One tax, One market. GST is started from 1st of July 2017.
In the tax invoice for Goods, there is HSN i.e. Harmonised System of Nomenclature code while in
service invoice there is SAC. Services are also classified and special code numbers are given. These
are called SAC or Service Accounting Code.
Sr. No. Types Rate of GST Goods and services items list
1 Zero 0% Goods : Essential Commodities like food grains,
rated fruits,vegetables,milk, salt, earthen pots etc.
Services : Charitable trust activities, transport of water
use of roads and bridges, public library, agriculture,
related services, Education and Health care services etc.
2 Low 5% Goods : Commonly used items- LPG cylinder, Tea,
rated coffee, oil, Honey, Frozen vegetables, spices, sweets etc.
Services : Railway transport services, bus transport
services, taxi services.
3 Standard 12% Goods : consumer goods: butter, ghee, dry fruit, jam,
rated jelly, sauces, pickles, mobile phone etc.
(I slab) Services : Printing Jobwork, Guest house, Services,
related to construction business.
4 Standard 18% Goods : Marble, Granite, Perfumes, Metal items,
rated (most of the Computer, Printer, Monitor, CCTV etc.
(II slab) goods and Services : Courier services, Outdoor catering, Circus,
services are Drama, Cinema, Exhibitions, Currency exchange, Broker
included) Services in share trading etc.
5 Highly 28% Goods : Luxury items, Motor Cycles and spare parts,
rated Luxury cars, Pan-masala, Vacuum cleaner, Dish washer,
AC, Washing machine, Fridge, Tobacco products,
Aerated water etc.
Services : Five star Hotel accommodation, Amusement
parks, Water parks, Theme parks, Casino, Race course,
IPL games, Air transport (business class) etc.
Note : The rates and types of GST are as prescribed by the government. GST rates are subject to
change. Electricity, petrol, diesel etc are not under purview of GST.
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Example 1: Purchased Laptop from Jalaram and Company worth ` 50,000 at 18% GST and amount
paid by cheque
Cost of Laptop = ` 50,000
Add : CGST 9% = ` 4,500
SGST 9% = ` 4,500
Net value = ` 59,000
Journal Entry
Debit Credit
Date Particulars L.F.
Amount (`) Amount (`)
Year Laptop A/c Dr. 50,000
Month/ Input CGST A/c Dr. 4,500
Date Input SGST A/c Dr. 4,500
To Bank A/c 59,000
(Being purchased Laptop by cheque at
18% GST)
Example 2: Sold Motor Car for ` 1,00,000 at 28% GST and amount received by cheque
Cost of Motor Car = ` 1,00,000
Add : CGST 14% = ` 14,000
SGST 14% = ` 14,000
Net value = ` 1,28,000
Journal Entry
Debit Credit
Year Bank A/c Dr. 1,28,000
Month/ To Motor Car A/c 1,00,000
Date To Output CGST A/c 14,000
To Output SGSTA/c 14,000
(Being sold Motor Car and amount
received by cheque at 28% GST)
3.4 Recording of Journal Entries
Goods Account :
The term goods includes commodities purchased by the businessmen for resale .It is generally
classified as Purchase A/c, Sales A/c, Return Outward A/c (Purchase Return), Return Inward A/c
(Sales Return), Goods withdrawn by proprietors A/c, Goods distributed as free samples A/c, Goods
destroyed by fire A/c, Goods damaged/lost in transit A/c, Goods Pilfered or stolen account.
1) Purchase Account : It is an account for recording all purchase of goods for trading/producing
activity
There are two types of purchases
i) Cash Purchases ii) Credit Purchases
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i) Cash Purchases : When goods are purchased and payment is made to seller immediately, by
cash or by bank, it is called as cash purchases.
Example 1: Purchased goods for cash from Mr. Sonu worth ` 2,000
In this transaction goods “comes in” on purchasing of goods and therefore purchase A/c is
debited on purchase of goods and cash goes out therefore cash A/c credited the entry is as follows
Debit Credit
Year Purchase A/c........................................Dr. 2,000
Month/ To Cash A/c 2,000
Date (Being purchased goods for cash)
ii) Credit Purchases : When goods are purchased and payment is to be made in future date to
seller i.e. Seller allows a certain period of time to the buyer to make the payment in respect of
such purchases it is called as credit purchases.
Example 2: Purchased goods from Mrs Sonali worth ` 15,000 on credit.
Debit Credit
Year Purchase A/c Dr. 15,000
Month/ To Mrs. Sonali's A/c 15,000
Date (Being purchased goods on credit)
2) Return Outward (Purchase Return)Account:
This account is for recording return of goods purchased.
Sometime goods purchased are returned to the supplier for various reasons like.
i) Goods are not according to sample
ii) Goods are of inferior quality.
iii) Goods are damaged in transit
iv) Goods are defective.
v) Goods are received in excess quantity than ordered.
vi) Delay in supply of Goods.
Thus, when goods purchased are returned to the supplier, it is called as “Return Outward” or
"Purchase Return"
Example 3: Returned Goods worth `200 to Mrs.Sonali

In this transaction the goods “goes out” on returning of goods to supplier therefore Return
Outward Account should be credited
Debit Credit
Year Mrs. Sonali's A/c Dr. 200
Month/ To Return Outward A/c 200
Date Purchase Return A/c
(Being goods returned)
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3) Sales: Sales for the business means goods sold. Sales are classified in the following types-
a) Cash sales b) Credit sales.
a) Cash sales: When goods are sold and money is received immediately, is called as cash sales.
Example 4: Sold goods worth ` 5,000 for cash to Mr. Govind.
Debit Credit
Year Cash A/c.................................................Dr. 5,000
Month/ To Sales A/c 5,000
Date (Being sold goods for cash to Mr. Govind)
b) Credit sales : when goods are sold and money will be received on future date it is called as
credit sales.
Example 5 : Sold goods to Mr. Govind for ` 30,000
Journal entry
Debit Credit
Year Mr. Govind's A/c....................................Dr. 30,000
Date (Being sold goods on credit)
4) Return Inward (Sales Returns):When the goods sold to customer are returned by that buyer
to the Seller due to various reasons it is called as “Return Inward” or Sales Returned.
Example 6: Govind returned goods worth ` 8000 out of goods of ` 30,000 purchased by him
Journal entry
Debit Credit
Year Return Inward A/c/ Sales Return A/c Dr. 8,000
Month/ To Govind's A/c 8,000
Date (Being sold goods returned by Govind)
5) Goods withdrawn by Proprietor

When the goods are withdrawn by proprietor from the business for his private/personal/
household use. In such case, Drawings Account is debited .The goods withdrawn by proprietor
goes out of the business and Goods withdrawn by proprietors A/c credited. The goods which are
taken by the proprietor are assumed as taken from the total purchases.
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Journal entry
Debit Credit
Year Drawing A/c........................................Dr. xxx
Month/ To Good withdrawn by Proprietor A/c xxx
Date or Purchases A/c
(Being goods withdrawn by proprietor for
personal use)
6) Goods distributed as free sample : It is the value of goods distributed by the firm as free
sample as an advertisement. Advertisement A/c is debited and the Goods Distributed as free
Sample/Purchases A/c is credited as goods goes out of the business.
Journal entry
Debit Credit
Year Advertisement A/c..............................Dr. xxx
Month/ To Good distributed as free sample A/c xxx
(Being goods distributed as free sample)
7) Goods Destroyed by fire/Accident: If goods are destroyed by fire/accident, it is a physical loss

of goods for which Loss by fire A/c is debited and since goods goes out of business, Goods
destroyed by fire/purchased A/c is credited.
A) If goods are not Insured (Uninsured) :
i) When goods destroyed by Fire/ Accident and Insurance Company has not accepted the
claim then the entry will be as follows:
Journal entry
Debit Credit
Year Loss by fire A/c...............................Dr. xxx
Month/ To Goods destroyed by fire A/c xxx
(Being goods destroyed by fire)
B) If goods are insured:
i) If full claim is admitted by the Insurance company then the entry will be as follows :
Journal entry
Debit Credit
Year Insurance Co. A/c...............................Dr. xxx
Month/ To Goods destroyed by fire A/c xxx
(Being insurance claim accepted by the
company)
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ii) If the claims is partly admitted by the Insurance Co. then the entry will be as follows:
Journal entry
Debit Credit
Year Insurance Co. A/c................................Dr. xxx
Month/ (Amt. of claim accepted / admitted)
Date Loss by fire A/c ...................................Dr. xxx
(Amt. of loss)
To Goods destroyed by fire A/c xxx
or Purchases A/c
(Being goods destroyed and Insurance co.
admitted the claim partly)
8) Goods damaged or Lost in transit:

While despatching the goods to the buyer and before it reaches him if there is any damage to the
goods in transit due to an accident then it is a physical loss of goods.
Journal entry

Year Loss in transit A/c..............................Dr. xxx
Month/ To Goods lost in transit A/c xxx
(Being goods lost in transit)
i) If goods are insured & full claim is admitted by Insurance co. Then the entry will be are
as follows :
Journal entry

Year Insurance Co. A/c.................................Dr. xxx
Month/ (Amt. of claim) xxx
Date To Goods lost in transit A/c
or Purchases A/c
(Being Insurance company admitted the
claim)
59

ii) If the claim is partly admitted by the insurance co. The entry will be as follows :
Journal entry
Debit Credit
Year Insurance Co. A/c.................................Dr. xxx
Month/ (Amount of claim admitted)
Date Loss in transit A/c................................Dr. xxx
(Claim not accepted)
To Goods lost in transit A/c xxx
or Purchases A/c
(Being goods lost in transit and partly
claim admitted)
9) Pilfered goods or stolen:

If the goods are pilfered or lost by theft or stolen it becomes physical loss of goods.
Journal entry
Debit Credit
Year Loss by theft A/c..................................Dr. xxx
Month/ To Goods lost A/c
Date or Purchases A/c xxx
(Being goods lost by theft)
3.3 Writing of Journal Entries
Types of Journal Entries
Simple Journal Compound/Combined

Entries Journal Entries
1. Simple Journal Entry:

In a simple entry, only two accounts are affected, one account is debited and the other is credited.
Few transactions are given below for Simple Journal Entries. The process of journalising can be
explained with the following illustration.
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Illustration-A
Process of Journalising:
Transactions Two effect Two Types of Rules A/c to be A/c to be
Accounts Account Applicable Debited Credited
1. Started Cash comes Cash A/c Real A/c Dr. what Cash A/c
business in to the comes in
with Cash business
` 1,00,000 Proprietor is Capital A/c Personal Cr. the giver Capital A.c
the giver of A/c
benefit..
2. Purchased Computer Computer Real A/c Dr. what Computer
Computer comes in A/c comes in A/c
of ` 20,000 Cash goes Cash A/c Real A/c Cr. what Cash A/c
for Cash. out goes out
3. Paid for Wages is an Wages A/c Nominal Dr. the Wages A/c
Wages expenses Cash A/c A/c expenses/
` 9,000 Cash goes Real A/c losses
out Cr. what Cash A/c
goes out
Illustration - B :
Journal entries
Debit Credit
1. Cash A/c...............................................Dr. 1,00,000 -
To Capital A/c - 1,00,000
(Being started business with cash)
2. Computer A/c.......................................Dr. 20,000 -
To Cash A/c - 20,000
(Being purchased Computer for cash)
3. Wages A/c............................................Dr. 9,000 -
To Cash A/c - 9,000
(Being Wages paid)
Total 1,29,000 1,29,000
Illustration-1
Journalise the following transactions in the books of Narendra General Stores
2019 April 1 Narendra commenced business with Cash ` 80,000
3 Purchased goods from Kiran ` 40,000 on credit
5 Paid rent ` 2,000
10 Sold goods to Mr.Vikas ` 5,500 on credit
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15 Purchased Furniture of ` 30,000 @ GST 18%

18 Received a Bearer Cheque of ` 25,000 from Mr.Vikas
21 Paid to Kiran by Cheque of Dena Bank ` 20,000
30 Paid Salary ` 5000
Solution:
In the books of Narendra Journal with classification of Accounts
Debit Credit
Type of
Date Particulars L.F. Amount Amount
Account
(`) (`)
2019
April
1 Cash A/c Dr. Real A/c 80,000
To Capital A/c Personal A/c 80,000
(Being started business with cash)
3 Purchases A/c Dr. Nominal A/c 40,000
To Kiran's A/c Personal A/c 40,000
(Being purchased goods from Kiran
on credit)
5 Rent A/c Dr. Nominal A/c 2,000
To Cash A/c Real A/c 2,000
(Being paid for Rent)
10 Vikas's A/c Dr. Personal A/c 55,000
To Sales A/c Nominal A/c 55,000
(Being sold goods to Vikas on credit)
15 Furniture A/c Dr. Real A/c 30,000
Input CGST A/c Dr. Nominal A/c 2,700
Input SGSTA/c Dr. Nominal A/c 2,700
(Being purchased Furniture @ 18%
GST)
18 Cash A/c Dr. Real A/c 25,000
To Vikas's A/c Personal A/c 25,000
(Being received bearer cheque from
Vikas)
21 Kiran's A/c Dr. Personal A/c 20,000
To Dena Bank A/c Personal A/c 20,000
(Being paid to Kiran by Cheque)
30 Salary A/c Dr. Nominal A/c 5,000
(Being paid for salary)
Total 2,62,400 2,62,400
62

Explanatory Note:
1. Entry on April 18
A bearer cheque is received from Vikas. Bearer cheque received is treated as cash received. [Real
A/c] and Vikas is giver [Personal A/c], Cash A/c is debited and Vikas A/c is credited.
2. Entry on April 21
The amount of cheque ` 20,000 will be paid by Dena Bank to Kiran who is receiver [Personal
A/c] hence Kiran's A/c is debited and Bank A/c is credited.
Discount :
Discount means an allowance or concession given by the seller of goods to the purchaser. There
are two types of discount: i) Trade Discount and ii) Cash Discount
i) Trade Discount: It is an allowance given on printed list price of goods. This discount is allowed
at the time of Purchase / Sale of goods on cash as well as credit transactions. Trade discount is
not recorded in the books of accounts
Example : Amar bought goods worth ` 20,000 from Rakesh at 10% trade discount.
Journal Entry in the Books of Amar ( Buyer)
Debit Credit
(`) (`)
Year Purchases A/c.......................................Dr. 18,000
Month/ To Rakesh's A/c 18,000
Date (Being bought goods from Rakesh at 10%
trade discount)
Journal Entry in the Books of Rakesh ( Seller)

Debit Credit
(`) (`)
Year Amar A/c..............................................Dr. 18,000
Date (Being sold goods to Amar at 10% discount)
ii) Cash Discount: It is the concession given to encourage prompt payment .

Discount is a Nominal Account. Cash discount is a loss to the receiver of cash and a gain to the
giver of cash. Therefore, whenever cash discount is allowed, discount allowed account should
be debited in the books of the person who receives cash and discount received account should
be credited in the books of the person who pays cash. It is to be calculated after deducting Trade
discount i.e. on invoice price. It is recorded in the books of accounts.
63

Example 1: Received from Kartik ` 1,900 and allowed him discount ` 100
Journal entry
Debit Credit
(`) (`)
Year Cash A/c ..........................................Dr. 1,900
Month/ Discount Allowed A/c .....................Dr. 100
Date To Kartik's A/c 2,000
(Being cash received and discount allowed)
Total 2,000 2,000
Example 2: Paid to Chanda ` 980 who allowed us discount ` 20

Journal entry
Debit Credit
(`) (`)
Year Chanda's A/c ...................................Dr. 1,000
Month/ To Cash A/c 980
Date To Discount Received A/c 20
(Being cash paid and discount received)
Total 1,000 1,000
2) Combined Journal Entry
In many of transactions ,more than two accounts are affected .
A Journal Entry which contains more than one debit or more than one credit or both is called as
a combined /compound Journal Entry.
Thus, in a combined Journal Entry.
(i) Several accounts are debited and one account is credited.
(ii) One account is debited and several accounts are credited.
(iii) More than one account is debited and more than one account is credited.
Example1: Simple entry and combined entry transaction :
Started business with Cash ` 150,000 Goods, ` 30,000 and Laptop ` 50,000.
Simple entry Combined entry
A) Cash A/c Dr 1,50,000 Cash A/c Dr 1,50,000
To Capital A/c 150,000 Stock of goods A/c Dr 30,000
B) Stock of goods A/c Dr 30,000 Laptop A/c Dr 50,000
To Capital A/c 30,000 To Capital A/c 2.30,000
(Being started business with cash, goods and
C) Laptop A/c Dr 50,000 laptop)
To Capital A/c 50,000
64

In the above three simple entries capital A/c is commonly credited.

Example 2: Transaction :Sold goods worth `30,000 to Kishor who paid us `10,000 on account.
Simple entry Combined entry
A) Kishor's A/c Dr 30,000 Cash A/c Dr 10,000
To Sales A/c 30,000 Kishor's A/c Dr 20,000
B) Cash A/c Dr 10,000 To Sales A/c 30,000
To Kishor A/c 10,000 (Being goods sold to Kishor and part paymnet
received)
In the above two simple entries Kishor’s A/c is debited by ` 30,000 and subsequently credited
by `10,000 . The net effect is that Kishor’s A/c is debited by `20,000 which is shown in a combined
entry.
Example 2: : Paid Wages `5000 and Salaries `2000 = Wages A/c Dr 5,000
Salaries A/c Dr 2,000
To Cash A/c 7,000
Example 3: Received Commission` 700 and Dividend `500 = Cash A/c Dr 1,200
To Commission Received A/c 700
To Dividend Received A/c 500
Illustration-2
Journalise the following transactions in the books of Sankalp General Stores
2019
July 1 Started business with Cash ` 1,00,000, Stock of Goods worth ` 50,000,
and Computer ` 50,000.
4 Purchased goods from Karina on credit ` 10,000 at 5% trade discount.
10 Sold goods to Priyanka ` 20,000 at 10% trade discount.
13 Paid into State Bank of India ` 50,000.
15 Goods worth ` 2,000 lost by theft.
18 Paid for Rent ` 4,000.
20 Received Cash of ` 17,500 from Priyanka in full settlement of her account.
25 Paid for Stationery purchased ` 8,000.
Solution: In the books of Sankalp General Stores
Journal
Debit Credit
2017
July 1
Cash A/c Dr. 1,00,000
Stock of Goods A/c Dr. 50,000
Computer A/c Dr. 50,000
To Capital A/c 2,00,000
(Being started business with Cash, Goods and
Computer)
65

4 Purchases A/c Dr. 9,500

To Karina's A/c 9,500
(Being purchased goods from Karina on credit at
5% trade discount)
10 Priyanka's A/c Dr. 18,000
To Sales A/c 18,000
(Being goods sold to Priyanka on credit at 10%
trade discount)
13 State Bank of India A/c Dr. 50,000
To Cash A/c 50,000
(Being cash deposited into State Bank of India)
15 Loss by theft A/c Dr. 2,000
To Goods Lost A/c or Purchases A/c 2,000
(Being goods lost by theft)
18 Rent A/c Dr. 4,000
To Cash A/c 4,000
20 Cash A/c Dr. 17,500
Discount Allowed A/c Dr. 500
To Priyanka's A/c 18,000
(Being cash received from Priyanka and discount
allowed)
25 Stationery A/c Dr. 8000
To Cash A/c 8,000
(Being paid for stationery)
Total 3,09,500 3,09,500
Illustration-3
Journalise the following transactions in the books of Rajkumar Grocery Seller.
2019
April 1 Rajkumar started business with Cash ` 2,00,000, Building ` 2,00,000 and borrowed
loan from Rakesh ` 50,000.
4 Deposited Cash into Dena Bank ` 50,000.
7 Purchased Computer from Brijesh of ` 30,000 @ 18% GST and paid by Cheque.
10 Cash Sales ` 90,000..
12 Goods sold on credit to Ganesh ` 10,000 at 5% Trade Discount.
15 Ganesh returned goods of ` 950.
18 Goods taken by Rajkumar for his personal use ` 1,000.
20 Paid Telephone Charges ` 500 and Taxi Fare ` 200.
22 Paid Transport Charges ` 5,000 @ 5% GST.
24 Paid Audit Fees ` 5,000 by Cheque.
66

26 Purchased Furniture of ` 70,000 and amount paid by cheque @ 12% GST.

28 Sold Motor Car worth ` 1,00,000 @18% GST and Sales proceeds credited to our
account.
30 Paid cash to Kavita ` 15,500,who allowed us discount ` 500.
Solution: In the books of Rajkumar Grocery Seller
Journal
Debit Credit
2018
April 1
Cash A/c Dr. 2,50,000
Building A/c Dr. 2,00,000
To Rakesh's loan A/c 50,000
(Being started business with Cash, Building and
loan from Rakesh)
4 Dena Bank A/c Dr. 50,000
To Cash A/c 50,000
(Being cash deposited into Dena Bank)
7 Computer A/c Dr. 30,000

Input CGST A/c Dr. 2,700
Input SGST A/c Dr. 2,700
To Dena Bank A/c 35,400
(Being purchased computer @ 18% GST and
paid by cheque)
10 Cash A/c Dr. 90,000
To Sales A/c 90,000
(Being goods sold for cash)
12 Ganesh's A/c Dr. 9,500
To Sales A/c 9,500
(Being goods sold to Ganesh on credit @5%
trade discount)
15 Return Inward A/c Dr. 950
To Ganesh A/c 950
(Being goods withdrawn for personal use)
18 Drawing A/c Dr. 1,000
To Goods Withdrawn by Proprietor A/c 1,000
67

20 Telephone Charges A/c Dr. 500

Conveyance A/c Dr. 200
To Cash A/c 700
(Being paid for Telephone charges and Taxi fare)
22 Transport Charges A/c Dr. 5,000

Input CGST A/c Dr. 125
Input SGST A/c Dr. 125
To Cash A/c 5,250
(Being paid for transport charges including 5%
GST)
24 Audit fees A/c Dr. 5,000

(Being paid for Audit fees)
26 Furniture A/c Dr. 70,000

(Being Furniture purchased with 12% GST)
28 Dena Bank A/c Dr. 1,18,000

To Motor Car A/c 1,00,000
To Output CGST A/c 9,000
To Output SGST A/c 9,000
(Being sold Motor car at 18% GST)
30 Kavita's A/c Dr. 16,000

To Cash A/c 15,500
To Discount Received A/c 500
(Being paid to Kavita and discount received)
Total 8,60,200 8,60,200
68

Explanatory Note
1) Transactions dated 7th April 2019
Cost of computer = ` 30,000
Add: 9% CGST = ` 2,700
9% SGST = ` 2,700
Total value = ` 35,400

Transport charges = ` 5,000
Add: 2.5% CGST = ` 125
2.5% SGST = ` 125
Total amount paid = ` 5,250

Cost of furniture = ` 70,000
Add: 6% CGST = ` 4,200
6% CGST = ` 4,200
Total value = ` 78,400
Illustration-4
Journalise the following transactions in the books of Shridevi Medical Store
2019
August 1 Shridevi started business with own Cash ` 90,000 , Stock of goods worth ` 40,000
Machinery worth ` 70,000 and borrowed money ` 50,000 from her friend Konika at
12% p.a.
4 Bought goods worth ` 50,000 from Madhuri @ 10% trade discount .
6 Returned goods worth `450 to Madhuri for not being as per sample
8 Sold goods worth ` 80,000 to Kiran @ 10% trade discount and received cash after
allowing her 5% cash discount.
13 Paid for Rent ` 4,000.
17 Purchased a new Machinery worth `1,00,000 from Bajaj Ltd. at 28% GST and amount
paid by debit card.
20 Paid for Salary ` 27,000.
27 Purchased 4 Computers of ` 1,20,000 @18% GST and amount paid by Debit Card.
31 Withdrew from Bank ` 10,000 for personal use.
69

Solution:
Journal of Shridevi Medical Stores
Debit Credit
2018
August
1 Cash A/c Dr. 1,40,000
Stock of Goods A/c Dr. 40,000
Machinery A/c Dr. 70,000
To Konika's loan A/c 50,000
(Being started business with cash, goods,
machinery and loan from Konika)
To Madhuri's A/c 45,000
(Being bought goods from Madhuri on credit at
10% discount)
6 Madhuri's A/c Dr. 450
To Purchase Return A/c 450
(Being goods returned to Madhuri)
8 Cash A/c Dr. 68,400
Discount allowed A/c Dr. 3,600
To Sales A/c 72,000
(Being goods sold for cash at 10% trade
discount and 5% cash discount)
13 Rent A/c Dr. 4,000
To Cash A/c 4,000
17 Machinery A/c Dr. 1,00,000
To Bank A/c 1,28,000
(Being Machinery purchase at 28% GST and
paid by Debit card)
20 Salaries A/c Dr. 27,000
To Cash A/c 27,000
(Being paid for Salary)
70

27 Computers A/c Dr. 1,20,000

(Being purchased four Computers at 18% GST
and paid by Debit card)
31 Drawings A/c Dr. 10,000

To Bank A/c 10,000
(Being cash withdrawn from bank for personal
use)
Total 6,78,050 6,78,050
Illustration-5
Journalise the following transactions of in the books of Vishal Electronics
2018
April 1 Vishal commenced business with Cash ` 90,000, and Furniture ` 60,000 Building
` 1,00,000.
4 Purchased Motor Car from Honda Company by Cheque ` 55,000 at 18% GST.
5 Paid Insurance of the above Car ` 3,000 to United India Insurance Company.
10 Paid into State Bank of India ` 40,000.
12 Paid for Salary ` 10,000 and Rent ` 3,000
15 Bought goods from Rajesh ` 80,000 and paid him ¼ amount in cash immediately.
18 Cash sales ` 60,000 @ 5% GST.
20 Received Rent ` 1,000 and Commission ` 4,000.
25 Paid for Telephone Charges ` 1,500.
27 Invoiced goods to Katrina for cash ` 75,000 at 5% GST.
29 Sunita brought goods from us ` 45,000 @ 5% GST .
30 Paid for Printing `17,000 by Debit Card of SBI.
71

Solution:
Journal of Vishal Electronics
Debit Credit
Amount Amount
2018
April 1 Cash A/c Dr. 90,000
Furniture A/c Dr. 60,000
(Being started business with Cash, Furniture and
Building )
4 Motor Car A/c Dr. 55,000

To Bank A/c 64,900
(Being purchased motor car by cheque with 18%
GST)
5 Insurance A/c Dr. 3,000
To Cash A/c 3,000
(Being paid insurance premium on motor car)
10 State Bank of India A/c Dr. 40,000

To Cash A/c 40,000
(Being cash deposited into state bank of India)
12 Salary A/c Dr. 10,000
Rent A/c Dr. 3,000
To Cash A/c 13,000
(Being paid for Rent and Salary)
To Rajesh's A/c 60,000
To Cash A/c 20,000
(Being purchased goods from Rajesh on credit
and 1/4 amount paid))
18 Cash A/c Dr. 63,000

To Sales A/c 60,000
(Being goods sold for cash at 5% GST)
72

20 Cash A/c Dr. 5,000

To Rent A/c 1,000
To Commission A/c 4,000
(Being received rent and commission)
25 Telephone charges A/c Dr. 1,500
To Cash A/c 1,500
(Being paid for postage and telephone charges)
27 Cash A/c Dr. 78,750
To Sales A/c 75,000
(Being goods sold for cash at 5% GST)
29 Sunita A/c Dr. 47,250
To Sales A/c 45,000
(Being sold good for Sunita an credit at 5%
GST)
30 Printing A/c Dr. 17,000
To State Bank of India A/c 17,000
(Being paid for stationery by Debit card)
Total 6,67,400 6,67,400
Illustration-6
Journalise the following transactions in the books of Rajwade Trading Company
2019
May 1 Started business with Cash ` 1,00,000,Bank Balance ` 2,00,000 and Building ` 2,00,000
3 Purchased goods from Ram of ` 50,000 at 18% GST.
5 Sold goods to Rakesh of ` 70,000 at 18% GST for Cash.
7 Paid for Repairs ` 5,000.
10 Placed an order with Ranveer and Sons for goods ` 60,000 at 12%GST
15 Paid for Wages ` 15,000.
18 Purchased goods from Mohan of ` 10,0000 at 12% GST.
20 Paid for Conveyance Expenses ` 7,000.
25 Purchased goods from Kishor of ` 50,000 at 28% GST and paid half the amount by
Cheque.
30 Purchased Machinery of ` 50,000 at 18% GST and half the amount paid immediately by
Cheque.
31 Withdrew from Bank ` 10,000 for personal use.
73

Solution:
Journal of Rajwade Trading Company
Debit Credit
2019
May 1 Cash A/c Dr. 1,00,000
Bank A/c Dr. 2,00,000
(Being started business with Cash, Bank balance
and Building )

To Ram's A/c 59,000
(Being purchased goods from Raman for cash @
18% GST)
5 Cash A/c Dr. 82,600

To Sales A/c 70,000
(Being sold goods to Rakesh for cash @ 18%
GST)
7 Repairs A/c Dr. 5,000
To Cash A/c 5,000
(Being paid for repairs)
15 Wages A/c Dr. 15,000
To Cash A/c 15,000
(Being paid for Wages)
18 Purchases A/c Dr. 1,00,000
To Mohan's A/c 1,12,000
(Being purchased goods from Mohan on credit at
12% GST)
20 Conveyance A/c Dr. 7,000
To Cash A/c 7,000
(Being paid for conveyance)
74


To Kishor's A/c 32,000
To Bank 32,000
(Being purchased goods from Kishor on credit
and half amount paid by cheque)
30 Machinery A/c Dr. 50,000
To Bank A/c 59,000
(Being purchased Machinery for cash @ 18%
GST)
To Bank A/c 10,000
(Being cash withdrawn from Bank for personal
use)
Total 9,13,600 9,13,600
Note: Transaction dated 10th May is happening of an event and not a transaction hence no journal
entry will be passed.
Illustration-7
Journalise the following transactions in the books of Saniya Electronics, Pune
Debit balance on 1st April 2019 Cash at bank ` 50,000, Sundry Debtors ` 15,000, Stock ` 35,000,
Plant & Machinery ` 1,00,000, Credit balances on 1st April 2019 Sundry Creditor Varsha ` 10,000
Bank loan ` 40,000 .
2019
April 1 Purchased goods worth ` 90,000 from Kangana @ 12% GST and amount paid by
Cheque.
5 Sold goods to Neha `30,000 @ 18% GST.
10 Sold goods to Sanjay of ` 50,000 @ 28% GST and payment received by Cheque.
14 Purchased Goods for Cash ` 50,000 @ 18% GST less 10% Cash Discount.
18 Paid for Advertisement ` 8,000.
20 Purchased a Horse for ` 40,000 and paid Carriage Charges ` 2,000.
22 Paid for Printing & Stationery ` 11,000.
26 Sold goods to Alok for Cash ` 13,000 @ 12% GST less 10% Cash Discount.
28 Received an amount of ` 1,000 from Varsha which was previously written off as Bad
Debts.
30 Goods costing ` 5,000 distributed as Free Sample.
75

Solution: In the books of Saniya Electronics

Journal entries
Debit Credit
2019
April 1 Bank A/c Dr. 50,000
Sundry Debtors A/c Dr. 15,000
Stock A/c Dr. 35,000
Plant and Machinery A/c Dr. 1,00,000
To Varsha A/c 10,000
To Bank loan A/c 40,000
(Being balances brought forwarded from the
previous year )
(Being purchased goods less 10% trade discount
@ 12% GST and paid cheque)
5 Neha's A/c Dr. 55,400
To Sales A/c 50,000
(Being goods sold to Neha on credit @18%
GST)
10 Bank A/c Dr. 64,000

To Sales A/c 50,000
(Being sold goods @ 28% GST and amount
received by cheque)
To Cash A/c 54,000
To Discount Received A/c 5,000
(Being purchased goods for cash at 10% cash
discount and 18% GST)
76

18 Advertisement A/c Dr. 8,000

To Cash A/c 8,000
(Being) paid for Advertisement)
20 Live Stock A/c Dr. 42,000

To Cash A/c 42,000
(Being purchased horse and paid carriage
charges)
22 Printing and Stationary A/c Dr. 11,000
To Cash A/c 11,000
(Being paid for printing and stationery)
26 Cash A/c Dr. 13,260

Discount Allowed A/c Dr. 1,300
To Sales A/c 13,000
To Output CGST A/c 780
To Output SGST A/c 780
(Being goods sold to Alok for cash @ 12% GST
and @10% cash discount)
28 Cash A/c Dr. 1,000
To Bad Debts Recovered A/c 1,000
(Being the amount previously written off as bad
debts now recovered)
30 Advertisement A/c Dr. 5,000
To Goods distributed as Free Sample A/c 5,000
(Being to goods distributed as free sample)
Total 5,60,760 5,60,760
Explanatory notes dated 26th (`)

1) Entry on April 26
value of goods 13,000
Add 6% CGST 780
Add 6% SGST 780
Total value 14,560
Less: Discount 10% on 13,000 - 1,300
cash received 13,260
77

Illustration-8
Journalise the following transactions in the books of Reymond for the Month of April 2019
2019
April 1 Purchased goods from Kajal worth ` 2,00,000 at 5% Trade Discount and @ 18% GST
and ½ amount paid by cheque.
4 Purchased Shares of Mahindra Company ` 60,000 and ` 1,000 paid as Brokerage.
9 Sold goods to Ravikant worth ` 60,000 at 10% Trade Discount and @ 18% GST 1/3
amount received by cash at 5% Cash Discount.
10 Paid College Fees of proprietor’s son ` 1,000.
12 Purchased Computer of ` 50,000 @ 18% GST
15 Paid Transport charges on the above computer of ` 2,000.
26 Paid for Rent ` 5,000 and ` Advertisement 15,000.
27 Sold goods to Salman ` 20,000 @ 18% GST .
30 Purchased Goods for ` 1,00,000 @ 12%GST and paid by cheque.
30 Wages Outstanding ` 20,000.
Solution:
In the books of Raymond
Journal entries
Debit Credit
2019
April 1 Purchases A/c Dr. 1,90,000
To Kajal's A/c 1,12,100
(Being Goods purchased 5% T.D. and 8% GST,
half amount paid by Cheque)
4 Investment in Shares in Mahindra Co. A/c Dr. 61,000
To Bank A/c 61,000
(Being purchased shares of Mahindra
Company including brokerage, amount
paid by cheque)
78

9 Cash A/c Dr. 20,178

Discount allowed A/c Dr. 1,062
Ravikant A/c Dr. 42,480
To Sales A/c 54,000
(Being goods sold to Ravikant at 10% trade
discount and @ 18% GST and 1/3 amount
received by cash and allowed 55 cash discount)
To Cash A/c 1,000
(Being paid proprietors sons college fees)
To Cash A/c 59,000
(Being purchased computer for cash @ 18%
GST)
To Cash A/c 2,000
(Being paid transport charges on purchase of
computer)
20 Salary A/c Dr. 15,000
To Cash A/c 15,000
(Being paid for salary)
26 Rent A/c Dr. 5,000
Advertisement A/c Dr. 15,000
To Cash A/c 20,000
(Being paid for Rent and Advertisement)
27 Salman A/c Dr. 23,600

To Sales A/c 20,000
(Being goods sold to Salman @18% GST)
79

30 Purchases A/c Dr. 1,00,000

(Being purchased goods @12% GST and paid by
cheque)
30 Wages A/c Dr. 20,000
To Outstanding Wages A/c 20,000
(Being wages outstanding)
Total 6,01,520 6,01,520
Explanatory notes
1) Entry on April 9
a) Invoice price = ` 60,000
Less: 10% trade discount = - ` 6,000
Value of goods ` 54,000
Add: 9% CGST + ` 4,860
9%SGST + ` 4,860
Total value ` 63,720
(1/3) (2/3)
` 21,240 ` 42,480
Less: 5% Discount = ` 1,062
Cash received = ` 20,178
Activity :
1) Journalise and collect GST Bills of 10 transactions incurred from your pocket money.
2) From your household/family transactions of a month, prepare Journal.
3) Collect minimum 10 computer generated home appliances bills and prepare Journal.
4) Visit C.A. Office and collect information about various Accounting Systems.
80


Q.1 A) Answer in One Sentence:
1) What is Journal ?
2) What is Narration ?
3) What is GST ?
4) In which year GST was imposed by the Central Government of India ?
5) What is meant by simple entry ?
6) What is the meaning of combined entry ?
7) Which account is debited, when rent is paid by Debit card ?
8) Which discount is not recorded in the books of account ?
9) In which order monthly transactions are recorded in a Journal ?
10) Which account is credited, when goods are sold on credit ?
Q.2 Give one word/term or phrase for each of the following statements:
1) A book of prime entry.
2) The tax imposed by Central Government on Goods and Services
3) Brief explanation of an entry.
4) The process of recording transactions in the Journal.
5) The French word from which the word Journal is derived.
6) Concession given for immediate payment.
7) Entry in which more than one accounts are to debited or credited.
8) Anything taken by proprietor from business for his private use.
9) Tax payable to the Government on purchase of goods.
10) Page number of the ledger.
Q.3 Select the most appropriate alternative from the alternatives given below and rewrite
1) ……… means explanation of the transactions recorded in the Journal.

a) Narration b) Journalising c) posting d) Casting
2) ……… discount is not recorded in the books of accounts.
a) Trade b) Cash c) GST d) VAT
3) Recording of transaction in Journal is called ……
a) posting b) journalising c) narration d) prime entry
4) Every Journal entry require ……
a) casting b) posting c) narration d) journalising
5) The ……… column of the Journal is not recorded at the time of journalising.
a) date b) particulars c) ledger folio d) amount
81

6) Goods sold on credit should be debited to ………

a) purchase A/c b) customer A/c c) sales A/c d) cash A/c
7) Wages paid for installation of Machinery should be debited to ……
a) wages A/c b) machinery A/c c) cash A/c d) Installation A/c
8) The commission paid to the agent should be debited to ………
a) drawing A/c b) cash A/c c) commission A/c d) Agent A/c
9) Loan taken from Dena Bank should be credited to ……
a) Capital A/c b) Dena Bank A/c c) Cash A/c d) Dena Bank Loan A/c
10) Purchase of animals for cash should be debited to ……
a) Live stock A/c b) Goods A/c c) Cash A/c d) Bank A/c
1) Narration is not required for each and every entry.
2) A journal voucher is must for all transactions recorded in the Journal.
3) Cash discount allowed should be debited to discount A/c.
4) Journal is a book of prime entry.
5) Trade discount is recorded in the books of accounts.
6) Goods lost by theft is debited to goods A/c.
7) If rent is paid to landlord, landlord's A/c should be debited.
8) Book Keeping records monetary and non-monetory transactions.
9) Drawings made by the proprietor increases his capital.
10) GST paid on purchase of goods Input tax A/c should be debited.

1) The first book of original entry is the ………
2) The process of recording transaction into journal is called ……
3) An explanation of the transaction recorded in the journal ……
4) …… discount is not recorded in the books of accounts.
5) …… is concession allowed for bulk purchase of goods or for immediate payment.
6) Every Journal Entry requires ……
7) …… discount is always recorded in the books of accounts.
8) …… is the document on the basis of which the entry is recorded in journal.
9) There are …… parties to a cheque.
10) The …… cheque is more safe than other cheques as it cannot be encashed on the counter
of the bank.
82

Q.6
1) Prepare specimen of Tax Invoice
2) Prepare specimen of Receipt
3) Prepare specimen of Crossed cheque
4) Prepare specimen of Cash voucher.
Q.7 Correct the following statements and rewrite the statements
1) All business transactions are recorded in the Journal.
2) Cash discount is not recorded in the books of accounts.
3) Journal is a book of Secondary entry.
4) GST is imposed by the Government of India from 1st July 2018.
5) Machinery purchased by the Proprietor decreases his capital.
Answer : 1) Only monetary transactions are recorded in the Journal.

2) Cash discount is recorded in the books of accounts.
3) Journal is a book of Prime entry.
4) GST is imposed by the Government of India from 1st July, 2017.
5) Machinery purchased by the proprietor increases his Capital.
Q.8 Do you agree or disagree with following statements.
1) Narration is required for every entry.
2) GST stands for Goods and Sales Tax.
3) Trade discount is not recorded in the books of accounts.
4) Wages paid for installation of Machinery is debited to Wages Account.
5) The process of entering or recording the transactions in a Journal is called as Journalising.
Q.9 Calculate the following :

1) Purchased Motor Car from Tata & Company worth ` 2,00,000 at 18% GST. Find out GST
amount.
2) Paid Transport charges ` 10,000 @ 5% GST. Calculate CGST & SGST.
3) Bought goods from Ranjan ` 10,000 @ 5% GST and 10% cash discount. Calculate cash
discount.
4) Received cheque of ` 90,000 from Kiran in full settlement of his account ` 1,00,000/-.
Calculate discount rate.
5) Sold goods of ` 1,00,000 at 10%. Trade Discount and 10% cash discount to Ram and
received 50% amount by cheque. Calculate the amount of cheque received.
83

Q.10 Complete the following table.

Debit Credit
Sr. No. Transactions
1 Paid Income Tax ` 5,000 by cheque ? -
- Bank A/c
2 Received from Sonali ` 20,000 by RTGS. Bank a/c -
- ?
3 Sanjay became insolvent and not received ` 500 ? -
- Sanjay A/c
4 Purchased Horse for ` 10,000 ? -
- Cash A/c
5 Transferred from Fixed deposit A/c of proprietor Bank A/c -
to business Bank A/c ` 50,000 - ?
PRACTICAL PROBLEMS
1. Journalise the following transactions in the books of Anand General Merchants.
2019
April 1 Mr. Anand started business with cash ` 60,000.
5 Purchased goods for cash ` 30,000.
7 Sold goods of ` 10,000 to Suresh.
10 Purchased Furniture from Mr. Govind on credit ` 30,000.
15 Paid for Rent ` 3000 and paid by debit card.
21 Purchased goods from Urmila on credit ` 70,000.
27 Paid for Transport ` 1,000 to United Transport.
30 Paid to Urmila ` 20,000 on behalf of Sharmila.
2. Journalise the following transactions in the books of Gajanan
2019
May 3 Purchased goods for ` 90,000 and amount paid by Bank directly
7 Sold goods to Satish on credit ` 30,000.
9 Paid for Postage ` 10,000
15 Received cheque of ` 30,000 from Sati.
21 Received Dividend ` 5000.
25 Purchased Laptop of ` 40,000 and paid by cheque.
28 Deposited cash ` 10,000 into State Bank of India.
31 Purchased goods for ` 40,000 and paid by RTGS
84

3. Journalise the following transactions in the books of Ashok General Stores.

2019
May 1 Received ` 5,000 from Ram on behalf of Bharat.
4 Purchased Goods for cash ` 55,000.
12 Purchased goods from Ganesh ` 30,000 on credit.
17 Sold goods to Mrs. Neha ` 60,000 on credit.
20 Purchased Machinery of ` 80,000 @ 12% GST and amount paid by cheque.
25 Paid to SG & Sons by cheque ` 30,000.
28 Received Commission ` 10,000 from Ganesh.
30 Paid Rent ` 5000.
31 Purchased Shares of Atul Company Ltd. for ` 10,000 through Demat account.
4. Journalise the following transactions in the books of Sanjay General Stores.
2019
June 1 Started business with cash ` 50,000, Bank ` 1,00,000, Goods worth ` 50,000.
5 Purchased goods from Mohan on credit ` 80,000 at 10% Trade Discount.
9 Sold goods to Urmila ` 30,000 at 5% Trade Discount.
12 Paid in to Dena Bank ` 40,000.
15 Goods worth ` 5000 distributed as free sample.
22 Paid for Commission ` 5,000 to Anand.
24 Received ` 28,000 from Urmila in full settlement of her account by Debit Card.
29 Paid for Advertisement ` 9,000/
30 Purchased Laptop for ` 20,000 @28% GST and amount paid by NEFT.
5. Journalise the following transactions in the books of Kunal Stores.
2018
August 1 Purchased goods of ` 90,000 at 10% Trade Discount and 10% Cash Discount from
Rakesh and 1/3rd amount received by cheque.
5 Opened current account in State Bank of India by depositing ` 60,000.
8 Cash purchases ` 85,000.
10 Goods sold on credit to Tushar ` 20,000 @ 10% Trade Discount.
12 Paid Salary ` 4,000.
16 Tushar returned goods of ` 250.
17 Goods taken by Kunal for his private use ` 2,000.
20 Purchased Laptop of ` 40,000 from Joshi Electronics @18% GST and paid by cheque.
22 Rent paid by cheque ` 15,000.
25 Purchased Motor car worth ` 2,00,000 for cash @ 18% GST and paid by Bank.
26 Goods distributed as free sample ` 4,000.
28 Purchased goods from Amit of ` 60,000 on credit.
30 Paid by ECS cash to Amit ` 58,500, who allowed us discount ` 1,500.
30 Sold goods ` 5,000 at a loss of ` 1,000
31 Sold goods for ` 20,000.
85

6. Journalise the following transactions in the books of Nina General Stores

2018
Sept 1 Sold goods of ` 50,000 at 10% Trade Discount and 10% Cash Discount to Raj and
received 50% by cheque and 20% by cash.
3 Bought goods worth ` 60,000 from Prashant at 7.5% Trade Discount and half amount
paid by cash.
5 Returned goods worth ` 550 to Prashant.
7 Sold goods worth ` 90,000 to Ranvir on credit at 10% Trade Discount.
12 Received Commission ` 4,500.
15 Received cheque of ` 80,000 from Ranvir in full settlement of his account.
18 Purchased Computer worth ` 80,000 from Reliance Company by cheque at 28% GST.
22 Wages paid ` 13,000.
23 Paid for Life Insurance premium ` 17,000.
27 Sold goods worth ` 28,000 to Tushar who paid us ` 18,000 immediately
7. Journalise the following transactions in the books of Varun

2018
Oct 1 Purchased Machinery of ` 95,000 and paid ` 5,000 for freight.
3 Purchased goods for ` 1,50,000 and amount paid by Bank.
6 Purchased Laptop from Nagesh & Co. worth ` 1,80,000 @ 18% GST.
10 Paid into Bank of Baroda ` 70,000.
12 Paid for Rent ` 4,000 and Commission ` 3,000.
15 Bought goods from Tushar Company Ltd. ` 1,20,000 at 12% GST and paid 1/2 amount
by RTGS.
16 Cash purchases ` 50,000 amount paid by cheque.
20 Invoiced goods to Satish ` 80,000 at 12% GST and amount received by cheque.
25 Paid for Telephone charges ` 90,000
27 Mrs. Varsha bought goods from us ` 90,000 at 12% Trade Discount.
28 Purchased goods from Abhijeet & Sons ` 1,50,000 at 18% GST.
30 Paid to Abhijeet & Sons and received 10% Cash Discount by cheque.
31. Paid for Advertisement ` 8,000 and Brokerage ` 12,000.
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8. Journalise the following transactions in the books of Dhoni Auto Car Centre
2018
Nov 1 Sold 1,000 shares for ` 100 each and paid brokerage @ 1% and amount credited to our
account.
4 Purchased goods from Ashish & Co. of ` 2,00,000.
6 Sold goods to Virat & Co. ` 1,50,000.
8 Paid for Advertisement ` 30,000 to Times of India.
10 Paid for Printing and Stationery ` 7,000.
12 Purchased goods from Prakash & Co. 1,50,000 @18% GST.
15 Paid for Transport charges ` 10,000 @12% GST.
20 Purchased goods from Vikram & Sons ` 1,20,000 @ 18% GST and paid half the amount
immediately.
25 Paid to Prakash & Co. less 10% discount.
30 Invoiced Goods to Sanjay ` 60,000.
31 Sanjay returned goods of ` 10,000.
31 Sanjay became insolvent and recovered only 50 paise in a rupee as final settlement from
him.
9. Journalise the following transactions in the books of Hero Enterprises.

Balance on 1st April 2019
Cash at Bank ` 80,000, Sundry Debtors Ram ` 20,000, Rahim ` 30,000, Stock ` 55,000,
Building ` 1,50,000.
Credit Balances on 1st April 2019
Sundry Creditors Swapna ` 20,000, Rohit ` 30,000, Bank Loan ` 50,000.
2019
April 1 Purchased goods worth ` 1,50,000 from Prashant & Co., less 10% Trade Discount.
4 Sold goods to Mr. Amit Sharma ` 70,000 at 10% Trade Discount on credit.
9 Purchased goods for cash ` 2,00,000 @28% GST amount paid by NEFT.
12 Sold Goods to Aditya Ray of ` 90,000 @28% GST.
15 Paid for Rent ` 5000 and Salary ` 18,000.
17 Paid for Proprietor's house Rent ` 12,000.
20 Sold half of the goods purchased on 9th April at 20% Profit and 28% GST.
25 Purchased Furniture ` 1,80,000 @12% GST and amount paid by RTGS.
28 Sold an old Furniture of ` 20,000 for ` 12,000.
30 Sold shares of ` 10,000 for ` 15,000 and amount received by cheque.
87

10. Journalise the following transactions in the books of Harbhajan & Co. for the month
of 1st April 2019.
Balance on 1st April 2019
Cash in hand ` 35,000, Cash at Bank ` 25,000, Furniture ` 1,50,000, Laptop `1,00,000,
Debtors : Sangita ` 40,000, Viru ` 30,000
2019
Creditors : Ganesh ` 10,000, Garima ` 40,000, Bank loan ` 50,000.
April 1 Purchased goods from Ajay kumar worth ` 2,50,000 at 10% Trade discount @18% GST
and paid 1/4 amount in Cash.
5 Purchased shares of Infosysis Company ` 50,000 and ` 500 paid as brokerage by
DematA/c.
8 Sold goods to Raj worth ` 90,000 at 10% Trade discount and 1/3 amount received by
cash and 5% cash discount is allowed.
12 Paid house rent of proprietor ` 9,000 and office rent ` 5,000.
15 Purchased Laptop of ` 60,000 @ 18% GST and paid amount by cheque.
20 Paid transport charges on the above Laptop ` 1,000 @ 18% GST.
25 Paid Commission ` 20,000 to Ram.
26 Paid Telephone Charges ` 1,000.
28 Transferred from private Bank A/c of proprietor to business Bank A/c ` 40,000.
30 Bought goods for ` 1,50,000 @ 12% as GST by cheque.
30 Exchanged our Furniture of ` 30,000 against a Motor car of the same value for business.
Activity
1. Journalise your family transactions for a month.
2. Collect various types of GST bills and compare the rates.
3. Collect different types of documents used for accounting.
j j j
88

4 Ledger
Contents
4.1 Meaning, Definition and Importance of Ledger.

4.2 Specimen of Ledger.
4.3 Posting of entries from Journal/Subsidiary Books to Ledger.
4.4 Balancing of Ledger Accounts.
4.5 Preparation of Trial Balance.
o Students are able to post recording from Books of original entries to Ledger.
o Students learn the balancing of various ledger accounts.
o Students are able to prepare Trial Balance
Introduction
In the process of accounting, all the business transactions are recorded in chronological order in
Journal. These business transactions are recorded in proper books of accounts. The books of accounts
can be grouped as follows:
Books of Accounts
Journal or Subsidiary Books Ledger

(Books of Original/Primary entry (Book of Final/Secondary entry)
We are aware that all types of business transactions are recorded in Journal e.g. Transactions
related to assets, liabilities, expenses, income, cash or credit etc.
At the end of the particular period if we want to know what is the total amount spent on particular
type of expense, or what is the amount payable to particular person /party? These types of questions
cannot be answered easily through Journal. So to overcome these limitations of Journal we need
Ledger. A Ledger is called as the main Book of Accounts. Once the transactions are recorded in
Journal or Subsidiary books the next stage is the transfer of those transactions in their respective
accounts opened in the Ledger.
4.1 Meaning and Importance of Ledger
Meaning and Definitions :
Ledger is the Principal Book of accounts. It is also called as book of final entry. It is summarised
record which contains all the accounts e.g. Assets A/c, Liabilities A/c, Capital A/c, Revenue A/c,
Expenses A/c.
89

The word ‘LEDGER’ is derived from Latin word ‘Ledger’ which means ‘to contain’ As the
ledger is the collection of all the accounts so ‘it contains’ and hence the name signifies.
1. “ A Ledger Account may be defined as a summary, statement of all the transactions relating
to persons, assets, expenses or incomes which have taken place during a given period to
time and shows their net effect”.- S. P. Jain, K. L. Narang –Advanced Accountancy
2. “Main record of the accounts of a business, traditionally, a ledger was a large book with
separate pages for each account. In modern systems ledger may consist of separate cards
or computer records’- Oxford Dictionary
3. “ A Ledger containing accounts in which all the transactions of a business enterprises or
other accounting units are classified either in detail or in summary form”- E. L. Kohler- A
Dictionary for Accountants
Importance of Ledger
1. It is the summarised record of all the transactions in form of Asset A/c, Liabilities A/c, Expenses
A/c, Income A/c etc.
2. The ultimate object of Book-Keeping is to ascertain with the least trouble, what is the amount
owed to the supplier, what is the amount receivable from the customer and so on. In the process
of posting information collected is condensed in form of Debtors A/c ,Creditors A/c to get the
ready results
3. It is necessary for preparation of Trial Balance.
4. The financial position of the business can be easily known with the help of various types of
Assets A/c and Liabilities A/c
5. It is possible to prepare various types of income statement on the basis of balances shown by
different ledger Accounts.
6. Ledger can be used as a control tool as it shows accounts of various expenses with the balance.
7. On the basis of the results shown in the Ledger it is useful for the management to forecast or
plan the future plan of action.
Contents of Ledger
Ledger is a bound book which contains several pages. Each page of a ledger is serially numbered.
For each account separate page is allotted. The page number of the ledger is called as 'Ledger Folio'
(L.F.) Each ledger account is divided into two sides. The left side is known as debit side and the right
side is known as credit side. This is indicated by writing the abbreviations ‘Dr.’ on the left side top
corner and ‘Cr.’ on the right side top corner.
Every Ledger has an index. Index is prepared in the alphabetical order. The page number on
which a particular account appears is shown against the name of the account shown in index. This
facilitates quick reference.
Both the sides of the ledger have four columns. These columns are:-
1) Date: In this column the date of the transaction is written. The year, month and date
should be clearly mentioned.
2) Particulars: In this column, the name of the account in which the corresponding credit
or debit is found under double entry principle will be mentioned. The posting on the debit
side begins with ‘To’ and on the credit side with ’By’.
90

3) Journal Folio (J.F.): Folio means page number. In Journal Folio (J.F.) column, page
number of journal from where we have transferred the entry into Ledger is to be written.
4) Amount: In the column, the amount for which an account is debited or credited is entered.
4.2 Specimen of Ledger
Specimen of the ledger in ‘T’ form is given below:
In the books of ………………..
Name of the Account
Dr. Cr.
Date Particulars J.F. Amt Date Particulars J.F. Amt
(`) (`)
Specimen of the ‘Statement form of an Account’

Date Particulars J.F. Debit Credit Balance Initial Remark
(`) (`) (`)
Do you know?????
How computerised ledger account looks
In modern accounting system we use various accounting softwares for recording the transactions.
91

Orion Computer Repair Company

General Ledger
Accounts Receivable
Date Description P.R. Debit (`) Credit (`)
9/8/2018 Computer Repair Sales GJ1 18,000

Orion Computer Repair Company
General Ledger
Accounts Receivable
Date Description P.R. Debit (`) Credit (`)
9/8/2018 Computer Spare Parts Order GJ1 7,500
25/9/2018 Computer Spare Parts Order GJ1 6,500
30/9/2018 Closing Outstanding Spare Part Bills GJ1 14,000
4.3 Posting of entries from Journal/Subsidiary books to Ledger

Transactions are recorded in various books of original entry as and when they occur. From the
books of original entry, the necessary records in the Ledger are made. The process of transferring
entries from the Journal or Subsidiary Books into the appropriate account in the Ledger is called
'Posting'.
The Recording process:

The process of recording transactions in the Ledger involves the following steps:
1) From the Journal entries, ledger posting is to be done.
2) Open the necessary ledger accounts with proper headings.
3) If the opening balance of ledger account is given , it should be posted first, either as ‘To
balance b/d’ or ‘By balance b/d’
4) For posting the transactions into the ledger account, first write the date of the transaction
in the date column.
5) In the particular column on the debit side of the ledger account the name of the account
credited in the entry is written and on the credit side of ledger account, the name of the
account to be debited in the entry is written.
Illustration 1
The above process of recording transactions can be studied with the help of following example;
1) Balance of Cash on 1st January 2018 ` 15,000
2) On 5th January 2018 Raj invested ` 10,000 in the business.
92

The Journal Entry for the transaction would be

2018 Cash A/c……………………….Dr. 10,000
Jan 5 To Raj’s Capital A/c 10,000
Dr. Cash Account Cr.

Date Particulars J.F. Amt (`) Date Particulars J.F. Amt (`)
2018 To Balance b/d 15,000
Jan 5 To Raj's capital A/c 10,000
Dr. Raj's Capital Account Cr.

2018 By Cash A/c 10,000
Jan 5
Illustration 2
Posting of combined entries
2018, Jan 18 Paid ` 3,000 as Rent and ` 5,000 as Salaries.
Combined entry:
Rent A/c………………………………Dr. 3,000
Salaries A/c……………………………Dr. 5,000
To Cash A/c 8,000
Rent A/c and Salaries A/c are debited only with the amount against them in the Journal Entry.
Cash A/c is credited with ` 8,000 in Journal entry. But since it is on account of two different expenses,
both have to be written in the credit side, the total of which is equal to ` 8,000
There are total 3 accounts involved in the entry so posting of this entry will be done in 3 ledger
accounts.
Dr. Rent Account Cr.
2018 To Cash A/c 3,000
Jan 18
Dr. Salaries Account Cr.

2018 To Cash A/c 5,000
Jan 18

2018
Jan 18 By Rent A/c 3,000
Jan 18 By Salaries A/c 5,000
93

Illustration 3
Posting of combined entries related to GST
Intra-state purchase of goods for ` 40,000 and GST applicable, amount paid by cheque.
The rates of GST applicable are
Input SGST 2.5% Input CGST 2.5% Input IGST 5%
Journal Entry (Page no. 5)
Debit Credit
2018
Jan 31 Purchases A/c Dr. 11 40,000
Input SGST A/c Dr. 15 1,000
Input CGST A/c Dr. 16 1,000
To Bank A/c 17 42,000
(Being Goods purchased and 2.5% SGST and
2.5% CGST paid )
Dr. Purchase Account (Ledger Page No. 11) Cr.

2018
Jan 31 To Bank A/c 05 40,000
Dr. Input SGST Account (Ledger Page No. 15) Cr.

2018
Jan 31 To Bank A/c 05 1,000
Dr. Input CGST Account (Ledger Page No. 16) Cr.

2018
Jan 31 To Bank A/c 05 1,000
Dr. Bank Account (Ledger Page No. 17) Cr.

2018 By Purchases A/c 05 40,000
Jan 31 By Input SGST A/c 05 1,000
By Input CGST A/c 05 1,000
94

Do You Know?
Rate of GST applicable to goods and services is different. Tax liability is to be found out according
to Inter-state sale/purchase and Intra-state sale/purchase.
Currently there are three types of GSTs applicable
1) SGST- State Goods and Service Tax
2) CGST-Central Goods and Service Tax
3) IGST– Integrated GST.
* Rate applicable to different types of goods and services subject to change according to
Government policies.
Posting of entries from Subsidiary Books

1) Posting from Cash Book
Separate column of Cash and Bank will serve as Cash A/c and Bank A/c.
So no need to open Cash A/c and Bank A/c, as the Cash Book serves the purpose of Journal as
well as Ledger. Entries posted on the debit side of the Cash Book are posted on credit side of
Personal A/c ,Real A/c or Nominal A/c . In the same way entries which are posted on credit side
of Cash Book are shown on debit side of those ledger accounts.
Posting from Petty Cash Book

Initially main cashier hands over some cash to petty cashier for that entry is
Petty Cash A/c.........................................................................Dr.
To Cash/Bank A/c
Petty cashier will spend for all petty expenses from available cash. To record theses various
expenses journal entry will be
Individual Expenses A/c .........................................................Dr.
To Petty cash A/c
Taking imaginary expenses head, the Journal Entry would be :
Travelling & Conveyance A/c.................................................Dr.
Postage A/c..............................................................................Dr.
Printing & Stationery A/c........................................................Dr.
Sundry Expenses A/c...............................................................Dr.
To Petty Cash A/c
The ledger posting will be done in Individual Expenses account as well as in Petty Cash Account.
95

Illustration 4
Posting of entries in Purchase Book
The total of Purchase Book for the month will be shown on debit side of Purchase Account and in
suppliers account effect will be shown on credit side of each Supplier’s Account.
Purchase Book
Inward
Date Particulars L.F. Amt (`)
Invoice No.
2018
Dec 5 Mudra stores 15,000
Dec 21 Akash Co. Ltd. 12,000
Total 27,000
Dr. Purchases A/c Cr.

2018
Dec 31 To Sundries as per 27,000
Purchase Book
Dr. Mudra Stores A/c Cr.

2018
Dec 5 By Purchases A/c 15,000
Dr. Akash Co. Ltd. A/c Cr.

2018
Dec 21 By Purchases A/c 12,000
Illustration 5
Posting of entries in Sales Book
The total of Sales Book for the month will be shown on credit side of Sales Account and in
customers account effect will be shown on debit side of each Customer’s Account.
Sales Book
Outward
Date Particulars L.F. Amt (`)
Invoice No.
2018
Dec 17 Narendra 22,000
Dec 22 Devendra 18,000
Total 40,000
96

Dr. Sales A/c Cr.

2018 By Sundries as per 40,000
Dec 31 Sales Book
Dr. Narendra's A/c Cr.

2018
Dec 7 To Sales A/c 22,000
Dr. Devendra's A/c Cr.

2018
Dec 22 To Sales A/c 18,000
Illustration 6
Posting of entries in Purchase Return Book/Return Outward Book
The total of Purchase Return Book will be shown on credit side of Purchase Return Account and
in suppliers account effect will be shown on debit side separately for each supplier.
Purchase Return Book/Return Outward Book
Date Particulars Debit Note No. L.F. Amt (`)

2018
Dec 7 Mudra Stores 2,200
Total 2,200
Dr. Purchase Return A/c Cr.

2018 By Sundries as per 2,200
Dec 31 Purchase Return
Book
Dr. Mudra Stores A/c Cr.

2018
Dec 7 To Purchase Return 2,200
A/c
97

Illustration 7
Posting of entries in Sales Return Book/Return Inward Book
The total of Sales Return Book for the month will be posted on debit side of Sales Return Account
and effect will be shown on credit side of each Customer’s Account.
Sales Return book/Return Inward book
Outward
Date Name of the Supplier L.F. Amt (`)
Invoice No.
2018
Dec 24 Devendra 900
Total 900
Dr. Sales Return A/c Cr.

2018 To Sundries as per 900
Dec 31 Sales Return book
Dr. Devendra's A/c Cr.

2018
Dec 24 By Sales Return A/c 900
Posting of entries from Journal Proper
The entries shown in Journal Proper are posted to respective accounts in the Ledger.
Balancing of Ledger Accounts
Balancing of Ledger accounts means totalling both the sides of Ledger Account, finding the
difference between greater total and smaller total and recording the difference on the smaller side
Steps for balancing the ledger accounts
1) Take the totals of both the sides i.e Debit and Credit.
2) Find out the difference between both the sides.
3) If the debit side total is more than the credit side then difference will be shown on credit
side as ‘By Balance c/d’ in particulars column and difference amount is shown in amount
column.
4) Same way if the credit side total is higher than the debit side total then the difference
amount is shown on debit side as ‘To Balance c/d’ in particulars column and difference
amount is shown in amount column.
5) These closing balances of different ledger accounts are shown as Opening Balances for
the next period. Closing balance shown on debit side of ledger account will be shown as
Opening Balance on the credit side at the beginning of the period as ‘By Balance b/d’
6) Closing Balance shown on credit side of ledger account will be shown on debit side of the
account as Opening Balance at the beginning of the period as ‘To Balance b/d’
98

Do you know?????
If the total of debit side of the account is higher than the
total of credit side the account is said to have Debit balance
and vice-versa.
4.4 Balancing of Ledger Accounts

1. Personal Account
2. Real Account
3. Nominal Account
Balancing of Personal Account
These accounts may have debit balance or credit balance or nil balance. A personal account having
debit balance is a Debtor and credit balance is a Creditor. Balance of these accounts is carried forward.
a) Debit balance: If the debit side total of ledger Account is more than the credit side total it
indicates a debit balance.
Illustration 8
2018
Feb 1 Sold goods to Raghav `6,000.
3 Received cash from Raghav `5,400 and allowed him cash discount `600.
17 Invoiced goods to Raghav ` 14000.
20 Received from Raghav ` 6,000.
Journal Entries
Debit Credit
2018
Feb 1 Raghav's A/c Dr. 6,000
To Sales A/c 6,000
(Being goods sold to Raghav)
3 Cash A/c Dr. 5,400
Discount Allowed A/c Dr. 600
To Raghav's A/c 6000
(Being cash received from Raghav and discount
allowed)
17 Raghav's A/c Dr. 14,000
To Sales A/c 14,000
(Being goods sold to Raghav)
20 Cash A/c Dr. 6,000
To Raghav's A/c 6,000
(Being cash received from Raghav)
Total 32,000 32,000
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Dr. Raghav's Account Cr.

2018 2018
Feb 1 To Sales A/c 6,000 Feb 3 By Cash A/c 5,400
17 To Sales A/c 14,000 3 By Discount allowed A/c 600
20 By Cash A/c 6,000
28 By Balance c/d 8,000
20,000 20,000
Mar 1 To Balance b/d 8,000
Note: Raghav’s A/c is having Debit balance so he is a Debtor of the business.
b) Credit balance: If the total of credit side of an account is more than debit side it indicates credit
balance.
Illustration 9
2019
Jan. 1 Bought goods from Anupam ` 8,000.
10 Goods returned to Anupam `700.
20 Cash paid to Anupam `7,000.
Solution : Journal entries
Debit Credit
2019
Jan 1 Purchases A/c Dr. 8,000
To Anupam's A/c 8,000
(Being goods purchased on credit)
10 Anupam's A/c Dr. 700

To Purchases Return A/c 700
(Being goods returned)
20 Anupam's A/c Dr. 7,000
To Cash A/c 7,000
(Being cash paid to Anupam)
Total 15,700 15,700
100

Posting of these entries in Anupam’s A/c

Dr. Anupam's Account Cr.
2019 2019
Jan 10 To Purchases Jan 1 By Purchases A/c 8,000
Return A/c 700
20 To Cash A/c 7,000
31 To Balance c/d 300
8,000 8,000
Feb 1 By Balance b/d 300
Note : Anupam’s A/c shows a credit balance so he is our Creditor.

Illustration 10
Following transactions took place between Abha & Nabha .Prepare Abha’s A/c in the books of
Nabha and Nabha’s A/c in the books of Abha.
2019
Sept. 1 Abha owed to Nabha ` 22,000.
3 Nabha received ` 16,000 on account from Abha.
9 Abha bought goods from Nabha ` 5,000.
20 Abha paid to Nabha ` 6,000 on account @5% cash discount.
25 Nabha received goods returned by Abha ` 550.
30 Abha paid ` 1,500 to Nabha.
In the books of Nabha
Dr. Abha's Account Cr.
2019 2019
Sept 1 To Balance b/d 22,000 Sept 3 By Cash A/c 16,000
Sept 9 To Sales A/c 5,000 20 By Cash A/c 5,700
20 By Discount 300
allowed A/c
25 By Sales Return A/c 550
30 By Cash A/c 1,500
27,000 27,000
2019
Oct 1 To Balance b/d 2,950
101

In the books of Abha

Dr. Nabha's Account Cr.
2019 2019
Sept 3 To Cash A/c 16,000 Sept 1 By Balance b/d 22,000
20 To Cash A/c 5,700 9 By Purchases A/c 5,000
20 To Discount 300
Received A/c
25 To Purchase Return 550
A/c
30 To Cash A/c 1,500
30 To Balance c/d 2,950
27,000 27,000
2019
Oct 1 By Balance b/d 2,950
Note : In the books Nabha,Abha is having debit balance so she is a debtor of Nabha.
In the books Abha, Nabha is having credit balance so she is a creditor of Abha.
Balancing of Real Account
Accounts which are related to assets and properties are real accounts. e.g.: Cash A/c, Furniture A/c
etc. Real Account always shows a debit balance.
Illustration 11
Pass necessary Journal Entries for the following transactions and show Cash Account only.
2019
Mar. 1 Cash Balance ` 10,000.
6 Bought Goods ` 2,500.
7 Received from Sudhir ` 3,000.
10 Paid to Madhuri `2,000.
12 Cash Sales `7,000.
20 Paid Rent ` 3,500.
Solution : Journal entries
Debit Credit
2019
Mar 6 Purchases A/c Dr. 2,500
To Cash A/c 2,500
(Being goods purchased for cash)
7 Cash A/c Dr. 3,000
To Sudhir's A/c 3,000
(Being amount received from Sudhir)
10 Madhuri's A/c Dr. 2,000
To Cash A/c 2,000
(Being amount paid to Madhuri)
102

12 Cash A/c Dr. 7,000

To Sales A/c 7,000
20 Rent A/c Dr. 3,500
To Cash A/c 3,500
(Being paid Rent)
Total 18,000 18,000

2019 2019
Mar 1 To Balance b/d 10,000 Mar 6 By Purchases A/c 2,500
7 To Sudhir's A/c 3,000 10 By Madhuri's A/c 2,000
12 To Sales A/c 7,000 20 By Rent A/c 3,500
20,000 20,000
April 1 To Balance b/d 12,000
Note: Cash A/c always shows a debit balance.

Balancing of Nominal Account
Nominal Accounts means the accounts which are related to expenses, incomes, losses and gains. This
account may have a debit balance or a credit balance. At the end of the accounting year the balances
of all Nominal Accounts are transferred to Trading or Profit and Loss Account.
Illustration 12
2019
Feb. 1 Salaries A/c (Dr.bal) ` 30,000
5 Paid Salaries by cheque ` 5,000
March 5 Paid Salaries ` 3,000
Accounts are closed on 31st March every year.
Dr. Salaries Account Cr.
2019 2019
Feb 1 To Balance b/d 30,000 Feb 28 By Balance c/d 35,000
5 To Bank A/c 5,000
35,000 35,000
Mar 1 To Balance b/d 35,000 Mar 31 By Profit & Loss A/c 38,000
5 To Cash A/c 3,000
38,000 38,000
103

Activity 1
Sahil is having wooden furniture manufacturing unit. He maintains his books on double entry
system. On 1.1.2018 his cash balance is `50,000. He purchased loose parts of furniture from Décor
mart at ` 6,000 on 7.1.2018. He sold Chairs to Avinash traders for ` 9,000 on 9.1.2018.
Cash purchases `4,500 on 12.1.2018, Sold a study table for ` 2,500 on 15.1.2018, Paid to Décor
mart `4,200 on 20.1.2018, Received from Avinash traders ` 7,000 on24.1.2018,Paid for cleaning
charges `800 on 28.1.2018.
Amount paid to Décor mart ` 1,500 in full settlement of account 1.2.2018. On 7.2.2018
amount received from Avinash traders `1,900 in full settlement of account. Paid for salary ` 8,000
on 15.2.2018. Paid for Rent ` 9,000 on 25.2.2018.
On the basis of above information answer the following
1. What is the balance of cash on 31.1.2018 and 28.2.2018 ?
2. Who is the Debtor on 31.1.2018 and for what amount ?
3. Who is the Creditor on 31.1.2018 and for what amount ?
4. Who is the Debtor and creditor on 28.2.2018 ?
Activity 2
You or your parents must be having Bank account. Bank provides the details of all our
transactions related to Bank in the Pass book. This book is nothing but our account (Customer’s
A/c) in the books of bank. It is computerised ledger printed in statement form. Try to read this
ledger and identify the entries posted in the Pass Book e.g. cheque deposited in bank , Amount
withdrawn from bank etc. Read the description printed in the Pass Book for these entries and write
down the 10 transactions for which entries are posted in the Pass Book.
Activity 3
An inexperienced accountant, Girish maintained a ledger account incompletely. Check the
ledger account and help him to find out the missing amounts and answer the questions given below.
In the books of Manish
Dr. Mahesh's Account Cr.
2018 2018
Mar 1 To Balance b/d 64,000 Mar 6 By Return Inward A/c …?…
3 To Sales A/c 60,000 9 By Purchases A/c 9,000
11 To Cash A/c 5,000 16 By Purchases A/c 30,000
24 To Sales A/c 31,000 22 By Bank A/c 24,000
25 To Return …?… 22 By Discount allowed 3,000
Outward A/c A/c
31 By Bank A/c 85,000
31 By Discount Allowed …?…
A/c
1,62,000 1,62,000
104

Out of the goods sold to Mahesh on 3rd March, 10% goods are returned by him on 6th March.
1) Write transactions for the postings dated 6th March and 25th March.
2) Write down the Journal Entries for the postings dated 22nd March and 31st March.
3) Is Mahesh Debtor or Creditor on 31st March?
4.5 Preparation of Trial Balance

Trial Balance
A Trial balance is an abstract or list of all the ledger accounts as on a specific date showing debit
and credit balances of all Ledger Accounts. Usually, Trial Balance is prepared at the end of the
financial year. However it can be prepared periodicaly depending upon requirement of the business.
It is prepared to ascertain the arithmetical accuracy of Books of Accounts.
Types of Trial Balance:
(1) Gross Trial Balance: In this type of Trial Balance total of debit side of a particular account is
shown in the debit column of the Trial Balance and total of credit side of a particular account is
shown in the credit column of the Trial Balance. It is not in common use as it does not disclose
the balance of each account.
(2) Net Trial Balance: In this type of Trial Balance only the balances of each ledger account are
shown against its name. If an account shows a credit balance then its balance is recorded in the
credit amount column and vice versa. this Trial Balance is used in practice
Methods of preparing Trial Balance:
There are two methods of preparing Trial Balance
(1) Vertical or Journal form of Trial Balance
(2) Horizontal or Ledger form of Trial Balance
Format of Vertical / Journal form of Trial Balance

Trial Balance as on………..
Debit Credit
Sr. No. Head of Accounts L.F.
(`) (`)
Format of Horizontal / Ledger form of Trial Balance

Trial Balance as on…………..
Sr. No. Debit Balances L.F. Amt (`) Sr. No. Credit Balances L.F. Amt (`)
105

Utility of a Trial Balance:

1) It shows balances of different Ledger accounts.
2) It proves arithmetical accuracy of Books of Accounts.
3) It helps to prepare Final Accounts of a business.
Illustration 13
Journalise the following transactions in the books of Virat traders, open necessary ledger accounts,
balance the accounts and prepare a Trial Balance as on 31st March 2019
2019
March 1 Virat started business with Cash ` 50,000, Cash at Bank of India ` 7,000, Furniture
` 10,000.
3 Purchased goods from Rohit worth ` 10,000 less 10% T.D.
7 Sold goods to Sunil ` 5,000 less 5% T.D.
10 Deposited Cash with Bank Of India ` 5,000.
12 Purchased Furniture from Varma on credit worth ` 20,000.
15 Paid to Varma by net banking ` 8,000.
17 Paid Printing expenses ` 200.
20 Received Commission ` 200.
25 Withdrew Cash from Bank ` 1,000 by ATM
28 Paid to Varma ` 11,500 in full settlement of his account.
30 Paid Advertisement bill ` 500
Solution : In the books of Virat Traders
Journal
Debit Credit
2019
Mar. 1 Cash A/c Dr. 50,000
Bank of India A/c Dr. 7,000
Furniture A/c Dr. 10,000
To Virat's Capital A/c 67,000
(Being started business with cash, bank and
furniture)
To Rohit's A/c 9,000
(Being purchased goods from Rohit less 10%
T.D.)
7 Sunil's A/c Dr. 4,750
To Sales A/c 4,750
(Being goods sold to Sunil less 5% T.D.)
106

10 Bank of India A/c Dr. 5,000

To Cash A/c 5,000
(Being cash deposited with Bank)
To Varma's A/c 20,000
(Being purchased furniture from Varma)
15 Varma's A/c Dr. 8,000
To Bank of India's A/c 8,000
(Being purchased furniture by netbanking)
17 Printing Expenses A/c Dr. 200
To Cash A/c 200
(Being paid printing bill)
20 Cash A/c Dr. 200
To Commission A/c 200
(Being received commission)
25 Cash A/c Dr. 1,000
To Bank of India's A/c 1,000
(Being withdraw cash from Bank)
28 Varma's A/c Dr. 12,000
To Cash A/c 11,500
To Discount received A/c 500
(Being paid to Varma in full settlement of his
account.)
30 Advertisement A/c Dr. 500
To Cash A/c 500
(Being paid Advertisement bill)
Total 1,27,650 1,27,650
Ledger Accounts
Dr. Virat's Capital Account Cr.
2019 2019
Mar. 31 To Balance c/d 67,000 Mar. 1 By Cash A/c 50,000
1 By Bank of India's 7,000
A/c
1 By Furniture A/c 10,000
67,000 67,000
April 1 By Balance b/d 67,000
107


2019 2019
Mar. 1 To Virat's Capital A/c 50,000 Mar. 10 By Bank of India A/c 5,000
20 To Commission A/c 200 17 By Printing A/c 200
25 To Bank of India A/c 1,000 28 By Varma's A/c 11,500
30 By Advertisement A/c 500
51,200 51,200
Dr. Bank of India's Account Cr.

2019 2019
Mar. 1 To Virat's Capital A/c 7,000 Mar. 15 By Varma's A/c 8,000
10 To Cash A/c 5,000 25 By Cash A/c 1,000
12,000 12,000
Dr. Furniture Account Cr.

2019 2019
Mar. 1 To Virat's Capital A/c 10,000 Mar. 31 By Balance c/d 30,000
10 To Varma's A/c 20,000
30,000 30,000
Dr. Purchases Account Cr.

2019 2019
Mar. 3 To Rohit's A/c 9,000 Mar. 31 By Balance c/d 9,000
9,000 9,000
108

Dr. Rohit's Account Cr.

2019 2019
Mar.31 To Balance c/d 9,000 Mar. 3 By Purchases A/c 9,000
9,000 9,000
Dr. Sunil's Account Cr.

2019 2019
Mar. 7 To Sales A/c 4,750 Mar. 31 By Balance c/d 4,750
4,750 4,750
Dr. Sales Account Cr.

2019 2019
Mar.31 To Balance c/d 4,750 Mar. 31 By Sunil's A/c 4,750
4,750 4,750
Dr. Varma's Account Cr.

2019 2019
Mar.15 To Bank of India's A/c 8,000 Mar. 1 By Furniture A/c 20,000
28 To Cash A/c 11,500
28 To Discount received 500
A/c
20,000 20,000
Dr. Printing Expenses Account Cr.

2019 2019
Mar. 1 To Cash A/c 200 Mar. 31 By Balance c/d 200
200 200
April 1 To Balance b/d 200
109

Dr. Commission Account Cr.

2019 2019
Mar.31 To Balance c/d 200 Mar. 31 By Cash A/c 200
200 200
April 1 By Balance b/d 200
Dr. Discount Account Cr.

2019 2019
Mar.31 To Balance c/d 500 Mar. 31 By Varma's A/c 500
500 500
April 1 By Balance b/d 500
Dr. Advertisement Account Cr.

2019 2019
Mar.30 To Cash A/c 500 Mar. 31 By Balance c/d 500
500 500
April 1 To Balance b/d 500
Trial Balance as on 31st March 2019

Debit balances Amt (`) Credit balances Amt (`)
Cash 34,000 Virat’s capital 67,000

Bank of India 3,000 Rohit 9,000
Furniture 30,000 Sales 4,750
Purchases 9,000 Commission 200
Sunil 4,750 Discount 500
Printing Expenses 200
Advertisement 500
81,450 81,450
110

Illustration 14
The following balances appeared in the ledger of Karan on 1st January 2018.
Debit balances Amount (`) Credit Balances Amount (`)
Cash Account 60,000 Karan's Capital A/.c 2,00,000
Purchases Account 80,000 Sales A/c 40,000
Bank of Maharashtra A/c 1,00,000
January 5 Bought goods from Rushi ` 10,000.
10 Drew from Bank ` 20,000 for office and ` 6,000 for self use.
17 Return goods to Rushi 2,000.
19 Cash Purchases ` 14,000.
22 Cash Sales ` 20,000.
26 Deposited into Bank ` 16,000.
28 Interest collected by Bank ` 7,000 on our behalf.
Solution :
Journal entries
Debit Credit
2018
Jan. 1 Purchases A/c Dr. 10,000
To Rushi's A/c 10,000
(Being goods purchased on credit )
10 Cash A/c Dr. 20,000
Karan's Drawings A/c Dr. 6,000
To Bank of Maharashtra's A/c 26,000
(Being Amount withdrawn for personal use and
office use.)
17 Rushi's A/c Dr. 2,000
To Purchases Return A/c 2,000
(Being goods returned to Rushi )

To Cash A/c 14,000
(Being goods purchased for cash)
22 Cash A/c Dr. 20,000
To Sales A/c 20,000
111

26 Bank of Maharashtra's A/c Dr. 16,000

To Cash A/c 16,000
(Being cash deposited into bank)
28 Bank of Mahrarashtra A/c Dr. 7,000

To Interest A/c 7,000
(Being interest collected by bank on our behalf)
Total 95,000 95,000
Ledger Accounts :
2018 2018
Jan. 1 To Balance b/d 80,000 Jan. 31 By Balance c/d 1,04,000
5 To Rushi's A/c 10,000
19 To Cash A/c 14,000
1,04,000 1,04,000
Feb 1 To Balance b/d 1,04,000
Dr. Rushi Account Cr.

2018 2018
Jan.17 To Purchases Return 2,000 Jan. 5 By Purchases A/c 10,000
A/c
10,000 10,000
Feb. 1 By Balance b/d 8,000

2018 2018
Jan. 1 To Balance b/d 60,000 Jan. 19 By Purchases A/c 14,000
10 To Bank of 20,000 26 By Bank of 16,000
Maharashtra's A/c Maharashtra's A/c
19 To Sales A/c 20,000 31 By Balance c/d 70,000
1,00,000 1,00,000
Feb. 1 To Balance b/d 70,000
112

Dr. Karan's Drawings Account Cr.

2018 2018
Jan.10 To Bank of 6,000 Jan.31 By Balance c/d 6,000
Maharashtra's A/c
6,000 6,000
Dr. Purchases Return Account Cr.

2018 2018
Jan.31 To Balance c/d 2,000 Jan. 17 By Rushi's A/c 2,000
2,000 2,000
Dr. Sales account Cr.

2018 2018
Jan.31 To Balance c/d 60,000 Jan. 1 By Balance b/d 40,000
22 By Cash A/c 20,000
60,000 60,000
Dr. Bank of Maharashtra's Account Cr.

2018 2018
Jan. 1 To Balance b/d 1,00,000 Jan. 10 By Cash A/c 20,000
26 To Cash A/c 16,000 10 By Karan's Drawings 6,000
31 To Interest received A/c
A/c 7,000 31 By Balance c/d 97,000
1,23,000 1,23,000
Dr. Interest Received Account Cr.

2018 2018
Jan.31 To Balance c/d 7,000 Jan. 28 By Bank of 7,000
Maharashtra's A/c
7,000 7,000
113

Trial Balance as on 31st Jan. 2018

Debit Credit
Sr. No. Name of Account L.F.
1. Cash 70,000
2. Purchases 1,04,000
3. Purchase Return 2,000
4. Rushi 8,000
5. Bank of Maharashtra 97,000
6. Karan's Capital 2,00,000
7. Karan's Drawings 6,000
8. Sales 60,000
9. Interest 7,000
Total 2,77,000 2,77,000
Do You know?????
How transaction travels?
Source Trial
Documents Journal Ledger Balance
Q.1 Answer in one sentence only

1) What is Ledger?
2) What is ledger posting?
3) When does an account show a nil balance?
4) What is Folio?
5) Where is the statement form of ledger A/c is used in actual practice?
6) Why Proprietor’s Capital account is a liability for the business?
7) Why does cash account never shows a credit balance?
8) What is ‘Trial Balance’?
Q.2 Write the word, term, phrase, which can substitute each of the statement.
1) Principal Book of accounts.
2) Transferring a journal entry to the appropriate accounts in the Ledger.
3) Page number of Ledger to which an entry is posted.
4) The process of extracting the balance and inserting it on lesser side of an account.
5) A debit balance to Personal Accounts.
6) A credit balance to Bank Account.
7) An account to be debited for goods damaged by fire.
8) A Trial Balance in which only net balances of all ledger accounts are transferred.
114

Q.3 Select appropriate alternatives from those given below and rewrite the sentences.
1) In case of a credit transaction one of the account must be a …………….account.
a) Cash b) Credit c) Personal d) Debit
2) ‘c/d’ indicates …………..balance.
a) Opening b) Closing c) Positive d) Negative
3) ………….. Column of ledger is used for writing page number of Journal.
a) J.F. b) L.F. c) Date d) Particulars
4) Debtors Account shows ……….balance.
a) Real b) Negative c) Credit d) Debit
5) ………..is the process of deriving the difference between totals of the debit and credit
side of each ledger a/c.
a) Totalling b) Journalizing c) Balancing d) Posting.
6) Total of Purchase book is………….to Purchase Account.
a) posted b) moved c) given d) entered.
7) Real account always shows…………balance.
a) minimum b) maximum c) debit d) credit
8) …………..is prepared to test arithmetical accuracy of Books of Accounts.
a) Trial Balance b) Ledger c) Journal d) List
Q.4 State whether the following statements are ‘True or False’ with reasons.
1) Ledger is a book of Original Entry.
2) The process of recording a transaction in the Journal is called Posting.
3) A cash withdrawal from business by the trader should be credited to Drawings A/c
4) Balances of Nominal Accounts are carried forward to the next year.
5) When debit side of an account is greater than the credit side, the account shows a debit
balance.
6) The name of an account written on top of each account is called ‘Head of Account’.
7) Agreement of Trial Balance always proves accounting accuracy.
8) Trial balance is based on the double entry principle that for every debit there is equal
amount of corresponding credit.
1) ………….. Balance on Nominal Account shows expenses or loss.

2) Cash account always shows………..balance.
3) The right hand side of an account is called………..side.
4) Creditors shows………balance.
5) ………..accounts are closed by transferring its balances to Profit and Loss Account.
115

6) ‘b/d’ means………….
7) Rent paid for the residential quarter will be debited to…….account.
8) Sold goods of ` 24,000 at 20% Profit on cost, the purchase price of the goods is……….
Q.6 Complete the following table.
1) Journal Journalising
? Posting
2) Sales Return Return Inward

Purchase Return ?
3) L.F. Journal
? Ledger
4) Assets Debit Balance

Liabilities ?
5) Land & Building Real Account

Commission Received ?
Q.7 Put 4 mark for the nature of balance for the following.
Account Dr. Balance Cr. Balance
1) Capital A/c 4
2) Goodwill
3) Bank Overdraft
4) Bills Receivable 4
5) Creditors 4
6) Drawings
7) Advertisement
8) Prepaid Rent
9) Outstanding Salary
10) Bad debts
116

PRACTICAL PROBLEMS
Q.1 Give Journal entries of the following posting from the ledger account.
In the books of Sopan
2019 2019
Feb. 1 To balance b/d 8,000 Feb. 5 By Telephone 750
3 To Sales A/c 700 Charges A/c
6 To Interest A/c 600 9 By Purchases A/c 800
8 To Jayashree's A/c 1,500 28 By Balance c/d 9,250
10,800 10,800
Mar. 1 To Balance b/d 9,250

2019 2019
Feb. 9 To Cash A/c 800 Feb.28 By Balance c/d 800
800 800
Mar. 1 To Balance b/d 800
Dr. Jayashree's Account Cr.

2019 2016
Feb. 15 To Sales A/c 5,000 Feb. 8 By Cash A/c 1,500
5,000 5,000
Mar. 1 To Balance b/d 3,500
Q.2 Prepare necessary Ledger Accounts from the following Subsidiary Books.
Purchase Book
Inward
Date Particulars L.F. Amount (`)
Invoice No.
2019
Oct. 2 Amol 7,500
7 Aishwarya 2,400
11 Vivek 3,900
17 Sheth 6,500
27 Shabari 1,000
Total 21,300
117

Purchases Return Book

Inward
Date Particulars L.F. Amount (`)
Invoice No.
2019
Oct. 10 Aishwarya 480
20 Sheth 650
28 Shabari 200
Total 1,330
Q.3 From the following transactions prepare necessary Ledger Accounts in the Books of Vinay
and balance the same.
2019
Jan. 1 Started business with Cash ` 10,000
6 Bought goods from Vikas ` 3,000
9 Sold goods to Bhushan ` 2,400
12 Paid to Vikas on account ` 1,600
19 Received on account from Bhushan ` 1,000
25 Cash Purchases ` 3,600
30 Cash Sales ` 5,000
31 Paid Wages ` 400
Q.4 Journalise the following transactions and prepare Cash A/c only.
2019
July 1 Hardik started business with Cash ` 15,000 and Machinery ` 20,000
4 Purchased goods for ` 9,000 less 10% Cash Discount.
9 Sold goods to Amar ` 3,000
12 Distributed goods worth ` 700 as free samples.
14 Bought Stationery for ` 550 for office use.
18 Received ` 950 from Dhanashree, a customer, whose account was earlier written off
as a bad debts.
21 Abhiram invoiced us goods worth ` 3,000.
24 Settled Abhiram’s account, he allowed 5% cash discount.
27 Exchanged goods worth 2,500 against Furniture of the same amount.
29 Withdrawn cash from ATM ` 5,000 for office use and ` 3,000 for personal use.
118

Q.5 Prepare Aparna’s account in books of Suparna.

2019
Jan. 1 Balance due from Aparna ` 60,000
4 Sold goods to Aparna ` 15,000 at 10% Trade Discount.
7 Goods returned by Aparna ` 1,500 (Gross)
11 Received crossed cheque from Aparna ` 50000
17 Invoiced goods to Aparna ` 12,000
25 Sold goods to Aparna in cash ` 6,000
30 Received cash from Aparna ` 33,000 in full settlement of her account.
Q.6 Prepare Cash A/c, Bank A/c, Purchases A/c, Sales A/c and Capital A/c. and balance
the same in the books of Madanlal.
2019
Aug. 1 Started business with bank balance ` 40,000.
2 Purchased goods from Aseem worth ` 15,000 less 10% Trade Discount.
3 Sold goods to Arun for ` 8,000 for cash.
4 Paid Rent ` 3,000 and Electricity bill ` 500.
5 Purchased 100 Shares of Perfect Technologies for ` 55 per share and paid Brokerage
` 250 by transfer through netbanking.
6 Withdrawal of goods for personal use ` 500.
7 Sold goods for cash ` 5,000 less 10% Cash Discount.
8 Deposited cash into Bank ` 2,000.
9 Paid ` 3,000 for daughter’s tuition fees by Debit Card.
10 Purchased a Table for ` 2,000.
19 Received ` 1,500 by selling the scrap.
27 Paid cash into bank in excess of ` 2,000
Q.7 Journalise the following transactions; post them into Ledger for February 2019
1 Sunil Started business with stock of goods ` 20,000 and Cash ` 1,70,000 out of which ` 50,000
borrowed from his friend Kedar@10 p.a.
5 Placed an order for goods worth ` 7,000 with Mohan for which advance ` 5,500 was paid.
9 Purchased Stationery for office use ` 4,500
12 Goods distributed as free samples ` 2,000
17 Paid Freight ` 400 on behalf of Mr. Dev.
24 Received Goods from Mohan as per our order dated 5th Feb and settled his account.
27 Bought goods from Shekhar on two months credit for ` 7,000 at 20% Trade Discount with
instructions to send them to Sagar.
28 Sent to Sagar Outward Invoice for goods supplied by Shekhar. at list price less 10% Trade
Discount.
119

Q.8 Journalise the following transactions and Prepare ledger accounts in the books of
Sanjeev.
2019
June 1 Cash Received from Raju ` 10,000 for commission.
3 Intra-state sale to Rakesh ` 3,000 and SGST @2.5% and CGST @2.5% applicable..
5 Received full amount from Rakesh.
8 Intra-state purchases from Mangesh ` 2,000 and SGST @2.5% and CGST @2.5%
applicable.
11 Paid the necessary amount to Mangesh.
18 Paid Rent ` 2,500
24 Paid mobile bill ` 1,000 out of which ` 700 for office use and for ` 300 for personal
use.
Q.9 The following ledger balances were extracted from the books of Pawan Pawar,Pune
as on 1st July 2019
Debit balances Amt.(`) Credit balances Amt.(`)

Machinery 4,40,000 Purchase return 60,000
Rashmi’s 70,000 Sales 3,60,000
Purchases 1,30,000 Pawan’s capital 4,80,000
Sales return 40,000 Interest 6,000
Cash 1,00,000 Rakesh 56,000
Bank 1,80,000
Stationery 2,000
The following transactions took place during July 2019. Post them into Ledger and prepare
Trial Balance as on 31st July 2019.
1 Introduced additional Capital ` 40,000

4 Bought goods from Rakesh ` 80,000 @ 10% Trade Discount
7 Sold goods to Rashmi ` 30,000
9 Returned goods to Rakesh ` 20,000 (Gross)
11 Rashmi returned goods to us ` 400
14 Paid to Rakesh ` 40,000 @ 2% Cash Discount
22 Made purchases ` 17,000 and amount paid by cheque
120

24 Cash Sales ` 8,000

27 Bought Stationery ` 3,000
28 Received from Rashmi ` 39,000 by RTGS and discount allowed ` 1000
29 Paid Salary ` 10,000
29 Sold goods to Rashmi ` 20,000
31 Bought goods from Rakesh ` 36,000 and paid by cheque.
j j j
121

5 Subsidiary-Books
Contents
5.1 Introduction, Meaning and need for maintaining Subsidiary Books.

5.2 Cash Book with Cash Column
5.3 Cash Book with Cash and Bank Columns.
5.4 Simple and Analytical Petty Cash Book under Imprest System.
5.5 Purchase Book.
5.6 Purchase Return Book.
5.7 Sales Book.
5.8 Sales Return Book
5.9 Journal Proper
o Students understand the meaning and need of Subsidiary Books.

o Students know the actual recording of transactions in special Journal.
o Students can classify cash and credit transactions.
o Students are able to prepare and balance different types of Cash Book.
o Student learn to give accounting treatment for banking transactions and contra entries.
o Students can prepare various Subsidiary Books.
5.1 Introduction
A small business may be able to record all transactions in single Journal but as the business
expands the number of transactions becomes so large, that the Journal is required to be sub-divided
into Special Journals which are called Subsidiary Books.
Meaning : The sub division of Journal on the basis of nature of transaction is known as
Subsidiary Books. These books are also called as Books of Original entries or Prime entries because
the transactions are first recorded in Subsidiary Books and then posted in the Ledger.
Need for maintaining Subsidiary Books :
1) Specialisation : When the staff is appointed for same type of work it leads to specialisation and
increase in efficiency.
122

2) Time saving and economical : Different accounting procedures can be taken up at the same
time. This will save time and prove to be economical.
3) Division of work : The writing of Subsidiary Books can be conveniently divided among different
clerks. Hence it is easy to keep the Books upto date.
4) Quick information and future reference : Subsidiary Books gives quick information relating
to the accounts and makes future reference easy.
5) Internal check : Verification of correctness can be made more effectively.
Types of Subsidiary Books on the basis of transaction :
Cash/Bank Credit Bill Others

Transactions Transactions Transactions
1 2 3 4 Journal
Purchase Sales Purchase Sales Proper
Book Book Return Return
Book Book
Bills Bills
Single Bank Two Petty Receivable Payable
column Book column Cash Book Book
Cash Book Cash Book Book
Following are the important Subsidiary Books.

1) Cash Book.
2) Petty Cash Book.
3) Purchase Book
4) Purchase Return Books (Return Outward Book)
5) Sales Book
6) Sales Return Book (Return Inward Book)
7) Journal Proper
5.2 Cash Book :
All Cash and Bank transactions are recorded in the Cash Book. The Cash Book has two sides
where the left hand side is Receipt Side (Debit-side) and the right hand side is Payment Side (Credit
side). When amount is received details are recorded on the Receipt side and when payments are made
details are recorded on the Payment side. Cash Book a Journal since it is a Book of Original entries
and it also a ledger since it constitutes a classified record of all cash transactions in the form of Ledger
and helps in finding out Cash and Bank balance at the end of particular accounting period. Thus, it can
be said that cash book serves dual purpose of journal as well as ledger.
123

Format of Simple Cash Book

In the books of _________
Dr. Simple Cash Book Cr.
Date Receipts Receipt L.F. Amount Date Payments Voucher L.F. Amount
No. ` No. `
1) Prepare a Simple Cash Book

2019 March 1 Cash in hand ` 2,500
5 Cash paid to Suresh ` 1,000
7 Cash Purchase ` 500
14 Cash Received from Prakash ` 1,000
16 Cash Sales ` 800
20 Paid Carriage ` 100
25 Paid Salary ` 500
In the books of Company
Date Receipts R. L. Amount Date Payment V. L. Amount
No. F. ` No. F. `
2019 2019
March March
1 To Balance b/d 2,500 5 By Suresh A/c 1,000
14 To Prakash A/c 1,000 (Being paid to
(Being cash Suresh)
received) 7 By Purchase A/c 500
16 To Sales A/c (Being goods
(Being cash 800 purchased for
sales) cash)
20 By Carriage A/c 100
(Being Carriage
paid)
25 By Salary A/c 500
(Being Salary
paid)
4,300 4,300
April
124

2. Enter the following transactions in the Simple Cash Book of M/s Sourabh Traders
2019 July 1 Started business with cash ` 1,00,000
3 Deposited cash into Bank ` 80,000
5 Purchased Stationary for cash ` 2,000
7 Cash Purchases ` 15,000
8 Sold goods for cash ` 20,000 at 8% Trade Discount
10 Paid Insurance Premium ` 5,000
12 Paid cash to Dixit ` 10,000
15 Received cash from Saxena ` 80,000
17 Received Commission ` 2,000
18 Drew for domestic use ` 4,000
22 Sold old Furniture ` 5,000
25 Paid Salary to Ram ` 6,000
30 Received Interest ` 4,000
Solution :
In the books of M/s Sourabh Traders
Date Receipts R. L. Amount Date Payments V. L. Amount
No. F. ` No. F. `
2019 2019
July July
1 To Capital A/c 1,00,000 3 By Bank A/c 80,000
(Being business 18,400 (Being Cash
started) deposited in Bank)
8 To Sales A/c 5 By Stationary A/c 2,000
(Being cash sales) 80,000 (Being Stationary
15 To Saxena A/c purchased)
(Being received 7 By Purchase A/c 15,000
cash) (Being goods
17 To Commission 2,000 purchased)
A/c 10 By Insurance 5,000
(Being Premium A/c
commission (Being Insurance
received) Premium paid)
22 To Furniture A/c 5,000 12 By Dixit A/c 10,000
(Being old (Being Cash paid)
Furniture sold) 18 By Drawings A/c 4,000
30 To Interest A/c 4,000 (Being Drawings
(Being Interest made)
received) 25 By Salary A/c 6000
(Being Salary paid)
2,09,400 2,09,400
Aug.
125

3. Enter the following transactions in a Simple Cash Book of Kamal Traders.

2018 Aug 1 Cash in hand ` 37,400
4 Cash received from Sakshi ` 25,000
5 Cash purchases ` 25,000 at 12% T.D.
8 Invested in Shares ` 25,000
10 Paid for Sundry Expenses ` 3,000
12 Paid Life Insurance Premium ` 8,000
16 Received Dividend ` 2,000
20 Paid Telephone Bill ` 6,000
22 Received Interest ` 1,000
25 Cash Sales ` 25,000 at 20% T.D.
28 Paid Electricity Bill ` 4,500
Solution : In the books of Kamal Traders
Date Receipts R. L. Amount Date Payments V. L. Amount
No. F. ` No. F. `
2018 2018
Aug.1 To Balance b/d 37,400 Aug. 5 By Purchases A/c 22,000
4 To Sakshi's A/c 25,000 (Being Cash
(Being Cash purchased)
received) 8 By Investment in 25,000
16 To Dividend A/c 2,000 Shares A/c
(Being (Being shares
Dividend purchased)
received) 10 By Sundry 3,000
22 To Interest A/c Expenses A/c
(Being Interest 1,000 (Being Sundry
received) expenses paid)
25 To Sales A/c 12 By Drawings A/c 8,000
(Being Cash 20,000 (Being Life
sales) Insurance paid)
20 By Telephone Bill 6,000
A/c
(Being Telephone
bill paid)
28 By Electricity Bill 4,500
A/c
(Being Electricity
bill paid)
85,400 85,400
Sept.
126

5.3 Two column Cash Book (Cash Book with Cash and Bank column)
Bank plays an important role in providing various services to traders. It accepts deposits from
customers and allows withdrawals by way of cash or cheque or various net banking transactions.
In addition to this bank provides a number of functions, like, payment by cheques and drafts, loan
facility, cash credit, collection of cheques and above all safety of cash. Moreover, when a trader
opens a current account with the bank he can avail Overdraft facility.
A businessman who indulges in a number of banking transactions opens a Current Account with
the bank to take the advantage of Overdraft facility.
5.3.1 Columns in Cash Book with Cash and Bank columns :
Cash book with Cash and Bank columns has one additional column on receipt side and
payment side along with cash column. This column is known as 'Bank' column. Only banking
transactions are recorded in this column. Bank column represents the Bank Current Account.
5.3.2 Format of Cash Book with Cash and Bank columns :
In the books of --------------
Two column Cash Book
Date Receipts R.No. L.F. Cash Bank Date Payments V.No. L.F. Cash Bank
(`) (`) (`) (`)
5.3.3 Accounting treatment of banking transactions in Cash Book with Cash and Bank
columns :
1. Opening balance of bank account : When total of receipt side (debit side) is greater than the
total of payment side (credit side) it is known as debit balance. When total of payment side
(credit side) is greater than the total of receipt side (debit side) it is known as credit balance.
Bank account is a personal account therefore; it can have debit balance or credit balance. Credit
balance in bank account means 'Bank Overdraft'.
(a) When debit balance of Bank account is given : When debit balance of Bank account is
given it will appear on the receipt side of cash book in the Bank column as : "To Balance
b/d"
(b) When credit balance of bank account is given or Overdraft in bank account is given:
Credit balance of bank is known as overdraft. Overdraft is a situation when amount
withdrawn by account holder exceeds deposits in current account. It is a short term loan
given by bank to current account holders. It is recorded on the payment side of the cash
book in the bank column as under "By Balance b/d".
2. Cheque received : Cheques can be received for cash sales, commission, dividend, interest or
settlement of accounts by debtors.
(a) Crossed cheque received : When crossed cheque is received, it is recorded, on receipt
side of cash book in the bank column as "To Sales/Asset/Income/Debtor's A/c"
Journal entry : Bank A/c...............Dr
To Sales/Asset/Income/Debtor's A/c
127

(b)
Bearer cheque received : Bearer cheque received is treated as cash and recorded on the
receipt side in the cash column as "To Sales/Asset/Income/Debtor's A/c"
Journal entry : Cash A/c...............Dr
(c) Cheque received and deposited into bank on the same day : Cheques received are
deposited into the bank for collection. This is recorded on receipt side in the bank column
as "To Sales/Asset/Income/Debtor's A/c"
(d) Cheque received dishonoured : Cheque received has to be presented to the bank for
collection within three months from the date of drawing otherwise it becomes worthless.
When bank refuses to pay the amount to the payee due to certain reasons the cheque is
said to be dishonoured. Dishonoured cheque is recorded on the payment side to cancel the
receipt effect in the bank as "By Person's A/c"
Journal entry : Person's A/c...............Dr
To Bank A/c
(e) Cheque issued : Cheques can be issued for cash purchases, paying commission, paying
interest settlement of creditors accounts. It can be used for withdrawing cash from bank.
It is recorded on the payment side in the bank column as "By Purchases/Expenses/
Assets/Creditor's A/c"
Journal entry : Purchases/Expenses/Assets/Creditor's A/c...............Dr
To Bank A/c
(f) Cheques issued dishonoured :
To Person's A/c
(g)
Cash withdrawn from bank for personal use : This will appear on payment side in the
bank column as "By Drawings A/c"
Journal entry : Drawings A/c...............Dr
To Bank A/c
3. Bank advices and statements : Banks offer a range of services like collection of cheques
that are deposited into bank, collection of dividend, payment of expenses on behalf of account
holder etc. Bank then sends an advice to the account holder giving details of these transactions.
Current account holders also get a periodical statement from the bank which gives details of
transactions like dishonour of cheque, direct deposit made by customer, interest charged on
Overdraft, bank charges deducted by bank, interest allowed by bank etc. On the basis of advice
and statement received transactions are recorded by the trader in the cash book.
(a)
Direct deposit by customer into Bank : Instead of paying by cash or cheque for
settlement of accounts, customers may directly deposit money into our Bank Account.
This is recorded on the receipt side in the bank column as "To Customers A/c"
To Customer's A/c
128

(b) Interest allowed by bank : Bank allows interest on bank deposits, this is income for the
trader and therefore increases the balance in bank. It is recorded on the receipt side in the
bank column as "To Interest A/c"
To Interest A/c
(c) Interest charged on overdraft debited by bank : Overdraft facility is a short term loan
given to current account holders. Bank charges certain percentage of interest on overdraft
amount which is expenditure to the trader. It is recorded on the payment side in the bank
column as "By Interest on overdraft A/c"
Journal entry : Interest on overdraft A/c...............Dr
To Bank A/c
(d) Bank charges debited by bank : Certain amount is charged by the bank for services
rendered by them. This is known as bank charges. Bank charges are expenditure for the
trader and are recorded on the payment side in the bank column as "By Bank Charges
A/c"
Journal entry : Bank Charges A/c...............Dr
To Bank A/c
(e) Dividend or interest on investment collected by bank on behalf of trader : This is
income of trader collected by the bank. On receiving an advice or statement from Bank,
the trader records this transaction on the receipt side in the bank column as "To Interest
on Investment A/c / Dividend A/c"
To Interest on Investment or Dividend A/c
(g) Payment made by Bank under the standing instruction given by trader : As per the
standing instructions given to Bank, the Bank makes payments of Insurance premium,
Telephone bill, Electricity bills and other expenses on behalf of trader. This is recorded
on the payment side in the bank column as "By Respective Expenses A/c"
Journal entry : Respective Expenses A/c...............Dr
To Bank A/c
4. Transfer of amount : In addition to Current Account, a businessman may have Credit or a
Loan amount with the bank to meet his financial requirements. He can transfer money from
Cash credit or Loan account to Current account or from Current account to Cash Credit or
Loan account. Similarly amount can be transferred from Personal Savings Account to Current
Account or from the Current Account to Personal Account. The treatments for these transactions
are as under.
(a)
From Cash Credit or Loan Account to Current Account : This transaction increases
the current account balance and is therefore recorded on the receipt side in the bank
column as "To Cash Credit or Loan A/c"
To Cash credit/Loan A/c
(b) From Current Account to Cash Credit or Loan Account : This transaction decreases
the current account balance and is therefore recorded on the payment side in the bank
column as "By Cash Credit or Loan A/c"
Journal entry : Cash Credit/Loan A/c...............Dr
To Bank A/c
129

(c) From Personal Saving account to Current Account : This is additional cash brought
into business by the trader. It increases the capital balance and current account balance
and is recorded on the receipt side in the bank column as "To Capital A/c"
To Capital A/c
(d) From current account to personal savings Account : This is drawings of the proprietor.
It decreases the current account balance and is recorded the payment side in the bank
column as "By Drawings A/c"
Journal entry : Drawings A/c...............Dr
To Bank A/c
5. Contra Entries : Certain transaction affects Cash Account and Bank Account simultaneously
but with opposite effect. It may decrease the cash balance and increase bank balance or increase
the cash balance and decrease bank balance at the same time. In columnar Cash Book, Cash
Account and Bank Account appear under the same heading of cash book. To record increase in
bank balance, bank account is debited and to record decrease in cash balance, cash account is
credited and vice versa. Entries recorded on both the sides of Cash Book are called as "Contra
Entries". It occurs only when Cash Account and Bank Account are simultaneously affected in a
transaction. Contra entries are denoted by the capital letter "C" in the Ledger Folio column.
Situations under which contra entry takes place :
1. Cash deposited into the Bank.
2. Cash withdrawn from the Bank for office use.
3. Bearer Cheque received on previous date and deposited into the Bank"
Accounting treatment for contra entries are as under :
(a) Cash deposited into the Bank : This transaction increases the bank balance and decreases
the cash balance and is recorded as under : Receipt side "To Cash A/c" in the bank
column.
Payment side "By Bank A/c" in the cash column.
To Cash A/c
In the above transaction Bank is the receiver therefore it is debited to Cash Account.
Similarly cash is going out therefore it is credited by Bank Account.
(b)
Cash withdrawn from bank for office use : This transaction increases the cash balance
and decreases the bank balance and is recorded as under : Receipt side "To Bank A/c"
in the cash column. Payment side "By Cash A/c" in the bank column.
Journal entry : Cash A/c...............Dr
To Bank A/c
Here cash comes into the business therefore it is debited to Bank Account. Similarly bank
is the giver and therefore is credited by Cash Account.
130

(c)
Bearer Cheque received on previous date deposited into the Bank : Bearer cheques
received are treated as cash. When it is deposited into the bank for collection it is assumed
that cash is going out and bank is the receiver. This transaction increases the bank balance
and decreases the cash balance. It is recorded as under : Receipt side "To Cash A/c" in
the bank column. Payment side "By Bank A/c" in the cash column.
To Cash A/c
5.3.4 Balancing of Cash Book with Cash and Bank column :
After recording all receipts and payments, the Cash Book is balanced to find out the cash balance
and bank balance.
Cash column : Since the amount of cash in hand is always more than or equal to the payments,
the total amount of receipt side should be more than the total amount of payment side. Total amount
of payment side is deducted from the total amount of receipt side and the balance is recorded on the
payment side as "By Balance c/d" in the cash column. At the beginning of the next accounting period
this balance is brought down on the receipt side as "To Balance b/d" in the cash column.
Bank column : Bank account is a Personal Account. It can have debit balance or credit balance.
When the total of receipt side is more than the total of payment side the difference is known as
positive or normal balance. This balance is recorded on the payment side in the bank column as "By
Balance c/d" At the beginning of the next accounting period this balance is brought down on the
receipt side in the bank column as "To Balance b/d".
When the total amount of payment side is more than the total amount of receipt side the difference
is known as bank overdraft or credit balance. This is recorded on the receipt side in the bank column
as "To Balance c/d". At the beginning of the next accounting period, overdraft amount is brought
down on the payment side in the bank column as "By Balance b/d".
Types of Bank Account : The following are the types of Bank Account.
1. Current Account : Current Account is suitable for businessman, since there is no restriction
on number of deposits and number of withdraws or cheque payment made through current
account. Generally, no interest is allowed on Current Account, but overdraft facility is available
on Current Account.
2. Savings Account : A person having fixed or regular income can deposit his surplus in Saving
Account. This account helps the person having limited income to develop the habit of savings.
There are restrictions on withdrawals. Interest at a prescribed rate is allowed on this account.
No Overdraft facility is available on this Account.
3. Fixed Deposit Account : In this account a fixed amount is deposited for a fixed period of time in
order to earn higher rate of interest. The amount deposited cannot be withdrawn before expiry
of that period. This account is not useful to businessman for regular banking transactions. It is
useful to create time deposit and earn extra income.
4. Recurring Deposit Account : The account holder deposits fixed amount, monthly upto a
particular decided period. It offers higher rate of interest as compared to Saving Bank Account
and lower rate of interest as compared to fixed deposit account. Depositor is not allowed to
withdraw money till its maturity.
131

Illustratiion - 1 Consider the following example.

Prepare two column Cash Book of Seema Traders
`
2019 Jan 01 Started business with Cash 60,000
04 Cash deposited into Bank of India 25,000
06 Cash Purchases 6,000
10 Purchased Computer for office use 22,000
15 Sold goods to Rakesh & Co.
and received a bearer cheque. 10,000
20 Rakesh's cheque deposited into Bank.
24 Paid Carriage 300
25 Cash withdrawn for personal use 3,000
30 Paid Rent by cheque 1,200
Solution : In the books of Seema Traders
Dr. Cash Book Cr.
Date Receipts R. L. Cash Bank Date Payments V. L. Cash Bank
No. F. ` ` No. F. ` `
2019 2019
Jan. Jan.
1 To Capital A/c - - 60,000 - 4 By Bank A/c - C 25,000 -
(Being (Being cash
started deposited)
business) 6 By Purchases A/c - - 6,000 -
4 To Cash A/c (Being cash
(Being cash - C - 25,000 Purchases)
deposited) 10 By Computer A/c - - 22,000 -
15 To Sales A/c (Being computer
(Being cash - - 10,000 - purchased)
sales made) 20 By Bank A/c - C 10,000 -
20 To Cash A/c (Being cheque
(Being - C - 10,000 deposited)
cheque 24 By Carriage A/c - - 300 -
deposited (Being carriage
into bank) paid)
25 By Drawing A/c - - 3,000 -
(Being cash
withdrawn for
personal use)
30 By Rent A/c - - - 1,200
(Being rent paid
by cheque)
31 By Balance c/d - - 3,700 33,800
70,000 35,000 70,000 35,000
Feb.
1 To Balance b/d 3,700 33,800
132

2) From following transaction related to Sundar and Co. Prepare Cash Book with two
columns
Date Details Amount (`)
2018 Sept 01 Bank Balance 52,000
01 Cash Balance 15,000
04 Purchased goods and payment made by cheque 15,000
08 Sold goods for cash 8,000
13 Purchased Machinery and payment made by cheque 10,000
16 Sold goods and received cheque (deposited same day) 12,000
17 Purchased goods for cash from Mrunal 18,000
20 Purchased Stationery and paid by cheque 2,100
24 Cheque given to Avadhut 1,800
27 Cash withdrawn from Bank 12,000
30 Paid Rent by cheque 500
30 Paid Salary 4,000
Solution : In the books of Sundar and Co.

Dr. Cash Book with two columns Cr.
N. F. ` ` N. F. ` `
2018 2018
Sept Sept
1 To Balance 15,000 52,000 4 By Purchase A/c 15,000
b/d (Being cash
8 To Sales A/c 8,000 - purchases)
(Being goods 13 By Machinery A/c 10,000
sold for cash) (Being Machinery
16 To Sales A/c 12,000 purchased)
(Being goods 17 By Purchases A/c 18,000
sold against (Being cash
cheque) purchased)
27 To Bank A/c C 12,000 - 20 By Stationery A/c 2,100
(Being cash (Being Stationery
withdrawn purchased)
for office 24 By Avadhut A/c 1,800
use) (Being cheque
issued)
27 By Cash A/c C 12,000
(Being Cash
withdrawn for
office use)
30 By Rent A/c 500
(Being Rent paid)
30 By Salary A/c 4,000
(Being Salary paid)
30 By Balance c/d 13,000 22,600
35,000 64,000 35,000 64,000
Oct.
1 To Balance b/d 13,000 22,600
133

3) Enter the following transactions in cash book with cash and bank columns of Mehta
Brothers.
2019 Oct. 1 Cash in hand ` 13,000 and Bank balance ` 24,000
3 Cash sales ` 80,000 at 10% Traders discount.
5 Cash purchases ` 60,000 at 10% T.D. and 5% C.D. half the amount was paid in
cash and remaining by cheque.
7 Deposited cash in to bank ` 40,000
9 Received bearer cheque from Sumit ` 9,500
13 Sold goods for cash ` 12,000 at 4% T.D.
15 Paid Life Insurance premium ` 4,000
18 Cheque received on 9th Oct. 2019 deposited into bank.
22 Received crossed cheque from Prabhakar ` 6,000
27 Introduced additional capital ` 25,000 and deposited the same into Bank A/c
28 Paid Electricity bill ` 3,000 and Telephone bill ` 4,100
30 Received crossed cheque for dividend ` 6,250.
134

Solution : In the books of Mehta Brothers

Dr. Cash Book Cr.
No. F. ` ` No. F. ` `
2018 2018
Oct.
1 To Balance - - 13,000 24,000 5 By Purchase - - 25,650 25,650
b/d A/c
3 To Sales A/c - - 72,000 - (Being Cash
(Being goods purchases)
sold for 7 By Bank A/c - C 40,000 -
cash) (Being Cash
7 To Cash A/c - C - 40,000 deposited)
(Being Cash - - 4,000 -
15 By Drawings
deposited) A/c
9 To Sumit A/c - - 9,500 - (Being amount
(Being Cash paid for life
received) insurance
premium)
13 To Sales A/c - C 9,500 -
(Being cash - - 11,520 - 18 By Bank A/c
sales) (Being cash
deposited)
18 To Cash A/c - C -
(Being 9,500 28 By Electricity - - 3,000 -
deposited) - - A/c
(Being
22 To Prabhakar 6,000 electricity bill
A/c paid)
(Being Cash
received 28 By Telephone - - 4,100 -
from Bill A/c
Prabhakar) (Being
- - - 25,000 Telephone bill
27 To Capital paid)
A/c
(Being 31 By Balance c/d - - 19,770 85,100
Additional
capital
brought)
- - - 6,250
30 To Dividend
A/c
(Being
Dividend
received)
1,06,020 1,10,750 1,06,020 1,10,750
Nov.
1 To Balance 19,770 85,100
b/d
135

Working Note :
Transaction dated 5th Oct. 2018
Net cash purchases = Cash purchases 10% T.D.
= 60,000 - 6,000 = 54,000
Amount paid = Net Cash purchases - 5% C..D.
= 54000 - 5% of 54,000
= 54,000 - 2,700 = 51,300
1/2 Amount paid in cash = 51,300 x 1/2 = 25,650
Remaining amount paid by cheque = 51,300 - 25,650 = 25,650
4) Prepare two columns Cash Book of Guru Dakshina Brothers. (Narrations not
required)
2019 March 1) Cash balance ` 13,000 and Bank Overdraft ` 18,000
2) Received from Neha cash ` 1,700 and bearer cheque ` 500.
7) Paid to Dhanraj ` 6,000 by cheque.
8) Cash Sales ` 6,545 and discount allowed ` 55
10) Cheque received on 2nd March 2019 deposited into Bank.
12) Deposited into Bank ` 5,000
13) Goods purchased from Prachi on credit ` 5,000
15) Cheque received from Neha returned dishonoured.
20) Purchased goods from Sweety `5,000 at 7% T.D. and paid half the amount
immediately.
22) Bank paid insurance premium `1,000 and collected interest on investment
`1,650
24) Cheque issued to Dhanraj was dishonoured.
26) Gupta stores directly deposited into our Bank A/c `7,500
30) Deposited cash in excess of `3,920 in to Bank.
136

Solution : In the books of Guru Dakshina Brothers

Dr. Cash Book with Cash and Bank column Cr.
Date Receipt R. L. Cash Bank Date Payment V. L. Cash Bank
No. F. ` ` No. F. ` `
2019 2019
Mar . Mar.
1 To Balance 13,000 1 By Balance b/d 18,000
b/d
7 By Dhanraj 6,000
2 To Neha A/c 2,200 A/c
8 To Sales A/c 6,545 10 By Bank A/c C 500
10 To Cash A/c C 12 By Bank A/c C 5,000
500
12 To Cash A/c C 5,000 15 By Neha A/c
500
22 To Int. on 1,650 20 By Purchases
2,325
Investment A/c
A/c
22 By Ins. Prem. 1,000
24 To Dhanraj A/c
6,000
A/c
30 By Bank A/c C 10,000
26 To Gupta 7,500 31 By Balance c/d 3,920 5,150
Stores A/c
30 To Cash A/c C
10,000
21,745 30,650 21,745 30,650

April
1 To Balance b/d 3,920 5,150
Working Note :
1) Transaction dated 20th March 2019
Gross Purchases ` 5000
Less : 7% T.D. ` 350
` 4,650 x 1/2 = 2325 Cash paid
2) Total Receipt of Cash ` 21,745

Less : Payment Total up to 22 March ` 7,825
` 13,920
Less : Cash Deposited into Bank
in excess of ` 3,920 ` 10,000
` 3,920 Closing Cash Balance
Note : Transaction dated 13th March is of credit purchases of goods so it is not recorded in cash book.
137

5.4 Petty Cash Book

In large business organization the accounting work is divided systematically. There are various
departments spending small amount on stationary, postage and telegram, refreshment carriage etc.
The person maintaining petty cash book is known as petty cashier. The Petty cashier is given
certain amount by the main cashier as an advance at the beginning of every month from which all
petty expenses are paid and recorded by petty cashier. The term petty is derived from the French word
"Petit" which means "small". So this book is maintained for recording small expenses which cannot
be paid by cheque.
Types of Petty Cash Book :
There are two types of Petty Cash Book which are as under :
1) Simple petty cash
2) Analytical Columnar Petty Cash Book
1) Simple Petty Cash Book :
Simple Petty Cash Book is divided into two sides Receipt side and Payment side. Cash or cheque
received from head cashier is recorded in column of amount received and petty expenses paid
are recorded in amount paid column. Transactions recorded in Simple Petty Cash Book are
to be posted in respective Expenses A/c in Ledger. This requires additional time and labour
therefore business firm do not use Simple Petty Cash Book.
From the following transactions prepare Simple Petty Cash Book
In the Books of Noha Brothers
Date Details Amount (`)
2019 Jan. 01 Received from head cashier 1,200
04 Paid Telephone Charges 193
07 Paid for Mobile Charges 57
10 Purchased Office Files 125
14 Gave tip to peon 40
16 Sale of old Newspaper 60
19 Gave advance to Sweety 100
22 Paid Packing charges 170
24 Paid for Advertisement 120
27 Paid for Cleaning charges 60
28 Gave Donations 101
30 Purchased Revenue Stamps 60
138

Solution :
Simple Petty Cash Book
Amount Date Particulars Voucher L.F. Total
Received No. Amount
(`) paid (`)
1,200 2019 Jan. 1 To Cash A/c
4 By Telephone Charges A/c 193
7 By Mobile charges A/c 57
10 By Office files A/c 125
14 By Tip to Peon A/c 40
60 16 To Sale of old News paper A/c -
19 By Sweety A/c 100
22 By Packing Charges A/c 170
24 By Advertisement A/c 120
27 By Cleaning Charges A/c 60
28 By Donations A/c 101
30 By Revenue Stamps A/c 60
Total Expenses 1,026
31 By Balance c/d 234
1,260 1,260
234 2019 Feb. 1 To Balance b/d
2) Analytical Petty Cash Book/Columnar Petty Cash Book :

An Analytical Petty Cash Book has two sides,left hand side for recording receipt of cash and
right hand side for recording payments. Analytical Petty Cash Book has many sub columns on
payment side for recording various expenses.
For example : Printing and Stationery, Postage, Carriage and Cartage etc. There is no hard and
fast rule for number of columns in analytical Petty Cash Book. For example Ledger column is
prepare for making payment towards Personal or Real accounts. The Petty Cashier prepares a
statement stating the summary of expenses paid and submits it to the Chief cashier.
Imprest system of Petty Cash Book : Maintaining Petty Cash Book under Imprest System
is the best system. Under Imprest System estimate is made for petty expenses for a certain
period. Such amount is paid to Petty cashier to start with. At the end of the period he presents
the accounts of payment made by him to the head cashier. After checking the account the petty
cashier will be given a sum equal to the amount actually spent by him. Now the Petty cashier
will start with the same amount that he had at the beginning of the previous period. The system
is known as Imprest System of Petty Cash Book.
139

Format of Analytical Petty Cash Book
Particulars
L.F.
Date
Postage
Printing
Carriage
Expenses
Expenses
Travelling
& Stationary
Voucher No.
Miscellaneous
Total Amount
Ledger Account
Cash Book folio
Amount Recieved
Telephone charges
` ` ` ` ` ` ` ` `
xx To ………………
By……………… xx xx
140

Total Exp - xxx xx xx xx xx xx xx xx
By Balance c/d xx
xxx xxx
xx To balance b/d
xxx To………………
Courtesy : MSBT
Ilustration 1 : Mr. Sourabh the Petty Cashier of Raje Mobile Company, Latur received ` 8,000
on June 01, 2019 from Head Cashier. Details of Petty Expenses for the month are as
follows :
Date Particulars Amount (`)

2019 June 1 Auto fare 255
3 Courier Expenses 60
4 Postal stamps purchased 210
5 Eraser/Pen/Pencils purchased 525
6 Speed post charges 198
8 Taxi fare 390
8 Refreshment 850
10 Auto fare 310
12 Registered postal charges 142
13 Files purchased 45
14 Cartage 65
16 Computer Stationery purchased 1,650
19 Bus fare 240
19 Mobile charges 270
20 Office sanitation charges paid 160
22 Refreshment 450
23 Photocopy charges paid (Zerox) 270
28 Courier expenses 140
29 Unloading charges 170
30 Bus fare 150
Prepare Analytical Petty Cash Book
141

Solution I In the books of Raje Mobile Company, Latur
Petty Cash Book
Cou-
Amount Total rier/ Tele- Travelling Misce.
Vouch- Amount Post- phone & Convey- Printing
Date Particulars Ex- L.F. Ledger
Recieved er No. Paid & Sta- penses `
age Expenses `
`
ance Ex- tionery
` ` penses ` `
`
8,000 2019 June 1 To Cash A/c -
1 By Auto fare - 255 255
3 By Courier exp. - 60 60
4 By Postal Stamps - 210 210
5 By Eraser/pen pencil - 525 525
6 By Speed post charges - 198 198
8 By Taxi fare - 390 390
8 By Refreshment - 850 850
10 By Auto fare - 310 310
12 By Registered postal charges - 142 142
142
13 By Files - 45 45
14 By Cartage - 65 65

16 By Computer stationery - 1,650 1,650

19 By Bus fare - 240 240
19 By Mobile charges - 270 270
20 By Office sanitation - 160 160
22 By Refreshment - 450 450
23 By Photo stating charges - 270 270
28 By Courier Expenses - 140 140
29 By Unloading charges - 170 170
30 By Bus fare - 150 150
Total Exp - 6,550 750 270 1,345 2,220 1,965
8,000 8,000
1,450 July 01 To Balance b/d
Courtesy : MSBT
From the above Analytical Petty Cash Book pass Journal Entries and prepare Ledger Accounts.
In the Books of Raje Mobile company, Latur
Solution 1
In the books of Raje Mobile Company, Latur
Journal Entries
Debit Credit
Amount (`) Amount(`)
2019
June 1 Petty Cash A/c Dr. 8,000
To Cash A/c 8,000
(Being cash received from Head cashier)
June 30 Courier and Postage A/c Dr. 750
Telephone Expenses A/c Dr. 270
Travelling & Conveyance A/c Dr. 1,345
Printing & Stationery A/c Dr. 2,220
Miscellaneous Expenses A/c Dr. 1,965
To Petty Cash A/c 6,550
(Being petty expenses posted to petty cash
account)
Ledger Accounts in the books of Raje Mobile Company, Latur

Dr. Petty Cash Account Cr.
2019 2019
June 1 To Cash A/c 8,000 June 30 By Sundries as per 6,550
Petty Cash Book A/c
8,000 8,000
Dr. Courier & Postage Account Cr.

2019
June 30 To Petty Cash A/c 750
750
143

Dr. Telephone Expenses Account Cr.

2019
June 30 To Petty Cash A/c 270
270
Dr. Travelling & Conveyance Expenses Account Cr.

2019
June 30 To Petty Cash A/c 1,345
1,345
Dr. Printing & Stationery Account Cr.

2019
2,220
Dr. Miscellaneous Expenses Account Cr.

2019
1,965
Illustration 2 - Enter the following transactions in an Analytical Petty Cash Book under
Imprest System for July 2018
2018 July 1 Cash Balance 335
1 Cash received from Head Cashier 2,165
2 Gave Gift to clerk Omkar 251
5 Paid for Registered and Speed Post 240
6 Sold old Newspaper 100
7 Washing Charges paid to peon 170
10 Paid Lunch Bill to salesman 160
13 Gave Advance to peon Arun 500
16 Paid for Carriage & Cartage 180
19 Purchased Chair for office use 300
22 Purchased Stamp Pad, Paper and Pencil 170
26 Purchased Office Files 110
30 Paid for Repairs of Machinery 230
144

Solution : In the books of ………………
Petty Cash Book
Analysis of petty expenses
Total Printing
Amount Voucher Amount Ledger
& Carriage & Misc.
Received Date Particulars No. Paid Postage Station- Cartage Repairs Expenses L.F.
` ` ` ery ` ` ` ` `
2018,
335 July 1 To Balance b/d
2,165 1 To Cash A/c
2 By Gift to clerk 251 251
5 By Register & Speed post 240 240
100 6 To Sale of old News paper
7 By Washing charges 170 170
10 By Lunch bill 160 160
145
13 ByAdvance to Arun 500

500
16 By Carriage & Cartage 180 180
19 By Chair 300 300
22 By Stamp and Papers etc. 170 170
26 By Office files 110 110
30 By Repairs 230 230
Total Expenses 2,311 240 280 180 230 581 800
2,600 2,600
289 Aug 1 To Balance b/d
2,311 Aug 1 To Cash A/c
Courtesy : MSBT
Illustration 3 - Enter the following transactions in an Analytical Petty Cash Book under
Imprest System for Aug .2018. Imprest money was maintained at ` 2,000.

2018 August 1 Opening Petty Cash Balance 150
1 Cheque received from Chief Cashier 1,850
5 Paid for Carriage `18 and Envelopes ` 65

6 Paid for Cleaning & Washing Charges 80
8 Paid for Telephone charges 280
10 Paid for Donation 250
14 Paid for Subscription to newspaper 120
19 Paid for Post cards ` 60 & Revenue Stamps ` 45

22 Paid for Refreshment 200
26 Paid for Auto charges 55
27 Paid Wages 75
28 Paid for Repairs to Machinery 180
30 Paid to Mr. Krishna 500
146

Solution 3 : In the books of ………………
Analytical Petty Cash Book
Analysis of petty expenses
Vou. Total
L.F.
Amt Date Particulars
Wages
Ledger
Repairs
No. Amount
Postage
Charges
Carriage
Expenses
Stationery
Printing &
Travelling
& Cartage
Telephone
Misc. exp.
Received Paid
` ` ` ` ` ` ` ` ` ` `
2018,
150 Aug 1 To Balance b/d
1,850 1 To Bank A/c
5 By Carriage 18 18
5 By Envelopes 65 65
6 By Cleaning & Washings 80 80
8 By Telephone 280 280
147
10 By Donation 250 250
14 By News paper subscription 120 120

19 By Revenue stamp 45 45
19 By Post cards 60 60
22 By Refreshment 200 200
26 By Auto charges 55 55
27 By Wages 75 75
28 By Repairs 180 180
30 By Krishna 500 500
Total Exp 1,928 18 65 280 60 55 75 180 695 500
2,000 2,000
72 Sept 1 To Balance b/d
1,928 Sept 1 To Bank A/c
Courtesy : MSBT
5.5 Purchase Book (Bought Day Book) :

Goods purchased on credit for manufacturing or for resale are only recorded in purchase book.
Cash purchases are not recorded in purchase book. Similarly credit purchases other than goods like
purchase of office equipment, furniture, stationary and building are not recorded in purchase book. For
example, a business dealing in machinery spare parts will record only credit purchase of machinery
spare parts in purchase book. This book is also known as Purchase Journal
Goods purchased on credit are always recorded at net value.
Purchase Book - Format of Purchase Book

Date Name of supplier Inward L.F. Amount
Invoice No. (`)
1) Prepare Purchase Book in the books of Noha Traders

2019 Apr 1 Purchased goods from Mrs. Kamal ` 1,000 on credit (Invoice No.4)
4 Purchased goods from Sakshi for cash ` 500
5 Purchased Machinery from Machinery Tools Company on credit ` 5,000
8 Purchased goods from Sourabh on credit ` 2,000 (Invoice No. 10)
10 Purchased goods from Aishwarya on credit ` 5,000 (Invoice No. 11)
In the books Noha Traders

Purchase Book
Date Name of supplier Inward L.F. Amount
Invoice No. (`)
2019 April
1 Mrs. Kamal 4 1,000
8 Mr. Sourabh 10 2,000
10 Mrs. Aishawarya 11 5,000
Total 8,000
Note : 1) Transaction dated 04 April 2019 cannot be recorded in Purchase Book because it is cash
purchases.
2) Transaction dated 5th April, 2019 cannot be recorded in Purchase Book, it is recorded in
Journal Proper as it is credit purchase of Machinery.
148

2) Enter the following transaction in Purchase Book of Konika Electronics. Post them
into ledger and prepare Trial Balance as on 31st August, 2018.
2018 Aug 3 Purchase from M/s. Seema Electronics (Invoice No. 2250) 20 mini size Mobile
@ `2,000 per piece, 12 Home Theatres @ `4,500 per piece at 20% T. D.
10 Purchased from Pawan Electronics (Invoice No. 2860) 100 Pendrives @ `210
per piece at 10% T.D.
16 Purchased from Modern Electronics (Invoice No. 2456) 15 stereos @ `4200
per piece, 20 Colour LCD @ `14,000 per piece at 12.5% T.D.
26 Purchased from Seema Electronics (Invoice No. 2394) 10 mini size LCD at
`8000 per piece 6 LEDS at `12500 per piece at 20% T.D.
29 Bought from Pawan Electronics (Invoice No. 2960) 50 pen drives at `210 per
piece at 20% T.D.
Solution : In the books of Konika Electronics - Purchase Book
Date Name of supplier L.F. Inward Amount
Invoice No. ( `)
2018 Aug 3 Seema Electronics ` 2,250
20 Mobile x 2,000 per piece 40,000
12 Home Theatre x 4,500 54,000
94,000
Less - 20% T.D. 18,800 75,200
10 Pawan Electronics 2,860
100 Pendrives x 210 21,000
Less - per piece 10% T.D. 2,100 18,900
16 Modern Electronics 2,456
15 Stereos x 4200 per piece 63,000
20 LCDS x 14000 per piece 2,80,000
3,43,000
Less - 12.5% T.D. 42,875 3,00,125
26 Seema Electronics 2,394
10 LCDS x 8,000 per piece 80,000
6 LCDS x 12,500 per piece 75,000
1,55,000
Less - 20% T.D. 31,000 1,24,000
29 Pawan Electronics 2,960
50 Pendrive 210 per piece 10,500
Less - 20% T.D. 2,100 8,400
Total 5,26,625
Note : Details of calculations can be shown as working notes.
149

In the books of Konica electronics

Date Particulars L.F. Amt (`) Date Particulars L.F. Amt (`)
2018 2018
Aug 31 To Sundries as per 5,26,625 Aug 31 By Balance c/d 5,26,625
Purchase Book
5,26,625 5,26,625
Sept 1 To Balance b/d 5,26,625
Dr. Seema Electronics Account Cr.

2018 2018
Aug 31 To Balance c/d 1,99,200 Aug 3 By Purchases A/c 75,200
26 By Purchases A/c 1,24,000
1,99,200 1,99,200
Sept 1 By Balance b/d 1,99,200
Dr. Pawan Electronics Account Cr.

2018 2018
Aug 31 To Balance c/d 27,300 Aug 10 By Purchases A/c 18,900
29 By Purchases A/c 8,400
27,300 27,300
Sept 1 By Balance b/d 27,300
Dr. Modern Electronics Account Cr.

2018 2018
Aug 31 To Balance c/d 3,00,125 Aug 16 By Purchases A/c 3,00,125
3,00,125 3,00,125
Sept 1 By Balance b/d 3,00,125
150

In the books of Konica Electronics

Trial Balance as on 31st August, 2018
Debit Credit
Particulars L.F.
Purchases 5,26,625 -
Seema Electronics - 1,99,200
Pawan Electronics - 27,300
Modern Electronics - 3,00,125
Total 5,26,625 5,26,625
5.6 Purchase Return Book.
In this book, purchases return of goods are recorded. Sometimes goods purchased are returned
to the supplier for various reasons such as the goods are not of the required quality, or are defective.
For every return, a debit note (in duplicate) is prepared the original one is sent to the supplier for
making necessary entries in his book. The supplier also prepare a note, which is called the credit note.
It is also called as Purchase return Journal or Returns Outward Book.
Format of Purchase Return Book
Date Name of Supplier Debit Note No. L.F. Amount (`)
1) Debit Note : Debit Note is a statement containing the details of the goods like quantity, rate etc.
This note is prepared by the person who is returning the goods. It indicates that the account of
the person or party to whom the goods are returned is debited.
Format of Debit Note
VIGNESH TRADING COMPANY LIMITED
Karve Road, PUNE
Debit Note No. Date
To
We hereby inform you that we have debited your account with Rupees
only.
For the goods returned by us as under :
Qty. Particulars Invoice No. Rate (`) Amount (`)
E& O. E. For Vignesh trading Co. Ltd.

Prepared by _____________sd/
Signature
151

1) From the following prepare Purchase Return Book

20 Aug 2018 - Goods returns to Seema Electronics is as follows
2 Mini T. V. sets @ `2,000 each and a Home Theatre @ 4,500 each return against Debit Note
No. 4/2018.
Purchase Return Book
Date Name of suppliers Debit Note L.F. Amount
No. ( `)
2018 Aug.20 Seema Electronics 4/2018 8,500
8,500
Dr. Purchase Return Account Cr.

2018
Aug. 31 By Sundries as per 8,500
Purchase Return
Book
5.7 Sales Book.

Goods sold on credit are only recorded in Sales Book. Cash sales are not recorded in Sales Book.
Similarly goods assets news paper sold on credit are not recorded in Sales Book.
E.g. A businessman dealing in furniture will recorded only credit sale of Furniture in sales book.
Cash sales of Furniture will not be recorded in sales book. It is also known as Sales Journal
Goods sold on credit are always recorded at net value.
Format of Sales Book
Date Name of Customer Outward L.F. Amount (`)
Invoice No.
152

Illustration 1 : Prepare Sales Book in the Books of Bhairavanath Traders

2019 Apr. 1 Sold goods on credit to Arun ` 5,000 (Invoice No. 112)
4 Purchased goods for cash from Arun ` 3,000
8 Invoiced goods to Noha credit ` 4,000 (Invoice No. 115)
10 Sold goods to Mrunal on credit ` 5,000 (Invoice No. 118)
12 Sold old Furniture to Avadhut on credit ` 8,000
In the books of Bhairavanath Traders

Sales Book
Date Name of Customer Outward L.F. Amount (`)
Invoice No.
2019 Apr. 1 Arun 112 5,000
8 Noha 115 4,000
10 Mrunal 118 5,000
14,000
Note : 1) Transaction dated 4 April 2019 cannot be recorded in Sales Book as it is cash purchase.
2) Transaction dated 12 March 2019 cannot be recorded in Sales Book as it is recorded in
Journal Proper as it is sale of asset. (Furniture)
Illustrsation 2 : M/s. Kohinoor Agencies sold on credit
2018 Apr 6 Five water purifiers @ `2,000 each and five buckets @ `170 each to Rama Traders
(Invoice No. 207)
9 Three Road side containers @ `4,000 each to M/s. Nutan Enterprise (Invoice No.
208)
28 Sold 100 Water containers @ `850 each to Rama Traders (Invoice No. 209)
Prepare Sales Book and post them into Ledger
Sales Book
Date Outward Name of Customer L.F. Amount
Invoice No. ( `)
2018 April
6 207 Rama Traders 10,850
9 208 M/s Nutan Enterpirses 12,000
28 209 M/s Rama Traders 85,000
Total 1,07,850
153

Dr. Sales Account Cr.

Date Particulars L.F. Amt Date Particulars L.F. Amt (`)
(`)
2018
April 30 By Sundries as per
Sales Book 1,07,850
Dr. Rama Traders Account Cr.

(`)
2018
April 6 To Sales A/c 10,850
28 To Sales A/c 85,000
Dr. M/s Nutan Enterprises Account Cr.

(`)
2018
April 9 To Sales A/c 12,000
5.8 Sales Return Book (Return Inward Book) :

When goods sold on credit are not according to specifications, sample or are damaged in transit,
buyer or debtor can return them to seller. Such return of goods sold on credit only is recorded in Sales
Return Book. Return of goods sold for cash is not recorded in this book. It is also known as Sales
Return Journal.
On receipt of goods from the customer, a credit note is prepared. The difference between the
credit and the debit note is that the former is prepared by the seller and the later is prepared by the
buyer.
2) Credit Note : Credit Note is a statement containing the details of the goods returned as to
quantity, rate etc. The credit note indicates that the account of the person to whom the goods are
returned is credited.
154

Format of Credit Note

VIJAY TRADING COMPANY LIMITED
Karve Road, PUNE
Credit Note No. Date
To
We hereby inform you that we have credited your account with Rupees
only.
For the goods returned by us as under :
Qty. Particulars Invoice No. Rate (`) Amount (`)
E& O. E. For Vijay trading Co. Ltd.

Prepared by _____________sd/
Signature
Format of Sales Return Book
Date Name of Customer Credit Note No. L.F. Amount (`)
For Example :
20 May 2018 Goods Returned by Rama Traders `2,100 [Water purifier (Credit Note No. 10/2/2018]
Format of Sales Return Book
Date Name of Customer Credit Note No. L.F. Amount (`)
20 May 2018 Rama Traders 10/2/2018 2,100
Total 2,100
Dr. Sales Return Account Cr.
2018
May 31 To Sundries as per 2,100
Sales Return Book
Dr. Rama Traders Account Cr.

2018 By Sales Return
May 20 A/c 2,100
155

Problem No. 5 : Prepare Purchase Book & Purchase Return Book from the following
transactions with GST in Maharashtra
Date Details
2018 Aug. 05 Purchased from M/s. Rama Delhi (Invoice No. 780)
30 T.V. @ ` 10,000 each & 4 Home Theatres at ` 12,500 each @ 10% T.D
07 03 T.V. Return to M/s. Rama Delhi (Gross) (Found defective) Debit Note No. 211
20 Bought from M/s. Time Electronics Haryana (Invoice No. 11)
5 Washing Machines @ ` 10,000 each &
5 LCD T.V. @ ` 25,000 each @ 5% T.D.
Rate of GST applicable on above purchases are
CGST @ 9%
SGST @ 9% & IGST @ 18%
Solution Purchase Book (Analytical)
Date Name of Supplier Inward L.F. Details Total Purchase CGST SGST IGST
Invoice (`) (`) (`) (`) (`) (`)
No.
2018 M/s. Rama Delhi 780
Aug. 30 T.V. x10,000 each 3,00,000
5
4 Home Theatres
12,500 50,000
3,50,000
Less - T.D. 10% 35,000
3,15,000
Add : IGST 18% 56,700 3,71,700 3,15,000 56,700
20 M/s. Time Electronics 11
Hariyana
5 Washing Machine x
10000 50,000
5 LCD x 25,000 each 1,25,000
1,75,000
Less - T.D. 5% 8,750
1,66,250
Add : IGST 18% 29,925 1,96,175 1,66,250 29,925
Total 5,67,875 4,81,250 86,625
156

Purchase Book
Date Debit Name of Supplier L.F. Details Total Purchase CGST SGST IGST
Note (`) (`) (`) (`) (`) (`)
No.
2018 211 M/s. Rama Delhi
Aug.7 3 T.V. x ` 10,000 30,000
Less - T.D. 10% 3,000
27,000
Add : IGST 18% 4,860 31,860 27,000 4,860
Total 31,860 27,000 4,860
Illustration No. 6 Prepare Sales Book & Sales Return book of M/s. Sourabh of Maharash-
tra from the following transactions with GST.
Date Details
2018 Aug.07 Sold to M/s. Mehul Brothers, Delhi (Invoice No. 362)
30 Shirts @ `250 per Shirt
40 Pants @ `350 per Pant @ 8 @ T.D.
10 Returned 5 Shirts by M/s. Mehul Brothers, Delhi (Gross) Credit Note No. 61
18 Sold to M/s. Raja Traders, Jalana (Invoice No. 363)
20 Jackets @ `450 per Jacket
10 Plain Shirts @ `200 per Shirt at 8% T.D.
Rate of GST applicable on above Readymade
CGST @ 2.5%
SGST @ 2.5%
IGST @ 5%
Solution Sales Book (Analytical)

Date Name of Customer Outward L.F. Details Total Sales CGST SGST IGST
Invoice (`) (`) (`) (`) (`) (`)
No.
2018 M/s. Mehul Bros. Delhi 362
Aug.
30 Shirts @ `250 each 7,500
7
40 Pants @ `350 each 14,000
21,500
Less - T.D. 8% 1,720
19,780
Add : IGST 5% 989 20,769 19,780 989
157

18 M/s. Raja Traders 363

Jalana
20 Jackets @ `450 per 9,000
10 Shirts @ `200 per 2,000
11,000
Less - T.D. 8% 880
10,120
Add : SGST 2.5% 253
CGST 2.5% 253 10,626 10,120 253 253
Total 31,395 29,900 253 253 989
Sales Return Book (Analytical)

Date Name of Customer Credit L.F. Details Total Sales CGST SGST IGST
Note (`) (`) (`) (`) (`) (`)
No.
2018 M/s. Mehul Bros. Delhi 61
Aug. 5 Shirts @ `250 each 1,250
10 Less - T.D. 8% 100
1,150
Add : IGST 5% 58 1,208 1,150 - - 58
Total 1,208 1,150 - - 58
Illustration No. 7 : Enter the following transaction of M/s. Kirti in Purchase book, Sales
book, Purchase Return book, Sales Return Book.
Date Details
2018 Mar.01 Sold goods to Sudhakar Stores ` 39,000 @ 10% T.D.
3 Purchased goods from Avadhoot Traders ` 47,350 & paid carriage ` 250
6 Sudhakar Stores returned goods of ` 3,220 (Net)
10 Cash purchases ` 18,600 & cash sales ` 16,000
13 Rakesh invoiced goods to us as per our order placed on 28th Feb. 2018 ` 37,000
17 Sold goods ` 33,400 to Ragini @ 10% T.D.
20 Returned goods to Rakesh ` 3,850 as they were defective
22 Credit purchases from M/s. Michel Traders ` 19,450 & they allowed a TD ` 150
Ragini return goods ` 1900 (Gross) as they were damaged.
23 Purchased Office Furniture on credit from Sharma Furniture Mart ` 55,000
26 Purchased goods from Garima Stores ` 8,000 & sold the same to Sunita @ 25%
29 profit on cost.
Sent a Debit Note to Michel Traders ` 3,200
31
158

Solution : In the books of M/s. Kirti

Purchase Book
Date Name of Supplier Inward L.F. Amount
Invoice No. ( `)
2018 Mar. 03 Avadhoot Traders - 47,350
13 Rakesh 37,000
22 Michel Traders 19,300
29 Garima Stores 8,000
Total 1,11,650
Sales Book
Date Name of Customer Outward L.F. Amount
Invoice No. ( `)
2018 Mar. 01 Sudhakar Stores - 35,100
17 Ragini 30,060
29 Sunita 10,000
Total 75,160

Date Name of Supplier Debit Note No. L.F. Amount ( `)
2018 Mar. 20 Rakesh - 3,850

31 Michel Traders 3,200
Total 7,050
Sales Return Book

Date Name of Customer Credit Note No. L.F. Amount ( `)
2018 Mar. 06 Sudhakar Stores - 3,220
23 Ragini 1,710
Total 4,930
Note : Following Journal Entry can be passed for the transaction dated 26th March, 2018
Journal Proper
Debit Credit
Amount Amount ( `)
Mar. 26 To Sharma Furniture Mart A/c 55,000
(Being Furniture purchased from Sharma
Furniture Mart)
159

Working Note :
1) Transaction dated 3rd March carriage paid ` 150 will be recorded in Cash Book.
2) Transaction dated 10th March will be recorded in Cash Book.
3) Transaction dated 10th March will be recorded in Cash Book.
Illustration No. 8 : Enter the following transactions in the books of Shreyas Traders in
Purchase book, Sales book, Purchase Return book, Sales Return book.
Date Details
2018 July 01 Purchased goods from Neelkamal Stores ` 33,000 at 5%. Trade Discount half the
amount was paid immediately.
3 Invoiced goods of ` 27,750 to Dhaval Traders.
4 Sonali invoiced goods ` 14,000 to us at 4% T.D. as per our order dated 27 June
2018
9 Sold goods of ` 30,000 on credit to Sourabh & Sons at 7% T.D.
12 Sent a Debit Note to Neelkam Stores ` 3,000 (Gross)
14 Sent a Credit Note to Dhaval Traders of ` 3,550
19 Received Debit Note from Sonali ` 1,000 (Gross)
21 Sent Credit Note to Sourabh & Sons ` 4,675 (Net).
24 Purchased goods from Surabhi Stores ` 15,000 & sold the same to Prachi at a profit
of 25% on cost.
25 Purchased goods of ` 6,600 from Seema Stores & paid carriage ` 240
27 Prachi return goods ` 5,000 as they were defective & same were returned to Surabhi
Stores.
30 Purchased Furniture for office use ` 23,000 from Bharat Furniture on credit.
Solution : In the books of Shreyas Traders

Purchase Book
Invoice No. ( `)
2018 July 01 Neelkamal Stores 15,675
4 Sonali 13,440
24 Surabhi Stores 15,000
25 Seema Stores 6,600
Total 50,715
160

Sales Book
Invoice No. ( `)
2018 July 03 Dhaval Traders - 27,750
9 Sourabh & Sons 27,900
24 Prachi 18,750
Total 74,400
Date Name of Customer Debit Note L.F. Amount

No. ( `)
2018 July 12 Neelkamal Stores - 2,850
19 Sonali 960
27 Surabhi Stores 4,000
Total 7,810
Sales Return Book

Date Name of Supplier Credit Note L.F. Amount
No. ( `)
2018 July 14 Dhaval Traders - 3,550
21 Sourabh & Sons 4,675
27 Prachi 5,000
Total 13,225
Working Note :
Transaction dated 27-7-2018 value of goods returned to Surabhi Stores.
(Price of goods received from Prachi) = 100/(100 + 25)
= 5,000 x (100/125) = 4,000
Note : Transaction dated 30th March is related to purchase of Furniture on credit, hence it will not be
recorded in the above books.
161

Illustration No. 9 - Record the following transactions in Purchase book, Sales book, Pur-
chase Return book, Sales Return book of Kamal General Stores, Solapur.
Date Details
2018 May 01 Jaya Invoiced goods ` 15,000 at 9% T.D. as per invoice No. 23
3 Purchased Computer from IBM Computers ` 55,000 as per invoice No. 86
4 Invoiced goods to Priya for ` 20,000 at 4.5% T.D. as per invoice No. 34
7 Sold goods to Sneha for ` 14,500 at 10% T.D. as per invoice No. 35
12 Priya return goods ` 3,500 (Gross) for which we issued Credit Note No. 87
15 Goods ` 4,500 (Gross) returned to Jaya & issued Debit Note No. 49
17 Sold old Machinery to Bipin on credit ` 29,800.
20 Sold goods to Amina for ` 26,650 as per invoice No. 36 & Purchased goods from
her for ` 12,250 as per their invoice No. 455.
22 Kailash Traders purchased goods from us ` 16,000 at 6% T.D. as per invoice
No. 37
24 Sweety supplieed goods to us ` 2,450 vide invoice No. 630.
27 Kailash Traders return goods to us ` 5,180 (Net) & issued a Credit Note No. 88
29 Return goods ` 460 to Sweety & issued debit note No 50
Solution : In the books of Kamal General Stores
Purchase Book

Invoice No. ( `)
2018 May 01 Jaya 23 13,650
20 Amina 455 12,250
24 Sweety 630 2,450
Total 28,350
Sales Book
Invoice No. ( `)
2018 May 04 Priya 34 19,100
7 Sneha 35 13,050
20 Amina 36 26,650
22 Kailash Traders 37 15,040
Total 73,840
162


Date Name of Customer Debit Note L.F. Amount
No. ( `)
2018 May 15 Jaya 49 4,095
29 Sweety 50 460
Total 4,555
Sales Return Book

Date Name of Supplier Credit Note L.F. Amount
No. (`)
2018 May 12 Priya 87 3,342
27 Kailash Traders 88 5,180
Total 8,522
Note : Transactions dated 3rd and 17th of March is related to purchase and sale of Asset on credit,
hence it will not appear in the above books.
5.9 Journal Proper

A book maintained to record the transactions which do not find place in Special Journal (Subsidiary
Books) is known as Journal Proper. Thus transactions that cannot be recorded in any particular book
are recorded in Journal Proper. For example : Assets and other things except goods purchased on
credit cannot be recorded in Cash Book or in Purchase Book, but these type of transactions are
recorded in Journal Proper.
Following transactions are recorded in this Journal Proper

1. Opening Entries : In the begining of new accounting year record of the opening balances of
assets, liabilities and capital in the form of opening entries are made in Journal Proper.
2. Adjustment Entries : In order to update Ledger Account on accrual basis such entries are
made at the end of accounting period. Such as rent outstanding, prepaid insurance, depreciation
commission received in advance, etc.
3. Rectification Entries : To rectify errors in recording transactions in the books of original entries
and their posting to ledger account Journal Proper is used.
4. Transfer Entries : Drawings Account is transferred to Capital Account at the end of accounting
year. Expenses and Revenues which are not balanced at the time of balancing are opened to
record specific transactions. Accounts relating to operation of business such as Sales, Purchases,
Opening stock, Income, Gains and Expenses and Drawings are closed at the end of accounting
year and their total balances are transfered to Trading and Profit and Loss Account by recording
the Journal entries. These are also called closing entries.
163

5. Other Entries like

a) Purchase of Assets on credit
b) Sale of old Assets on credit.
c) Withdrawal of goods by properietor
d) Bad debts written off.
e) Loss of goods by fire or stolen or damaged in transit.
f) Goods distributed as free sample or charity.
g) Discount received and allowed on cash transactions.
Format of Journal Proper

In the books of .............
Journal Proper
Date Particulars L.F. Debit Amount Credit Amount
(`) (`)
Accounting treatment for transactions appearing in Journal Proper

1. Opening Entries : These entries are passed at the beginning of financial year to bring the assets
and liabilities into the books of Account. All assets are debited and liabilities are credited.
Excess of assets over liabilities is capital which will be credited.
i.e. Capital = Assets - Liabilities
Illustration 1 : Cash in hand ` 8,500
Cash at Bank ` 35,000
Plant & Machinery ` 1,10,000
Stock ` 37,000
Debtors ` 43,000
Creditors ` 32,000
Pass Opening Journal entries for the above.
164

Solution : Journal Proper

(`) (`)
2019 Cash A/c Dr 8,500
April 1 Cash at Bank A/c Dr 35,000
Plant & Machinery Dr 1,10,000
Stock Dr 37,000
Debtors Dr 43,000
To Creditors A/c 32,000
(Being Assets & Liabilities brought down)
Total 2,33,500 2,33,500
`
Note : Total Assets 2,33,500
Less : Total Liabilities 32,000
Capital 2,01,500
Excess of Assets over Liabilities is Capital
2. Adjusting Entries : To calculate Profit Final Accounts are prepared at the end of accounting
year on the basis of Trial Balance. Trail Balance contains balances of only those accounts which
are recorded in the books of Accounts. Items like further bad-debts, depreciation of assets,
closing stock, income receivable, outstanding expenses etc. do not appear in Trial Balance.
Unless all these items are brought into the books of accounts. Final Accounts will not disclose
accurate result. Thus to bring these items into the books of accounts adjusting entries are
passed.
Illustration 2 :Pass adjusting entries for the following.
1) Further Bad Debts ` 3,750
2) Provide for depreciation on Building ` 31,500
Solution Journal Proper
(`) (`)
1 Bad Debts A/c Dr 3,750
To Debtors A/c 3,750
(Being Bad-debts written off))
2 Depreciation A/c Dr 31,500
To Building A/c 31,500
(Being Building depreciated)
Total 35,250 35,250
3. Closing Entries : In order to find out Profit or Loss, all the accounts of Expenses and Income
are closed at the end of year. Accounts of Expenses and Income are closed by transferring them
to "Trading" Account or Profit and Loss Account by passing closing entries. Closing entry is
passed at the time of preparing Final Accounts.
165

Illustration 3 :Pass closing entries for the following.

1) Office Expenses for the year ` 17,500 is transfered to Profit & Loss A/c
2) Purchases of the Year amounted to ` 2,95,000
(`) (`)
1 Profit & Loss A/c Dr 17,500
To Office Expenses A/c 17,500
(Being Office Expenses account closed by
transferring it to Profit & Loss A/c)
2 Trading A/c Dr 2,95,000
To Purchases A/c 2,95,000
(Being Purchases A/c transferred to Trading A/c)
Total 3,12,500 3,12,500
Note : Trading and Profit & Loss A/c are prepared at the end of the year to ascertain Gross Profit or
Gross Loss and Net Profit or Net Loss. Revenue Expenses and Income are transferred to Trading or
Profit & Loss A/c as the case may be.
4. Transfer Entries : Sometimes in order to close one particular account, the balance in the account
is transferred to another account. Entries passed in such cases are known as "Transfer Entries"
Illustration 4 :Pass Necessary transfer entries for the following.
1) Net Profit ` 87,500 is transfered to Capital A/c
2) Drawings ` 10,500 is transfered to Capital A/c
(`) (`)
1 Profit & Loss A/c Dr 87,500
To Capital A/c 87,500
(Being Net Profit transferred to Capital A/c)
2 Capital A/c Dr 10,500
To Drawings A/c 10,500
(Being Drawings transferred to Capital A/c)
Total 98,000 98,000
5. Rectification Entries : A mistake committed by accountant without any intention of fraud is

known as an error. If the mistakes are not corrected the Books of Accounts will not give a true
and fair result. Thus to correct the errors accountant passes Rectification Entries.
166

Illustration 5 :Pass the necessary rectification entries for the following.

1) Goods purchased from Mr. Sourabh on credit ` 50,000 were not recorded in the Books.
2) Wages paid for installation of Machinery ` 5,000 were debited to Wages Account.

(`) (`)
1 Purchases A/c Dr 50,000
To Sourabh's A/c 50,000
(Being credit purchases not recorded in
Books, now rectified)
2 Machinery A/c Dr 5,000
To Wages A/c 5,000
(Being wages paid for installation of
machinery wrongly debited to Wages A/c
now rectified)
Total 55,000 55,000
6. Cash Discount Allowed and received : Cash discount allowed and Cash Discount received are
non cash transactions one used they are not recorded in Cash Book. It is recorded in the Journal
Proper as under.
Illustration 6 :Pass the entries for the following.
1) Suresh allowed us a cash discount of ` 420 in full settlement of his account.
2) Allowed Cash Discount to Kunal Stores ` 650.
(`) (`)
1 Suresh's A/c Dr 420
(Being cash discount received)
2 Discount Allowed A/c Dr 650
To Kunal Stores A/c 650
(Being discount allowed)
Total 1,070 1,070
7. Other entries :
Example : Pass the entries in the Journal Proper
1) Purchased Furniture from M/s Patel Furniture on credit for ` 74,000
2) Sold Machinery for ` 9,400 to Suraj on credit.
3) Goods of ` 4,000 were withdrawn by Proprietor for his Personal use.
4) Goods distributed as free samples ` 11,000
5) Goods of ` 8,500 were lost by fire.
6) Cash Discount Received from Seema ` 500
7) Allowed Cash Discount to Hemant ` 600
167


(`) (`)
1 Furniture A/c Dr 74,000
To M/s Patel Furniture A/c 74,000
(Being Furniture purchased from M/s Patel))
2 Suraj's A/c Dr 31,500
To Machinery A/c 31,500
(Being machinery sold on credit)
3 Drawings A/c Dr 4,000
To Goods A/c 4,000
(Being goods taken by proprietor for personal use)
4 Advertisement A/c Dr 11,000
To Goods distributed as Free Samples A/c 11,000
(Being goods distributed as free samples)
5 Loss by Fire A/c Dr 8,500
To Goos Destroyed by Fire 8,500
(Being goods lost by fire)
6 Seema's A/c Dr 500
(Being discount received)
7 Discount Allowed A/c Dr 600
To Hemant's A/c 600
(Being discount allowed)
Total 1,30,100 1,30,100

Objective type Questions & Answers
Q.1 Answer the following questions in one sentence.
1) What is Subsidiary Books ?
2) What is a Cash Book ?
3) State the meaning of 'Contra entry'.
4) State the meaning of imprest system of Petty Cash Book.
5) Which transactions are recorded in Purchase Book ?
6) Which sales are recorded in Sales Book ?
7) Which transactions are recorded in the Journal Proper ?
8) Who is a Petty Cashier ?
168

Q.2 Give word/term or phrase for each of the following statements :

1) Person who maintains Petty Cash Book.
2) A bank account which the businessman prefer to open.
3) Petty Cash Book in which the payment side is ruled in suitable columns.
4) Subsidiary book in which only credit purchases of goods is recorded.
5) Subsidiary book in which return of goods sold on credit is recorded.
6) The entry which is recorded on both sides of cash book.
7) Name the account which encourages personal savings.
8) A note issued by buyer to seller giving full details of goods returned.
9) Note issued by seller on receipt of defective goods from customer.
10) Name the bank account on which overdraft facility is given to Account holder.
Q.3 Select the most appropriate answers from the alternatives given below and rewrite
the sentences
1) Cash column of Cash Book can never have ..... balance.
(a) credit (b) debit (c) zero (d) none of the above
2) Any entry recorded on both sides of Cash Book is known as ..... entry
(a) opening (b) rectifying (c) transfer (d) contra
3) The source document for recording in Sales book is .....
(a) Inward Invoice (b) Outward Invoice
(c) Voucher (d) Cash Memo
4) Credit purchase of Machinery is recorded in the .......
(a) Purchase Book (b) Cash Book (c) Journal Proper (d) Returns Outward Book
5) Sub-division of journal is knows as .... book.
(a) Subsidiary (b) Purchase Return (c) Purchase (d) Journal Proper
6) Additional cash introduced in business is recorded in .....
(a) Purchase Book (b) Cash Book (c) Journal Proper (d) Returns Inwards Book.
7) Entry for bad debts is recorded in the ......
(a) Sales Book (b) Purchase Book (c) Cash Book (d) Journal Proper
8) Direct deposit made by customer into our bank is recorded in the ..... side of the Cash
Book.
(a) payments (b) credit (c) receipts (d) both
9) The person who draws the cheque and signs on it is the ......
(a) drawer (b) drawee (c) payee (d) all of the above
10) A fixed amount is deposited for a fixed period in ..... deposit account.
(a) Current (b) Savings (c) Fixed (d) Recurring
169

Q.4 State whether the following statements are True or False with reasons :
1) Journal is a book of secondary entry.
2) Assets sold on credit are entered in Sales Journal.
3) Cash and credit purchases are entered in Purchase Book.
4) Cash sales are entered in Sales Journal
5) Cash Book records transactions relating to receipts and payments of cash.
Q.5 Do you agree with the following statements.

1) Trade discount is recorded in Cash Book.
2) Petty Cash Book is a book having record of big payments.
3) Cash received is entered on the debit side of Cash Book.
4) Transactions recorded on both debit and credit side of Cash Book is known as Contra
Entry.
5) Credit purchase of machinery is entered in Purchase Journal.
Q.6 Complte the following sentenses :

1) Cash Book is a ..... Journal.
2) In Journal Proper, only .... discount is recorded.
3) Return of goods purchased on credit to the suppliers will be entered in ......... Journal.
4) Assets sold on credit are entered in ....
5) Double column Cash Book records transactions relating to cash and....
6) Credit purchases of goods are recorded in ....
7) Cash Book does not record the ..... Transactions.
8) Credit balance shown by a bank column in Cash Book is......
9) Petty Cash Book is used for recording ..... expenses.
10) In Purchase Book goods purchased on ..... are recorded.
Q.7 Correct the following sentences and rewrite the same.

1) Cash purchases of goods are recorded in Purchase book.
2) Cash Book records cash trnasactions as well as credit transactions.
3) Small and large business records all transaction in subsidiary books.
4) The person who maintain Petty Cash Book is called Chief Cashier.
170

Q.8 Calculate the following.

1) Cash purchases ` 1,60,000 at 10% T.D. and 5% C.D. What is the amount of Net
purchases ?
2) Purchased goods from Harish ` 12,000 @ 7% T.D. What is the amount of Trade discount?
3) Sold 50 shirts at ` 300 per shirt and 40 Trousers at ` 600 each, What is the amount of
sales ?
4) Sold 30 Jackets at ` 500 per Jacket at 8% Trade discount, What is the amount of Trade
discount ?
Q.9 Complete the following Table.

1) Cash Purchases Credit purchases Purchase Return Net Purchases
35,000 + 55,000 - ? = 88,000
2) Cash Sales Credit Sales Sales Return Total Sales

? + 60,000 - 3,000 = 1,02,000
3) Cash Sales Credit Sales Trade discount Total Sales

90,000 + 1,10,000 - 16,000 = ?
4) Cash Purchases Credit purchases Trade discount Net Purchases

70,000 + ? - 18,000 = 1,62,000
5) Opening cash Cash Receipts Cash Payments Total cash

Balance
? + 60,000 - 45,000 = 23,000
6) Cash Sales Credit Sales Total Sales Total Debtors

1,20,000 + 1,40,000 = 2,60,000 - ?
7) Cash Purchases Credit purchases Total Purchases Total Creditors

80,000 + ? = 1,90,000 - 1,10,000
8) Opening Petty Petty Cash Petty Expenses Closing Petty

Cash Balance Received Paid Cash Balance
250 + 1,750 - ? = 420

Cash Received Paid Cash Balance
400 + ? - 1,800 = 250

Cash Balance Received Paid Cash Balance
? + 1,800 - 2,250 = 150
171

PRACTICAL PROBLEMS
1. Prepare a two column Cash Book with the help of following information for January
2018. Amt (`)
01 Started business with cash 1,20,000
03 Cash paid into Bank of Baroda 50,000
05 Purchased goods from Sakshi on credit 20,000
06 Sold goods to Divakar and received a bearer cheque 20,000
10 Paid to Sakshi cash 20,000
14 Cheque received on December 06, 2018 deposited into Bank
18 Sold goods to Shivaji on credit 12,000
20 Cartage paid in cash 500
22 Received cash from Shivaji 12,000
27 Commission received 5,000
30 Drew cash for personal use 2,000
2 Prepare two column Cash Book from the following transaction for the year July 2018.
Amt (`)
01 Cash in hand 17,500
01 Cash at Bank 5,000
03 Purchased goods for cash 3,000
05 Received cheque from Arun 10,000
08 Sold goods for cash 8,000
10 Arun's cheque deposited into bank
12 Purchased goods and paid by cheque 20,000
15 Paid establishment expenses through bank 1,000
18 Cash Sales 7,000
20 Deposited into bank 10,000
24 Paid General expenses 500
27 Received commission by Cross cheque 6,000
29 Paid Rent 2,000
30 Withdrew cash for personal use 1,200
31 Wages paid 6,000
172

3 Record the following transactions in Cash Book of M/s Kamal Traders. Balance for
the month of July 2018 : Cash in hand ` 2,000 and balance in Bank Current
account ` 8,000. Amt (`)
03 Cash sales 2,300
05 Purchased goods and amount paid by cheque 6,000
08 Cash sales 10,000
12 Paid General expenses 700
15 Sold goods and amount received by Cheque and deposited in to Bank 20,000
18 Purchased Motor Car paid by cheque 15,000
20 Cheque received from Mrunal deposited into Bank 10,000
22 Cash Sales 7,000
25 Mrunal's cheque returned dishonoured
28 Paid Rent 2,000
29 Paid Telephone expenses by cheque 500
31 Cash withdrawn from Bank for personal use 2,000
Prepare two column Cash Book
Exercise 4 : Prepare Analytical Petty Cash Book from the following transactions in the
books of Swarali General Stores, Kolhapur. The imprest amount is ` 1,500
received from main cashier.
2018 Jan. Amt (`)
01 Paid cartage 50
02 Telephone charges 40
02 Bus Fare 20
03 Postage 30
04 Refreshment to employees 80
06 Courier charges 30
08 Refreshment to customers 50
10 Cartage 35
15 Taxi Fare to Manager 70
18 Purchased Stationery 65
20 Bus Fare 10
22 Xerox charges 30
25 Internet charges 35
27 Postage stamps 200
29 Repair on Furniture 105
30 Cleaning expenses 115
31 Miscellaneous expenses 100
173

5. From the following information prepare Columnar Petty Cash Book kept on imprest
system in the books of Manisha Books Stall, Beed.
2018 April Amt (`)
01 Opening petty cash balance 200
02 Received a bearer cheque to make up the imprest amount 1,200
03 Gave a tips to peon 40
04 Purchased stationery 150
05 Paid Taxi Fare 35
06 Purchased Stamp pad 140
07 Paid Cartage 40
08 Paid Bus Fare 30
11 Paid to sweeper 50
13 Purchased a Box of pencils 40
14 Paid Mobile charges 35
15 Gave to Sohan on account 250
19 Paid for Refreshment to staff 150
20 Paid Railway Fare 30
21 Paid Carriage 65
6. Prepare proper Subsidiary Books and post them to the ledger from the following
transactions for the month of February 2018.
2018 Feb Amt (`)
01 Goods sold to Virat 5,000
04 Purchased goods from Khushboo Traders 2,480
06 Sold goods to Shankar Traders 2,100
07 Virat returned goods 600
08 Returns goods to Khusboo Traders 280
10 Sold goods to Mahesh 3,300
14 Purchased from Kunti Traders 5,200
15 Furniture purchased from Arun 3,200
17 Bought goods from Kunti Traders 4,060
20 Return goods to Kunti Traders 200
22 Return goods from Mahesh 250
24 Purchased goods from Kirti less 10% T.D. 5,700
25 Sold goods to Shri Surya goods less 5% T.D. 6,600
26 Sold goods to Prakash Brothers 4,000
28 Return goods to Kirti less 10% T.D. 1,000
28 Prakash Brothers returned goods 500
174

7. Enter the following transactions in the books of Vijay in Purchase Book, Sales Book,
Purchase Returns Book and Sales Returns Book and Journal Proper for the month
of August 2018.
2018 Aug.
01 Purchased goods from Vikas Stores ` 18,000 at 5% Trade Discount
02 Sold goods of ` 9,000 to Prabhakar Traders
05 Veena sold goods of ` 16,000 to us at 5% Trade Discount as per our order dated 28th July,
2018.
08 Sent a Debit Note to Vikas Stores ` 1,600 (Gross) for goods returned.
10 Sold goods of ` 12,000 on credit to Shamal & Sons at 6% Trade Discount.
18 Received Credit Note from Veena ` 900 (Gross) for goods returned.
22 Sent Credit Note to Prabhakar Traders for ` 1,500 for goods returned. Received credit
note from Shamal & Sons for ` 1,200 (Net) for goods returned.
23 Purchased goods of ` 16,600 from Priya Stores and paid for Carriage ` 150.
25 Purchased goods from Sadhana Stores ` 12,000 and sold the same to Aradhana Stores at
a profit of 20% on cost.
28 Aradhana Stores returned goods of ` 2,400 as they were defective and the same were
returned to Sadhana Stores.
31. Purchased Furniture for office use ` 30,000 from Art Furniture Works on credit.
8. Mr. Akash gives you the following information and asks you to prepare Purchase
Book, Sales Book, Purchase Returns Book and Sales Return Book for the month of
January 2018.
2018 Jan.
01 Purchased goods on credit from Dhanal Traders for ` 15,000 and sold the same to Kunal
Traders at a profit of 25% on cost.
05 Placed an order with Sunetra for goods of ` 10,000 less 5% Trade discount.
08 Purchased goods of ` 20,000 at 10% Trade Discount from Saurabha Traders.
13 Sold goods to Vinayak Stores ` 8,000 at 5% Trade Discount.
15 Vinayak Stores returned goods to us ` 200
18 Sunetra executed our order placed on 5th Jan. 2018.
20 Sold goods to Vishnu Traders ` 21,000 less 5% Trade Discount.
22 Returned goods to Sunetra ` 1,000 (Gross).
28 Kunal Traders returned goods to us ` 500
30 Returned goods to Sourabh Traders ` 1,500.
175

9. Enter the following transactions in the Subsidiary Book of Kamal Traders.

2018 Apr
01 Bought from Suhas goods of ` 12,000 as per his Invoice No. 41.
04 Purchased from Virat goods of ` 11,870 less 10% Trade Discount vide Bill No. 12.
07 Bought from Kuldip goods of ` 11,000 less 25% Trade Discount vide Bill No. 12.
08 Bought from M/s. Art Furniture Works, Furniture for ` 13,000 vide Invoice No. 84.
12 Sold to Dhiraj goods of ` 11,500 vide Sales Invoice No. 27
13 Sold to Raja goods of ` 12,780 less 5% Trade Discount, vide invoice No. 88
21 Sold to Suresh goods of ` 8,000 less 20% Trade Discount
23 Dhiraj returned goods of ` 500 vide our Credit note No. 14
26 Suresh returned goods of ` 150 (gross) vide our Credit Note No. 115
28 Returned to Suhas goods ` 1,200 vide our Debit Note No. 09
30 Returned to Virat goods of ` 1,300 (Gross) vide our Debit Note No. 10.
30 Returned to Kuldip goods of ` 1,100 (Gross) vide our Debit Note No. 11.
10. Enter the following transactions in the Subsidiary Books of Navyug Traders :
2018 Mar
01 Sold to Bharat Patil goods ` 10,000 at 10% Trade discount.
04 Purchased from Naresh goods of ` 11,000 less 10% Trade discount.
06 Purchased Furniture from M/s. Sham Furniture Works, of ` 15,000 for office use.
07 Bharat Patil returned 20% of the goods bought by him on 1st March above and we gave
him fresh goods in exchange.
08 Sold to Sundar goods of ` 13,000 less 15% Trade Discount.
10 Sold to Sumit Computer for ` 23,800 with a book value of ` 24,000.
12 Placed an order with Sajan for goods of ` 12,000.
17 Purchased from Naresh goods of ` 14,000 and sold them to Kamesh for ` 16,000.
19 Kamesh returned us goods of ` 1,600 and immediately returned the same to Naresh.
23 Sold to Rakesh for ` 4,500 old Furniture with a book value of ` 4,800.
26 Returned to M/s. Sham Furniture Works, office Furniture of ` 4,500.
28 Sajan executed our order dated 12th March, 2018.
j j j
176

Activity
1) Collect actual Invoices from trader and Prepare Purchase & Sales Book.
2) Collect actual Debit & Credit notes from any business organization.
3) Prepare Petty Cash book of your house hold expenses for the month
4) Prepare Petty Cash book for a month of your pocket money.
5) Collects documents of Petty expenses of any business organization & prepare Petty
Cash Book.
6) Make list of 20 transactions and find out in which type of Subsidiary Book these
transactions are recorded.
7) Visit a Bank get a KYC form fill it and open your Saving Account.
j j j
177

6 Bank Reconciliation Statement
Contents
6.1 Meaning, Definition and Utilities of Accounting Documents

6.2 Meaning, Definition, Need and Importance of Bank Reconciliation Statement.
6.3 Reasons for difference between Cash Book balance and Pass Book balance.
6.4 Specimen of Bank Reconciliation Statement.
6.5. Preparation of Bank Reconciliation Statement.
o Students can prepare specimen of different Bank Documents.
o Students will understand the difference between Cash Book and Pass Book
o Students will know the reasons behind the differences in Cash Book balance and Pass Book
balance.
o Students can prepare Bank Reconciliation Statement competently.
6.1. Meaning, Importance and Utilities of accounting documents.

Introduction:
Accounting Documents describes all the basic facts of transactions like the amount of
transaction, to whom the amount was paid, the purpose of transaction and the date of transaction.
This is essential in the process of Book Keeping as it provides evidence that a financial transaction
has actually taken place. There has been a drastic change in the functioning of modern banks. Internet
and mobile banking play a prominent role in today's business. Payments and receipts of cash through
these methods generates instant and automatic proof for both the parties.
But even now a large number of transactions are made by personally visiting the bank. Payments
and receipts by cheques and drafts have not lost their significance altogether.
Types of Bank Documents:
1. Pay-in-slip
Meaning: Pay-in-slip is also known as deposit slip. This slip is filled when the account holder
deposits cheque or cash into his bank account. When cash is deposited account holder gives
his account number, date of deposit and details of cash deposited. Similarly, when a cheque is
deposited details of cheque, account number, name of drawee bank, amount etc are filled.
178

Pay-in-slip is divided into two parts. The right hand side is kept with the bank for their record.
The left hand side known as counterfoil is duly stamped, signed and dated by the receiving clerk. This
is returned back to the account holder which serves as acknowledgement.
Importance and Utilities:
i) Facilitates the account holder to deposit cash or cheque to be credited in his account.
ii) Entries in respect of cash or cheque deposited into bank are recorded in the books of accounts
on the basis of pay-in-slip.
iii) Counterfoil or acknowledgement acts as legal evidence.
Contents:
(same contents appear on the left hand side and right hand side of the pay-in-slip)
i) Name of Bank, branch and address.
ii) Date of transaction.
iii) Amount deposited in figures and words. (Cash/cheque)
iv) Name of account holder.
v) Account Number.
vi) Type of account.
vii) Details of denomination, i.e. number of ` 100, ` 200, `500, ` 2000 notes etc. deposited.
viii) Details of cheque.
ix) Details of drawee bank.
x) PAN card number if the amount of deposit is more than ` 50,000.
Format : Pay-in-slip
Fig. 6.1 (a)
In modern times, a cheque along with duly filled pay-in-slip can be simply dropped into the
drop box placed in the bank for collection.
2. Withdrawal Slip
Meaning: Withdrawal means removing funds from a bank. Form which is to be filled for
withdrawing money from bank is known as withdrawal slip or form. A copy of this document
is not available to record the transaction in the books of accounts but it is reflected in the Pass
Book.
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i) This document is used by the account holder within the bank only to withdraw money.
ii) Account holder signs on the face of the slip and backside of the slip.
iii) Signature of the account holder is matched with his/her specimen signature recorded in the
books of bank thereby avoiding malpractices.
Contents:
i) Name of the bank and branch.
iii) Account holder’s name.
iv) Account number and type.
v) Amount in figures and words.
vi) Signature of the account holder.
If the amount of withdrawal is more than ` 50,000 account holder has to submit a photocopy of his
PAN card.
A cheque can also be used to withdraw cash from bank by the account holder.
Format :
Fig. 6.1 (b)
Availing banking services through an extensive use of information technology without physically
walking into the bank premises is called virtual banking.
3. Bank Pass Book:

Meaning: Pass Book is a copy or extract of ledger account of account holder appearing in the
books of bank. In this the bank provides the account holder with the details of all ledger entries
appearing in the books of bank. It is a small book given to the account holder to inform him
180

about the transactions and balances from time to time. Modern times Pass Book is prepared on
the basis of computerised accounting system.
i) Pass Book gives the balance of an account on a particular date.
ii) It acts as documentary evidence which can be produced in the court of law in case of disputes.
iii) It is confirmation that all transactions are made through bank.
Contents:
i) Name of the bank and branch.
ii) Address and telephone number of bank.
iii) Full name of account holder and address.
iv) Type of account.
v) Account number and customer ID.
vi) Photo of account holder.
vii) IFSC (Indian Financial System Code) It is an alphanumeric code that facilitates electronic funds
transfer like IMPS, NEFT and RTGS.
viii) Columns for date, particulars, cheque number, amount withdrawn, amount deposited, balance,
bank officer’s signature.
Format: Pass Book
Date Particulars Cheque No. Amount Amount Balance Signature /
Withdrawn deposited (`) initials
Dr. ` Cr. `
Fig. 6.1 (c)
Pass Books appeared in the 18th century, allowing customers to have transaction information in
their own hands for the first time. Prior to this, customers had no history of their own deposits
and withdrawals. Today bank statements can be viewed on lines.
4. Bank Statement:
Meaning: Businessmen open current account for their business considering the benefits provided
by this account. Current account holders enjoy unlimited number of deposits and withdrawals and
therefore the number of transactions is large. Businessmen like to know the details of transactions and
the bank balance. Therefore, the bank issues a bank statement to them. A bank statement is a summary
of financial transactions which have taken place over a given period on a bank account held by
account holder. Earlier, bank statements were printed paper statements produced monthly, quarterly
or annually. Bank as a matter of service would provide a periodical bank statement. Today with better
access to the internet and online banking,bank statement also known as electronic statement can be
viewed online, downloaded and printed by the account holder. This reduces the cost of paper and
postage.
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i) Bank statement enables the account holder to know the balance with bank.
ii) Suitable arrangements for payment can be made.
iii) It helps businessmen know the time taken for clearance of cheques deposited.
iv) It helps in preparation of bank reconciliation statement.
Contents:
i) Details of bank, branch and address.
iii) Particulars.
iv) Cheque number.
v) Withdrawals.
vi) Deposits.
vii) Balance.
Format : Statement of Account
Bank of India Current Account

S.B. Road Statement of Account Date: / /20___
Account type: Institutional Page No.:
Ledger No.:
Account
Date Particulars Cheque No. Amount Amount Balance Signature /
Withdrawn deposited initials
Dr. ` Cr. ` (`)
Fig. 6.1 (d)

5. Bank Advice:
Bank advice is a letter sent by the bank to customer / account holder in a prescribed form to
inform them about dishonour of cheques deposited for collection, bank charges debited, dishonour
of Bills receivable discounted, Bill sent to bank for collection, interest charged and allowed by bank,
dividend or interest collected by bank and any other payment made by bank according to the standing
instruction given by the customer.
i) Businessmen can update his records from time to time on receiving Bank Advice.
ii) Evidence of transaction made through bank is created.
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Contents:
i) Name and address of bank.
ii) Date of sending the advice.
iii) Name, address and account number of customer.
iv) Particulars of transaction.
v) Amount to be debited or credited.
Format:
Bank Advice
The People’s Co-Operative Bank LTD., Pune
Date: 24 Nov, 2018
To,
M/s Dhanashree Traders, Pune
A/c No.- Current A/c 00001234
Sir,
Your A/c has been credited/debited as per following details:
Particulars of transaction Amount
Debit (`) Credit (`)
Your electricity bill is paid as per your 15,000 00
instruction, a copy of bill is enclosed
Total 15,000 00
Bank Manager
Fig. 6.1 (a)
SMS alerts and notifications have overtaken bank advice today. Account holder receives SMS
on their registered mobile number giving updates of their latest banking transactions.
6.2 Meaning, Definition, Need and Importance of Bank Reconciliation Statement.

Meaning: A businessman maintains a Cash Book with bank column in his ledger, wherein he
records all banking transactions. The bank column in his Cash Book represents bank current
account. Bank being the other party records these transactions in their ledger known as Pass
Book. When businessman deposits money or cheque into bank for collection it is recorded in
the Cash Book on the debit or receipt side. Bank records this on the credit or receipt side of Pass
Book. Similarly, when businessman issues cheque for making payments, it is recorded on the
credit or payment side of Cash Book. Bank records this transaction on the debit side or payment
side of Pass Book / bank statement. Thus, whatever is recorded by businessman in the Cash
Book is invariably recorded in the Pass Book / bank statement. Ideally then, Cash Book bank
balance and Pass Book balance should be the same. The only difference would be that if Cash
Book has a debit balance the Pass Book will have a credit balance and vice versa.
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In the books of business In the books of Bank

Dr. Cash Book Cr. Dr. Pass Book (business’s A/c) Cr.
Receipts (`) Payments (`) Receipts (`) Payments (`)
Fig. 6.2(a) Fig. 6.2(b)

But in practice Cash Book bank balance is sometimes different from the Pass Book balance.
You will learn about the causes of differences and method of reconciling balance of these two books
by preparing bank reconciliation statement. A copy of bank statement is issued to the current account
holder periodically by the bank. Bank statement is compared with the Cash Book for analysing the
causes of difference in the balance of the two books.
Definition:
“A statement which reconciles the Bank balance as per Cash Book and the balance as per Pass
Book showing all causes of difference between the two.”
“A statement showing the causes of disagreement between the balance shown by the bank Pass
Book and the balance shown by the Cash Book under the bank column at the end of the specific
period or month, is called Bank Reconciliation Statement.”
Need and importance of Bank Reconciliation Statement:

i) It explains and clarifies the causes of disagreement between bank balance as per Cash Book and
Pass Book.
ii) It helps in detecting errors and omission made in Pass Book and Cash Book.
iii) It reduces the chance of fraud by the staff dealing in cash.
iv) It helps to check whether the bank makes proper entries for banking transactions.
v) It helps to have a moral check on the staff of business organisations to keep Cash Book up to
date.
vi) It is an important mechanism of internal check and gives information of cash inflow and outflow.
6.3 Reasons for difference between Cash Book balance and Pass Book balance.
i) Time difference.
ii) Errors and omission made by businessman or bank.
i) Time difference:
Transaction cannot be recorded in the Cash Book and Pass Book at the same time. There is a
time gap between recording transaction in the two books. For example, when businessman
deposits a cheque into bank for collection, it is a transaction for him and he immediately records
it in his Cash Book. On the other hand, bank will record it in Pass Book only after collecting the
amount of cheque. At this point of time entry for transaction appears only in Cash Book thereby
creating a difference in the balance of the two books which is to be reconciled.
184

ii) Errors and omission made by bank or businessman:

Differences in balance may also arise due to errors committed by bank or businessman. For
example, bank charges debited by bank ` 540 is recorded as ` 450 in Cash Book. Here the
transaction appears in both the books but with wrong amount causing a difference in the balance
of the two books.
Causes of difference in Cash Book and Pass Book
I. Due to time difference. II. Due to errors and omission

a) Transaction that appears in Cash Book made by bank or business.
but not in Pass Book. i) Recorded on wrong side.
i) Cheque issued but not presented. ii) Recording wrong amount.
ii) Cheque deposited but not collected. iii) Wrong balancing and
totalling.
b) Transaction that appears in Pass Book iv) Double recording.
but not in Cash Book.
v) Omission of a transaction.
i) Interest credited by bank.
ii) Direct collection of income on
behalf of customer.
iii) Direct payment of expenses by
bank.
iv) Bank charges, interest on overdraft,
commission charged by bank.
v) Dishonour of cheques or Bills of
exchange.
vi) Amount directly deposited in the
bank account.
Fig 6.3(a)
I. Due to time difference:
a) Transaction that appears in Cash Book but not in Pass Book.
i) Cheque issued but not presented: As soon as a cheque is issued, it is entered on the credit
side of the Cash Book but the bank makes no entry for cheque until it is presented for
payment. It means if the cheque is not presented for payment up to the date of preparation
of bank reconciliation statement, the balance in the Pass Book will be higher than the
balance as per Cash Book on that date.
ii) Cheques deposited / paid into bank but not cleared: As soon as cheques are received
and deposited into the bank they are recorded in the Cash Book on debit side which
increase the balance at bank as per Cash Book but bank does not give credit for the
cheques deposited until it is cleared and collected by bank. Therefore, a difference will
arise on the date of preparation of bank reconciliation statement.
185

b) Transaction that appears in Pass Book but not in Cash Book.

i) Interest credited by bank: If the bank allows interest to customer it credits the customer
account and the bank balance as per Pass Book will increase. But customer will make
corresponding entry in the Cash Book only when he receives the intimation from the
bank. Until then the balance as per Pass Book would be more than the balance as per Cash
Book.
ii) Direct collection on behalf of customer: As per the standing instructions of the customer,
bank can collect interest, dividend, rent etc. directly from the person concerned and credit
the customer’s account and increase the balance as per Pass Book. But the same will be
entered in Cash Book only when the customer receives the statement or intimation of the
same from bank. Till then the balance as per Cash Book and bank statement (Pass Book)
will differ.
iii) Direct payment by bank: As per standing instructions bank can pay certain expenses
on behalf of the customer e.g. insurance premium, electricity bill, telephone bill, loan
instalments etc. As soon as such payments are made bank debits customer account in
bank Pass Book / bank statement but the customer has no information of the same till it
is informed to him. Till then balance as per Pass Book / bank statement will be less than
balance as per Cash Book.
iv) Bank charges, interest on overdraft, commission charged by bank: Sometimes bank
charges their customers for various services provided to them. It may be in the form of
bank charges or commission. Similarly, bank can charge interest on overdraft facility
provided to the customer. Bank debits the customer’s account for such facilities time
to time. However, the firm will know about these charges, commission etc. only when
it goes through the bank Pass Book / bank statement. So, on the date of reconciliation
balance as per Pass Book will be less than that of Cash Book.
v) Dishonour of cheques or Bill of exchange: When cheque or Bill of exchange discounted
with the bank is dishonoured, the same is debited in the Pass Book / bank statement but
not given effect in the Cash Book until intimation is received. Similarly, when customer
makes the payment by cheque and if it is dishonoured, bank credits the same in Pass Book
/ bank statement to cancel the earlier effect of cheque but will not give effect of dishonour
of cheque in the Cash Book until the intimation is received from bank. Thus, the balance
differs.
vi) Amount directly deposited in the bank account : There are instances when debtors
directly deposit money in businessman’s bank account. Businessman is not aware of this
transaction till he receives the intimation in bank statement. In this case bank records
the receipt in customers account but the same is not recorded in the businessman’s Cash
Book. As a result, the balance shown in bank Pass Book will be more than the balance
shown in Cash Book.
IMPS (Immediate Payment Service) is an instant payment interbank electronic funds transfer
system in India. When an account holder needs to transfer funds immediately, IMPS can be
used because this service is available 24/7 throughout the year including bank holidays.
NEFT(National Electronic Funds Transfer) is suitable for small money transfers(less than ` 2
Lakhs) and RTGS (Real Time Gross Settlement) is suitable for larger money transfers (greater
than ` 2 Lakhs).
186

II. Due to errors and omission made by bank or businessman:

Sometimes bank may commit errors while recording the transactions in the Pass Book / bank
statement which may disagree with the balance as per Cash Book and Pass Book. For e.g.
i) Recorded on wrong side.
ii) Recording wrong amount.
iii) Wrong balancing and totalling.
iv) Double recording.
v) Omission of a transaction.
6.4 Specimen of Bank Reconciliation statement.
Bank Reconciliation Statement
As on __________
Particulars Amount (`) Amount (`)
Bank balance / Overdraft as per Cash Book / Pass Book xxx
Add: Reasons which would increase balance of the other
book
1. xxx
2. xxx xxx
Less : Reasons which would decrease balance of the other
book
1. xxx
2. xxx
3. xxx xxx
Bank balance / Overdraft * as per Pass Book / Cash Book xxx

Fig. 6.4 (a)
* Balance becomes overdraft when answer is with negative (-) sign and vice versa.
Alternate Presentation.
Bank Reconciliation Statement can be prepared in alternative method. In this method two
columns are prepared to record the amount. One column is for recording reasons that increase balance
(plus items) and the other is for recording reasons that reduce the balance (minus items).
n Debit balance of Cash Book is written in plus column.
n Credit balance of Cash Book or overdraft is written in minus column.
n Debit balance of Pass Book or overdraft is written in minus column.
n Credit balance of Pass Book is written in plus column.
The two columns are then totalled and the difference is ascertained. This difference is balance or
overdraft as per Cash Book or Pass Book.
187


As on __________
Bank balance / Overdraft as per Cash Book / Pass Book
Add: Reasons which would increase balance
1.
2.
3.
Less : Reasons which would decrease balance of the other
book
1.
2.
Bank balance / Overdraft * as per Pass Book / Cash Book xxx
Fig. 6.4 (b)
6.5 Preparation of Bank reconciliation Statement.

Procedure for finding the causes of difference and effects thereof:
When there is a difference between balance as per Pass Book and Cash Book following steps are
required to find the causes of difference-
1. Compare the items appearing on the debit side of the Cash Book with those on the credit
side of the Pass Book (deposit column) and tick mark those items appearing in both the
books.
2. Compare the items appearing on the credit side of the Cash Book with those on the debit
side of the Pass Book (withdrawal column) and tick mark those items appearing in both
the books.
3. Make a list of the items that are unticked in both the books. These are the items responsible
for the difference in the balance shown by Cash Book and Pass Book.
4. Analyse the causes of difference.
5. Select the date for preparation of Bank Reconciliation Statement. Bank reconciliation
statement can be prepared on any date. The date for the preparation of the Bank
Reconciliation Statement is generally chosen as the last day of the month because Cash
Book balance and Pass Book balance are readily available on that date.
6. Prepare Bank Reconciliation Statement by taking balance as per Cash Book or Pass Book
as starting point.
7. Adjust the starting point with other balances by adding or subtracting the unticked items
as found in step 3. If balance as per Cash Book has been taken as the starting point, then
balance as per Cash Book is to be adjusted according to entries passed in the Pass Book
or vice versa.
188

8. Apply the rule of plus and minus.

a) When balance as per Cash Book is given
 Add credits in Cash Book or in Pass Book.
 Less debits in Cash Book or in Pass Book.
b) When balance as per Pass Book is given

 Add debits in Cash Book or in Pass Book.
 Less credits in Cash Book or in Pass Book.
c) When overdraft as per Cash Book is given

 Add debits in Cash Book or in Pass Book.
 Less credits in Cash Book or in Pass Book.
d) When overdraft as per Pass Book is given

 Add credits in Cash Book or in Pass Book.
 Less debits in Cash Book or in Pass Book.
Reasons for When bank When bank When overdraft When overdraft
discrepancy balance is given balance is given balance is given balance is given
as per Cash Book as per Pass Book as per Cash Book as per Pass Book
Dr. Bal Cr. Bal Cr. Bal Dr. Bal
1. Cheque deposited (-) (+) (+) (-)
into bank but not
credited.
2. Cheque issued but (+) (-) (-) (+)
not presented for
payment.
3. Bank charges (-) (+) (+) (-)
debited in Pass
Book.
4. Interest credited in (+) (-) (-) (+)
Pass Book only
5. Interest debited in (-) (+) (+) (-)
Pass Book only.
6. Payments made by (-) (+) (+) (-)
the bank recorded
in Pass Book only.
7. Direct payment by (+) (-) (-) (+)
customer in bank
recorded in Pass
Book.
189

8. Bills receivable (-) (+) (+) (-)

discounted with
bank being
dishonoured,
recorded in Pass
Book only.
9. Cheque deposited (-) (+) (+) (-)
into bank being
dishonoured, nor
recorded in Cash
Book.
Fig. 6.5 (a)
A. When extract of Cash Book and Pass Book is given for a common period:
When extracts are given for common period the following points must be considered.
a) Uncommon items are to be considered.
b) The opening balance of Cash Book and Pass Book.
Items that create difference between the balance as per Cash Book and as per Pass Book can
be ascertained by comparing the two books. Entries appearing in both the books in the same period
do not create any difference in the balance of the two books, thus are to be ignored. The items which
appear in Cash Book but does not appear in Pass Book and vice versa will only create difference in
the balance of the two books. These are entered in the Bank Reconciliation Statement.
Illustration 1.
Ledger of Businessman
Dr. Cash Book (Bank column only) Cr.
Date Receipts Amount Date Payments Amount
(`) (`)
2019 Apr. 2019 Apr.
01 To Balance b/d  15,600 05 By Salaries  4,500
05 To Anand  5,200 09 By Ramlal Bros.  6,000
08 To Cash  4,000 15 By Atul and Sons. 7 2,600
15 To Mohan 7 7,100 25 By Raman and Co.  3,220
28 To Deepak 7 6,800 30 By Balance c/d 7 22,380
38,700 38,700
May
190

In the books of Bank

Dr. Pass Book Cr.
Date Payments Amount Date Receipts Amount
(`) (`)
2019 Apr. 2019 Apr.
08 To Salaries  4,500 01 By Balance b/d  15,600
18 To Ramlal Bros.  6,000 08 By Cash Deposited  4,000
22 To Insurance 7 6,500 10 By Anand  5,200
Premium 14 By Dividend 7 2,000
29 To Raman and Co.  3,220
30 To Bank Charges 7 800
26,800 26,800
May
1 By Balance b/d 5,780
Find out the reasons for difference in the balance of the two books. Prepare Bank reconciliation
Statement as on 30th April 2019:
i) When balance as per Cash Book is given.
ii) When balance as per Pass Book is given.
Solution: On comparing the Cash Book balance with Pass Book balance it can be noted that items
appearing in both the books are given a () tick mark. these do not create any difference in the
balance of the two books and are to be ignored. Items that are appearing in any one of the Book only
is given (7) 'cross mark', these are the reasons which will create difference in the balance of the two
Books which are to be added or deducted in Bank Reconciliation Statement.
On comparing debit side (receipt) of Cash Book with credit side (receipt) of Pass Book it is
found that: -
i) Cheques received from Mohan ` 7,100 and Deepak ` 6,800 is deposited into the bank for
collection but not yet collected by bank.
ii) Dividend ` 2,000 collected by bank does not appear in the Cash Book.
On comparing credit side (payment) of Cash Book with debit side (payment)of the Pass Book it
is found that :-
i) Cheque ` 2,600 issued to Atul and Sons has not been presented for payment.
ii) Bank has paid insurance premium ` 6,500 for which no entry has been made in cash
book.
iii) Bank has debited bank charges ` 800 which does not appear in Cash Book.
These discrepancies will appear in the Bank Reconciliation Statement as under :-
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i) When balance as per Cash Book is given:

As on 30th April 2019
Balance as per Cash Book 22,380
Add : 1. Dividend collected by bank appearing in Pass
Book only 2,000
2. Cheques issued but not presented for payment
Atul and Sons 2,600 4,600
26,980
Less : 1. Cheques deposited but not yet collected
Mohan ` 7,100
Deepak ` 6,800 13,900
2. Insurance premium paid by bank does not appear
in Cash Book 6,500
3. Bank charges appearing in Pass Book only 800 21,200
Bank balance as per Pass Book 5,780
ii) When balance as per Pass Book is given:
As on 30th April 2019
Balance as per Pass Book 5,780
Add : 1. Cheques deposited but not yet collected
Mohan ` 7,100
Deepak ` 6,800 13,900
2. Insurance premium paid by bank appears in Pass
Book 6,500
3. Bank charges debited in Pass Book only 800 21,200
26,980
Less : 1. Cheques issued but not presented for payment
Atul and sons 2,600
2. Dividend collected by bank and credited in Pass
Book only 2,000 4,600
Bank balance as per Cash Book 22,380
Note: When we start with the Cash Book balance, we arrive at Pass Book balance and when
we start with Pass Book balance, we arrive at Cash Book balance.
A business can prepare Bank Reconciliation Statement with Cash Book balance or
Pass Book balance.
192

B. When extract of Cash Book and Pass Book is given for different periods:
When extract is given for uncommon period, consider only common items appearing in both the
books. Common items only create discrepancies in the balance of the two books which are to
be adjusted in the Bank Reconciliation Statement.
Illustration 2
In the books of ____________
(`) (`)
2019 Jan. 2019 Jan.
01 To Balance b/d 30,000 01 By Purchases 15,000
05 To Deepa 22,500 04 By Kuldeep 21,000
08 To Gita 7,500 06 By Advertisement 13,500
10 To Sangeeta  75,000 15 By Hemant  19,500
12 To Rucha 51,000 21 By Pravin  9,900
19 To Shruti  24,000 26 By Machinery 23,100
29 By Vidya  27,000
2,10,000 2,10,000
Dr. Pass Book Cr.
(`) (`)
2019 Feb. 2019 Feb.
06 To Hemant  19,500 01 By Balance b/d 38,400
09 To electricity bill 1,050 01 By Sangeeta  75,000
09 To Pravin  9,900 05 By Piyush 15,000
10 To Vidya  27,000 07 By Arijit 9,000
11 To Nishant 1,410 09 By Shruti  24,000
Prepare Bank Reconciliation Statement as on 31st Jan 2019.
Solution: On comapring the Cash Book balance with Pas Book balance it can be noted that items
appearing in both the books are given a () mark. These will create a difference in the balance or two
books and will appear in Bank Reconciliation statement.
Extract of Cash Book and Pass Book in the illustration is for different periods i.e. Jan. 2018 and Feb.
2018.
On comparing the receipt side of Cash Book with receipt side of Pass Book and payment side of
Cash Book with payment side of Pass Book the following reasons for discrepancies are found.
193

i) Cheques deposited into bank for collection but not yet collected by bank are:
Sangeeta ` 75,000 Shruti ` 24,000
ii) Cheques issued but not presented for payment are:
Hemant ` 19,500
Pravin ` 9,900
Vidya ` 27,000
As on 31st Jan, 2019
Add : 1. Cheques issued but not presented for payment
Hemant 19,500
Pravin 9,900
Vidya 27,000 56,400
1,37,400
Less : 1. Cheques deposited but not collected by bank
Sangeeta 75,000
Shruti 24,000 99,000
C. When bank balance as per Cash Book / favourable balance as Per Cash Book / debit
balance as per Cash Book is given:
Illustration 3
On 31st March 2019 the Cash Book of Mr. Arvind showed a bank balance of ` 57,400, but Pass
Book showed a different balance. On comparing the Cash Book with the Pass Book the following
discrepancies were noted:
i) Cheque of ` 6,350 deposited into bank but was not yet collected by bank.
ii) Bank paid our electricity bill ` 9,700 which was not recorded in the Cash Book.
iii) Cheque issued to our supplier ` 15,100was not presented for payment up to31st March 2019.
iv) Interest on investment `8,800 was collected by bank was not recorded in Cash Book.
v) Bank charges ` 650 was debited in Pass Book.
vi) Mr. Tanmay our debtor directly deposited ` 12,000 into our bank account on 28th March 2019,
which was not entered in Cash Book.
Prepare a Bank Reconciliation Statement as on 31st March 2019.
194

In the books of Mr. Arvind

As on 31st March 2019
Add : 1. Cheques issued but not yet presented for payment 15,100
2. Interest on investment collected by bank not

recorded in Cash Book 8,800
3. Direct deposit made by debtor not recorded in

Cash Book 12,000 35,900
93,300
Less : 1. Cheques deposited but not yet collected by bank 6,350
2. Electricity bill paid by bank not recorded in Cash

book 9,700
3. Bank charges debited in Pass Book only 650 16,700
D. When bank balance as per Pass Book / favourable balance as per Pass Book / credit
balance as per Pass Book is given.
Illustration 4.
From the following details find out the bank balance as per Cash Book of Mr. Anurag as on
30th June 2019.
i) Bank balance as per Pass Book ` 14,000.
ii) Two cheques of ` 8,900 and `10,700 were issued on 25th June 2019, out of which only one
cheque of `8,900 was presented for payment before 30th June 2019.
iii) Cheques of ` 16,400 were deposited but only one cheque of ` 6,400 was cleared by bank on 28th
June 2019.
iv) Cash of `5,500 withdrawn from bank for personal use was not recorded in the Cash Book.
v) ` 350 bank incidental charges debited to Mr. Anurag’s account, is not recorded in Cash Book.
vi) There was a debit in Pass Book of ` 7,500 in respect of a cheque dishonoured on 30th June 2019.
vii) Interest ` 425 was credited in Pass Book only.
195

In the books of Mr. Anurag

As on 30th June 2019
Balance as per Pass Book 14,000
Add : 1. Cheques deposited but not cleared by bank 10,000
2. Cash withdrawn from bank for personal use not 5,500

recorded in Cash Book
3. Incidental charges debited in Pass Book only 350
4. Cheque dishonoured debited in Pass Book only 7,500 23,350

37,350
Less : 1. Cheques issued but not presented for payment 10,700
2. Interest credited in Cash Book only 425 11,125

E. When overdraft as per Cash Book / unfavourable balance as per Cash Book / credit
balance as per Cash Book is given.
Illustration 5.
Cash Book of Kunal showed an Overdraft of ` 36,280 as on 31st July 2019. On comparing his Cash
Book and Pass Book following differences were found:
i) An amount of ` 18,700 was directly paid into bank by our customer Manish, was not recorded
in Cash Book.
ii) Cheque of ` 18,900 deposited in the bank, was collected and credited by bank but was entered
in Cash Book as ` 19,800.
iii) Cheques issued for salary to staff ` 25,000 on 27th July 2019 was presented for payment only
on 4th Aug 2019.
iv) Cash ` 20,000 withdrawn from ATM for office use was not recorded in Cash Book.
v) Debit side of Cash Book, bank column was overcast by ` 100.
vi) As per standing instruction bank paid our office rent ` 19,500.
vii) Commission collected by bank ` 3,750 on behalf of us was not recorded in Cash Book.
Prepare Bank Reconciliation Statement as on 31st July 2019.
196

Solution : In the books of Kunal

As on 31st July 2019
Bank Overdraft as per Cash Book 36280
Add : 1. Cheque deposited and collected by bank but was 900
debited in Cash Book with more amount
2. Cash withdrawn from ATM for office use not
3. Debit side of Cash Book, bank column was 100
overcast 19,500 40,500
4. Office rent paid by bank appears in Pass Book only
76,780
Less : 1. Direct deposit made by customer into bank not
2. Cheques issued but not presented for payment 25,000
3. Commission collected and credited by bank only 3,750 47,450
Bank Overdraft as per Pass Book. 29,330
Alternate Method :
Bank Reconciliation statement can alos be prepared with two column of plus (+) and Minus (-) as
follows :
As on 31st July 2019
Plus items Minus items
Particulars
Bank Overdraft as per Cash Book 36,280
1. Direct deposit made by customer not recorded in cash book 18,700
2. Cheque deposited and collected by bank but was debited in
900
cash balance with wrong amount
4. Cash withdrawn from ATM not recorded in Cash Book 20,000
5. Debit side of Cash Book was overcast 100
6. Office rent paid by bank appears in Pass Book only 19,500
7. Commission collected by bank appears in Pass Book only 3,750
8. Bank overdraft as per Pass Book 29,330
76,780 76,780
197

F. When Overdraft as per Pass Book / unfavourable balance as per Pass Book / debit
balance as per Pass Book is given:
Illustration 6.
Prepare Bank Reconciliation Statement from details given below, to find out balance as per Cash
Book of Mr. Bhuvaneshwar as on 31st Oct 2018.
i) Pass Book of Mr. Bhuvaneshwar shows an overdraft of ` 53,970.
ii) Bank wrongly credited Mr. Bhuvaneshwar's account with ` 17,070.
iii) Bank paid annual subscription to Chamber of Commerce ` 6,000 on Mr. Bhuvaneshwar’s
standing order which was not recorded in Cash Book.
iv) Payment side, bank column of Cash Book was under cast ` 350.
v) Interest on overdraft charged by bank was ` 1,530.
vi) Cash deposit of ` 23,000 on 31st Oct 2018 was not recorded in the Pass Book.
vii) Cheques issued but not presented to bank for payment ` 40,000.
Solution: In the books of Mr. Bhuvaneshwar
As on 31st Oct 2018
Bank Overdraft as per Pass Book 53,970
Add : 1. Wrong credit given by bank in Pass Book 17,070
2. Cheques issued but not presented to bank for
payment 40,000 57,070
1,11,040
Less : 1. Annual subscription of Chamber of Commerce
paid by bank not recorded in Cash Book 6,000
2. Payment side of Cash Book bank column was
undercast 350
3. Interest on overdraft debited in Pass Book only 1,530
4. Cash deposit was not recorded in Pass Book 23,000 30,880
Illustration 7.
On 31st March 2018 bank Pass Book of Mr. Rajiv showed a credit balance of ` 6,300 but Cash Book
showed a different balance. On comparing the two books the following differences were noticed.
i) Cheques sent to bank for collection ` 85,000 on 25th March 2018 but a cheque of ` 60,000 was
only cleared by bank before 31st March 2018.
ii) Out of cheques issued ` 58,500, cheques of ` 48,500 were not presented for payment before 31st
March 2018.
iii) A Bill of Exchange for ` 4,000 discounted with the bank was dishonoured on 30th March 2018.
Intimation of the same was received on 5th April 2018.
iv) Interest allowed by bank `820 appeared twice in the Cash Book.
198

v) Pass Book debit side was overcast ` 200.

vi) Cheque received from Akash ` 4,250 deposited into bank for collection was not yet collected.
The entry was recorded in the cash column of Cash Book.
vii) A Bills Payable amounting to ` 8,700 paid by bank has not been recorded in the Cash Book.
viii) Mr. Aditya, our customer directly deposited `17,000 into our account through NEFT. It was not
recorded in the Cash Book.
Prepare the Bank Reconciliation Statement as on 31st March 2018.
Solution: In the books of Mr. Rajiv
Bank Balance as per Pass Book 6,300
Add : 1. Cheques sent to bank for collection but not yet 25,000
cleared
2. Discounted bill dishonoured does not appear in
Cash Book 4,000
3. Interest allowed by bank appears twice in cash
book 820
4. Pass Book debit side was overcast 200
5. Bills Payable paid by bank not recorded in cash
book 8,700 38,720
45,020
Less : 1. Cheques issued but not presented for payment 48,500
2. Direct deposit made by customer not recorded in
Cash Book 17,000 65,500
Note:
Reason No. vi) will not appear in the bank reconciliation statement. This does not create any difference
in the balance of the two books because it has not been recorded in the Bank column of cash-book and
it does not appear in the Pass Book too since it has not been collected by bank.
Illustration 8.
The Cash Book of Pankaj shows a credit balance of ` 32,490 in the bank column on 30th September
2018. Prepare Bank Reconciliation Statement as on 30th September 2018.
i) Three cheques of ` 8,200, ` 11,360 and ` 16,440 were deposited into bank but only a cheque of
`11,360 was credited by bank before 30th September 2018.
ii) Cheques issued but not encashed before 30th September 2018 was ` 93,000.
iii) Bank charges for issue of cheque book ` 250 and SMS alerts ` 170 was debited in Pass Book
only.
199

iv) Mr. Shreyans transferred ` 1,23,200 through NEFT but was wrongly debited with ` 12,320 in
our Cash Book.
v) Receipt side of Pass Book was undercast by ` 1,000.
vi) Dividend collected and credited by bank ` 12,500, was not entered in Cash Book.
Solution: In the books of Pankaj

As on 30th September 2018

Bank overdraft as per Cash Book 32,490
Add : 1. Cheques deposited but not yet collected by the
bank 24,640
2. Bank charges for issue of cheque book did not
appear in Cash Book 250
3. SMS alert charges appeared in Pass Book only 170
4. Receipt side of Pass Book was undercast 1,000 26,060
58,550
Less : 1. Cheques issued but not yet encashed 93,000
2. Direct deposit through NEFT was made by
customer but lesser amount was debited in cash
book 1,10,880
3. Dividend collected and credited by bank appears
in Pass Book only 12,500 2,16,380
Bank balance as per Pass Book 1,57,830
Illustration 9.
On 31stMarch 2018, Bank Pass Book of Mr. Ravi showed a credit balance of ` 16,700.
Prepare Bank Reconciliation Statement with the following information:
i) Cash of ` 8,500 drawn from his savings account has been shown in current account in Cash
Book.
ii) Cheques amounting to ` 27,000 were deposited into bank for collection, out of which cheques
amounting to ` 23,000 only were credited upto 31st March 2018.
iii) Cheques of ` 40,500 were issued on 25th March 2018, of which only one cheque of ` 1,500 was
presented for payment on 30th March 2018.
iv) Bill Receivable of ` 11,700 which was discounted with the bank was dishonoured on 30th
March 2018. The intimation was received on 5th April 2018.
v) Insurance premium ` 14,400 paid by bank appeared twice in the Cash Book.
vi) Pass Book debit side was overcast by ` 300.
vii) Interest allowed by bank ` 800 appeared in the Pass Book only.
200

Solution: In the books of Mr. Ravi

Add : 1. Cheques deposited but not yet collected by the
bank 4,000
2. Discounted bill dishonoured recorded in Pass
Book only 11,700
3. Pass Book debit side was overcast 300 16,000
32,700
Less : 1. Cash withdrawn from Savings Account wrongly
shown in Cash Book under Current Account 8,500
3. Insurance premium paid by bank recorded twice in
Cash Book 14,400
4. Interest allowed by bank does not appear in cash
book 800 62,700
Illustration 10.
From the following particulars prepare the Bank Reconciliation Statement as on
31st Jan 2019.
i) Debit balance as per Cash Book ` 48,000.
ii) Cheque of ` 37,000 was deposited and collected by the bank but not recorded in Cash Book.
iii) Cash deposit of ` 26,200was recorded in cash column of Cash Book.
iv) Purchased furniture and payment by debit card ` 25,000, was not recorded in Cash Book.
v) Online transfer was made to our creditors account `26,700 through IMPS, for which no entry
was made in Cash Book.
vi) Telephone bill ` 7,250 and electricity bill ` 8,250 paid through online banking, was not recorded
in the Cash Book.
vii) Cheque received from Vinod for ` 28,600 paid into bank was dishonoured on 27th Jan 2019 but
advice was received only on 4th Feb 2019.
201

Solution: Bank Reconciliation Statement

As on 31st Jan 2019
Add : 1. Cheques deposited and collected by the bank but
not recorded in Cash Book 37,000
2. Cash deposit wrongly recorded in cash column of
Cash Book 26,200 63,200
1,11,200
Less : 1. Payment made by debit card not recorded in the
Cash Book 25,000
2. Online transfer made through IMPS not recorded
in Cash Book 26,700
3. Online payment for telephone and electricity bills
appear in Pass Book only 15,500
4. Cheque dishonoured not yet entered in cash
book 28,600 95,800
Bank Balance as per Pass Book 15,400
Reconciliation of Debtors and Creditors:

Reconciliation helps us to identify and fix accounting errors. Reconciliation is carried out
to verify the completeness and accuracy of a particular part of accounting records by comparing it
with another record. Reconciliation Statement can also be prepared for vendor reconciliation i.e.
reconciliation of debtors and creditors. Debtors represent money owed to us and creditors represent
money owed by us. Here we compare debtor’s ledger in our books with our ledger in the debtor’s
book and reconcile the differences if any.
Procedure for Reconciliation of Debtors and Creditors:
1. Request debtor to give our ledger account as appearing in their books.
2. Prepare debtor’s ledger account in our book in excel.
3. Copy paste both in one excel file.
4. Compare and match entries appearing in both the ledger accounts.
5. Prepare list for entries which are not matching.
6. Group similar types of differences and give heading.
7. Prepare vendor reconciliation statement with the differences.
202

Activities:
1. The following Bank Reconciliation Statement is prepared by our accountant Mr. New on 28th
Feb 2018 with balance as per Cash Book. Pass Book balance on that date was ` 1,00,000.
There are some mistakes in the statement. Can you correct it for us?
As on 28th Feb 2018
Bank Balance as per Cash Book 1,24,100
Add : 1. Cheque deposited but not cleared by bank 30,000
2. Cheque issued but not presented to bank for
payment 28,000
3. Insurance premium paid and debited in Pass Book
only 5,000
4. Interest collected and credited in Pass Book only 3,000 66,000
1,90,100
Less : 1. Bank charges debited in Pass Book only 1,000
2. Dividend collected by bank recorded in Pass Book
only 4,000
3. Cheque deposited and realised but wrongly entered
twice in Cash Book 24,000
4. Cheque issued and encashed but wrongly entered
in Cash Book as ` 9,800 instead of ` 8,900 900 29,900
Bank Overdraft as per Pass Book 1,60,200

2. Visit 2 or 3 banks and collect banking documents like Pay-in-slip, deposit slip etc. and compare
the contents.
3. Visit any stationery / medical shop near your house and ask them how they prepare their Bank
Reconciliation Statement.
4. If you have an ATM card take a mini statement and study the details of deposits, withdrawals
and balances.
5. Visit a bank to find out how many days does it take to collect local and outstation cheques.
6. Read the following reasons and identify the cause of difference on the basis of
i) time difference
ii) errors made by bank or businessman.
a) Cheques issued for payment but not yet presented to bank.
b) Interest on overdraft debited by bank but not yet recorded in Cash Book.
c) Cheque deposited into bank but not yet collected by the bank.
d) Bank paid insurance premium which was recorded twice in the Cash Book.
e) Cash ` 12,300 deposited into bank was recorded as ` 13,200 in Cash Book.
f) Interest allowed by bank credited in Pass Book only.
203


Q.1. Answer in one sentence.
1. Who prepares a bank Pass Book?
2. What is pay-in-slip?
3. What is bank overdraft?
4. What is withdrawal slip?
5. Who sends the bank statement?
6. What does a debit balance in Cash Book represent?
7. Who prepares the Bank Reconciliation Statement?
8. What does debit balance in Pass Book represent?
9. On which side is interest on bank deposit recorded in Pass Book?
10. Why is Bank Reconciliation Statement prepared?
Q.2. Give one word / term / phrase which can substitute each of the following statement:
1. The account on which overdraft facility is allowed by bank.

2. Extract of ledger account of account holder in the books of bank.
3. Alphanumeric code that facilitates electronic funds transfer in India.
4. Statement showing the causes of disagreement between balance of Cash Book and Pass
Book.
5. Debit balance in Pass Book.
6. A form which is filled for depositing cash or cheque into bank.
7. Left hand side of Pay-in-slip.
8. Credit balance in Cash Book.
9. A book maintained by trader to record banking transactions.
10. Excess of bank deposits over withdrawals by businessman in bank current account.
Q.3. Do you agree or disagree with the following statements:
1. The bank column of Cash Book represents bank account.

2. Bank statement enables account holder to prepare Bank Reconciliation Statement.
3. Cheques issued for payment but not presented to bank appears in Cash Book only.
4. Bank Reconciliation Statement is prepared only during the year end.
5. Bank Reconciliation Statement is similar to bank statement.
204

6. Bank balance as per Cash Book is always equal to bank balance as per Pass Book.
7. Bank advice is sent by the businessman to bank.
8. Pay-in-slip is used for depositing cheque into bank.
9. Difference in Cash Book balance and Pass Book balance may arise due to errors committed
while recording.
10. Payment and receipt of cash through internet banking generates automatic proof.
Q.4. Select the most appropriate alternative from those given and rewrite the following
statements:
1. Overdraft means _______ balance of Cash Book.

a) closing b) debit c) opening d) credit
2. When a cheque is deposited and collected by bank Pass Book is _________ .
a) dishonoured b) debited c) credited d) written.
3. A __________ is a summary of financial transactions that take place over a period of time
on a bank account.
a) withdrawal slip b) bank advice c) bank statement d) Pay-in-slip.
4. Debiting an entry in Cash Book ___________ cash balance.
a) increases b) decreases c) nullifies d) none of the above.
5. Bank Reconciliation Statement is prepared by _________ .
a) student b) businessman c) bank d) none of the above.
6. Bank balance as per Pass Book means ___________ balance of Pass Book.
a) credit b) opening c) debit d) closing.
7. Bank gives overdraft facility to __________ account holder.
a) savings b) recurring c) current d) fixed.
8. Debit balance as per Cash Book is also known as ___________ balance.
a) favourable b) overdraft c) abnormal d) unfavourable.
9. When extracts of Cash Book and Pass Book are given for uncommon periods, only
________ items are considered for preparation of Bank Reconciliation Statement.
a) uncommon b) normal c) favourable d) common.
10. When extract of Cash Book and Pass Book are given for common period, only _________
items are considered for preparation of Bank Reconciliation Statement.
a) uncommon b) common c) favourable d) unfavourable.
205

Q.5. Complete the following statements :

1. Payments credited in Cash Book are __________ in Pass Book.
2. While preparing Bank Reconciliation Statement only __________ column of Cash Book
is considered.
3. Cheques issued to creditors appear first in ____________ book.
4. A statement showing the reasons for difference in Cash Book balance and Pass Book
balance is known as ___________ .
5. Overcast on receipt side of Pass Book means _________ in Pass Book balance.
6. Online transfer made to our creditors appear on the _________ side of Cash Book.
7. Interest on overdraft charged by bank is ____________ in Pass Book.
8. Normally the Cash Book shows debit balance and Pass Book shows ________ balance.
9. The form filled for withdrawing cash from bank is known as __________ .
10. A businessman can update his records on receiving __________ .
Q.6. State whether the following statements are True or False with reasons :
1. Cheques deposited into bank but not yet cleared appears in the Pass Book only.
2. Direct deposit made by debtors into businessman's bank account is recorded on the credit
side of Pass Book.
3. Businessman can prepare Bank Reconciliation statement only with Cash Book Balance.
4. When overdraft as per Cash Book is given, bank charges debited in Pass Book only, is to
be added.
5. Bank Statement is sent by Bank to businessman.
Q.7. Draft the following specimen with imaginary Name, Account number, Amount.
1. Bank Statement
2. Pay-in-slip
3. Withdrawal slip
4. Bank Advice
5. Pass Book
206

Q.8. Correct and rewrite the following statements.

1. The form filled for depositing cash or cheque into bank is known as Pass Book.
2. Bank Reconciliation Statement is prepared by Bank.
3. Debit balance as per Pass Book is known as favourable balance.
4. When a cheque is deposited into Bank it is credited in Cash Book.
5. When extracts are given for common period only common items are to be considered.
Q.9. Complete the following table.

Reasons When Normal When Normal
balance as per balance as per
Cash Book is Pass Book is
given Add/Less given Add/Less
1) Interest debited in
Pass Book only.
2) Direct deposit made by customer in
(+)
bank recorded in Pass Book
3) Cheque deposited into bank but not
yet collected by bank
4) Cheque deposited into bank is
(+)
dishonoured
5) Cheque issued but not presented for
(-)
payment.
PRACTICAL PROBLEMS
1. Following is the extract of Cash Book (Bank Column only) and Pass Book. Prepare
Bank Reconciliation Statement as on 31st Oct. 2018.
In the books of _________
(`) (`)
2018 Oct 2018 Oct
01 To Balance b/d 10,000 07 By Tejas 12,000
05 To Aparna 5,000 10 By Anil 3,000
08 To Apoorva 6,000 15 By Bank charges 200
12 To Omkar 3,000 17 By Advertisement 2,000
20 To Sunil 4,000 20 By Drawings 1,000
28,000 28,000
207


Dr. Pass Book Cr.
(`) (`)
2018 Oct. 2018 Oct.
07 To Interest 500 01 By Balance b/d 10,000
10 To Insurance premium 2,000 10 By Apoorva 6,000
13 To Anil 3,000 22 By Sunil 4,000
20 To Telephone bill 2,000 24 By Raju 2,000
20 To Drawings 1,000 27 By Swanand 3,000
25,000 25,000
2. From the following extract of Cash Book and Pass Book prepare Bank Reconciliation
Statement as on 31st March 2019.
In the books of __________
(`) (`)
2019 Mar. 2019 Mar.
01 To Balance b/d 79,500 04 By Rent 36,000
04 To Avinash 18,000 06 By Mansi 20,100
09 To Dhananjay 25,500 12 By Nikhil 9,600
15 To Meenal 10,800 17 By Drawings 15,000
20 To cash 24,000 24 By Nishant 27,600
27 To Prasad 14,700 31 By Balance c/d 64,200
1,72,500 1,72,500
In the Books of Bank Pass Book
Date Particulars Withdrawals Deposits Balance
Dr. ` Cr. ` `
2019 Apr.
01 By Balance b/d 86,400
04 By Meenal 10,800 97,200
06 By Prasad 14,700 1,11,900
10 To Salary 24,000 87,900
13 To Nishant 27,600 60,300
18 By Bharat 11,400 71,700
23 To Keshav 6,600 65,100
27 To Mansi 20,100 45,000
30 By Sharvari 18,000 63,000
208

3. On 31st August 2018 bank Pass Book of Mr. Ravi showed a credit balance of
` 33,600, but Cash Book showed a different balance. On comparing the two books
following differences were noticed:
1. Cheques paid into the bank but not credited before 31st Aug 2018 amounted to ` 24,500.
2. Direct deposit by customer through NEFT ` 33,000 recorded in the Pass Book only.
3. Cheques issued on 28th Aug 2018 were presented for payment on 5th Sep. 2018 amounted
to ` 38,800.
4. A bill receivable for ` 15,000 discounted with the bank was dishonoured on 30th Aug
2018. Intimation of the same was received only on 3rd Sep 2018.
5. Pass Book credit side was overcast ` 2,000.
6. Bank debited ` 400 for bank charges in Pass Book, was not recorded in Cash Book.
Prepare Bank Reconciliation Statement as on 31st August 2018.
4. From the following details prepare Bank Reconciliation Statement as on 31st Dec
2018.
1. Bank overdraft as per Cash Book on 31st Dec 2018 was ` 48,450.
2. Bank charges for SMS alerts ` 370 were debited in Pass Book but not recorded in Cash
Book.
3. Interest on overdraft ` 2,870 did not appear in Cash Book.
4. A bill for ` 12,000 discounted with bank appears in Cash Book at full amount but bank
has deducted ` 200 discounting charges.
5. Cheques issued but not presented for payment before 31st Dec 2018 amounted to `
32,300.
6. Cheques amounting to ` 24,000 deposited into bank but only a cheque of ` 8,000 was
collected by bank before 31st Dec 2018.
7. Paid stationary bill ` 11,300 by debit card. It was not recorded in Cash Book.
5. From the following particulars prepare Bank Reconciliation Statement as on 30th

June 2019.
1. Credit balance as per Pass Book ` 20,000.
2. A cheque for ` 3,500was issued and paid by bank, recorded in Pass Book as ` 5,300.
3. Cheque deposited ` 9,700 collected by bank was not recorded in Cash Book.
4. Payment side of Cash Book was undercast by ` 100.
5. Electricity bill paid by bank ` 6,200 was recorded twice in Pass Book.
209

6. Prepare Bank Reconciliation statement from the following information as on 31st

March, 2019.
1) Balance as per Cash Book ` 10,000.
2) Cheque of ` 2,000 issued but not presented to Bank for payment.
3) Our debtor directly deposited ` 3,500 to our Bank account by NEFT, not recorded in the
Cash Book.
4) Bank paid electricity bill on our behalf ` 450 and charged Bank charges ` 100.
5) Paid `1,500 to ABC & company, our supplier by business debit card but recorded in Cash
Book as `150.
6) Bank credited interest on Investment ` 500.
7) Cheque of ` 885 issued and presented to Bank but wrongly entered in the Pass Book as
` 865.
7.On 31st January 2018 Bank balance as per Cash Book was `40,000 but Pass Book
was showing some other balance following were the causes of difference.
1) Cheques issued for `1,00,000 in January 2018 but cheques of `50,000 only presented to
Bank for payment before January 31st 2018
2) Cheques sent to Bank for collection of `2,00,000 out of which cheques of `80,000 only
credited by Bank in January 2018.
3) Following entries were shown in Pass Book in January 2018, but no corresponding entries
were made in the Cash Book.
i) Payment of `6,400 by Bank for electricity Bill by ECS.
ii) Interest credited by Bank `12,000
iii) Bank debited commission `1,000 and Bank charges for `600.
iv) Direct deposit made by customer ` 1,000 by NEFT to our account.
Prepare Bank Reconciliation statement as on 31st January, 2018.
8. On January 2018, the Pass Book of Mr. Girish Kumbhar showed a bank balance of `14,000.
A comparison of the Cash Book with the Pass Book, revealed the following.
1) Cheque deposited but not credited by Bank `10,000
2) Dividend on shares collected by Bank but not recorded in the Cash Book `1,000
3) Bank paid Insurance premium as per standing instruction by ECS `500, no corresponding
entry was passed in the Cash Book.
4) Bank debited Commission `75.
5) A debit of `900 in respect of cheque dishonoured appears in Pass Book only.
6) Cheque of `1,500 deposited into Bank wrongly recorded twice in the Cash Book.
7) Total cheques of 20,000 issued during the month of January 2018, but cheques of `8,000
only were presented for payment in January 2018.
210

9. Form the following details provided by Prashant enterprises, prepare Bank Reconcili-
ation statement as on 31st March, 2018.
1) Overdraft as per Cash Book `28,000
2) Cheque issued of `2,000 and presented to Bank returned dishonoured but the effect of
dishonoured is not recorded in the Cash Book.
3) Bank debited Bank charges `150.
4) Bank transferred `2,500 to savings account of the proprietor but not recorded in the Cash
Book.
5) Cheque issued to supplier but not presented to Bank before 21st March 2018, `1,600
6) Cheques of `3,000 and `2,000 deposited into Bank but cheque of `3,000 only credited by
Bank before 31st March 2018.
7) Out customer directly deposited `1,500 in our Bank account but wrongly recorded in the
cash column of the Cash Book.
8) Bank debited interest on overdraft `750.
10. Prepare Bank Reconciliation Statement as on 31st Dec. 2018

1) Debit balance as per Pass Book `16,000
2) Customer directly deposited in our Bank account by NEFT `8,000.
3) Cheques deposited into Bank but not credited by Bank `10,500
4) Pass Book shows debit entry for Bank commission `300, not recorded in Cash Book.
5) A Bill of Exchange of `3,500 discounted with the Bank in December 2018, returned
dishonoured in January 2019.
6) As per standing instructions Bank paid Telephone bill `650, not recorded in Cash Book..
7) Cheque of `975 deposited into Bank but wrongly recorded on `795 in Cash Book.
j j j
211

7 Depreciation
Contents
7.1 Meaning, Definition and Importance of Depreciation.

7.2 Factors of Depreciation.
7.3 Methods of Depreciation.
7.3.1. Straight Line Method.
7.3.2. Written Down Value Method.
7.3.3. Difference between Fixed Instalment Method and Written Down Value Method.
7.4 Accounting Treatment forDepreciation.
o Students understand the concepts, methods and importance of Depreciation.

o Students understand the difference between Fixed Assets and Current Assets.
o Students are able to calculate the amount of depreciation of different fixed assets.
o Students are able to differentiate the amount of depreciation by Straight Line Method and
Written Down Value Method
In daily life, we use many assets which could be Tangible or Intangible. Such assets have their
own life e.g. Building, Furniture, Machinery, etc. It is necessary to spread the cost over a number of
years during the useful life of the assets. This process of spreading the cost of fixed assets is termed
as ‘Depreciation’.
7.1 Meaning and Definition of Depreciation:-
The word depreciation is derived from the Latin word ‘Depretium’ which means reduction.
Every business concern acquires some fixed assets which are used in the business for its trading
activity. These assets are purchased for business with an intention of permanent use and not for resale.
Working life of all fixed assets, except Land, decreases with the passage of time. The value of
these assets decrease every year. So, reduction in the value of fixed assets due to its Wear and Tear or
actual use is called as ‘Depreciation’.
“Depreciation is defined as shrinkage in the value of an asset due to wear and tear, passage
of time or obsolescence.”
Unless depreciation is charged to the revenues, the true income of the business cannot be
ascertained properly, and we cannot make provision for their replacement. Purchase of an asset is a
capital expenditure and not a recurring expenditure.
212

NOTE:.
1. Land is never depreciated,many a times it is appreciated. Moreover, the area of the
Land neither increases nor decreases.
2. Depreciation is charged every year whether the business concern is earning profit or
suffering a loss.
Definition:-
1. “Depreciation is the gradual decrease in the value of an asset from any cause.”
-R.N.Carter.
2. “Depreciation may be defined as a gradual deterioration in the value due to use.”
-R.G.Williams.
3. “Depreciation may be defined as permanent and continuing diminution in the quality,quantity or
the value of an asset.” -William Pickles.
4. “A measure of the wearing out,consumption or other loss of a value of a depreciable asset

arising from use, effluxion of time or obsolescence through technology and market changes.”
-The Institute of Chartered Accountants of India.(ICAI)
5. “Depreciation is the allocation of the depreciable amount of an asset over its estimated useful
life. Depreciation for the accounting period is charged to income either directly of indirectly.”
-The International Accounting Standard Committee.(ICAC)
6. “Continuous, gradual and permanent reduction in the value of assets is called depreciation.”
CAUSES OF DEPRECIATION
213

1. Normal and Natural Wear and Tear-

Value of fixed asset is reduced due to its normal and natural wear and tear or actual use. More
the use of an asset, more the wear and tear.
2. Passage of Time-
Fixed assets get depreciated due to affluxion of time,so it is necessary to depreciate them even
if they are not in use. e.g. Patents, Trademarks, Copyrights, Leases, Software, Designs, etc.
3. Obsolescence–
On account of technological development or changes in techniques of production, the old
assets become obsolete or out-dated and all these cause reduction in their values. It is called
obsolescence, e.g Computer ,Television etc.
4. Depletion –
To deplete means to empty. Depletion is also one of the causes of decrease in the value of
wasting assets such as Forests, Oil-wells, Mines, Quarries, etc.
5. Natural Calamities/Impairment of an Asset –
The price of fixed assets decreases due to natural calamities such as earthquakes, storms,
cyclones, fire, floods, or accidents,etc. and damages of the assets is accounted for in the Books
of Accounts.
6. Invention –
When the new machines or assets are invented, the earlier assets or machines being used may
lose their utility and hence their value is reduced. e.g. When in the market, i-phone8 was
introduced the value of i-phone7 reduced.
7. Market Value –
Market Value of an asset goes on changing according to the prevailing conditions. Hence
depreciation also changes. When market value of an asset decreases as compared to its cost, it
causes the depreciation on it.
NEED AND IMPORTANCE OF DEPRECIATION–

1. Depreciation is charged to Profit and Loss A/c as it is an element of Cost. It is also essential
to arrive at true value of the asset and also net Profit or Loss during a particular accounting
period. Even if an asset is not in use, its value is reduced due to passage of time. Depreciation is
Cost/Loss to the business. It is a non – cash expenditure. It is a Nominal Account.
2. If depreciation is not provided and deducted from the value of assets, the assets will be overvalued
and we cannot find out true and fair financial position of the business.
3. Depreciation is necessary to make provision for replacement of old assets. If provision for
depreciation is not made, the business may not have sufficient funds to replace them.
4. It enables the business to compute and pay correct amount of tax to the Government.
5. Depreciation must be calculated and equivalent funds should be provided for every year, so that
at the end of its life, the assets may be easily replaced.
214

7.2. FACTORS TO BE CONSIDERED WHILE CHARGING DEPRECIATION

While deciding the amount of depreciation to be charged every year, the following basic factors
should be taken into consideration.
Factors of
Depreciation
Estimated
Estimated
Cost of Asset Economic Life
Terminal Value
of Asset
1. Cost of Asset:-
The cost of asset is an important factor while computation of depreciation. Historical cost of the
assets represents the money spent in connection with its acquisition, installation or improvement
thereof.
In short Original Cost of the Assets = Purchasing Price of Assets + its Installation or Incidental
charges i.e. cost of transportation, transit insurance, custom duty, unloading charges, brokerage,
wages for fixation , amount spent for repairs on second hand assets or reconditioning, etc.
2. Useful or Estimated Economic Life of Assets :-
The useful life of an asset is generally taken to be in terms of years or working life of the assets
expected utility to the business concern.
In other words it means the business should use the assets till the business gets useful services
from the asset and earns Profit from its use.
3. Estimated Terminal or Scrap or Residual Value :-
Scrap Value is the Realisable (net) value of the asset at the end of its economic life. This value
should be calculated after deducting the disposal and removal costs from the sale value of the
asset.
7.3. METHODS OF DEPRECIATION
There are different methods of charging depreciation according to the nature of asset, use of
asset and necessity. Following are the various methods for providing depreciation.
1. Fixed Instalment or Straight Line or Original Cost Method.
2. Diminishing or Reducing Balance or Written Down Value Method.
3. Annuity Method.
4. Depreciation Fund Method.
5. Revaluation Method.
6. Insurance Policy Method.
7. Machine Hour Rate Method, etc.
215

Note: Out of the above methods, only first two methods have been prescribed in the syllabus for
class XI Commerce and hence only these methods are explained below.
7.3.1. Fixed Instalment or Straight Line or Original Cost Method:-

Under this method depreciation is charged at a specific percentage on the Original Cost of the
asset every year, so as to reduce the asset account to nil or to its Scrap value at the end of the estimated
life of the asset.
To ascertain the annual charge under this method, all that is necessary is to divide the original
value of the asset (minus its residual value, if any) by the number of years of its estimated life.
Depreciation is calculated by following formula-

Original cost – Scrap Value
Depreciation (p.a.) =
Estimated life of the asset (in years)
l Original cost of Asset = Purchasing price of an Asset + Incidential Charges etc.
For example
A machine costing `15,000 is purchased and installation charges of ` 3000 is paid. Estimated life
of the asset is 10 years and the Scrap Value is estimated to be ` 2,000 at the end of its life. The amount
of depreciation would be,
(15,000 +3,000) - 2000

Depreciation(p.a.) =
10
16,000
=
10
= ` 1,600 p.a.
Depreciation is also charged when the rate of depreciation is given. It is calculated by using
following formula
Cost of the Asset x Rate of depreciation
100
NOTE : At the time of calculation of depreciation amount, the period for which the asset is used
in the business during the current Accounting year should be considered.
216

For example –
The Original cost of an asset is ` 80,000,and the depreciation is charged @ 10% p.a. at Fixed
Instalment Method, then the amount of depreciation will be computed as follows.
1. Depreciation p.a.(1st year) = 80,000 x 10/100 = ` 8,000 p.a.
WDV= 80,000 – 8,000 = 72,000 ( at the end of the 1st year)
2. Depreciation p.a.(2nd year) = 80,000 x 10/100 = ` 8,000 p.a.
WDV= 72,000 – 8,000 = 64,000 ( at the end of the 2nd year)
3. Depreciation p.a.(3rd year) = 80,000 x 10/100 = ` 8,000 p.a.
WDV= 64000 – 8,000 = 56,000 ( at the end of the 3rd year)
4. Depreciation p.a.(4th year) = 80,000 x 10/100 = ` 8,000 p.a.
WDV= 56,000 – 8,000 = 48000 ( at the end of the 4th year)
Note : In this method depreciation is charged every year on Original Cost of the asset.
The amount of depreciation to be charged per year on the asset is constant. If the amount of
depreciation is plotted annually on a graph paper and the points are joined together, then the graph
will reveal a Parallel Line to X axis, that is why this method is also called as Straight Line Method.
Y Straight Line Method
10,000
Amount of Depreciation (`)
8,000
6,000
4,000
2,000
X
0 1 2 3 4 5 6
Years
7.3.2. Diminishing or Reducing Balance or Written Down Value Method:-

Under this method, depreciation is calculated at a certain percentage each year on the balance
of the asset which is brought forward from the previous year. In other words, under this method
depreciation is calculated at a specific percentage on the value of that asset which stands in the books
of accounts on the opening date of each year.
217

The amount of depreciation charged per year is not fixed but it goes on decreasing gradually as
the opening balance of the asset will decrease in each year. The charges depreciation in initial periods
are higher than those in the later periods.
For example –
The Original Cost of an asset is `80,000,and the depreciation is charged @ 10% p.a. under
Written Down Value Method, then the amount of depreciation will be computed as follows
1. Depreciation p.a.(1st year) =80,000 X 10/100 = ` 8,000 p.a.
WDV= 80,000 – 8,000 = 72,000 ( at the end of the 1st year)
2. Depreciation p.a.(2nd year) =72,000 X 10/100 = ` 7,200 p.a.
WDV= 72,000 – 7,200 = 64,800 ( at the end of the 2nd year)
3. Depreciation p.a.(3rd year) =64,800 X 10/100 = ` 6,480 p.a.
WDV= 64,800 – 6,480 = 58,320 ( at the end of the 3rd year)
4. Depreciation p.a.(4th year) =58,320 X 10/100 = ` 5,832 p.a.
WDV= 58,320 – 5,832 = 52,488 ( at the end of the 4th year)
Note : In this method depreciation is charged on original cost in first year and from the next
year it is charged on Written Down Value(WDV)of an asset. It is charged on opening balance
of every year.
The amount of depreciation charged during each year of asset life goes on decreasing every
year. If the charge of depreciation is plotted annually on a graph paper and the points joined together,
then the graph will reveal as follows :
Y
Written Dopwn Value Method
10,000
Amount of Depreciation (`)
8,000
6,000
4,000
2,000
X
0 1 2 3 4 5 6
Years
Fig. 7.2 Depreciation amount using Written Down Value Method
218

7.3.3 Difference between Fixed Instalment Method and Written Down Value Method.
Points Fixed Instalment Method Written Down Value Method
Under this method depreciation per Under this method depreciation per
Meaning
year on the asset remains fixed year on the asset goes on reducing
Charged on On original cost of the asset. On reduced balance of the asset.

Amount of depreciation remains the Amount of depreciation goes on
Amount
same each year. decreasing each year.
Value of fixed asset can be reduced Value of fixed asset cannot be
Value of fixed asset
to Zero. reduced to Zero.
Profits are more during the earlier
Profits are less during the earlier
Profits years of the life of the asset than
years than the later years
later years
Recognition by
It is not recognized by any Tax/Law It is Recognised by Tax/Law
Tax/Law
This method is suitable where repair This method is suitable where repair
Suitability charges are less and obsolescence is charges are more in later years and
not frequent. obsolescence is more.
Under Written Down value method
Under Straight line method the
Depreciation Curve the curve slopes downward from
curve is parallel to X axis.
left to right.
7.4 Accounting treatment

Journal entries under both the methods are same and they are as under;
A. In the year of Purchase
1. For Purchase of Asset for Cash
Asset A/c ------------Dr.
To Cash / Bank A/c
(Being asset purchased for cash.)
2. For Purchase of Asset on Credit
Asset A/c ------- Dr.
To, Supplier’s/Party’s A/c
(Being purchased asset on credit from.........)
3. For other incidental expenses incurred to put the asset into operation
Asset A/c-----------------Dr.
To Cash / Bank A/c
(Being the payment of incidental charges.)
219

4. For charging depreciation.

Depreciation A/c-------------Dr.
To Asset A/c
(Being depreciation charged)
5. Balance of depreciation A/c is transferred to Profit and Loss A/c
Profit and Loss A/c -----------Dr.
To Depreciation A/c.
(Being balance of depreciation A/c is transferred to Profit & Loss A/c.)
B. Second year onwards
1. For charging depreciation.
Depreciation A/c-------------Dr.
To Asset A/c
(Being Depreciation charged )
2.
At the end of the year balance of depreciation A/c is transferred to Profit and
Loss A/c
Profit and Loss A/c -----------Dr.
(Being balance of Depreciation A/c transferred to Profit & Loss A/c.)
C. During the year of sale
1. For depreciation charged upto the date of sale of the asset.
Depreciation A/c-----------------Dr.
To Asset A/c
(Being Depreciation charged)
2. For Sale of Asset(at its Book value)
Bank A/c-----------------Dr.
To Asset A/c
(Being sale proceed on sale of asset at book value.)
3. For Sale of Asset at profit.
Bank A/c ------------------Dr.
To Asset A/c. (W.D.V)
To Profit on sale of Asset A/c.
(Being the asset has been/is sold at profit.)
4. Transferring Profit to Profit and Loss A/c.
Profit on Sale of Asset A/C ----------------Dr.
To Profit and Loss A/c
(Being the profit on sale of the asset transferred Profit & Loss A/c.)
220

5. For Sale of Asset at Loss.

Bank A/c ................................................................Dr.
Loss on Sale of Asset A/c.......................................Dr.
To Asset A/c(W.D.V)
(Being the asset sold at loss.)
6. Transferring Loss to Profit and Loss A/c.
Profit and Loss A/c.................................................Dr.
To Loss on sale of Asset A/c.
(Being the loss on sale of the asset transferred to Profit & Loss A/c.)
7. Depreciation on remaining asset if any.
Depreciation A/c..............................................................Dr.
To Asset A/c.
(Being depreciation charged )
8.
At the end of the year balance of Depreciation A/c is transferred to Profit and
Loss A/c
Profit and Loss A/c...........................................................Dr.
(Being balance of depreciation A/c is transferred to Profit & Loss A/c.)
ILLUSTRATION ON STRAIGHT LINE METHOD
Illustration 1.
‘SIDDHI’ Ltd Ratnagiri purchased a Machinery costing ` 2,00,000 on 1st April, 2015.
Depreciation is charged @10% on Original Cost each year on 31st March.
Give Journal entries, Machinery A/c and Depreciation A/c for the years 2015-16, 2016-17,
2017-18.
Solution : In the Books of ‘SIDDHI’ Ltd Ratnagiri.

Journal Entries........
Debit Credit
2015
April 1 Machinery A/c Dr. 2,00,000
(Being Machinery purchased )
2016
Mar. 31 Depreciation A/c Dr. 20,000
(Being depreciation charged @ 10% p.a.)
221

2016
Mar. 31 Profit & Loss A/c Dr. 20,000
To Depreciation A/c 20,000
(Being balance of depreciation A/c is transferred
to Profit & Loss Account)
2017
(Being depreciation charged @10% on Original
Cost)
2017
2018 Depreciation A/c Dr. 20,000
Mar. 31 To Machinery A/c 20,000
(Being depreciation charged @ 10% on Original
Cost)
2018 Profit & Loss A/c Dr. 20,000
Mar. 31 To Depreciation A/c 20,000
Working Note:-
1. Calculation of depreciation (`)
Cost as on 1st April 2015 2,00,000
Less - 10% depreciation for 2015-16 20,000
WDV as on 1st April 2016 1,80,000
2. Alternate Method
Cost as on 1st April 2015 2,00,000
Less - 10% depreciation for 3 years
(20,000+20,000+20,000) 60,000
222

In the Books of SIDDHI Ltd., Ratnagiri

Dr. Machinery Account Cr.
2015 2016
April 1 To Bank A/c 2,00,000 Mar. 31 By Depreciation A/c 20,000
Mar. 31 By Balance c/d 1,80,000
2,00,000 2,00,000
2016 2017
April 1 To Balance b/d 1,80,000 Mar. 31 By Depreciation A/c 20,000
1,80,000 1,80,000
2017 2018
1,60,000 1,60,000
2018
April 1 To Balance b/d 1,40,000
Dr. Depreciation Account Cr.

2016 2016
Mar. 31 To Machinery A/c 20,000 Mar. 31 By Profit & Loss A/c 20,000
20,000 20,000
2017 2017
20,000 20,000
2018 2018
20,000 20,000
Illustration 2.
On 1st April 2016 M/s Punawala & Co. Latur. Purchased Equipments of ` 50,000 against
cheque. They decided to follow Fixed Instalment Method of depreciation. The life of the Equipments
is estimated as 8 years and scrap-value of the Equipments at the end of its life is estimated as ` 2,000.
On 1st Jan 2019 entire Equipment is sold for ` 35,000. The firm closes its Books of Accounts on 31st
March, each year
Prepare Equipments A/c, Pass Journal entries for third year and also calculate depreciation.
223

Solution : In the Books of M/s Punawala & Co. Latur

Dr. Equipments Account Cr.
2016 2017
April 1 To Bank A/c 50,000 Mar. 31 By Depreciation A/c 6,000
Mar. 31 By Balance c/d 44,000
50,000 50,000
2017 2018
April 1 To Balance b/d 44,000 Mar. 31 By Depreciation A/c 6,000
44,000 44,000
2018 2019
April 1 To Balance b/d 38,000 Jan. 1 By Depreciation A/c 4,500
2019 To Profit on sale of Jan. 1 By Bank A/c 35,000
Jan. 1 Equipment A/c 1,500
39,500 39,500
Working Notes : 1. Calculation of Depreciation 2. Calculation of Proft or Los on sale
Cost of an asset - Scrap Value of equipments
Depreciation (p.a.) = `
Estimated life an Asset
Cost of Equipments 50,000
50,000 - 2,000 Less : Depreciation for 2 years
8 and 9 months 16,500
Cost as on 1-1-2019 33,500
48,000 Selling price 35,000
8 Less : Cost price 33,500
Depreciation = ` 6,000 p.a. Profit on sale 1,500
In the books of M/s Punawala & Co. Latur

Journal Entries for the year 2018-19
Debit Credit
2019
Jan. 1 Depreciation A/c Dr. 4,500
To Equipments A/c 4,500
Jan. 1 Bank A/c Dr. 35,000
To Equipments A/c 33,500
To Profit on sale of equipments A/c 1,500
(Being Equipments sold at Profit)
224

Mar. 31 Profit on sale of Equipments A/c Dr. 1,500

To Profit & Loss A/c 1,500
(Being Profit on sale of Equipments transferred
to Profit & Loss A/c)

(Being depreciation transferred to P & L A/c)
Illustration 3.
Prabhune and Sons Kolhapur, made Furniture for their own office on 1st October 2015. For this
they had spent ` 72,000 on Materials and ` 32,000 on Wages.
The estimated life of the Furniture is to be for 10 years and its expected scrap value at the end
of it would be ` 24,000.
They sold the entire Furniture for ` 80,000 on 1st October 2018. They close the books of accounts
on 31st March every year.
Show the Furniture A/c and Depreciation A/c for first four years.
Solution : In the Books of Prabhune & Sons, Kolhapur

2015 2016
Oct. 1 To Bank A/c 1,04,000 Mar. 31 By Depreciation A/c 4,000
(72,000 + 32000) Mar. 31 By Balance c/d 1,00,000
1,04,000 1,04,000
2016 2017
1,00,000 1,00,000
2017 2018
92,000 92,000
2018 2018
April 1 To Balance b/d 84,000 Oct. 31 By Depreciation A/c 4,000
Oct. 31 By Bank A/c 80,000
84,000 84,000
225


2016 2016
Mar. 31 To Furniture A/c 4,000 Mar. 31 By Profit & Loss A/c 4,000
4,000 4,000
2017 2017
8,000 8,000
2018 2018
8,000 8,000
2018 2019
To Furniture A/c 4,000 4,000
Oct. 1 Mar. 31 By Profit & Loss A/c
4,000 4,000
Working Note-
1. Calculation of total cost
Original Cost of asset = (Material + Wages)
=` (72,000 + 32,000)
=` 1,04,000,
2. Calculation of Depreciation
Original cost of an asset - Scrap Value
Depreciation =
Estimated Life of Asset (years)
1,04,000 - 24,000
Depreciation =
10
80,000
Depreciation =
10
Depreciation = ` 8,000 p.a. (for 6 months - ` 4,000)
Illustration 4.
On 1st Jan 2015 ‘SCON’ Transports’, Pune, purchased four Trucks for ` 25,000 each. Depreciation
has been provided @10%p.a. using Straight Line Method.
On 1st Jan 2016 one Truck was sold for ` 20,000. On 1st July 2016 another Truck (purchased
for ` 25,000 in 1st Jan 2015 ) was sold for ` 22,000.A new Truck costing ` 40,000 was purchased on
1st Jan 2017.
You are required to prepare Trucks A/c and Depreciation A/c for First three years assuming that
books of accounts are closed on 31st March each year.
226

In the Books of 'SCON'Transports', Pune

Dr. Trucks Account Cr.
2015 2015
Jan. 1 To Bank A/c (I) 1,00,000 Mar. 31 By Depreciation A/c 2,500
(A+B+C+D) (WN)
1,00,000 1,00,000
2015 2016
April 1 To Balance b/d 97,500 Jan. 1 By Depreciation A/c
(I - A) 1,875
Jan. 1 By Bank A/c 20,000
Jan. 1 By Loss on sale of
Truck A/c 2,500
Mar. 31 By Depreciation A/c
(I - B+C+D) 7,500
97,500 97,500
2016 2016
April 1 To Balance b/d 65,625 July 1 By Depreciation A/c 625
July 1 To Profit on sale of (I-B)
Truck A/c 750 July 1 By Bank A/c 22,000
2017 2017
Jan. 1 To Bank A/c (II) 40,000 Mar. 31 By Depreciation A/c 6,000
(I-C+D+II)
1,06,375 1,06,375
2017

2015 2015
Mar. 31 To Trucks A/c 2.500 Mar. 31 By Profit & Loss A/c 2,500
2,500 2,500
2016 2016
Jan. 1 To Trucks A/c 1,875 Mar. 31 By Profit & Loss A/c 9,375
Mar. 31 To Trucks A/c 7,500
9,375 9,375
227

2016 2017
July 1 To Trucks A/c 625 Mar. 31 By Profit & Loss A/c 6,625
2017
Mar. 31 To Trucks A/c 6,000
6,625 6,625
Working Note:-
1. Calculation of Profit / Loss on sale of Truck on 1st Jan 2016
Truck purchased on 1-1-2015 ` 25,000
Less-10% depreciation upto sale ` 2,500 (625+1,875)
WDV as on 1-1-2016 ` 22,500
Less-Selling Price ` 20,000
Loss on sale of Truck ` 2,500
2. Calculation of Profit / Loss on sale of Truck on 1st July 2016.
Truck purchased on 1-1-2015 ` 25,000
Less-10% depreciation up to sale ` 3,750 (625+2,500+625)
WDV as on 1-7-2016 ` 21,250
Selling Price ` 22,000
Profit on sale of Truck ` 750
Alternative Working Note :
Truck I-A Truck I-B Truck I-C Truck I-D Truck II Total
` ` ` ` ` Depre-
ciation
`
1-1-15 25,000 1-1-15 25,000 1-1-15 25,000 1-1-15 25,000 1-1-17 40,000
31-3-15 625 31-3-15 625 31-3-15 625 31-3-15 625 2,500
1-4-15 24,375 1-4-15 24,375 1-4-15 24,375 1-4-15 24,375
1-1-16 1,875 31-3-16 2,500 31-3-16 2,500 31-3-16 2,500 9,375
W.D.V 22,500 1-4-16 21,875 1-4-16 21,875 1-4-16 21,875
Sales 20,000 1-7-16 625 31-3-17 2,500 31-3-17 2,500 31-3-17 1,000 6,625
price
Loss on 2,500 W.D.V 21,250 1-4-17 19,375 1-4-17 19,375 1-4-17 39,000
sale
Sales 22,000
price
Profit 750
on sale
228

Illustration 5.
M/s Rubina Traders, Sindhudurg, bought Furniture worth ` 30,000 on 1st April 2016 and
additional Furniture on 1st October 2016 worth ` 20,000. They charged depreciation at 15% p.a. on
Fixed Instalment Basis.
On 1st October 2018 they sold one Cupboard for ` 5,000 Original cost of which on 1st April
2016 was ` 10,000. On the same date , a new Cupboard was purchased for ` 15,000.
Show the Furniture A/c and Depreciation A/c for the years 2016-17, 2017-18 and 2018-19
assuming that the financial year closes on 31st March every year.
Solution :
In the Books of 'Rubina Traders', Sindhudurg
2016 2017
Oct. 1 To Bank A/c 20,000 Mar. 31 By Balance c/d 44,000
50,000 50,000
2017 2018
44,000 44,000
2018 2018
April 1 To Balance b/d 36,500 Oct. 1 By Depreciation A/c 750
Oct. 1 To Bank A/c 15,000 (I-A)
Oct. 1 By Loss on sale of
2019 furniture A/c 1,250
(I-B+II+III) 7,125
51,500 51,500
2019
229


2017 2017
6,000 6,000
2018 2018
7,500 7,500
2018 2019
Oct. 1 To Furniture A/c 750 Mar. 31 By Profit & Loss A/c 7,875
2019
Mar. 31 To Furniture A/c 7,125
7,875 7,875
Working Note:-
Calculation of Depreciation and Profit / Loss on sale of Furniture
Furniture Sold Furniture Unsold Furniture II Furniture III Total
IA IB Depreciation
on
` ` ` ` `
Cost 1-4-16 10,000 1-4-16 20,000 1-10-16 20,000 1-10-18 15,000
Depr. 31-3-17 1,500 31-3-17 3,000 31-3-17 1,500 6,000
Depr. 31-3-18 1,500 31-3-18 3,000 31-3-18 3,000 (6 M) 7,500
Depr. 1-10-18 750 31-3-19 3,000 31-3-19 3,000 31-3-19 1,125 7,825
W.D.V 6,250 1-4-19 11,000 1-4-19 12,000 1-4-19 13,875
Sales 5,000
price
Loss on 1,250
sale
Illustration 6.
M/s Amir Agency Solapur showed a debit balance of `.56,000 to Machinery A/c on 1st Oct.
2015. The Original Cost of the Machinery was `.80,000.
On 1st April 2016 M/s Amir Agency bought an additional Machinery of `.45,000 and spent
`.5,000 for its installation. On 1st Oct 2017 a part of the Machinery purchased on 1st April 2016 was
sold for `.15,000 the Original Cost of which was `.20,000.
M/s Amir Agency charged 10% depreciation on Fixed Instalment Basis and its financial year
closes on 31st March every year.
Show Machinery A/c for the years 2015-16, 2016-2017 and 2017-18 and pass Journal
Entries for Third year only.
230

Solution :
In the Books of M/s Amir Agency, Solapur
2015 2016
Oct. 1 To Balance b/d 56,000 Mar. 31 By Depreciation
Mar. 31 A/c-I 4,000
By Balance c/d 52,000
50,000 56,000
2016 2017
April 1 To Balance b/d 52,000 Mar. 31 By Depreciation
April 1 To Bank A/c 50,000 A/c-I & II 13,000
1,02,000 1,02,000
2017 2017
April 1 To Balance b/d 89,000 Oct. 1 By Depreciation A/c
(II-A) 1,000
Oct. 1 By Loss on sale of
2018 Machinery A/c 2,000
(I+IIB) 11,000
89,000 89,000
2018
In the books of Amir Agency, Solapur
Journal Entries
Debit Credit
2017
Oct. 1 Depreciation A/c Dr. 1,000
(Being depreciation charged @ 10% on original
cost)
Oct. 1 Bank A/c Dr. 15,000
Loss on sale of Machinery A/c Dr. 2,000
(Being Machinery has been sold at a loss)
231


(Being depreciation charged @ 10% p.a. on
original cost)
To Loss on sale of Machinery A/c 2,000
(Being loss on sale of Machinery transferred to
P & L A/c)
(Being balance of depreciation A/c transferred to
P & L A/c)
Total 43,000 43,000
Working Note:-
Calculation of Depreciation and Profit / Loss on sale of Machinery
Machinery-I Unsold Machinery Sold Machinery Unsold Total
(`) II A (`) II B (`) Depreciation (`)
1-10-15 56,000
31-3-16 4,000 4,000
1-4-16 52,000 1-4-16 20,000 1-4-16 30,000
31-3-17 8,000 31-3-17 2,000 31-3-17 3,000 13,000
1-4-17 44,000 1-4-17 18,000 1-4-17 27,000
31-3-18 8,000 1-10-17 1,000 31-3-18 3,000 12,000
1-4-18 36,000 W.D.V 17,000 1-4-18 24,000
Sales price 15,000
Loss on sale 2,000
ILLUSTRATIONS ON WRITTEN DOWN VALUE METHOD.

Illustration 1
Saurabh bought a Machine costing ` 1,15,000 on 1st April 2016 and paid` 5,000 towards its
installation. He writes off depreciation @10% p.a. on Written Down Value Method every year. His
books are closed on 31st March every year.
On 1st Oct 2018 he disposed off the Machine for ` 80,000.
Give Journal Entries in the books of Saurabh till 31st March,2019.
232

Solution: In the books of Saurabh

Journal Entries
Debit Credit
2016
April 1 Machinery A/c Dr. 1,15,000
(Being Machinery purchased )
April 1 Machinery A/c Dr. 5,000
To Bank A/c 5,000
(Being Installation charges paid)
(Being balance of deprecation A/c transferred to
Profit & Loss Account)
2018
Oct. 1 To Machinery A/c 4,860
Oct. 1 Bank A/c Dr. 80,000

Loss on sale of Machinery A/c Dr. 12,340
(Being Machinery has been sold at Loss)
2019 Profit & Loss A/c Dr. 12,340
Mar. 31 To Loss on sale of Machinery A/c 12,340
(Being Loss on sale of Machinery has been
transferred to Profit & Loss Account)
233

Working Note:
Calculation of Profit/Loss on sale of Machinery
Original Cost on 1-4-2016 ` 1,20,000
Less : Depreciation for 2017(12m) ` 12,000
WDV on 1-4-2017 ` 1,08,000
WDV on 1-4-2018 ` 97,200
WDV on 1-10-2018 ` 92,340
Less : Selling Price ` 80,000
Loss on sale of Machinery ` 12,340
Illustration.2
Sangam Trading Co. Buldhana purchased Vehicle on 1st April 2016 costing ` 85,000 and spent `
5,000 on its registration. On 30th Sept 2016 additional Vehicle is purchased for ` 10,000.
On 31st March 2018,a Vehicle was sold for ` 12,000 the Original Cost of which was ` 20,000.on 1st
April 2016
Prepare Vehicle A/c for the years 2016-17, 2017-18 and 2018-19 and pass the Journal Entries for the
year 2017-18 assuming that Vehicle is depreciated at 10% p.a. on Diminishing Balance Method on
31st March each year.
Solution : In the Books of 'Sangam Trading Co.', Buldhana
Dr. Vehicle Account Cr.
2016 2017
Sep. 30 To Bank A/c 10,000 Mar. 31 By Depreciation A/c 500
1,00,000 1,00,000
2017 2018
April 1 To Balance b/d 90,500 Mar. 31 By Depreciation 1,800
A/c-I
Mar. 31 By Bank A/c 12,000
Mar. 31 By Loss on sale of 4,200
Vehicle A/c
Mar. 31 By Depreciation 6,300
A/c-II
Mar. 31 By Depreciation 950
A/c-III
90,500 90,500
234

2018 2019
April 1 To Balance b/d 65250 Mar. 31 By Depreciation 5,670
A/c-II
Mar. 31 By Depreciation 855
A/c-III
65,250 65,250
2019
In the books of Sargam Trading Company

Journal
Debit Credit
2016
To Vehicle A/c 1,800
Mar. 31 Cash/Bank A/c Dr. 12,000

Loss on sale of Vehicle A/c Dr. 4,200
(Being Vehicle sold at Loss)

To Loss on Sale of Vehicle A/c 4,200
(Being Loss on sale of vehicle transferred to

(Being depreciation charged on II & III Vehicle)

Total 38,500 38,500
235

Working Note:-
Calculation of Depreciation and Profit / Loss on sale of Vehicle
Vehicle Sold I Vehicle II Vehicle III Total
(`) (`) (`) Depreciation (`)
1-4-16 20,000 1-4-16 70,000 30-9-16 10,000
31-3-17 2,000 31-3-17 7,000 31-3-17 500 9,500
1-4-17 18,000 1-4-17 63,000 1-4-17 9,500
31-3-18 1,800 31-3-18 6,300 31-3-18 950 9,050
W.D.V 16,200 1-4-18 56,700 1-4-18 8,550
Sales price 12,000 31-3-19 5,670 31-3-19 855 6,525
Loss on sale 4,200 1-4-19 51,030 1-4-19 7,695
Illustration 3
Sharmila Automobiles Ltd Thane. Purchased a Machine for ` 80,000 on1stJuly,2015. On 1st
Oct, 2016.Company purchased an additional Machine costing ` 30,000.On 31st March 2018 the
Machine purchased on 1st July 2015 became obsolete and was sold for ` 65,000. Depreciation was
provided annually on 31st March the rate of 10% per annum on the Reducing Balance Method
Prepare Machinery A/c and Depreciation A/c for the period from 2015-16,2016-17and 2017-18.
Solution : In the Books of 'Sharmila Automobiles, Ltd.', Thane
2015 2016
July 1 To Bank A/c 80,000 Mar. 31 By Depreciation A/c 6,000
80,000 80,000
2016 2017
1,04,000 1,04,000
2017 2018
April 1 To Balance b/d 95,100 Mar.31 By Depreciation 6,660
2018 A/c-I
Mar. 31 To Profit on sale of 5,060 Mar.31 By Bank A/c 65,000
Machinery A/c Mar.31 By Depreciation 2,850
A/c-II
Mar.31 By Balance c/d 25,650
1,00,160 1,00,160
2018
236


2016 2016
6,000 6,000
2017 2017
8,900 8,900
2018 2018
Mar. 31 To Machinery A/c I 6,660 Mar. 31 By Profit & Loss A/c 9,510
Mar. 31 To Machinery A/c
II 2,850
9,510 9,510
Working Note:-
Calculation of Profit/Loss on sale of Machinery
Original Cost on 1-7-2015 ` 80,000.
Less : Depreciation for 2016(9m) ` 6,000.
WDV on 1-4-2016 ` 74,000.
WDV on 1-4-2017 ` 66,600.
WDV on 31-3-2018 ` 59,940.
Selling Price ` 65,000.
Profit on sale of Machinery ` 5,060.
Calculation of Additional Machine Depreciation.
Original Cost on 1st Oct. 16 ` 30,000
Less : Depreciation for 2016-17 ` 1,500
Less: Depreciation for 2017-18 ` 2,850 ` 4,350.
Written Down Value of Machinery ` 25,650.
on 31st March, 2018
237

Illustration 4.
Kanchan Trading Centre. Dadar, purchased a Computer on 1st April 2015 for ` 50,000.In the
same year on 1st Oct additional Computer was purchased for ` 20,000. On 1st Oct 2016 the Computer
purchased on 1st April 2015 was sold for ` 40,000 and on the same date new Computer was purchased
for ` 24,000.
Their charge depreciation at 8% p.a. on Reducing Balance Method.
Prepare Computers A/c and Depreciation A/c for the first three (3) years Assuming that the
accounting year closes on 31st March every year.
Solution :
In the Books of 'Kanchan Trading Center', Dadar
Dr. Computers Account Cr.
2015 2016
70,000 70,000
2016 2016
April 1 To Balance b/d 65,200 Oct. 1 By Depreciation A/c 1,840
Oct. 1 To Bank A/c 24,000 Oct. 1 By Cash /Bank A/c 40,000
Oct. By Loss on sale of
Computer A/c 4,160
2017
Mar. 31 By Depreciation A/c 2.496
(II+III)
89,200 89,200
2017 2018
April 1 To Balance b/d 40,704 Mar.31 By Depreciation A/c 3,256
(II+III)
Mar.31 By Balance c/d 37,448
40,704 40,704
2018
238


2016 2016
Mar. 31 To Computer's A/c 4,800 Mar. 31 By Profit & Loss A/c 4,800
4,800 4,800
2016 2017
Oct. 1 To Computer's A/c 1,840 Mar. 31 By Profit & Loss A/c 4,336
2017 2,496
Mar. 31 To Computer's A/c
(II & III)
4,336 4,336
2018 2018
Mar. 31 To Computer A/c 3,256 Mar. 31 By Profit & Loss A/c 3,256
(II & III)
3,256 3,256
Working Note:-
Calculation of Depreciation and Profit / Loss on sale of Computer
Computer Sold Computer II Computer III Total
(`) (`) (`) Depreciation (`)
1-4-15 50,000 1-10-15 20,000 1-10-16 24,000
31-3-16 4,000 31-3-16 800 4,800
1-4-16 46,000 1-4-16 19200 (6 M)
1-10-16 1,840 31-3-17 1,536 31-3-17 960 4,336
W.D.V 44,160 1-4-17 17,664 1-4-17 23,040
Sales price 40,000 31-3-18 1413 31-3-18 1,843 3,256
Loss on sale 4,160 1-4-18 16251 1-4-18 21,197
Illustration 5.
M/s Janki Traders, Ratnagiri acquired a Building on 1stApril 2015 for ` 12,00,000.On 1st April
2016 an extension was made to the above Building by spending ` 8,00,000.
On 1st October,2016 they sold half part of the Building through broker for`9,50,000.Brokerage was
paid at 3% on selling price.
On 31st March every year, they charged depreciation @10% under Diminishing Balance Method
Prepare Building A/c and Depreciation A/c for three (3)years i.e2015-16,2016-17 and 2017-18.
239

Solution : In the Books of 'M/s Janki Traders', Ratnagiri

Dr. Buildings Account Cr.
2015 2016
April 1 To Bank A/c 12,00,000 Mar. 31 By Depreciation A/c 1,20,000
12,00,000 12,00,000
2016 2016
April 1 To Balance b/d 10,80,000 Oct.1 By Depreciation A/c
April To Bank A/c 8,00,000 I(A) 47,000
Oct. 1 To Profit on sale of Oct. 1 By Cash /Bank A/c 9,21,500
Building A/c 28,500 2017
I(B) 94,000
19,08,500 19,08,500
2017 2018
April 1 To Balance b/d 8,46,000 Mar.31 By Depreciation A/c 84,600
I(B)
Mar.31 By Balance c/d 7,61,400
8,46,000 8,46,000
2018
April 1 To Balance b/d 7,61,400

2016 2016
Mar. 31 To Building A/c 1,20,000 Mar. 31 By Profit & Loss A/c 1,20,000
1,20,000 1.20,000
2016 2017
Oct. 1 To Building A/c I(A) 47,000 Mar. 31 By Profit & Loss A/c 1,41,000
2017 To Building A/c

Mar. 31 I(B) 94,000
1,41,000 1,41,000
2018 2018
Mar. 31 To Building A/c 84,600 Mar. 31 By Profit & Loss A/c 84,600
I(B)
84,600 84,600
240

Working Note:-
Calculation of Depreciation and Profit / Loss on sale of Building
Building Purchased on 1st April 2015 - 1 2,00,000.
Less : Depreciation for 2015-16 - 1,20,000.
Written Down Value - 10,80,000.
Add: Extension of Building on 1st April 2016 - 8,00,000.
Total Value of Building - 18,80,000.
Sold ` 9,40,000 Unsold ` 9,40,000
A) Building (Half-Sold) ` B) Building (Half-Unsold) `

1st April 2016 9,40,000 1st April 2016 9,40,000.
Less: Depreciation Less: Depreciation
as on 1st Oct 2016 47,000 For 2016-17 94,000.
Written Down Value 8,93,000 W.D.V. 8,46,000.

Less: Selling Price 9,21,500 Less : Depreciation17-18 84,600.
Profit on sale of Building 28,500 W.D.V. 7,61,400.

Q.1 Answer in One Sentence only.
1. What is depreciation ?
2. Why depreciation is charged ?
3. What is a ‘Scrap Value’ of an asset?
4. Why depreciation is charged even in the year of loss?
5. Which account is credited when depreciation is charged ?
6. Where is the profit or loss on sale of asset is transferred ?
7. To which account balance on Depreciation A/c is transferred ?
8. What is the formula to calculate depreciation by Straight Line Method ?
9. What is Fixed Instalment Method ?
10. Which account is debited when expenses are paid on installation of Machinery ?
Q.2 Write the word/term/phrase which can substitute each of the following statement:
1. A continuous, gradual and permanent reduction in the value of a fixed asset.
2. The expenditure incurred for purchase, installation charges etc. of an asset.
3. The amount that a fixed asset is expected to realise on its disposal.
4. The period for which the asset remains in working condition.
5. The method of depreciation in which the total depreciation is equally spread over the life
of the asset.
241

6. The method of depreciation in which the rate of depreciation is fixed but the amount of
depreciation reduces every year.
7. The type of asset on which depreciation is charged.
8. Expenses incurred for fixation of the new asset to bring it in working condition.
9. Excess of Selling price of fixed asset over its Written Down Value.
10. Method of depreciation that cannot reach to zero value.
the sentence.
1. Decrease in the value of fixed assets is known as ..........
a) Depreciation b)Appreciation c) Combination d) None of these
2. Depreciation is charged only on ..........assets.
a) Fixed b) Current c) Non-performing. d) Fictitious.
3. The amount spent on installation of new machinery is a ...............expenditure.
a) Revenue b) Capital c) Deferred Revenue d) Income.
4. The amount that a fixed asset is expected to realise on its disposal is known as............
a) Book value b) Scrap value c) Market value d) Original value.
5. The amount of depreciation reduces year after year under....................
a) Fixed Instalment Method b) Written Down Value Method
c) Depreciation Fund Method. d) Revaluation Method.
6. The amount of depreciation remains constant every year under..................
a) Straight Line Method b) Diminishing Balance Method
c) Revaluation Method. d) Insurance Policy Method
7. The balance of depreciation account is transferred to .............................
a) Manufacturing A/c b) Trading A/c c) Profit & Loss A/c d) Balance sheet
State whether the following Statements are True or False with reasons.
1. Depreciation is charged on fixed assets.

2. Depreciation increases the value of the asset.
3. Balance of depreciation account is transferred to Profit & Loss A/c.
4. The Profit or Loss on sale of fixed asset is ascertained only after charging depreciation.
242

5. Wages paid for installation of Machinery are debited to Wages A/c.

6. It is not necessary to depreciate an asset if it is not in use.
7. Depreciation is charged on Current Assets only.
8. Depreciation need not be charged when business is making losses.
Q.5 Complete the following sentence.

1. Depreciation is charged on ................asset.
2. Wages paid for Installation / fixation of Machinery is debited to .............account.
3. Under ...............system, the amount of depreciation changes every year.
Cost of asset Less ...................
4. Depreciation =
Estimated Working Life of the Asset.
5. Gradual and permanent decrease in the value of asset is known as ...............
6. In Fixed Instalment System the amount of depreciation is ..............every year.
7. The amount spent on installation of Machinery is a ...................expenditure.
8. ............. is the value which an asset realises at the end of its useful life.
9. Depreciation Account is a .................account.
10. Depreciation is derived from a Latin word ...............
Q.6 Do you agree or disagree with the following statements.

1. Depreciation is non-cash expense.
2. Under written down value method the Depreciation curve slopes parallel to 'X' axis.
3. The rate of depreciation depends upon the life of fixed asset.
4. The terminal value of asset never affects the annual amount of depreciation.
5. By charging depreciation on fixed assets ascertainment of true and fair financial position
is possible.
Q.7 Correct the following statement and rewrite the statement.

1. Residual value of an asset increases the amount of annual depreciation.
2. Depreciation is calculated on all assets.
3. Under written down value method depreciation is calculated on original cost of an asset.
4 Depreciation provided on asset is debited to asset account.
5. Profit on sale of asset is credited to asset account.
243

1. A machine costing ` 23,000 is estimated to have a life of 7 years and the scrap value is
estimated ` 2,000 at the end of its useful life.
Find out the amount of depreciaiton p.a.
2. If the cost of the Computer is ` 40,000 and depreciaiton is to be charged at 8% p.a.
calculate the amount of depreciaiton.
3. Mr. 'X' purchased Furniture on 1st Oct., 2015 at ` 2,80,000 and spent ` 20,000 on its
installation. He provides depreciation at 6% under straight line method on 31st March,
2016. Calculate the amount of depreciation.
4. M/s Sitaram and Co. purchased a Machinery on 1st Jan, 2016 for ` 2,00,000. Compnay
provides depreciation @ 10% p.a. on Reducing Balance Merthod on 31st March every
year.
Calculate written down value of Machinery as on 31st March, 2017.
5. On 1st July, 2016 M/s Ramai & Co. sold Machinery for ` 7,000, the original cost ` 10,000/-
which was pruchased on 1st April, 2015. Find out the profit or loss on sale of Machinery
by charging depreciation at 10% p.a. on original cost on 31st March every year.
Practical Problems on Straight Line Method

1. On 1st April 2015 Farid of Nasik purchased a Motor Car for ` 55,000. The scrap value of
the Motor Car was estimated at ` 10,000 and its estimated life is 10 years The Registration
charges of the Motor Car was ` 5,000.
Show Motor Car Account for first four years, assuming that the books of accounts
are closed on 31st March every year
2. On 1st Jan 2017 ‘Sai Industries Nagpur, purchased a Machine costing ` 1,65,000 and spent
` 15,000 for its installation charges. The estimated life of the Machine is to be 10 years and
the scrap value at the end of its life would be ` 30,000. On 1st Oct 2018 the entire Machine
was sold for ` 1,50,000.
Show Machinery Account, Depreciation Account for the years 2016-17, 2017-18 and
2018-19, assuming that the accounts are closed on 31st March every year.
244

3. Shubhangi Trading Company of Dombivli purchased Machinery for ` 86,000 on 1st Jan 2016
and immediately spent ` 4,000 on its fixation and erection. On1st Oct,2016 additional Machinery
costing ` 40,000 was purchased.
On 1st Oct 2017 the Machinery purchased on 1st Jan 2016 became obsolete and was sold for `
70,000. On 1st July 2017 a new Machine was also purchased for ` 45,000
Depreciation was provided annually on 31st March at the rate of 12% per annum on fixed
instalment method.
Prepare Machinery Account for three years and pass Journal Entries for Third year
i.e. 2017-2018.
4. On 1st Jan 2015, Triveni Traders Raigad purchased a Plant for ` 12,000, and installation
charges being ` 3,000. On 1st July 2016 another Plant was purchased for ` 25,000, on 1st
April 2017 another Plant was purchased for ` 27,000, wages paid for installation amounted
to ` 2,000. Carriage paid for the Plant amounted to ` 1,000.
Show Plant Account up to 31st March 2018 assuming that the rate of depreciation is
@10%p.a. on Straight Line Method
5. Sameer & Company, Mumbai purchased a Machine worth ` 2,00,000 on 1st April 2016. On 1st
July 2017, the company purchased an additional Machine for ` 40,000.
On 31st March 2019, the company sold the Machine purchased on 1st July 2017 for
` 35,000. Company writes off depreciation at the rate of 10% on the original cost and the books
of accounts are closed every year on 31st March.
Show the Machinery Account and Depreciation Account for the first three years ending
31st March 2016-17, 2017-18 and 2018-19
6. Samarth Manufacturing Co. Ltd, Aurangabad, purchased a New Machinery for ` 45,000 on
1st Jan 2015 and immediately spent ` 5,000 on its fixation and erection . In the same year 1st
July additional Machinery costing ` 25,000was purchased. On 1st July 2016 the Machinery
purchased on 1st Jan 2015 became obsolete and was sold for ` 40,000
245

Depreciation was provided for annually on 31st March at the rate of 10% per annum on Fixed
Instalment Method.
You are required to prepare Machinery Account for the year 2014 - 15, 2015 - 16,
2016-17.
Practical Problems on Written Down Value Method

1. M/s Omkar Enterprise Jalgaon acquired a Printing Machine for `75,000 on 1 Oct 2015 and
spent `5,000 on its transport and installation. Another Machine for `45,000 was purchased on
1st Jan 2017. Depreciation is charged at the rate of 20% on Written Down Value Method, on 31st
march every year.
Prepare Printing Machine Account for the first four years.
2. Vishal Company, Dhule, purchased Machinery costing ` 60,000 on 1st April 2016. They
purchased further Machinery on 1st October 2017, costing ` 30,000 and on 1st July 2018,
costing ` 20,000. On 1st Jan2019 ,one-third of the Machinery , which was purchased on 1st
April 2016, became obsolete and it was sold for ` 18,000.
Assume that, company account closes on 31st March every year.
Show Machinery Account for the first three(3)years and pass journal entries for Third
year, after charging depreciation at 10% p.a. on Written Down Value Method.
3. Mahesh Traders Solapur purchased Furniture on 1st April 2014 for ` 20,000. In the same year
on 1st Oct additional Furniture was purchased for ` 10,000
On 1st Oct 2015, the Furniture purchased on 1st April 2014 was sold for ` 15,000 and on the
same day a new Furniture was purchased for ` 20,000.
The firm charged depreciation at 10 % p.a. on Reducing Balance Method.
Prepare Furniture Account and Depreciation Account for the year ending 31st March
2015, 2016 and 2017.
246

4. Radhika-Masale’ Amravati purchased a Plant on 1st Jan 2015 for `80,000. A new Plant was also
purchased for `60,000,installation expenses being `10,000 on 1st April 2016. On 1st Jan 2017,
a new Plant was purchased for `20,000, by disposing-off the 1st Plant at `60,000.
Prepare Plant Account and Depreciation Account for 31st March2015, 31st March 2016
and 31st March 2017, assuming that the rate of depreciation was @10%on Diminishing
Balance Method.
5. On 1st April 2015 Suman Traders purchased Machinery for ` 30,000. On 1st Oct,2015,they
purchased further Machinery costing `20,000.
On 1st Oct 2016 they sold the Machine purchased on 1st April 2015 for `18,000 and brought
another Machine for `15,000 on the same date.
Depreciation is provided on Machinery @20% p.a. on the Diminishing Balance Method and
financial year closes on 31st March every year.
Prepare the Machinery Account and Depreciation Account for the year 2015-16, 2016-17
and 2017-18.
Activity: Do it.
1. Visit any Business organisation and collect the information of the assets which are depreciated
in that organisation.
2. Visit any Business Organisation, office of Chartered Accountant and collect the information
about the methods and percentage of depreciation actually followed by them.
3. Vaidhi & Co Bhandup purchased five Computers on various dates which were as follows.
On 1st April 2015 - ` 1,00,000 On 1st July 2015 - ` 30,000.
On 30th September 2015 - ` 80,000. On 1st January 2016 - ` 50,000.
On 31st March 2016 - ` 40,000
Calculate the amount of depreciation for the above five Computers for the year ended 31st
March 2016. @10% p.a.
4. Rajeev Industries Chiplun Purchased a Machinery on 1st July 2016 at cost `40,000.The rate of
depreciation is 12% p.a.
Calculate the amount of depreciation for First (3)three years under Straight Line Method and
Written Down Value Method.
5. Home Appliances : Electric Products - Mobile and Washing Machine on Which assets have
depreciation is higher / more compared to others
j j j
247

8 Rectification of Errors
Contents
8.1 Meaning & Effects of errors

8.2 Types of Errors
8.3 Detection & Rectification of errors
8.4 Preparation of Suspense Accounts
o Students will know the meaning and effects of Rectification of Errors

o Students will know the different Types of Errors and their examples
o Students are able to detect the errors and rectify them.
o Students will learn the meaning and need of Suspense A/c
o Students will know how to maintain Suspense A/c.
8.1 Introduction and Meaning

In the previous chapter we have learnt that a Trial Balance is prepared to check the arithmetic
accuracy of transactions recorded in a Journal posting them into the ledger and balancing the ledger
account. If a Trial Balance agrees it is assumed that recording posting etc. have been done correctly.
But this is only partly correct because even if Trial Balance agrees there may be some errors in the
accounting records.
248

Accuracy is assured only when there are no errors in the books of accounts. To confirm accuracy
errors are identified and rectified. Many business units have shifted from manual accounting to
computerized accounting. Yet errors in accounting are unavoidable. Hence errors are to be located
and rectified to find out the real profit or loss and financial position.
Reasons of Errors
1. Lack of Accounting Knowledge
2. Wrong Data Collections
3. Wrong Recording
4. Incorrect Arithmetical Calculations

Need of Rectification:
1. For the preparation of correct Accounting Entries/Records.
2. Preparation of Profit & Loss A/c with corrected figures to finalize correct Profit and Loss.
3. To find out the accurate financial position of the firm/enterprise by preparing Balance Sheet with
corrected figures.
Types of Errors:
While writing the Books of Accounts it is likely that some mistakes are committed and they are
required to be corrected. Errors can be classified in the following four categories.
249

1) Errors of Omission: This kind of error arises when a transaction is partially or completely
omitted to be recorded in the books of accounts. e.g. failure to record credit purchases. As a
result of this omission neither the creditor’s account is credited nor is the Purchase account
debited. This type of error does not affect the agreement of Trial Balance and hence the Trial
Balance fails to disclose such type of errors.
These can be of two types:
a) Error of complete omission which does not affect the agreement of Trial Balance.
b) Error of partial omission which affects the agreement of Trial Balance.
Type of Error with Meaning Sub-Types with Examples

I. Error of Omission (a) Error of Complete Omission
These errors are caused due to Goods sold to Aditya on credit but not recorded in
complete or partial omission. Sales Book.
(b) Partial Omission
Goods sold to Aditya on credit recorded in Sales
Book but not posted to the A/c of Aditya thus Sales
A/c is credited but Aditya’s A/c is not debited. This
error will affect the Trial Balance.
2) Errors of Commission: These are the errors which are committed due to wrong Entries or
Posting of transactions wrong totalling or wrong balancing of the accounts, wrong casting of
the- Subsidiary Books or wrong recording of amount in the books of original entry. These errors
affect the agreement of Trial Balance.
Errors of commission are classified into following:
a) Errors of Recording b) Errors of Casting
c) Errors of Carrying d) Errors of Posting

II. Errors of Commission (a) Errors of Recording in the Book of
These errors are caused due to wrong Original Entry
recording of transactions, wrong totalling Goods purchased from Chaitanya
of Subsidiary Books or Ledger Accounts, for `850/- recorded as `580/- in the
Wrong posting and wrong carry forward Purchase Book. (This error will not
affect the agreement of Trial Balance
as same amounts will be posted in both
the accounts Purchase A/c and Chaitnaya's
A/c.)
(b) Wrong Totalling of Subsidiary Book.
Example : Purchase Book has been under
cast (total taken less) by ` 500/- Purchase
A/c will be debited less by `500/-
decreasing the debit side of Trial Balance
by `500/-.
250

(c) Error in Totalling or Balancing of

Ledger Accounts
Example : Creditors A/c has been
undercast by `700/-. In this case credit
balance of Trial Balance will be less by
`700/-
(d) Error of Posting
(i) Posting to the wrong side but correct
account.
Goods sold to Rohan for `900/-
entered to the credit of Rohan’s A/c
instead of posting to the debit side of
his account.
(ii) Posting with wrong amount.
(iii) Posting twice in an Account.
(iv) Errors in posting to the wrong A/c
but correct side..
(e) Error in carrying forward.
Total of Purchase Book `1,500/- is carried
forward as `1,250/- Creats less debit of
`250/- in Purchase A/c and also less debit
in Trial Balance.
3) Errors of Principle: Transactions recorded without following the accounting principles and
rules are known as Errors of Principle. An error of principle may occur due to the incorrect
classification of expenditure or receipt between capital and revenue as it may lead to under/
over stating of income or assets or liabilities. This error does not affect the Trial Balance as
amounts are placed on the correct side but in a wrong account.

III. Errors of Principles. (a) Treating Capital items as Revenue
These errors are caused due to the violation item
of accounting principles. Example: Wages paid for the installation of
new Machinery debited to Wages Account
instead of Machinery Account.
(b) Treating Revenue items as Capital
Item
Example : `500/- paid for the repairs of
an old Machinery is debited to Machinery
Account instead of Repairs Account.
251

4) Compensating Errors: When two or more errors are committed in such a way that the net
effect of these errors on the debit and credit of accounts is nil or nullified such errors are called
compensating errors. These errors do not affect the agreement of Trial Balance.

IV. Compensating Errors Example: On May 10th 2018 a sum of `3000/-
Two or more errors committed in such a paid to Ashok is posted as `300/- to the Debit of
way that the net effect of these errors of the his A/c and on May 20th 2018 a sum of `300/-
debit and credit of the accounts is nil. paid to Kumar has been posted as `3000/- to the
Debit of his A/c. Net Effect will be zero.
Errors may also be classified as One Sided Errors and Two Sided Errors.
One Sided errors affects only one account and affects the agreement of Trial Balance. These
Errors can be rectified by giving a note for debiting or crediting the account, if it is located before
preparation of Trial Balance.
When One Sided Errors are located after the preparation of Trial Balance then these errors will
be rectified with help of Suspense Account.
Two sided errors affects two or more accounts and it does not affect the agreement of Trial
Balance. It always be rectified with the help of Journal Entries.
Note : Rectified entries are recorded in Journal Proper.
ILLUSTRATIONS
1. The following errors were located in the books of Anil & Sons before the preparation of the Trial
Balance. Rectify them.
(1) Goods sold to Aryan for `2,000 on credit were not entered in the Sales Book.
(2) An amount of ` 600 paid for repairs to the Machinery stands wrongly posted to Machinery
Account.
(3) Salaries ` 2,500 paid to Shrikant was wrongly debited to his personal account in the
ledger.
Rectifying Entry = Reverse Entry + Correct Entry
Working Note :
Sr. Wrong Entry Reverse Entry Correct Entry Rectifying Entry
No.
1 Nil Nil Aryan’s A/c Dr. 2,000 Aryan’s A/c Dr. 2,000
(Complete Omission) To Sales A/c 2,000 To Sales A/c 2,000
2 Machinery A/c Dr. 600 Cash A/c Dr. 600 Repairs A/c Dr. 600 Repairs A/c Dr. 600
To Cash A/c 600 To Machinery A/c 600 To Cash A/c 600 To Machinery A/c 600
3 Shrikant’s A/c Dr. 2,500 Cash A/c Dr. 2,500 Salary A/c Dr. 2,500 Salary A/c Dr. 2,500
To Cash A/c 2,500 To Shrikant’s A/c ,500 To Cash A/c 2,500 To Shrikant’s A/c 2,500
252

Solution: Journal Proper of Anil & Sons

Debit Credit
(1) Aryan's A/c Dr. 2,000
To Sales A/c 2,000
(Being the sale of goods to Aryan not entered in
sales book, now rectified)
(2) Repairs A/c Dr. 600

To Machinery A/c 600
(Being the repairs wrongly debited to machinery
account, now rectified)
(3) Salary A/c Dr. 450

To Shrikant's A/c 450
(Being salary paid to Shrikant wrongly debited
to his account, now rectified)
2. Rectify the following errors which are located in the books of Mr. Anand
1) Sale of old Furniture for `2,000 treated as sale of goods.
2) `15,000 paid of Salary to Mr. Rohit ,stands debited to his Personal Account.
3) An amount of `7,000 withdrawn by the proprietor for his personal use has been debited to Trade
Expenses a/c.
4) Cash received from Mr. Sawant `500 was credited to Mr. Shinde.
5) Repairs for Building was debited to Building account `500.
6) `1,500 received as interest was credited to Commission Account.
7) `5,000 paid for the purchase of Computer was charged to Office Expenses Account.
253

Working Note : Formula Reverse Entry + Correct Entry = Rectified entry
Sr.
Wrong Entry Reverse Entry Correct Entry Rectifying Entry
No.
1 Cash A/c Dr. 2,000 Sales A/c Dr. 2,000 Cash A/c Dr. 2,000 Sales A/c Dr. 2,000
To Sales A/c 2,000 To Cash A/c 2,000 To Furniture A/c 2,000 To Furnituere A/c 2,000
2 Mr. Rohit A/c Dr. 15,000 Cash A/c Dr. 15,000 Salary A/c Dr. 15,000 SalaryA/c Dr. 15,000
To Cash A/c 15,000 To Mr. Rohit A/c 15,000 To Cash A/c 15,000 To Mr. Rohit A/c 15,000
3 Trade Expenses A/c Dr. 7,000 Cash A/c Dr. 7,000 Drawings A/c Dr. 7,000 Drawings A/c Dr. 7,000
To Cash A/c 7,000 To Trade Expenses A/c 7,000 To Cash A/c 7,000 To Trade Expenses A/c 7,000
4 Cash A/c Dr. 500 Shinde A/c Dr. 500 Cash A/c Dr. 500 Shinde A/c Dr. 500
254
To Shinde A/c 500 To Cash A/c 500 To Sawant A/c 500 To Sawant A/c 500

5 Building A/c Dr. 500 Cash A/c Dr. 500 Repairs A/c Dr. 500 Repairs A/c Dr. 500
To Cash A/c 500 To Building A/c 500 To Cash A/c 500 To Building A/c 500
6 Cash A/c Dr. 1,500 Commission A/c Dr. 1,500 Cash A/c Dr. 1,500 Commission A/c Dr. 1,500
To Commission A/c 1,500 To Cash A/c 1,500 To Interest A/c 1,500 To Interest A/c 1,500
7 Ofiice Expenses A/c Dr. 5,000 Cash A/c Dr. 5,000 Computer A/c Dr. 5,000 Computer A/c Dr. 5,000
To Cash A/c 5,000 To Ofiice Expenses A/c 5,000 To Cash A/c 5,000 To Office Expenses A/c 5,000
Courtesy : MSBT
Solution: Journal of Anand & Sons

Debit Credit
(`) (`)
(1) Sales A/c Dr. 2,000
To Furniture A/c 2,000
(Being sold old Furniture recorded as sale of
goods now rectified)
(2) Salary A/c Dr. 15,000
To Rohit A/c 15,000
(Being Paid salary paid to Mr. Rohit debited to
his personal account now rectified)
(3) Drawings A/c Dr. 7,000
To Trade Expenses A/c 7,000
(Being Cash withdrew for personal use debited
to Trade Expenses account now rectified)
(4) Shinde A/c Dr. 500
To Sawant A/c 500
(Being cash received from Sawant credited
Shinde account now recrtified)
To Building A/c 500
(Being paid repair to Building debited Building
(6) Commission A/c Dr. 1,500
To Interest A/c 1,500
(Being interest received credited to commission
(7) Computer A/c Dr. 5,000
To Office Expenses A/c 5,000
(Being computer purchased debited to office
expenses account, now rectified)
8.3 Detection & Rectification of errors

Stages of Detecting Errors:
Rectifying errors depends generally on when the error is detected. Errors can be detected at any one
of the following stages.
Stage 1 - Before preparation of Trial Balance
Stage 2 - After preparation of the Trial Balance but before preparing Final Accounts.
Stage 3- After preparing Final Accounts.
255

ILLUSTRATIONS
Illustration 1 :
Following are some accounting errors, rectify them.
1) Sales for `15,000/- made to Vaishnavi was not entered in the Sales Book.
2) Salary of `9,000/- paid to Accountant Varundas was debited to his personal account
3) Old Furniture sold for `3,500/- was entered in the Sales Book.
4) Carriage paid `500 on purchase of a Machine was debited to Carriage A/c
5) Cash `45,000/- paid to Aditya Verma was debited to Kumar Verma’s A/c
Journal Proper
Debit Credit
(`) (`)
(1) Vaishnavi’s A/c Dr. 15,000
To Sales A/c 15,000
(Being Sale to Vaishnavi’s omitted to be entered
in Sales Book is now corrected)
(2) Salary A/c Dr. 9,000
To Varundas A/c 9,000
(Being Salary paid to Varundas was debited to
his personal account is now corrected)
256

(3) Sales A/c Dr. 3,500

To Furniture A/c 3,500
(Being Old furniture sold was wrongly entered in
the sales Book is now corrected)
(4) Machinery A/c Dr. 500
To Carriage A/c 500
(Being amount paid for carriage on purchase
of machine debited to carriage account is now
corrected)
(5) Aditya Verma’s A/c Dr. 45,000
To Kumar Verma’s A/c 45,000
(Being Amount paid to Aditya Verma was debited
to Kumar verma is corrected)
Illustration 2:
Rectify the following errors.
1) Total of the Return Inward book was overcast by `200/-
2) Rent of `800/- paid to Mr. Amit has been debited to his Personal Account.
3) Goods sold to Mr. Abhiraj `350/- have been entered in the Purchases Day Book as `530/-
4) Repairs to Furniture `300/- have been debited to Furniture and Fixtures A/c
5) Commission received `200/- has been posted to the debit of Commission Account.
6) A cheque for `320/- issued to Mr. Ram has been wrongly entered in the cash column of the Cash
Book.
Journal Proper
Debit Credit
(1) No Journal entry is required as it is affecting
only one account. Returns Inwards A/c is to be
credited with `200/- to cancel excess debit given
(2) Rent A/c Dr. 800

To Amit’s A/c 800
(Being Rent paid to Amit debited to his personal
account now rectified)
(3) Abhiraj A/c Dr. 880
To Purchases A/c 530
To Sales A/c 350
(Being credit sales to Abhiraj `350/- wrongly
entered through Purchases Book as `530/- . now
rectified)
257


To Furniture & Fixtures A/c 300
(Being Repairs to Furniture debited to Furniture
& Fixtures now rectified)
(5) No Journal Entry is required as it is affecting
only one account Commission A/c is to be
credited with `400/-
(6) Cash A/c Dr. 320
To Bank A/c 320
(Being cheque issued wrongly entered in cash
column of the Cash Book, now rectified
Illustration 3:
1) Sales return book was overcast by ` 800/-
2) Factory electricity bill ` 7,000/- paid but recorded twice in the books.
3) Total of Sales book was undercast by ` 900/-
4) Paid for Rent ` 825/- was wrongly posted to Rent account as ` 325/-
5) Wages paid for extension of Building ` 9,900/- was charged to wages account.
6) Paid carriage for purchase of Machinery ` 2,000/- was charged to carriage account.
7) Life insurance premium of proprietor paid ` 1,500/- wrongly debited to Insurance A/c
Journal Proper
Debit Credit
(1) No Journal entry is required as it affects only
one account so Sales Return Account should be
credited with `800/-
(2) Cash A/c Dr. 7,000
To Factory Electricity A/c 7,000
(Being rectification of double recording of factory
electricity bill now rectified)
(3) No Journal Entry as it affects only one account so
Sales Account should be credited with `900/-
(4) No Journal Entry as it affects only one account so

Rent account should be debited with `500/-
(5) Building A/c Dr. 9,900

To Wages A/c 9,900
(Being Wages paid for extension of Building
wrongly debited to Wages Account, now rectified.)
258

(6) Machinery A/c Dr. 2,000

To Carriage A/c 2,000
(Being carriage paid for Machinery wrongly
debited to carriage account, now rectified)
To Insurance A/c 1,500
(Being rectification of wrong debit given to
Insurance Account instead of Drawings Account
now rectified)
Illustration 4:
Rectify the following errors:
1) Goods for `7,500/- were purchased from Vaishali Traders on credit, but no entry has yet been
passed.
2) Purchase return for ` 2,000/- not recorded in the books.
3) Goods for ` 3,000/- sold to Anjali Traders on Credit were entered in Sales Book as ` 300 only
4) Goods of the value of ` 2,000/- returned by Sumit & Co. were included in stock, but no entry
was passed in the books.
5) Goods purchased for ` 1,200/- entered in the Purchases Book as `12,000/-
6) An invoice for goods sold to Neeta was overcast by `200/-
Journal Proper
Debit Credit
(1) Purchases A/c Dr. 7,500
To Vaishali Traders A/c 7,500
(Being Credit purchases from Vaishali Traders
were omitted to be recorded, now rectified)
(2) Creditors A/c Dr. 2,000
To Purchase Return A/c 2,000
(Being Purchases return was not recorded, now
rectified)
(3) Anjali Traders A/c Dr. 2,700
To Sales A/c 2,700
(Being Goods sold to Anjali Traders were
wrongly recorded now rectified)
(4) Sales Return A/c Dr. 2,000

To Sumit & Co. 2,000
(Being Good returned by Sumit & Co. were
omitted to be recorded now rectified)
259

(5) Creditors A/c Dr. 10,800

To Purchase A/c 10,800
(Being Goods purchased wrongly recorded now
rectified)
(6) Sales A/c Dr. 200
To Neeta’s A/c 200
(Being Invoice for goods sold overcast now
rectified)
Illustration 5:
Give Journal Entries to rectify the following errors:
1) Goods purchased from Sujit for ` 3,000/- were recorded in Sales Book.
2) Goods for `5,200/- sold to Sachin was passed through Purchase Book.
3) A customer returned goods worth `800/- was recorded in Purchase Return Book.
4) A credit sale of ` 240/- to Ajit was entered in the Sales books as ` 420/-
5) Sale of old Table and Chairs for ` 900/- was treated as sale of goods.
6) Rent paid for proprietor’s residence ` 1,200/- , debited to Rent A/c.
Journal Proper
Debit Credit
(1) Purchases A/c Dr. 3,000
Sales A/c Dr. 3,000
To Sujit’s A/c 6,000
(Being Goods purchased from Sujit were wrongly
recorded in Sales Book, now rectified)
(2) Sachin’s A/c Dr. 10,400
To Sales A/c 5,200
To Purchases A/c 5,200
(Being Goods sold to Sachin wrongly recorded in
Purchases Book, now rectified)
(3) Sale Return A/c Dr. 800
Purchases Return A/c Dr. 800
To Customer’s A/c 1,600
(Being Goods returned by a customer recorded in
Purchases Return Book, now rectified)
To Ajit’s A/c. 180
(Being Credit sales to Ajit were wrongly
recorded, now rectified)
260


To Furniture A/c 900
(Being sale of furniture was recorded as sale of
goods, now rectified)
To Rent A/c 1,200
(Being Rent paid for proprietor’s residence,
debited to Rent Account, now rectified)
8.4 Suspense account

Meaning of Suspense Account :
When the Trial Balance does not tally the amount of difference is located to the debit (when
the total of the credit column is higher than the debit column) or credit (when the total of the debit
column is higher than the credit column) to a temporary account known as ‘Suspense Account’.
Errors ffecting only one account is known as one sided errors. These errors will now be rectified with
the help of Suspense Account. When all one sided errors are located and rectified Suspense Account
automatically closes.
Illustration 6:
The Trial Balance of Shri. Kishorilal did not agree and the difference of debit balance of ` 620
was temporarily transferred to Suspense A/c. Later on following errors were located. Give the Journal
entries to rectify the following errors and show the Suspense A/c.
1) An amount of `840/- received from M/s Singh & Co. was posted to the debit as `50/-
2) `530/- spent for repairs to Machinery were posted to the debit of Machinery A/c `150/-
3) Discount of `25/- allowed by Shah & Co. to us was posted to their credit.
4) An Amount of `730/- paid to Chetan & Co was wrongly credited to Lalit & Co. as `250/-
5) The total of Purchase Day Book has been undercast `100
Journal Proper
Debit Credit
(1) Suspense A/c Dr. 890
To M/s Singh & Co. 890
(Being the rectification entry for wrong debit of
M/s Singh & Co., now rectified.)
(2) Repairs to Machinery A/c Dr. 530
To Suspense A/c 380
(Being repairs to Machinery was wrongly debited
to Machinery A/c, now rectified)
261

(3) Shah & Co. A/c Dr. 50

To Suspense A/c 50
(Being Rectification of wrong credit given to
Shah & co. now rectified.)
(4) Chetan & Co. A/c Dr. 730
Lalit & Co. A/c Dr. 250
To Suspense A/c 980
(Being paid to Shah & Co. credited to Lalit &
Co. with wrong amount now rectified.)
(5) Purchase A/c Dr. 100

To Suspense A/c 100
(Being Purchase Day Book undercast now
rectified.)
Dr. Suspense A/c Cr.

Particulars Amt (`) Particulars Amt (`)
To Balance b/d 620 By Repairs to Machinery A/c 380
To M/s Singh & Co. A/c 890 By Shah & Co. A/c 50
By Chetan & Co. A/c 730
By Lalit & Co. A/c 250
By Purchases A/c 100
1,510 1,510
Illustration 7 :
Rectify the following errors through Suspense Account :
1) Purchase of goods from Sachin for ` 3,000/- was entered in the Sales Book, however Sachin’s
Account was correctly credited.
2) Cash received from Anilkumar a debtor `4,500/- was correctly entered in the Cash Book but
was omitted to be posted to his account.
3) Sales Book was overcast by ` 2,000/-.
4) Cash of `5000 paid to Sadik was credited to Sabir A/c as ` 1,800/-.
5) The total of Purchase Returns Book of `3,150/- was carried forward as `1,530/-
6) Cash paid to Shweta ` 7,500/- was debited to Ankita A/c by `7,000/-.
262

Journal Proper
Debit Credit
(`) (`)
(1) Purchase A/c Dr. 3,000
Sales A/c Dr. 3,000
To Suspense A/c 6,000
(Being Purchase of good was entered in the
the Sale Book now retified)
(2) Suspense A/c Dr. 4,500
To Anilkumar's A/c 4,500
(Being Anilkumar’s account omitted to be
credited, now rectified)
(3) Sales A/c Dr. 2,000
(Being Sales Book overcast rectified)
(4) Sadik A/c Dr. 5,000
Sabir A/c Dr. 1,800
(Being cash paid to Sadik was wrongly credited
to Sabir is now rectified)
(5) Suspense A/c Dr. 1,620
To Purchase Return A/c 1,620
(Being Purchase Return Book is undercast
now rectified)
(6) Shweta’s A/c Dr. 7,500
To Ankita A/c 7,000
To Suspense A/c 500
(Being cash paid to Shweta wrongly debited
to Ankita, now rectified)
Illustration 8:
1) A sale of goods of the value of `8,000/- to Sharma has been wrongly debited to Verma’s Account.
2) A purchase of ` 1,200/- from S.Kumar instead of being credited to him from the Purchase book
has been wrongly debited to him.
3) Cash ` 350/- received from G.Ramesh and entered on the Receipts side of the Cash Book has
not been posted.
4) A payment of ` 800/- made to K.Mayur for cash purchase of goods from him stands debited to
his Account.
5) An amount of ` 1,500/- drawn by the proprietor for his personal use stands debited to General
Expenses Account.
263

Journal Proper
Debit Credit
(1) Sharma’s A/c Dr. 8,000
To Verma’s A/c 8,000
(Being Sale of goods to Sharma wrongly debited
to Varma's A/c, now rectified)
(2) No Journal entry is required S.Kumar’s A/c is to
be credited with `2 400/-
(3) No Journal entry is required G.Ramesh’s A/c is to
be credited with `350/-
(4) Purchase A/c Dr. 800
To K.Mayur’s A/c 800
(Being Payment of K. Mayur for cash purchases,
debited to his account now rectified)
To General Expenses A/c 1,500
(Being amount drawn for personal use wrongly
debited General expenses account now rectified)
In the above example if it would have been stated that “The Trial Balance did not agree and the
difference was put to Suspense Account.” The correction entries (2) & (3) would be as follows:
` `
2) Suspense A/c Dr. 1,200
To S.Kumar’s A/c 1,200
3) Suspense A/c Dr. 350
To G.Ramesh’s A/c 350
And the Suspense Account would be:
To S.Kumar’s A/c 1,200 By Difference in Trial balance 1,550
To G. Ramesh’s A/c 350
1,550 1,550
264

Illustration 9:
Trial Balance of Amitabh did not agree. Amitabh put the difference to Suspense Account.
Subsequently he located the following errors.
1) Amount paid on regisration of Motor Car ` 800 was recorded as legal charges.
2) Repairs to Machinery ` 300 debited to Machinery account.
3) Repairs paid for the overhauling of second hand machinery purchased `1,000/- was debited to
repairs account.
4) Purchased material ` 90,000/- and paid wages of ` 10,000/- for construction of building, not
recorded in the books.
5) Furniture purchased for ` 6,000/- was posted to purchase account ` 400/-
6) Old Machinery sold to Sumit at ` 1,000/- was recorded through Sales Book.
7) Total of Sales Returns Book ` 2,000/- was not posted to the ledger.
Rectify the above errors and prepare Suspense Account to ascertain the original difference in Trial
Balance.
Solution: Journal Proper

Debit Credit
(1) Motor Car A/c Dr. 800
To Legal charges A/c. 800
(Being amount paid for registration of Motor Car
wrongly debited to legal charges account ,now
rectified.)
(Being Repairs paid wrongly debited to
machinery account, now rectified)
(3) Machinery A/c Dr. 1,000
To Repairs A/c 1,000
(Being Repairs for overhauling of second hand
machinery purchased wrongly debited to repairs
(4) Building A/c Dr. 1,00,000
To Cash A/c 1,00,000
(Being Material and Wages paid for construction
of Building not debited to building account, now
rectified.)
265

(5) Furniture A/c Dr. 6,000

To Purchases A/c 400
(Being Furniture purchased wrongly debited to
purchases account, now rectified.)
(6) Sales A/c Dr. 1,000
(Being sale of Machinery wrongly recorded in
Sales Book, now rectified)
(7) Sales Return A/c Dr. 2,000
(Being total of Sales Returns Book not posted to
ledger now rectified)

To Balance b/d 7,600 By Furniture A/c 5,600
(Balancing figure) By Sales return A/c 2,000
7,600 7600
Hence original difference in Trial Balance was `7,600 excess credited.

Q.1 Answer in One Sentence:
1) What is meant by rectification of errors?
2) What is meant by error of principle?
3) What is meant by error of partial omission?
4) What is meant by error of complete omission?
5) What are compensating errors?
Q.2 Give one word/term or phrase for each of the following statements.
1) Errors which affect the agreement of Trial Balance.
2) Taking the total more while closing books of accounts.
3) Error which arises when a transaction is partially or completely omitted to be recorded in
the books of accounts.
4) Transactions recorded due to violating of the accounting principles.
266

5) Accounts to which difference in Trial Balance is transferred.

6) Error in which the effect of one mistake is nullified by another mistake.
7) Error which are not disclosed by the Trial Balance.
8) Errors of incorrect entries or wrong posting.
Q.3 Select the most appropriate alternative from those given below and rewrite the sen-
tence.
1) Rectification entries are passed in -----------------.
a) Journal Proper b) Ledger c) Balance sheet d) Cash Book
2) The type of error for which journal entry is always required for rectification ---------------.
a) over casting b) one sided error c) under casting d) two sided error
3) Errors occurred due to wrong posting are called as errors of -------------.
a) principle b) commission c) compensating d) omission
4) If transaction is totally omitted from the Books, it is called ------------------
a) Error of recording b) Error of omission
c) Error of principle d) Error of commission
5) Suspense Account is opened when ____ does not tally
a) Balance sheet b) Trading account c) Profit and Loss d) Trial Balance
1) Trial Balance is prepared from the balance of ledger accounts.
2) A Trial Balance can agree in spite of certain errors.
3) Rectification entries are passed in Cash Book.
4) There is no need to open a Suspense Account if the Trial Balance agrees.
5) All the errors can be rectified only through Suspense Account.

1) The unintentional omission or commission of amounts and accounts while recording the
transactions are known as an error.
2) The errors committed due to wrong recording, wrong posting, wrong totalling, wrong
balancing, wrong calculations are known as Arithmetical errors.
3) When one or more debit errors happen to equal one or more credit errors it is said to be a
Compensating error.
267

4) The agreement of Trial balance is not affected when a transaction is not recorded at all in
the original Books.
5) When a transaction is not recorded according to the principles of accounting it is known
as Compensating errors.

1) …………… is assured only when there are no errors in the books of accounts.
2) Transactions recorded in contravention of the accounting principles are known as …………
3) ………… entry depends generally on when the error is detected.
4) Temporary account opened to rectify the entry is known as………………
5) Errors are caused due to …………… recording of transactions.
PRACTICAL PROBLEMS
1. Rectify the following errors
1) Salary paid to Pravin was wrongly debited to his personal account `6,500/-
2) Cash Purchases ` 12,000/- from Siddhant Traders was debited to Siddhant Trader Account.
3) Paid Rent `5,000 to landlord Shantilal was debited to his personal account.
4) Received interest `700 from Bank was wrongly credited to Bank Account.
5) Advertisement expenses ` 5,000/- paid to Time of India was debited to Time of India.
2. Rectify the Following errors
1) Machinery purchased for ` 9,000/- has been debited to Purchase Account.
2) ` 15,000/- paid to Indus Company for Machinery purchased stand debited to Indus
Company Account.
3) Printer Purchased for `10,000/- was wrongly passed through Purchase Book.
4) ` 800/- paid to Mohan as Legal Charges was debited to his personal account.
5) Cash paid to Ramesh `500/- was debited to Suresh.

1) A credit sales of goods to Sanjay ` 3,000/- has been wrongly passed through the ‘Purchase
Book’.
2) A credit purchase of goods from Sheetal amounting to ` 2,000/- has been wrongly passed
through the ‘Sales Book’.
3) A return of goods worth ` 500/- to Umesh was passed through the ‘Sales Return Book’.
4) A return of goods worth ` 900/- by Ganesh were entered in ‘Purchase Return Book’.
5) Credit Purchases from Neha ` 10,000/- were recorded as ` 11,000/-
268


1) Paid Rent ` 2,000/- to Nikhil has been debited to his personal account.
2) Total of the Sales Return Book is wrongly taken more by ` 200/-
3) Goods sold to Dhanraj ` 6,500/- on credit was not posted to his personal account.
4) Old Computer purchased was debited to Repairs account ` 8,000/-
5) Repairs to Furniture of ` 500/- has been debited to Furniture account.

1) Wages paid for construction of Building ` 10,000/- was wrongly debited to Wages Account.
2) Cash received from Patel ` 5,000/- though recorded in Cash Book was not posted to his
personal account in the Ledger.
3) Sold goods worth ` 9,000/- to Rohini has been wrongly debited to Mohini’s Account.
5) Material purchased for construction of Building was debited to Purchase Account `5,000/-
6. There was a difference of ` 1,230/- in a Trial Balance. It was placed on the Debit
side of Suspense A/c. Later on the following errors were discovered. Pass rectifying
entries and prepare Suspense A/c.
1) Sales Book was overcast by ` 1,000/-
2) Goods sold to Aarti for ` 4,400/- has been posted to her account as `4,000/-
3) Purchases Book was overcast by `100/-
4) An amount of ` 500/- received from Ranjeet, has not been posted to his account.
5) Goods sold to Sameer for ` 750/- were recorded in Purchase Book.
6) An amount of ` 500/- has been posted to the credit side of Commission Account instead
of ` 570/-
7. A book-keeper finds that the debit side of the Trial Balance is short of ` 308/- and so
for the time being, he balance of the side by putting the difference to Suspense
Account. The following errors were disclosed.
1) The debit side of purchases account was undercast by `100/-
2) ` 100/- being the monthly total of discount allowed to customer were credited to discount
account in the ledger.
3) An entry for goods sold of ` 102/- to Mihir was posted to his account as ` 120/-
4) ` 26/- appearing in the Cash Book as paid for the purchase of Stationery for office use
have not been posted to Ledger.
5) ` 275/- paid by Mihir were credited to Mithali’s Account.
You are required to make the necessary Journal Entries and the Suspense Account.
8. Trial Balance of Anurag did not agree. It showed an excess credit of ` 6,000/-. He
put the difference to Suspense Account. He discovered the following errors.
1) Cash received from Ramakant ` 8,000/- posted to his account as `6,000/-
2) Credit purchases from Naman ` 7,000/- were recorded in Sales Book. However, Naman’s
Account was correctly credited.
3) Return Inwards Book overcast by ` 1,000/-
269

4) Total of Sales Book ` 10,000/- was not posted to Sales Account.

5) Machinery purchased for ` 10,000/- was posted to Purchases Account as ` 5,000/-.
Rectify the errors and prepare Suspense Account.
9. There was an error in the Trial Balance of Mr. Yashwant on 31st March 2019, and
the difference in Books was carried to a Suspense Account. On going through the
Books you found that.
1) ` 1,000/- being purchases return were posted to the debit of Purchase Account.
2) ` 4,000/- paid to Badrinath was debited to Kedarnath’s Account.
3) ` 5,400/- received from Kishor was posted to the debit of his account.
4) Discount received ` 2,000/- was posted to the debit of Discount Allowed Account.
5) ` 2,740/- paid to Repairs to Motor Cycle was debited to Motor Cycle Account ` 1,740/-
Give Journal Entries to rectify the above errors and ascertain the amount transferred to Suspense
Account on 31st March, 2019 by showing the Suspense Account, assuming that the Suspense
Account is balanced after the above corrections.
10. Rectify the following errors.

1) Goods purchased from Kishor ` 700/- was passed through Sales Book.
2) An item of ` 120/- in respect of purchase returns, has been wrongly entered in the Purchase
Book.
3) Amount payable to Subhash for repairs done to Printer ` 180/- and new Printer supplied
for ` 1,920/- , were entered in the Purchase Book as ` 2,000/-
4) Returned goods to Nitin ` 1,500/- was passed through Returns Inward Book.
5) An item of `450/- relating to Prepaid Rent account was omitted to be brought forward.
j j j
270

9 Final Accounts of a Proprietary concern
Contents
9.1 Meaning, Objectives and Importance of Final Accounts.

9.2 Preparation of Trading Account.
9.3 Preparation of Profit and Loss Account
9.4 Preparation of Balance Sheet
9.5 Effects of following adjustments.
u Closing stock
u Outstanding Expenses
u Prepaid Expenses
u Depreciation on assets
u Bad debts and R.D.D.
u Discount on Debtors and Creditors
u Income received in advance
u Accrued Income
u Goods distributed as free sample
u Goods withdrawn by proprietor for Personal use.
u Interest on capital
u Interest on Drawings
o Students are able to understand Meaning, Objective and Importance of Final Accounts.
o Students are able to Prepare Trading A/c, Profit and Loss A/c and Balance sheet with
competency.
o Students are able to understand effects of adjustments.
Introduction :
Accounting is considered as a scientific approach in maintaining record of business transactions.
It provides a systematic accounting record to all on the financial status of the enterprise. No sooner
a business transaction takes place, the accounting process starts. The process is completed by the
drafting the final accounts.
271

9.1 A) Meaning of Final Accounts :

The primary aim of accounting is assessment of business performance for the benefit of all
stakeholders (such as owners, employees, suppliers, customers, financiers etc.) which will also help
them to form their opinions on the financial position of their business concerns. For this purpose,
various accounting reports are prepared in the form of Final Accounts at the end of every financial
year. In brief, Final Accounts are financial statements that valiadate and explain working results and
financial status for a specific period of time on a particular date. It is a set of Trading Account, Profit
and Loss Account and Balance Sheet. Balancing figure of Trading Account is Gross Profit or Gross
Loss. In case of Profit and Loss Account the balancing figure is Net Profit or Net Loss. Whereas
Balance Sheet shows financial position of assets and liabilities at a given period of time.
n The basic objectives of Final Accounts is to determine Gross Profit /Gross Loss and Net Profit
or Net Loss of the business during the financial year.
n Final Accounts shows the true and correct financial position of business.
n It informs the operating results and exact financial position of the business to the stake holders
to take financial decisions.
n It enables to control financial activities of business effectively.
C) Importance of Final Accounts :
1) Final Accounts are the basis on which management or businessmen decides business policies
and take financial decisions.
2) Final Accounts gives a true picture of the financial status of business for the financial year.
3) Final Accounts are useful for accurate accounting records.
4) Transparency in business dealings are possible due to financial statemetns.
5) Final Accounts help to get a clear break-up of amounts payable to government as various taxes,
e.g. Income tax, GST etc.
6) It is a mandatory requirement to maintain records of financial state of any business establishment.
How to Prepare Final accounts ? -
Every time a business transaction takes place, the details of it is made in Primary books. These
entries are then posted to the ledger. At the end of a financial year the ledger accounts are balanced
and closing balance of each ledger account is determined. There many be a debit or credit balance.
With the help of all these balances, a Trial Balance is prepared. This in turn helps in preparing
Trading Account, Profit and Loss Account and Balance Sheet, which is known as Final Accounts.
This accounting process can be represented as follows :
272

Business Transactions
Journal Entries
Ledger Posting
Balancing the ledger
Trial balance
Final Accounts at the

end of every year
Final accounts include
1) Manufacturing Accounts
2) Trading Account
3) Profit and Loss Accounts
4) Profit & Loss Appropriation Account
5) Balance sheet
Note : Manufacturing Account and profit and Loss Appropriation account are not included
in the syllabus of XI commerce. So for XI commerce Final Accounts consist only of Trading
Account, Profit and Loss Account and Balance Sheet.
Trading Account
Trading Account is an account which gives the overall preview of all trading activities. The
expenses and losses relating to trading activities are debited to this account and all outward movements
of goods and stock of goods at the end of the year are recorded to the credit side of this account.
Debit side of Trading Account includes activities such as opening stock, purchases and all direct
expenses - e.g. Wages, Freight, Carriage Inward, Coal, Gas, Fuel, Water, Manufacturing or Direct
expenses. Similarly credit side of trading includes Closing Stock, Sales, less returns (sales returns)
any kind of goods that is used for promotions as Free Samples, goods withdrawn by proprietor for
personal reasons etc. Therefore it is said Trading Account is prepared to ascertain gross profit or loss
for a given period of time. When there is credit balance. It is referred to as Gross Profit and when
there is debit balance it refered to a Gross Loss which is transferred to profit and loss account. Trading
Account is a Nominal Account.
273

Important terms of Trading Account :

1) Stock : Goods that are unsold are called Stock.
Stocks are of two types :
(i) Opening stock : It refers to unsold goods at the beginning of the year.
(ii) Closing Stock : The unsold goods on the last day of accounting period is referred to as
Closing Stock. This is always valued at cost or market price, whichever is less. Closing
Stock is credited to the Trading Account. It is also recorded on the asset side of Balance
Sheet.
2) Purchases : This includes the purchases of goods and not purchases of assets. Purchase of goods
may be on the basis of cash or credit. Purchase Returns are deducted from total purchases and
thereafter net purchases are recorded on the debit side of Trading Account.
3) Sales : Sales includes the sales of goods and not sale of Assets. Sale of goods may be on the
basis of cash or credit. Sales returns are deducted from total sales and thereafter net sales are
recorded on the credit side of Trading Account.
4) Direct Expenses : Direct expenses are those expenses which are incurred for purchase of goods,
production of goods and purchase expenses. All nominal accounts e.g. Wages, Manufacturing
expenses, Factory lighting, Coal, Gas, Fuel, Water. Dock dues, Carriage inward etc.
Specimen of Trading Account
Trading Account for the year ended ………
Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(`) (`) (`) (`)
To Opening Stock xxxx By Sales xxxx
To Purchases xxxx Less : Sales Return xxxx xxxx
Less : Purchase Return xxxx xxxx (Return Inward)
(Return outwards) By Goods distributed as xxxx
To Direct Expenses xxxx free sample
To Freight & Carriage By Goods taken by xxxx
Inward xxxx proprietor for personal
To Custom Duty xxxx use
To Wages xxxx By Closing Stock xxxx
To Coal, Gas, Fuel etc. xxxx By Gross Loss c/d xxxx
To Royalties xxxx
To Factory expenses xxxx
To Gross Profit c/d xxxx
xxxx xxxx
274

Illustration 1
From the following information prepare Trading Account of Sangita Traders for 31st March, 2019.
Wages 16,000 Stock (1.04.2018) 22,000
Royalties 11,000 Sales 3,80,000
Sales Returns 24,000 Purchases 1,90,000
Goods withdrawn by Sangita Purchases Returns 6,400
for Personal use 16,000 Manufacturing Expenses 8,400
Factory Rent 4,200 Motive Power 16,000
Stock (31.03.2019) 36,000 Freight 7,400
Solution : Trading Account of Sangita Traders for the year ended 31st March 2019
Dr. Cr.
(`) (`) (`) (`)
To Opening stock 22,000 By Sales 3,80,000
To Purchases 1,90,000 Less : Sales Return 24,000 3,56,000
Less : Purchase Return 6,400 1,83,600
To Wages 16,000 By Drawings 16000
To Royalties 11,000 By Closing stock 36,000
To Factory Rent 4,200
To Manufacturing 8,400
Expenses
To Motive Power 16,000
To Freight 7,400
To Gross Profit c/d 1,39,400
(Balancing figure)
4,08,000 4,08,000
Journal Entries for preparing Trading Account

All accounts of Direct expenses are closed and their balances are transferred to Trading A/c. For this
"closing entries" are passed as under :
A) Transferring of Opening Stock, Purchases, Direct expenses
1) Transfer of Purchase Returns
Purchase Returns A/c...................Dr. xxxx
To Purchases A/c xxxx
(Being Purchase returns transferred to Purchases A/c)
275

2) Sales A/c.......................................Dr. xxxx

To Sales Return A/c xxxx
(Being Sales returns transferred to Sales A/c)
3) Trading A/c...................................Dr. xxxx
To Opening stock A/c xxxx
To Direct expenses A/c xxxx
To Purchases A/c xxxx
(Being Opening stock and Direct expenses and purchases transferred to Trading A/c)
B) Transferring of Sales
Sales A/c.......................................Dr. xxxx

To Trading A/c xxxx
(Being sales transferred to Trading A/c)
C) Entry of Closing stock
Closing stock A/c.........................Dr. xxxx

To Trading A/c xxxx
(Being closing stock given in adjustment transferred to Trading A/c)
D) For Gross Profit/Gross Loss
1) Trading A/c...................................Dr. xxxx

To Profit & Loss A/c xxxx
(Being Gross Profit transferred to Profit & Loss A/c)
2) Profit & Loss A/c.........................Dr. xxxx

To Trading A/c xxxx
(Being Gross Loss transferred to Profit & Loss A/c)
9.3 Profit and Loss Account

This account is main Account of final Accounts which gives the final working results of business.
It is prepared on the basis of indirect expenses and indirect incomes of the business concern. Profit
and Loss Account is maintained to ascertain Net Profit or Net Loss. The debit side of Profit and Loss
Account includes all indirect expenses such as office or administrative expenses, financial expenses,
selling or distribution expenses etc. The credit side of profit and Loss Account includes indirect
incomes like commission received, rent received, discount earned etc. When the credit side of this
account is greater than debit side it is called Net Profit and when debit side of this account is greater
than credit side it is called as Net Loss. Net Profit/Loss is transferred to Capital Account. Profit and
Loss Account is a Nominal Account.
276

Specimen of Profit and Loss Account :

Profit & Loss Account for the year ended ………
Dr. Cr.
(`) (`) (`) (`)
To Gross Loss b/d (if any) xxxx By Gross Profit b/d (if any) xxxx
To Salaries & Wages xxxx By Rent received xxxx
To Rent Rates & Taxes xxxx By Commission received xxxx
To Insurance xxxx By Interest on Investment xxxx
To Bank Charges xxxx By Interest on Deposits xxxx
To Discount (allowed) xxxx By Misc. Income xxxx
To Audit fees xxxx By Discount received xxxx
To Depreciation on By Net Loss xxxx
xxxx
Land & Building xxxx (transferred to Capital A/c)
Plant & Machinery xxxx
Furniture etc. xxxx xxxx
To Travelling expenses xxxx
To Advertisement xxxx
To Printing & Stationery xxxx
To Interest (paid) xxxx
To Loss by fire xxxx
To Loss by theft xxxx
To Packing expenses xxxx
To Commission xxxx
To Bad Debts (old) xxxx

Add : New bad debts xxxx
Add : New RDD xxxx
xxxx
Less : Old RDD xxxx xxxx
To Net Profit xxxx
(Transferred to Capital A/c)
xxxx xxxx
277

Illustration 1
From the following Trial balance of Raju & Sons, you are required to prepare Trading Account and
Profit & Loss A/c for the year ended 31st March, 2018.
Debit balance Amt (`) Credit balance Amt (`)
Wages 9,200 Purchases Returns 6,520
Purchases 66,800 Sales 1,52,900
Carriage Inward 3,350 Commission received 18,000
Sales returns 4,800 Rent Received 9,000
Opening Stock 31300 Discount Received 4,600
Salary 17,400
Royalty 4,800
Rent, Rates & Taxes 12,680
Bad debts 500
Carriage Outward 3,720
Printing & Stationery 2,400
Advertisement 18,000
Discount Allowed 1,520
Insurance 5,800
Factory Rent 7,000
Commission paid 1,800
1,91,020 1,91,020
Adjustment : 1) Closing stock Rs. 56,850
Solution : In the Books of Raju & Sons
Trading Account for the year ended 31st March, 2018
Dr. Cr.
(`) (`) (`) (`)
To Opening stock 31,300 By Sales 1,52,900
To Purchases 66,800 Less : Sales Return 4,800 1,48,100
Less : Purchase Return 6,520 60,280 (Return Inward)
(Return outwards) By Closing stock 56,850
To Wages 9,200
To Carriage Inward 3,350
To Royalty 4,800
To Factory Rent 7,000
To Gross Profit c/d 89,020
(Balancing figure)
2,04,950 2,04,950
278

Profit & Loss Account for the year ended 31st March, 2018
Dr. Cr.
(`) (`) (`) (`)
To Salary 17,400 By Gross Profit b/d 89,020
To Advertisement 18,000 By Commission received 18,000
To Discount 1,520 By Rent Received 9,000
To Rent, Rates and Taxes 12,680 By Discount Received 4,600
To Insurance 5,800
To Bad Debts 500
To Carriage Outward 3,720
To Commission 1,800
To Printing & Stationery 2,400
To Net Profit 56,800
(Transfer to Capital A/c)
1,20,620 1,20,620
Journal Entries relating to Profit & Loss A/c

A) For transfer of Expenses and Losses
Profit & Loss A/c..........................Dr.

To All Indirect expenses A/c
(e.g. To Salaries A/c
To Rent A/c
To Advertisement A/c
To Insurance A/c
etc……………)
(Being Indirect expenses transferred to Profit & Loss A/c)
B) For transfer of Incomes and Gains
All Indirect incomes A/c.............Dr.

(e,g, Discount, Dividend, Interest etc.)
To Profit & Loss A/c
(Being Indirect incomes transferred to Profit & Loss A/c)
C) For Transferring Net Profit/Net Loss to Capital A/c
a) For transferring Net Profit
1) Profit & Loss A/c..........................Dr.
To Capital A/c
279

a) For transferring Net Loss

Capital A/c....................................Dr. xxxx
To Profit & Loss A/c xxxx
(Being Net Loss transferred to Capital A/c)
9.4 Balance Sheet
Balance Sheet is a statement showing financial position of a business concern.
Balance Sheet has no debit or credit side as it is a statement and not an account. Left hand side of
Balance sheet is "Liability side"and Right hand side "Asset side". Both sides of Balance Sheet should
be of equal amount. A Balance sheet shows assets & liabilities of the business.
All Debit balances of Personal and Real Accounts are shown on the Asset Side and All Credit
Balances of Personal Accounts are shown on Liability side. No Nominal Account will appear in the
Balance Sheet
In the books of M/s
Balance Sheet as on 31st March.....
Liabilities Amt Amt Assets Amt Amt
(`) (`) (`) (`)
Capital (opening) xx Cash in hand xx
Add : Net Profit xx Cash at Bank xx
Add : Interest on capital xx Bills Receivable xx
xx Sundry Debtors xx
Less : Drawings xx Goodwill xx
Less : Interest on Drawings xx Furniture xx
Less : Net Loss xx xx Plant & Machinery xx
Bank Loan xx Land & Building xx
Bank Overdraft xx Prepaid expenses xx
Sundry Creditors xx Outstanding Income xx
Bills Payable xx Closing Stock xx
Outstanding Expenses xx
Pre-received Income xx
Total xxx Total xxx
Journal Entries of Some important adjustments :
1) Closing Stock :
Closing Stock A/c.................Dr.
To Trading A/c
(Being Closing stock transferred to Trading A/c)
2) Depreciation on assets : Depreciation means gradual and continuous decrease or reduction in
the value of assets. This amount of depreciation is charged on fixed assets. It is treated as loss
so it to debited to Profit & Loss account and to be deducted from respective asset. Entry will be
as follows :
280

i) Depreciation A/c...................Dr.
To Respecitve Asset A/c
(Being Depreciation charged on assets)
ii) Profit & Loss A/c.................Dr.

To Depreciation A/c
(Being Depreciation transferred to Profit & Loss A/c)
3) Outstanding expenses : The expenses which have been incurred but not paid during the year.
are unpaid expenses. Following journal entry is to be passed.
Expenses A/c...............................Dr.
To Outstanding expenses A/c
(Being amount of outstanding expenses A/c transferred to expenses A/c)
For Example : Rent, salary etc.
Outstanding expenses are included in respective expenses A/c on Trading account/Profit & Loss
account and to be shown on Liability side of Balance sheet)
4) Prepaid expenses (Unexpired expenses) : The expenses paid in advance of the current year
during is known as prepaid expenses and entry is as follows
Prepaid expenses A/c...................Dr.

To Expenses A/c
(Being amount of Prepaid expenses is debited to expenses A/c)
5) Accrued Income (Outstanding Income): The income which have been earned but not received
during the year are outstanding income.
Outstanding Income A/c...............Dr.

To Income A/c
(Being Income Outstanding)
6)Income received in advance
(i) The income related to next accounting year but received in current year is known as
income received in advance.
Income A/c........................Dr.
To Income received in advance A/c
(Being income received in advance)
7) Bad Debts : The Debts which are irrecoverable is called Bad-debts. The amount of Bad debts is
loss to business. So Bad debts is debited to Profit & Loss A/c and is to be deducted from Sundry
Debtors, for which following Journal entries is to be passed -
i) Bad debts A/c.........................Dr.

To Sundry Debtors A/c
(Being Bad debts written off)
281

ii) Profit & Loss A/c.................Dr.

To Bad debts A/c
(Being Bad debts transferred to Profit & Loss A/c)
8) Reserve or Provision for Doubtful Debts : There are some debtors, of which recovery is
doubtful. It may not be realised. For this purpose such provision is created which is known as
Reserve for doubtful debts. This provision is created on the experiences of previous year. It is
an anticipated loss therefore provision for doubtful debts is necessary.
i) Profit & Loss A/c.................Dr.

To Reserve for doubtful debts (R.D.D.) A/c
(Being Provision of doubtful debts created)
9) Provision/Reserve for Discount on Debtors : It is an incentive to debtors for early payment.

Such discount is also treated as loss. This discount is calculated on the amount of debtors (After
deducting New Bad debts & New R.D.D.)
Profit & Loss A/c.........................Dr.
To Provision for discount on Debtors A/c
(Being Provision for discount on Debtors created)
10) Provision/Reserve for Discount on Creditors : It is an incentive to make payment of creditors

at the earliest. So discount received from creditors is treated as Profit or gain. So it is to be
credited to Profit & Loss A/c and to be deducted from creditors from Balance Sheet. It is the
only exception to the convention of conservatism.
Provision for discount on Creditors A/c..................Dr.
To Profit & Loss A/c
(Being Provision for discount on Creditors created)
Note : 1) When only Bad debts are given in Trial Balance it is debited to Profit & Loss A/c as it
is loss.
2) When R.D.D. is given in Trial Balance, it is known as old R.D.D. [Existing R.D.D.]
3) When R.D.D. is given in adjustment, it is called New R.D.D.
11) Goods withdrawn by proprietor for Personal use : It refers to total amount of goods withdrawn
by proprietor for personal use.
i) Drawings A/c........................Dr.
To Trading/Purchases A/c
ii) Proprietor’s Capital A/c........Dr.

To Drawings A/c
(Being balance of Drawings A/c transferred to Capital A/c)
282

12) Goods distributed as Free sample : Distribution of goods as a free sample is an advertisement.
So amount of goods distributed as a free sample is to be debited to Profit and Loss account
under the head of Advertisement (if any).
i) Goods distributed as free sample A/c...........Dr.
To Trading/Purchases A/c
(Being amount of goods distributed as free sample transfered to trading A/c)
ii) Advertisement A/c...............Dr.
To Goods distributed as a free sample A/c
(Being amount of goods distributed as a free sample transferred to Advertisement A/c)
13) Inerest on Capital :
i) Interest on Capital A/c................................Dr.
To Capital A/c
(Being interest on capital provided)
ii) Profit and Loss A/c...............Dr.
To Interest on Capital A/c
(Being interest on capital transferred to capital A/c)
14) Interest on Drawings :

i) Capital A/c..................................................Dr.
To Interest on Drawings A/c
(Being interest on Drawings charged)
ii) Interest on Drawing A/c........Dr.
To Profit and Loss A/c
(Being interest on Drawings transferred to Capital A/c)
Name of Adjustment Journal Entries Two Effects
1) Closing Stock Closing Stock A/c............ Dr 1) Credit side of Trading A/c
To Trading A/c 2) Shown on Assets side of Balance
Sheet
2) Depreciation 1) Depreciation A/c......... Dr 1) Debit side of Profit & Loss A/c
To Asset A/c
2) Profit & Loss A/c........ Dr 2) Deducted from particular Assets on
To Depreciation A/c assets side of Balance sheet
3) Outstanding or Expenses A/c.................... Dr 1) Add to particular expenses on
Unpaid Expenses To Outstanding expenses A/c Trading or Profit and Loss A/c
2) Shown on Liability side of Balance
Sheet.
4) Prepaid Expenses Prepaid Expenses A/c....... Dr 1) Less from that particular expenses
To Expenses A/c on Trading or Profit & Loss A/c
2) Shown on Assets side of Balance
sheet
283

5) Accrued Income/ Accrued Income A/c……Dr 1) Add to particular income on credit

Outstanding Income To Income A/c side of Profit & Loss A/c
2) Shown on Assets side of Balance
sheet.
6) Pre-received Income A/c....................... Dr 1) Less from particular income on
Income To Pre-received Income /c credit side of Profit & Loss A/c
2) Shown on Liabilities side of
Balance sheet
7) Bad debts 1) Bad debts A/c.............. Dr 1) Debit side of Profit & Loss A/c
To Debtors A/c (New R.D.D + Bad debts)
2) Profit & Loss A/c........ Dr 2) Deducted from Sundry debtors on
To Bad debts A/c assets side.
8) R.D.D (Reserve for Profit & Loss A/c............. Dr 1) Debit side of Profit & Loss A/c
doubtful debts) To R.D.D. A/c 2) Deducted from Sundry debtors on
assets side.
9) Provision for Profit & Loss A/c............. Dr 1) Debit side of Profit & Loss A/c
Discount on Debtors To Provision for discount 2) Deducted from Sundry debtors on
on debtors A/c Assets Side of Balance Sheet.
10) Provision for Provision for discount on 1) Credit side of Profit & Loss A/c
Discount on creditors A/c..................... Dr 2) Deducted from Sundry creditors on
Creditors To Profit & Loss A/c liabilities side of Balance sheet
11) Goods taken by 1) Drawings A/c.............. Dr 1) Credit side of Trading or deducted

proprietor for To Trading A/c or from purchases A/c
personal use Purchases A/c
2) Proprietor's Capital A/c..Dr. 2) Deducted from capital on ……
To Drawing A/c Liability side
l2) Goods distributed as 1) Goods distributed as free 1) Credit side of Trading or deducted
free sample sample A/c.................. Dr from purchases A/c
To Trading A/c or
Purchases A/c 2) Debited to Profit & Loss A/c
2) Advertisement A/c...Dr.
To Goods distributed as
free sample A/c
(To Purchases A/c)
13) Interest on Capital Profit & Loss A/c........... Dr 1) Debit side of Profit & Loss A/c
To Capital A/c 2) Add to Capital, Liability side of
Balance sheet.
14) Interest on Capital A/c..................... Dr 1) Credit side of Profit & Loss A/c
Drawings To Profit & Loss A/c 2) Add to Drawings/Less from Capital.
284

Illustration 1
From the following Trial Balance of Bharadwaj & Sons prepare Trading and Profit & Loss Account
for the year ended and Balance Sheet as on 31st March, 2019.
Trial Balance As on 31.3.2019
Debit balance Amt (`) Credit balance Amt (`)

Royalties 4,000 Sundry Creditors 56,000
Drawings 10,000 Sales 81,000
Wages 6,000 Purchase Returns 3,000
Purchases 71,000 Capital 2,50,000
Cash 10,000 Bills payable 20,000
Sales Returns 5,000 Bank Overdraft 40,000
Bank 40,000
Insurance 1,000
Furniture 34,000
Buildings 1,20,000
Sundry Debtors 1,00,000
Bad debts 1,000
Sundry Expenses 3,000
Travelling Expenses 2,000
Opening Stock 24,000
Carriage Outwards 1,600
Rent 1,000
Carriage Inward 400
Salaries 16,000
4,50,000 4,50,000
Additional Information :
Closing Stock - ` 54,000
285

Solution : In the Books of Bhardwaj & Sons

Trading Account and Profit and loss Account for the year ended 31st March 2019
Dr. Cr.
(`) (`) (`) (`)
To Opening Stock 24,000 By Sales 81,000
To Purchases 71,000 Less : Sales Return 5,000 76,000
Less : Purchase Return 3,000 68,000
To Royalties 4,000
To Wages 6,000 By Closing Stock 54,000
To Carriage Inward 400
1,30,000 1,30,000
To Salaries 16,000 By Gross Profit b/d 27,600
To Rent 1,000
To Sundry Expenses 3,000
To Insurance 1,000
To Bad debts 1,000
To Travelling Expenses 2,000
To Carriage Outwards 1,600
To Net Profit 2,000
27,600 27,600
Balance Sheet as on 31st March, 2019

Liabilities Assets
(`) (`) (`) (`)
Capital 2,50,000 Buildings 1,20,000
Add : Net Profit 2,000 Furniture 34,000
2,52,000 Sundry Debtors 1,00,000
Less : Drawings 10,000 2,42,000
Sundry Creditors 56,000 Bank 40,000
Bills Payable 20,000 Cash 10,000
Bank Overdraft 40,000 Closing stock 54,000
3,58,000 3,58,000
286

Illustration 2
From the following Trial Balance of Mangesh Traders you are required to prepare Final Accounts.
Trial Balance as on 31st March, 2018
Particulars Debit (`) Credit (`)

Opening stock 32,750
Purchases 55,000
Sales 89,500
Purchases Returns 2,630
Sales Returns 4,480
Royalties 4,000
Wages & Salaries 8,000
Office Salaries 11,000
Bills Receivable 19,250
Bills Payable 12,500
Office Equipments 20,000
Motor Van 30,400
Plant and Machinery 25,000
Bad Debts 2,500
Advertisement 6,000
Cash in Hand 5,000
Sundry Debtors 31,250
Reserve for Bad debts 1,000
Sundry Creditors 24,000
Capital 1,25,000
2,54,630 2,54,630
Adjustments :
1) Closing Stock on 31st March, 2018 was valued at cost price ` 19,000, Market price ` 20,000
2) Office Salaries outstanding ` 1,000
3) Prepaid Wages `1,000
4) Provide depreciation @ 5%, 10% and 15% on Office Equipments, Motor Van and Plant and
Machinery respectively.
287

Solution : In the Books of Mangesh Traders

Dr. Cr.
(`) (`) (`) (`)
To Wages and Salaries 8,000 By Closing Stock 19,000

Less : Prepaid Wages 1,000 7,000
To Royalties 4,000
1,04,020 1,04,020
To Office Salaries 11,000 By Gross Profit b/d 7,900
Add : Outstanding Salary 1,000 12,000 By Reserve for Bad 1,000
To Bad debts 2,500 Debts.
To Depreciation on By Net Loss 19,390
- Office Equipments 1,000 (Transferred to Capital
- Motor Van 3,040 A/c)
- Plant & Machinery 3,750 7,790
To Advertisement 6,000
28,290 28,290
288


Liabilities Assets
(`) (`) (`) (`)
Capital 1,25,000 Office Equipments 20,000
Less : Net Loss 19,390 1,05610 Less : Depreciation 5% 1,000 19,000
Outstanding Salaries 1,000 Motor Van 30,400

Bills Payable 12,500 Less : 10% Depreciation 3,040 27,360
Sundry Creditors 24,000 Bills Receivable 19,250
Plant & Machinery 25,000
Less : 10% Depreciation 3,750 21,250
Debtors 31,250
Closing Stock 19,000
Prepaid Wages 1,000
Cash in hand 5,000
1,43,110 1,43,110
Depreciation :
1) 5% on ` 20,000 (Office Equipments) 20,000 x 5/100,
So Depreciation on Office Equipments is ` 1,000
2) 10% on ` 30,400 (Motor Van 30,400 x 10/100,

So Depreciation on Motor van is ` 3,040
3) 15% on ` 25,000 (Plant and Machinery) 25,000 x 15/100,
So Depreciation on Plant and Machinery is ` 3,750
289

Illustration 03
From the following Tiall Balance of Reena Enterprises you are require to prepare Trading Account,
Profit & Loss Account for the year ending on 31st March, 2018 and Balance Sheet as on that date
Capital 3,00,000
Drawings 20,000
Furniture 60,000
Prepaid Insurance 1,770
Debtors & Creditors 70,000 1,29.250
Purchases & Sales 57,000 1,20,000
Investment 68,000
Factory Insurance 26,000
Audit Fees 21,000
Carriage Inward 1,800
Land & Building 1,40,000
Rent 7,120
Reserve for Bad debts 6,000
Returns 2,000 9,000
Discount 1,000 7,000
Commission Received 8,000
5,79,250 5,79,250
Adjustments :
1) Write off Bad debts ` 2,000 and Provide 2.5% reserve for bad debts on debtors.
2) Closing stock valued at Cost Price ` 46,000 and Market price ` 40,000
3) Provide Depreciation @ 5% on Building and 10% on Machinery.
4) Rent prepaid ` 3,560
5) Outstanding Carriage Inward is ` 1,200
290

Solution : In the Books of Reena Enterprises

Dr. Trading Account and Profit and loss Account for the year ended 31st March 2018 Cr.
(`) (`) (`) (`)
To Opening Stock 45,200 By Sales 1,20,000
To Factory Insurance 26,000
To Carriage Inward 1,800 By Closing Stock 40,000
Add : Outstanding 1,200 3,000
1,58,000 1,58,000
To Audit fees 21,000 By Gross Profit b/d 35,800
To Rent 7,120 By Discount 7,000
Less : Prepaid Rent 3,560 3,560 By R.D.D. (Old) 6,000
To Depreciation Less : R.D.D. (New) 1,700
- Land & Building 7,000 4,300
- Plant & Machinery 5,000 12,000 Less : Bad Debts (New) 2,000 2,300
To Carriage Outward 8,360 By Commission 8,000
To Discount 1,000 Received
To Net Profit 7,180
(Transfered to Capital A/c)
53,100 53,100
Liabilities Assets
(`) (`) (`) (`)
Capital 3,00,000 Sundry Debtors 70,000
Add: Net Profit 7,180 Less : Bad Debts 2,000
3,07,180 68,000
Less : Drawings 20,000 2,87,180 Less : 2.5% R.D.D. 1,700 66,300
Creditors 1,29,250 Land & Building 1,40,000
Outstanding Carriage 1,200 Less : 5% Depreciation 7,000 1,33,000
Inward Plant & Machinery 50,000
Less : 10% Depreciation 5,000 45,000
Prepaid Rent 3,560
Furniture 60,000
Investment 68,000
4,17,630 4,17,630
291

llustration 4
From the following Trial Balance of Khandwala Enterprises prepare Final Accounts.
Capital 55,000
Drawings 3,000
Purchases 31,100
Direct Expenses 2,500
Sales 50,000
Returns 1,980
Rent & taxes 6,000
Bad Debts 400
Reserve for bad debts 1,500
Discount 2,375
Commission received 255
Debtors and Creditors 20,250 18,500
Furniture 6,000
Machinery 12,000
Goodwill 7,500
Wages & Salaries 7,000
Salaries (for 10 months) 5,000
Advertisement 9,000
Investment in Debentures 8,500
Loans and Advances 13,750
1,39,005 1,39,005
Adjustments :
1) Closing Stock `17,250
2) Rent of ` 4,000 has been prepaid
3) Provide 2% reserve for Bad Debts on Debtors. It was realised that our Debtor worth ` 1,000
proved to be bad and has to be written off.
4) Write off Depreciation @ 7.5% on Machinery and 15% on Furniture.
5) Create discount on Creditors @ 3%
292

Solution : In the Books of Khandwala Enterprises

(`) (`) (`) (`)
To Direct Expenses 2,500
To Wages & Salaries 7,000
To Gross Profit c/d 8,270 By Closing Stock 17,250
65,270 65,270
Add : Outstanding salaries 1,000 6,000 By Discount on 555
To Rent & Taxes 6,000 Creditors
Less : Prepaid Rent 4,000 2,000 By Commission 255
To Depreciation on received
- Machinery 900 By Net Loss 12,380
- Furniture 900 1,800 (Transferred to Capital
To Discount 2,375 A/c)
To Bad Debts (Old) 400
Add : Bad Debts (New) 1,000
Add : R.D.D. (New) 385
1,785
Less : R.D.D. (Old) 1,500 285
21,460 21,460

Liabilities Assets
(`) (`) (`) (`)
Capital 55,000 Machinery 12,000
Less: Net Loss 12,380 Less : Depreciation 7.5% 900 11,100
42,620 Furniture 6,000
Less : Drawings 3,000 39,620 Less : Depreciation 15% 900 5,100
Creditors 18,500 Debtors 20,250
Less : Reserve for 555 17,945 Less : Bad Debts 1,000
Discount on creditors 19,250
(W.N) Less : R.D.D. 2% (W.N.) 385 18,865
13,750 Closing Stock 17,250
Outstanding Salary 1,000 Prepaid Rent 4,000
Loans & Advances 13,750 Goodwill 7,500
Investment in Debentures 8,500
72,315 72,315
293

Working note :
1) In Trial Balance Salaries are given ` 5,000 for 10 months and 2 months are outstanding.
Therefore 2 months outstanding amount will be ` 1,000
Salaries ` 5,000
Add : outstanding ` 1,000 ` 6,000
2) R.D.D. - 2% on 19,250 = ` 385

3) 3% Reserve for discount on creditors - 3% on 18,500 = ` 555
Illustration 5
From the following Trial Balance of Omkar you are required to prepare Trading Account and Profit
and Loss Account for the year ending on 31st March 2018 and Balance Sheet as on that date.
Debit Balances Amt (`) Credit Balances Amt (`)
Debtors 45,000 Capital 1,20,000
Opening Stock 11,550 Sales 60,750
Purchases 53,250 Return Outward 450
Sales Return 1,050 Dividend Received 2,250
Bad debts 600 Creditors 37,500
Rent. Rates & taxes 2,670 Bank Overdraft 24,000
Insurance 2,400 R.D.D. 1,200
Furniture & Fixtures 28,500
Cash at Bank 32,280
Legal Expenses 3,000
Advertisement 1,800
Brokerage 2,100
Drawings 3,000
Wages 2,250
Coal, Gas, Fuel & Water 1,800
Machinery 12,000
2,46,150 2,46,150
294

Adjustments :
1) Closing Stock valued at `. 42,000.
2) Write off ` 1,200 Bad Debts and create a provision for bad & doubtful debts at 2% on debtors.
3) Outstanding expenses - Legal Expenses ` 750 and Wages ` 225
4) Charge depreciation on Office Euipments 2.5% and Machinery 5%.
5) Prepaid - Insurance ` 900
Solution : In the Books of Omkar
Dr. Cr.
(`) (`) (`) (`)
Less : Purchase Return 450 52,800
To Wages 2,250
Add : Outstanding Wages 225 2,475 By Closing Stock 42,000
To Coal, Gas, Fuel & Water 1,800
1,01,700 1,01,700
To Legal Expenses 3,000 By Gross Profit b/d 33,075
Add : Outstanding 750 3,750 By Dividend Received 2,250
To Insurance 2,400
Less : Prepaid 900 1,500
To Depreciation
Machinery 600 1,673
To Rent, Rates and Taxes 2,670
To Bad Debts (New) 1,200
Add : Bad debts (Old) 600
Add : R.D.D. (New) 876
2,676
Less : R.D.D. (Old) 1,200 1,476
To Brokerage 2,100
35,325 35,325
295

. Balance Sheet as on 31st March, 2018

Liabilities Assets
(`) (`) (`) (`)
Capital 1,20,000 Office Equipments 42,900
Add: Net Profit 20,356 Less : Depreciation 2.5% 1,073 41,827
1,40,356 Machinery 12,000
Less : Drawings 3,000 1,37,356 Less : 5% Depreciation 600 11,400
Creditors 37,500 Furniture & Fixtures 28,500
Outstanding Exp. Debtors 45,000
Legal Expenses 750 Less : Bad Debts (New) 1,200
Wages 225 975 43,800
Bank Overdraft 24,000 Less : 2% R.D.D. (New) 876 42,924
Prepaid Insurance 900
Cash at Bank 32,280
1,99,831 1,99,831
Illustration 6
From the following Trial Balance and information given to you, prepare Trading Account, Profit &
Loss Account & Balance Sheet as on 31st March, 2018 in the books of M/s Abhay.
Debit Balances Amt (`) Amt (`)
Capital 2,28,000
Furniture 40,000
Insurance 10,000
Salaries 17,000
Rent. Rates and Taxes 7,000
Machinery 50,000
Wages 8,000
Drawings 14,000
Purchases & Sales 62,000 1,71,000
Stock (1/4/2017) 31,000
Returns 5,000 6,300
Rent received 6,000
Discount Received 1700
296

R.D.D. 5,000
Bad debts 2,000
Advertisements 10,900
Cash at Bank 8,500
6% Bank Loan (taken on 1/10/2017) 50,000
Brokerage 4,000
Loose Tools 36,000
Goodwill 1,00,000
5,38,000 5,38,000
Adjustments :
1) Closing Stock cost price ` 37,000 and Market price ` 40,000
2) Provide for R.D.D. @ 5% on Sundry Debtors.
3) Outstanding expenses - Wages - ` 3,000, Salary - ` 3,600
4) Provide depreciation on Machinery @ 10% and Furniture 5%.
5) Allowed Interest on Capital 5% p.a.
6) Prepaid Insurance ` 2,000
Solution : In the Books of M/s Abhay
Dr. Cr.
(`) (`) (`) (`)
To Opening Stock 31,000 By Sales 1,71,000
To Carriage Inward 1,000
2,03,000 2,03,000
297

To Salaries 17,000 By Gross Profit b/d 1,04,300

Add : Outstanding Salaries 3,600 20,600 By Discount Received 1,700
To Int. on Capital 11,400 By Rent Received 6,000
To Bad debts (Old) 2,000
Add : R.D.D. (New) 4,500
6,500
Less : R.D.D. (old) 5,000 1,500
To Depreciation on
Machinery 5,000
Furniture 2,000 7,000
To Insurance 10,000
Less : Prepaid Insurance 2,000 8,000
To Rent, Rates and Taxes 7,000
To Int. on Bank Loan 1,500
To Brokerage 4,000
1,12,000 1,12,000

Liabilities Assets
(`) (`) (`) (`)
Capital 2,28,000 Machinery 50,000
Add : Int on Capital 11,400 Less : Depreciation 10% 5,000 45,000
2,39,400 Furniture 40,000
Add: Net Profit 34,500 Less : Depreciation 5% 2,000 38,000
2,73,900 Bills Receivable 36,000
Less : Drawings 14,000 2,59,900 Closing Stock 37,000
6% Bank Loan 50,000 Sundry Debtors 90,000
Add :Outstanding Int. 1,500 51,500 Less : R.D.D. 5% 4,500 85,500
Creditors 54,000 Cash at Bank 8,500
Outstanding Exp : Loose Tools 36,000
Salaries 3,600 Goodwill 1,00,000
Wages 3,000 6,600 Prepaid Insurance 2,000
3,88,000 3,88,000
298

Working Note :
1) Interest on Capital 5% p.a. on ` 2,28,000 = ` 11,400
2) Hidden Adjustment in Trial Balance
6% Bank Loan, taken on 1st Oct, 2017 - ` 50,000
Interest should be charged for 6 months only.
6% on ` 50,000 for 6 months = ` 1,500
Illustration 7
From the following Trial Balance and additional information given of M/s Laxmi Enterprises you are
required to prepare Trading Account. Profit & Loss Account for the year ending 31st March, 2019 and
Balance Sheet as on that date.
In the books of M/s Laxmi Enterprises
Machinery 1,00,000 Discount 2,000
Sundry Debtors 1,20,800 Sales 77,500
Furniture 36,000 Purchases Returns 4,800
Stock (1st April, 2018) 20,000 Creditors 52,000
Wages 1,800 10% Bank Loan (taken 76,000
Electricity Charges 4,600 on 1st Oct. 2018)
Insurance 5,000 R.D.D. 1,600
Factory Rent 4,600 Bank Overdraft 53,300
Travelling Expenses 3,600 Capital 1,00,000
Advertisement 2,500
Office Rent 3,000
Purchases 49,300
Sales Returns 2,800
Bad Debts 1,200
Drawings 12,000
3,67,200 3,67,200
Adjustments :
1) Stock as on 31st March 2019, amounted to ` 57,000
2) Depreciate Machinery and Furniture @ 5%
3) Unexpired Insurance ` 1,000.
4) ` 800 are written off as bad debts and create a Provision for Reserve for Doubtful Debts 5% on
Sundry Debtors and Reserve for Discount on Debtors 2% and discount on Creditors 3%.
5) Outstanding Expenses - Wages ` 2,200 and Office Rent ` 1,400.
6) Goods withdrawn worth ` 2,000 by owner for personal use.
299

Solution : In the Books of M/s Laxmi Enterprises

Dr. Cr.
(`) (`) (`) (`)
To Wages 1,800 By Goods withdrawn 2,000
Add : Outstanding Wages 2,200 4,000 for personal use
To Factory Rent 4,600 By Closing Stock 57,000
To Gross Profit c/d 60.600
1,33,700 1,33,700
To Office Rent 3,000 By Gross Profit b/d 60,600
Add : Outstanding Rent 1,400 4,400 By Discount received 2,000
To Electricity Charges 4,600 By Provision for 1,560
To Insurance 5,000 Discount on Creditors
To Travelling Expenses 3,600
To Depreciation on :
Machinery 5,000
To Bad debts (Old) 1,200
Add : Bad debts (New) 800
Add : R.D.D. (New) 6,000
8,000
Less : R.D.D. (Old) 1,600 6,400
To Provision for Discount 2,280
on Debtors
To Interest on Bank Loan 3,800
64,160 64,160
300


Liabilities Assets
(`) (`) (`) (`)
Capital 1.00.000 Machinery 1,00,000
Add : Net Profit 25,780 Less : Depreciation 5% 5,000 95.000
1,25,780 Furniture 36,000
Less : Drawings 14,000 1,11,780 Less : 5% Depreciation 1,800 34,200
(12,000 + 2,000) Prepaid Insurance 1,000
Outstanding Exp : Sundry Debtors 1,20,800
Wages 2,200 Less : Bad debts 800
Office Rent 1,400 3,600 1,20,000
Creditors 52,000 Less : RDD. 5% 6,000
less : Discount on 1,560 50,440 1,14,000
Creditors3% Less 2% Provision for 2,280 1,11,720
10% Bank Loan 76,000 discount
Add : Interest 3,800 79,800 Closing Stock 57,000
Outstanding
Bank Overdraft 53,300
2,98,920 2,98,920
Illustration 8
Shreyas requested you, to prepare Trading Account, Profit & Loss Account for the year ended on 31st,
March 2018. and Balance Sheet as on that date.
Opening Stock 14,400 Creditors 19,300
Debtors 30,000 Returns outward 750
Returns Inward 1,650 Sales 20,000
Rent, Rates & Insurance 2,250 Discount 365
Productive Wages 2,525 Capital 75,000
Discount 390 Outstanding Interest 650
Interest 475 Loan 7,500
Loss by fire 1,650
Salaries 1,850
Purchases 24,350
Drawings 2,500
Loose Tools 17,500
Cash in hand 1,250
Cash at Bank 7,500
1,23,565 1,23,565
301

Adjustments :
1) Stock as on 31st March 2018, amounted to `48,500
2) Charge depreciation on Loose Tools @ 10% and on Plant & Machinery @ 15%
3) Prepaid Insurance amounted to ` 500 and outstanding Rent ` 400.
4) Charge Interest on Capital @ 5% and on Drawings 7%
5) Outstanding Salary ` 650
Solution : In the Books of Shreyas
Dr. Cr.
(`) (`) (`) (`)
Less : Purchase Return 750 23,600
To Productive Wages 2,525 By Closing Stock
48,500
66,850 66,850
To Rent, Rates & Insurance 2,250 By Gross Profit c/d 26,325
Add : Outstanding Rent 400 By Discount Received 365
2,650 By Interest on 88
Less : Prepaid Insurance 500 2,150 Drawings
To Discount 390
To Interest on Capital 3,750
Loose Tools 1,750
Plant & Machinery 2,100 3,850
To Interest 475
To Salaries 1,850
Add : Outstanding Salary 650 2,500
To Loss by Fire 1,650
To Carriage Outwards 1,275
26,778 26,778
302


Liabilities Assets
(`) (`) (`) (`)
Capital 75,000 Loose Tools 17,500
Add : Net Profit 10,738 Less : Depreciation 10% 1,750 15,750
Add : Interest 5% on 3,750 Plant & Machinery 14,000
Capital 89,488 Less : Depreciation 15% 2,100 11,900
Less : Drawings 2,500 Cash at Bank 7,500
86988 Closing Stock 48.500
Less : Int on Drawings 88 86,900 Prepaid Insurance 500
Creditors 19,300 Debtors 30,000
Loan 7,500 Cash in hand 1,250
Outstanding Interest 650
Outstanding Rent 400
Outstanding Salary 650
1,15,400 1,15,400
Note : Interest on Drawing is charged for 6 months only as date of Drawing is not given.
Amount of Drawing given in Trial Balance is ` 2,500, So 7% on 2500 = 175
Interest on Drawing is charged for 6 months only; Therefore 175/2 = 88.
It means, Drawings ` 2,500 + 88 = 2,588
Illustration 9
From the following Trial Balance of Kisan Traders prepare Trading Account, Profit & Loss Account
for the year ended on 31st, March 2019. and Balance Sheet as on that date.
Stock (1.4.2018) 1,50,000 Sundry Creditors 2,00,000
Purchases 8,50,000 Bank Overdraft 1,80,000
Wages 1,20,000 Interest Received 60,000
Indirect Expenses 80,000 Reserve for doubtful debts 10,000
Return Inward 20,000 Sales 13,95,300
Power & Fuel 95,000 Returns Outward 30,000
Advertisement 70,000 Capital 6,00,000
Travelling Expenses 30,000
Plant & Machinery 1,80,000
Computers & Printers 5,20,000
Insurance Premium 20,000
Cash in hand 42,300
Bad Debts 11,000
Drawings 49,000
24,75,300 24,75,300
303

Adjustments :
1) Closing Stock is valued at ` 2,80,000
2) Wages unpaid ` 30,000, Indirect Expenses outstanding ` 22,000.
3) Machinery includes ` 40,000 for the purchase of a new Machinery on 1st Oct, 2018 depreciate
Plant and Machinery at 10% and Computers & Printers at 10%.
4) Reserve for doubtful debts is to be maintained at 5%.
5) Insurance Premium is paid for one year up to 30th June, 2019.
6) Travelling expenses include ` 10,000 for personal travelling expenses of owner.
Solution : In the Books of Kisan Traders
Dr. Cr.
(`) (`) (`) (`)
To Opening Stock 1,50,000 By Sales 13,95,300
To Purchases 8,50,000 Less : Sales Return 20,000 13,75,300
Less : Purchase Return 30,000 8,20,000
To Wages 1,20,000
Add : Unpaid wages 2,80,000
30,000 1,50,000 By Closing Stock
To Power & Fuel 95,000
16,55,300 16,55,300
To Indirect Expenses 80,000 By Gross Profit b/d 4,40,300
Add : Outstanding 22,000 1,02,000 By Interest 60,000
To Advertisement 70,000 Received
To Travelling expenses 30,000
Less :Personal 10,000 20,000
Trravelling
To Insurance Premium 20,000
To Bad Debts 11,000
Add : New R.D.D. 11,000
22,000
Less : Old R.D.D. 10,000 12,000
Buildings 52,000 68,000
To Net Profit 1,95,300
5,00,300 5,00,300
304

Balance Sheet of Kishan Traders as on 31st March, 2019

Liabilities Assets
(`) (`) (`) (`)
Capital 6,00,000 Cash in hand 42,300
Less : Drawings 49,000 Sundry Debtors 2,20,000
Less : Drawings 10,000 Less : 5% New R.D.D. 11,000 2,09,000
(Travelling expenses) 5,41,000 Plant & Machinery 1,80,000
Add : Net Profit 1,95,300 7,36,300 Less : Depreciation 16,000 1,64,000
Sundry Creditors 2,00,000 (WN)
Bank Overdraft 1,80,000 Computers & Printers 5,20,000
Outstanding expenses Less : 10% Depreciation 52,000 4,68,000

Wages 30,000 Closing Stock 2,80,000
Indirect Expenses 22,000 52,000 Prepaid Insurance 5,000
11,68,300 11,68,300
Working Note :
1) Insurance Premium for 1 year ` 20,000 paid upt 30th June 2019.
Prepaid Insurance for 3 months 20,000/1 x 3/12 = ` 5,000
2) New R.D.D. is 5% on Debtors
i.e. 2,20,000/1 x 5/100 = 11,000
3) Balance on Machinery A/c ` 1,80,000
Cost of New Machinery
Purchased on 1st Oct. 2018 ` 40,000
Balance of old Machinery ` 1,40,000
a) Depreciation on old Machinery for 12 months
1,40,000/1 x 10/100 ` 14,000
Add : b) Depreciation on New Machinery
(for 6 months)
40,000/1 x 10/100 x 6/12 ` 2,000
` 16,000
Total Depreciation on Machinery is ` 16,000
305

Illustration 10
Prepare Trading, Profit and Loss Account and Balance Sheet in the Books of Arun J. with the help of
following information and Trial Balance given below for the year ending 31st March, 2019.
Debtors 24,000 Capital 25,000
Opening Stock 8,000 Sales 20,000
Royalties 1,500 Creditors 10,000
Wages 1,000 Returns 1,000
Salaries 2,500 Loans & Advances 8,000
Drawings 3,000 Bills Payable 12,000
Goodwill 8,000 Interest Received 1,000
Returns 500
Telephone Charges 1,000
Carriage Inwards 1,000
Trade Expenses 500
Insurance 2,000
Furniture 5,000
Purchases 12,000
77,000 77,000
Adjustments :
1) Closing Stock is valued at Cost Price ` 13,000 where as Market Price ` 15,000
2) Depreciate Plant & Machinery by 5% and Furniture by 10%
3) Insurance ` 700 is unexpired.
4) Outstanding Salary and Wages ` 800 and ` 1,000 respectively.
5) R.D.D. is to be created 5% on Sundry Debtors
6) Goods of ` 3,000 distributed as free sample
306

Solution : In the Books of Arun

(`) (`) (`) (`)
To Purchases 12,000 Less : Sales Return 500 19,500
Less : Returns 1,000 11,000
To Royalties 1,500
Add : Outstanding 1,000 2,000 By Goods 3,000
To Carriage Inwards 1,000 distributed as free
To Gross Profit c/d 12,000 sample
35,500 35,500
To Insurance 2,000 By Gross Profit b/d 12,000
Less : Prepaid 700 1,300 By Interest 1,000
To Salaries 2,500 Received
Add : Outstanding 800 3,300
Plant & Machinery 300
Furniture 500 800
To R.D.D. 1,200
To Telephone Charges 1,000
To Trade Expenses 500
To Advertisements 3,000
(Goods distributed as
free sample)
To Net Profit 900
13,000 13,000
Liabilities Assets
(`) (`) (`) (`)
Capital 25,000 Closing Stock 13,000
Add : Net Profit 900 Plant & Machinery 6,000
25,900 Less : depreciation 5% 300 5,700
Less : Drawings 3,000 22,900 Furniture 5,000
Creditors 10,000 Less : Depreciation 10% 500 4,500
Outstanding Expenses Prepaid Insurance 700
Salaries 800 Goodwill 8,000
Wages 1,000 1,800 Debtors 24,000
Loans & Advances 8,000 Less : R.D.D. 5% 1,200 22,800
Bills Payables 12,000
54,700 54,700
307

Illustration 11
From the following Trial Balance of Pravin & Sons prepare Trading Account, Profit & Loss Account
for the year ended on 31st, March 2019. and Balance Sheet as on that date.
Cash 4,000 R.D.D. 1,600
Wages 6,000 Creditors 50,280
Interest 3,000 Sales 62,000
Salaries 12,000 Purchase Returns 1,720
Drawings 10,000 Bank Overdraft 20,000
Advertisement 1,200 Commission Received 2,800
Machinery 51,000 Capital 1,00,000
Debtors 76,000
Sales Returns 1,500
Purchases 54,500
Bad Debts 1,920
Discount 2,080
Rent 4,000
2,38,400 2,38,400
Adjustments :
1) Closing Stock is valued at ` 84,000
2) Wages include ` 800 being advance given to workers.
3) Outstanding expenses Salaries ` 3,600 and Rent ` 3,000
4) Write off ` 2,000 as bad debts, and create a provision for doubtful debts 3% on Debtors.
5) Amount of Machinery is reduced to ` 48,000
6) Charge Interest on Capital 5% p.a.
308

Solution : In the Books of Pravin & Sons

(`) (`) (`) (`)
Less : Advance paid 800 5,200
1,44,500 1,44,500
To Rent 4,000 By Gross Profit b/d 76,520
Add : Outstanding Rent 3,000 7,000 By Commission 2,800
To Depreciation on Received
Machinery 3,000
To Salaries 12,000
Add : Outstanding Salary 3,600 15,600
To Bad Debts (New) 2,000
Add : Bad Debts (old) 1,920
3,920
Add : R.D.D. (New) 2,220
6,140
Less : R.D.D. (Old) 1,600 4,540
To Interest on capital 5,000
To Interest 3,000
To Discount 2,080
79,320 79,320

Liabilities Assets
(`) (`) (`) (`)
Capital 1,00,000 Machinery 51,000
Add : Interest on 5,000 Less : Depreciation 3,000 48,000
Capital 1,05,000 Debtors 76,000
Add : Net Profit 36,700 Less : Bad debts (New) 2,000
1,41,700 74,000
Less : Drawings 10,000 1,31,700 Less : New R.D.D. 3% 2,220 71,780
Creditors 50,280 Closing Stock 84,000
Outstanding Expenses Advance to worker 800
- Salaries 3,600 Cash 4,000
- Rent 3,000 6,600
2,08,580 2,08,580
309

Working Notes :
1) New Bad debts ` 2,000 and R.D.D. is 3%
So Debtors ` 76,000
Less : Bad debts (New) ` 2,000
` 74,000
Therefore R.D.D. 3% on 74,000
New R.D.D. 2,220
74,000/1 x 3/100 = ` 2,220
2) Interest on Capital 5% p.a.
So 1,00,000/1 x 5/100 = ` 5,000
Therefore Interest on Capital is ` 5,000
Illustration 12
Following is a Trial Balance of Vijay Traders, You are required to prepare Trading Account and Profit
& Loss Account for the year ended 31st March, 2018 and Balance Sheet as on that date

Rent, Rates & Taxes 3,500 R.D.D. 2,500
Insurance 1,000 Loan from Prakash 34,700
Wages 6,000 Sales 92,300
Repairs 9,400 Capital 45,000
Drawings 3,000 Sundry Creditors 18,000
Sundry Debtors 15,000 Sundry Income 7,500
Purchases 40,000 Bills Payable 17,000
Discount 900 Discount Received 3,000
General Expenses 3,600
Furniture 40,000
Stock (1.4.2017) 12,000
Bank 7,500
Bad Debts 600
2,20,000 2,20,000
310

Adjustments :
1) Prepaid Insurance ` 400
2) Create 10% R.D.D. on Sundry Debtors and 6% discount on Debtors.
3) Outstanding expenses : General Expenses ` 1,400 and Wages ` 1,000
4) Depreciate Furniture by 10% and Plant & Machinery by 4%
5) Sundry Income of ` 1,500 received in advance.
6) Stock on 31st March 2018, amounted to ` 30,000
Solution : In the Books of Vijay Traders

Dr. Cr.
(`) (`) (`) (`)
To Purchases 40,000
1,22,300 1,22,300
To Rent, Rates and Taxes 3,500 By Gross Profit b/d 63,300
To Insurance 1,000 By R.D.D. (old) 2,500
Less : Prepaid 400 600 Less : R.D.D. (New) 1500
1,000
To General Expenses 3,600 Less : Bad Debts (old) 600 400
Add : Outstanding 1,400 5,000 By Sundry Income 7,500
To Depreciation on : Less : Received in 1,500
Furniture 4,000 Advance 6,000
Machinery 2,000 By Discount Received 3,000
6,000
To Discount 900
Add : Reserve for 810 1,710
Discount on Debtors
To Repairs 9,400
transfered to Capital A/c
72,700 72,700
311


Liabilities Assets
(`) (`) (`) (`)
Capital 45,000 Furniture 40,000
Add : Net Profit 46,490 Less : Deprecation 10% 4,000 36,000
91,490 Plant & Machinery 50,000
Less : Drawings -3,000 88,490 Less : Deprecation 4% 2,000 48,000
Sundry Creditors 18,000 Sundry Debtors 15,000
Loan from Prakash 34,700 Less : R.D.D. (New) 10% 1,500
Outstanding Expenses : 13,500
General Expenses 1,400 Less : 6% Discount on 810 12,690
Wages 1,000 2,400 Debotrs
Sundry Income 1,500 Prepaid Insurance 400
-recieved in advance Closing Stock 30,000
Bills Payable 17,000 Bank 7,500
1,62,090 1,62,090
Working Note :
Old R.D.D. (i.e. Provision for Doubtful debts given inTrial Balance) is more than the new R.D.D. So
excess provision for doubtful debts (` 400) is shown on the credit side of Profit and Loss A/c. It is
treated as gain.
Illustration 13
Following is a Tril Balance of Ajay Enterprises, You are required to prepare Trading Account and
Profit & Loss Account for the year ended 31st March, 2019 and Balance Sheet as on that date
Particulars Debit Amt (`) Credit Amt (`)

Debtors 52,835
Opening Stock 8,605
Purchases 25,375
Fuel and Power 1,818
Creditors 42,860
Drawings 5,000
Capital 1,60,000
Sales 39,472
Returns 860 1,375
312

Cash at Bank 16,375

Furniture (Purchased on 1/7/2018) 39,500
Salaries 7,000
Motor car 20,500
Wages 7,000
General Expenses 7,295
8% Loan (taken on 1/10/2018) 15,000
Bad debts 2,000
R.D.D. 800
Bills Payable 6,866
Machinery 40,800
Insurance 5,000
Commission Received 1,450
Investments 26,000
2,67,823 2,67,823
Adjustments :
1) Stock on hand 31st March 2019, amounted to ` 28,000
2) Write off ` 1,500 as Bad debts and create a Provision for doubtful debts @ 5% on Debtor.
3) Depreciation on Furniture, Motor car, and Machinery @ 10%, 7% and 5% respectively.
4) Commission ` 550 is due but not received.
5) Outstanding Expenses General Expenses ` 1,000 and Wages ` 500.
6) Prepaid expenses Insurance ` 2,000
Solution : In the Books of Ajay Enterprises

Trading and Profit and loss Account for the year ended 31st March 2019
Dr. Cr.
(`) (`) (`) (`)
To Purchases 25,375 Less : Returns 860
Less : Returns 1,375 24,000 38,612
Add : Outstanding 500 7,500
To Fuel & Power 1,818
66,612 66,612
313


To Insurance 5,000 By Commission 1,450
Less : Prepaid 2,000 3,000 Add : Accrued 550 2000
To Carriage Outward 1,860 commission
To Gen. Expenses 7,295
Add : Outstanding 1,000 8,295 By Net Loss 5,771
To bad debts (old) 2,000 (Transferd to
Add : Bad debts (New) 1,500 Capital A/c)
Add : R.D.D. (New) 2,567
6,067
Less : R.D.D. (Old) 800 5,267
Motor Car 1,435
Furniture 2,963
Machinery 2,040 6,438
To Interest on Loan 600
32,460 32,460

Liabilities Assets
(`) (`) (`) (`)
Capital 1,60,000 Furniture 39,500
Less : Net Loss 5,771 Less : 10% Depreciation 2,963 36,537
1,54,229 (9 Months)
Less : Drawings 5,000 1,49,229 Motor Car 20,500
Bills Payable 6,866 Less : 7% Depreciation 1,435 19,065
Creditors 42,860 Machinery 40,800
Outstanding Expenses : Less : 5% Depreciation 2,040 38,760
General Expeses 1,000 Sundry Debtors 52,835
Wages 500 1,500 Less : Bad Debts (New) 1,500
8% Loan 15,000 51,335
Add : Interest 600 15,600 Less : 5% R.D.D. (New) 2,567 48,768
Accrued Commission 550
Cash at bank 16,375
Investment 26,000
2,16,055 2,16,055
314

Activity : Students should visit and interact with Sole Proprietor in your residential area, and
collect information of various Expenses, Income, Profits, Losses, Purchases, Sales & Stock of
goods, Asset & Liabilities. Prepare Trading A/c, Profit & Loss A/c and Balance sheet of his
business with the help of collected information.
Activity : Find out the mistakes from the Trading Account, Profit & Loss Account and Balance
Sheet given under. There are some mistakes which students have to find out.
(`) (`) (`) (`)
To Purchases 10,500 Less : Return 200 17,000
Less : Returns Inward 500 10,000 outward
To Wages 2,000
To Advertisements 800 By Closing Stock 40,000
To Royalties 400
57,000 57,000
To Insurance 7,200 By Interest on Bank 600
To Advertisement 2,000 Loan
To Rent 800
To Discount Received 400
To Printing & Stationery 700
To Net Profit 4,300
19,400 19,400
Liabilities Assets
(`) (`) (`) (`)
Capital 70,000 Building 20,000
Add : Net Profit 4,300 Plant & Machinery 30,800
74,300 Debtors 33,000
Less : Drawings 300 74,000 Commission 2,000
Creditors 9,800 Closing Stock
Bank Loan 30,000 40,000
Bills Payable 4,000
Prepaid Expenses 800
Goodwill 5,000
Postage 200
1,25,800 1,25,800
Note : This Final A/c is given for activity purpose only. Trial Balance & other adjustments are not
given. So Balance sheet will not tally.
315


Q.1. Answer in One Sentence
1) What is a Trading A/c ?
2) What do you mean by Profit & Loss A/c ?
3) Why Balance Sheet is prepared ?
4) State the meaning of Final Accounts ?
5) What is Net Profit ?
6) What do you mean by Gross Profit ?
7) State the meaning of Accrued Income ?
8) State the meaning of Outstanding Expenses ?
9) What is Depreciation ?
10) What do you mean by Prepaid Expenses ?
Q.2 Give a word, term or phrase which can substitute each of the following statements:
1) Expenses paid before it is due.
2) Income due but not yet received.
3) Carriage paid on sale of goods.
4) Statement of Assets & Liabilities.
5) Account prepared to know Net Profit or Net Loss.
6) Value of goods remaining unsold at the end of the year.
7) The provision made to compensate the loss on account of likely debts.
8) The accounts prepared at the end of the accounting year to know the profit or loss and
Financial position of business.
9) An amount spent on promoting sale of goods.
10) An additional information provided below the Trial Balance.
Q.3 Select the most appropriate alternatives given below and rewrite the sentence :
1) ………… is excess of assets over liabilities

a) Goodwill b) Capital c) Investments d) Drawings
2) Discount earned is transferred to credit side of ……… account.
a) Current A/c b) Profit & Loss c) Trading d) Capital
3) …… is a statement which shows the financial position of business on a specific date.
a) Trading account b) Trial Balance c) Profit & Loss A/c d) Balance Sheet
4) Outstanding expenses are shown on the ……… side of Balance Sheet.
a) Assets b) Liability c) Both d) None of these
5) Interest on Drawing is credited to …… Account.
a) Trading b) Profit & Loss c) Capital d) All
316

6) Debit balance of Trading Account means ……

a) Gross Loss b) Net Loss c) Net Profit d) Gross Profit
7) Carriage Inward is debited to …… Account.
a) Trading b) Profit & Loss c) Capital d) Bank
8) Excess of credit over to debit in Profit & Loss Account indicates ………
a) Net Profit b) Gross Profit c) Gross Loss d) Net Loss
9) Closing stock is always valued at cost or market price which is ……
a) more b) less c) zero d) equal
10) When specific date is not given, in that case interest on drawing is charged for ……
month.
a) Four b) Six c) Eight d) Nine
Q.4 State True or False with reasons :

1) In every adjustment atleast there are three effects.
2) Every item of Trial Balance has only one effect.
3) Income due but not received is a liability.
4) Goodwill is not a fictitious asset.
5) Credit balance of Profit & Loss account shows net profit.
Q.5 Fill in the blanks :

1) Gross Profit is transferred to ……… account.
2) Debit Balance of Trading Account indicates ………
3) Income Receivable appears on ……… side of Balance Sheet.
4) Interest on Bank Loan is debited to …… A/c
5) Profit and Loss account is prepared to find out ……… results of the business.
6) All indirect / operating expenses are transferred to …… account.
7) Interest of proprietor's drawing is credited to ……… account.
8) An excess of debit over credit in the Profit & Loss A/c represents the ………
9) All direct expenses are transferred to ……… account.
10) Balance Sheet is ……… of assets & liabilities.
317

Q.6 Find the odd one :

1) Rent. Salary, Insurance, Plant and Machinery
2) Purchases, Closing stock, Debtors, Factory Rent.
3) Capital, Bills Payable, Debtors, Outstanding wages
4) Advertisement, Travelling Expenses, Factory Rent, Insurance
5) Cash in Hand, Debtors, Outstanding Income, Reserve for Doubtful Debts
Q.7 Do you agree or disagree with the following statement :

1) Reserve for bad debts is created by debiting Profit and Loss Account.
2) Balance Sheet is a statement as well as an account.
3) Indirect Expenses are debited to Trading Account.
4) Bank Overdraft is treated as an Internal Liability.
5) Capital is excess of Liabilities over Assets.
Q.8 Correct and Rewrite the following statements :

1) Balancing figure of Trading Account is Net Profit or Net Loss.
2) All direct expenses are debited to Profit and Loss Account.
3) When the credit side of Profit and Loss account is greater than debit side, it is called Net
Loss.
4) Capital A/c………… Dr
To Profit and Loss Account
5) Trading A/c ……………Dr
To Sales A/c
(Being Sales transferred to Trading A/c)
1) Calculate the Capital
Assets (`) Liabilities (`)
Building - 20,000 Bills Payable - 18,000
Furniture - 15,000 Creditors - 20,700
Debtors - 30,000 Outstanding Wages - 1,250
Investments - 10,000
Cash at Bank - 5,000
Plant and Machinery - 20,000
318

2) Machinery of ` 35,500 is purchased on 1st July, 2018 and on the same day ` 4,500 are
spend on installation of Machinery. Proprietor has decided to Depreciate Machinery
at the rate of 7% p.a. Calculate the amount of depreciation, assuming that accounting
year is ending on 31st March every year.
3) Mr. Pramod borrowed Loan from State Bank of India ` 3,50,000 on 1st Oct.,2018 at
the rate of interest 12% p.a. Calculate the Interest on bank loan for the year 2018-19,
assuming that financial year end on 31st March every year.
4) Annual Insurance Premium ` 8,000 is paid on 1st Dec, 2018. Calculate the amount
of Insurance Premium for the accounting year ending on 31st March, 2019.
5) Calculate the Gross Profit/Gross Loss
Purchases A/c ` 15,500, Sales A/c ` 30,000 Carriage Inward ` 1,200
Opening Stock ` 5,000 Purchases Returns ` 500, Closing Stock ` 18,000
PRACTICAL PROBLEMS
1. From the following Balances of Jayashri Traders, you are required to prepare Trading
Account for the year ended 31/03/2019
Particulars Debit Amount (`) Credit Amount (`)
Purchases 59,000
Purchases Returns 7,000
Sales Returns 1,600
Sales 1,03,000
Wages 3,400
Royalty 4,000
Total 1,10,000 1,10,000
Closing Stock ` 40000
2. Prepare Profit and Loss Account of Sanjay Brothers for the year ended 31st March, 2018
from the following balances.
1) Bank charges ` 22,000 11) Commission (Cr) ` 17,500
2) Interest (Cr.) ` 16,000 12) Printing & Stationery ` 21,000
3) Sundry expenses ` 42,000 13) Loss by fire ` 18,000
4) Insurance ` 35,000 14) Discount (Dr) ` 23,000
5) Salaries ` 40,000 15) Discount (Cr) ` 37,000
6) Rates and Taxes ` 13,000 16) Misc. Income ` 14,000
7) Postage ` 8,000 17) Depreciation ` 34,000
8) Advertisement ` 40,000 18) Carriage Outwards ` 60,000
9) Rent paid ` 32,000 19) Godown Expenses ` 40,000
10) Bad debts ` 10,000 Note: Gross Profit ` 407500
319

3. From the following Trial Balance of Sanjiv & Sons. Prepare Trading Account and Profit &
Loss Account for the year ending on 31st March, 2019 and a Balance Sheet as on that date.
Purchases & Sales 1,78,000 4,60,000
Returns 2,000 4,000
Buildings 58,000
Motor Van 40,000
Wages 28,000
Reserved for Bad debts 3,200
Commission 2,400
Office expenses 5,400
Carriage 9,000
Furniture 20,000
Premises 81.000
Loose Tools 20,400
Drawings 24,700
Cash in hand 71,000
Dividend 3,300
Capital 1,40,000
Salaries 44,000
Bills Receivable & Bills Payable 5,600 8,400
Bad debts 2,400
Advertisement (for 3 year) 6,000
7,19,300 7,19,300
Additional information :
1) Closing stock on 31st March, 2019, was at cost ` 60,000 and Market Price ` 70,000.
2) Outstanding expenses : Wages ` 4,000, Salary ` 2,400
3) Provide depreciation at 10% on Motor Van and 5% on Furniture.
4) Write off ` 2,000 for bad debts and create R.D.D. at 5% on debtors.
5) Provide 10% p.a. interest on capital.
320

4. From the following Trial Balance of Nandini & Co. as on 31st March 2019. Prepare Final
Accounts after considering the adjustments given below.
Loose Tools 1,10,000
Furniture & Fixtures 81,000
Bad debts 1,400
Stock (31st March 2018) 52,000
Purchases 77,000
Sales Cash 21,000
Sales Credit 81,000
Returns 400 600
Advertisements 4,800
Rate taxes & Insurances 6,000
Repairs & maintenance 1,200
Salaries (2/3rd for factory) 18,000
Rent (Paid for 11 months) 2,200
Machinery (Includes ` 24,000 84,000
purchased on 1st Oct. 2018)
Capital 3,60,000
R.D.D. 8,000
Sundry Creditors 70,000
Drawings 14,000
Interest 1,200
Dividend 2,800
Bank Balance 40,000
Royalty 6,000
9% Bank loan (30th Sept 2018) 40,000
Discount 1,000
5,84,600 5,84,600
Adjustments :
1) Closing stock valued at ` 1,00,000
2) Write off ` 2,000 as bad debts and create a provision for doubtful debts @ 5% on Sundry Debtor
3) Depreciate Machinery by 10% p.a. and Loose Tools is valued at ` 1,00,000
4) Charge Interest on Capital @ 2% p.a.
321

5. Prepare Final accounts of Abdul Traders for the year ending 31st March, 2019 with
the help of following Trial Balance and Adjustments.
Debit Balance Amount (`) Credit Balance Amount (`)
Salaries 10,000 Interest Received 2,400
Purchases 71,400 Capital 1,60,000
Rent (11 months) 2,200 Sales 85,000
Machinery 56,000 Provision for Bad Debts 2,000
Advance against wages 4,000 Commissions Received 1,600
Opening stock 20,000 Bills Payable 9,200
Bad debts 1,000 Creditors 56,000
Wages 2,600
Loose Tools 26,000
Commission receivable 400
Cash 1,000
Bank 3,000
Drawings 7,600
Freight Inward 1,000
Loan to Aruna 30,000
3,16,200 3,16,200
Adjustments :
1) Closing stock valued at ` 89,600
2) Outstanding expenses Salaries ` 2,000, Wages ` 4,000
3) Charge depreciation on Machinery @ 10%
4) Bad debts written off ` 2,000 and create a provision for bad and doubtful debts 5% on Sundry
Debtors
322

6. Following is the Trial Balance of Geeta Enterprises. You are required to prepare Trading
and Profit & Loss Account for the year ended 31st March, 2019 and Balance Sheet as on
that date after taking into account the additional information provided to you.

Capital A/c 50,000
Drawings 1,750
Opening Stock 8,000
Purchases & Sales 16,500 22,500
Returns 625 750
Carriage Outward 425
Wages - Productive 1,000
Unproductive 600
Salaries 1,000
Travelling expenses 1,125
Trade Expenses 325
Fuel and Coal 250
Discount 460 550
Sundry expenses 225
Bad Debts 200
Furniture 5,500
Packing expenses 175
Sundry Debtors & Creditors 10,090 6,750
Cash in hand 2,200
Investments 10,250
Reserve for Doubtful debts 150
80,700 80,700
Additional information :
1) Closing stock of goods on 31st March, 2019 valued at ` 7,100 at cost price and ` 7,500/- as
market price.
2) Travelling expenses include ` 125 spent on personal travelling.
3) ` 175 are to be written off as bad debts which were due from Mr. Ashok, a debtor and 5% R.D.D.
is to be maintained on debtors
4) Reserve for discount on debtors as well as on creditors is to be maintained at 2% and 3%
respectively.
5) Provide 10% depreciation on Plant & Machinery and Furniture.
323

7. Following are the closing ledger balances of Deepak & Co. Prepare Trading Account
and Profit & Loss Account for the year ended 31st March 2019 and Balance sheet as
on that date.
Ledger Balances of Mr Deepak and Co. as on 31st March, 2019
Particulars Amount (`) Particulars Amount (`)
Bank 30,000 Capital 1,20,000
Bills Payable 7,500 Insurance Premium 18,000
Furniture 19,500 (1.1.2019 to 31.12.2019)
Commission Received 3,000 Salaries 30,000
Stock (1.4.2018) 27,000 Bank loan 30,000
Building 37,500 Sundry expenses 7,500
Wages 7,500 Interest paid 1,500
Creditors 37,500 Machinery 25,500
Bad Debts 4,500 Sales 96,000
R.D.D. (old) 3,000 Purchases 42,000
Sales Returns 1,500 Debtors 31,500
Purchases returns 3,000
Cash in hand 16,500
Adjustments :
1) Closing stock was valued at ` 60,000
2) An amount of ` 3,000 is still to be received on account of commission.
3) Provision for discount on debtors and Provision for discount on Creditors are to be created 2%
and 3% respectively.
4) Amount of Furniture is to reduce by ` 4,500 and Building by 10%.
5) Outstanding expenses Salaries ` 4,500 and Wages ` 1,500
324

8. Following is the Trial Balance extracted from the books of Raju Traders. You are
required to prepare Trading A/c, Profit & Loss A/c for e year ending on 31st March
2019 and Balance Sheet as on that date after Considering the additional information
given below.
Particulars (Debit) Amount (`) Particulars (Credit) Amount (`)
Raju's Drawings 5,000 Capital 2,00,000
Opening stock 30,000 Sales 1,64,000
Wages 5,000 Returns outward 2,400
Purchases 60,000 Creditors 40,000
Trade Expenses 800 Discount 1,600
Royalties 1,600 Bills payable 13,600
Salaries 20,000
Debtors 80,000
Bad debts 900
Discount 1,200
Furniture 16,000
Advertisement 3,000
Carriage outwards 600
Computers 1,20,000
Cash in hand 1,100
Cash at Bank 2,000
4,21,600 4,21,600
Adjustments :
1) Closing stock is valued at ` 40,000 at Cost Price and ` 44,000 as Market Price.
2) Provide Depreciation on Plant & Machinery, Furniture, Computers @ 5%, 10%, 15% respectively.
3) Salaries are paid for 10 months only.
4) Further Bad debts amounted to ` 400 and provide 10% R.D.D. on Sundry Debtors.
5) Advertisement is paid for 2 years
325

9. From the following Trial Balance of Shradha Enterprises, you are required to
prepare Final Accounts for the year ending on 31st March 2019.
Opening Stock 2,40,000 Capital 13,00,000
Purchases 8,50,000 Sundry Creditors 1,20,000
Returns Inward 15,000 Bills Payable 60,000
Wages 29,000 Sales 25,00,000
Power and Fuel 21,800 Return Outward 8,000
Travelling Expenses 14,700 Discount 2,000
Audit fees 7,000 Bank Overdraft 1,54,000
Royalty 72,000 Reserve for Bad and
Discount 1,750 doubtful debts 8,000
Postage 13,500
Bad debts 3,000
Furniture 1,20,000
Plant & Machinery 15,00,000
Freehold Premises 7,02,000
Rent, Rates and Insurance 42,250
41,52,000 41,52,000
Adjustments :
1) Insurance is prepaid to the extent of ` 2,250
2) Closing stock is valued at ` 3,80,000 Cost price and ` 4,00,000 as Market price.
3) Outstanding Expenses are Wages ` 6,000 and Rent ` 5,000
4) Write off further bad debts ` 1,500 and provide 5% Reserve for doubtful debts.
5) Depreciation on Furniture and Plant & Machinery at 10% p.a. and on Freehold Premises at
15% p.a.
326

10. From the following Trial Balance of Ayub & Co. as on 31st March 2019, you are
required to prepare Trading Account, Profit and Loss Account for the year ending
31st March 2019 and Balance Sheet as on that date after making necessary adjust-
ments..
Cash in hand 4,575 Discount 900
Cash at Bank 15,450 Loan from Abhay 15,000
Drawings 18,000 Creditors 18,225
Furniture 6,000 Sales 1,95,000
Plant & Machinery 45,000 Returns Outward 3,000
Opening Stock 30,000 Capital 90,000
Purchases 1,20,000
Salaries & Wages 33,600
Debtors 30,600
Returns Inward 7,500
Audit Fees 2,250
Rent. Rates and Taxes 5,400
Bad debts 600
Travelling Expenses 750
Insurance 1,200
Interest on Loan from Abhay 450
Trade Expenses 300
Sundry expenses 450
3,22,125 3,22,125
Adjustments :
1) Stock on hand on 31st March, 2019 valued at ` 60,000
2) Rent amounting to ` 600 Prepaid.
3) Bad Debts ` 600 and create a Provision for Doubtful Debts 5%
4) Depreciation on Plant & Machinery by 10% and Furniture is valued at ` 4,500
5) Outstanding Salaries ` 900
327

11. From the following Trial Balance of Rajnish & Sons and the additional information
given below prepare Trading & Profit and Loss Account for the year ending on 31st
March 2018 and Balance Sheet as on that date.

Stock (01.04.2017) 1,20,000 Capital 6,00,000
Purchases 4,00,000 Sales 3,00,000
Wages 17,000 Return outward 8,000
Carriage 6,000 Sudnry Creditors 1,80,000
Salaries 60,000 Bills Payable 90,000
Rent, Rates and Taxes 12,000 8% Loan (taken on 1,00,000
Insurance 8,000 01.10.2017)
Royalties 10,000 Bank Overdraft 79,200
Discount 4,500
Courier charges 5,200
Bad Debts 7,000
Trade Expenses 2,500
Drawings 15,000
Machinery 3,00,000
Furniture 1,50,000
Patents 50,000
Sundry Debtors. 1,90,000
13,57,200 13,57,200
Adjustments :
1) Closing Stock valued at ` 3,00,000 cost price and ` 3,20,000 at Market price.
2) Salaries were paid for 10 months only.
3) Insurance is paid for one year ending on 30.06.2018
4) One of the debtors Mr. Amit became insolvent, from whom ` 10,000 was not received.
5) 5% R.D.D. is to be maintained on Debtors
6) Depreciate Machinery & Furniture @ 10% and 5% respectively.
328

12. From the following Trial Balance of John & Sons you are require to prepare Trading
Account, Profit and Loss Account for the year ending 31st March 2019 and Balance
Sheet as on that date.

Drawings (1st July 2018) 12,000 Sundry Creditors 40,000
Cash in hand 8,000 Returns 4,500
Cash at Bank 20,000 Dividend 100
Bills Receivable 15,000 Rent 200
Wages 1,800 Sales 53,200
Discount 700 Bank Loan 5,000
Rent 2,000 Capital 99,700
Advertisement 3,000
Bad debts 1,200
Travelling Expenses 800
Purchases 40,000
Machinery 15,000
Motor Car 18,000
Returns 1,200
Stock (1st April 2018) 10,000
Carriage outwards 1,000
6% Investment 18,000
(1st Sept 2018)
2,02,700 2,02,700
Adjustments :
1) Closing Stock ` 27,000
2) Charge Depreciation on Machinery and Motor car @ 10% and 5% respectively.
3) Create R.D.D. 5% on Sundry Debtors
4) Interest on Drawings @ 5% p.a.
5) Create Discount on Sundry Creditors 3%
6) Advertisement ` 1,000 is prepaid.
7) Outstanding Rent ` 1,500
329

13. From the following Trial Balance of Pushkraj you are required to prepare Trading
Account and Profit and Loss Account for the year ended 31st March 2019 and
Drawings 2,000 Capital 80,000
Motor Car 30,000 Sundry Creditors 25,000
Cash in hand 1,000 Dividend 4,800
Bills Receivable 20,000 Commission 2,535
Wages 1,000 8% Loan (taken on 13,700
Discount 235 1.7.2018)
Rent 300 Purchases Returns 400
Advertisement 2,500 Sales 38,680
Bad Debts 500
Travelling expenses 1,000
Purchases 27,400
Machinery 30,000
Office expenses 500
Sales Returns 680
Carriage Outward 500
Cash at Bank 2,000
1,65,115 1,65,115
Adjustments :
1) Stock on 31st March, 2019 was valued at ` 28,000
2) Create a Provision for doubtful debts on Sundry Debtors @ 5%
3) Depreciate Motor car by 5% p.a. and Machinery by 7% p.a.
4) Outstanding expenses Rent ` 800 & Wages `1,000
5) Charge interest on Capital @ 3% p.a.
6) Goods of ` 4,000 withdrawn by proprietor for personal use.
330

14. From the following Trial Balance of Jyoti Trading Co. Prepare a Trading Account
and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet
as on that date.

Stock (1.4.2018) 9,500 Capital 2,00,000
Sales Returns 750 R.D.D. 1,000
Loose Tools 55,000 Sales 38,750
Debtors 50,800 Purchases return 455
Bills Receivable 4,000 Creditors 47,000
Purchases 29,455 Bills Payable 8,000
Furniture 15,000 Discount 1,845
Salaries 5,000
Legal expenses 2,000
Insurance 2,200
Goodwill 20,000
Machinery 40,000
Wages 2,345
Bank 30,000
Drawings 8,000
Investments 20,000
2,97,050 2,97,050
Adjustments :
1) Closing stock valued at ` 58,000 Cost Price while Market price is ` 60,000
2) Write off ` 1,200 as Bad debts and create provision for doubtful debts 2% on Sundry Debtors
and also create provision for discount on Creditors 5%.
3) Loose Tools is valued at ` 52,000 and depreciate Furniture by 10% p.a.
4) Outstanding expenses Salary ` 1,000 and Wages ` 225
5) Charge interest on Capital 2% and on Drawings 10%.
331

15. From the following Trial Balance of Manish Enterprise, Prepare the Trading Account
and Profit and loss Account for the year ended 31st March 2019 and Balance sheet
as on that date.
Cash in hand 5,200 Capital 50,000
Opening stock 10,370 Bank Loan 15,000
Goodwill 10,000 Bills Payable 8,500
Patents 4,000 Creditors 38,260
Cash at Bank 4,400 General Reserve 1,500
Freight 2,500 Dividend 2,000
Power & Fuel 1,500 Interest on Fixed Deposit 3,440
Furniture 12,000 Sales 40,000
Purchases 35,260
Mobile charges 3,200
Factory Salaries 2,400
Repairs 800
Lighting 1,000
Carriage outward 360
Professional charges 1,240
Debtors 40,000
Carriage Inwards 770
1,58,700 1,58,700
Adjustments :
1) Closing Stock was ` 32,000.
2) Write off 50% of patents, depreciate Plant & Machinery by 10% p.a and Office Equipments
by 20%.
3) Reserve for bad debts is to be created 5% and discount on Debtors 2%.
4) Outstanding expenses Mobile charges ` 300 and Freight ` 500
5) Charge Interest on Capital @ 5%.
6) Goods of ` 2,000 distributed on free sample.
j j j
332

10 Single Entry System
Contents
10.1 Introduction and Meaning of Single Entry System

10.2 Difference between Single Entry System and Double Entry System
10.3 Preparation of Statement of Affairs
10.4 Preparation of Statement of Profit or Loss
10.5 Additional Information / Adjustments
• Additional Capital
• Drawings
• Depreciation of Fixed Assets
• Bad debts
• Reserve for Doubtful Debts (RDD)
• Undervaluation & Overvaluation of Assets & Liabilities
• Interest on Loan
• Interest on Capital
• Interest on Drawings
• Outstanding / unpaid expenses
• Prepaid expenses/ Expenses paid in Advance/Unexpired Expenses
o Students are able to understand the meaning of Single Entry System

o Students are able to distinguish between Single Entry System & Double Entry System.
o Students are able to prepare opening & closing statements of affairs & statement of profit
or loss of a Sole Trading Concern
10.1 Introduction:
We have studied Double Entry System of Sole Trading concern in previous chapters. Now in
this chapter we are going to learn Single Entry System of Sole Trading concern only. In ancient times
there was no scientific method of recording business transactions. They were maintaining record of
business transactions by their traditional methods. Single Entry System can be useful suitable for
small size business, where the number of transactions are small. Single entry system is not a particular
system of accounting rather it is a Double entry system in an incomplete and unscientific form. It is
not a scientific and accurate system of Accounting.
333

Meaning of Single Entry System:

Under this system, Cash Book and personal accounts of debtors and creditors are maintained.
Real and Nominal accounts are not maintained. Single Entry System has no proper set of rules to be
followed.
Definitions:
i) Kohler defines Single Entry System as, “A system of Book Keeping in which as a rule only
records of cash and of personal accounts are maintained. It is always incomplete double entry
varying with the circumstances.”
ii) Carter has defined Single Entry as, “a method or variety of methods, employed for the
recording of transactions, which ignores the two fold aspect and consequently fails to provide
the businessman with the information necessary for him to be able to ascertain his financial
position.”
Single entry system is a combination of Single entry, Double entry and No Entry.
Single Entry System is suitable for the following reasons:
1. It is a very simple method of recording business transactions.
2. Accounting records can easily be maintained since it does not require adequate skill and
knowledge of principles of Book Keeping.
3. It is less expensive as compared to Double Entry Book Keeping.
4. Ascertainment of Profit or Loss is much easier.
5. It is to small concern with limited number of transactions and very few assets and liabilities.
6. It can be prepared easily in short period of time.
Difference between Single Entry System and Double Entry System
Points Single Entry System Double Entry System

1) Dual Aspect Under this system each transaction is Under this system each transaction
not recorded with dual aspect. is recorded in dual aspect.
2) Accounts Under this system Personal Accounts Under this system, Personal
and Cash Accounts are maintained. Real and Nominal Accounts are
Real and Nominal Accounts are not maintained.
maintained.
3)Trial Balance Under this system Trial Balance Under Double Entry System, Trial
cannot be prepared because Balance can be prepared therefore
of incomplete information of arithmetical accuracy of the books
Accounting. Arithmetical accuracy of accounts is verified.
of the accounting cannot be verified.
4) Profit or Loss Under this system Profit and Loss Under this system Profit and Loss
Account is not prepared to find out Account is prepared to find out
the Net Profit or Net Loss. Net Profit or Net Loss.
5) Balance sheet Under this system only Statement of Under this system to find out
Affairs is prepared, Balance Sheet is correct financial position, Balance
not prepared. Sheet is prepared.
334

6) Utility Single Entry System is only useful to Double Entry System is useful for
small business concerns. all types of business concerns.
7) Rules Single Entry System does not follow Double Entry System follows
any accounting rules. accounting rules.
8) Authenticity The Government authorities do not The Government authorities
consider this system as authentic. consider this system as authentic
9) Expensive Single Entry System is less expensive Double Entry System is expensive
because time and labour involved is compare to Single Entry System.
less.
10) Financial Position With the help of Statement of Affairs Balance Sheet is prepared to give
we can understand the estimated true and fair financial position of
financial position of the business. business.
10.3 Preparation of Opening and Closing Statement of Affairs:

To find out the financial position of the business, under Single Entry System, following
Statements are prepared.
i) Opening Statement of Affairs
ii) Closing Statement of Affairs
iii) Statement of Profit or Loss.
Statements of Affairs:
A Statement of Affairs is a statement of Assets and Liabilities. It is as good as Balance Sheet.
Right hand side is used for recording Assets and left hand is used recording for Liabilities. Statement
of Affairs is prepared under the Single Entry System in order to find out the amount of Opening or
Closing Capital of the business. The difference between the total of Assets and total of Liabilities is
considered as the amount of capital.
Opening Statement of Affairs:
Opening Statement of Affairs is prepared to findout opening Capital balance. Opening Assets
and Opening Liabilities are shown in the “Opening Statement of Affairs”. If the total of the Assets
side is greater than the total of the Liability side it represents Opening Capital.
Opening Capital = Opening Assets – Opening Liabilities
Closing Statement of Affairs:

Closing Statement of Affairs is prepared at the end of the Accounting year to find out the
closing Capital balance. Closing Assets and Closing Liabilities are shown in the “Closing Statement
of Affairs”. If the total of the Assets side is greater than the total of the Liability side it represents
Closing Capital.
Closing Capital = Closing Assets – Closing Liabilities
335

Following format of the Statement of Affairs may give the idea of items to be shown in it.
In the Books of ---------
Statement of Affairs as on --------- -
Liabilities Amt (`) Assets Amt (`)
Sundry Creditors ------- Plant and Machinery --------
Bills Payable -------- Furniture and Fixtures --------
Outstanding Expenses ------- Building --------
Bank Overdraft ------- Investments --------
Bank Loan ------- Sundry Debtors --------
Bills Receivable -------
Capital (Balancing figure) -------- Prepaid Expenses ---------
Cash in Hand ---------
Cash at Bank --------
-------- --------
(Note: Opening Statement of Affairs and Closing Statement of Affairs can be prepared in
columnar form)
10.4 Preparation of Statement of Profit or Loss:

A statement of Profit or Loss is to be prepared in order to find out the Profit or Loss made during
the year.
When Books of Accounts are maintained under Single Entry System profit made during the
year is calculated by the following methods:
i) Net Worth Method
ii) Conversion Method
(Note: The second method is not included the 11th standard syllabus, so it is not explained here)
Net Worth Method:

To ascertain Profit of a Business, Trading Account and Profit and Loss Account are prepared,
but under Single Entry System it is not possible because of lack of adequate information. Therefore,
under this system, profit is ascertained by preparing Statement of Profit or Loss.
After ascertaining capitals, they are compared with each other. If the Closing Capital is more than the
Opening Capital the difference is Profit. If the Closing Capital is less than the Opening Capital the
difference is Loss. Moreover, it is necessary to consider the other adjustments (i.e. Additional Capital,
Drawings etc.) to ascertain Profit or Loss. This Profit or Loss is further adjusted for depreciation,
interest on capital and provision for bad and doubtful debts to calculate Net Profit or Net Loss.
336

The following is the format of Statement of Profit or Loss:

In the Books of ----
Statement of Profit or Loss for the year ended ------------
Closing Capital/Capital at the end of the year ------------
Add : Drawings made during the year
In Cash ------------
In Kind ------------
------------
Less : Additional Capital brought during the year
Adjusted Closing Capital ------------
Less : Opening Capital
Net Profit/Loss for the year ------------
The following example can give the idea of calculating the Profit or Loss.
Opening Capital = ` 90,000
Closing capital = ` 1,50,000
Additional capital brought during the year ` 10,000.
Drawings made during the year ` 15,000.
Solution:
Statement of Profit or Loss for Year Ending-------
Particulars Amt.(`) Amt. (`)

Closing Capital 1,50,000
Add : Drawings 15,000
1,65,000
Less : Additional Capital introduced during the year 10,000
Adjusted Closing Capital 1,55,000
Less : Opening Capital 90,000
Net Profit for the Year 65,000
10.5 Additional Information (Adjustments):

1. Additional Capital:
During Accounting Year, amount of cash or assets of any kind brought by proprietor into the
business is called Additional Capital or Further Capital. Additional Capital is deducted from the
Closing Capital in the Statement of Profit or Loss.
337

2. Drawings:
In the Statement of Profit or Loss, the amount of drawings is to be added to Closing Capital
Balance. Closing Capital will be increased due to drawings during the accounting year.
3. Depreciation:
Depreciation should be recorded in the Statement of Profit or Loss. The amount of depreciation
is a charged against Profit or Loss and is to be deducted.
4. Bad Debts:
The debts which are not recovered from a debtor is called Bad Debts. Hence it should be deducted
in the statement of Profit or Loss.
5. Reserve for Doubtful Debts (provision for bad and doubtful debts)-
Reserve for bad and doubtful debts is to be deducted in the statement of Profit or Loss.
6. Undervaluation and Over valuation of Assets and Liabilities:
To find out the correct Profit or Loss of the business, if the assets and liabilities are undervalued
or overvalued it is to be adjusted properly.
A) Undervaluation of Assets: In the Books of Accounts value of assets is undervalued so
that the asset should be increased by the amount of undervaluation to bring it to proper
value. Under valuation means lower capital which required to be adjusted and it is added
in Statement of Profit or Loss.
B) Overvaluation of Assets: In the books of Accounts value of the Asset is already
overvalued so that assets should be decreased by the amount of over valuation to bring it
to the proper value. Overvaluation means higher capital which requires to be adjusted it
is deducted in Statement of Profit or Loss.
C) Undervaluation of Liabilities: Undervaluation means liabilities are recorded at lesser
amount which is to be adjusted. It is deducted from Statement of Profit or Loss.
D) Overvaluation of Liabilities: Overvaluation means the liabilities are recorded at higher
amount which to be adjusted it is to be added in the Statement of Profit or Loss.
7) Interest on Loan:
The amount borrowed by the business is called as Loan. Interest on loan is the expenditure to
the business, hence it is to be deducted in Statement of Profit or Loss.
8) Interest on Capital:
Interest on Capital is to be calculated on Opening Capital and also the amount of Additional
Capital, which is utilized by the business. Interest on capital is expenditure to the business.
Hence it is to be deducted from the Statement of Profit or Loss.
e.g. Opening Capital as on 31st March 2017 is ` 1,50,000 Additional Capital introduced in the
business as on 1st Oct 2017 is ` 40,000. The rate of interest on capital is 10% p.a. The amount
of interest will be as follows:
Interest on Capital 10% on ` 1,50,000 for one year ` 15,000
Interest on Additional Capital 10% on ` 40,000 for 6 months ` 2,000
Total Amount of Interest on capital ` 17,000
338

9) Interest on Drawings :
It is the income to the business; hence to be added in the Statement of Profit or Loss. If the
date of drawings is not given and rate of interest is given, then interest on drawings is to be
calculated for six months.
10) Outstanding/ Unpaid Expenses:
The expenses due but not paid during the year are known as Outstanding Expenses. It is to be
deducted in Statement of Profit or Loss.
11) Prepaid Expenses/Expenses paid in Advance/Unexpired expenses :
In the business certain expenses are paid in advance which are known as Prepaid Expenses.
Such expenses are not related with current year; hence it is added in Statement of Profit or Loss.
The consolidated effect of the above adjustments can be seen at a glance in the following
Statement of Profit or Loss.
Statement of Profit or Loss for Year Ended -------

Closing Capital/Capital at the end of the accounting year ----------
Add : Drawings made during the accounting year
In Cash ----------
In Kind ---------- ----------
----------
Less : Additional Capital ----------
Adjusted Closing Capital ----------
Less : Opening Capital/Capital at the beginning of the accounting
year ----------
Profit before adjustments: ----------
Add-Income and Gains during the accounting year
1. Interest on Drawings ----------
2. Interest on Investment ----------
3. Prepaid Expenses ----------
4. Outstanding Income ----------
5. Undervaluation of Assets /Increase in the value of Assets ----------
6. Overvaluation of Liabilities/Decrease in the value of ---------- ----------
Liabilities
339

----------
Less : Expenses and Losses during the accounting year.
1. Interest on Capital ----------
2. Interest on Bank Loan ----------
3. Bad debts and provision for bad and doubtful ----------
debts
4. Depreciation on fixed assets ----------
5. Overvaluation of Assets (Decrease in the value of assets) ----------
6. Undervaluation of Liabilities (Increase in the value of ----------
assets)
7. Outstanding Expenses ----------
8. Income received in advance ---------- ----------
Net Profit/Net Loss during the accounting year. ---------- ----------
Problem: 1
Mr. Manoj keeps his books under Single Entry System and gives the following information:
Capital as on 31.3.2017 ` 80,000
Capital as on 31.3.2018 ` 1,00,000
Drawings made during the year ` 3,000
Additional Capital introduced during the year ` 8,000
Calculate Profit or Loss for the year ended 31st March, 2018.
Solution:
Statement of Profit or Loss for the year ended 31st March, 2018

Closing Capital/Capital at the end of the year. 1,00,000
Add-Drawings during the year 3,000

1,03,000
Less- Additional Capital during the year 8,000

Adjusted Closing Capital 95,000
Less- Opening Capital/Capital at the beginning of the year. 80,000
Net Profit for the year 15,000
340

Problem:2
Following information of an accounting year is given: Opening Capital as on 31.03.2017 ` 62,000;
Drawings ` 5,000 Additional Capital added during the year ` 9,000 and Closing Capital as on
31.03.2018 ` 50,000
Calculate the Profit or Loss for the year ended 31st March, 2018
Solution:
Particulars Amt. (`) Amt. (`)

Closing Capital 50,000
Add-Drawings 5,000
55,000
Less-Additional Capital 9,000

Less- Opening Capital 62,000
Net Loss for the year 16,000
Problem: 3
Arjun keeps his books under Single Entry System. His Assets and Liabilities were as under.;
Particulars 31.3.2017 (`) 31.3.2018 (`)
Cash 1,500 1,000
Sundry Debtors 30,000 46,000
Stock 35,000 31,000
Plant and Machinery 61,000 75,000
Sundry Creditors 15,000 13,500
Bills Payable _____ 4,000
During the year 2017-18 he introduced ` 15,000 as additional capital. He withdrew ` 2,500
every month for his private purpose.
Ascertain his Profit or Loss for the year ended 31st March 2018.
Solution: In the Books of Arjun
Statement of Affairs as on 31st March, 2017
Sundry Creditors 15,000 Cash 1,500
Capital (Balancing figure) 1,12,500 Sundry Debtors 30,000
Stock 35,000
1,27,500 1,27,500
341


Bills Payable 4,000 Sundry Debtors 46,000
Stock 31,000
Plant and Machinery. 75,000
Capital(Balancing figure) 1,35,500
1,53,000 1,53,000
Statement of Profit or Loss for Year Ending 31st March, 2018

Closing Capital/Capital at the end of the year 1,35,500
Add- Drawings during the year (` 2,500 x12 months) 30,000
1,65,500
Less- Additional Capital introduced During the year 15,000
Less : Opening Capital /Capital at the beginning of the year 1,12,500
Net Profit for the Year 38,000
Problem: 4
Mr. Morya keeps his books on Single Entry System and gives the following information:
Particulars 31.3.2017 (`) 31.3.2018 (`)

Cash at Bank 10,000 40,000
Stock in Trade 20,000 35,000
Furniture 30,000 30,000
Machinery 60,000 60,000
Bills Payable 4,000 4,000
Bank Loan@10% p.a. 4,300 4,300
342

Additional information:
1. Mr. Morya withdrew from business account ` 6,000 for personal use.
2. He introduced Additional Capital of ` 30,000
3. Depreciation is to be charged at 10% p.a. on Furniture and Machinery.
Prepare: 1) Opening and Closing Statement of Affairs
2) Statement of Profit or Loss for the year ended 31.3.2018
Solution: In the books of Mr. Morya
Statement of Affairs as on ------------
31.3.2017 31.3.2018 31.3.2017 31.3.2018
Liabilities Assets
(`) (`) (`) (`)
Bills Payable 4,000 4,000 Machinery 60,000 60,000
Sundry Creditors 10,000 15,000 Furniture 30,000 30,000
Bank Loan 10% 4,300 4,300 Stock in Trade 20,000 35,000
Capital (Balancing 1,26,700 1,83,700 Sundry Debtors 25,000 42,000
Figure) Cash at Bank 10,000 40,000
1,45,000 2,07,000 1,45,000 2,07,000
Statement of Profit or Loss

for Year Ending 31st March, 2018

Capital as on 31st March,2018 1,83,700
1,89,700
Less : Additional Capital during the year 30,000
Less : Capital as on 31st March,2017 1,26,700
Profit for the year before adjustments 33,000

Less Expenses and Losses during the year
i) Depreciation on Machinery(10% on ` 60,000) 6,000
ii) Depreciation on Furniture(10% on ` 30,000) 3,000
iii) Interest on Bank Loan (10% on ` 4,300) 430 9,430
Net Profit during the year 23,570
343

Problem: 5
Shubham, a trader does not keep proper books of accounts. However, he furnishes the following
particulars :
Particulars 31.3.2017 (`) 31.3.2018 (`)
Cash at Bank 3,000 6,500
Cash at Hand 200 5,000
Equipments 8,000 8,000
Furniture 10,000 10,000
During the year, Shubham introduced ` 3,000 as further capital and withdrew ` 5,000 as
drawings. Write off depreciation on Furniture at 10% p.a. and on Equipments at 5%.p.a.
Prepare a statement showing the Profit or Loss made by him for the year ended 31st March,
2018.
Solution: (Ulternative Method)
In the Books of Shubham
Sundry Creditors 15,000 Cash at Bank 3,000
Cash in Hand 200
Stock in Trade 60,000
Capital (Balancing Figure) 76,200 Sundry Debtors 10,000
Equipments 8,000
Furniture 10,000
91,200 91,200

Sundry Creditors 10,000 Cash at Bank 6,500
Cash in Hand 5,000
Capital (Balancing 1,11,100 Stock in Trade 68,000
Figure) Sundry Debtors 25,000
Equipments 8000
Less- Depreciation 5% 400 7,600
Furniture 10000
Less-Depreciation 10% 1000 9,000
1,21,100 1,21,100
344


Closing Capital/ Capital as on 31st March 2018 1,11,100
1,16,100
Less- Additional Capital during the year 3,000
Less-Opening Capital/ Capital as on 31st March 2017 76,200
Profit during theYear 36,900
Note : The above problem is solved with alternative method where in all adjustments are shown in
closing statement of affairs.
Problem: 6
Jyoti keeps her books on Single Entry System. From the following particulars, prepare Opening and
Closing Statement of Affairs and Statement of Profit or Loss for the year ended 31st March 2018.
Particulars 1.4.2017 (`) 31.3.2018 (`)

Bank Balance 35,000 30,000
Cash Balance 14,000 10,000
Sundry Debtors 1,20,000 1,60,000
Stock 50,000 90,000
Furniture 18,000 18,000
Machinery 90,000 1,20,000
Additional Information:
1. Jyoti has withdrawn ` 33,500 from the business for her private use.
2. She has introduced additional Capital of ` 5,000 in the business on 1st Jan,2018
3. Additions to Machinery were made on 1st January, 2018
4. Depreciate Furniture and Machinery @ 10% p.a.
5. Maintain R.D.D. @ 15% on Sundry Debtors.
6. Closing Stock is overvalued by 20% in the books.
345

Solution:
In the books of Jyoti
Opening and Closing Statement of Affairs as on --------------
1.4.2017 31.3.2018 1.4.2017 31.3.2018
Liabilities Assets
(`) (`) (`) (`)
Sundry Creditors 32,000 50,000 Bank Balance 35,000 30,000
Bills Payable 18,500 25,000 Cash Balance 14,000 10,000
Sundry Debtors 1,20,000 1,60,000
Capital (Balancing 2,76,500 3,53,000 Stock 50,000 90,000
Figure) Furniture 18,000 18,000
Machinery 90,000 1,20,000
3,27,000 4,28,000 3,27,000 4,28,000
Statement of Profit or Loss for the year ended 31st March 2018

Closing Capital as on 31st March,2018 3,53,000
Add. Drawings 33,500
3,86,500
Less Additional Capital 5,000
Less Opening Capital as on 1st April,2017 2,76,500
Profit before adjustments

1,05,000
Less: Expenses and Losses during the year
1. Depreciation on Furniture (10% on ` 18,000) 1,800
2. a) Depreciation on Machinery
(10% on ` 90,000) 9000
b) Depreciation on additional Machinery
(10% on ` 30,000 for 3 months) 750 9,750
3. R.D.D. (15% on ` 1,60,000) 24,000
4. Overvaluation of Stock 15,000 50,550
Net Profit during the year 54,450
346

Working Note:
Overvaluation of Stock by 20% , So we have to find out the Actual value of stock.
Book Value
Actual Value = × 100
100 + % of Overvaluation
90,000
100 + 20
90,000
120
Actual Value = ` 75,000
Therefore, Current value of Stock is lesser than the Book value by `15,000 (i.e. ` 90,000 – ` 75,000)
It is a loss and deducted from Trading profit in the Statement of Profit or Loss.
Problem: 7
Rohit a trader keeps his books on Single Entry System. His financial position as on 1.4.2018 and
31.3.2019 were as under;
Particulars 1.4.2018 (`) 31.3.2019 (`)
Cash 12,000 18,000
Bank Balance 10,000 15,000
Building 40,000 60,000
Furniture 15,000 20,000
During the year he had withdrawn ` 100 per month for household expenses. Depreciate Building
by 10 % p.a. and Furniture by 12% p.a. (Assume additions to both were made on 1st Oct. 2018)
Debtors ` 1,000 are bad and to be written off. Create Reserve for Doubtful Debts at 5% and
maintain reserve for discount on debtors at 2%. Allow interest on capital at 5% p.a. and interest on
drawings at 5% p.a. Prepare Opening and Closing Statement of Affairs and Statement of Profit or
Loss for the year ended 31.3.2019.
Solution: In the Books of Rohit
Statement of Affairs as on 1st April, 2018
Bank Balance 10,000
Capital (Balancing figure) 1,22,000 Stock in Trade 35,000
Building 40,000
Furniture 15,000
1,42,000 1,42,000
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Stock 50,000
Capital ( Balancing Figure) 1,66,000 Building 60,000
Furniture 20,000
Bank Balance 15,000
1,98,000 1,98,000

Capital as on 31st March, 2019 1,66,000
Add: Drawings (`100×12 per month) 1,200
1,67,200
Less: Capital as on 1st April, 2018 1,22,000
Profit before adjustments 45,200
Add: Income and Gains during the year
1. Interest on drawings(5% on ` 1,200 for 6 months 30
Less: Expenses and Losses during the year 45,230

1. Interest on Capital (5% on ` 1,22,000) 6,100
2. A) Depreciation. on Building
(10% on ` 40,000) = 4,000
B) Depreciation on additional Building 5,000
(10% on ` 20,000 for 6 months) = 1,000
3. A) Depreciation on Furniture
(12% on `15,000) = 1800
B) Depreciation on additional Furniture
(12% on `5,000 for 6 months) = 300 2,100
4. Bad debts 1,000
5. R.D.D. 1,700
(` 35,000 - `1000 = ` 34,000 for 5% )
6. Reserve for Discount on Debtors 646 16,546
(2% on ` 34,000 - 1,700 = 32,300)
Net Profit For the year 28,684
Note: As the date of Drawings is not given, Interest on Drawings is calculated for 6 months only.
348

Problem: 8
Aditya keeps his books on Single Entry System and the following information is disclosed.
Particulars 31.3.2016 (`) 31.3.2017 (`)
Cash at Bank 36,000 45,000
Debtors 15,000 22,000
Bills Payable ___ 10,000
Investments ___ 20,000
1. Aditya transferred `150 each month during first half year and ` 200 each month for remaining
period from his business to his private banking account by way of drawings and took away
`300 worth of goods for personal use.
2. Aditya sold his household Furniture for `5,000 and proceeds were utilized for business.
3. Furniture is to be depreciated by 10% and Reserve for Doubtful Debts is to be maintained at 5%
on Debtors
Prepare : 1. Opening Statement of Affairs
2. Closing Statement of Affairs
3. Statement of Profit or Loss for the year ended 31st March 2017.
Solution:
In the Books of Aditya
Statement of Affairs as on -------------------
31.3.2016 31.3.2017 31.3.2016 31.3.2017

Liabilities Assets
(`) (`) (`) (`)
Sundry Creditors 27,850 35,400 Cash at Bank 36,000 45,000
Bills Payable ___ 10,000 Stock in Trade 30,000 35,000
Debtors 15,000 22,000
Capital (Balancing 62,650 86,100 Investments ___ 20,000
figure)
90,500 1,31,500 90,500 1,31,500
349

Statement of Profit or Loss

for the year ended 31st March 2017

Capital as on 31st March, 2017 86,100
Add-Drawings
In Cash (150 × 6 month + 200 × 6 month) 2,100
In Goods 300 2,400
88,500
Less : Additional Capital introduced during the year 5,000
Less : Capital as on 31st March,2016 62,650
Profit before adjustment 20,850
Less : Expenses and Losses during the year
1. Depreciation on Furniture (10% on 9500) 950
2. 5% R.D.D. on Debtors (5% on 22000) 1,100 2,050
Net Profit for the year 18,800
Problem 9
Divya keeps her books under Single Entry System. The following details are given.
Particulars 1.4.2017 (`) 31.3.2018 (`)
Cash in hand 2,000 4,000
Cash at Bank 3,000 5,000
Building 30,000 30,000
Bills Receivable 1,000 1,500
Stock 6,000 8,000
1. Interest on Capital is to be allowed at 10% p.a.
2. Building is to be depreciated by 10% and Plant and Machinery by 5% p.a.
3. Creditors are undervalued by ` 2,000
4. Bill Payable are overvalued by ` 600
350

5. Provide R.D.D. at 5% on Debtors

6. Divya brought additional capital into the business ` 1,000 on 1st Oct. 2017.
Prepare: Opening Statement of Affairs, Closing Statement of Affairs and Statement of Profit or Loss
for the year ended 31st March 2018.
Solution: In the books of Divya
Statement of Affairs as on ---------------
1.4.2017 31.3.2018 1.4.2017 31.3.2018
Liabilities Assets
(`) (`) (`) (`)
Sundry Creditors 2,000 1,000 Cash in hand 2,000 4,000
Bills Payable 2,000 2,200 Cash at Bank 3,000 5,000
Building 30,000 30,000
Capital (Balancing 45,000 54,300 Plant and Machinery 3,000 3,000
figure) Bills Receivable 1,000 1,500
Stock 6,000 8,000
49,000 57,500 49,000 57,500

Capital as on 31st March, 2018 54,300
Less- Additional Capital 1,000
Less : Capital as on 1st April, 2017 45,000
Profit before adjustment 8,300
Add : Incomes and Gains during the year
Overvaluation of Bills Payable 600
Less : Expenses and Losses during the year 8,900
1. a) Interest on Opening Capital
(10% on `. 45,000) = ` 4,500
b) Interest on Additional Capital = ` 50 4,550
(10% on `1000 for 6 months)
2) R.D.D. (5% on ` 6000 300
3) Depreciation on Building (10% on ` 30,000) 3,000
4) Depreciation on Plant and Machinery 150
(5% on ` 3,000) 2,000
5) Undervaluation of Creditors
10,000
Net Loss during the year 1,100
351

Problem: 10
Mr. Raj keeps his book on Single Entry System From the following particulars, prepare Opening
Statement of Affairs and Closing Statement of affairs and Statement of Profit or Loss.
Particulars
31.3.2018 31.3.2019
10 % Govt. Bonds ____ 20,000
Bank Overdraft 32,000 40,000
Furniture 12,000 12,000
Stock 40,000 60,000
Machinery 30,000 50,000
1. Mr. Raj has withdrawn ` 2,000 from the business for his daughter’s marriage
2. He introduced additional capital of ` 6,000 in the business on 1st Oct. 2018
3. Additions to Machinery were made on 1st Oct. 2018.
4. Bad Debts ` 2000 and maintain Reserve for Doubtful Debts @ 5% on debtors
5. Stock was overvalued by 20 %
6. Creditors were undervalued by 20%
7. 10% Govt. Bonds were purchased on 1st Oct. 2018.
8. Charge interest on Drawings at 10% p.a.
9. Allow interest on Capital at 10% p.a.
10. Depreciation on Furniture 10% p.a.
11. Depreciation on Machinery at 10 % p.a.
Solution: In the books of Mr. Raj
Statement of Affairs as on -------------------
31.3.2018 31.3.2019 31.3.2018 31.3.2019
Liabilities Assets
(`) (`) (`) (`)
Creditors 30,000 60,000 Debtors 40,000 50,000
Bank Overdraft 32,000 40,000 10% Govt. Bonds ____ 20,000
Bills Payable 18,000 22,500 Furniture 12,000 12,000
Capital 61,000 98,500 Stock 40,000 60,000
(Balancing Figure ) Machinery 30,000 50,000
1,41,000 2,21,000 1,41,000 2,21,000
352

Statement of Profit or Loss for the year ended 31.3.2019

Closing Capital 98,500
Add : Drawings 2,000
1,00,500
Less: Additional Capital 6,000
Less: Opening Capital 61,000
Profit before adjustments 33,500
Add : Incomes and Gains during the year
1. Interest on Drawings 100
(10% on ` 2000 for 6 months)
2. Interest on Govt. Bonds 1,000 1,100
(10% on ` 20000 for 6 months)
34,600
Less : Expenses and Losses during the year
1. i) Interest on Opening Capital
(` 61,000×10/100) = ` 6,100
ii) Interest on Additional Capital
(` 6,000 × 10/100 × 6/12) = ` 300 6,400
2. Depreciation on Furniture 1,200
(` 12,000×10/100)
3. Depreciation on Machinery = ` 3,000
(` 30,000 × 10/100)
Depreciation on additional Machinery = ` 1,000 4,000
(` 20,000 × 10/100 × 6months/12months)
4. Bad debts 2,000
5. R.D.D. 5% on Debtors 2,400
(` 50,000 - ` 2,000 = ` 48,000)
(5% on ` 48,000)
6. Overvaluation of Stock (W.N.1) 10,000
7. Undervaluation of Creditors (W.N.2) 15,000 41,000
Net Loss for the year (-) 6,400
353

Working Note:
1) Stock is Overvalued by 20%, So we have to find out the Actual value of Stock
Book Value
100 + % of overvaluation
` 60,000
100 + 20
` 60,000
120
Therefore Actual value of stock is lesser than the Book Value by ` 10,000 (i.e. ` 60,000 –
` 50,000) It is a loss and deducted in the statement of Profit or Loss
2) Creditors are undervalued by 20%. We have to find out the Actual value of Creditors
Book Value
100 - % of undervaluation
` 60,000
100 - 20
` 60,000
80

Therefore Actual value of creditors is greater than the Book Value by ` 15,000
(i.e. ` 75,000 – ` 60,000) It is a profit and added to in Statement of Profit or Loss.
Activity-I
Visit a small business unit and collect information regarding incomes, expenses, assets, liabilities
and prepare a Statement of Affairs and Statement of Profit or Loss.
Activity –II
Visit the business units which follows Single Entry System to find out Profit or Loss of their business.
354


Q.1 Answer in One sentence only.
1. What do you mean by Single Entry System?
2. What is Statement of Affairs?
3. Which types of accounts are normally not kept under the Single Entry System?
4. Which statement is prepared under the Single Entry system to ascertain the capital
balances?
5. How Opening Capital is calculated under Single Entry System?
6. Which type of accounts are maintained under Single Entry System?
7. Can a Trial Balance be prepared under Single Entry System?
8. Which type of organization generally follows Single Entry System?
Q.2 Write a word, term or phrase which can substitute each of the following statements.
1. A statement which is similar to Balance Sheet.
2. System of Accounting normally suitable to small business organization.
3. A statement similar to Balance Sheet prepared to find out the amount of opening capital
4. An excess of assets over liabilities.
5. Excess of closing capital over opening capital of proprietor under Single Entry System.
6. Name of method of accounting suitable to firms to having limited transactions.
7. A System of accounting which is unscientific.
8. Further capital introduced by the proprietor in the business concern over and above his
existing capital.
Q.3 Select the most appropriate answer from the alternatives given below and
rewrite the sentence.
1) The capital balances are ascertained by preparing -------

a) Statement of affairs b) Cash Account
c) Drawings Accounts d) Debtors Accounts
2) Under Single Entry System, Opening Capital = Opening Assets less-----
a) Opening Liabilities b) Closing Liabilities c)Debtors Account d) Creditors Account
3) Additional Capital introduced during the year is ---------------- from closing capital in
order to find out the correct profit
a) Added b) Deducted c) Divided d) Ignored
4) Single Entry System may be useful for -----
a) Sole traders b) Company c) Government d) None of these
5) In order to find out the correct profit, drawings is ------ from closing capital
a) Multiplies b) Divided c) Deducted d) Added
355

6) The difference between assets and liabilities is called -------

a) Capital b) Drawings c) Income d) Expenses
7) When Closing Capital is greater than the Opening Capital, the difference is -----
a) Profit b) Loss c) Assets d) Liabilities
8) Opening Capital is ` 30,000; Closing Capital is `60,000; Withdrawals are ` 5,000; and
further capital brought in is `3,000; Profit is ----------------
a) ` 45,000 b) ` 35,000 c) ` 32,000 d) ` 22,000
Q.4 State True or False with reasons:

1) Double Entry System of Book-keeping is scientific method of books of accounts
2) Preparation of Trial Balance is not possible under Single Entry System
3) Statement of Affairs and Balance Sheet are one and the same.
4) Single Entry System is not useful for large organization.
5) Only Cash and Personal accounts are maintained under Single Entry System.
Q.5 Do you agree with the following statements?

1) Further capital introduced during the year increases profit.
2) Interest on Drawings decreases the amount of profit under Single Entry System.
3) Real and Nominal accounts are not maintained under Single Entry System.
4) Single Entry System is based on certain rules and principles
5) Statement of Profit is just like Profit and Loss Account.
Q.6 Fillin the Blanks

1) Statement of Affairs is just like --------
2) Under Single Entry System, Profit=Closing Capital Less ---------
3) In order to find out the correct profit, drawings are ------ to the closing capital.
4) In --------- Book Keeping System, in every business transactions we find two effects.
5) The difference between Assets and Liabilities is called --------
6) Single Entry System is more popular for -------
7) Additional Capital introduced during the year is ------ from Closing Capital in order to
find out the correct profit.
8) Single Entry System is Suitable for ------ business.
356

1) Interest on Drawings, Outstanding Expenses, Undervaluation of Assets, Prepaid Expenses.

2) Interest on Capital, Interest on Loan, Overvaluation of Liabilities, Depreciation on Assets.
3) Creditors, Bills Payable, Bank Overdraft, Stock in Trade
Q.8 Complete the following table :

1) Closing Capital Opening Capital Profit
` 10,000 - ` 5,000 =
2) Opening Assets Opening Liabilities Opening Capital
- ` 20,000 = ` 10,000
3) Closing Assets Closing Liabilities Closing Capital
` 10,000 - ` 5,000 =
4) Closing Drawings Adjusted Opening Profit

Capital Closing Capital Capital
+ ` 15,000 = ` 40,000 - ` 20,000 =
5) Cash in Cash at Sundry Bills Capital

Hand Bank Debtors Payable
` 10,000 + ` 5,000 = ` 8,000 - ` 4,000 =
357

Q.9 Complete the following table. Put Proper mark in Box

When the closing capital is given Add Less
1) Drawings
2) Prepaid Expenses
3) Overvaluation of Liabilities
4) Undervaluation of Liabilities
5) Interest on Drawings
6) Opening Capital
7) Undervalaution of Assets
8) Interest on Capital
9) Depreciation of Assets
10) Bad debts
PRACTICAL PROBLEMS
1. Mr. Poonawala keeps his books under Single Entry System and gives the following
information:
Capital as on 31.3.2017- ` 60,000 Capital as on 31.3.2018 – ` 1,00,000
Drawings made during the year ` 2,000 Additional capital introduced during the year ` 12,000
Calculate Profit or Loss during the year
2. Sujit a small trader provides you the following details of his business.
Particulars 1.4.2017 (`) 31.3.2018 (`)

Cash in Hand 2,000 7,000
Debtors 40,000 60,000
Creditors 50,000 80,000
_____ 9,000
10% Govt. Bonds
Bank Overdraft 70,000 30,000
Motor Van 50,000 70,000
Furniture 15,000 15,000
Stock 70,000 90,000
358

Additional information:
1. Sujit withdraws ` 5,000 for his personal use, on 1st Oct. 2017
2. He had also withdraws ` 30,000 for rent of his residential flat.
3. Depreciation Furniture by 10% p.a. and writes off ` 1,000 from Motor Van.
4. Charge interest on Drawings ` 3,000
5. 10% Govt. Bonds were purchased on 1st Oct. 2017
6. Allow interest on capital at 10% p.a.
7. ` 1,000 is written off as bad debts and provide 5% p.a. R.D.D on Debtors
Prepare: Opening Statement of Affairs, Closing Statement of Affairs and statement of Profit or Loss
for the year ending 31st March,2018.
3. Anjali keeps her books by Single Entry System. Her position on 1.4.2016 was as
follows.
Cash at Bank ` 4,000, Cash in Hand ` 1,000, Stock ` 6,000; Sundry Debtors ` 8,400, Plant and
Machinery ` 7,500, Bill Receivable ` 2,600, Creditors ` 3500; Bills Payable ` 4,000
On 31.3.2017 her position was as follows; cash at Bank ` 3,900, Cash in Hand ` 2,000. Stock
` 9000, Sundry Debtors, ` 7,500; Plant and Machinery ` 7,500; Bills Payable ` 2,200, Bills
Receivable ` 3,400; Creditors ` 1,500
During the year Anjali introduced further Capital of ` 1,500 and she spent ` 700 per month for
her personal use.
Depreciation Plant and Machinery by 5% p.a. and create Reserve for Doubtful debts @5%p.a.
on debtor.
Prepare Opening and Closing Statement of Affairs and Statement of Profit or Loss for the year
ended 31.3.2017
4. Mr. Vijay is dealing in the business of fruits. He maintains accounting record with
single entry. The following figures are taken from his record.
Particulars 31.3.2017 (`) 31.3.2018 (`)

Building 50,000 60,000
Furniture 30,000 30,000
Stock 15,000 25,000
Cash Balance 10,000 20,000
Bank Overdraft 8,000 _____
Bank Balance _____ 12,000
359











6 Bank Reconciliation Statement
Q.2. Give one word / term / phrase which can substitute each of the following statement:
Answer : 1. Current account. 2. Pass Book.

3. IFSC (Indian Financial System Code). 4. Bank Reconciliation Statement.
5. Overdraft as per Pass Book. 6. Pay-in-slip.
7. Counterfoil. 8. Overdraft as per Cash Book.
9. Cash Book. 10. Bank balance (favourable balance).
Q.3. Do you agree or disagree with the following statements:
Answer : Agree : 1, 2, 3, 8, 9, 10 Disagree : 4, 5, 6, 7
Q.4. Select the most appropriate alternative from those given and rewrite the following
statements:
Answer : 1. Credit. 2. Credited. 3. Bank statement. 4. Increases.

5. Businessman. 6. Credit. 7. Current 8. Favourable.
9. Common. 10. Uncommon.
Q.5. Complete the following statements :
Answer : 1. Debited. 2. Bank. 3. Cash.

4. Bank Reconciliation Statement. 5. Increase.
6. Payment / credit. 7. Debited. 8. Credit.
9. Withdrawal slip. 10. Bank advice.
Q.6. State whether the following statements are True or False with reasons :
Answer : True : 2, 4, 5 False : 1, 3
370

3. On 31st August 2018 bank Pass Book of Mr. Ravi showed a credit balance of
` 33,600, but Cash Book showed a different balance. On comparing the two books
following differences were noticed:
Answer : Bank Overdraft as per Cash Book ` 300
4. From the following details prepare Bank Reconciliation Statement as on 31st Dec
2018.
Answer : Bank Overdraft as per Pass Book ` 46,890
5. From the following particulars prepare Bank Reconciliation Statement as on 30th

June 2019.
Answer : Bank Balance as per Cash Book ` 28,100
6. Prepare Bank Reconciliation statement from the following information as on 31st

March, 2019.
Answer : Bank balance as per Pass Book `12,070
7. On 31st January 2018 Bank balance as per Cash Book was `40,000 but Pass Book
was showing some other balance following were the causes of difference.
Answer : Overdraft as per Pass Book `25000
8. On January 2018, the Pass Book of Mr. Girish Kumbhar showed a bank balance of `14,000.
A comparison of the Cash Book with the Pass Book, revealed the following.
Answer : Overdraft as per Pass Book `13,975

9. Form the following details provided by Prashant enterprises, prepare Bank Reconcili-
ation statement as on 31st March, 2018.
10. Prepare Bank Reconciliation Statement as on 31st Dec. 2018

371

7 Depreciation
Q.2 Write the word/term/phrase which can substitute each of the following statement:
Answers : 1.Depreciation 2.Cost of Asset 3.Scrap value 4.Life period of asset. 5.Fixed
Instalment Method. 6.Reducing Balance Method. 7.Fixed asset. 8.Installation Charges.
9.Profit on sale of asset. 10.Diminishing Balance Method.
the sentence.
Answers –1- Depreciation, 2- Fixed, 3 – Capital, 4 - Scrap value, 5 - Written Down Value
Method, 6 - Straight Line Method, 7 - Profit & Loss A/c.
Q.4 State whether the following Statements are True or False with reasons.
Answers – True - 1, 3, 4 False - 2, 5, 6, 7, 8
Answers : 1.Fixed 2.Machinery 3. Diminishing balance 4. Scarp value 5. Depreciation

6. Constant. 7. Capital. 8. Scrap value. 9. Nominal. 10. Depretium.
Answers : Agree : 1, 3, 5 Disagree : 2, 4
Answer: 1. Depreciation ` 3,000 p.a. 2. Depreciation ` 3,200 p.a. 3. Depreciation ` 9,000

4. W.D.V. ` 1,75,500 5. Loss on sale of Machinery ` 1,750
Answer: Depreciation for each years-` 5,000. Balance of Motor Car -` 40,000
Answer: Depreciation for First year-`3,750. Depreciation for Second year -` 15,000
Depreciation for Third year - `7,500. Loss on sale of Machine -`3,750
372

Answer: Depreciation for First year - `2,700. Depreciation for Second year -` 13,200
Depreciation for Third year - `14,250 Loss on sale of Machinery - ` 1,100
Balance of Machinery - ` 73,750
Answer: Depreciation for First year - ` 375. Depreciation for Second year -` 1,500
Depreciation for Third year - ` 3,375 Depreciation for fourth year- ` 7,000
Balance of Plant - ` 57,750
Answer : Depreciation for First years - ` 20,000. Depreciation for Second years -` 23,000
Depreciation for Third year - ` 24,000 Profit on sale of Machinery - ` 2,000
Balance of Machinery - ` 1,40,000
Answer : Depreciation for First year - ` 1,250. Depreciation for Second year -` 6,875
Depreciation for Third year - ` 3,750 Loss on sale of Machinery - ` 2,500
Balance of Machinery - ` 20,625
Answer: Depreciation for First year - ` 8,000. Depreciation for Second year -` 16,650
Balance of Printing Machinery A/c - ` 64,224
Answer: Depreciation for First year - ` 6,000. Depreciation for Second year -` 6,900
Balance of Machinery A/c - ` 64,429 Loss on sale - ` 3,420
Answer: Depreciation for First year-`2,500. Depreciation for Second year-`2,850.

Loss on sale of Furniture - `2,100. Depreciation for Third year-`2,755.
Balance of Furniture A/c – `24,795.
Answer: Depreciation for First year-` 2,000. Depreciation for Second year-` 7,800.
Depreciation for Third year-` 12,765. Loss on sale of Plant-` 4,935.
Balance of Plant – ` 82,500.
.
Answer: Depreciation for First year-` 8,000. Depreciation for Second year-` 7,500.
Loss on sale of Machinery-` 3,600.Depreciation for Third year-` 5,580.
Balance of Machinery – ` 22,320.
373

8 Rectification of Errors
Q.2 Give one word/term or phrase for each of the following statements.
Answer: 1) One sided errors 2) Overcasting 3) Errors of Omissions 4) Error of Principle

5) Suspense Account 6) Compensating error 7) Two sided errors 8) Error of commission
Q.3 Select the most appropriate alternative from those given below and rewrite the sen-
tence.
Answer : 1) Journal Proper , 2) two sided error, 3) commission, 4) -Error of omission,
5) Trial Balance
Answer: True : 1,2,4 False : 3,5
Answer: Agree : 1, 3, 4 Disagree : 2, 5
Answer: 1) Accuracy 2) errors of principle 3) Rectifying 4) suspense account 5) wrong
9. There was an error in the Trial Balance of Mr. Yashwant on 31st March 2019, and
the difference in Books was carried to a Suspense Account. On going through the
Books you found that.
Answer : Opening Cr Balance of Suspense A/c ` 1,580
9 Final Accounts of a Proprietary concern
Q.2 Give a word, term or phrase which can substitute each of the following statements:
Answer : 1) Prepaid Expenses, 2) Accrued Income, 3) Carriage Outward, 4) Balance Sheet,

5) Profit & Loss Account, 6) Closing Stock, 7) Provision For Bad & Doubtful Debts, 8) Final
Accounts, 9) Selling Expenses, 10) Adjustments.
374

Q.3 Select the most appropriate alternatives given below and rewrite the sentence :
Answer : 1) Capital, 2) Profit & Loss account, 3) Balance Sheet, 4) Liability, 5) Profit & Loss
account, 6) Gross loss, 7) Trading A/c 8) Net Profit, 9) Less, 10) Six,
Q.4 State True or False with reasons :
Answer : True : 2, 5 False : 1, 3, 4

Q.5 Fill in the blanks :
Answer : 1) Profit & Loss account, 2) Gross loss, 3) Asset, 4) Profit & Loss account,
5) Net working, 6) Trading Account, 7) Profit & Loss Account, 8) Net loss 9) Trading A/c
10) Statement.
Answer : 1) Plant and Machinery, 2) Debtors, 3) Debtors, 4) Factory Rent, 5) Reserve for
Doubtful Debts
Q.7 Do you agree or disagree with the following statement :
Answer : Agree : 1, 5 Disagree : 2, 3, 4
Answer : 1) ` 60,050 2) ` 2,100 3) ` 24,000 4) ` 2,667 5) ` 26,800 (Gross Profit)
2. Prepare Profit and Loss Account of Sanjay Brothers for the year ended 31st March, 2018
from the following balances.
Ans. : Gross Profit Rs. 40,000

3. From the following Trial Balance of Sanjiv & Sons. Prepare Trading Account and Profit &
Loss Account for the year ending on 31st March, 2019 and a Balance Sheet as on that date.
Answer : Gross Profit ` 2,81,000, Net Profit 2,05,700, Total of Balance Sheet ` 4,40,800
4. From the following Trial Balance of Nandini & Co. as on 31st March 2019. Prepare Final
Accounts after considering the adjustments given below.
Ans. : Gross Profit ` 55,200 Net Profit ` 8,220 Total of Balance Sheet ` 4,73,420
375

5. Prepare Final accounts of Abdul Traders for the year ending 31st March, 2019 with
the help of following Trial Balance and Adjustments.
6. Following is the Trial Balance of Geeta Enterprises. You are required to prepare Trading
and Profit & Loss Account for the year ended 31st March, 2019 and Balance Sheet as on
that date after taking into account the additional information provided to you.
Ans. : Gross Profit ` 3,650, Net Loss ` 2,942 Total of Balance Sheet ` 51,730
7. Following are the closing ledger balances of Deepak & Co. Prepare Trading Account
and Profit & Loss Account for the year ended 31st March 2019 and Balance sheet as
on that date.
Ans. : Gross Profit ` 79,500 Net Profit ` 28,245, Total of Balance Sheet ` 2,28120
8. Following is the Trial Balance extracted from the books of Raju Traders. You are
required to prepare Trading A/c, Profit & Loss A/c for e year ending on 31st March
2019 and Balance Sheet as on that date after Considering the additional information
given below.
Ans. : Gross Profit ` 1,09,800 Net Profit ` 49,240, Total of Balance Sheet ` 3,01,840
9. From the following Trial Balance of Shradha Enterprises, you are required to
prepare Final Accounts for the year ending on 31sty March 2019.
Ans. : Gross Profit ` 16,54,200 Net Profit ` 12,84,525, Total of Balance Sheet ` 29,29,525
10. From the following Trial Balance of Ayub & Co. as on 31st March 2019, you are
required to prepare Trading Account, Profit and Loss Account for the year ending
31st March 2019 and Balance Sheet as on that date after making necessary adjust-
ments..
Ans. : Gross Profit ` 1,00,200 Net Profit ` 48,000 Total of Balance sheet `1,54,125
11. From the following Trial Balance of Rajnish & Sons and the additional information
given below prepare Trading & Profit and Loss Account for the year ending on 31st
March 2018 and Balance Sheet as on that date.
Ans. : Gross Profit ` 55,000 Net Loss ` 1,14,700 Total of Balance Sheet ` 9,35,500
376

12. From the following Trial Balance of John & Sons you are require to prepare Trading
Account, Profit and Loss Account for the year ending 31st March 2019 and Balance
Sheet as on that date.
Ans. : Gross profit ` 31,700 Net Profit ` 20,780 Total of Balance sheet ` 1,53,480
13. From the following Trial Balance of Pushkraj you are required to prepare Trading
Account and Profit and Loss Account for the year ended 31st March 2019 and
14. From the following Trial Balance of Jyoti Trading Co. Prepare a Trading Account
and Profit and Loss Account for the year ended 31st March 2019 and Balance Sheet
as on that date.
15. From the following Trial Balance of Manish Enterprise, Prepare the Trading Account
and Profit and loss Account for the year ended 31st March 2019 and Balance sheet
as on that date.
10 Single Entry System
Q.2 Write a word, term or phrase which can substitute each of the following statements.
Answers: 1. Statement of affairs, 2. Single Entry System, 3. Opening statements of affairs,

4. Capital, 5.Profit 6. Single Entry System, 7. Single Entry System, 8. Additional Capital,
Q.3 Select the most appropriate answer from the alternatives given below and rewrite the
sentence.
Answers: 1) Statement of affair 2) Opening liabilities 3) Deducted, 4) Sole traders, 5) Added

6) Capital, 7) Profit , 8) ` 32000
Q.4 State True or False with reasons:
Answers: True : 1, 4, 5 False : 2, 3
377

Q.5 Do you agree with the following statements?
Answers: Agree : 3, 4 Disagree : 1, 2, 5
Q.6 Fill in the Blanks
Answers : 1.Balance Sheet 2.Opening Capital 3.Added 4. Double Entry System 5.Capital
6. Sole Trader 7. Deducted 8. Small
Answer : 1) Outstanding Expenses 2) Overvaluation of Liabilities 3) Stock in Trade
Q.8 Complete the following table :
Answer : 1) ` 5,000 2) ` 30,000 3) ` 5,000 4) ` 25,000, ` 20,000 5) ` 19,000
1. Mr. Poonawala keeps his books under Single Entry System and gives the following
information:
Answer: Profit during the year ` 30,000
Ans: Opening Capital Balance ` 1,27,000, Closing Capital Balance ` 2,31,000, Net Profit during
the year ` 1,23,300)
3. Anjali keeps her books by Single Entry System. Her position on 1.4.2016 was as
follows.
Ans: Opening Capital Balance ` 22,000, Closing Capital Balance ` 29,600, Net Profit
during the year ` 13,750
4. Mr. Vijay is dealing in the business of fruits. He maintains accounting record with
single entry. The following figures are taken from his record.
Ans: (Opening Capital Balance ` 1,22,000, Closing Capital Balance ` 2,32,000, Net Profit
during the year ` 1,34,500)
5. Miss. Fiza keeps her books on Single Entry System and disclosed the following infor-
mation of her business.
Ans: (Opening Capital Balance ` 48,000, Closing Capital Balance ` 1,39,000, Net Profit during
the year ` 77,750)
378

6. Miss. Sanika keeps her books on Single Entry System. The statement of afffairs is
given on 31st March, 2018.
Ans: Closing Capital ` 1,02,000, Net Profit during the Year ` 70,150
Ans: Closing Capital Balance ` 1,71,500, Net Profit during the year ` 12,775
8. Ganesh keeps his books by Single Entry Method. Following are the details of his
business:
Ans: Opening Capital Balance ` 2,32,000, Closing Capital Balance ` 2,88,000, Net Profit during
the year ` 69,000
9. Peter keeps his books on Single Entry System. From the following particulars, Prepare
Opening and Closing Statement of Affairs and Statement of Profit or Loss for the year
ending 31st March,2018.
Ans: Opening Capital Balance ` 1,67,500, Closing Capital Balance ` 2,26,000, Net Profit
during the year ` 35,200
10. Suresh keeps his books by Single Entry System. His position on 1.4.2017 was as follows.
Ans: Opening Capital Balance ` 33,500,Closing Capital Balance ` 35,400, Net Profit during the
year ` 6,400
j j j
379

380


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The Coordination Committee formed by GR No. Abhyas - 2116/(Pra.Kra.43/16) SD - 4

Maharashtra State Bureau of Textbook Production

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First Edition : 2019 © Maharashtra State Bureau of Textbook Production

Print Order No.

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Pune (Dr. Sunil Magar)

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Book-keeping and Accountancy

• Students understand fundamental principles of Double Entry

• Students are able to post recording from Books of original

• Students understand the meaning & need of Subsidiary

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• Students can prepare specimen of different Bank Documents.

• Students understand the Meaning, Objectives and Importance

• Students are able to understand the meaning and importance

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Sr. No. Chapter Name Page No.

1 Introduction to Book- Keeping and Accountancy 1 - 18

5 Subsidiary Books 122 - 177

6 Bank Reconciliation Statement 178 - 211

7 Depreciation 212 - 247

8 Rectification of Errors 248 - 270

9 Final Accounts of a Proprietary Concern 271 - 332

10 Single Entry System 333 - 362

11 Answer Key 363 - 380

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1 Introduction to Book-keeping and Accountancy

1.1 Meaning, Definition and Objectives

o Students understand the meaning, features and the importance of accounting.

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1.1 Meaning and Definition:

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3) Book-keeping serves as a permanent record of the monetary transacitons of an enterprise

1.2 Importance of Book-keeping:

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1.3 Difference between Book-Keeping and Accountancy

Outcomes Book-keeping basically results in The results of Accountancy is Profit and

1.4 Meaning and Definition of Accountancy:

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1.5 Basis (Methods) of Accounting System

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1. Reliability of the Accounting Information: Reliability is described as one of the

Cash Credit Barter

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1.7.3 Debtors and Creditors:

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1.7.6 Solvent and Insolvent:

Trading Concern and Not for Profit Concerns.

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1.7.10 Assets, Liabilities, Net Worth:

iv) Types of Liabilities:

Net worth = Owner’s Equity = Capital

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