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ACCOUNTANCY

Higher Secondary – First Year

A Publication under
Government of Tamilnadu
Distribution of Free Textbook Programme
)NOT FOR SALE(

Untouchability is a sin
Untouchability is a crime
Untouchability is inhuman

TamilNadu Textbook And

EDUCATIONAL SERVICES Corporation
College Road, Chennai – 600 006.
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© Government of Tamilnadu
FirstEdition - 2004
Reprint - 2017

Chairperson
Dr. (Mrs) R. AMUTHA
Reader in Commerce
Justice Basheer Ahmed Sayeed College for Women
Chennai - 600 018.

Reviewers
Dr. K. GOVINDARAJAN Dr. M. SHANMUGAM
Reader in Commerce Reader in Commerce
Annamalai University SIVET College
Annamalai Nagar - 608002. Gowrivakkam,Chennai-601302.

Mrs. R. AKTHAR BEGUM

S.G. Lecturer in Commerce
Quaide-Millet Govt. College for Women
Anna Salai, Chennai - 600002.

Authors
Thiru G. RADHAKRISHNAN Thiru S. S. KUMARAN
S.G. Lecturer in Commerce Co-ordinator, Planning Unit
SIVET College (Budget & Accounts)
Gowrivakkam, Chennai - 601302. Education for All Project
College Road, Chennai-600006.

Thiru N. MOORTHY Mrs. N. RAMA

P.G. Asst. (Special Grade) P.G. Assistant
Govt. Higher Secondary School Lady Andal Venkatasubba Rao
Nayakanpettai - 631601 Matriculation Hr. Sec. School
Kancheepuram District. Chetpet, Chennai - 600031.

Price : Rs.

This book has been prepared by the Directorate of School Education

on behalf of the Govt.of Tamilnadu.

This book has been printed on 60 GSM paper

Printed by Web Offset at:

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PREFACE

The book on Accountancy has been written strictly in accordance with the new
syllabus framed by the Government of Tamil Nadu.
As curriculum renewal is a continuous process, Accountancy curriculum has
undergone various types of changes from time to time in accordance with the changing
needs of the society. The present effort of reframing and updating the curriculum in
Accountancy at the Higher Secondary level is an exercise based on the feed back from
the users.
This prescribed text book serves as a foundation for the basic principles of
Accountancy. By introducing the subject at the higher secondary level, great care has
been taken to emphasize on minute details to enable the students to grasp the concepts
with ease. The vocabulary and terminology used in the text book is in accordance with
the comprehension and maturity level of the students.
This text would serve as a foot stool while they pursue their higher studies. Since
the text carries practical methods of maintaining accounts the students could use this for their
career.
Along with examples relating to the immediate environment of the students
innovative learning methods like charts, diagrams and tables have been presented to
simplify conceptualized learning.
As mentioned earlier, this text serves as a foundation course which is coupled
with sample questions and examples. These questions and examples serve for a better
understanding of the subject. Questions for examinations need not be restricted to
the exercises alone.

Chairperson

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SYLLABUS

1. Introduction to Accounting [ 14 Periods ]

Need and Importance – Book-keeping – Accounting – Accountancy,
Accounting and Book-keeping – Users of accounting information – Branches
of accounting – Basic accounting terms.
2. Conceptual Frame work of Accounting [ 7 Periods ]
Basic assumptions – Basic concepts – Modifying principles – Accounting
Standards.
3. Basic Accounting Procedures I
– Double Entry System of Book-Keeping [ 7 Periods ]
Double entry system – Account – Golden rules of accounting.
4. Basic Accounting Procedures II – Journal [ 21 Periods ]
Source documents – Accounting equation – Rules for debiting and crediting
– Books of original entry – Journal – Illustrations.
5. Basic Accounting Procedures III – Ledger [ 21 Periods ]
Meaning – Utility – Format – Posting – Balancing an account – Distinction
between journal and ledger.
6. Subsidiary Books I – Special Purpose Books [21 Periods]
Need – Purchase book – Sales book – Returns books – Bills of exchange –
Bills book – Journal proper.
7. Subsidiary Books II – Cash Book [ 21 Periods ]
Features – Advantages – Kinds of cash books.
8. Subsidiary Books III – Petty Cash Book [ 7 Periods ]
Meaning – Imprest system – Analytical petty cash book – Format – Balancing
of petty cash book – Posting of petty cash book entries – Advantages.
9. Bank Reconciliation Statement [ 21 Periods ]
Pass book – Difference between cash book and pass book - Bank reconciliation
statement – Causes of disagreement between balance shown by cash book and
the balance shown by pass book – Procedure for preparing bank reconciliation
statement – Format.

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10. Trial Balance and Rectification of Errors [ 21 Periods ]

Definition – Objectives – Advantages – Methods – Format – Sundry debtors
and creditors – Limitations – Errors in accounting – Steps to locate the errors
– Suspense account – Rectification of errors.
11. Capital and Revenue Transactions [ 7 Periods ]
Capital transactions – Revenue transactions – Deferred revenue transactions –
Revenue expenditure, Capital expenditure and Deferred revenue expenditure
– Distinction – Capital profit and revenue profit – Capital loss and revenue
loss.
12.
Final Accounts [ 22 Periods ]
Parts of Final Accounts – Trading account – Profit and loss account – Balance
sheet – Preparation of Final Accounts.

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Contents
Page No.

1. Introduction to Accounting 1

2. Conceptual Frame Work of Accounting 15

3. Basic Accounting Procedures I

Double Entry System of Book-Keeping 21

4. Basic Accounting Procedures II – Journal 28

5. Basic Accounting Procedures III – Ledger 66

6. Subsidiary Books I – Special Purpose Books 89

7. Subsidiary Books II – Cash Book 115

8. Subsidiary Books III – Petty Cash Book 145

9. Bank Reconciliation Statement 162

10. Trial Balance and Rectification of Errors 184

11. Capital and Revenue Transactions 212

12. Final Accounts 223

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Chapter -1
INTRODUCTION TO ACCOUNTING

Learning Objectives
After studying this Chapter, you will be able to:

 understand the Need, Meaning, Definition, Objectives and Advantages of

Book-Keeping.

 know the Need, Definition, Objectives and Process of Accounting.

 distinguish between Book-Keeping and Accounting.

 identify the Users of Accounting Information and their Need.

 know the Basic Accounting Terms.
_________________________________________________________________

“Accounting is as old as money itself”. Since in early ages commercial

activities were based on barter system, record keeping was not a necessity. The
Industrial Revolution of 19th century along with rapid rise in population, paved
way for the development of commercial activities, mass production and credit
terms. Thus recording of business transaction has become an important feature.
In recent years with the change of technologies and marketing along with stiff
competition, accounting system has undergone remarkable changes.

1.1 Need and Importance of Accounting

When a person starts a business, whether large or small, his main aim is
to earn profit. He receives money from certain sources like sale of goods, interest
on bank deposits etc. He has to spend money on certain items like purchase of
goods, salary, rent, etc. These activities take place during the normal course of
his business. He would naturally be anxious at the year end, to know the progress
of his business. Business transactions are numerous, that it is not possible to
recall his memory as to how the money had been earned and spent. At the same
time, if he had noted down his incomes and expenditures, he can readily get the
required information. Hence, the details of the business transactions have to be
recorded in a clear and systematic manner to get answers easily and accurately
for the following questions at any time he likes.

i. What has happened to his investment?

ii. What is the result of the business transactions?

iii. What are the earnings and expenses?

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iv. How much amount is receivable from customers to whom goods have
been sold on credit?

v. How much amount is payable to suppliers on account of credit purchases?

vi. What are the nature and value of assets possessed by the business
concern?

vii. What are the nature and value of liabilities of the business concern?

These and several other questions are answered with the help of
accounting. The need for recording business transactions in a clear and systematic
manner is the basis which gives rise to Book-keeping.

1.2. Book-keeping
Book-keeping is that branch of knowledge which tells us how to keep a
record of business transactions. It is often routine and clerical in nature. It is
important to note that only those transactions related to business which can be
expressed in terms of money are recorded. The activities of book-keeping include
recording in the journal, posting to the ledger and balancing of accounts.
1.2.1 Definition
R.N. Carter says, “Book-keeping is the science and art of correctly recording
in the books of account all those business transactions that result in the transfer
of money or money’s worth”.
1.2.2 Objectives
The objectives of book-keeping are

i. to have permanent record of all the business transactions.

ii. to keep records of income and expenses in such a way that the net
profit or net loss may be calculated.

iii. to keep records of assets and liabilities in such a way that the financial
position of the business may be ascertained.

iv. to keep control on expenses with a view to minimise the same in order
to maximise profit.

v. to know the names of the customers and the amount due from them.

vi. to know the names of suppliers and the amount due to them.

vii. to have important information for legal and tax purposes.

1.2.3 Advantages
From the above objectives of book-keeping, the following advantages can
be noted

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i. Permanent and Reliable Record: Book-keeping provides permanent

record for all business transactions, replacing the memory which fails to remember
everything.

ii. Arithmetical Accuracy of the Accounts: With the help of book

keeping trial balance can be easily prepared. This is used to check the
arithmetical accuracy of accounts.

iii. Net Result of Business Operations: The result (Profit or Loss) of

business can be correctly calculated.

iv. Ascertainment of Financial Position: It is not enough to know the

profit or loss; the proprietor should have a full picture of his financial position in
business. Once the full picture (say for a year) is known, this helps him to plan
for the next year’s business.

v. Ascertainment of the Progress of Business: When a proprietor

prepares financial statements evey year, he will be in a position to compare
the statements. This will enable him to ascertain the growth of his business.
Thus book keeping enables a long range planning of business activities besides
satisfying the short term objective of calculation of annual profits or losses.

vi. Calculation of Dues : For certain transactions payments may be

made later. Therefore, the businessman has to know how much he has to pay
others.

vii. Control over Assets: In the course of business, the proprietor acquires
various assets like building, machines, furnitures, etc. He has to keep a check
over them and find out their values year after year.

viii. Control over Borrowings: Many businessmen borrow from banks

and other sources. These loans are repayable. Just as he must have a control
over assets, he should have control over liabilities.

ix. Identifying Do’s and Dont’s : Book keeping enables the proprietor
to make an intelligent and periodic analysis of various aspects of the business
such as purchases, sales, expenditures and incomes. From such analysis, it will
be possible to focus his attention on what should be done and what should not
be done to enhance his profit earning capacity.

x. Fixing the Selling Price : In fixing the selling price, the businessmen
have to consider many aspects of accounting information such as cost of
production, cost of purchases and other expenses. Accounting information is
essential in determining selling prices.

xi. Taxation: Businessmen pay sales tax, income tax, etc. The tax
authorities require them to submit their accounts. For this purpose, they have to
maintain a record of all their business transactions.
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xii. Management Decision-making: Planning, reviewing, revising,

controlling and decision-making functions of the management are well aided by
book-keeping records and reports.

xiii. Legal Requirements: Claims against and for the firm in relation to
outsiders can be confirmed and established by producing the records as evidence
in the court.

1.3 Accounting
Book-keeping does not present a clear financial picture of the state of
affairs of a business. When one has to make a judgement regarding the financial
position of the firm, the information contained in these books of accounts has
to be analysed and interpreted. It is with the purpose of giving such information
that accounting came into being.

Accounting is considered as a system which collects and processes financial

information of a business. These informations are reported to the users to enable
them to make appropriate decisions.
1.3.1 Definition
American Accounting Association defines accounting as “the process of
identifying, measuring and communicating economic information to permit informed
judgements and decision by users of the information”.
1.3.2 Objectives
The main objectives of accounting are

i. to maintain accounting records.

ii. to calculate the result of operations.

iii. to ascertain the financial position.

iv. to communicate the information to users.

1.3.3 Process
The process of accounting as per the above definition is given below:
Input Process Output

Identifying
Recording
Business Classifying Information
transactions Summarising to
(monetary value) Analysing Users
Interpreting
Communicating

In order to accomplish its main objective of communicating information to

the users, accounting embraces the following functions.
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i. Identifying: Identifying the business transactions from the source

documents.
ii. Recording: The next function of accounting is to keep a systematic
record of all business transactions, which are identified in an orderly manner,
soon after their occurrence in the journal or subsidiary books.
iii. Classifying: This is concerned with the classification of the recorded
business transactions so as to group the transactions of similar type at one
place. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the
accounts, trial balance is prepared.
iv. Summarising : The classified information available from the trial balance
are used to prepare profit and loss account and balance sheet in a manner useful
to the users of accounting information.
v. Analysing: It establishes the relationship between the items of the profit
and loss account and the balance sheet. The purpose of analysing is to identify
the financial strength and weakness of the business. It provides the basis for
interpretation.
vi. Interpreting: It is concerned with explaining the meaning and significance
of the relationship so established by the analysis. Interpretation should be useful
to the users, so as to enable them to take correct decisions.
vii. Communicating: The results obtained from the summarised, analysed
and interpreted information are communicated to the interested parties.
1.3.4 Meaning of Accounting Cycle
An accounting cycle is a complete sequence of accounting process,
that begins with the recording of business transactions and ends with the
preparation of final accounts.
Accounting Cycle

Balance
Sheet
(Closing)
Profit & Transactions
Loss
Account
Balance
Sheet
(Opening)
Trading Journal
Account

Trial Ledger
Balance

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When a businessman starts his business activities, he records the day-to-

day transactions in the Journal. From the journal the transactions move further
to the ledger where accounts are written up. Here, the combined effect of debit
and credit pertaining to each account is arrived at in the form of balances.

To prove the accuracy of the work done, these balances are transferred
to a statement called trial balance. Preparation of trading and profit and loss
account is the next step. The balancing of profit and loss account gives the net
result of the business transactions. To know the financial position of the business
concern balance sheet is prepared at the end.

These transactions which have completed the current accounting year,

once again come to the starting point – the journal – and they move with new
transactions of the next year. Thus, this cyclic movement of the transactions
through the books of accounts (accounting cycle) is a continuous process.

1.4 Accountancy, Accounting and Book-keeping

Accountancy refers to a systematic knowledge of accounting. It explains
“why to do” and “how to do” of various aspects of accounting. It tells us why and
how to prepare the books of accounts and how to summarize the accounting
information and communicate it to the interested parties.

Accounting refers to the actual process of preparing and presenting the

accounts. In other words, it is the art of putting the academic knowledge of
accountancy into practice.

Book-keeping is a part of accounting and is concerned with record keeping

or maintenance of books of accounts. It is often routine and clerical in nature.
1.4.1 Relationship between Accountancy, Accounting and Book-keeping
Book-keeping provides the basis for accounting and it is complementary to
accounting process. Accounting begins where book-keeping ends. Accountancy
includes accounting and book-keeping. The terms Accounting and Accountancy
are used synonymously. This relationship can be easily understood with the help
of the following diagram.

C O U N TA N C Y
AC
C O U N T IN
AC k-ke ep G
oo i
ng
B

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1.4.2 Distinction between Book-keeping and Accounting

In general the following are the differences between book-keeping
and accounting.

Sl.No. Basis of Book-keeping Accounting

Distinction
1. Scope Recording and It is not only recording
maintenance of books of and maintenance of
accounts. books of accounts
but also includes
analysis, interpreting
and communicating the
information.
2. Stage Primary stage. Secondary stage.
3. Objective To maintain systematic To ascertain the net
records of business result of the business
transactions. operation.
4. Nature Often routine and clerical Analytical and executive
in nature. in nature.
5. Responsibility A book-keeper is An accountant is also
responsible for recording responsible for the work
business transactions. of a book-keeper.
6. Supervision The book-keeper does An accountant supervises
not supervise and check and checks the work of
the work of an the book-keeper.
Accountant.
7. Staff involved Work is done by the Senior staff performs the
junior staff of the accounting work.
organisation.

1.5 Users of Accounting Information

The basic objective of accounting is to provide information which is useful
for persons and groups inside and outside the organisation.

I. Internal users: Internal users are those individuals or groups who are
within the organisation like owners, management, employees and trade unions.

II. External users: External users are those individuals or groups who
are outside the organisation like creditors, investors, banks and other lending
institutions, present and potential investors, Government, tax authorities,
regulatory agencies and researchers.

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The users and their need for information are as follows:

Users Need for Information

Internal
i. Owners To know the profitability and financial soundness of
the business.

ii. Management To take prompt decisions to manage the business

efficiently.

iii. Employees and To form judgement about the earning capacity of

Trade unions the business since their remuneration and bonus
depend on it.
External

i. Creditors, banks and To determine whether the principal and the interest
other lending thereof will be paid in when due.
institutions

ii. Present investors To know the position, progress and prosperity of the
business in order to ensure the safety of their
investment.
iii. Potential investors To decide whether to invest in the business or not.

iv. Government and Tax To know the earnings in order to assess the tax
authorities liabilities of the business.

v. Regulatory agencies To evaluate the business operation under the

regulatory legislation.

vi. Researchers To use in their research work.

Users of Accounting Information

Owners

Researchers Management

Employees and
Regulatory Agencies Trade Unions

Accounting
Information

Government and
Creditors, Banks &
Tax Authorities
Lending Institutions

Potential Investors Present Investors

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1.6 Branches of Accounting

Increased scale of business operations has made the management function
more complex. This has given raise to specialised branches in accounting. The
main branches of accounting are Financial Accounting, Cost Accounting and
Management Accounting.
1.6.1 Financial Accounting :
It is concerned with recording of business transactions in the books of
accounts in such a way that operating result of a particular period and financial
position on a particular date can be known.
1.6.2 Cost Accounting
It relates to collection, classification and ascertainment of the cost of
production or job undertaken by the firm.
1.6.3 Management Accounting
It relates to the use of accounting data collected with the help of financial
accounting and cost accounting for the purpose of policy formulation, planning,
control and decision making by the management.

Branches of Accounting
Accounting

Financial Cost Management

Accounting Accounting Accounting

1.7 Basic Accounting Terms

The understanding of the subject becomes easy when one has the
knowledge of a few important terms of accounting. Some of them are explained
below.
1.7.1 Transactions
Transactions are those activities of a business, which involve transfer of
money or goods or services between two persons or two accounts. For example,
purchase of goods, sale of goods, borrowing from bank, lending of money, salaries
paid, rent paid, commission received and dividend received. Transactions are of
two types, namely, cash and credit transactions.
Cash Transaction is one where cash receipt or payment is involved in
the transaction. For example, When Ram buys goods from Kannan paying the
price of goods by cash immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but
will be paid or received later. In the above example, if Ram, does not pay cash
immediately but promises to pay later, it is credit transaction.
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1.7.2 Proprietor
A person who owns a business is called its proprietor. He contributes capital
to the business with the intention of earning profit.
1.7.3 Capital
It is the amount invested by the proprietor/s in the business. This amount
is increased by the amount of profits earned and the amount of additional capital
introduced. It is decreased by the amount of losses incurred and the amounts
withdrawn. For example, if Mr.Anand starts business with Rs.5,00,000, his capital
would be Rs.5,00,000.
1.7.4 Assets
Assets are the properties of every description belonging to the business.
Cash in hand, plant and machinery, furniture and fittings, bank balance, debtors,
bills receivable, stock of goods, investments, Goodwill are examples for assets.
Assets can be classified into tangible and intangible.

Tangible Assets: These assets are those having physical existence. It

can be seen and touched. For example, plant & machinery, cash, etc.

Intangible Assets: Intangible assets are those assets having no

physical existence but their possession gives rise to some rights and benefits
to the owner. It cannot be seen and touched. Goodwill, patents, trademarks are
some of the examples.
1.7.5 Liabilities
Liabilities refer to the financial obligations of a business. These denote
the amounts which a business owes to others, e.g., loans from banks or other
persons, creditors for goods supplied, bills payable, outstanding expenses, bank
overdraft etc.
1.7.6 Drawings
It is the amount of cash or value of goods withdrawn from the business
by the proprietor for his personal use. It is deducted from the capital.
1.7.7 Debtors
A person (individual or firm) who receives a benefit without giving money
or money’s worth immediately, but liable to pay in future or in due course of
time is a debtor. The debtors are shown as an asset in the balance sheet. For
example, Mr.Arul bought goods on credit from Mr.Babu for Rs.10,000. Mr.Arul is
a debtor to Mr.Babu till he pays the value of the goods.
1.7.8 Creditors
A person who gives a benefit without receiving money or money’s worth
immediately but to claim in future, is a creditor. The creditors are shown as a

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liability in the balance sheet. In the above example Mr.Babu is a creditor to Mr.Arul
till he receive the value of the goods.
1.7.9 Purchases
Purchases refers to the amount of goods bought by a business for resale or
for use in the production. Goods purchased for cash are called cash purchases.
If it is purchased on credit, it is called as credit purchases. Total purchases
include both cash and credit purchases.
1.7.10 Purchases Return or Returns Outward
When goods are returned to the suppliers due to defective quality or
not as per the terms of purchase, it is called as purchases return. To find net
purchases, purchases return is deducted from the total purchases.
1.7.11 Sales
Sales refers to the amount of goods sold that are already bought or
manufactured by the business. When goods are sold for cash, they are cash
sales but if goods are sold and payment is not received at the time of sale, it is
credit sales. Total sales includes both cash and credit sales.
1.7.12 Sales Return or Returns Inward
When goods are returned from the customers due to defective quality or
not as per the terms of sale, it is called sales return or returns inward. To find
out net sales, sales return is deducted from total sales.
1.7.13 Stock
Stock includes goods unsold on a particular date. Stock may be opening
and closing stock. The term opening stock means goods unsold in the beginning
of the accounting period. Whereas the term closing stock includes goods unsold
at the end of the accounting perid. For example, if 4,000 units purchased @
Rs. 20 per unit remain unsold, the closing stock is Rs.80,000. This will be opening
stock of the subsequent year.
1.7.14 Revenue
Revenue means the amount receivable or realised from sale of goods and
earnings from interest, dividend, commission, etc.
1.7.15 Expense
It is the amount spent in order to produce and sell the goods and services.
For example, purchase of raw materials, payment of salaries, wages, etc.
1.7.16 Income
Income is the difference between revenue and expense.

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1.7.17 Voucher
It is a written document in support of a transaction. It is a proof that a
particular transaction has taken place for the value stated in the voucher. It may
be in the form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher
is necessary to audit the accounts.
1.7.18 Invoice
Invoice is a business document which is prepared when one sell goods
to another. The statement is prepared by the seller of goods. It contains the
information relating to name and address of the seller and the buyer, the date
of sale and the clear description of goods with quantity and price.
1.7.19 Receipt
Receipt is an acknowledgement for cash received. It is issued to the party
paying cash. Receipts form the basis for entries in cash book.
1.7.20 Account
Account is a summary of relevant business transactions at one place relating
to a person, asset, expense or revenue named in the heading. An account is a
brief history of financial transactions of a particular person or item. An account
has two sides called debit side and credit side.

QUESTIONS
I. Objective Type :
a) Fill in the blanks:
1. The amount which the proprietor has invested in the business is_________.

2. Book-keeping is an art of recording ___________ in the book of accounts.

3. ___________ is a written document in support of a transaction.

4. Accounting begins where _______ ends.

5. Liabilities refer to the ___________ obligations of a business.

6. Owner of the business is called __________.

7. An account is a _________ of relevant business transactions at one place

relating to a person, assets, expense or revenue named in the heading.

8. Receipt is an acknowledgement for __________.

9. Income is the difference between revenue and ________.

[Answers: 1. capital; 2. business transactions; 3. voucher; 4.bookkeeping;

5. financial; 6. Proprietor; 7. summary; 8. cash received;
9. expense]

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b) Choose the correct answer:

1. The debts owing to others by the business is known as

a) liabilities b) expenses c) debtors

2. Assets minus liabilities is

a) drawings b) capital c) credit

3. A written document in support of a transaction is called

a) receipt b) credit note c) voucher

4. Business transactions may be classified into

a) three b) two c) one

5. Purchases return means goods returned to the supplier due to

a) good quality b) defective quality c) super quality

6. Amount spent inorder to produce and sell the goods and services is
called

a) expense b) income c) revenue

[Answers: 1. (a), 2. (b), 3. (c), 4. (b), 5. (b), 6. (a)]

II. Other Questions:
1. What is book-keeping?
2. Define Book-keeping.

3. What are the objectives of book-keeping?

4. What are the advantages of book-keeping?

5. What information can a businessman obtain from his book-keeping?

6. What do you mean by accounting?

7. Define Accounting.

8. What is accounting process?

9. What are the differences between book-keeping and accounting?

10.
Explain the inter-relationship between book-keeping, accounting and
accountancy.

11. Briefly explain the users and their need for accounting information.

12. What are the branches of accounting?

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13. Write short notes on :

a) Debtors b) Creditors c) Stock

14. Briefly explain the following terms

a) Voucher b) Invoice c) Account

15. Write short note on

a) Revenue b) Purchase c) Assets

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Chapter -2
CONCEPTUAL FRAME WORK
OF ACCOUNTING

Learning Objectives
After learning this chapter you will be able to:

 know the Basic Assumptions of Accounting.

 understand the Basic Accounting Concepts.

 know the Modifying Principles of Accounting.

_________________________________________________________________

Accounting is the language of business. It records business transactions

taking place during the accounting period. Accounting communicates the result
of the business transactions in the form of final accounts. With a view to make
the accounting results understood in the same sense by all interested parties,
certain accounting assumptions, concepts and principles have been developed
over a course of period.

2.1 Basic Assumptions

The basic assumptions of accounting are like the foundation pillars on
which the structure of accounting is based. The four basic assumptions are as
follows:
2.1.1 Accounting Entity Assumption
According to this assumption, business is treated as a unit or entity apart
from its owners, creditors and others. In other words, the proprietor of a business
concern is always considered to be separate and distinct from the business which
he controls. All the business transactions are recorded in the books of accounts
from the view point of the business. Even the proprietor is treated as a creditor
to the extent of his capital.
2.1.2 Money Measurement Assumption
In accounting, only those business transactions and events which are of
financial nature are recorded. For example, when Sales Manager is not on good
terms with Production Manager, the business is bound to suffer. This fact will not
be recorded, because it cannot be measured in terms of money.

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2.1.3 Accounting Period Assumption

The users of financial statements need periodical reports to know the
operational result and the financial position of the business concern. Hence it
becomes necessary to close the accounts at regular intervals. Usually a period
of 365 days or 52 weeks or 1 year is considered as the accounting period.
2.1.4 Going Concern Assumption
As per this assumption, the business will exist for a long period and
transactions are recorded from this point of view. There is neither the intention
nor the necessity to wind up the business in the foreseeable future.

2.2 Basic Concepts of Accounting

These concepts guide how business transactions are reported. On the basis
of the above four assumptions the following concepts (principles) of accounting
have been developed.
2.2.1 Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping.
All business transactions recorded in accounts have two aspects - receiving benefit
and giving benefit. For example, when a business acquires an asset (receiving
of benefit) it must pay cash (giving of benefit).
2.2.2 Revenue Realisation Concept
According to this concept, revenue is considered as the income earned on
the date when it is realised. Unearned or unrealised revenue should not be taken
into account. The realisation concept is vital for determining income pertaining
to an accounting period. It avoids the possibility of inflating incomes and profits.
2.2.3 Historical Cost Concept
Under this concept, assets are recorded at the price paid to acquire
them and this cost is the basis for all subsequent accounting for the asset. For
example, if a piece of land is purchased for Rs.5,00,000 and its market value is
Rs.8,00,000 at the time of preparing final accounts the land value is recorded
only for Rs.5,00,000. Thus, the balance sheet does not indicate the price at which
the asset could be sold for.
2.2.4 Matching Concept
Matching the revenues earned during an accounting period with the cost
associated with the period to ascertain the result of the business concern is called
the matching concept. It is the basis for finding accurate profit for a period which
can be safely distributed to the owners.

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2.2.5 Full Disclosure Concept

Accounting statements should disclose fully and completely all the
significant information. Based on this, decisions can be taken by various
interested parties. It involves proper classification and explanations of accounting
information which are published in the financial statements.
2.2.6 Verifiable and Objective Evidence Concept
This principle requires that each recorded business transactions in the
books of accounts should have an adequate evidence to support it. For example,
cash receipt for payments made. The documentary evidence of transactions
should be free from any bias. As accounting records are based on documentary
evidence which are capable of verification, it is universally acceptable.

2.3 Modifying Principles

To make the accounting information useful to various interested parties, the
basic assumptions and concepts discussed earlier have been modified. These
modifying principles are as under.
2.3.1 Cost Benefit Principle
This modifying principle states that the cost of applying a principle should
not be more than the benefit derived from it. If the cost is more than the benefit
then that principle should be modified.
2.3.2 Materiality Principle
The materiality principle requires all relatively relevant information should
be disclosed in the financial statements. Unimportant and immaterial information
are either left out or merged with other items.
2.3.3 Consistency Principle
The aim of consistency principle is to preserve the comparability of
financial statements. The rules, practices, concepts and principles used in
accounting should be continuously observed and applied year after year.
Comparisons of financial results of the business among different accounting period
can be significant and meaningful only when consistent practices were followed
in ascertaining them. For example, depreciation of assets can be provided under
different methods, whichever method is followed, it should be followed
regularly.
2.3.4 Prudence (Conservatism) Principle
Prudence principle takes into consideration all prospective losses but leaves
all prospective profits. The essence of this principle is “anticipate no profit and
provide for all possible losses”. For example, while valuing stock in trade, market
price or cost price whichever is less is considered.

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Frame Work of Accounting

Assumptions Concepts Modifying Principles

1. Accounting Entity 1. Dual Aspect 1. Cost Benefit
2. Money Measurement 2. Revenue Realisation 2. Materiality
3. Accounting Period 3. Historical Cost 3. Consistency
4. Going Concern 4. Matching 4. Prudence
5. Full Disclosure
6. Verifiable and
objective evidence

2.4 Accounting Standards

To promote world-wide uniformity in published accounts, the International
Accounting Standards Committee (IASC) has been set up in June 1973 with nine
nations as founder members. The purpose of this committee is to formulate and
publish in public interest, standards to be observed in the presentation of audited
financial statements and to promote their world-wide acceptance and observance.
IASC exist to reduce the differences between different countries’ accounting
practices. This process of harmonisation will make it easier for the users and
preparers of financial statement to operate across international boundaries. In
our country, the Institute of Chartered Accountants of India has constituted
Accounting Standard Board (ASB) in 1977. The ASB has been empowered to
formulate and issue accounting standards, that should be followed by all business
concerns in India.

QUESTIONS
I. Objective Type :
a) Fill in the Blanks:
1. Stock in trade are to be recorded at cost or market price whichever is less
is based on _____________ principle.

2. The assets are recorded in books of accounts in the cost of acquisition is

based on _____________ concept.

3. The benefits to be derived from the accounting information should exceed

its cost is based on _____________ principle.

4. Transactions between owner and business are recorded separately due to

_____________ assumption.

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5. Business concern must prepare financial statements at least once in a

year is based on ___________ assumption.

6. _____________ principle requires that the same accounting methods should

be followed from one accounting period to the next.

[Answers : 1. prudence, 2. historical cost, 3. cost benefit, 4. business entity,

5. accounting period, 6. consistency]

b) Choose the correct answer:
1. As per the business entity assumption, the business is different from the

a) owners b) banker c) government

2. Going concern assumption tell us the life of the business is

a) very short b) very long c) none

3. Cost incurred should be matched with the revenues of the particular period
is based on

a) matching concept b) historical cost concept

c) full disclosure concept

4. As per dual aspect concept, every business transaction has

a) three aspects b) one aspect c) two aspects

[Answers : 1 (a), 2. (b), 3. (a), 4. (c)]

II. Other Questions :
1. What are the basic assumptions of accounting?

2. What do you mean by business entity assumption?

3. Write short notes on the following assumption.

a) Money measurement b) Accounting period

4. What do you mean by going concern assumption?

5. What are the basic concepts of accounting?

6. What do you understand by revenue realisation concept?

7. What do you mean by historical cost concept?

8. Describe the following concepts

a) Matching b) Full disclosure

9. What do you understand by verifiable and objective evidence concept?

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10. Explain in detail the modifying principles of accounting.

11. What do you mean by materiality principle?

12. What do you understand by consistency principle?

13. Write short notes on

a) Prudence principle b) Dual aspect concept

14. Briefly explain the various accounting concepts.

15. Briefly explain the various accounting assumptions.

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Chapter - 3
BASIC ACCOUNTING PROCEDURES - I
DOUBLE ENTRY SYSTEM OF BOOK KEEPING

Learning Objectives
After learning this chapter you will be able to:

 understand the Meaning, Features and Advantages of Double Entry

System

 know the Meaning and Types of Accounts.

 identify the Accounting Rules.

________________________________________________________________
Recording of business transactions has been in vogue in all countries
of the world. In India, maintenance of accounts was practised not in such a
developed form as we have today. Kautilya’s famous Arthasastra not only
relates to Politics and Economics, but also explains the art of account keeping
in a separate chapter. Written in 4th century BC, the book gives details about
account keeping, methods of supervising and checking of accounts and also
about the distinction between capital and revenue, income and expenses etc.

Double entry system was introduced to the business world by an Italian

merchant named Lucas Pacioli in 1494 A.D. Though the system of recording
business transactions in a systematic manner has originated in Italy, it was
perfected in England and other European countries during the 18th century only
i.e., after the Industrial Revolution. Many countries have adopted this system
today.

3.1 Double Entry System

There are numerous transactions in a business concern. Each transaction,
when closely analysed, reveals two aspects. One aspect will be “receiving
aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the
“Debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect”
or “income/gain aspect”. This is termed as the “Credit aspect”. These two
aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry
System. The double entry system is so named since it records both the aspects
of a transaction.

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In short, the basic principle of this system is, for every debit, there must
be a corresponding credit of equal amount and for every credit, there must be a
corresponding debit of equal amount.
3.1.1 Definition
According to J.R.Batliboi “Every business transaction has a two-fold effect
and that it affects two accounts in opposite directions and if a complete record
were to be made of each such transaction, it would be necessary to debit one
account and credit another account. It is this recording of the two fold effect of
every transaction that has given rise to the term Double Entry System”.
3.1.2 Features
i. Every business transaction affects two accounts.
ii. Each transaction has two aspects, i.e., debit and credit.
iii. It is based upon accounting assumptions concepts and principles.
iv. Helps in preparing trial balance which is a test of arithmetical
accuracy in accounting.
v. Preparation of final accounts with the help of trial balance.
3.1.3 Approaches of Recording
There are two approaches for recording a transaction.

I. Accounting Equation Approach

II. Traditional Approach

I. Accounting Equation Approach
This approach is also called as the American Approach. Under this method
transactions are recorded based on the accounting equation, i.e.,
Assets = Liabilities + Capital

This will be discussed in detail in the next chapter.

II. Traditional Approach
This approach is also called as the British Approach. Recording of
business transactions under this method are formed on the basis of the existence
of two aspects (debit and credit) in each of the transactions. All the business
transactions are recorded in the books of accounts under the ‘Double Entry
System’.
3.1.4 Advantages
The advantages of this system are as follows:

i. Scientific system: This is the only scientific system of recording

business transactions. It helps to attain the objectives of accounting.
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ii. Complete record of transactions: This system maintains a complete

record of all business transactions.

iii. A check on the accuracy of accounts: By the use of this

system the accuracy of the accounting work can be established by the
preparation of trial balance.

iv. Ascertainment of profit or loss: The profit earned or loss occured

during a period can be ascertained by the preparation of profit and
loss account.

v. Knowledge of the financial position : The financial position of the

concern can be ascertained at the end of each period through the
preparation of balance sheet.

vi.
Full details for control: This system permits accounts to be kept in
a very detailed form, and thereby provides sufficient informations for
the purpose of control.

vii. Comparative study : The results of one year may be compared

with those of previous years and the reasons for change may be
ascertained.

viii. Helps in decision making: The mangement may be able to obtain

sufficient information for its work, especially for making decisions.
Weaknesses can be detected and remedial measures may be
applied.

ix. Detection of fraud: The systematic and scientific recording of business

transactions on the basis of this system minimises the chances of
fraud.

3.2 Account
Every transaction has two aspects and each aspect has an account. It is
stated that ‘an account is a summary of relevant transactions at one place
relating to a particular head’.
3.2.1 Classification of Accounts
Transactions can be divided into three categories.

i. Transactions relating to individuals and firms

ii. Transactions relating to properties, goods or cash

iii. Transactions relating to expenses or losses and incomes or gains.

Therefore, accounts can also be classified into Personal, Real and Nominal.
The classification may be illustrated as follows

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Accounts

Personal Impersonal

Natural Artificial Representative Real Nominal

Tangible Intangible

I. Personal Accounts : The accounts which relate to persons.

Personal accounts include the following.

i. Natural Persons : Accounts which relate to individuals. For example,
Mohan’s A/c, Shyam’s A/c etc.
ii. Artificial persons : Accounts which relate to a group of persons or
firms or institutions. For example, HMT Ltd., Indian Overseas Bank,
Life Insurance Corporation of India, Cosmopolitan club etc.
iii. Representative Persons: Accounts which represent a particular person
or group of persons. For example, outstanding salary account, prepaid
insurance account, etc.
The business concern may keep business relations with all the above
personal accounts, because of buying goods from them or selling goods to them
or borrowing from them or lending to them. Thus they become either Debtors or
Creditors.

The proprietor being an individual his capital account and his

drawings account are also personal accounts.

II. Impersonal Accounts: All those accounts which are not personal accounts. This
is further divided into two types viz. Real and Nominal accounts.

i. Real Accounts: Accounts relating to properties and assets which are

owned by the business concern. Real accounts include tangible and
intangible accounts. For example, Land, Building, Goodwill, Purchases,
etc.
ii. Nominal Accounts: These accounts do not have any existence, form
or shape. They relate to incomes and expenses and gains and losses
of a business concern. For example, Salary Account, Dividend Account,
etc.

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Illustration : 1

Classify the following items into Personal, Real and Nominal Accounts.

1. Capital 2. Sales

3. Drawings 4. Outstanding salary

5. Cash 6. Rent

7. Interest paid 8. Indian Bank

9. Discount received 10. Building

11. Bank 12. Chandrasekar

13. Murugan Lending Library 14. Advertisement

15. Purchases

Solution:

1. Personal account 2. Real account

3. Personal account 4. Personal (Representative) account

5. Real account 6. Nominal account

7. Nominal account 8. Personal (Legal Body) account

9. Nominal account 10. Real account

11. Personal account 12. Personal account

13. Personal account 14. Nominal account

15. Real account

3.3 Golden Rules of Accounting

All the business transactions are recorded on the basis of the following
rules.

S.No. Name of Account Debit Aspect Credit Aspect

1. Personal The receiver The giver
2. Real What comes in What goes out
3. Nominal All expenses and All incomes and
losses gains.

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QUESTIONS
I. Objective Type :
a) Fill in the blanks:
1. The author of the famous book “Arthasastra” is __________.

2. Every business transaction reveals __________ aspects.

3. The incoming aspect of a transaction is called _________ and the

outgoing aspect of a transaction is called _________.

4. Traditional approach of accounting is also called as _________

approach.

5. The American approach is otherwise known as _________ approach.

6. Impersonal accounts are classified into _________ types.

7. Plant and machinery is an example of _________ account.

8. Capital account is an example of _________ account.

9. Commission received will be classified under _________ account.

[Answers: 1. Kautilya, 2. two, 3. debit, credit, 4. British, 5. Accounting

equation, 6. two, 7. real, 8. personal, 9. nominal]

b) Choose the correct answer:
1. The receiving aspect in a transaction is called as
a) debit aspect b) credit aspect c) neither of the two

2. The giving aspect in a transaction is called as

a) debit aspect b) credit aspect c) neither of the two

3. Murali account is an example for

a) personal A/c b) real A/c c) nominal A/c

4. Capital account is classified under

a) personal A/c b) real A/c c) nominal A/c

5. Goodwill is an example of

a) tangible real A/c b) intangible real A/c c) nominal A/c

6. Commission received is an example of

a) real A/c b) personal A/c c) nominal A/c

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7. Outstanding rent A/c is an example for

a) nominal account b) personal account

c) representative personal account

8. Nominal Account is classified under

a) personal A/c b) impersonal A/c c) neither of the two

9. Drawings account is classified under

a) real A/c. b) personal A/c. c) nominal A/c.

[Answers : 1. (a), 2. (b), 3. (a), 4. (a), 5. (b), 6. (c), 7. (c), 8. (b), 9. (b)].
II. Other Questions:
1. Explain the meaning of Double Entry System.

2. Define Double Entry System.

3. What are the advantages of Double Entry System?

4. How are accounts classified?

5. Write notes on personal accounts.

6. Write notes on real accounts.

7. Explain nominal accounts.

8. What are the golden rules of Accounting?

9. Classify the following items into real, personal and nominal accounts

a. Capital f. State Bank of India

b. Purchases g. Electricity Charges

c. Goodwill h. Dividend

d. Copyright i. Ramesh

e. Latha j. Outstanding rent

[Answers : Personal account – (a), (e), (f), (i), (j)

Real account – (b), (c), (d)

Nominal account – (g), (h)]

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Chapter - 4
BASIC ACCOUNTING PROCEDURES - II
JOURNAL

Learning Objectives
After learning this chapter you will be able to:
 understand the Origin of Transactions – Source Documents.
 understand the Concept of Accounting Equation.
 know the Rules of Debit and Credit.
 know the Meaning and the Preparation of Journal.
 bring out the Advantages of Journal.
_________________________________________________________________
Accounting process starts with identifying the transactions to be recorded
in the books of accounts. Accounting identifies only those transactions and events
which involve money. They should be of financial character. Accountant does so
by sorting out various cash memos, invoices, bills, receipts and vouchers.
In the accounting process, the first step is the recording of transactions
in the books of accounts. The origin of a transaction is derived from the source
document.

4.1 Source Documents

Source documents are the evidences of business transactions which
provide information about the nature of the transaction, the date, the amount and the
parties involved in it. Transactions are recorded in the books of accounts when
they actually take place and are duly supported by source documents. According
to the verifiable objective principle of Accounting, each transaction recorded in
the books of accounts should have adequate proof to support it. These supporting
documents are the written and authentic proof of the correctness of the recorded
transactions. These documents are required for audit and tax assessment. They
also serve as the legal evidence in case of a dispute. The following are the most
common source documents.
4.1.1 Cash Memo

When a trader sells goods for cash, he gives a cash memo and when he
purchases goods for cash, he receives a cash memo. Details regarding the items,
quantity, rate and the price are mentioned in the cash memo.

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Cash Memo

Vinoth Watch Co.,

135, South Usman Road, Thyagaraya Nagar, Chennai-17.

No: 52 Date : 18.8.2003

To ................................................................................................

Rate Amount
Qty. Description
Rs. Rs.
3 Titan Regulia 1,800 5,400
2 Titan Raga 1,200 2,400
7,800
Less: Discount 10% 780
5 Total 7020
Goods once sold are not taken back.

Manager
For Vinoth Watch Co.

4.1.2 Invoice or Bill

When a trader sells goods on credit, he prepares a sale invoice. It contains

full details relating to the amount, the terms of payment and the name and
address of the seller and buyer. The original copy of the sale invoice is sent to
the purchaser and its duplicate copy is kept for making records in the books of
accounts.

Similarly, when a trader purchases goods on credit, he receives a credit

bill from the supplier of goods.

INVOICE
Ramesh Electronics
306, Anna Salai, Chennai - 600 002.
No. 405 Date : 20.8.2003
Name & address of the Customer : Bhanu Enterprises
43, Eldams Road, Teynampet,
Chennai - 18.

Terms : 5% cash discount if payment is made within 30 days.

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Rate Amount
Qty. Description
Rs. Rs.
5 Refrigerators 9,000 45,000
10 Washing Machines 15,000 1,50,000
1,95,000
Sales Tax @ 10% 19,500
2,14,500
Handling & delivery charges 1,500
15 Total 2,16,000
(Rupees Two lakhs sixteen thousand only)

Partner

E&O.E For Ramesh Electronics

Note : E.&O.E., means errors and omissions excepted. In other words, if there
is any error in the invoice, the same has to be adjusted accordingly.
4.1.3 Receipt

When a trader receives cash from a customer, he issues a receipt containing

the date, the amount and the name of the customer. The original copy is handed
over to the customer and the duplicate copy is kept for record. In the same way,
whenever we make payment, we obtain a receipt from the party to whom we
make payment.
RECEIPT
Saravana Book House
43, 1st Main Road, Chennai - 35.
Receipt No. 315 Date :16.9.2003

Received with thanks a sum of Rs. 15,000 (Rupees fifteen thousand only)
from M/s. Sulthan & Sons being the supply of books as per the list enclosed.

Cheque/DD/No. : 10345 Dt. : 10.9.2003

Canara Bank, Trichy.

Signature

Seal
Note : If the amount is more than Rs.500, affix a revenue stamp.

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4.1.4 Debit Note

A debit note is prepared by the buyer and it contains the date of of the
goods returned, name of the supplier, details of the goods returned and reasons
for returning the goods. Each debit note is serially numbered. A duplicate copy
or counter foil of the debit note is retained by the buyer. On the basis of debit
note, the suppliers account is debited in the books.
DEBIT NOTE
Ganesh Traders No : 315
22, Ram Nagar, Date: 14.6.2003
Chennai - 600 015
Name & Address of Supplier : Shanmuga Traders
122, III Street
Chennai - 600 021.
Terms : 5% cash discount if payment is made within 30 days.
Date Particulars Rs. Rs.
2003 20 FM Radio sets purchased under your
invoice No.394, dated, 2nd June, 2003, now
June 14
returned, as the sets are not in working
conditions @ Rs.75 per set.

Add Packing expenses 1,500

100 1,600
Total 1,600
E & O., E Manager
4.1.5 Credit Note

A credit note is prepared by the seller and it contains the date on which
goods are returned, name of the customer, details of the goods received back,
amount of such goods and reasons for returning the goods. Each credit note is
serially numbered. A duplicate copy of the credit note is retained for the record
purpose. On the basis of credit note, the customer’s account is credited in the
books.
CREDIT NOTE
No : 243 Date: 15.9.2003
COTTON WORLD
22, Metha Nagar, Chennai - 600 029.
Name & Address of the Customer : Palanichami & Sons
122, Oppanakkara Street,
Coimbatore - 6.

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Terms : 2% cash discount if payment is made within 30 days.

Date Particulars Rs. Rs.
2003 T-Shirts - 32” - 200 Nos
Sept 15 @ Rs.100 each 20,000
Less : Discount @10% 2,000
(Return due to inferior quality) 18,000
Total 18,000

E & O., E
Manager

4.1.6 Pay-in-slip

Pay-in-slip is a form available in banks and is used to deposit money

into a bank account. Each pay-in-slip has a counterfoil which is returned to the
depositor duly sealed and signed by the bank official. This source document
relates to bank transactions. It gives details regarding date, account number,
amount deposited (in cash or cheque) and name of the account holder.
Pay-in-slip
Indian Overseas Bank Indian Overseas Bank ....................... Branch
...........................Branch Credit Current Account %. No. .......200.......
.......200..... of (name) .......................................................
Current Acount No ..... Rupees ...........................................................
of (name)........................ .................................................
Cheque/Cash Rs............ as per details furnished overleaf
Rupees ........................... Cheque/Cash
........................................
................... ................... Rs.....................
Cashier Clerk Authorised Official
Seal L.F Initial
This counter foil is not
valid unless signed by an .........................................................................
authorised official of the Depositor’s Signature Cashier/Clerk Authorised official
Bank (in addition to the Name & Address............................ Tel. No............
cashier in case of deposit
.........................................................................
by cash).

4.1.7 Cheque

A cheque is a document in writing drawn upon a specified banker to pay

a specified sum to the bearer or the person named in it and payable on demand.
Each cheque book has a counterfoil in which the same details in the cheque are
filled. The counterfoil remains with the account holder for his future reference.
The counterfoil forms the source document for entries to be made in the books
of accounts.

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Cheque

Date : ......................
PAY ........................................................................................
................................................................................................. OR BEARER
RUPEES .......................................................................................................

............................................................................... Rs.
A/c. No. INTL.

The Tamil Nadu State Apex Co-operative Bank Ltd.,

Ashok Nagar, 273-B, 10th Avenue,
CHENNAI - 600 083.
"3 0 8 8 9 4 600091007 " : 10
4.1.8 Vouchers

A voucher is a written document in support of a business transaction.

Vouchers are prepared by an accountant and each voucher is counter signed by
an authorised person of the organisation.

No. VOUCHER
Date

Rs.
Pay to ..........................................................................................................
Rs. in Words ................................................................................................
being ............................................................................................................
and debit ......................................................................................................

Authorised by Received the above sum of Rs. .....................

Paid by Drawn on Bank

Cash (or) Cheque Receiver’s Signature

The vouchers are properly filed according to their serial numbers so that
the auditors may easily vouch them and these may also serve as documentary
evidence in future.

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Bills receivable, bills payable, wage sheet/salaries pay acquittance,

correspondence etc., also serve as the source documents. Thus, there must be
a source document for each transaction recorded in the books of accounts.

Note : The formats of the source documents are given above, only to know
the details but not for the preparation.

4.2 Accounting Equation

The source document is the origin of a transaction and it initiates the
accounting process, whose starting point is the accounting equation.
Accounting equation is based on dual aspect concept (Debit and Credit).
It emphasizes on the fact that every transaction has a two sided effect i.e., on
the assets and claims on assets. Always the total claims (those of outsiders and
of the proprietors) will be equal to the total assets of the business concern. The
claims are also known as equities, are of two types: i.) Owners equity (Capital);
ii.) Outsiders’ equity (Liabilities).
Assets = Equities
Assets = Capital + Liabilities (A = C+L)
Capital = Assets – Liabilities (C = A–L)
Liabilities = Assets – Capital (L = A–C)
4.2.1 Effect of Transactions on Accounting Equation :
Illustration 1

If the capital of a business is Rs.3,00,000 and other liabilities are Rs.2,00,000,

calculate the total assets of the business.
Solution
Assets = Capital + Liabilities
Capital + Liabilities = Assets
Rs. 3,00,000 + Rs.2,00,000 = Rs.5,00,000
Illustration 2
If the total assets of a business are Rs.3,60,000 and capital is Rs.2,00,000,
calculate liabilities.

Solution

Assets = Capital + Liabilities

Liabilities = Assets – Capital

Assets – Capital = Liabilities

Rs. 3,60,000 – Rs. 2,00,000 = Rs. 1,60,000

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Illustration 3
If the total assets of a business are Rs.4,50,000 and outside liabilities are
Rs.2,50,000, calculate the capital.
Solution:
Capital = Assets – Liabilities
Assets – Liabilities = Capital
Rs. 4,50,000 – Rs. 2,50,000 = Rs.2,00,000
Illustration - 4
Transaction 1: Murugan started business with Rs.50,000 as capital.
The business unit has received assets totalling Rs.50,000 in the form of
cash and the claims against the firm are also Rs.50,000 in the form of capital. The
transaction can be expressed in the form of an accounting equation as follows:
Assets = Capital + Liabilities
Cash = Capital + Liabilities
Rs. 50,000 = Rs. 50,000 + 0
Transaction 2: Murugan purchased furniture for cash Rs.5,000.
The cash is reduced by Rs,5,000 but a new asset (furniture) of the same
amount has been acquired. This transaction decreases one asset (cash) and at
the same time increases the other asset (furniture) with the same amount, leaving
the total of the assets of the business unchanged. The accounting equation now
is as follows:
Assets = Capital + Liabilities
Cash + Furniture = Capital + Liabilities
Transaction 1 50,000 + 0 = 50,000 + 0
Transaction 2 (–) 5,000 + 5,000 = 0 + 0
Equation 45,000 + 5,000 = 50,000 + 0

Transaction 3: He purchased goods for cash Rs.30,000.

As a result, cash balance is reduced by the goods purchased, leaving the

total of the assets unchanged.
Assets = Capital + Liabilities
Cash + Furniture + Stock = Capital +Liabilities
(Goods)
Transaction 1&2 45,000 + 5,000 + 0 = 50,000 + 0
Transaction 3 (-) 30,000 + 0 + 30,000 = 0 + 0
_______________________________________________________________
Equation 15,000 + 5,000 + 30,000 = 50,000 + 0
___________________________________________________________________

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Transaction 4: He purchased goods on credit for Rs.20,000.

The above transaction will increase the value of stock on the assets side
and will create a liability in the form of creditors.

Assets = Capital + Liabilities

Cash + Furniture + Stock = Capital +Creditors

Transaction 1-3 15,000 + 5,000 + 30,000= 50,000 + 0

Transaction 4 0 + 0 + 20,000= 0 + 20,000

_______________________________________________________________
Equation 15,000 + 5,000 + 50,000 = 50,000 + 20,000
___________________________________________________________________

Transaction 5: Goods costing Rs.25,000 sold on credit for Rs.35,000.

The above transaction will give rise to a new asset in the form of Debtors
to the extent of Rs.35,000. But the stock of goods will be reduced by Rs.25,000
i.e., the cost of goods sold. The net increase of Rs.10,000 is the amount of
revenue which will be added to the capital.

Assets = Capital + Liabilities

Cash + Furniture + Stock + Debtors = Capital + Creditors
+
Revenue

Transaction 1-4 15,000 + 5,000 + 50,000 + 0 = 50,000 + 20,000

Transaction 5 0 + 0 + (-)25,000 + 35,000 = 10,000 + 0

___________________________________________________________________
Equation 15,000 + 5,000 + 25,000 + 35,000 = 60,000 + 20,000
___________________________________________________________________

Transaction 6: Rent paid Rs.3,000.

It reduces cash and the rent is an expense, it results in a loss which decreases
the capital.
Assets = Capital + Liabilities

Cash + Furniture + Stock + Debtors = Capital + Creditors

Transaction 1-5 15,000 + 5,000 + 25,000 + 35,000 = 60,000 + 20,000

Transaction 6 – 3,000 + 0 + 0 + 0 = (-) 3,000 + 0
________________________________________________________________
Equation 12,000 + 5,000 + 25,000 + 35,000 = 57,000 + 20,000
77,000 = 77,000
________________________________________________________________
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From the above transactions, it may be concluded that every transaction has
a double effect and in each case - Assets = Capital + Liabilities, i.e., ‘Accounting
equation is true in all cases’. The last equation appearing in the books of
Mr.Murugan may also be presented in the form of a statement called Balance
Sheet. It will appear as below:

Balance Sheet of Mr. Murugan

as on . . . . . . . . . . . . . .

Liabilities Rs. Assets Rs.

Capital 57,000 Cash 12,000
Creditors 20,000 Stock 25,000
Debtors 35,000
Furniture 5,000
77,000 77,000

Note : Increase in one asset will be automatically either decrease in another

asset or increase in liability or increase in capital. Likewise decrease in asset
by way of either in increase in another asset or decrease in liability or capital.

Illustration 5

Show the Accounting Equation on the basis of the following transactions

and prepare a Balance Sheet on the basis of the last equation.

Rs.

1. Maharajan commenced business with cash 1,00,000

2. Purchased goods for cash 70,000

3. Purchased goods on credit 80,000

4. Purchased furniture for cash 3,000

5. Paid rent 2,000

6. Sold goods for cash costing Rs.45,000 60,000

7. Paid to creditors 20,000

8. Withdrew cash for private use 10,000

9. Paid salaries 5,000

10. Sold goods on credit (cost price Rs.60,000) 80,000

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 Solution :
Accounting Equation
S.
Transaction Assets = Capital + Liabilities
No.
Maharajan commenced Cash + Stock + Furniture + Debtors = Capital + Creditors
1.
business with Rs. 1,00,000/- 1,00,000 + 0 + 0 + 0 = 1,00,000 + 0
1,00,000 + 0 + 0 + 0 = 1,00,000 + 0
2. Purchased goods for cash
(-) 70,000 + 70,000 + 0 + 0 = 0 + 0
30,000 + 70,000 + 0 + 0 = 1,00,000 + 0
3. Purchased goods on credit
0 + 80,000 + 0 + 0 = 0 + 80,000
30,000 + 1,50,000 + 0 + 0 = 1,00,000 + 80,000
4. Purchased Furniture
(-) 3,000 + 0 + 3,000 + 0 = 0 + 0
27,000 + 1,50,000 + 3,000 + 0 = 1,00,000 + 80,000
5. Paid Rent
(-) 2,000 + 0 + 0 + 0 = (-) 2,000 + 0

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25,000 + 1,50,000 + 3,000 + 0 = 98,000 + 80,000
6. Sold goods for cash
(+) 60,000 + (-) 45,000 + 0 + 0 = 15,000 + 0
85,000 + 1,05,000 + 3,000 + 0 = 1,13,000 + 80,000
7. Paid to creditors
(-) 20,000 + 0 + 0 + 0 = 0 + (-) 20,000
65,000 + 1,05,000 + 3,000 + 0 = 1,13,000 + 60,000
8. Withdrew cash for private use
(-) 10,000 + 0 + 0 + 0 = (-) 10,000 + 0
55,000 + 1,05,000 + 3,000 + 0 = 1,03,000 + 60,000
9. Paid Salaries
(-) 5,000 + 0 + 0 + 0 = (-) 5,000 + 0
10. Sold goods on credit costing 50,000 + 1,05,000 + 3,000 + 0 = 98,000 + 60,000
Rs. 60,000 0 + (-) 60,000 + 0 + 80,000 = (+) 20,000 + 0
50,000 + 45,000 + 3,000 + 80,000 = 1,18,000 + 60,000
Equation
1,78,000 = 1,78,000
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Explanation :
Accounts Affected
S.
Transactions
No. Assets Capital & Liabilities

1. Capital brought in Cash increases Capital increases

(comes in) (created)
2. Cash purchases Stock increases __
Cash decreases
3. Credit purchases Stock increases Creditors increase

4. Furniture bought Cash decreases __

Furniture increases
(comes in)
5. Rent paid Cash decreases Capital decreases
(Rent is an
expenses it results
in a loss)
6. Cash Sales Cash increases __
Stock decreases
7. Payment to creditors Cash decreases Creditors decrease

8. Withdrawal of cash for Cash decreases Capital decreases

private use (Drawings)
9. Salaries paid Cash decreases Capital decreases
(Salary is an
expense - Loss)
10. Credit Sales Stock decreases __
Debtors increase
Balance Sheet of Mr.Maharajan

as on ............................
Capital & Liabilities Rs. Assets Rs.
Capital 1,18,000 Cash 50,000
Creditors 60,000 Stock 45,000
Furniture 3,000
Debtors 80,000
1,78,000 1,78,000

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4.3 Rules for Debiting and Crediting

In actual practice, the individual transactions of similar nature are recorded,
added and substracted at one place. Such place is customarily the meaning
of debit and credit, it is essential to understand the meaning and form of an
account.

An account is a record of all business transactions relating to a

particular person or asset or liability or expense or income. In accounting, we
keep a separate record of each individual, asset, liability, expense or income.
The place where such a record is maintained is termed as an ‘Account’.
All accounts are divided into two sides. The left hand side of an account
is called Debit side and the right hand side of an account is called Credit side.
In the abbreviated form Debit is written as Dr. and Credit is written as Cr. For
example, the transactions relating to cash are recorded in an account, entitled
‘Cash Account’ and its format will be as given below:

Debit (Dr.) Cash Account Credit (Cr.)

In order to decide when to write on the debit side of an account and when
to write on the credit side of an account, there are two approaches. They are:
1) Accounting Equation Approach, 2) Traditional Approach.
Nature of Account

The accounting equation is a statement of equality between the debits and the
credits. The rules of debit and credit depend on the nature of an account. For
this purpose, all the accounts are classified into the following five categories in
the accounting equation approach:-

1. Assets Accounts

2. Capital Account

3. Liabilities Accounts

4. Revenues or Incomes Accounts

5. Expenses or Losses Accounts

If there is an increase or decrease in one account, there will be equal

decrease or increase in another account. Accordingly, the following rules of debit
and credit in respect of the various categories of accounts can be obtained.

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The rules may be summarised as below :-

1. Increases in assets are debits;

decreases in assets are credits.

2. Increases in capital are credits;

decreases in capital are debits.

3. Increases in liabilities are credits;

decreases in liabilities are debits.

4. Increases in incomes and gains are credits;

decreases in incomes and gains are debits.

5. Increases in expenses and losses are debits;

decreases in expenses and losses are credits.

Elements of Accounting Debit Credit

Equation
Assets Increase Decrease
Liabilities Decrease Increase
Capital Decrease Increase
Revenues Decrease Increase
Expenses Increase Decrease

In the traditional approach, all the accounts are classified into the following
three types.

1. Personal Accounts 2. Real Accounts 3. Nominal Accounts

Golden Rules for Debit and Credit:
1. Personal Accounts – a) Debit the receiver

b) Credit the giver

2. Real Accounts – a) Debit what comes in

b) Credit what goes out

3. Nominal Accounts – a) Debit all expenses and losses

b) Credit all incomes and gains

4.4 Books of Original Entry

The books in which a transaction is recorded for the first time from a
source document are called Books of Original Entry or Prime Entry. Journal is
one of the books of original entry in which transactions are originally recorded
in a chronological (day-to-day) order according to the principles of Double Entry
System.
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4.4.1 Journal

Journal is a date-wise record of all the transactions with details of the

accounts debited and credited and the amount of each transaction.
4.4.2 Format
Journal
Debit Credit
Date Particulars L.F. Amount Amount
Rs. Rs.

Explanation:
1. Date : In the first column, the date of the transaction is entered. The
year and the month is written only once, till they change. The sequence of the
dates and months should be strictly maintained.

2. Particulars : Each transaction affects two accounts, out of which one

account is debited and the other account is credited. The name of the account
to be debited is written first, very near to the line of particulars column and the
word Dr. is also written at the end of the particulars column. In the second line,
the name of the account to be credited is written, starts with the word ‘To’, a
few space away from the margin in the particulars column to the make it distinct
from the debit account.

3. Narration : After each entry, a brief explanation of the transaction

together with necessary details is given in the particulars column with in brackets
called narration. The words ‘For’ or ‘Being’ are used before starting to write down
narration. Now, it is not necessary to use the word ‘For’ or ‘Being’.

4. Ledger Folio (L.F): All entries from the journal are later posted into
the ledger accounts. The page number or folio number of the Ledger, where the
posting has been made from the Journal is recorded in the L.F column of the
Journal. Till such time, this column remains blank.

5. Debit Amount : In this column, the amount of the account being debited
is written.

6. Credit Amount : In this column, the amount of the account being

credited is written.

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4.4.3 Steps in Journalising

The process of analysing the business transactions under the heads of

debit and credit and recording them in the Journal is called Journalising. An
entry made in the journal is called a ‘Journal Entry’.

Step 1 → Determine the two accounts which are involved in the transaction.

Step 2 → Classify the above two accounts under Personal, Real or Nominal.

Step 3 → Find out the rules of debit and credit for the above two accounts.

Step 4 → Identify which account is to be debited and which account is to be

credited.

Step 5 → Record the date of transaction in the date column. The year and
month is written once, till they change. The sequence of the dates
and months should be strictly maintained.

Step 6 → Enter the name of the account to be debited in the particulars column
very close to the left hand side of the particulars column followed by
the abbreviation Dr. in the same line. Against this, the amount to be
debited is written in the debit amount column in the same line.

Step 7 → Write the name of the account to be credited in the second line starts
with the word ‘To’ a few space away from the margin in the particulars
column. Against this, the amount to be credited is written in the credit
amount column in the same line.

Step 8 → Write the narration within brackets in the next line in the particulars
column.

Step 9 → Draw a line across the entire particulars column to seperate one
journal entry from the other.

4.5 Illustrations
Example 1:

January 1, 2004 – Saravanan started business with Rs. 1,00,000.

Analysis of Transaction
Determine the two accounts Cash Capital
Step 1
involved in the transaction. Account Account

Classify the accounts under Real Personal

Step 2
personal, real or nominal. Account Account

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2(a) 1(b)
Find out the rules of debit and
Step 3 Debit what Credit the
credit.
comes in. giver

Identify which account is to be Cash A/c is to Capital A/c is

Step 4
debited and credited. be debited to be credited

Solution : Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 12 1,00,000 -
Jan 1
To Capital A/c 45 1,00,000 -
(The amount invested in
the business)
The Ledger Folio column indicates 12 against Cash Account which means
that Cash Account is found in page 12 in the ledger and this debit of Rs.1,00,000
to Cash A/c can be seen on that page. Similarly 45 against Capital A/c indicates
the page number in which Capital account is found and the credit of Rs.1,00,000
indicated there in.
Example 2:

Jan. 3, 2004 : Received cash from Balan Rs. 25,000

Analysis of Transaction

Determine the two accounts Cash Balan

Step 1
involved in the transaction. Account Account

Classify the accounts under Personal

Step 2 Real Account
personal, real or nominal. Account

2(a) 1(b)
Find out the rules of debit and
Step 3 Debit what Credit the
credit.
comes in. giver
Balan A/c
Identify which account is to be Cash A/c is
Step 4 is to be
debited and credited. to be debited
credited

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Solution :
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 12 25,000 -
Jan 3
To Balan's A/c 81 25,000 -
(Cash received from
Balan)
The Ledger Folio column indicates 12 against Cash Account which means
that Cash Account is found in page 12 in the ledger and this debit of Rs.25,000
to Cash A/c can be seen on that page. Similarly 81 against Balan A/c indicates
the page number in which Balan Account is found and the credit of Rs.25,000
indicated there in.
Example 3: July 7, 2004 – Paid cash to Perumal Rs.37,000.
Analysis of Transaction
Determine the two accounts involved Perumal Cash
Step 1
in the transaction. Account Account

Classify the accounts under Personal Real

Step 2
personal, real or nominal. Account Account

1(a) 2(b)
Find out the rules of debit and
Step 3 Credit what
Debit the
credit.
receivergoes out
Cash A/c is
Identify which account is to be Perumal A/c is
Step 4 to be
debited and credited. to be debited
credited
Solution :
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Perumal A/c Dr. 95 37,000 -
July 7
To Cash A/c 12 37,000 -
(Cash paid to Perumal)

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Example 4: Feb. 7, 2004 – Bought goods for cash Rs. 80,000.

Analysis of Transaction
Determine the two accounts Purchases Cash
Step 1
involved in the transaction. Account Account

Classify the accounts under Real Real

Step 2
personal, real or nominal. Account Account

2(a) 2(b)
Find out the rules of debit and
Step 3 Debit what Credit what
credit.
comes in goes out
Purchase Cash A/c
Identify which account is to be
Step 4 A/c is to be is to be
debited and credited.
debited credited

Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Purchases A/c Dr. 48 80,000 -
Feb 7
To Cash A/c 12 80,000 -
(Cash purchase of
goods)
Example 5: March 10, 2004 – Cash sales Rs.90,000.
Analysis of Transaction
Determine the two accounts Cash Sales
Step 1
involved in the transaction. Account Account

Classify the accounts under Real Real

Step 2
personal, real or nominal. Account Account

2(a) 2(b)
Find out the rules of debit and
Step 3 Debit what Credit what
credit.
comes in goes out
Sales A/c
Identify which account is to be Cash A/c is to
Step 4 is to be
debited and credited. be debited
credited

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Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 90,000 -
Mar 10
To Sales A/c 90,000 -
(Cash Sales)
Example 6: March 15, 2004 – Sold goods to Jaleel on credit Rs.1,00,000.
Analysis of Transaction
Determine the two accounts involved Jaleel Sales
Step 1
in the transaction. Account Account

Classify the accounts under Personal Real

Step 2
personal, real or nominal. Account Account

1(a) 2(b)
Find out the rules of debit and
Step 3 Debit the Credit what
credit.
receiver goes out
Jaleel A/c Sales A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited
Solution :
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Jaleel A/c Dr. 1,00,000 -
March 15
To Sales A/c 1,00,000 -
(Credit Sales)
Example 7: March 18, 2004 – Purchased goods from James on credit Rs.1,50,000.
Analysis of Transaction
Determine the two accounts Purchases James
Step 1
involved in the transaction. Account Account

Classify the accounts under Real Personal

Step 2
personal, real or nominal. Account Account

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2(a) 1(b)
Find out the rules of debit and
Step 3 Debit what Credit the
credit.
comes in giver
Purchases A/c James A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited
Solution :
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Purchases A/c Dr. 1,50,000 -
March 18
To James A/c 1,50,000 -
(Credit purchases)
Example 8: March 20, 2004 – Returned goods from Jaleel Rs.5,000.
Analysis of Transaction
Determine the two accounts Sales Return Jaleel
Step 1
involved in the transaction. Account Account

Classify the accounts under Real Personal

Step 2
personal, real or nominal. Account Account

2(a) 1(b)
Find out the rules of debit and
Step 3 Debit what Credit the
credit.
comes in giver
Sales return
Jaleel A/c
Identify which account is to be A/c
Step 4 is to be
debited and credited. is to be
credited
debited
Solution :
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004 Sales return A/c Dr. 5,000 -
March 20 To Jaleel A/c 5,000 -
(Returned goods)

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Example 9: March 25, 2004 – Goods returned to James Rs.7,000.

Analysis of Transaction
Purchases
Determine the two accounts James
Step 1 return
involved in the transaction. Account
Account

Classify the accounts under Personal Real

Step 2
personal, real or nominal. Account Account

1(a) 2(b)
Find out the rules of debit and
Step 3 Debit the Credit what
credit.
receiver goes out
Purchases
James A/c
Identify which account is to be return A/c
Step 4 is to be
debited and credited. is to be
debited
credited
Solution :
Journal
Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
James A/c Dr. 7,000 -
March 25
To Purchases return
7,000 -
A/c
(Goods returned)
Example 10: March 25, 2004 – Paid salaries in cash Rs.6,000.
Analysis of Transaction

Determine the two accounts Salaries Cash

Step 1
involved in the transaction. Account Account

Classify the accounts under Nominal Real

Step 2
personal, real or nominal. Account Account

3(a)
2(b)
Find out the rules of debit and Debit all
Step 3 Credit what
credit. expenses &
goes out
losses
Salaries A/c Cash A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited

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Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Salaries A/c Dr. 6,000 -
March 25
To Cash A/c 6,000 -
(Salaries paid)
Example 11: April 14, 2004 – Commission received Rs.5,000.
Analysis of Transaction

Determine the two accounts Cash Commission

Step 1
involved in the transaction. Account Account

Classify the accounts under Real Nominal

Step 2
personal, real or nominal. Account Account
3(b)
2(a)
Find out the rules of debit and Credit all
Step 3 Debit what
credit. incomes &
comes in
gains
Commission
Cash A/c
Identify which account is to be A/c
Step 4 is to be
debited and credited. is to be
debited
credited
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 5,000 -
April 14
To Commission A/c 5,000 -
(Commission received)
4.5.1 Capital and Drawings

It is important to note that business is treated as a separate entity from

the business man. All transactions of the business have to be analysed from the
business point of view and not from the proprietor’s point of view. The amount
with which a trader starts the business is known as Capital. The proprietor may

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withdraw certain amounts from the business to meet personal expenses or goods
for personal use. It is called Drawings.
Drawings from Business

Cheque Goods
Cash

Cash goes out Bank - The giver Value of purchases

decreases

Debit Drawings A/c Debit Drawings A/c Debit Drawings A/c

Credit Cash A/c Credit Bank A/c Credit Purchases A/c

Example 12: January 31, 2004 – Saravanan withdrew for personal use Rs. 20,000.
Analysis of Transaction

Determine the two accounts Drawings Cash

Step 1
involved in the transaction. Account Account

Classify the accounts under Personal Real

Step 2
personal, real or nominal. Account Account
1(a) 2(b)
Find out the rules of debit and
Step 3 Debit the Credit what
credit.
receiver goes out
Drawings A/c Cash A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Drawings A/c Dr. 20,000 -
Jan. 31
To Cash A/c 20,000 -
(The amount withdrawn
for personal use)

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4.5.2 Bank Transactions

Bank transactions that occur often in the business concerns are cash paid
into bank, cheques and bills received from customers paid into bank for collection,
payment of cheques for expenses and cheques issued to suppliers or creditors.
When a cheque is received treat it as cash.
Example 13: January 18, 2004 – Opened a current account with Indian Overseas
Bank Rs.10,000.
Analysis of Transaction

Determine the two accounts involved Bank Cash

Step 1
in the transaction. Account Account

Classify the accounts under Personal Real

Step 2
personal, real or nominal. Account Account

1(a) 2(b)
Find out the rules of debit and
Step 3 Debit the Credit what
credit.
receiver goes out
Bank A/c Cash A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited

Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Indian Overseas Bank A/c Dr. 10,000 -
Jan. 18
To Cash A/c 10,000 -
(Opened a current A/c.)
Example 14: Feb 3, 2004 – Rent paid by cheque Rs. 5,000.
Analysis of Transaction

Determine the two accounts Rent Bank

Step 1
involved in the transaction. Account Account

Classify the accounts under Nominal Personal

Step 2
personal, real or nominal. Account Account

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3(a)
1(b)
Find out the rules of debit and Debit all
Step 3 Credit the
credit. expenses &
giver
losses
Rent A/c Bank A/c
Identify which account is to be
Step 4 is to be is to be
debited and credited.
debited credited

Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Rent A/c Dr. 5,000 -
Feb 3
To Bank A/c 5,000 -
(Rent paid by cheque
No.)
Example 15: March 5, 2004 – Received cheque from Elavarasan Rs.20,000.
Analysis of Transaction

Determine the two accounts involved Cash Elavarasan

Step 1
in the transaction. Account Account

Classify the accounts under Real Personal

Step 2
personal, real or nominal. Account Account

2(a) 1(b)
Find out the rules of debit and
Step 3 Debit what Credit the
credit.
comes in giver
Elavarasan
Cash A/c
Identify which account is to be A/c
Step 4 is to be
debited and credited. is to be
debited
credited

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Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 20,000 -
March 5
To Elavarasan A/c 20,000 -
(Cheque received but not
paid into bank)
Example 16: March 15, 2004 – Cheque received from Santhosh Rs.30,000 and im-
mediately banked.
Analysis of Transaction

Determine the two accounts Bank Santhosh

Step 1
involved in the transaction. Account Account

Classify the accounts under Personal Personal

Step 2
personal, real or nominal. Account Account

1(a) 1(b)
Find out the rules of debit and
Step 3 Debit the Credit the
credit.
receiver giver

Bank A/c Santhosh

Identify which account is to be
Step 4 is to be A/c is to be
debited and credited.
debited credited

Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Bank A/c Dr. 30,000 -
March 15
To Santhosh A/c 30,000 -
(Cheque received and
immediately banked)

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4.5.3 Compound Journal Entry

When two or more transactions of similar nature take place on the same
date, such transactions can be entered in the journal by means of a combined
journal entry is called Compound Journal Entry. The only precaution is that the
total debits should be equal to total credits.
Example 17: June 1, 2004 – Anju contributed capital Rs. 50,000
Manju contributed capital Rs. 70,000
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 1,20,000 -
June 1
To Anju’s Capital A/c 50,000 -
To Manju’s Capital A/c 70,000 -
(The amount invested
by Anju & Manju)
Example 18:

July 1, 2004 – Ajay contributed capital – Cash Rs. 90,000

Furniture Rs. 20,000

Vijay contributed capital – Cash Rs. 50,000

Stock Rs. 70,000

Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 1,40,000 -
July 1
Stock A/c Dr. 70,000 -
Furniture A/c Dr. 20,000 -
To Ajay’s Capital A/c 1,10,000 -
To Vijay’s Capital A/c 1,20,000 -
(Capital introduced by
Ajai & Vijay)

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Example 19: July 13, 2003 – Received cash Rs.24,700 from Shanthi in full settle-
ment of her account of Rs.25,000.

Here cash received is Rs.24,700 in full settlement of Rs.25,000 so the

difference Rs.300 is discount allowed.
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2003
Cash A/c Dr. 24,700 -
July 13
Discount allowed A/c Dr. 300 -
To Shanthi’s A/c 25,000 -

(Shanthi settled her account)

Example 20: July 14, 2003 – Paid cash to Thenmozhi Rs.14,500, in full settlement of
her account of Rs.15,000.

Here cash paid Rs.14,500 in settlement of Rs.15,000 so the difference Rs.

500 is discount received.
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2003
Thenmozhi A/c Dr. 15,000 -
July 14
To Cash A/c 14,500 -
To Discount received A/c. 500 -
(Settled Thenmozhi’s account)
Bad Debts

When the goods are sold to a customer on credit and if the amount becomes
irrecoverable due to his insolvency or for some other reason, the amount not
recovered is called bad debts. For recording it, the bad debts account is debited
because the unrealised amount is a loss to the business and the customer’s
account is credited.
Example 21 : Jamuna who owed us Rs.10,000 is declared insolvent and 25 paise in a
rupee is received from her on 15th July, 2003.

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Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2003
Cash A/c Dr. 2,500 -
July 15
Bad Debts A/c Dr. 7,500 -
To Jamuna A/c 10,000 -
(25 paise in a rupee
received on her
insolvency)
Bad Debts Recovered

Some times, it so happens that the bad debts previously written off are
subsequently recovered. In such case, cash account is debited and bad debts
recovered account is credited because the amount so received is a gain to the
business.
Example 22: Received cash for a Bad debt written off last year Rs.7,500 on 18th
January, 2004.
Solution:
Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 7,500 -
Jan 18
To Bad debts recovered A/c 7,500 -
(Bad debts recovered)
4.5.5 Opening Entry
Opening Entry is an entry which is passed in the beginning of each current
year to record the closing balance of assets and liabilities of the previous year.
In this entry asset accounts are debited and liabilities and capital account are
credited. If capital is not given in the question, it will be found out by deducting
total of liabilities from total of assets.

Example 23: The following balances appeared in the books of Malarkodi as on

1st January 2004 – Cash Rs. 7,000, Bank Rs.70,000, Stock Rs.80,000, Furniture
Rs.10,000, Computer Rs.50,000, Debtors Rs.33,000 and Creditors Rs.90,000.

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The opening entry is

Journal

Debit Credit
Date Particulars L.F
Rs. P. Rs. P.
2004
Cash A/c Dr. 7,000 -
Jan 1
Bank A/c Dr. 70,000 -
Stock A/c Dr. 80,000 -
Debtors A/c Dr. 33,000 -
Furniture A/c Dr. 10,000 -
Computer A/c Dr. 50,000 -
To Creditors A/c 90,000 -
To Capital A/c (Balancing figure) 1,60,000 -
(Assets and liabilities brought
forward)
4.5.6 Advantages

The main advantages of the Journal are:

1. It reduces the possibility of errors.

2. It provides an explanation of the transaction.

3. It provides a chronological record of all transactions.

4.5.7 Limitations

The limitations of the Journal are:

1. It will be too long if all transactions are recorded here.

2. It is difficult to ascertain the balance of each account.

QUESTIONS
I. Objective Type:
a) Fill in the Blanks :

1. The source document gives information about the nature of the

_________.

2. The accounting equation is a statement of _________ between the debits

and credits.

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3. In double entry book-keeping, every transaction affects at least two

_________.

4. Assets are always equal to liabilities plus _________.

5. A transaction which increases the capital is called _________.

6. The journal is a book of _________.

7. Recording of transaction in the journal is called _________.

8. The _________ column of journal represents the place of posting of an

entry in the ledger account.

9. _________ account is debited for the amount not recovered from the
customer.

10. The assets of a business on 31st December, 2002 were worth Rs.50,000
and its capital was Rs.35,000. Its liabilities on that date were Rs.
_________.

[Answer : 1. transactions, 2. equality, 3. accounts, 4. capital, 5. revenue or

income, 6. original entry, 7. journalising, 8. L.F, 9. bad debts,
10. Rs.15,000]
b) Choose the correct answer:

1. The origin of a transaction is derived from the

a) Source document b) Journal c) Accounting equation

2. Which of the following is correct?

a) Capital = Assets + Liabilities b) Capital = Assets – Liabilities

c) Assets = Liabilities – Capital

3. Amount owned by the proprietor is called

a) Assets b) Liabilities c) Capital

4. The Accounting Equation is connected with

a) Assets only b) Liabilities only

c) Assets, Liabilities and capital

5. Goods sold to Srinivasan should be debited to

a) Cash A/c b) Srinivasan A/c. c) Sales A/c.

6. Purchased goods from Venkat for cash should be credited to

a) Venkat A/c b) Cash A/c c) Purchases A/c

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7. Withdrawals of cash from bank by the proprietor for office use should be
credited to

a) Drawings A/c b) Bank A/c c) Cash A/c

8. Purchased goods from Murthy on credit should be credited to

a) Murthy A/c b) Cash A/c c) Purchases A/c

9. An entry is passed in the beginning of each current year is called

a) Original entry b) Final entry c) Opening entry

10. The liabilities of a business are Rs.30,000; the capital of the proprietor is
Rs.70,000. The total assets are:

a) Rs.70,000 b) Rs.1,00,000 c) Rs.40,000

[Answers : 1. (a), 2. (b), 3. (c), 4. (c), 5. (b), 6. (b), 7. (b), 8. (a), 9.(c), 10 (b)]
II. Other Questions :

1. Explain the meaning of source documents.

2. What is cash memo?

3. What is an invoice?

4. What is a receipt?

5. What is pay-in-slip?

6. What is a debit note?

7. What is a credit note?

8. Explain the meaning of Accounting Equation.

9. What is a Journal?

10. Mention the five categories of Accounts.

11. How is the Journal ruled?

12. What is Journalising?

13. What do you mean by L.F.? How do you fill in this column?

14. What is a narration?

15. What is capital?

16. What is drawings?

17. What is a Compound Journal Entry?

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18. Explain the rules for journalising.

19. Explain the steps in journalising?

20. Bring out the advantages and the limitations of journal.

III. Problems:

1. On 31st December 2003, the total assets and liabilities were Rs.1,00,000
and Rs.30,000 respectively. Calculate capital.

2. Indicate how assets, liabilities and capital are affected by each of the
following transactions with an accounting equation:

i. Purchase of machinery for cash Rs. 3,00,000.

ii. Receipt of cash from a debtor Rs. 50,000.

iii. Cash payment of a creditor Rs.30,000.

3. Give transactions with imaginary figures involving the following:

i. Increase in assets and capital,

ii. Increase and decrease in assets,

iii. Increase in an asset and a liability,

iv. Decrease of an asset and owner’s capital.

4. Supply the missing amounts on the basis of Accounting Equation

Assets = Liabilities + Capital

Assets = Liabilities + Capital

i. 20,000 = 15,000 + ?

ii. ? = 5,000 + 10,000

iii. 10,000 = ? + 8,000

5. State the nature of account and show which account will be debited and
which account will be credited?

1. Rent received

2. Building purchased

3. Machinery sold

4. Discount allowed

5. Discount received

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6. Correct the following entries wherever you think:

i. Brought capital in to business:

Capital A/c Dr.

To Cash A/c

ii. Cash Purchases:

Cash A/c Dr.

To Sales A/c

iii. Salaries paid to clerk Mr.Kanniyappan:

Salaries A/c Dr.

To Kanniyappan A/c

iv. Paid carriage:

Carriage A/c Dr.

To Cash A/c

7. What do the following Journal Entries mean?

i. Cash A/c Dr.

To Furniture A/c

ii. Rent A/c Dr.

To Cash A/c

iii. Bank A/c Dr.

To Cash A/c

iv. Tamilselvi A/c Dr.

To Sales A/c

8. Show the accounting equation on the basis of the following transactions.

Rs.

i. Ramya started business with cash 25,000

ii. Purchased goods from Shobana 20,000

iii. Sold goods to Amala costing Rs.18,000 25,000

iv. Ramya withdrew from business 5,000

[Assets Rs. 47,000 = Capital Rs.27,000 + Liabilities Rs.20,000]

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9. Prepare accounting equation and balance sheet on the basis of the

following :

Rs.

i. Pallavan started business with cash 60,000

ii. He purchased furniture 10,000

iii. He paid rent 2,000

iv. He purchased goods on credit from Mr.Mahendran 30,000

v. He sold goods (cost price Rs.20,000) for cash 25,000

[Assets Rs. 93,000 = Capital Rs.63,000 + Liabilities Rs.30,000]

10. Journalise the following Opening Entry:

Rs.

Cash in hand 2,000

Plant 50,000

Furniture 5,000

Creditors 13,000

Debtors 18,000

11. Journalise the following transactions in the books of Tmt.Amutha

Rs.

2004, Jan. 1 Tmt.Amutha commenced business with cash 50,000

2 Purchased goods for cash 10,000

5 Purchased goods from Mohan on credit 6,000

7 Paid into Bank 5,000

10 Purchased furniture 2,000

20 Sold goods to Suresh on credit 5,000

25 Cash sales 3,500

26 Paid to Mohan on account 3,000

31 Paid salaries 2,800

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12. Journalise the following transactions of Mrs.Rama

Rs.

2004, Jan 1 Mrs.Rama commenced business with cash 30,000

2 Paid into bank 21,000

3 Purchased goods by cheque 15,000

7 Drew cash from bank for office use 3,000

15 Purchased goods from Siva 15,000

20 Cash sales 30,000

25 Paid to Siva 14,750

Discount Received 250

31 Paid rent 500

Paid Salaries 2,000

13. Journalise the following transactions of Mr.Moorthi

Rs.

2004, June 3 Received cash from Ramkumar 60,000

4 Purchased goods for cash 15,000

11 Sold goods to Damodaran 22,000

13 Paid to Ramkumar 40,000

17 Received from Damodaran 20,000

20 Bought furniture from Jagadeesan 5,000

27 Paid rent 1,200

30 Paid salary 2,500

14. Journalise the following in the Journal of Thiru.Gowri Shankar

Rs.

2003, Oct. 1 Received cash from Siva 75,000

7 Paid cash to Sayeed 45,000

10 Bought goods for cash 27,000

12 Bought goods on credit from David 48,000

15 Sold goods for cash 70,000

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15. Record the following transactions in the Journal of

Tmt.Bhanumathi.

2004, Feb. 3 Bought goods for cash Rs.84,500

7 Sold goods to Dhanalakshmi on credit Rs.55,000

9 Received commission Rs.3,000

10 Cash Sales Rs.1,09,000

12 Bought goods from Mahalakshmi Rs.60,000

15 Received five chairs from Revathi & Co.at Rs.400 each

20 Paid Revathi & Co., cash for five chairs

28 Paid Salaries Rs.10,000

Paid Rent Rs.5,000

16. Journalise the following transactions in the books of

Thiru.Kalyanasundaram.

2004, March 1 Sold goods on credit to Mohanasundaram Rs.75,000.

12 Purchased goods on credit from Bashyam Rs.70,000.

15 Sold goods for cash from David Rs.50,000.

20 Received from Mohanasundaram Rs.70,000.

25 Paid to Bashyam Rs.50,000.

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Chapter - 5
BASIC ACCOUNTING PROCEDURES - III
LEDGER
Learning Objectives

After studying this chapter you will be able to:

 understand the Meaning and Procedure for posting.

 know the Procedure for Balancing and the Significance of Balances.

 know the Relationship between Journal and Ledger.

_________________________________________________________________

In the Journal, each transaction is dealt with separately. Therefore, it is not

possible to know at a glance, the net result of many transactions. So, in order
to ascertain the net effect of all the transactions relating to a particular account
are collected at one place in the Ledger.

A Ledger is a book which contains all the accounts whether personal, real
or nominal, which are first entered in journal or special purpose subsidiary books.

According to L.C. Cropper, ‘the book which contains a classified and

permanent record of all the transactions of a business is called the Ledger’.

The ledger that is normally used in a majority of business concern

is a bound note book. This can be preserved for a long time. Its pages are
consequently numbered. Each account in the ledger is opened preferably on a
separate page. If one page is completed, the account will be continued in the
next or some other page. But in bigger concerns, it is not practical to keep the
ledger as a bound note book, Loose-leaf ledger now takes the place of a bound
note book. In a loose-leaf ledger, appropriate ruled sheets of thick paper are
introduced and fixed up with the help of a binder. Whenever necessary additional
pages may be inserted, completed accounts can be removed and the accounts
may be arranged and rearranged in the desired order. Therefore, this type of
ledger is known as Loose-leaf Ledger.

5.1 Utility
Ledger is a principal or main book which contains all the accounts in which
the transactions recorded in the books of original entry are transferred. Ledger is
also called the ‘Book of Final Entry’ or ‘Book of Secondary Entry’, because
the transactions are finally incorporated in the Ledger. The following are the
advantages of ledger.

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i. Complete information at a glance:

All the transactions pertaining to an account are collected at one place in

the ledger. By looking at the balance of that account, one can understand the
collective effect of all such transactions at a glance.

ii. Arithmetical Accuracy

With the help of ledger balances, Trial balance can be prepared to know
the arithmetical accuracy of accounts.

iii. Result of Business Operations

It facilitates the preparation of final accounts for ascertaining the operating

result and the financial position of the business concern.

iv. Accounting information

The data supplied by various ledger accounts are summarised, analysed

and interpreted for obtaining various accounting information.

5.2 Format
Dr. Name of Account Cr.

Amount Amount
Date Particulars J.F Rs. Date Particulars J.F Rs.
P. P.
Year To (Name By (Name
Year
of Credit of Debit
Month Month
Account in account in
Date
Date Journal) Journal)

Explanation:

i. Each ledger account is divided into two parts. The left hand side is known as
the debit side and the right hand side is known as the credit side. The words
‘Dr.’ and ‘Cr.’ are used to denote Debit and Credit.
ii. The name of the account is mentioned in the top (middle) of the account.

iii. The date of the transaction is recorded in the date column.

iv. The word ‘To’ is used before the accounts which appear on the debit side of
an account in the particulars column. Similarly, the word ‘By’ is used before
the accounts which appear on the credit side of an account in the particulars
column.

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v. The name of the other account which is affected by the transaction is written
either in the debit side or credit side in the particulars column.

vi. The page number of the Journal or Subsidiary Book from where that particular
entry is transferred, is entered in the Journal Folio (J.F) column.

vii. The amount pertaining to this account is entered in the amount column.

Personal Accounts

Santhosh Account

Dr. Cr.

Debit Santhosh when he receives goods, Credit Santhosh when he gives goods,
money or value from the business money or value to the business

Real Accounts

Computer Account

Dr. Cr.

Debit Purchase of asset Credit Sale of asset

Nominal Accounts

Salaries Account

Dr. Cr.

Debit expenses or losses

Commission Received Account

Dr. Cr.

Credit incomes or gains

5.3 Posting
The process of transferring the entries recorded in the journal or subsidiary
books to the respective accounts opened in the ledger is called Posting. In other
words, posting means grouping of all the transactions relating to a particular
account at one place. It is necessary to post all the journal entries into various
accounts in the ledger because posting helps us to know the net effect of various
transactions during a given period on a particular account.

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5.3.1 Procedure of posting

The procedure of posting is given as follows:

I. Procedure of posting for an Account which has been debited in the journal
entry.

Step 1 → Locate in the ledger, the account to be debited and enter the date
of the transaction in the date column on the debit side.

Step 2 → Record the name of the account credited in the Journal in the
particulars column on the debit side as “To..... (name of the account
credited)”.

Step 3 → Record the page number of the Journal in the J.F column on the
debit side and in the Journal, write the page number of the ledger
on which a particular account appears in the L.F. column.

Step 4 → Enter the relevant amount in the amount column on the debit side.

II. Procedure of posting for an Account which has been credited in the journal
entry.

Step 1 → Locate in the ledger the account to be credited and enter the date
of the transaction in the date column on the credit side.

Step 2 → Record the name of the account debited in the Journal in the
particulars column on the credit side as “By...... (name of the account
debited)”

Step 3 → Record the page number of the Journal in the J.F column on the
credit side and in the Journal, write the page number of the ledger
on which a particular account appears in the L.F. column.

Step 4 → Enter the relevant amount in the amount column on the credit side.

Illustration 1

Mr. Ram started business with cash Rs. 5,00,000 on 1st June 2003.

The above transaction will appear in Journal and Ledger as under.

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Solution :
In the Books of Ram
Journal

Debit Credit
Date Particulars L.F
Rs. Rs. P.
2003
Cash A/c. Dr. 5,00,000
June 1
To Ram’s Capital A/c 5,00,000 -
(Ram started business with
Rs.5,00,000)
Note: Here two accounts are involved, Cash Account and Ram’s capital account,
so we should allot in the ledger a page for each account.

Ledger

Dr. Cash Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003 To Ram’s
5,00,000
June 1 Capital A/c

Dr. Ram’s Capital Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003 By Cash
5,00,000
June 1 A/c

Illustration 2:

Journalise the following transactions in the books of Amar and post them in the
Ledger:-

2004

March 1 Bought goods for cash Rs. 25,000

2 Sold goods for cash Rs. 50,000

3 Bought goods for credit from Gopi Rs.19,000

5 Sold goods on credit to Robert Rs.8,000

7 Received from Robert Rs. 6,000

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9 Paid to Gopi Rs.5,000

20 Bought furniture for cash Rs. 7,000

Solution :

Journal of Amar
Debit Credit
Date Particulars LF.
Rs. P. Rs. P.
Purchases A/c Dr. _
2004 25,000
_
Mar 1 To Cash A/c 25,000

(Cash purchases)
2 Cash A/c Dr. _
50,000
_
To Sales A/c 50,000

(Cash Sales)
3 Purchases A/c Dr. 19,000 _
_
To Gopi A/c 19,000

(Credit purchases)
5 Robert A/c Dr. 8,000 _
_
To Sales A/c 8,000

(Credit Sales)
7 Cash A/c Dr. 6,000 _
_
To Robert A/c 6,000

(Cash received)
9 Gopi A/c Dr. 5,000 _
_
To Cash A/c 5,000

(Cash paid)
20 Furniture A/c. Dr. 7,000 _
_
To Cash A/c 7,000

(furniture purchased)
Explanation : There are six accounts involved: Cash, Purchases, Sales, Furniture,
Gopi & Robert, so six accounts are to be opened in the ledger.

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Ledger of Amar
Cash Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004 2004
Mar 5 To Sales A/c 50,000 Mar 1 By Purchases
25,000
7 To Robert A/c 6,000 A/c
5,000
9 By Gopi A/c
7,000
20 By Furniture A/c

Purchases Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004
Mar 1 To Cash A/c 25,000

3 To Gopi A/c 19,000

Sales Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004
Mar 2 By Cash A/c 50,000

5 By Robert A/c 8,000

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Furniture Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004
Mar 20 To Cash A/c 7,000

Gopi Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004 2004
By Purchase
Mar 9 To Cash A/c 5,000 Mar 3 19,000
A/c
Robert Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2004 2004
Mar 5 To Sales A/c 8,000 Mar 7 By Cash A/c 6,000

5.3.2 Posting of Compound Journal Entries

Compound or Combined Journal Entry is one where more than one

transactions are recorded by passing only one journal entry instead of passing
several journal entries. Since every debit must have the corresponding equal
amount of credit, special care must be taken in posting the compound journal
entry, where there may be only one debit aspect but many corresponding credit
aspects of equal value or vise versa. The posting of such transactions is done
in the same way as already explained.

Illustration 3 : Jan. 12, 2003, Cash sales Rs.10,000, Cash received from
Kannan Rs.5,000 and commission earned Rs.2,500.

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Journal
Debit Credit
Date Particulars L.F
Rs. Rs.
2003 Cash A/c. Dr.

Jan 12 To Sales A/c. 17,500

To Kannan’s A/c. 10,000

To Commission A/c. 5,000
(Received cash for sale, from 2,500
Kannan and as commission)

Solution :

Ledger

Cash Account

Dr. Cr.

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

To Sales A/c 10,000

2003 To Kannan’s A/c. 5,000
Jan 12 To Commission
2,500
A/c

Sales Account
Dr. Cr.

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

2003

Jan 12 By Cash A/c 10,000

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Kannan’s Account
Dr. Cr.

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

2003

Jan 12 By Cash A/c 5,000

Commission Account
Dr. Cr.

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

2003

Jan 12 By Cash A/c 2,500

Note: In the above transactions, there is only one debit aspect namely cash
account and three credit aspects. Therefore, while posting in the cash account,
the names of three credit aspects are entered in the cash account on the debit
side, thus having a total of Rs.17,500 which is equal to the amount in the debit
column of the journal.
The cash account is written on the credit side of the three accounts,
namely, Sales, Kannan and Commission received, as it acts as an opposite and
corresponding accounts for Sales Rs.10,000, Kannan Rs.5,000 and Commission
Rs.2,500 respectively which are equal to the amount in the credit column of the
journal.
5.3.3 Posting the Opening Entry
The opening entry is passed to open the books of accounts for the new
financial year. The debit or credit balance of an account what we get at the
end of the accounting period is known as closing balance of that account. This
closing balance becomes the opening balance in the next accounting year.
The procedure of posting an opening entry is same as in the case of an
ordinary journal entry. An account which has a debit balance, the words ‘To
balance b/d’ are recorded on the debit side in the particulars column. An
account which has a credit balance, the words “By balance b/d” are recorded
in the particulars column on the credit side. Infact opening entry is not actually
posted but the accounts are merely incorporated in the ledger, if the ledger is a
new one or old.

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Illustration 4

Post the opening entry into the ledger of Rajan as on 1st April 2003, cash
in hand Rs. 10,000; Loan Rs. 1,00,000.
Solution:
In the Books of Rajan
Cash Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003
To Balance
Apr 1 10,000
b/d

Loan Account
Dr. Cr.
Amount Amount
Date Particulars J.F Rs. Date Particulars J.F Rs.
P. P.
2003
By Balance
Apr 1 1,00,000
b/d
5.4 Balancing an Account
Balance is the difference between the total debits and the total credits
of an account. When posting is done, many accounts may have entries on their
debit side as well as credit side. The net result of such debits and credits in an
account is the balance.
Balancing means the writing of the difference between the amount columns
of the two sides in the lighter (smaller total) side, so that the grand totals of the
two sides become equal.
5.4.1 Significance of balancing
There are three possibilities while balancing an account during a given
period. It may be a debit balance or a credit balance or a nil balance depending
upon the debit total and the credit total.

i. Debit Balance : The excess of debit total over the credit total is called
the debit balance. When there is only debit entries in an account, the amount

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itself is the balance of that account, i.e., the debit balance. It is first recorded on
the credit side, above the total. Then it is entered on the debit side, below the
total, as the first item for the next period.

Cash Account

Dr. Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003 2003
Mar 2 To Sales A/c 15,000 Mar 15 By Purchase A/c 8,000
12 To Kumar’s A/c 4,000 28 By Salary A/c 2,500
31 By Balance c/d 8,500

19,000 19,000

Apr 1 To Balance b/d 8,500

ii. Credit Balance : The excess of credit total over the debit total is called
the credit balance. When there is only credit entries in an account, the amount
itself is the balance of that account i.e., the credit balance. It is first written in
the debit side, as the last item, above the total. Then it is recorded on the credit
side, below the total, as the first item for the next period.

Capital Account

Dr. Cr.

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

2004 2003
Mar 31 To Balance c/d 50,000 Apr 1 By Cash 50,000

50,000 50,000
2004
Apr 1 By Balance b/d 50,000

iii. Nil Balance : When the total of debits and credits are equal, it is closed
by merely writing the total on both the sides. It indicates the equality of benefits
received and given by that account.

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Shankar Account

Dr. Cr.

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

2003 2003
Mar 20 To Sales A/c 6,000 Mar 25 By Cash 6,000

6,000 6,000
5.4.2 Balancing of different accounts

Balancing is done periodically, i.e., weekly, monthly, quarterly, halfyearly

or yearly, depending on the requirements of the business.
i. Personal Accounts : These accounts are generally balanced regularly
to know the amounts due to the persons (creditors) or due from the persons
(debtors).

ii. Real Accounts : These accounts are generally balanced at the end
of the financial year, when final accounts are being prepared. However, cash
account is frequently balanced to know the cash on hand. A debit balance in an
asset account indicated the value of the asset owned by the business. Assets
accounts always show debit balances.

iii. Nominal Accounts : These accounts are in fact, not to be balanced as

they are to be closed by transfer to final accounts. A debit balance in a nominal
account indicates that it is an expense or loss. A credit balance in a nominal
account indicates that it is an income or gain.
All such balances in personal and real accounts are shown in the Balance
Sheet and the balances in nominal accounts are taken to the Profit and Loss
Account.
5.4.3 Procedure for Balancing

While balancing an account, the following steps are involved:

Step 1 → Total the amount column of the debit side and the credit side separately
and then ascertain the difference of both the columns.

Step 2 → If the debit side total exceeds the credit side total, put such difference on
the amount column of the credit side, write the date on which balancing
is being done in the date column and the words “By Balance c/d” (c/d
means carried down) in the particulars column.

OR

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If the credit side total exceeds the debit side total, put such difference on
the amount column of the debit side, write the date on which balancing
is being done in the date column and the words “To Balance c/d” in
the particulars column.

Step 3 → Total again both the amount columns, put the total on both the sides
and draw a line above and a line below the totals.

Step 4 → Enter the date of the beginning of the next period in the date column
and bring down the debit balance on the debit side along with the
words “To Balance b/d” (b/d means brought down) in the particulars
column and the credit balance on the credit side along with the words
“By balance b/d” in the particulars column.

Note: In the place of c/d and b/d, the words c/f or c/o (carried forward or carried
over) and b/f or b/o (brought forward or brought over) may also be used. When
the balance is carried down in the same page, the words c/d and b/d are used,
while balance is carried over to the next page, the term c/o and b/o are used.
When balance is carried forward to some other page either in same book or
some other book, the abbreviations c/f (carried forward) and b/f (brought forward)
are used.

Illustration 5 : Balance the following Ledger Account as on 31st March 2003.

Siva’s Account

Dr. Cr.

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

2003 To Sales A/c 1,50,000 2003

Mar 5 To Sales A/c 10,000 Mar. 8 By Sales
21 Returns A/c 10,000
12 By Cash A/c 25,000
20 By Bank A/c 50,000

Explanation : The steps involved in balancing Siva’s Account.

Step 1 → Total the amount column of the debit side Rs. 1,60,000

Total the amount column of the credit side Rs. 85,000

Balance / Difference Rs. 75,000

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Since the total of debit amount column exceeds the total of credit
amount column, the difference is Debit balance.

Step 2 → Enter the date of balancing, which is normally the last date of the
accounting period (i.e., 31st March 2003) in the date column, “By
Balance c/d” in the particulars column, and the difference in the amount
column on the credit side.

Step 3 → Total both the amount columns and draw a line above and a line below
the totals.

Step 4 → Enter the date of the beginning of the next period in the date column
(i.e., 1st April 2003) , ‘To Balance b/d’ in the particulars column and
enter the balance amount in the amount column on the debit side.

After taking into consideration of the above steps, Siva’s Account will appear
as follows:-

Siva’s Account

Dr. Cr.

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

2003 2003
Mar 5 To Sales A/c 1,50,000 Mar 8 By Sales
21 To Sales A/c 10,000 Return A/c 10,000

12 By Cash A/c 25,000

20 By Bank A/c 50,000
31 By Balance c/d 75,000

1,60,000 1,60,000

2003
April 1 To Balance b/d 75,000

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Illustration 6 : Balance the ledger accounts for Illustration 2.

Solution:
Cash Account
Dr. Cr.

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

2004 2004
Mar 5 To Sales A/c 50,000 Mar 1 By Purchases A/c 25,000
7 To Robert A/c 6,000 9 By Gopi A/c 5,000
20 By Furniture A/c 7,000
31 By Balance c/d 19,000

56,000 56,000
April 1 To Balance b/d 19,000

Purchases Account

Dr. Cr.

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

2004 2004
Mar 1 To Cash A/c 25,000 Mar By Balance c/d 44,000
3 To Gopi A/c 19,000 31
44,000 44,000
To Balance
April 1 44,000
b/d
Sales Account

Dr. Cr.

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

2004 2004
Mar 31 To Balance c/d 58,000 Mar 2 By Cash A/c 50,000
5 By Robert A/c 8,000

58,000 58,000
April 1 By Balance b/d 58,000

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Furniture Account

Dr. Cr.

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

2004 2004

Mar 20 To Cash A/c 7,000 Mar 31 By Balance c/d 7,000

7,000 7,000
Apr 1 To Balance b/d 7,000

Gopi Account

Dr. Cr.

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

2004 2004

Mar 19 To Cash A/c 5,000 Mar 3 By Purchases A/c 19,000

31 To Balance c/d 14,000

19,000 19,000
April
By Balance b/d 14,000
1
Robert Account

Dr. Cr.

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

2004 2004

Mar 5 To Sales A/c 8,000 Mar 7 By Cash A/c 6,000

31 By Balance c/d 2,000

8,000 8,000
Apr 1 To Balance b/d 2,000

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5.5 Distinction between Journal and Ledger :

Books of original entry (Journal) and Ledger can be distinguished as
follows:

Basis of Distinction Journal Ledger

1. Book It is the book of prime It is the main book of
entry. account.
2. Stage Recording of entries in Recording of entries in
these books is the first the ledger is the second
stage. stage.
3. Process The process of recording The process of
entries in these books is recording entries in the
called “Journalising”. ledger is called “Posting”.
4. Transactions Transactions relating to Transactions relating to
a person or property or a particular account are
expense are spread over. found together on a
particular page.
5. Net effect The final position of a The final position of a
particular account can not particular account can
be found. be ascertained just at a
glance.
6. Next Stage Entries are transferred to From the Ledger, first the
the ledger. Trial Balance is drawn and
then final accounts are
prepared.
7. Tax authorities Do not rely upon these Rely on the ledger for
books assessment purpose.

QUESTIONS
I. Objective Type:
a) Fill in the blanks:

1. Ledger is the _________ book of account.

2. The process of transferring entries from Journal to the Ledger is called

________.

3. c/d means _________ and b/d means _________.

4. c/f means _________ and b/f means _________.

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5. Debiting an account signifies recording the transactions on the _________

side.

6. The left hand side of an account is known as _________and the right hand
side as _________.

7. Credit Balance means _________ is heavier than _________.

8. Real accounts cannot have _________ balance.

9. Account having debit balance is closed by writing _________.

10. L.F. column in the journal is filled at the time of _________ .

[Answers: 1. principal, 2. posting, 3. carried down; brought down, 4. carried

forward; brought forward, 5. debit side, 6. debit side; credit side,
7. credit total; debit total, 8. credit, 9. By Balance c/d, 10. posting]
b) Choose the correct answer :

1. Ledger is a book of :

a. original entry b. final entry c. all cash transactions.

2. Personal and real accounts are:

a. closed b. balanced c. closed and transferred

3. The column of ledger which links the entry with journal is

a. L.F column b. J.F column c. Particulars column

4. Posting on the credit side of an account is written as

a. To b. By c. Being

5. Nominal account having credit balance represents

a. income / gain b. expenses / losses c. assets

6. Nominal account having debit balance represents

a. income / gain b. expenses / losses c. liability

7. Real accounts always show

a. debit balances b. credit balances c. nil balance.

8. Account having credit balance is closed by writing

a. To Balance b/d b. By Balance c/d c. To Balance c/d

9. When the total of debits and credits are equal, it represents

a. debit balance b. credit balance c. nil balance

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10. The balances of personal and real accounts are shown in the

a. profit and loss account b. balance sheet c. both.

[Answers: 1 (b), 2. (b), 3. (b), 4. (b), 5. (a), 6. (b), 7. (a), 8. (c), 9. (c), 10. (b)]
II. Other Questions:

1. What is ledger?

2. Define ledger.

3. Explain the utilities of a ledger.

4. What is a Loose-Leaf Ledger?

5. What is posting?

6. What are the steps in posting?

7. Explain the meaning of balancing an account.

8. Explain the steps in balancing.

9. What is debit balance?

10. What is credit balance?

11. Explain the significance of debit and credit balances of various types of
accounts.

12. Indicate the nature of normal balance in the following accounts.

a. Cash f. Debtors

b. Creditors g. Purchases

c. Sales h. Capital

d. Furniture i. Salaries paid

e. Commission received j. Computer

13. Explain the posting of a compound journal entry with an example.

14. Distinquish Journal with Ledger.

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III. Problems:

1. Journalise the following transactions of Mr.Ravi and post them in the ledger
and balance the same.

2004, June 1 Ravi invested Rs.5,00,000 cash in the business

3 Paid into Bank Rs.80,000

5 Purchased building for Rs.3,00,000

7 Purchased goods for Rs.70,000

10 Sold goods for Rs.80,000

15 With drew cash from bank Rs.10,000

25 Paid electric charges Rs.3,000

30 Paid Salary Rs. 15,000

2. Record the following transactions in the Journal of Mr.Radhakrishnan and

post them in the ledger and balance the same.

2004, Jan. 1 Radhakrishnan commenced business with cash,

Rs.15,00,000.

3 Paid into Bank Rs.5,00,000

5 Bought goods for Rs.3,60,000

7 Paid travelling charges Rs.5,000

10 Sold goods for Rs.2,50,000

15 Sold goods to Balan Rs.2,40,000

20 Purchased goods from Narayanan Rs.2,10,000

25 Withdrew cash Rs.60,000

3. Journalise the following transactions in the Journal of Mr.Shanmugam, post

them in the ledger and balance them.

2003, Aug. 1 Started business with Rs.4,50,000

3 Goods purchased Rs.70,000

5 Goods sold Rs.51,000

10 Goods purchased from Rangasamy Rs.2,00,000

16 Goods returned to Rangasamy Rs.5,000

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23 Drew from bank Rs.30,000

26 Furniture purchased Rs.10,000

27 Settled Rangasamy’s account

31 Salaries paid, Rs.12,000

4. Journalise the following transactions in Tmt.Rani’s Journal and post them

to ledger and balance them.

Rs.

2003, Sept. 1 Tmt. Rani started business with 3,00,000

5 Opened a current account with Indian

Overseas Bank 50,000

12 Bought goods from Tmt.Sumathi 90,000

18 Paid to Tmt. Sumathi 90,000

20
Sold goods to Tmt.Chitra 1,26,000

28 Tmt.Chitra settled her account

5. Journalise the following transactions in Thiru.Manikandan’s books and post

them to ledger and balance them.

2003, Aug 5 Sold goods to Arumugam on Credit Rs.17,500

9 Bought goods for cash from Chellappan Rs.22,500

12 Met Travelling expenses Rs. 2,500

15 Received Rs.80,000 from Sivakumar as loan

21 Paid wages to workers Rs.3,000

6. Enter the following transactions in journal and post them in the ledger of
Mr.Govindarajan and balance them.

2003, Aug 1 Govindarajan commenced his business with the

following assets and liabilities.

Plant and Machinery Rs.2,50,000.

Stock Rs. 90,000.

Furniture Rs.7,000.

Cash Rs. 50,000.

Sundry creditors Rs. 1,50,000.

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2 Sold goods to Sundar Rs. 1,50,000.

3 Bought goods from Natarajan Rs.65,000.

4 Sundar paid cash Rs. 1,25,000.

6 Returned damaged goods to Natarajan Rs.2,000.

10 Paid to Natarajan Rs.28,000.

31 Paid rent Rs. 5,000.

Paid salaries Rs. 9,000.

7. Post the following transactions direct into ledger of Thiru.Karthik and

balance them.

2003, Oct 1 Received cash from Ramesh Rs.1,60,000.

5 Bought goods for cash Rs.60,000.

7 Sold to Suresh Rs.30,000.

15 Bought from Dayalan Rs.40,000.

18 Sold to Ganesan Rs. 50,000.

20 Withdrew cash for personal use Rs.18,000.

25 Received commission Rs.20,000.

30 Paid rent Rs.5,000.

31 Paid salary Rs.10,000.

Prepare the necessary accounts in the ledger and bring the balances for

8. Problem No.11 in Chapter 4.

9. Problem No.12 in Chapter 4.

10. Problem No.13 in Chapter 4.

11. Problem No.14 in Chapter 4.

12. Problem No.15 in Chapter 4.

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Chapter - 6
SUBSIDIARY BOOKS I -
SPECIAL PURPOSE BOOKS

Learning Objectives

After learning this chapter you will be able to:


understand the Meaning, Kinds and Advantages of Subsidiary Books


know the Purpose, Format, Posting and Balancing of Purchases, Sales,
Purchases Return and Sales Return Books.


understand Bill of exchange and the Different Terms involved in Bill
transactions.


know the Meaning, Purpose and Posting of entries in Journal Proper.

_________________________________________________________________

For a business having a large number of transactions it is practically

impossible to write all transactions in one journal, because of the following
limitations.
i. Periodical details of some important business transactions cannot
be known, from the journal easily, e.g., monthly sales, monthly
purchases.
ii. Such a system does not facilitate the installation of an internal check
system since the journal can be handled by only one person.
iii. The journal becomes bulky and voluminous.

6.1 Need
Moreover, transactions can be classified and grouped conveniently
according to their nature, as some transactions are usually of repetitive in nature.
Generally, transactions are of two types:
Cash and Credit. Cash transactions can be grouped in one category whereas
credit transactions can be grouped in another category. Thus, in practice, the
main journal is sub-divided in such a way that a separate book is used for each
category or group of transactions which are repetitive and sufficiently large in
number.

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Each one of the subsidiary books is a special journal and a book of original
or prime entry. Though the usual type of journal entries are not passed in these
sub-divided journals, the double entry principles of accounting are strictly followed.
6.1.1 Kinds of Subsidiary Books

The number of subsidiary books may vary according to the requirements

of each business. The following are the special purpose subsidiary books.
Transactions

Day Books Bills Books Cash Book Journal Proper

Purchases Sales Purchases Sales Bills Bills

Book Book Return Return Receivable Payable
Book Book Book Book

6.1.2 Purpose

i. Purchases Book records only credit purchases of goods by the trader.

ii. Sales Book is meant for entering only credit sales of goods by the trader.

iii. Purchases Return Book records the goods returned by the trader to
suppliers.

iv. Sales Return Book deals with goods returned (out of previous sales) by
the customers.

v. Bills Receivable Book records the receipts of bills (Bills Receivable).

vi. Bills Payable Book records the issue of bills (Bills Payable).

vii. Cash Book is used for recording only cash transactions i.e., receipts and
payments of cash.

viii. Journal Proper is the journal which records the entries which cannot be
entered in any of the above listed subsidiary books.
6.1.3 Advantages

The advantages of maintaining subsidiary books can be summarised as

under :
i. Division of Labour : The division of journal, resulting in division of work,
ensures more clerks working independently in recording original entries in the
subsidiary books.

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ii. Efficiency : The division of labour also helps the reduction in work load,
saving in time and stationery. It also gives advantages of specialisation leading
to efficiency.
iii. Prevents Errors and Frauds : The accounting work can be divided in
such a manner that the work of one person is automatically checked by another
person. With the use of internal check, the possibility of occurrance of errors and
frauds may be avoided.
iv. Easy Reference : It facilitates easy references to any particular item.
For instance total credit sales for a month can be easily obtained from the Sales
Book.
v. Easy Postings : Posting from the subsidiary books are made at
convenient intervals depending upon the nature of the business.
6.2 Purchases Book
Purchases book also known as Bought Day Book is used to record all credit
purchases of goods which are meant for resale in the business. Cash purchases
of goods, cash and credit purchases of assets are not entered in this book.
Before discussing the Purchase Day Book, in detail we are to explain the
most significant terms, Trade Discount and Cash Discount.
6.2.1 Trade Discount
Trade discount is an allowance or concession granted by the seller to the
buyer, if the customer purchases goods above a certain quantity or above a certain
amount. The amount of the purchase made, is always arrived at after deducting
the trade discount, ie., only the net amount is considered. For example, if the
list price (price prescribed by the manufacturers or wholesalers) of a commodity
is Rs.100, and trade discount granted by manufacturer to the wholesaler is 20%
then cost price of the commodity to the wholesaler is Rs.80. Trade discount is
not recorded in the books. They are used for determining the net price.
6.2.2 Cash Discount
Sale of goods on credit is a common phenomenon in any business. When
goods are sold on credit the customers enjoy a facility of making payment on
some date in the future. In order to encourage them to make the payment before
the expiry of the credit period a deduction is offered. The deduction so made is
known as cash discount. For example, If Ram purchases goods worth Rs.5,000
on 30 days credit then, as per the terms of contract, he is authorised to make
payment 30 days after the date of purchase. If he is offered a cash discount of
2% on payment within 10 days and if he does so, he is entitled to deduct Rs.100
from the invoice price and pay Rs.4,900. In this case Rs.100 is cash discount.
But if he does not choose to make payment within 10 days then he will not get
any cash discount. In this case he will pay Rs.5,000 after 30 days.

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6.2.3 Distinction between cash discount and trade discount

Trade discount differs from cash discount in the following respects.

S.No Basis of Trade Discount Cash Discount

Distinction
1. Parties It is a reduction It is a reduction granted
granted by a by a whole- saler
manufacturer/ supplier (creditor) to the buyer
(debtor).
2. Purpose To help the retailer to To encourage prompt
earn some profit. payment within a
stipulated period.
3. Time when It is allowed on the It is allowed when
allowed purchase of goods. payment is made within
the specified period.
4. Variation It is usually given at It varies from customer
the same rate which is to customer depending
applicable to all on the time and period of
customers and will vary payment.
with the quantity
purchased.
5. Disclosure It is shown by way of It is not shown in the
deduction in the invoice invoice.
itself.
6. Ledger Account A separate Account A separate Account is
is not opened in the opened in the Ledger for
Ledger. discount received and
discount allowed.

6.2.4 Format
Purchases Book

Inward Amount
Date Particulars Invoice L.F. Details Total
Remarks
No. Rs. Rs.

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i. Date Column – Represents the date on which the transaction

took place.
ii. Particulars Column – This column includes the name of the seller
and the particulars of goods purchased.
iii. Inward Invoice No.Column – Reveals the serial number of the inward
invoice.
iv. LF. Column – This column shows the page number of the
suppliers account in the ledger accounts.
v. Details Column – Reveals the amount of goods purchased and
the amount of trade discount.
vi. Total Column – This column represents the net price of the
goods, i.e, the amount which is payable to the
creditors after adjusting discount and
expenses if any.
vii. Remarks Column – Contains any extra information.
At the end of each month, the purchase book is totalled. The total shows
the total amount of goods or materials purchased on credit.
6.2.5 Posting and Balancing
Once transactions are properly recorded in purchases journal, they are
posted into the ledger. The procedure for posting is stated as under.
Step 1 → Entries will be posted to the credit side of the respective creditors
(supplier) account in the ledger by writing “By Purchases A/c” in the
particulars column.
Step 2 → Periodic total is posted to the debit of purchases account by writing
“To sundries as per purchases book” in the particulars column.
Illustration 1: From the following transactions of Ram for July, 2003 prepare the
Purchases Book and ledger accounts connected with this book.
2003
July 5 Purchased on credit from Kannan & Co.
50 Iron boxes @ Rs. 500
10 Grinders @ Rs. 3,000
6 Purchased for cash from Siva & Bros.
25 Fans @ Rs. 1,250
10 Purchased from Balan & Sons on credit
20 Grinders @ Rs. 2,500
10 Mixie @ Rs. 3,000
20 Purchased, on credit, one Computer from Kumar for Rs. 35,000.

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Solution :
In the books of Ram
Purchases Book
Inward Amount
Date Particulars Invoice L.F. Details Total
No. Rs. Rs.
2003 Kannan & Co. 25,000
July 5 50 Iron boxes @ Rs. 500 30,000
10 Grinders @ Rs. 3,000
Goods purchased vide their 55,000
bill No....... Dated......
10 Balan & Co.
20 Grinders @ Rs.2,500 50,000
10 Mixie @ Rs. 3,000 30,000
Goods purchased vide their 80,000
bill No....... Dated......
Total 1,35,000

Ledger Accounts
Dr. Purchases Account Cr.
Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003
July To Sundries as
31 per Purchases
Book
1,35,000

Dr. Kannan & Co. Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003
July 5 By Purchases 55,000
A/c

Dr. Balan & Co. Account Cr.

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

2003 By Purchases
July 10 A/c 80,000

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Note : July 6th transaction is a cash transaction and July 20th transaction is
purchase of an asset, so both will not be recorded in the purchases book.

6.3 Sales Book

The sales book is used to record all credit sales of goods dealt with by
the trader in his business. Cash sales, cash and credit sales of assets are
not entered in this book. The entries in the sales book are on the basis of the
invoices issued to the customers with the net amount of sale. The format of sales
book is shown below:-
6.3.1 Format
Sales Book

Outward Amount
Date Particulars Invoice L.F. Details Total Remarks
No. Rs. Rs.

i. Date Column – Represents the date on which the

transaction took place.

ii. Particulars Column – This column includes the name of

purchasers and the particulars of goods
sold.

iii. Outward Invoice No.Column – Reveals the serial number of the

outward invoice.

iv. L.F. Column – The page number of the customers

accounts in the Ledger is recorded.

v. Details Column – Contains the amount of goods sold and the

amount of trade discount if any.

vi. Total Column – This column shows the net amount which
is receivable from the customers.

vii. Remarks Column – Any other extra information will be

recorded.

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6.3.2 Posting and Balancing

At the end of the month the individual entries and the total of the sales
book column are posted into the ledgers as under.
Step 1 → Individual amounts are daily posted to the debit of Customers’
Accounts by writing “To Sales A/c” in the particulars column.
Step 2 → Grand total of the sales book is posted to the credit of sales account
by writing “By Sundries as per Sales Book” in the particulars
column.

Illustration 2 From the transactions given below prepare the Sales Book of Ram
for July 2003.

2003
July 5 Sold on credit to S.S. Traders
10 Chairs @ Rs. 250 Less 10%
10 Tables @ Rs. 850 Discount

8 Sold to Raja for cash

15 Chairs @ Rs. 250

20 Sold to Mohan & Co.

5 Almirah @ Rs. 2,200
10 Tables @ Rs. 850

23 Sold on credit to Narayanan old computer for Rs. 5,000

28 Sold to Kumaran for cash

15 Chairs @ Rs. 250

Solution :
In the books of Ram
Sales Book

Outward Amount
Date Particulars Invoice L.F. Details Total
No. Rs. Rs.
2003
July 5 S.S. Traders & Co.
10 Chairs @ Rs. 250 2,500
10 Tables @ Rs. 850 8,500
11,000
Less : 10% Discount 1,100

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Sold to S.S. Traders,

9,900
Invoice No....... dated

20 Mohan & Co.

5 Almirah @ Rs. 2,200 11,000
10 Tables @ Rs. 850 8,500
Sales as per 19,500
Invoice No...... dated
Total 29,400

Ledger Accounts

Dr. Sales Account Cr.

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

2003

July By Sundries as per 29,400

31 sales book

Dr. S.S. Trader’s Account Cr.

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

2003

July 5 To Sales A/c 9,900

Dr. Mohan & Co.’s Account Cr.

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

2003

July 5 To Sales A/c 19,500

6.4 Returns Books

Returns Books are those books in which the goods returned to the suppliers
and goods returned by the customers are recorded.

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The reasons for the return of goods are

i. not according to the order placed.

ii. not upto the samples which were already shown.

iii. due to damage condition.

iv. due to difference in the prices charged.

v. undue delay in the delivery of the goods.

6.4.1 Kinds of Returns Books

The following are the kinds of Returns Books;

i. Purchases Return or Returns outward book

ii. Sales Return or Returns inward book

When the business concern returns a part of the goods purchased on credit,
the returns fall under the category Purchases Return or Returns Outward.

When the business concern receives a part of the goods sold on credit,
the returns fall under the category of Sales Return or Returns Inward.
6.4.2 Purchases Return Book

This book is used to record all returns of goods by the business to the
suppliers. The entries in the Purchases Returns Book are usually made on
the basis of debit note issued to the suppliers or credit note received from the
suppliers. We call it a debit note because the party’s (supplier) account is debited
with the amount written in this note. The same note is termed as credit note from
the receiving party’s point of view because he will credit the account of the party
from whom he has received the note together with goods. The flow of notes is
as follows.

Purchaser Sends
To

Credit Note Debit Note

Sends To
Seller

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6.4.2.1 Format
Purchases Return Book

Debit Amount

Date Particulars Note L.F. Details Total Remarks

No. Rs. Rs.

Note : The reason for goods returned is recorded in Remarks column.

Posting and Balancing

The individual entries and the periodic total of the Purchase Return Book
are posted into the Ledger as under:

Step 1 → Individual amounts are daily posted to the debit of supplier accounts
by writing “To Purchases Return A/c” in the particulars column.
Step 2 → Periodic total is posted to the credit of purchases return account by
writing “By Sundries as per Purchases Return Book” in the particulars
column.

Illustration 3

Enter the following transactions in the purchases return book of Hari and
post them into the ledger.

2003 Jan 5 Returned goods to Anand 5 chairs @ Rs.200 each, not in

accordance with order.

14 Returned goods to Chandran 4 chairs @ Rs.200 each and 10

tables @ Rs.350 each, due to inferior quality.

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Solution :
In the books of Hari
Purchases Return Book
Debit Amount
Date Particulars Note L.F. Details Total Remarks
No. Rs. Rs.
2003 Anand
Not in
Jan 5 5 Chairs @ Rs.200
accordance
1,000
with order
14 Chandran
4 Chairs @ Rs.200 800 Due to
10 Tables @ Rs.350 3,500 inferior
quality
4,300
Total 5,300
Ledger Accounts
Dr. Purchases Return Account Cr.
Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.

2003

Jan By Sundries as
31 per Purchases

return book
5,300
Dr. Anand Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003

Jan 5 To Purchases 1,000

Return A/c

Dr. Chandran Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003
Jan 14 To Purchases 4,300

Return A/c
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6.4.3 Sales Return Book

This book is used to record all returns of goods to the business by the
customers. The entries in the sales return book are usually on the basis of credit
notes issued to the customers or debit notes issued by the customers.

Seller Sends
To

Debit Note Credit Note

Sends To
Purchaser
6.4.3.1 Format
Sales Returns Book

Credit Amount
Date Particulars Note L.F. Details Total Remarks
No. Rs. Rs.

Note : Remarks column is meant to record the reason for return of goods.
Posting and Balancing
The individual entries and the periodic total of sales return book are posted
into the ledger as under.
Step 1 → Individual amounts are daily posted to the credit of customers
account by writing “By Sales return A/c” in the particulars column.
Step 2 → Periodic total is posted to the debit of sales return account by
writing “To Sundries as per sales return book “ in the particulars
column.
Illustration 4
Enter the following transactions in Returns Inward Book:
2003
April 6 Returned by Shankar 30 shirts each costing Rs.150, due to inferior
quality.

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8 Amar Tailors returned 10 Baba suits, each costing Rs.100, on

account of being not in accordance with their order.

21 T.N. Stores returned 12 Salwar sets each costing Rs.200, being not
in accordance with order.
Solution:
Sales Return Book

Credit Details Amount

Date Particulars Note L.F. Rs. Rs. Remarks
No.
2003 Due to
April Shankar 30 shirts @ Rs.150 inferior
6 quality
4,500

Not in
8 Amar Tailors 10 Baba suits accordance
@ Rs. 100 1,000 with the
order

21 T.N Stores Not in

12 Salwar sets accordance
@ Rs.200 2,400 with the
7,900 order
Total 7,900

Ledger Accounts

Dr. Sales Return Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003

April To Sundries
30
as per Sales

return book 7,900

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Dr. Shankar Account Cr.

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

2003
April 6 By Sales 4,500
Return A/c

Dr. Amar Tailors Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003

April 8 By Sales 1,000

Return A/c

Dr. T.N. Stores Account Cr.

Amount Amount
Date Particulars J.F Date Particulars J.F
Rs. Rs.
2003
April By Sales 2,400
21 Return A/c

6.5 Bill of exchange

When one wants to increase the business transactions, credits may be
allowed and the amounts are received after some time. If the amount involved
in the credit transaction is large, the seller needs security and evidence over the
dealings. Here the Bill of Exchange solves the problems of the seller.
6.5.1 Definition
According to the Negotiable Instruments Act, 1881, ‘Bill of Exchange is
an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order
of a certain person or to the bearer of the instrument’.
An analysis of the definition given above highlights the following important
features of a bill of exchange.
i. It is a written document.
ii. It is an unconditional order.

iii. It is an order to pay a certain sum of money.

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iv. It is signed by the drawer.

v. It bears stamp or it is drafted on a stamp paper.

vi. It is accepted by the acceptor.

vii. The amount is paid to drawer or endorsee.

6.5.2 Format
Bill of Exchange
328, Bazaar Street,
Stamp t e d Trichy - 4,
c c ep m
A da
01.06.2003 r a
n
Rs. 10,000/- Su /2003
4/6
Three months after date pay to me or to my order the
sum of Rupees Ten Thousand only for value received.

To Damodaran
Thiru.Sundaram,
430, Mint Street,
Chennai - 1.

6.5.3 Important terms

Explanation of some terms connected with bill of exchange is given

below.
1. Drawing of a Bill

The seller (creditor) prepares the bill in the form presented above. The act
of preparing the bill in its complete form with the signature is known as ‘drawing’
a bill.
2. Parties

There are three parties to a bill of exchange as under.

i.
Drawer: The person who prepares the bill is called the drawer i.e., a
creditor.

ii. Drawee: The person who has to make the payment or who accepts to
make the payment is called the drawee i.e., a debtor.

iii. Payee: The person who receives the payment is payee. He may be a
third party or the drawer himself.

In the above format drawer and payee is Damodaran. Sundaram is the

drawee.

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3. Acceptance

In a bill drawee gives his acceptance by writing the word ‘accepted’ and
also puts his signature and the date. Now the bill becomes a legal document
enforceable in the court of law.
4. Due date and Days of grace

When a bill is drawn payable after a specified period the date on which
the payment should be made is called ‘Due Date’. In the calculation of the due
date three extra days are added to the specified period of the bill are known as
‘Days of Grace’. If the date of maturity falls on a holiday, the bill will be due for
payment on the preceeding day.
Example :

Date of Bill Period of Bill Days of Grace Due date

1st March 2 month 3 4th May
12th July 1 month 3 14th Aug. since
15th Aug. (being
independence day)
is a public holiday.
1st Oct. 30 days 3 3rd November

5. Endorsement

Endorsement means writing of one’s signature on the face or back of a bill

for the purpose of transferring the title of the bill to another person. The person
who endorses is called the “Endorser”. The person to whom a bill is endorsed
is called the “Endorsee”. The endorsee is entitled to collect the money.
6. Discounting

When the holder of a bill is in need of money before the due date of a bill
he can convert it into cash by discounting the bill with his banker. This process
is referred to as discounting of bill. The banker deducts a small amount of the bill
which is called discount and pay the balance in cash immediately to the holder
of the bill.
7. Retiring of Bill

An acceptor may make the payment of a bill before its due date and
discharge his liability, it is called as retirement of a bill. Usually the holder of
the bill allows a concession called rebate to the drawee for the unexpired period
of the bill.

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8. Renewal

When the acceptor of a bill knows in advance that he will not be able to
meet the bill on its due date, he may approach the drawer with a request for
extension of time for payment. The drawer of the bill may agree to cancel the
original bill and draw a new bill for the amount due with interest thereon. This is
referred to as renewal.
9. Dishonour

Dishonour of the bill means the non-payment of bill, when it is presented

for payment.
10. Noting and Protesting

If a bill is dishonoured, the drawer may approach the court, and file a suit
against the drawee. In order to collect documentary evidence, the drawer may
approach a lawyer and explain the fact of the dishonour of the bill. The lawyer
will take the bill to the drawee and ask for the payment. If the drawee does not
make the payment, the lawyer will note the statement of the drawee and get the
statement signed by him. The lawyer will then put his signature. The statement
noted by the lawyer will be the documentary evidence for the dishonour of the
bill. Writing this statement by the lawyer is known as noting of the bill. The lawyer
performing this work of noting the bill is called as the ‘Notary Public’. A notary
public is an official appointed by the Government.

After recording a note of dishonour on the dishonoured bill, the Notary

Public issues a certificate to this effect which is called protest. A protest is
a certificate issued by the Notary Public attesting that the bill has been
dishonoured.

6.6 Bills Books

When the number of bills received or issued is large journalising of all bill
transactions will result in enormous waste of time. Hence, suitable registers like
bills receivable book and bills payable book are maintained to record the receipt
of bills receivable and issue of bills payable respectively. These books are also
called Bills Journals / Books.
6.6.1 Bills Receivable Book
Bills receivable (B/R) book is used for the purpose of recording the
details of bills receivable. The individual accounts of parties from whom bills
are received will be credited with the amount in the bills receivable book. The
periodic total is posted to the debit of bills receivable account in the ledger by
writing “To sundries as per Bills Receivable Book”.

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6.6.2 Bills Payable Book

Bills payable (B/P) book is used for the purpose of recording the details
of bills payable. The individual accounts of the parties to whom the bills are
issued will be debited with the corresponding amount in the bills payable book.
The periodic total is posted to the credit of bills payable account in the ledger
by writing “By Sundries as per Bills Payable Book”.

6.7 Journal Proper

Journal proper is used for making the original record of such transactions
for which no special journal has been kept in the business. The usual entries
that are put through this journal is explained below.
1. Opening Entries

Opening entries are used at the beginning of the financial year to open
the books by recording the assets, liabilities and capial appearing in the balance
sheet of the previous year.
Example:

Mr. Ramnath commenced business with the following items, make the
opening entries in journal proper as on 1st January 2003.
Cash Rs. 30,000

Stock Rs. 15,000

Furniture Rs. 3,000

Sundry creditors Rs. 10,000

Debit Credit
Date Particulars L.F.
Rs. Rs.

2003 Cash A/c Dr. 30,000

Jan. 1 Stock A/c Dr. 15,000
Furniture A/c Dr. 3,000
To Sundry creditors A/c 10,000
To Capital A/c 38,000
(Commencement of business
with assets & liabilities)

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2. Closing Entries

Closing entries are recorded at the end of the accounting year for
closing accounts relating to expenses and revenues. These accounts are closed
by transferring the balances to the Trading, Profit and Loss Account.
Example : Salaries paid Rs.15,000. Give the closing entry as on Dec. 31, 2003.

Debit Credit
Date Particulars L.F.
Rs. Rs.

2003 Profit & Loss A/c Dr.

Dec.31 15,000
To Salaries A/c 15,000
(Closing entry for salaries
paid)

3. Adjusting Entries
To arrive at a correct figure of profits and loss, certain accounts require some
adjustments. Entries for making such adjustments are called as adjusting entries.
These are needed at the time of preparing the final accounts.
Example : Provide depreciation on furniture Rs.1,00,000 @ 10% per annum. Give
adjustment entry as on Dec. 31, 2003.
Debit Credit
Date
Particulars L.F. Rs. Rs.
2003
Dec.31 Depreciation A/c Dr. 10,000
To Furniture A/c 10,000
(Depreciation written off )

4. Transfer Entries

Transfer entries are passed in the journal proper for transferring an item
entered in one account to another account.
Example : When the proprietor takes goods Rs.5,000 for personal use. Give transfer
entry on Dec. 31, 2003.

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Debit Credit
Date Particulars L.F.
Rs. Rs.

2003
Dec.31 Drawings A/c Dr. 5,000
To Purchases A/c 5,000
(Goods withdrawn for personal
use)

5. Rectifying Entries
Rectifying entries are passed for rectifying errors which might have committed
in the book of accounts.
Example : Purchase of furniture for Rs.10,000 was debited to Purchases Account.
Pass rectifying entry on Dec. 31, 2003.

Debit Credit
Date Particulars L.F.
Rs. Rs.

2003

Dec.31 Furniture A/c Dr. 10,000

To Purchases A/c 10,000
(Wrong debit to purchases
account rectified)

6. Miscellaneous Entries or Entries of Casual Nature

These are entries of casual nature which do not occur so frequently. Such
transactions include the following:

i. Credit purchases and credit sale of assets which cannot be recorded

through purchases or sales book

ii. Endorsement, renewal and dishonour of bill of exchange which

cannot be recorded through bills book.

iii. Other adjustments like interest on capital and loan, bad debts,
reserves etc.

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QUESTIONS
I. Objective Type:
a) Fill in the blanks:

1. Sub division of the journals into various books for recording transactions
of similar nature are called ________.

2. The total of the ________ book is posted to the debit of purchases

account.

3. The person who prepares a bill is called the ________.

4. Days of grace are ________ in number.

[Answers : 1. subsidiary books, 2. purchases, 3. drawer, 4. three]

b) Choose the correct answer :

1. Purchase of machinery is recorded in

a) sales book b) journal proper c) purchases book

2. Purchases book is kept to record

a) all purchases b) only cash purchases

c) only credit purchases

3. Credit sales are recorded in

a) sales book b) cash book c) journal proper

4. Goods returned by customers are recorded in

a) sales book b) sales return book

c) purchases return book

5. On 1st January 2003, Chandran draws a bill on Sundar for 3 months, its
due date is ____________

a) 31st March 2003 b) 1st April 2003 c) 4th April 2003

[Answers : 1. (b), 2. (c), 3. (a), 4. (b), 5. (c)

II. Other Questions:

1. What are the various types of subsidiary books?

2. What are the advantages of subsidiary books?

3. What is cash discount?

4. What are the differences between Trade Discount and Cash Discount?
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5. What is Purchases Book?

6. What is Sales Returns Book?

7. Define a bill of exchange. What are its features?

8. Write notes on parties involved in a bill of exchange.

9. What is Days of grace?

10. What is endorsement?

11. Write notes on retiring of a bill.

12. Write notes on renewal of a bill of exchange.

13. What is Journal Proper? For what purpose it is used?

14. Write notes on closing entries.

15. Write notes on rectifying entries.

III. Problems:

1. Enter the following transactions in the Purchase Book of

M/s.Subhashree.

2003

March 1 Purchased 100 Kg. of coffee seeds from Suresh @ Rs.40

per Kg.

5 Purchased 80 Kg. of tea dust from Hari @ Rs.20 per Kg.

12 Bought from Rekha Sugars, Trichy 1,200 Kg.of Sugar @ Rs.8

per Kg.

18 Bought from Perumal Sweets, Chennai, 40 tins of Sweets @

Rs.200 per tin.

20. Purchased from Govinda Biscuit Company, Chennai 20 tins

of biscuits @ Rs.400 per tin.

[Answer : Purchases book total Rs.31,200]

2. From the following particulars prepare the sales book of Modern Furniture
Mart
2003
June 5 Sold on credit to Arvind & Co.
20 tables @ Rs.600 per table
20 chairs @ Rs.300 per chair

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7 Cash sales to Anand & Co.,

10 tables @ Rs.300 per table
20 chairs @ Rs.150 per chair
10 Sold to Baskar & Co., on credit
10 almirahs @ Rs.3,000 per almirah
10 tables @ Rs.200 per table
15 Sold old typewriter for Rs.1,000 to Madan on credit
20. Sold to Gopinath on credit.
10 tables @ Rs.1,000 per table
2 revolving chairs @ Rs.1,200 per chair
[Answer : Sales book Rs.62,400]
3. Enter the following transactions in proper subsidiary books.
2003
March 1 Purchased goods from Balaraman Rs.2000
2 Sold goods to Senthil Rs.1,000
3 Goods purchased from Durai Rs.1,000
5 Sold goods to Saravanan Rs.700
8 Sold goods to Senthil Rs.500
10 Purchased goods from Elangovan Rs.600
14 Purchased goods from Parthiban Rs.300
20 Sold goods to Sukumar Rs.600
[Answer : Purchase book Rs.3,900; Sales book Rs.2,800]
4. Record the following transactions in the proper subsidiary books of
M/s.Ram & Co., and post them to the ledger.
2003
April 1 Goods sold to Ramesh Rs.1,000
5 Sold goods to Kumar Rs.2,200
8 Sold goods to Shankar Rs.300
10 Goods returned by Kumar Rs.600
15 Credit Note sent to Shankar for Rs.200 being the invoice
overcharged.

[Answer : Sales book Rs.3,500; Sales return book Rs.800]

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5. Write the following transactions in proper subsidiary books of

Mr.Rajasekaran.

2003

May 10 Purchased goods from Raman Rs.15,000

14 Returned goods to Raman Rs.500

18 Purchased goods from Sekaran Rs.10,000

20 Pradeep sold goods to us Rs.20,000

24 Sent a debit note to Sekaran for goods damaged in transit

Rs.1,000.

[Answer : Purchases book Rs.45,000; Purchases return book Rs.1,500]

6. Enter the following transactions in the proper subsidiary books of

Mr.Somu

2003

Nov. 1 Bought from Gopal 300 bags of wheat Rs.1,000 per bag less
trade discount 10%

3 Purchased from Madhavan 150 bags of rice Rs.900 per bag

less trade discount 10%

5 Returned to Gopal 10 bags of wheat which were purchased

on 1.11.03.

7 Sold to Shiva 50 bags of rice Rs.1,200 per bag less Trade

Discount 5%.
12 Sold to Sharma 25 bags of Wheat Rs.1,300 per bag less Trade
Discount 10%.

14 Returned 15 bags of rice to Madhavan.

15 Shiva returned 5 bags of rice.

17 Bought from Rajan 200 bags of wheat Rs.950 per bag

24 50 bags of wheat returned to Rajan

[Answer : Purchases book Rs.5,81,500; Sales book Rs.86,250;

Purchases return book Rs.68,650; Sales return book Rs.5,700]

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7. Enter the following transactions in the appropriate Special Journal of

M/s. Sita & Co.

2002

Oct 2 Bought goods from Satish Rs.2,400 as per invoice No.63.

4 Sold to Sivagami goods Rs.1,600 as per invoice No.71.

7 Returned to Satish goods of Rs.250 as per debit note No.4

8 Sivagami returned goods Rs.150 as per credit note No.8

12 Sold to Vijaya goods of Rs.950 as per invoice No.72

14 Purchased from Velan goods worth Rs.1,100

18 Returned to Sampath goods of Rs.150 as per debit note

No.5

22 Vijaya returned goods of Rs.240 Credit Note No.9

[Answer : Purchases book Rs.3,500; Sales book Rs.2,550;

Purchases return book Rs.400; Sales return book Rs.390]

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Chapter -7
SUBSIDIARY BOOKS II - CASH BOOK

Learning Objectives

After learning this chapter you will be able to:

 understand the Need and Meaning of the various Kinds of Cash Book.

 prepare the various Kinds of Cash Books.

_________________________________________________________________

In every business house there are cash transactions as well as credit

transactions. All credit transactions will become cash transactions when payments
are made to creditors or cash received from debtors. Since, cash transactions
will be numerous, it is better to keep a separate book to record only the cash
transactions.

7.1 Features
A cash book is a special journal which is used to record all cash receipts
and cash payments. The cash book is a book of original entry or prime entry
since transactions are recorded for the first time from the source documents.
The cash book is a ledger in the sense that it is designed in the form of a cash
account and records cash receipts on the debit side and cash payments on the
credit side. Thus, the cash book is both a journal and a ledger. Cash Book
will always show debit balance, as cash payments can never exceed cash
available. In short, cash book is a special journal which is used for recording all cash
receipts and cash payments.

7.2 Advantages
1. Saves time and labour: When cash transactions are recorded in the journal
a lot of time and labour will be involved. To avoid this all cash transactions
are straight away recorded in the cash book which is in the form of a ledger.

2. To know cash and bank balance: It helps the proprietor to know the cash
and bank balance at any point of time.

3. Mistakes and frauds can be prevented: Regular balancing of cash book

reveals the balance of cash in hand. In case the cash book is maintained by
business concern, it can avoid frauds. Discrepancies if any, can be identified
and rectified.

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4. Effective cash management: Cash book provides all information regarding

total receipts and payments of the business concern at a particular period.
So that, effective policy of cash management can be formulated.

7.3 Kinds of Cash Book

The various kinds of cash book from the point of view of uses may be as
follow:
Kinds of cash book

I II III IV
Single column Double column Triple column Petty
cash book cash book cash book cash book
a) With discount and with discount,
cash columns cash and bank
b) With cash and columns
bank columns

7.3.1 Single Column Cash Book

Single column cash book (simple cash book) has one amount column in
each side. All cash receipts are recorded on the debit side and all cash payments
on the credit side. In fact, this book is nothing but a Cash Account. Hence, there
is no need to open cash account in the ledger. The format of a single column
cash book is given below.
Format

Debit Side Single Column Cash Book of ................ Credit Side

R. L. Amount V. L. Amount
Date Particulars Date Particulars
N. F. Rs. N. F. Rs.

Explanation :

i. Date : This column appears in both the debit and credit side. It records
the date of receiving cash at debit side and paying cash at credit side.

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ii. Particulars : This column is used at both debit and credit side. It records
the names of parties (personal account), heads (nominal account) and
items (real account) from whom payment has been received and to whom
payment has been made.

iii. Receipt Number (R.N): This refers to the serial number of the cash
receipt.

iv. Voucher Number (V.N) : This refers to the serial number of the voucher
for which payment is made.

v. Ledger Folio (L.F): This column is used in both the debit and credit side
of cash book. The ledger page (folio) of every account in the cash book
is recorded against it.

vi. Amount : This column appears in both sides of the cash book. The actual
amount of cash receipt is recorded on the debit side. The actual payments
are entered on the credit side.
Balancing :

The cash book is balanced like any other account. The total of the receipt
(debit side) column will always be greater than the total of the payment column
(credit side). The difference will be written on the credit side as “By Balance
c/d”. In the beginning of the next period, to show the cash balance in hand, the
balance amount is recorded in the debit side as “To balance b/d”.

Illustration 1

Enter the following transactions in a single column cash book of Mr.Kumaran.

2004 Jan 1 Started business with cash ... Rs. 1,000

3 Purchased goods for cash ... Rs. 500

4 Sold goods ... Rs. 1,700

5 Cash received from Siva ... Rs. 200

12 Paid Balan ... Rs. 150

14 Bought furniture ... Rs. 200

15 Purchased goods from Kala on credit ... Rs. 2,000

20 Paid electric charges ... Rs. 225

24 Paid salaries ... Rs. 250

28 Received commission ... Rs. 75

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Solution:
Cash Book
of Mr. Kumaran

Dr. Cr.

R. L. Amount V. L. Amount
Date Particulars Date Particulars
N. F. Rs. N. F. Rs.

2004 2004
Jan 1 Jan 3 By Purchases A/c
4 To Capital A/c 1,000 12 ,, Balan A/c 500
5 To Sales A/c 1,700 14 ,, Furniture A/c 150
28 To Siva A/c 200 20 ,, Electric 200
To Commission A/c 75 charges A/c
24 ,, Salaries A/c 225
31 ,, Balance c/d 250
1,650

2,975 2,975
2004
Feb 1 To Balance b/d 1,650

Note : The transaction dated January 15th will not be recorded in the cash book
as it is a credit transaction.
7.3.2 Double Column Cash Book

The most common double column cash books are

i. Cash book with discount and cash columns

ii. Cash book with cash and bank columns.
i. Cash Book with discount and cash columns

On either side of the single column cash book, another column is added
to record discount allowed and discount received. The format is given below.

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Format
Double Column Cash Book
(Cash book with Discount and Cash Column)
Debit ....................................................................... Credit
Dis- Dis-
R. L. count Amount count
Date Particulars Date Particulars V. L. Amount
N. F. Allowed Rs. Allowed
N. F. Rs.
Rs. Rs.

It should be noted that in the double column cash book, cash column is
balanced like any other ledger account. But the discount column on each side
is merely totalled. The total of the discount column on the debit side shows the
total discount allowed to customers and is debited to Discount Allowed Account.
The total of the discount column on the credit side shows total discount received
and is credited to Discount Received Account.

Illustration 2: Prepare a Double Column Cash Book from the following transactions
of Mr.Gopalan:
Rs.

2004
Jan. 1 Cash in hand 4,000

6 Cash Purchases 2,000

10 Wages paid 40
11 Cash Sales 6,000

12 Cash received from Suresh and 1,980

allowed him discount 20

19 Cash paid to Meena 2,470

and discount received 30

27 Cash paid to Radha 400

28 Purchased goods for cash 2,070

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 Solution: Double Column Cash Book of Mr.Gopalan

(Cash book with Discount Column)

Dr Cr

Dis-
Dis- count
Date Particulars R.N. L.F. Date Particulars V.N. L.F. count Amount

Rs.
Allowed

Amount
Allowed Rs.

2004 2004
Jan 1 To Balance b/d 4,000 Jan 6 By Purchases
To Sales A/c A/c 2,000

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11 To Suresh A/c 6,000 10 By Wages A/c 40
12 20 1,980 19 By MeenaA/c 30 2,470
27 By Radha A/c 400
28 By Purchases 2,070
A/c
31 By Balance 5,000
c/d
20 11,980 30 11,980

Feb 1 To Balance b/d 5,000

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ii. Cash Book with Cash and Bank Columns

When bank transactions are more in number, it is advisable to open a cash

book by providing a separate column on either side of the cash book to record
the bank transactions therein.

In such case, it is not necessary to open a separate Bank Account in the

Ledger because the two columns in the cash book serve the purpose of Cash
Account and Bank Account respectively. It is a combination of Cash Account and
Bank Account. The format of this cash book is given below.
Double Column Cash Book

Debit Side (Cash book with Cash and Bank Columns) Credit Side
R. L. Cash Bank V. L. Cash Bank
Date Particulars Date Particulars
N. F. Rs, Rs, N. F. Rs, Rs,

There are two amount columns on debit side one for cash receipts and the
other for bank deposits (i.e., payment made into Bank Account). Similarly there
are two amount columns on the credit side, one for payments in cash and the
other for payments by cheques respectively.
Contra Entry
When an entry affect both cash and bank accounts it is called a contra
entry. Contra in Latin means opposite. In contra entries both the debit and credit
aspects of a transaction are recorded in the cash book itself.
Example 1: Cash paid into bank
Bank A/c Dr. x x x
To Cash A/c x x x
(Cash paid into bank)
This is a contra entry. As the cash book with cash and bank columns is
a combined cash and bank account, both the aspects of the transaction will be
entered in the same book. In the debit side ‘To Cash A/c’ will be entered in the
particulars column and the amount will be entered in the bank column. In the

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credit side ‘By Bank A/c’ will be entered in the particulars column and the amount
will be entered in the cash column.
Such contra entries are denoted by writing the letter ‘C’ in the L.F. column,
on both sides of the cash book. They indicate that no posting in respect thereof
is necessary in the ledger.
Example 2: Cash withdrawn from bank for office use.
Cash A/c Dr. x x x
To Bank A/c x x x
(Cash withdrawn for office use)
This is also a contra entry. In the debit side ‘To Bank A/c’ will be entered
in the particulars column and the amount will be entered in the cash column. In
the credit side ‘By Cash A/c’ will be entered in the particulars column and the
amount will be entered in the bank column.
Such contra entries are denoted by writing the letter ‘C’ in the L.F. column,
on both sides of the cash book. They indicate that no posting in respect thereof
is necessary in the ledger.
Illustration 3
Enter the following transactions in the double column cash book of Mr.Rajesh
and balance it.
2003
Aug. 1 Opening Balance : Cash in Hand Rs.4,250
Cash at Bank Rs.13,750
2 Paid to petty cashier Rs.2,500
2 Cash sales Rs.1,750
3 Paid to Arun by cheque Rs.3,750
3 Received a cheque from Mr.Ram Babu Rs.4,500 paid into bank.
5 Received cheque from Mr.Jayaraman Rs.6,000 paid into bank
8 Cash purchases Rs.2,500
8 Paid rent by cheque Rs. 2,500
9 Cash withdrawn from bank for office use Rs.2,500
10 Cash sales Rs.3,750
14 Stationery purchased Rs.1,000
20 Cash sales Rs.6750
21 Paid into bank Rs.10,000
23 Withdrew cash for personal use Rs.1,000
25 Salaries paid by cheque Rs.9000.

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 Solution: Double Column Cash Book of Mr.Rajesh

(Cash book with Cash and Bank Column)

Dr. Cr.

R. Cash Bank R. Cash

Date Particulars L.F Date Particulars L.F Bank Rs.
N. Rs. Rs. N. Rs.
2003 2003

Aug 1 To Balance b/d 4,250 13,750 Aug 2 By Petty Cash A/c 2,500
2 ,, Sales A/c 1,750 3 ,, Arun’s A/c 3,750
3 ,, Ram Babu’s A/c 4,500 8 ,, Purchases A/c 2,500
5 ,, Jayaramans A/c 6,000 8 ,, Rent A/c 2,500
9 ,, Bank A/c C 2,500 9 ,, Cash A/c C 2,500

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10 ,, Sales A/c 3,750 14 ,, Stationery A/c 1,000
20 ,, Sales A/c 6,750 21 ,, Bank A/c C 10,000
21 ,, Cash A/c C 10,000 23 ,, Drawings A/c 1,000
25 ,, Salary A/c 9,000
31 ,, Balance c/d 3,000 15,500

19,000 34,250 19,000 34,250

Sep 1 To Balance b/d 3,000 15,500

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Points to be remembered while preparing cash book:

Debit/Credit The column in
S.
Transaction side of cash which the amount
No.
book to be entered
1. Cash/ M.O./P.O. - received Debit Cash

2. Cash paid Credit Cash

3. Discount allowed Debit Discount allowed
4. Discount received Credit Discount received
Debit (C) Bank
5. Cash deposited in the bank
Credit (C) Cash
Debit (C) Cash
6. Cash withdrawn for office use
Credit (C) Bank
7. Cheque received Debit Cash
Debit (C) Bank
8. Cheque deposited into bank
Credit (C) Cash
Cheque received and
9. deposited into bank for Debit Bank
collection immediately
10. Cheque issued Credit Bank
Customer directly paid into
11. Debit Bank
bank
Cheque deposited and
12. Credit Bank
dishonoured
Cheque issued and
13. Debit Bank
dishonoured
14. Bank charges Credit Bank
15. Interest allowed by bank Debit Bank
16. Interest on overdraft Credit Bank
Payments directly made by
17. the bank as per standing Credit Bank
instructions
Amounts directly received
18. by bank as per standing Debit Bank
instructions
7.3.3 Triple Column Cash Book

Large business concerns receive and make payments in cash and by

cheques. Where cash discount is a regular feature, a Triple Column Cash Book
is more advantageous. This cash book has three amount columns (cash, bank
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and discount) on each side. All cash receipts, deposits into bank and discount
allowed are recorded on debit side and all cash payments, withdrawals from bank
and discount received are recorded on credit side.

The format is given in the next page.

Bank
Rs.
Cash
Cr.

Rs.
Received
Dr.

Dis.

Rs.
(Cash book with Discount, Cash and Bank Columns)
Triple Column Cash Book of Mr..........................

L.
F.
N.
V.
Particulars
Date
Cash Bank
Rs. Rs.
Allowed
L.Dis.
F.
R.
N.
Format :

Particulars
Date

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Illustration 4

Compile three column cash book of Mr.Sundar from the following transactions:

2002

Aug 1 Sundar started business with cash Rs.2,00,000

2 Deposited into Bank Rs.50,000.

4 Cash purchases Rs.5,000.

5 Purchases by cheque Rs.6,000.

6 Goods sold to Nathan on credit Rs. 5,000.

8 Received cheque from Mano Rs.490, Discount allowed Rs.10.

10 Paid carriage Rs.1,000.

12 Withdrew from Bank for office use Rs.10,000.

15 Paid to Sundari Rs.4,960, Discount allowed by her Rs.40.

20 Received a cheque for Rs.4950 from Nathan in full settlement of his

account, which is deposited into Bank.

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 Triple Column Cash Book of Mr.Sundar

Dr. Cr.

Dis. Dis.
R. L. Cash Bank V. L. Cash Bank
Date Particulars Allo Date Particulars Recei
N. F Rs. Rs. N. F Rs. Rs.
wed ved
2002 2002
Aug 1 To Capital A/c 2,00,000 Aug 2 By Bank A/c C 50,000
2 ,, Cash A/c C 50,000 4 ,, Purchases A/c 5,000
8 ,, Mano’s A/c 10 490 5 ,, Purchases A/c 6,000
12 ,, Bank A/c C 10,000 10 ,, Carriage A/c 1,000
20 ,, Nathan’s A/c 50 4,950 12 ,, Cash A/c C 10,000
15 ,, Sundari’s A/c 40 4,960

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31 ,, Balance c/d
1,49,530 38,950

60 2,10,490 54,950 40 2,10,490 54,950

Sep 1 To Balance b/d 1,49,530 38,950

Note : Transaction dated 6th August will not appear in the cash book as it is a credit transaction
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Illustration 5

Enter the following transactions in three column cash book of Mr.Muthu

and balance the same.

2003

Aug 1 Cash in hand Rs.75,000

Cash at bank Rs.40,000

4 Paid into bank Rs.20,000.

6 Purchased machinery by cheque Rs.10,000.

8 Received from Mohan Rs.2,560

Discount allowed Rs. 40.

10 Paid to Somu by cheque Rs.3,970 in full settlement of his account

Rs.4,000.

11 Withdrew cash from Bank for personal use Rs.5,000.

15 Received cheque from Balan Rs.4,900.

Allowed him discount Rs.100.

19 Balan’s cheque deposited into Bank

24 Anandan our customer has paid directly into our bank account
Rs.10,000.

27 Rent paid by cheque Rs.3,000.

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 Solution: Triple Column Cash Book of Mr.Muthu
Dr. Cr.

Dis.
R. L. Dis. Cash Bank V. L. Cash Bank
Date Particulars Date Particulars Recei
N. F Allowed Rs. Rs. N. F Rs. Rs.
ved
2003 2003
Aug 1 To Balance b/d 75,000 40,000 Aug 4 By Bank A/c C 20,000
4 ,, Cash A/c C 20,000 6 ,, Machinery A/c 10,000
8 ,, Mohan’s A/c 40 2,560 10 ,, Somu’s A/c 30 3,970
15 ,, Balan’s A/c 100 4,900 11 ,, Drawings A/c 5,000
19 ,, Cash A/c C 4,900 19 ,, Bank A/c C 4,900

129
24 ,, Anandan’s A/c 10,000 27 ,, Rent A/c 3,000

31 ,, Balance c/d 57,560 52,930

140 82,460 74,900 30 82,460 74,900

Sep 1 To Balance b/d 57,560 52,930

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Illustration 6

Prepare three column cash book of Mrs.Eswari from the following transactions
and balance the cash book on 30th June 2003.

2003

June 1 Cash in hand Rs.50,000

Bank overdraft Rs.15,000

3 Paid into bank Rs.25,000

5 Parthiban settled his account for Rs.3,750 by giving a cheque for

Rs.3,690.

8 Parthiban’s cheque sent to bank for collection.

10 Cash withdrawn from bank Rs.8,000.

14 Parthiban’s cheque returned dishonoured

15 Received from Ramesh a currency note for Rs.5,000 and gave him a
change for it.

18 Paid rent Rs.500.

20 Bank charges as per pass book Rs.150.

30 Deposited into Bank all cash in excess of Rs.5,000.

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 Soulution: Triple Column Cash Book of Mrs.Eswari

Dr. Cr.
Dis.
R. L. Dis. Cash Bank V. L. Cash Bank
Date Particulars Date Particulars Recei
N. F Allowed Rs. Rs. N. F Rs. Rs.
ved
2003 2003
June 1 To Balance b/d 50,000 June 1 By Balance b/d
3 ,, Cash A/c C 25,000 3 ,, Bank A/c C 25,000 15,000
5 ,, Parthiban’s A/c 60 3,690 8 ,, Bank A/c C 3,690
8 ,, Cash A/c C 3,690 10 ,, Cash A/c C 8,000
10 ,, Bank A/c C 8,000 14 ,, Parthiban’s A/c 3,690
30 ,, Cash A/c C 27,500 18 ,, Rent A/c 500
20 ,, Bank Charges 150

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30 ,, Bank A/c C 27,500
30 ,, Balance c/d 5,000 29,350

60 61,690 56,190 61,690 56,190

July 1 To Balance b/d 5,000 29,350

Note : Transaction dated 15th June will not be recorded in the cash book.
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Illustration 7

Enter the following transactions in three column cash book of Mrs.Anu

Radha.

2002

Sep 1 Cash in hand Rs.50,000

Bank balance Rs.15,000

2 Sold goods to Udayakumar for Rs.15,000, cash discount allowed 1% and

received cash for the balance.

3 Tax paid Rs.1,000.

7 Bought goods from Munuswamy for Rs.2,400, cash discount received 2%

and paid cheque for the balance.
9 Received repayment of loan from Elangovan Rs.10,000.

12 Paid into Bank Rs.5,000.

14 Paid Rs.1,400 to Aravind & Co., half by cash and half by cheque.

16 Dividend collected by the Bank as per pass book Rs.2,000.

18 Sold goods for cash and deposited into the bank on the same day
Rs.5,000.

20 Sent to Bharathi by money order Rs.460, the money order commission

being Rs.20.

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 Soultion: Triple Column Cash Book of Mrs.Anu Radha

Dr. Cr.

Dis.
R. L. Dis. Cash Bank V. L. Cash Bank
Date Particulars Date Particulars Recei
N. F Allowed Rs. Rs. N. F Rs. Rs.
ved
2002 2002
Sep 1 To Balance b/d 50,000 15,000 Sept 3 By Tax A/c 1,000
2 ,, Sales A/c 150 14,850 7 ,, Purchases A/c 48 2,352
9 ,, Elangovan’s Loan 10,000 12 ,, Bank A/c C 5,000
12 ,, Cash A/c C 5,000 14 ,, Aravind & Co. A/c 700 700
16 ,, Dividend A/c 2,000 20 ,, Bharathi A/c 460
18 ,, Sales A/c 5,000 20 ,, Money Order Com

133
mission A/c 20
30 ,, Balance c/d A/c 67,670 23,948

150 74,850 27,000 48 74,850 27,000

Oct 1 To Balance b/d 67,670 23,948

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Illustration 8

From the following information show how Mr.Venu Gopal’s triple column
cash book would appear for the week ended 7th October 2002 and close the
cash book for the day.

2002
Oct 1 Cash in hand Rs.30,000
Bank balance Rs.1,000

2 Sivan, our customer has paid directly into our bank account Rs.5,000.

3 Paid rent by cheque Rs.500.

4 Cheque issued in favour of Bharathi for purchase of furniture Rs.2,400.

5 Received from Vinoth Rs.2,225

Discount allowed Rs.75.

6 Paid into bank Rs.4,000

7 Cash withdrawn from bank Rs.2,000.

Bharathi, to whom we have issued a cheque of Rs.2,400
has reported that our cheque is dishonoured.

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 Soultion: Triple Column Cash Book of Mr.Venu Gopal

Dr. Cr.

Dis. Dis.
R. L. Cash Bank V. L. Cash Bank
Date Particulars Allo Date Particulars Recei
N. F Rs. Rs. N. F Rs. Rs.
wed ved
2002 2002
Oct 1 To Balance b/d 30,000 1,000 Oct 3 By Rent A/c 500
2 ,, Sivan’s A/c 5,000 4 ,, Bharathi A/c 2,400
5 ,, Vinoth’s A/c 75 2,225 6 ,, Bank A/c C 4,000
6 ,, Cash A/c C 4,000 7 ,, Cash A/c C 2,000
7 ,, Bank A/c C 2,000

135
7 ,, Bharathi A/c 2,400
7 ,, Balance c/d 30,225 7,500

75 34,225 12,400 34,225 12,400

Oct 8 To Balance b/d 30,225 7,500

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7.3.4 Postings from cash book to concerned ledger accounts

1. Opening (Cash and Bank) balance appearing in the cash book is not posted
to any account in the ledger.

2. Contra entries are not posted to any account.

3. Each item of discount allowed appearing on the debit side of the cash book
will be posted to the credit of respective personal account. Total of discount
allowed column should be posted to the debit side of discount allowed account
with the words “To Sundry Accounts”.

4. Each item of discount received appearing on the credit side of the cash book
will be posted to the debit of respective personal account. Total of discount
received column should be posted to the credit of discount received account
with the words “By Sundry Accounts”.

5. The other transactions recorded on the debit side of the cash book are posted
to the credit of the respective accounts in the ledger.

6. The other transaction recorded on the credit side of the cash book are posted
to the debit of the respective accounts in the ledger.

QUESTIONS
I. Objective Type:
a) Fill in the Blanks:

1. Discount allowed column appears in _______ side of the cash book.

2. In the triple column cash book, when a cheque is received the amount is
entered in the _______ column.

3. Discount received column appears in _____ side of the cash book.

4. A cheque received and paid into the bank on the same day is recorded in
the ______ column of the three column cash book.

5. When a cheque received from a customer is dishonoured, his account is

________.

6. Cash Book is one of the _______ books.

[Answers : 1. debit, 2. cash, 3. credit, 4. bank, 5. debited, 6. subsidiary]

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b) Choose the correct answer:

1. The cash book records

a) all cash payments b) all cash receipts
c) all cash receipts & payments
2. When goods are purchased for cash, the entry will be recorded in the
a) cash book b) purchases book c) journal
3. The balance of cash book indicates
a) net income b) cash in hand
c) difference between debtors and creditors
4. In triple column cash book, cash withdrawn from bank for office use will
appear in
a) debit side of the cash book only
b) both sides of the cash book.
c) credit side of the cash book only.
5. If a cheque sent for collection is dishonoured, the debit is given to
a) suppliers A/c b) bank A/c c) customers A/c
6. If a cheque issued by us is dishonoured the credit is given to
a) supplier’s A/c b) customer’s A/c c) bank A/c
[Answers : 1 (c), 2. (a), 3. (b), 4. (b), 5. (c), 6. (a)]
II. Other Questions:

1. What is cash book? What are its features?

2. What are the advantages of cash book?
3. What are the various kinds of cash book?
4. What is single column cash book?
5. What is double column cash book?
6. What is triple column cash book?
7. Write notes on ‘contra entry’.
8. Give the specimen of ‘triple column cash book’.
9. What are the rules for making entries in the double column cash book with
cash and bank column?
10. How are postings made from the cash book?

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III. Problems:

1. From the following particulars, prepare single column cash book of

Ms.Kokila.

2002

Mar. 1 Cash in hand Rs.20,000.

4 Cash purchases Rs.4,000.

7 Cash sales Rs.8,000.

8 Paid to Balan Rs. 5,000

9 Received cash from Cheran Rs.10,000.

13 Paid into bank Rs.10,000.

14 Cash withdrawn from bank Rs.4,000.

18 Paid salaries Rs.1,000.

20 Bought furniture Rs.3,000.

28 Rent paid Rs. 1,000.

(Answer : Cash balance Rs. 18,000)

2. Enter the following transactions in the single column cash book of

Mrs. Lalitha.

2002

Aug. 1 Cash in hand Rs.46,000.

3 Paid in to Bank Rs.12,000

4 Cash sales Rs. 24,000.

5 Credit sales to Mani Rs.3,000.

7 Printing charges Rs.3,000.

9 Received cheque from Natesan Rs.8,000

12 Dividend received Rs.2,000.

14 Computer purchased Rs.35,000.

17 Cash received from Mani Rs.3,000.

24 Cash withdrawn from bank Rs.2,000.

(Answer : Cash balance Rs.35,000)

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3. Prepare a single column cash book from the following particulars of

Mr.Chandran.

2002

Dec 1 Cash balance Rs.80,000.

7 Bought goods for cash Rs.25,000

9 Purchased goods on credit from Guru Rs.6,000.

12 Sold goods to Somu on credit Rs.8,000.

14 Paid Guru Rs.6,000.

17 Cash received from Somu Rs,8,000.

20 Paid trade expenses Rs.10,000.

21 Received cheque from Krishna Rs.10,000.

27 Commission received Rs.5,000.

(Answer : Cash balance Rs.62,000)

4. Enter the following transactions in the double column cash book of

Mr.Srinivasan.

2002

May 1 Cash in hand Rs.50,000.

3 Cash paid to Rajan Rs.6,000.

Discount allowed by him Rs. 100.

6 Cash purchases Rs.10,000.

10 Received cash from Arun Rs.2,900 and allowed him discount Rs.100.
13 Cash sales Rs.15,000.
15 Electricity charges paid Rs.1,000.

18 Paid for miscellaneous expenses Rs.2,000.

20 Received cash from Murali Rs.3,450 Discount allowed Rs.50.

(Answer : Cash balance Rs.52,350)

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5. Enter the following transactions in cash book with cash and discount
column of Mr.Nandakumar.

2003

Jan 1 Cash in hand Rs.60,000.

3 Bought goods from Premnath Rs.10,000.

4 Opened a current account with bank Rs.15,000.

7 Withdraw from bank Rs.5,000.

8 Sold goods to Kandan for Rs.10,000 credit on terms 2%

cash discount if payable within two weeks.

10 Paid cash to Premnath, less 1% C.D.

14 Received a cheque from Arul Rs.3,400, allowed him discount

Rs.100.

15 Kandan settled his account.

(Answer : Cash balance Rs.53,300)

6. Enter the following transaction in the Cash Book with Discount and Cash
Columns of Mr.Guru.

2003

Sep 1 Cash in hand Rs.19,000.

3 Sold goods for cash Rs.10,000.

4 Credit purchases from Venkat Rs.18,000.

6 Received from Mohan Rs.4,160

Discount allowed to him Rs.40.

8 Paid for Electricity charges Rs.850.

9 Cash deposited in bank Rs.20,000.

14 Paid cash to Venkat Rs.17,600 in full settlement.

24 Received cash from Vel Murugan Rs.4,800.

26 Salaries paid Rs.4,000.

28 Cash drawn from bank Rs.5,000.

[Answer : Cash balance Rs. 510]

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7. Enter the following transactions in Cash Book with cash and bank columns:
Balance the cash book.

2003

May 1 Cash in hand Rs.30,000.

2 Paid into bank Rs.10,000.

3 Cash purchases Rs.2,500.

4 Loan obtained from Vasan Rs.10,000.

5 Cash deposited in bank Rs.7,500.

6 Cash sales Rs.2,500.

8 Rent paid by cheque Rs.2,000.

10 Cash withdrew for office use Rs.4,000.

14 Paid Nataraj Rs.300 by M.O.

15 Akilan directly paid into our bank account Rs.3,000.

25 Cash withdrawn from bank Rs. 5,000.

(Answer : Cash balance 31,200, Bank balance Rs. 9,500)

8. Record the following transactions in Sujatha’s cash book with cash and
bank columns.
2002
Mar 1 Cash Balance Rs.45,000.
Bank Balance Rs.42,000.
3 Cash paid into bank Rs.5,000.
5 Purchases by cheque Rs.9,000.
8 Cash sales, deposited in the bank Rs.13,500.
10 Furniture purchased Rs.600.
14 Cheque received from Ramu Rs.2550.
17 Ramu’s cheque deposited in the bank for collection.
18 Cash withdrawn for personal use by cheque Rs.750.
20 Cash withdrawn from bank Rs.3,000.
26 Ramu’s cheque was returned by bank as dishonoured.
(Answer : Cash balance Rs.42,400; Bank Balance Rs.47,750)
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9. Prepare Double Column Cash Book with cash and bank columns from the
following:

2003

Jan 1 Cash in hand Rs.22,000

Cash at bank Rs.5,000.

2 Sold goods for cash Rs.15,000.

4 Cash withdrawn from bank Rs.2,000.

5 Credit purchases from Deena Rs.15,000.

6 Cash deposited into bank Rs.5,000.

10 Paid wages by cheque Rs.10,000.

14 Cash received from sale of furniture Rs.10,000 and out of it paid

into bank Rs.2,000.

18 Bank charges charged by the bank Rs.1,300.

20 Cheque issued to Deena Rs.15,000.

24 Received a cheque for Rs.1,000 from Pasubathy, deposited into the bank.
28 Deena, to whom we have issued a cheque for credit purchases has
reported that our cheque is dishonoured.

(Answer : Cash balance Rs.42,000; Bank balance (Cr) Rs.300)

10. Prepare a cash book with cash, bank and discount columns from the
transactions given below:

2002

Jan 1 Cash Balance Rs.75,000.

Bank Balance Rs. 45,000.

3 Deposited into bank Rs.60,000.

4 Bought furniture and paid by cheque Rs.7,500

5 Paid for repair Rs.650.

6 Goods purchased and paid by cheque Rs.12,500.

10 Received a cheque for Rs.21,000 from Chandran and allowed him

discount Rs.200.

13 Gave Muthu a cheque for Rs.11,500 and received a discount of

Rs.150.

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15 Sarathy directly paid into our bank account Rs.15,000.

20 Withdrew from bank for office use Rs.2,500.

28 Withdrew from bank for personal use Rs.500.

(Answer : Cash balance Rs.37,850; Bank balance Rs.85,500)

11. Enter the following transactions in Muralis cash book with column for
discount, cash & bank.

2002

April 1 Cash balance Rs.4,000.

Bank overdraft Rs.10,500.

4 Received Rs.2,000 from Manoj in cash. Allowed him discount of

Rs.100.

7 Cash sales Rs.2,000.

10 Furniture purchased Rs.800 by cheque.

12 Paid rent by cheque Rs.1,500.

15 Paid Rs.2,500 to Karthikeyan half cash and half by cheque.

18 Cash sales Rs.15,000.

20 Paid packing charges Rs.500.

24 Paid Murugan Rs.4,000. Discount allow by him Rs.50.

26 Paid into bank Rs.5,000.

(Answer : Cash balance Rs.12,250;

Bank balance (Cr.) Rs. 9,050)

12. Enter the following transactions in the Three Column Cash Book of
Mr.Albert.

2002

May 1 Cash in hand Rs.30,000.

Cash at bank Rs.2,000

3 Received cheque for goods sold to Arun and banked it Rs.1000.

5 Paid into bank Rs.4,000.

9 Paid cash to David from whom goods worth Rs.6,000 were purchased
for credit on 1st May on term 2% cash discount within two weeks.

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10 Paid to Robert by cheque Rs.2,400 in full settlement of his account

of Rs.2,500.

12 Received cash from Nathan Rs.4,750. Discount allowed Rs.250.

19 Interest allowed by bank Rs.200.

20 Robert to whom we have issued a cheque has reported that our

cheque is dishonoured.

22 Roshan got exchange a five hundred rupee note.

31 Paid into bank all cash in excess of Rs.5,000.

(Answer : Cash balance Rs.5,000. Bank balance Rs.27,070.

Deposited into bank Rs.19,870)

13. Enter the following transactions in the Triple Column Cash Book of Mr.Raja
Durai.

2002

May 1 Cash balance Rs.6,000.

Bank balance Rs.4,000.

2 Withdrew from Bank Rs.2,000.

3 Abdulla directly paid into our bank account Rs.3,000.

4 Cheque received from Daniel Rs.5,000 sent to bank.

7 Cheque received from Ramakrishnan for sales Rs.8,000.

8 Received cash from Subramaniyam Rs.2,800. Discount allowed

Rs.200.

10 Ramakrishnan’s cheque sent to bank for collection.

14 Paid to Balu by cheque Rs.13,900. Discount received Rs.100.

17 Withdrew cash for personal use Rs.1,500 and by cheque

Rs.12,500.

27 Rent paid Rs.2,000.

(Answer : Cash balance Rs.7,300; Bank balance (cr) Rs.8,400)

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Chapter - 8
SUBSIDIARY BOOKS III -
PETTY CASH BOOK

Learning Objectives

After studying this chapter, you will be able to:

 understand the Meaning and Uses of Petty Cash Book.

 know the Procedure for Recording in Petty Cash Book.

_________________________________________________________________

In every business, of whatever size, there are many small cash payments
such as conveyance, carriage, postage, telegram, etc. These expenses are
generally repetitive in nature. If all these small payments are recorded in the cash
book, it will be difficult for the cashier to maintain the records all by himself. In
order to make the task of the cashier easy, these small and recurring expenses
are recorded in a separate cash book called “Petty Cash Book” and the person
who maintains the petty cash is called the “Petty Cashier”.

Petty means ‘small’. The petty cash book is a book where small recurring
payments like carriage, cartage, postage and telegram, printing and stationery
etc., are recorded by the petty cashier, a person other than the main cashier.

8.1 Imprest System

Imprest means ‘money advanced on loan’. Under this system the amount
required to meet out various petty expenses is estimated and given to the petty
cashier at the beginning of the specified period, usually a month. All the payments
are supported by vouchers. At the end of the given period or earlier, when the
petty cashier has spent the petty cash amount, he closes the petty cash book
for the period and balances it. Then he submits the accounts to the cashier. He
verifies the petty cash book with the vouchers. After satisfying himself as to the
correctness and genuiness of the payments an amount equal to the cash spent
is given to the petty cashier. This amount together with the unspent amount will
bring up the cash in hand to the amount with which he originally started i.e., the
imprest amount. Thus the system of reimbursing the amount spent by the petty
cashier at fixed period, is known as the imprest system of petty cash.

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For example, On June 1, 2002, Rs.1,000 was given to the petty cashier.
He had spent Rs.940 during the month. He will be paid Rs.940 on 30th June by
the cashier so that he may again have Rs.1,000 for the next month i.e., July.

8.2 Analytical Petty Cash Book

As in the case of any other cash book, petty cash book also has the
debit side and the credit side. The debit side is smaller and has very infrequent
entries because cash receipt by the petty cashier is mainly from the cashier
at the beginning or close of a specified period. The credit side is bigger and
thus has many columns. For each important petty expenses there is a seperate
column, and therefore columnar cash book is another name for this petty cash
book. These analytical columns helps to know the actual amount spent on each
and every type of petty expenses for the specified period. Each petty payment is
first entered in the total payments column, and then recorded in the respective
analytical column, so that :

i. the total amount spent on each expenses for a particular period can be
easily ascertained by adding up the respective column.

ii. only the periodical total of each column is posted to the ledger.

iii. the total petty payment for any period can be easily ascertained from the
total payments column.

The analytical petty cash book may be designed according to the requirements
of the business.

8.3 Format
The format is given in the next page.

Explanation of columns in the analytical petty cash book

1. Receipts: This is the first column of the petty cash book. Amount
received by the petty cashier for meeting petty expenses and the
opening balance of petty cash will be recorded in this column.

2. C.B.F.N: This refers to Cash Book Folio Number. In this column we

write the page number of the cash book where cash paid by the
cashier is recorded.

3. Date: In this column, the date of receipt / payment of cash is

recorded.

4. Particulars: This column records the details of the receipts /

payments. Cash received in the beginning is shown as ‘To cash’
and all the petty expenses are shown as ‘By expenses’ (name of
the expense).

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Dr.

Receipt
Rs. P.

C.B.F.N.
Date
Particulars
V.N.
Rs.

Total
Cr.

Payments
P.

Postage
Rs.

and
P.

Telegrams
Rs.

Printing
and
P.

Statioaery
Rs.

Carriage
P.
Analysis of Payments

Rs.

Travelling
Analytical Petty Cash Book of.......................

expenses
P.
Rs.

Office
Expenses
P.

& Repairs
Rs.
Sundries
P.
L.F.

Rs.
Personal
Accounts

P.

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5. V.N.: The serial number of the voucher (cash payment) is written in

this column.

6. Total Payments: This column records the amount of every expense.

At the end of the week or month expenses are totalled and
afterwards balanced. The total expenses of the week or the month
is compared with the total of the receipts column and the balance
is obtained.

7. Postage and Telegrams: This column records postal expenses like

post card, envelope, inland letter, postage stamps, registered letter,
parcel, telegrams and telephone charges.

8. Printing & Stationery: It includes expenses incurred for purchasing

materials such as paper, ink, pencil, eraser, carbon paper and other
items of stationery.
9. Cartage / Freight / Carriage: In this column carriage inward of goods
is recorded. It includes cartage paid to coolie, tempo charges etc.

10. Travelling Expenses / Conveyance: In this column fare for hiring

autorickshaw, bus, train, taxi etc., are recorded.

11. Office Expenses & Repairs: Minor repairing charges and petty office
expenses like cleaning are included in this column.

12. Sundry Expenses / Sundries: Generally columns of important petty

expenses of the business according to the nature and type of
business are prepared. In addition to these important expenses,
there may be certain expenses, which may not have specific columns
for them. Expenses like refreshment, charity, tips, amount paid to
scavangers etc., are recorded in this column.

13. L.F.: This refers to the page number of the ledger where the
respective account is recorded.

14. Personal Accounts : Small amount of money paid to individuals are

entered in this column.

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8.4 Balancing Petty Cash Book

At the end of the period i.e., week or month the total payments column
and individual expenses columns are totalled. It should be ascertained that the
total of petty expenses column must be equal to the total of payments column.
The total payments column is compared with the total of receipts column and
balance is obtained. The closing balances is shown as ‘By Balance c/d’. The
closing balance is carried forward to the beginning of the next week or month.
It is shown as ‘To Balance b/d’.

Illustration 1 : A Petty cash book is kept on Imprest system, the amount of imprest
being Rs.1,000 and has seven analysis columns for Postage and Telegrams,
Printing and Stationery, Travelling Expenses, Repairs, Carriage, Sundry Expenses
and Personal Accounts. Enter the following transactions:

2003
March 1. Petty cash in hand Rs.350

1. Received cash to makeup imprest Rs.650

3. Paid for stationery Rs.155

5. Paid office expenses Rs. 78

8. Bought stamps Rs. 50

13. Paid for railway fare Rs.256

16. Paid to Shankar Rs. 100

20. Paid for carriage Rs.45

25. Paid for printing charges Rs. 175

27. Paid for telegram Rs. 65

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 Solution:

Analytical Petty Cash Book

Dr. Cr. Analysis of Payments

and
and
L.F.

V.N.

Date
Total
Office

Receipt
C.B.F.N.
Printing

Postage
Carriage
Personal

Sundries

expenses
Accounts

Expenses

Payments
Travelling
& Repairs

Stationery

Telegrams

Particulars
Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P.
2003
350 00 Mar 1 To balance b/d
650 00 1 To cash A/c
3 By Stationery - 155 00 - - 155 00 - - - - - - - - - - -

150
5 By Office Expn. - 78 00 - - - - - - - - - - 78 00 - - -
8 By stamps - 50 00 50 00 - - - - - - - - - - - - -
13 By Railway fare - 256 00 - - - - - - 256 00 - - - - - - -
16 By Shankar - 100 00 - - - - - - - - - - - - - 100 00
20 By carriage - 45 00 - - - - 45 00 - - - - - - - - -
25 By Print. - 175 00 - - 175 00 - - - - - - - - - - -
27 By Telegrams - 65 00 65 00 - - - - - - - - - - - - -
924 00 115 00 330 00 45 00 256 00 78 00 100 00
31 By balance c/d 76 00
1000 00 1000 00
76 00 Ap. 1 To Balance b/d
924 00 1 To cash A/c
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8.5 Posting of Entries in the Petty Cash Account

I. When petty cash is advanced at the beginning

A separate petty cash account is opened in the ledger. When advance

is received by the petty cashier petty cash account will be debited and
cash account will be credited.
II. When individual expenses column are periodically totalled

The total of various petty expenses are debited and the petty cash account
is credited with the total of the payments made.

The petty cash account will show the balance of cash. This balance will
be shown in the balance sheet as part of cash balance.

Illustration 2: Record the following transactions in the analytical petty cash book
of Mr.Manoharan. Balance the book on 6th May, 2003. Give Journal entries and
post the balances to concerned ledger accounts.

2003

May 1. Received for petty cash payment Rs.1,500

2. Paid taxi hire Rs. 250

3. Bought stamps Rs. 75

4. Paid for carriage Rs. 120

4. Paid for Telegrams Rs. 75

4. Paid for auto Rs. 125

5. Paid for carriage Rs. 300

6. Bought revenue stamps Rs. 50

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 Solution:

Analytical Petty Cash Book of Mr. Manoharan

Dr. Cr. Analysis of Payments

and
and
L.F.

V.N.

Date
Total
Office

Postage
Printing
Sundries
Personal
Accounts

C.B.F.N.
Carriage
Expenses

Receipts
& Repairs

Telegrams
expenses
Travelling

Payments
Stationery

Particulars
Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P.
2003
1,500 00 May To cash A/c.
1 By Taxi Hire - 250 00 - - - - - - 250 00 - - - - - - -

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2 By Stamps - 75 00 75 00 - - - - - - - - - - - - -
3 By Carriage - 120 00 - - - - 120 00 - - - - - - - - -
4 By Telegrams - 75 00 75 00 - - - - - - - - - - - - -
4 By Auto fare - 125 00 - - - - - - 125 00 - - - - - - -
4 By Carriage - 300 00 - - - - 300 00 - 00 - - - - - - -
5 By Revenue - 50 00 50 00 - - - - - - - - - - - - -
6 stamps

995 00 200 00 420 00 375 00

6 By balance c/d 505 00
1,500 00 1500 00
505 00 7 To Balance b/d
995 00 7 To Cash A/c
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In the Books of Mr. Manoharan

Journal

Debit Credit
Date Particulars L.F.
Rs. Rs.
2002
May 1 Petty cash A/c. Dr. 1,500
To cash A/c 1,500
(Cash received for petty expenses)

6 Postage & Telegrams Dr. 200

Carriage Dr. 420
Travelling Exp. Dr. 375
To Petty cash A/c 995
(Expenses incurred as per
petty cash book )

Ledger

Dr. Petty Cash Account Cr.

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

2002 2002
May 1
To cash A/c 1,500 May 6 By Sundries:

Postage and
telegram 200

Carriage 420
Travel Exp. 375
By Bal c/d 505

1,500 1,500

7 To balance b/d 505

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Postage and Telegrams Account

Dr. Cr.

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

2002
May 6 To Petty cash A/c 200

Carriage Account

Dr. Cr.

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

2002
May 6 To Petty cash A/c 420

Travelling Expenses Account

Dr. Cr.

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

2002
May 6 To Petty cash A/c 375

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8.6 Advantages
The advantages of analytical petty cash book is given below:

i. Simple Method: It is a simple method of recording petty expenses.

The maintenance of petty cash book does not require specialised
knowledge of accounting.

ii. Economy of Time: It requires lesser time in recording and also saves
the time of the main cashier.

iii. Lesser chances of mistakes: The petty cash book is checked by the
main cashier at the end of the specified period. This process
minimises the chances of mistakes.

iv. Frauds can be minimised: Recording transactions on the basis of

vouchers and checking of cash book by the main cashier minimises
the chances of fraud.

Illustration 3: Prepare Petty Cash Book on imprest system from the following
particulars.

2003

Sept. 1. Received for petty cash payments Rs.1,000

4. Paid for stationery Rs. 140

9. Paid for postage Rs.80

10. Paid for printing charges Rs. 150

11. Paid for carriage Rs. 125

17. Paid for telegrams Rs.25

20. Purchased envelops Rs. 30

21. Paid for coffee to office staff Rs. 30

22. Paid for office cleaning Rs. 50

30. Paid to Rajesh Rs. 200

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 Analytical Petty Cash Book

Dr. Cr. Analysis of Payments

and
L.F.

V.N.

Date
Total

Receipt
Repairs

Postage

C.B.F.N.
Carriage
Sundries
Personal
Accounts

Travelling
Expenses

Payments
Printing &
Stationery

Telegrams

Particulars
Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P. Rs. P.
2003
1,000 00 Sep 1 To Cash
4 By Stationery - 140 00 - - - - - - - - 140 00 - - - - -
9 By Postage - 80 00 80 00 - - - - - - - - - - - - -
10 By Printing char. - 150 00 - - - - - - - - 150 00 - - - - -
11 By Carriage - 125 00 - - 125 00 - - - - - - - - - - -

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17 By Telegrams - 25 00 25 00 - - - - - - - - - - - - -
20 By Envelops - 30 00 30 00 - - - - - - - - - - - - -
21 By Coff. to Staff - 30 00 - - - - - - - - - - 30 00 - - -
22 By Cleaning ch. - 50 00 - - - - - - - - - - 50 00 - - -
30 By Rajesh - 200 00 - - - - - - - - - - - - - 200 00

830 00
135 00 125 00 - - 290 00 80 00 200 00
30 By Balance 170 00
1,000 00 1,000 00
170 00 Oct 1 To Balance b/d
830 00 1 To Cash
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QUESTIONS
I. Objective type :
a) Fill in the blanks :

1. The book that records all small payments is called __________.

2. The person who maintains petty cash book is known as __________.

3. Analytical petty cash book is just like the __________.

4. The periodic total of each column in the analytical petty cash book is posted
to the concerned __________ accounts.

5. The petty cashier generally works on __________ system.

[Answers: 1. Petty cash book, 2. Petty cashier, 3. Cash book, 4. Nominal,

5. Imprest]
b) Choose the correct answer:
1. Petty cash may be used to pay

a) salaries to staff

b) purchase of furniture and fittings

c) expenses relating to post and telegrams

2. The balance in the petty cash book is

a) an asset b) a liability c) an income

3. On Jan 1st 2002, Rs.1,000 given to petty cashier. He has spent Rs.860
during the month of January. On Feb 1st to make the imprest he will
receive cheque for Rs.______.

a) Rs. 1,000 b) Rs. 860 c) Rs. 1,860

[Answer: 1.(c), 2. (a), 3 (b)]

II. Other Questions:

1. What is petty cash book?

2. Explain the imprest system.

3. Give a specimen of analytical petty cash book.

4. Write notes on posting the petty cash book.

5. What are the advantages of petty cash book?

6. What purpose does an analytical petty cash book serve?

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III. Problems:

1. Enter the following transactions in a petty cash book of Mr.Jack with

analytical columns. The petty cashier begins with an imprest amount of
Rs.1,000.

2002 Rs.

June 4 Postage stamps 40

5 Travelling expenses 75

6 Lunch expenses 150

8 Labour charges for bringing office tables 50

10 Repair charges to fax machine 250

12 Postage stamps 20

15 Cleaning the office 50

17 Stationary purchased 175

27 Paid to Ravi 150

[Answer : Balance Rs. 40]

2. Prepare petty cash book on imprest system from the following particulars
given below:

2002 Rs.

Dec. 1 Balance on hand 25

1 Received cheque to make the imprest 975

2 Paid for postage 40

4 Paid for stationery 225

6 Paid for wages 140

8 Paid for carriage 130

10 Paid for travelling expenses 150

11 Paid for telegrams expenses 50

12 Coffee to office staff 45

19 Taxi hire 150

[Answer: Balance Rs. 70]

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3. Prepare the analytical petty cash book of Mrs.Mala from the following:

2002 Rs.

Dec. 1 Cash in hand 435

1 Received from cashier 1,065

4 Bought postage stamps 75

7 Paid for stationery 135

8 Paid to Manimaran on account 475

13 Tea to sales agents 25

20 Bought ink & paper 43

21 Paid for carriage 45

24 Sent a telegram to Madurai 25

26 Paid for stationery 120

29. Paid for registered post 50

[Answer: Balance Rs.507]

4. Enter the following Petty transactions in the Analytical Petty Cash Book
of Mr. Elangovan

2002 Rs.

Oct. 1 Balance in hand 410

1. Received from the head cashier 1090

3. Paid electricity charges 335

5. Bought stationery 128

8. Printing charges 150

9. Postage stamps purchased 65

13. Repairs to furniture 125

14. Telegram sent to suppliers 50

15. Repairs to computer 250

[Answer : Balance Rs. 397]

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5. Prepare petty cash book of Mr.Nandakumar with suitable columns and

enter therein the following transactions. Balance the book on 10th March
2001.
2001 Rs.
Mar 1 Balance in hand 158
Received from chief cashier 592
2 Paid for postage stamps 50
5 Paid for stationery 105
6 Paid for carriage 65
7 Paid for postage stamp 75
Paid for telegrams 35
8 Paid for carriage 50
9 Paid for stationery 78
[Answer : Balance Rs. 292]
6. Record the following transactions in an analytical petty cash book of
Mr.Senthil and balance the same. On 1st April 2003 the petty cashier
started with an imprest of Rs. 1,500.
2003 Rs.
April 1 Postage stamps purchased 50
3 Sweeper and scavanger paid 25
5 Conveyance to manager 457
6 Telegram to Mumbai 44
7 Stationery purchased 68
10 Lorry hire for goods sent 250
13 Cartage and cooly on goods bought 75
18 Repair to cycles 30
19 Service charges to Typewriters 75
22 Ink and Gum purchased 23
24 Advertisement charges 100
27 Subscription paid to The Hindu 125
28 Tea to customers 12
[Answer : Balance Rs. 166]

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7. Enter the following transactions in a petty cash book of Mr.Murugan

maintained on imprest system with analytical columns:

2003 Rs.

July 15 Cash in hand 143

Received from the chief cashier 607

16 Bought stamps 25

17 Paid cartage 40

18 Tea and lunch expenses to customers 74

19 Telegram sent 23

20 Paid taxi hire 150

21 Purchased envelops 22

22 Paid for repairs of typewriter 65

23 Purchased one bottle of ink 12

27 Paid Railway fare to manager 187

31 Paid to coolie 20

[Answer : Balance Rs.132]

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Chapter - 9
BANK RECONCILIATION STATEMENT

Learning Objectives

After studying this Chapter, you will be able to:


know the Importance and Need of Bank Reconciliation Statement.


understand the Causes for Disagreement between Cash Book and
Pass Book Balances.


prepare Bank Reconciliation Statement.

__________________________________________________________________

Cash book with cash and bank columns have been explained in the earlier
chapter. On the debit side of the cash book, the bank column represents:

1. Cheques deposited into bank for collection.

2. Cash paid into bank and

3. Some entries that are made only after receiving the information from
the bank viz.,

i. Amounts collected by the bank on our behalf as per the standing

instructions, for example, Interest collected on investment.

ii. Interest given by the banker for the balance kept by us in our bank
account.

iii. The amount paid by our customers directly into our bank
account.

On the other hand, on the credit side of the cash book, represents:
1. Cheques issued for payment.

2. Cash withdrawn from bank for office use and personal use.

3. In addition, some entries are made after receiving information from the
bank viz.,

i. Amounts paid by the bank on our behalf as per the standing

instructions, for example, payment of insurance premium.

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ii. Interest charged by the bank for the amount drawn over and above
the actual balance kept in the bank account.

iii. Bank charges payable for the agency and utility services rendered
by the bank.

9.1 Bank Pass Book

Bank Pass Book (statement of account) is merely a copy of the customer’s
account in the books of a bank. It shows all the deposits, withdrawals and the
balance available in the customers account.
9.1.1 Format
Bank Pass Book

Dr. Cr. Balance

Date Particulars Withdrawals Deposits Dr / Cr Initials
Rs. Rs. Rs.

In the date column, the dates of the transactions are recorded. In the
particulars column withdrawals and deposits are recorded. The balance after each
transaction is recorded in the next column and the bank official signs in the last
column.

Following the principles of Double Entry, banker credits the account of

the customer for all the amounts received from the customer and on his behalf.
Similarly the banker debits the account of the customer for all withdrawals and
amounts paid to others on behalf of the customers.

The main point to be remembered is that entries are made only after cash
is received or paid, except in the case of interest and bank charges. Interest and
bank charges are mere book adjustments and in these ,there are neither receipt
of cash nor payment of cash.

9.2 Difference between Cash Book and Pass Book

Basis of Cash Book

S.No Pass Book
Distinction (Bank Column)

1. Maintained by Cashier Banker

Entered on the credit
Entered on the debit
2. Deposits of Cash column of the pass
side of the cash book.
book.
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Entered on the debit

Withdrawals of Entered on the credit
3. column of the pass
Cash side of the cash book.
book.
Entered on the
Entered in the pass
debit side of the cash
Cheques deposited book only on the date
4. book on the date of
for collection of the realisation
depositing the cheques
of the cheque.
into the bank.
Entered on the credit Entered on the debit
side of the cash book column of the pass
5. on the date of issuing book only on the date
Cheques issued
the cheque to the on which they are
creditors. presented and paid.
Collections and
Entered in the Cash
payments as per Entered
6. book after seeing the
customers standing in the Pass book first.
pass book.
instructions

It is signed by the
It is not signed by the
7. Signature Bank official after each
cashier
transaction.

It is balanced at the end It is balanced after

8. Balancing
of a specified period. each transaction

9.3 Bank Reconciliation Statement

The balance of the bank column in the double or triple column cash book
represents the customers cash balance at bank. It should be the same as shown
by his bank pass book on any particular day. For every entry made in the cash
book if there is a corresponding entry in the pass book(maintained by the banker)
or vice versa, the bank balance will be the same in both the books.

However, it must be noted that the cash book and the pass book are
maintained by two different parties and hence it is not certain that entry in one
book will always have a corresponding entry in the other. Normally entries in
the cash book should tally (agree) with those in the pass book and the balances
shown by both the books should be the same. But in practice, the balances
generally differ. In case of disagreement in the balance of the cash book and
the pass book, the need for preparing Bank Reconciliation Statement arises.

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9.3.1 Definition
‘Bank reconciliation statement is a list in which the various items that
cause a difference between bank balance as per cash book and pass book on
any given date are indicated’.
9.3.2 Need and Importance
After tracing the various items of difference, a bank reconciliation statement
is prepared. The following are its advantages in which lies its importance.
i. The errors that might have taken place in the cash book in
connection with bank transactions can be easily found.
ii. Regular preparation of bank reconciliation statement prevents
frauds.
iii. It indirectly imposes moral check on the accounting staff.
iv. By the preparation of bank reconciliation statement, uncredited
cheque can be detected and steps can be taken for their
collection.
9.4 Causes of disagreement between the balance shown by the cash
book and the balance shown by the pass book
1. Cheques paid into bank but not yet collected
The cheques paid into bank for collection but not credited into the account
of the customer, because the cheque is
i. not collected and credited till that date.
ii. collected but the bank staff has forgotten to make entry.
iii. collected but credited to wrong account.
iv. dishonoured.
v. collected for No.I account but credited to No.II account of the same
customer.
As soon as the cheques are sent to the bank, entries are made in the
debit side of the cash book (bank column). But, usually bank credit the customers
account only when they have received payment from the bank concerned, in other
words, when the cheques have been collected. Hence, there will be a time gap
between the depositing of the cheques and the collection by the bank.
For example, Bharat Company Limited deposited a cheque on March 28,
2003 for a sum of Rs.3,000. The cheque was collected on April 4, 2003. In case
the bank sends a statement of account upto March 31, 2003, there will be a
difference of Rs 3,000 between the balance shown by the cash book and the
pass book.

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2. Cheques issued but not yet presented for payment

The cheques issued but not debited customers account may be because
the cheque is

i. not cashed till date.

ii. not presented till date.

iii. presented but dishonoured for some reasons or other.

iv. lost by the party to whom the cheque was issued.

v. cashed out of No.I account but wrongly debited to No.II account of the
same customer.

In all of the above cases, the entry in the cash book is made immediately
on the issue of cheque but naturally the entry will be made by bank only when
the cheque is presented for payment. Thus there will be a gap of some days
between the entry for issue of cheque in the cash book and the entry for
payment made in the pass book.

For example, Bharat Company Limited issued a cheque in favour of

Mr.Krishna on March 28, 2003 for a sum of Rs.5,000. The cheque is presented
for payment at the bank on April 4, 2003. In case, bank sends a statement of
account upto March 31, 2003, there will be a difference of Rs.5,000 between
the balance as shown by the cash book and the balance as shown by the pass
book.
3. Amount credited by the banker in the pass book without the immediate
knowledge of the customer
The following are some of the examples for the above statement
i. The bank might have collected rent, dividend, bills of exchange, interest
etc., due for the customer as per standing instructions .
ii. Some debtors might have directly paid into bank.
iii. Bank credits interest on the credit balance of the customer’s
account.
iv. The banker has wrongly credited this account instead of some other
account.
In all the above cases, the entry will be first entered in the pass book.
The customer will know this only after he verifies the entries in the pass book.
So there may be a time gap of some days before the customer includes entries
made in the pass book.

For example, the bank has credited Bharat Company Limited’s account for
interest amounting to Rs.500 on March 31, 2003. The bank prepares and sends a

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statement of account on March 31, 2003. If the customer receives the statement
of account on April 4, 2003, there will be a difference of Rs 500 bewteen the
balance shown by the cash book and the balance shown by the pass book.
4. Amounts debited by the banker in the pass book without the immediate
knowledge of the customer

The following are some of the examples for this.

i. The banker has recorded bank charges, interest on overdraft etc.

ii. The banker has paid insurance premium, subscription for periodicals,
etc. on behalf of the customer as per the standing instructions.
iii. The banker has wrongly debited this account instead of some other
account.
iv. The banker has paid the bills payable of the customer as per
standing instructions .
v. Dishonour of a cheque deposited and discounted bills receivable.
In all the above cases, the entry will be first entered in the pass book of
the customer. And the customer will know only after he verifies the entries in the
pass book or statement of account . So there may be a time gap of some days
before the customer includes the entries made in the pass book.
For example, the bank has debited Bharat Company Limited’s account for
its charges amounting to Rs. 250 on March 31,2003. In case, the bank sends a
statement of account upto March 31,2003, there will be a difference of Rs.250
between the balance as per the cash book and the balance as per the pass book.

For example, A cheque for Rs.5,000 dishonoured on March 28, 2003. In

case, the bank sends a statement of account upto March 31, 2003 there will be
a difference of Rs.5,000 between the balance as shown by the cash book and
the balance as shown by the pass book.
After tracing the various items of differences, a Bank reconciliation statement
is prepared by starting with the balance shown by any of the two books. But
in actual practice, a Bank reconciliation statement is prepared by the customer
starting with the balance as per cash book and will ensure that the balance as
per pass book is arrived at.
Bank Overdraft

Bank overdraft is an amount drawn over and above the actual balance
kept in the bank account. This facility is available only to the current account
holders. Interest will be charged for the amount overdrawn i.e., overdraft. The
Cash book will show a credit balance i.e., unfavourable balance. The pass book
will show a debit balance.
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A summary of the transactions and the reconciliation procedure is given

in the table below.

9.5 Procedure for Preparing Bank Reconciliation Statement

Procedure to
ascertain the
balance as per pass
Entries by book from
customer Entries by cash book
S.
Transactions in the cash Bank in the Effect
No Unfavou
book pass book
(Bank -rable
Favourable
column) balance
balance
(over-
-draft)
Cash
Customer
When cash Bank enters in book
1. enters in the - -
is deposited credit column =Pass
debit side
book
Cash
Customer
When cash Bank enters in book
2. enters in the - -
is withdrawn debit column =Pass
credit side
book
Bank enters
in the debit
Customer Cash
column only
Issue of enters in the book
3. on the date Add Less
cheque credit side <Pass
when pre-
immediately book
sented for
payment
Only after
collection, the
Cheque
amount will be
received and
entered in the Cash
entered in Customer
credit column book
4. cash book debits cash Less Add
of the pass >Pass
and sent book
book because book
to bank for
the process
collection
takes some
time
No entry can
Bank Entered in
be found in Cash
charges for the debit
cash book book
5. services column of Less Add
till the pass >Pass
rendered by the passbook
book is book
bank immediately.
verified
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These are
Interest, No entry can entered in
dividend etc be found in the credit Cash
collected cash book column of book
6. Add Less
by bank on till the pass the passbook <Pass
behalf of book is immediately book
customer verified. after receiving
the amount

No entry is Entered in the Cash

Interest
made unless credit column book
7. allowed by Add Less
pass book is of the pass <Pass
bank
verified. book first. book

Entered in the
No entry is
Amount credit column Cash
found in cash
directly of the pass book
8. book till the Add Less
remitted into book on the <Pass
pass book is
bank same day book
verified.
of receipt.
Subscription,
premium
Entered in the
etc paid by Entry is
debit column Cash
the banker made only
of the pass book
9. as per the after the Less Add
book on the >Pass
standing pass book is
same day of book
instructions verified.
payment
of the
customer
Dishonour No entry in
Entered in
of bills the cash Cash
the debit
receivable book till the book
10. column of the Less Add
or cheques customer is >Pass
pass book
paid into intimated by book
immediately
bank the banker
No entry in
Entered in
Dishonour of the cash Cash
the credit
bills payable book till the book
11. column of the Add Less
or cheques customer is <Pass
pass book
issued intimated by book
immediately
the banker

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No entry is
Entered
found in cash Cash
Wrong credit (wrongly) in
book unless book
12. in the pass the credit Add Less
it is verified <Pass
book column in the
with the pass book
pass book
book.
Entered
No entry is Cash
Wrong debit (wrongly)
found in cash book
13. in the pass in the debit Less Add
book unless >Pass
book column in the
it is verified. book
pass book
9.6 Format
The format of Bank Reconciliation Statement when bank balance as per
cash book is taken as the starting point.

Bank Reconciliation Statement as on …………………..

Amount Amount
Particulars
Rs. Rs.
A Balance as per Cash Book ***
B Add: Cheques issued but not presented for
payment ***
Interest credited by bank but not recorded
in cash book ***
Debtors directly paid into bank but not ***
recorded in cash book
Wrong credit by banker ***
Collections by banker as per customer ***
standing instructions
Total (B) ***

C (Total A + B) ***
D Less: Cheques deposited but not credited by ***
the bank
Dishonoured cheques appeared in the ***
pass book but not entered in the cash
book
Bank charges as per pass book
Wrong debit by banker ***
Payments as per standing instructions ***
***

Total (D) ***

E Balance as per pass book ( C- D ) ***

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Points to be noted:

To work out the problems on Bank Reconciliation Statement, the following

points are to be remembered.

i. The heading is given as “Bank Reconciliation Statement as on

____________”

ii. All items to be added are grouped together and shown in the inner
column and the total is taken to the outer column for the purpose of
addition (B ).

iii. All items to be deducted are grouped together in the inner column and
the total can be shown in the outer column for deduction.(D).

iv. Favourable balance means the cash book will have a debit balance
and the passbook will have a credit balance.

v. Bank overdraft or unfavourable balance means cash book will have

a credit balance and passbook will have debit balance.

For easy reference the table given below will be useful.

Unfavourable Balance
Book Favourable Balance
(overdraft)
Cash Debit Credit
Pass Credit Debit
Illustration 1: When balance as per cash book is favourable.

From the following details, make out a bank reconciliation statement for
M/s.Elavarasan & Company as on December 31, 2003 to find out the balance
as per pass book.

Rs.

1. Cheques deposited but not yet collected by the bank 1,500

2. Cheque issued to Mr.Raju has not yet been presented for

payment 2,500

3. Bank charges debited in the pass book 200

4. Interest allowed by the bank 100

5. Insurance premium directly paid by the bank as per
standing instructions 500

6. Balance as per cash book 200

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Solution

Bank Reconciliation Statement as on December 31, 2003

Amount Amount
Particulars
Rs. Rs.

A Balance as per Cash Book 200

B Add: Cheques issued to Mr.Raju but not 2,500
presented for payment
Interest allowed by bank but not recorded
in cash book 100

2,600

C Less: Cheques deposited but not credited by 2,800

the bank 1,500
Bank has paid insurance premium as per
standing instructions 500
Bank charges as per pass book 200

2,200

D Balance as per Pass Book 600

Illustration 2: When balance as per pass book (favourable) is given

Mrs.Jame’s pass book showed a balance of Rs 25,000 on June 30, 2003.

Her cash book shows a different balance. On examination, it is found that

1. No record has been made in the cash book for a dishonour of a

cheque for Rs.250

2. Cheques paid into bank amounting to Rs. 3,500 were paid into the
bank on June 28, 2003 and the same had not been entered in the
pass book.

3. Bank charges of Rs. 300 have not been entered in the cash book.

4. Cheques amounting to Rs. 9,000 issued to Ms.Devi has not been

presented for payment still.

5. Mr. Balu who owed Rs. 3,000 has directly paid the sum into the
bank account.

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You are required to prepare a Bank reconciliation statement and ascertain

the balance as per cash book.
Solution

Bank Reconciliation Statement as on June 30, 2003

Amount Amount
Particulars
Rs. Rs.
Balance as per Cash Book 25,000
Add: Dishonour of cheque not recorded in
cash book 250
Cheques paid into bank, not collected 3,500
Bank charges as per pass book
not entered in the cash book 300

4,050

29,050
Less: Cheques issued but not presented 9,000
for payment
Amount directly paid by Mr.Balu into the 3,000
bank
12,000

17,050
Balance as per cash Book
Illustration 3: When overdraft as per cash book is given
Prepare a Bank Reconciliation Statement as at June 30, 2003 for M/s.Jothi
Sales Private Limited from the information given below
Rs.
1. Bank overdraft as per cash book 1,10,450
2. Cheques issued on June 20, 2003 but not yet presented
for payment 15,000
3. Cheques deposited but not yet credited by bank 22,750
4. Bills receivable directly collected by bank 47,200
5. Interest on overdraft debited by bank 12,115

6. Amount wrongly debited by bank 2,400

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Solution

Bank Reconciliation Statement as on June 30, 2003

Amount Amount
Particulars
Rs. Rs.

Overdraft balance as per cash book 1,10,450

Add: Cheques deposited but not yet credited 22,750
Interest on overdraft debited by bank 12,115
Wrong debit by bank 2,400

37,265

1,47,715

Less: Cheques issued but not presented

for payment 15,000
Bills receivable collected by bank 47,200
62,200

Overdraft balance as per bank pass book 85,515

Illustration 4: When overdraft as per Pass Book is given

Ms.Haritha gives you the following information regarding her bank account.
It shows an overdraft balance of Rs.6,500 on March 31, 2003. This does not
agree with the cash book balance.
1. Cheques amounting to Rs.15,000 were paid into bank out of which,
only cheques amounting to Rs.4,500 were credited by the bank.

2. Cheques issued during March amounted in all to Rs.11,000, out of

these, cheques amounting to Rs.3000 were unpaid till March 31,
2003.

3. The bank has wrongly debited account No.1 with Rs.500 in respect
of a cheque drawn on account No.2.

4. The account stands debited with Rs.150 for interest and Rs.30 for
bank charges.

5. The bank has paid the annual subscription of Rs.100 to club

according to instructions.

You are required to ascertain balance as per cash book

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Solution

Bank Reconciliation Statement as on March 31, 2003

Amount Amount
Particulars
Rs. Rs.

Overdraft balance as per pass book 6,500

Add: Cheques issued but not presented 3,000

3,000

9,500
Less: Cheques paid into bank but not 10,500
collected (Rs.15000-Rs.4500)

Wrong debit in pass book in account 500

No.1 instead of account No.2

Interest and bank charges not entered 180

in the cash book (Rs.150+Rs.30)

Subscription paid as per standing instruction 100 11,280

Balance as per cash book (Favourable) (1780)

When an extract of cash book (bank column) and pass book is given.

Illustration 5: Given below are the entries in the bank column of the cash book
and the pass book. Prepare a Bank Reconciliation Statement of Mr.Sekar as on
August 31, 2003.

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Cash Book

Dr. (Bank Columns) Cr

Amount Amount
Date Particulars Date Particulars
Rs. Rs.
2003 2003
Aug 1 To Balance b/d 20,525 Aug 8 By
Kokila A/c 12,000
18 To Shanker A/c 6,943 26 By
Geetha A/c 9,740
19 To Sales A/c 450 28 By
Latha A/c 11,780
(Rajan) 30 By
Salaries A/c 720
20 To Commission 200 (Amala)
A/c (Babu) 31 By Balance c/d 1,688
20 To Nirmala A/c 7,810
35,928 35,928
Sept 1 To Balance b/d 1,688

Pass Book

Dr. Cr. Balance

Date Particulars Withdrawals Deposits Dr./Cr. Initials
Rs. Rs. Rs.

01.08.03 By balance b/d 20,525 Cr

09.08.03 To Kokila 12,000 8,525 Cr
19.08.03 By Shankar 6,943 15,468 Cr
25.08.03 By Rajan 450 15,918 Cr
26.08.03 To Geetha 9,740 6,178 Cr
27.08.03 By Babu 200 6,378 Cr
28.08.03 To Amala 720 5,658 Cr
30.08.03 By B/R 20,000
By Interest 25
By Interest on
Investment 1,820 27,503 Cr
31.08.03 To B/P 4,000 23,503 Cr

Solution :
In the above problem, an extract of the cash book (bank column) and the
pass book of Mr.Sekar is given. The items given on the debit side of the cash
book should match with the items given on the credit column of the pass book
and vice versa. The items, which do not match, cause the difference between
both the balances.

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Bank Reconciliation Statement as on August 31, 2003

Amount Amount
Particulars
Rs. Rs.

Balance as per cash book 1,688

Add: Bills receivable collected, not entered in cash book 20,000
Interest collected, not entered in cash book 25
Interest on investment collected, not
entered in cash book 1,820
Cheques issued but not collected – Latha 11,780

33,625

Less: Cheques paid into bank, bu not collected – Nirmala 7,810 35,313

Bills payable paid, not entered in cash book 4,000

11,810

Balance as per pass book 23,503

QUESTIONS
I. Objective type:
a) Fill in the blanks:

1. The bank statement is sent by __________ to the customer.

2. Overdraft means credit balance as per ________ book.

3. When cash is withdrawn from the bank, the bank ________ the customer’s
account.

4. ________ balance in pass book shows bank overdraft.

5. For the purposes of reconciliation only the ________ column of the cash
book are to be considered.

6. A bank reconciliation statement is prepared by the ________.

[Answers : 1. bank, 2. cash, 3. debits, 4. debit, 5. bank, 6. customers]

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b) Choose the correct answer:

1. Bank Reconciliation statement is prepared by the

a) bank b) creditor of a business c) customer of a bank

2. Debit balance in the Cash Book means

a) overdraft as per Pass Book

b) credit balance as per Pass Book

c) overdraft as per Cash Book

3. When balance as per Cash Book is the starting point, to ascertain balance
as per pass book interest allowed by Bank is

a) subtracted b) added c) not adjusted

4. When balance as per Cash Book is the starting point, to ascertain the
balance as per pass book interest charged by Bank is:

a) added b) subtracted c) not adjusted

5. When the balance as per Cash Book is the starting point to ascertain
balance as per pass book, direct deposits by customers are:

a) added b) subtracted c) not adjusted

6. When the balance as per Cash Book is the starting point to ascertain
balance as per pass book, direct payment by bank are:

a) added b) subtracted c) not adjusted

7. A bank pass book is a copy of

a) the cash column of a customer’s cash book.

b) the bank column of a customer’s cash book.

c) the customer’s account in the bank’s ledger.

8. The bank statement shows an overdrawn balance of Rs.2,000. A cheque

for Rs.500 drawn in favour of a creditor has not yet been presented for
payment. When the creditor presents the cheque for payment, the bank
balance will be

a) Rs. 1,500 b) Rs. 2,500 (overdrawn) c) Rs.2,500

[Answers : 1. (c), 2. (b), 3. (b), 4. (b), 5. (a), 6. (b), 7. (c), 8. (b)]

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II. Other Questions :

1. What is a Bank Pass Book?

2. What is a Bank Reconciliation Statement?

3. When can a bank reconciliation be prepared?

4. Who prepares a bank statement?

5. Why is the preparation of Bank Reconciliation Statement necessary?

6. List the five items having the effect of higher balance in the Cash Book.

7. List the five items having the effect of lower balance in the Pass Book.

8. State any two causes of disagreeent between the balances shown by the
Cash Book and Pass Book.
III. Problems:

1. Make a bank reconciliation statement of Mr.Udayakumar from the following

particulars.

a) Balance as per cash book Rs.1,500.

b) Cheques deposited but not cleared Rs.100.

c) Cheques issued but not presented for payment Rs.150.

d) Interest allowed by bank Rs.20.

[Answer : Balance as per pass book Rs.1,570]

2. Prepare a bank reconcilition statement of Mr.Goutham from the following

data as on 31.12.2003.

Rs.

a) Balance as per cash book 12,500

b) Cheques issued but not presented for payment 900

c) Cheques deposited in bank but not collected 1,200

d) Bank paid insurance premium 500

e) Direct deposit by a customer 800

f) Interest on investment collected by bank 200

g) Bank charges 100

[Answer : Balance as per pass book Rs. 12,600]

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3. From the following particulars, ascertain the bank balance as per cash
book of Mr.Muthu as at 31st March 2003.

Rs.

a) Credit balance as per pass book as on 31.3.2003 Rs. 2,500.

b) Bank charges of Rs.60 had not been entered in the cash book.

c) Out of the cheques of Rs.3,500 paid into the bank, a cheque of

Rs.1,000 was not yet credited by the banker.

d) Out of the cheques issued for Rs.4,500, cheques of Rs.3,800 only

were presented for payment.

e) A divident of Rs.400 was collected by the banker directly but not

entered in the cash book.

f) A cheque of Rs.600 had been dishonoured prior to 31.3.2003, but no

entry was made in the cash book.

[Answer : Balance as per cash book Rs. 3,060]

4. On 31st March 2004 the cash book of Fashion World showed a balance
of Rs.1,500 as cash at bank, but the bank pass book as on that date
showed that cheques for Rs.185, Rs.175 and Rs.100 had not been
presented for payment. Also cheques to the mount of Rs.410 paid into the
bank had not been cleared. Find out the balance as per pass book as on
that date.

[Answer : Balance as per pass book Rs.1,550]

5. On 31st December 2003 the pass book of Ms.Rosy shows a credit balance
of Rs.3,357.

The cheques sent to the bank but not collected and credited
amounted to Rs.790 and three cheques drawn for Rs.300, Rs.150 and
Rs.200 respectively were not presented for payment till 31st January
2004.

Bank has paid a bill payable amounting to Rs.1,000 but it has not been
entered in the Cash Book and a bill receivable of Rs.500 which was
discounted with the bank was dishonoured by the drawee on due date.

The bank has charged Rs.12 as its commission for collecting outstation
cheques and has allowed interest Rs.10 on the trader’s balance.

Prepare a Bank Reconciliation Statement and show the balance as per

cash book.

[Answer : Balance as per cash book Rs.4,999]

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6. From the following particulars of Mr.Manikandan, prepare a Bank

Reconciliation Statement as on March 31, 2003:
a) The following cheques were paid into the firm’s current A/c in March
but were credited by the bank in April: Anbu Rs. 250, Balu Rs.350
and Chandru Rs.190.
b) The following cheques were issued by the firm in March and were
cashed in April: Prince Rs. 250, Queen Rs. 450 and Raja Rs.400.
c) A cheque for Rs.100 which was received from a customer was entered
in the bank column of the cash book in March but the same was paid
into the bank in April.
d) The pass book shows a credit of Rs. 250 for interest and a debit of
Rs. 100 for bank charges.
e) The balance as per Cash Book was Rs. 18,000 as on 31.3.2003.
[Answer : Balance as per pass book Rs. 18,360]
7. From the following particulars, ascertain the balance that would appear in
the Bank Pass Book of Cotton World Ltd. at 31st December, 2003.
a) The bank overdraft as per Cash Book on 31st December,
Rs. 1,26,800.
b) Interest on overdraft for 6 months ending 31st December, Rs.3,200
is entered in the Pass Book.
c) Bank charges of Rs.600 for the above period are debited in
the Pass Book.
d) Cheques issued but not cashed prior to 31st December, amounted
to Rs.23,360.
e) Cheques paid into bank but not cleared before 31st December, were
for Rs. 43,400.
f) Interest on investments collected by the bank and credited in the
Pass Book, Rs. 24,000.
[Answer : Overdraft as per pass book Rs. 1,26,640]
8. The Cash Book of Mr.Elavarasan showed that he had an Overdraft of
Rs.8,000 on 31st October, 2003. On verification of the Cash Book and the
Bank Pass Book the following points were noticed:
a) Cheques worth Rs.1,400 paid into the Bank had not been collected
till 31st October.
b) Cheques worth Rs. 720 issued before 31st October had not been
presented for payment.
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c) Interest on Overdraft Rs. 110 charged by the Bank was not entered
in the Cash Book.
d) A Bill Receivable worth Rs. 800 discounted on 1st September was
dishonoured.
e) A customer had paid into the Bank directly Rs. 450 and this was not
entered in the Cash Book.
Prepare a Bank Reconciliation Statement as on 31.10.73.
[Answer : Overdraft balance as per cash book Rs. 9,140]
9. The Cash book of Dhandapani showed an Overdraft of Rs.15,000. The
Cash Book entries were checked with the entries in the Pass Book. The
following details were disclosed. Prepare a Bank Reconciliation Statement
to show the Bank Balances as per Pass Book as on 30th June, 2003.
a) Out of the four cheques issued on 27th June, 2003 for Rs.21,000,
two cheques for 12,000 alone were presented for payment on 29th
June, 2003.
b) Cheques paid into the Bank amounted to Rs.17,800. But the Bank
had not cashed and credited in the Pass Book before that date.
c) There was an entry on the debit side of the Pass Book for Bank
Charges, Rs.150.
d) The Bank had also debited the account for Interest on O/D for Rs.280.
e) It was also noticed that the Bank had paid Rs.2,750 as Insurance
premium as per standing instructions on 29th June, 2003.
[Answer : Overdraft balance as per pass book Rs. 26,980]
10. From the following particulars of Mr.Jacob, ascertain the Bank Balance as
per Pass Book on December 31, 2003.
a) The Bank balance as per Cash Book was Rs.11,500 on December
31, 2003.
b) Cheques issued but not cashed before that date amounted to Rs.1,750.
c) Cheques paid into Bank, but not cleared before December 31, 2003
amounted to Rs.2,150.
d) Interest on Investments collected by the Bank but not entered in the
Cash Book amounted to Rs.275.
e) Local cheque paid in but not entered in the Cash Book Rs.250.
f) Bank Charges debited in the Pass Book Rs.95.
[Answer : Balance as per pass book Rs. 11,530]

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11. Prepare a Bank Reconciliation Statement of Mr.Srinivasan.

Cash Book

Dr. Cr.

2003 2003
Feb 1 To Bal. b/d 22,148 Feb 1 By Mani 2,822
18 To Kumar 12,000 15 By Giri 750
19 To Sales- Raman 200 20 By Chidambaram 87
28 To Balu 8,345 20 Purchases - Padma 182
28 To Commission 26 Salaries - Somu 150
28 Babu 810 26 Chandra 8,820
To Venkatesh 3,412 28 Rangan 2,346
By Bal. c/d 31,758
46,915 46,915
Mar 1 To Bal. b/d 31,758

Pass Book

Dr.
Cr. Dr./Cr.
With
Date Particulars Deposits Balance
drawals
Rs. Rs.
Rs.
2004
Feb 1 By Balance b/d 22,148
2 To Mani 2,822 19,326
16 To Giri 750 18,576
19 By Kumar 12,000 30,576
20 By Raman 200
20 To Chidambaram 87
20 To Padma 82 30,507
26 To Somu 150 30,357
28 To Insurance Premium 92
To B/P A/c 2,500
By Babu 810
By Muthu 1,200
By Interest 32
By Interest on investment 135
By B/R A/c. 750 30,692 Cr.

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Chapter - 10
TRIAL BALANCE AND
RECTIFICATION OF ERRORS

Learning Objectives

After learning this chapter you will be able to:

 know the Meaning, Objectives and Preparation of Trial Balance.

 identify the Kinds of Errors.

 understand the Procedure for Rectification of Errors.

_________________________________________________________________

In the previous chapters, you have learnt how to record and classify
the transactions in the various accounts along with balancing thereof. The
next step in the accounting process is to prepare a statement to check the
arithmetical accuracy of the transactions recorded so for. This statement is called
‘Trial Balance’.
Trial balance is a statement which shows debit balances and credit
balances of all accounts in the ledger. Since, every debit should have a
corresponding credit as per the rules of double entry system, the total of the
debit balances and credit balances should tally (agree). In case, there is a
difference, one has to check the correctness of the balances brought forward
from the respective accounts. Trial balance can be prepared in any date provided
accounts are balanced.

10.1 Definition
“Trial balance is a statement, prepared with the debit and credit balances
of ledger accounts to test the arithmetical accuracy of the books” – J.R. Batliboi.

10.2 Objectives
The objectives of preparing a trial balance are:

i. To check the arithmetical accuracy of the ledger accounts.

ii. To locate the errors.

iii. To facilitate the preparation of final accounts.

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10.3 Advantages
The advantages of the trial balance are

i. It helps to ascertain the arithmetical accuracy of the book-keeping

work done during the period.

ii. It supplies in one place ready reference of all the balances of the
ledger accounts.

iii. If any error is found out by preparing a trial balance, the same can
be rectified before preparing final accounts.

iv. It is the basis on which final accounts are prepared.

10.4 Methods
A trial balance can be prepared in the following methods.
i. The Total Method : According to this method, the total amount of
the debit side of the ledger accounts and the total amount of the
credit side of the ledger accounts are recorded.

ii. The Balance Method : In this method, only the balances of an

account either debit or credit, as the case may be, are recorded
against their respective accounts.

The balance method is more widely used, as it supplies ready figures for
preparing the final accounts.

10.5 Format
Trial Balance of ABC Ltd.

as on ..................

Debit Credit
Sl.No Name of Account L.F
Rs. Rs.

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Points to be noted :

i. Date on which trial balance is prepared should be mentioned at the

top.

ii. Name of Account column contains the list of all ledger accounts.

iii. Ledger folio of the respective account is entered in the next

column.

iv. In the debit column, debit balance of the respective account is

entered.

v. Credit balance of the respective account is written in the credit

column.

vi. The last two columns are totalled at the end.

10.6 Sundry Debtors and Sundry Creditors

In the ledger there are many personal accounts, some of them may show
debit balances, some others may show credit balances. If all the names are to be
written in the trial balance it will be unduly long. Therefore, a list of names with
the debit balances is prepared. This list is known as ‘Sundry Debtors’ (Sundry
means ‘many’). Similarly, a list of names with the credit balances is prepared.
This list is known as ‘Sundry Creditors’.
Illustration 1

The following balances were extracted from the ledger of Rahul on 31st
March, 2003. You are requested to prepare a trial balance as on that date in the
proper form.
Rs. Rs.
Salaries 36,320 Purchases 1,44,670
Sales 1,73,500 Sundry Debtors 1,430
Plant & Machinery 34,300 Travelling Expenses 2,630
Commission Paid 1,880 Carriage Inward 240
Stock on 1.4.2002 11,100 Sundry Creditors 14,260
Repairs 1670 Capital, 1.4.2002 62,500
Sundry Expenses 460 Drawings 3,500
Returns Inward 1,000 Cash at Bank 1,090
Discount Allowed 1,150 Returns Outward 400

Rent and Rates 3,220 Investments 6,000

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Solution:

Trial Balance of Rahul

as on 31st March, 2003

S. Name of the L. Dr. Cr. Nature of Balance

No. Account F. Rs. Rs. (Why Dr. or Cr.)

1. Salaries 36,320 – Nominal A/c-expense

2. Sales – 1,73,500 Real A/c - goods
3. Plant and Machinery 34,300 – Real A/c - asset
4. Commission Paid 1,880 – Nominal A/c expense
5. Stock on 1.4.2002 11,100 – Real A/c - goods
6. Repairs 1,670 – Nominal A/c-expense
7. Sundry Expenses 460 – Nominal A/c-expense
8. Returns Inward 1,000 – Real A/c - goods
9. Discount Allowed 1,150 – Nominal A/c - loss
10. Rent & Rates 3,220 – Nominal A/c-expense
11. Purchases 1,44,670 – Real A/c - goods
12. Sundry Debtors 1,430 – Personal A/c – customers
13. Travelling Expenses 2,630 – Nominal A/c-expense
14. Carriage Inward 240 – Nominal A/c-expense
15. Sundry Creditors – 14,260 Personal A/c – suppliers
16. Capital 1.4.2002 – 62,500 Personal A/c - owner
17. Drawings 3,500 – Personal A/c - owner
18. Cash at Bank 1,090 – Real A/c - asset
19. Returns Outward – 400 Real A/c - goods
20. Investments 6,000 – Real A/c. - asset

TOTAL 2,50,660 2,50,660

Note: The last column given in the solution does not appear in practice. It is
included here to illustrate the following generalised rules, that

i) a debit balance is either an asset or loss or expense; and

ii) a credit balance is either a liability or income or gain.

10.7 Limitations
Though the trial balance helps to ensure the arithmetical accuracy of the
books of accounts, it is possible only when the accountant has not committed
any error. As all the errors made are not disclosed by the trial balance, it would
not be regarded as a conclusive proof of correctness of the books of accounts
maintained.

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10.8 Errors in Accounting

The fundamental principle of the double-entry system is that every debit
has a corresponding credit of equal amount and vice-versa. Therefore, the total
of all debit balances in different accounts must be equal to the total of all credit
balances in different accounts, i.e., the total of the two columns should tally
(agree).
The tallying of the two totals (debit balances and credit balances) of the trial
balance ensures only arithmetic accuracy but not accounting accuracy. If however,
the two totals do not tally, it implies that some errors have been committed while
recording the transactions in the books of accounts. The following are the various
kinds of errors.
10.8.1. Kinds of Errors

Keeping in view the nature of errors, all the errors committed in the
accounting process can be classified into two.

i. Errors of Principle and

ii. Clerical Errors

Kinds of Errors
Errors

Errors of Principle Clerical Errors

Errors of Errors of Compensating

Omission Commission Errors

i. Partial omission i. Error of recording

ii. Complete omission ii. Error of posting
iii. Error of casting
iv. Error of carrying forward

I. Errors of Principle

Transactions are recorded as per generally accepted accounting principles.

If any of these principles is violated or ignored, errors resulting from such violation
are known as errors of principle. For example, Purchase of assets recorded
in the purchases book. It is an error of principle, because the purchases book
is meant for recording credit purchases of goods meant for resale and not fixed
assets. A trial balance will not disclose errors of principle.

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II. Clerical Errors

These errors arise because of mistakes committed in the ordinary course

of accounting work. These can be further classified into three types as follows.

a) Errors of Omission

This error arises when a transaction is completely or partially omitted to

be recorded in the books of accounts. Errors of omission may be classified as
below.

i. Error of Complete Omission: This error arises when a transaction is

totally omitted to be recorded in the books of accounts. For example, Goods
purchased from Ram completely omitted to be recorded. This error does not
affect the trial balance.

ii. Error of Partial Omission: This error arises when only one aspect of
the transaction either debit or credit is recorded. For example, a credit sale of
goods to Siva recorded in sales book but omitted to be posted in Siva’s account.
This error affects the trial balance.
b) Errors of Commission

This error arises due to wrong recording, wrong posting, wrong casting,
wrong balancing, wrong carrying forward etc. Errors of commission may be
classified as follows:

i. Error of Recording: This error arises when a transaction is wrongly

recorded in the books of original entry. For example, Goods of Rs.5,000,
purchased on credit from Viji, is recorded in the book for Rs.5,500. This error
does not affect the trial balance.

ii. Error of Posting: This error arises when information recorded in the
books of original entry are wrongly entered in the ledger. Error of posting may
be

i. Right amount in the right side of wrong account.

ii. Right amount in the wrong side of correct account

iii. Wrong amount in the right side of correct account

iv. Wrong amount in the wrong side of correct account

v. Wrong amount in the wrong side of wrong account

vi. Wrong amount in the right side of wrong account, etc.

This error may or may not affect the trial balance.

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iii. Error of Casting (Totalling) : This error arises when a mistake is

committed while totalling the subsidiary book. For example, instead of Rs.12,000 it
may be wrongly totalled as Rs.13,000. This is called overcasting. If it is wrongly
totalled as Rs.11,000, it is called undercasting.

iv. Error of Carrying Forward : This error arises when a mistake is

committed in carrying forward a total of one page to the next page. For example,
Total of purchase book in page 282 of the ledger Rs.10,686, while carrying
forward the balance to the next page it was recorded as Rs.10,866.
c) Compensating Errors

The errors arising from excess debits or under debits of accounts being
neutralised by the excess credits or under credits to the same extent of some other
account is compensating error. Since the errors in one direction are compensated
by errors in another direction, arithmetical accuracy of the trial balance is not
at all affected inspite of such errors. For example, If the purchases book and
sales book are both overcast (excess totalling) by Rs.10,000, the errors mutually
compensate each other. This error will not affect the agreement of trial balance.
10.8.2 Errors disclosed and not disclosed by trial balance

If the impact of the errors on trial balance is considered, errors may be

classified into two categories – Errors disclosed by trial balance, and Errors not
disclosed by trial balance.
ERRORS

Errors disclosed by Errors not disclosed by

Trial Balance Trial Balance

1. Errors of partial omission 1. Errors of complete omission

2. Errors of casting 2. Errors of recording
3. Errors of carrying forward 3. Errors of principle
4. Errors of posting in the wrong 4. Errors of posting to wrong
side of the correct account account in the right side with
the correct amount
5. Errors of posting to correct 5. Compensating Errors
account with wrong amount
6. Double posting in the same account

Illustration 2

State the type of error involved in the following transactions and say whether
it will affect the agreement of the trial balance or not.

1. The sales book is undercast by Rs. 2,000.

2. The purchases book is overcast by Rs. 1,500.

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3. The purchases return book is overcast by Rs.5,000.

4. The sales return book is overcast by Rs.1,000.

5. Goods returned by Vani worth Rs.1,500 were not entered.

6. Goods returned by Venu & Co. Rs.4,000 were not posted.

7. Goods sold to Robin for Rs. 2,600 has been debited to Robert’s A/c.

8. A credit sale to Basha for Rs. 3,500 was entered as Rs.5300.

9. A purchase of Machinery for Rs.50,000 has been entered in the purchases

book.

10. A credit purchase from Senthil for Rs. 6,250 was debited to Santhosh’s
A/c. from purchases book.

11. Cash received for commission Rs.2,735 was posted to the commission
account as Rs. 2,375.

12. The monthly total of discount column on the debit side of the cash book
Rs. 1,350 was credited to discount allowed account.

13. Cash paid for insurance Rs. 6,310 was posted to the insurance A/c. as
Rs. 6,130.

14. The monthly total of discount column on the credit side of the cash book
Rs. 22,500 was debited to discount received account.

15. A sale to Kaveri Rs. 6,900 has been entered in the purchases book.
Solution:

1. This is an error of casting and it affect sales account only. The trial balance
will not tally.

2. This is an error of casting and it affect purchases account only. The trial
balance will not agree.

3. This is an error of casting and it affect purchases return account only. The
trial balance will not agree.

4. This is an error of casting and it affect sales return account only. The trial
balance will not agree.

5. This is an error of complete omission. Since both the aspects have been
omitted, this error will not affect the agreement of the trial balance.

6. This is an error of partial omission. Since the principles of double entry

is not completed, this error will affect the agreement of the trial balance.

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7. This is an error of posting i.e., right amount in the right side of the wrong
account. This error will not affect the agreement of the trial balance.

8. This is an error of recording i.e., wrong entry in the subsidiary book. Since
the mistake is found in both debit and credit aspects to the same extent.
The agreement of the trial balance will not be affected.

9. This is an error of principle. This error will not affect the agreement of the
trial balance.

10. This is an error of recording i.e., wrong entry in the subsidiary book. Since,
the mistake is found in both debit and credit aspects to the same extent.
The agreement of the trial balance will not affected.

11. This is an error of posting involving posting of wrong amount. Since the
commission account has an excess credit of Rs.360, the trial balance will
be affected.

12. This is an error of posting involving posting on the wrong side of an account.
The amount must have been debited to discount allowed account. The trial
balance will not agree to the extent of Rs.2,700 i.e., twice the amount of
the transaction.

13. This is an error of posting involving posting of wrong amount. Since the
insurance account has a short debit of Rs.180, the trial balance will be
affected.

14. This is an error of posting involving posting on the wrong side of an account.
The amount must have been credited to discount received account. The
trial balance will not agree to the extent of Rs.45,000, ie., twice the amount
of the transaction.

15. This is an error of recording. In this transaction, error is made in the book
of original entry, the trial balance will not be affected. An entry has been
made wrongly in the purchases book instead of the sales book. To rectify
this, Kaveri A/c is to be debited with Rs.13,800 and Purchases A/c. and
Sales A/c. are to be credited with Rs.6,900 each.

10.9 Steps to Locate the Errors:

If the trial balance does not tally, it means there are some errors in the
books of accounts. The various steps which may be taken to locate the errors
include the following:

Step 1 → Check the total of the trial balance and ascertain the exact amount of
difference in the trial balance.

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Step 2 → The difference is halved to find out whether there is any balance of
the same amount in the trial balance. It is because, such a balance
might have been recorded on the wrong side of the trial balance and
hence, the difference is double the amount.

Step 3 → If the second step fails to locate the error, the difference in the trial
balance is divided by 9. If it is divisible by 9 without any remainder,
the error is due to transposition of figures. For example,
transposition of figures represents writing of Rs.780 for Rs.870.

Step 4 → See whether the balance of all ledger accounts including cash and
bank balances are included in the trial balance.

Step 5 → Ensure that all the opening balances have been correctly brought
forward in the current year’s books.
Step 6 → If the difference in the trial balance is of large amount, the trial
balance of the current year is compared with that of the previous
year and an account showing a large difference over the figure in
the previous year’s trial balance should be rechecked.

Step 7 → If the error is not detected by the above steps, care should be taken
to scrutinise the

i. totals of all the subsidiary books.

ii. posting made from the journal and the subsidiary books to the
relevant ledger accounts.

iii. balances extracted from the various ledger accounts.

iv. totalling of the ledger balances.

Even after following the above steps, if the error could not be located, the
whole of the prime entry must once again be checked and in case of need, the
posting to the ledger should be rechecked thoroughly.

10.10 Suspense Account

When it is difficult to locate the mistakes before preparing the final accounts,
the difference in the trial balance is transferred to newly opened imaginary and
temporary account called ‘Suspense Account’. Suspense account is prepared
to avoid the delay in the preparation of final accounts. If the total debit balances
of the trial balance exceeds the total credit balances, the difference is transferred
to the credit side of the suspense account. On the other hand, if the total credit
balances of the trial balance exceeds the total debit balances the difference is
transferred to the debit side of the suspense account.

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When the errors affecting the suspense account are located, they are
rectified with suspense account. Suspense account is continued in the books until
the errors are located and rectified. Such balance will be shown in the balance
sheet. Debit balance will be shown on the asset side and the credit balance will
be shown on the liability side. When all the errors affecting the trial balance are
located and rectified, the suspense account automatically gets closed.

The following illustration will help to understand the suspense account :

Illustration 3

The following balances were extracted from the ledger of Mr.Ramakrishna

as on 31st March 2003. You are required to prepare a trial balance as on that
date.

Rs. Rs.

Drawings 60,000 Salaries 95,000

Capital 2,40,000 Sales return 10,000

Sundry creditors 4,30,000 Purchases return 11,000

Bills payable 40,000 Commission paid 1,000

Sundry debtors 5,00,000 Trading expenses 25,000

Bills receivable 52,000 Discount earned 5,000

Plant & Machinery 45,000 Rent 20,000

Opening stock 3,70,000 Bank overdraft 60,000

Cash in hand 9,000 Purchases 7,08,000

Cash at bank 25,000 Sales 11,80,000
Solution :

In the books of Mr.Ramakrishna

Trial Balance as on 31st March 2003

S. L. Dr. Cr.
Name of the Account
No. F. Rs. Rs.
1. Capital – 2,40,000
2. Drawings 60,000 –
3. Sundry creditors – 4,30,000
4. Bills payable – 40,000
5. Sundry debtors 5,00,000 –

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6. Bills receivable 52,000 –

7. Plant & machinery 45,000 –
8. Opening stock 3,70,000 –
9. Cash in hand 9,000 –
10. Cash at Bank 25,000 –
11. Sales – 11,80,00
12. Salaries 95,000 –
13. Sales return 10,000 –
14. Purchases return – 11,000
15. Commission paid 1,000 –
16. Trading expenses 25,000 –
17. Discount earned – 5,000
18. Rent 20,000 –
19. Purchases 7,08,000 –
20. Bank overdraft - 60,000
21. Suspense A/c. 46,000 –
TOTAL 19,66,000 19,66,000

Note : The difference in the Trial Balance is transferred to suspense account to

avoid delay in the preparation of final accounts.

10.11 Rectification of Errors

Correction of errors in the books of accounts is not done by erasing, rewriting
or striking the figures which are incorrect. Correcting the errors that has occured
is called Rectification. Appropriate entry is passed or suitable explanatory note
is written in the respective account or accounts to neutralise the effect of errors.
From the point of rectification, errors may be classified as follows:

i. Single sided errors are errors which affect one side of an account.

ii. Double sided errors are errors which affect both the accounts in a
transaction.
Basic Principles for Rectification of Errors

All errors, whatever may be their kind or nature, result in one of the following
four positions in one or more accounts.

i. Excess debit in one or more accounts: This must be rectified by

‘crediting’ the excess amount to the respective account or
accounts.

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ii. Short debit in one or more accounts: This must be rectified by a

‘further debit’ to the respective account or accounts involved.

iii. Excess credit in one or more accounts: This can be rectified by

‘debiting’ the respective account with the excess amount involved.

iv. Short credit in one or more accounts: This can be rectified by a

‘further credit’ to the respective account or accounts involved.

The following three steps may be adopted while attempting to rectify an

error:

i. Ascertain what has actually been done, i.e. what is the error?.

ii. Make sure what ought to have been done, i.e., the correct record.

iii. Decide what is to be done in view of what has been done and what
ought to have been done. i.e., rectification.
Stages of Rectification

The stage in which rectification is done depends on identification or locating

the error. Rectification of errors may be explained in two stages.

i. Rectification before the preparation of trial balance : In this stage

errors are located before transferring the difference in the trial
balance to Suspense Account.

ii. Rectification after the preparation of trial balance: In this stage the
difference in the trial balance would have been transferred to
Suspense Account. So wherever applicable suspense account is
used while passing rectification entries.

Stage at which the errors Manner in which the errors

are rectified are rectified
i. When the errors are rectified before By debiting or crediting the respective
transferring the difference in the trial account with the required amount
balance to the suspense account by giving an explanatory note in the
particulars column.
ii.When the errors are rectified after By writing a journal entry with the
transferring the difference in the trial respective account or accounts affected
balance to the suspense account by the errors and suspense account.

Illustration 4

Rectify the following errors:

i. Purchases book overcast by Rs.1,300

ii. Sales book undercast by Rs.2,500.

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iii. Purchases return book overcast by Rs.750.

iv. Sales return book undercast by Rs.600.

Solution:

S. Nature of mistake Effect of mistake Rectification

No.
1. Overcasting of Excess debit in Credit the Purchases
purchases book A/c.
Purchases A/c
2. Undercasting of Short credit in Give further credit Sales
sales book Sales A/c A/c.
3. Overcasting of Excess credit in Debit Purchases Return
purchases return A/c
Purchases Return
book
A/c
4. Undercasting of Short debit in Give further debit to
sales return book Sales Return A/c Sales Return A/c.

To rectify the errors:

i. Credit – Purchases A/c with Rs.1,300.

ii. Credit – Sales A/c with Rs.2,500.

iii. Debit – Purchases return A/c with Rs.750.

iv. Debit – Sales return A/c with Rs.600.

Illustration 5

Rectify the following errors:

i. Purchases book is carried forward Rs.850 less.

ii. Sales book total is carried forward Rs.2,500 more.

iii. A total of Rs.7,580 in the purchases book has been carried forward
as Rs.8,570.

iv. The total of the sales book Rs.7,550 on page 20 was carried forward
to page 21 as Rs.5,570.

v. Purchases return book was carried forward as Rs.1,520 instead of

Rs.5,120.

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Solution:

S. Nature of mistake Effect of mistake Rectification

No.
1. Carrying forward Short debit in Give further debit
lower amount in Purchases A/c on Purchases A/c
purchases book
2. Carrying forward Excess credit in Debit sales A/c
higher amount in Sales A/c.
sales book
3. Carrying forward Excess debit in Credit purchases
higher amount in Purchases A/c A/c
purchases book
4. Carrying forward Short credit in Sales Give further credit
lower amount in A/c. to Sales A/c
sales book
5. Carrying forward Short credit in Credit Purchases
lower amount in Purchases return A/c return A/c
purchases return
book

Rectification:

i. Debit – Purchases A/c with Rs.850.

ii. Debit – Sales A/c with Rs.2,500.

iii. Credit – Purchases A/c with Rs.990.

iv. Credit – Sales A/c with Rs.1,980.

v. Credit – Purchases return A/c with Rs.3,600.

Illustration 6:

Rectify the following errors:

i. Purchases from Bagavathi for Rs.4,500 has been posted to the debit
side of her account.

ii. Sales to Vijay for Rs.1,520 has been posted to his credit as
Rs.1,250.

iii. Purchases from Shakila for Rs.750 has been omitted to be posted
to the personal A/c.

iv. Sales to Khader for Rs.780 has been posted to his account as
Rs.870.

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Solution:
i. Purchases from Bagavathi should have been posted to the credit of
Bagavathi’s A/c., but it has been debited. Hence, Credit Bagavathi’s
A/c with double the amount i.e, Rs.9,000.
ii. Sales to Vijay has to be debited in Vijay’s account but his account
is credited with Rs.1,250. Hence, Debit Vijay’s A/c with Rs.1,250 +
Rs.1,520 i.e, Rs.2,770.
iii. This is an error of omission. Posting must be to the credit of Shakila’s
A/c. Hence, post Rs.750 to the credit of Shakila’s A/c.
iv. Here Khader’s A/c has been debited with a wrong amount i.e., with
excess amount. To rectify this error, the excess amount must be
credited to his account. Hence, credit Khader’s A/c with Rs.90.
Illustration 7
The following errors were found in the books of Prabhu. Give the
necessary entries to correct them:
i) Salary of Rs.10,000 paid to Murali has been debited to his personal
account.
ii) Rs.3,500 paid for a typewriter was charged to office expenses
account.
iii) Rs.8,000 paid for furniture purchased has been charged to purchases
account.
iv) Repairs made were debited to building account for Rs.500.
v) An amount of Rs.5,000 withdrawn by the proprietor for his personal
use has been debited to trade expenses account.
vi) Rs.2,000 received from Shanthi & Co. has been wrongly entered as
from Shakila & Co.
Solution:

In the Books of Prabhu

Rectifying Journal Entries

Errors Particulars L.F Debit Credit

Rs. Rs.
i. Salaries A/c Dr. 10,000
To Murali A/c. 10,000
[Correction of wrong debit to Murali’s
personal A/c for salaries paid]

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ii. Typewriter A/c Dr. 3,500

To Office expenses A/c 3,500
[Correction of wrong debit to office
expenses A/c for purchase of
typewriter]
iii. Furniture A/c Dr. 8,000
To Purchases A/c 8,000
[Correction of wrong debit to
purchases account for furniture
purchased]
iv. Repairs A/c Dr. 500
To Building A/c 500
[Correction of wrong debit to building
Account for repairs made]
v. Drawings A/c Dr. 5,000
To Trade expenses A/c 5,000
[Correction of wrong debit to Trade
Expenses A/c. for cash withdrawn by
the proprietor for his personal use]
vi. Shakila & Co. A/c. Dr. 2,000
To Shanthi & Co. A/c 2,000
[Correction of wrong credit to Shakila
& Co. instead of Shanthi & Co.]

Illustration 8

Give journal entries to rectify the following errors:

i. Purchase of goods from Devi amounting to Rs.25,000 has been

wrongly passed through the sales book.

ii. Credit sale of goods Rs.30,000 to Rajan has been wrongly passed
through the purchases book.

iii. Sold old furniture for Rs.3,500 passed through the sales book.

iv. Paid wages for the construction of Building debited to wages account
Rs. 1,00,000.

v. Paid Rs.10,000 for the installation of Machinery debited to wages

account.

vi. On 31st Dec. 2003 goods worth Rs.5,000 were returned by Manjula
and were taken into stock on the same date, but no entry was passed
in the books.

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Solution:

Rectifying Journal Entries

Debit Credit
Errors Particulars L.F
Rs. Rs.
i. Purchases A/c Dr. 25,000
Sales A/c Dr. 25,000
To Devi A/c 50,000
[Correction of wrong entry in
sales book for a credit purchase
from Devi]
ii. Rajan A/c Dr. 60,000
To Purchases A/c 30,000
To Sales A/c 30,000
[Correction of wrong entry in
purchases book for credit sale
to Rajan]
iii. Sales A/c Dr. 3,500
To Furniture A/c 3,500
[Correction of wrong credit to
sales account for sale of old
furniture]

iv. Building A/c Dr. 1,00,000

To Wages A/c 1,00,000
[Correction of wrong debit to
wages account for wages paid
for construction of building]
v. Machinery A/c Dr. 10,000
To Wages A/c 10,000
[Correction of wrong debit to
wages account for wages paid
for installation of machinery]
vi. Sales Return A/c Dr. 5,000
To Manjula A/c 5,000
[Entry for goods returned and
taken into stock]

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Illustration 9

An accountant could not tally the Trial balance. The difference of Rs.5,180
was temporarily placed to the credit of suspense account for preparing the final
accounts. The following errors were later located.

i. Commission of Rs.500 paid, was posted twice, once to discount

allowed account and once to commission account.

ii. The sales book was undercast by Rs.1,000.

iii. A credit sale of Rs.2,780 to Roja though correctly entered in sales

book, was posted wrongly to her account as Rs.3,860.

iv. A credit purchase from Nataraj of Rs.1,500, though correctly entered

in purchases book, was wrongly debited to his personal account.

v. Discount column of the payments side of the cash book was wrongly
added as Rs.2,800 instead of Rs.2,400.

You are required to:

i. Pass the necessary rectifying entries.

ii. Prepare Suspense Account

Solution:

Rectifying Journal Entries

Debit Credit
Errors Particulars L.F
Rs. Rs.
i. Suspense A/c Dr. 500
To Discount allowed A/c 500
[Amount wrongly debited to discount
account, now rectified]
ii. Suspense A/c Dr. 1,000
To Sales A/c 1,000
[Sales book undercast by Rs.100,
now rectified]
iii. Suspense A/c Dr. 1,080
To Roja A/c 1,080
[Wrong posting of sale of Rs.2,780 to
Roja as Rs.3,860, now rectified]

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iv. Suspense A/c Dr. 3,000

To Nataraj A/c 3,000
[Credit purchase of Rs.1,500 from
Nataraj wrongly debited to his
personal account now rectified]
v. Discount received A/c Dr. 400
To Suspense A/c 400
[Excess credit in discount account,
now rectified]

Suspense Account

Dr. Cr.

Date Particulars L.F Date Particulars L.F Rs.

To Discount By Balance b/d 5,180

allowed A/c 500 By Discount
To Sales A/c 1,000 received A/c 400
To Roja A/c 1,080
To Nataraj A/c 3,000
5,580 5,580

QUESTIONS
I. Objective Type:
a) Fill in the blanks:

1. Trial Balance should be tallied by following the rules of _______.

2. If the total debits exceeds the total credits of trial balance, suspense
account will show _______ balance.

3. Suspense account having debit balance will be shown on the _______ side
of balance sheet.

4. If the total debit balances of the trial balance exceeds the total credit
balances, the difference is transferred to the _______ side of the suspense
account.

5. Suspense account having credit balance will be shown on the _______

side of the balance sheet.

6. Short credit of an account decreases the _______ column of the trial

balance.
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7. When errors are located and rectified, ______ automatically gets closed.

8. Journal entries passed to correct the errors are called _______.

9. Excess debit of an account can be rectified by _______ the same

account.

10. Short debit of an account can be rectified by _______ of the same

account.

[Answers : 1. double entry system, 2. credit, 3. assets, 4. credit, 5. liabilities,

6. credit, 7. suspense account, 8. rectifying entries, 9. credit (the
excess amount in), 10. further debit (the short amount)]
b) Choose the correct answer:

1. Trial balance is prepared to find out the

a) profit or loss b) financial position

c) arithmetical accuracy of the accounts

2. Suspense account in the trial balance is entered in the

a) Trading A/c b) Profit and loss A/c c) Balance sheet

3. Suspense account having credit balance will be shown on the

a) Credit side of the profit and loss A/c

b) Liabilities side of the balance sheet

c) Assets side of the balance sheet

4. State which of the following errors will not be revealed by the Trial
Balance.

a) Errors of complete omission.

b) Error of carrying forward.

c) Wrong totalling of the purchases book.

5. Errors which affect one side of an account are called

a) Single sided errors b) Double sided errors

c) None of the above.

6. Amount spent on servicing office Typewriter should be debited to:

a) Miscellaneous Expenses Account b) Typewriter Account.

c) Repairs Account.

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7. Wages paid to workers for the installation of a new Machinery should be

debited to:

a) Wages Account b) Machinery Account

c) Factory Expenses Account

8. Salary paid to Manager must be debited to

a) Manager’s Account b) Office Expenses Account

c) Salary Account.

9. Goods taken by the proprietor for domestic use should be credited to

a) Proprietor’s Drawings Account. b) Sales Account.

c) Purchases Account.

10. Cash received from Mani whose account was previously written off as a
Bad Debt should be credited to:

a) Mani’s Account. b) Miscellaneous Income Account.

c) Bad Debts Recovered Account.

[Answers: 1. (c), 2. (c), 3. (b), 4. (a), 5. (a), 6. (c), 7. (b), 8. (c), 9. (c), 10. (c)]
II. Other Questions :

1. What is a Trial Balance?

2. What are the objectives of preparing a Trial Balance?

3. What are the advantages of a Trial Balance?

4. Why is it said that the trial balance is not a conclusive proof of the
accuracy of the account books?

5. Explain the principle on which the agreement of trial balance is based.

6. Name the different kinds of errors?

7. Explain the different kinds of errors.

8. Write short notes on

i. Error of Principle ii. Compensating error

iii. Error of casting. iv. Error of Posting

9. What are the errors disclosed by the Trial Balance?

10. What are the errors not disclosed by the Trial Balance?

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11. What is a Suspense Account? When is it opened?

12. What do you mean by Rectification of Errors?

13. In what ways may the errors be rectified?

III. Problems

1. Prepare Trial Balance as on 31.12.2000 from the following balances of

Mr.Balan.

Rs. Rs.

Capital 3,40,000 Purchases 94,000

Creditors 13,000 Sales Returns 3,400

Drawings 4,000 Purchases Return 2,400

Salaries 38,200 Carriage inwards 1,400

Bill Receivable 5,800 Printing & Stationery 5,000

Bills Payable 7,000 Stock 29,900

Debtors 16,000 Machinery 50,000

Sales 1,44,000 Wages 5,000

Insurance 2,200 Rent 1,600

Land 2,50,000 Interest received 1,700

Commission received 800 Electricity charges 2,400

[Answer : Rs. 5,08,900]

2. The following balances are extracted from the books of Mr.Senthil. Prepare
Trial Balance as on 30.6.2004.

Rs. Rs.

Capital 4,70,200 Machinery 1,58,800

Cash in hand 6,000 Sundry Debtors 48,000

Building 3,20,000 Repairs 5,400

Stock 33,000 Insurance premium 3,300

Sundry creditors 26,000 Sales 2,90,000

Commission paid 750 Telephone charges 6,450

Rent & Taxes 6,300 Furniture 11,000

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Purchases 1,65,000 Discount earned 1,100

Salaries 70,600 Loan from Mohammed 51,000

Discount allowed 650 Reserve fund 5,900

Drawings 5,000 Bills receivable 8,600

Bad debts 1,350 Bills payable 6,000

[Answer : Rs. 8,50,200]

3. Prepare Trial Balance as on 31.3.2004 from the books of Mrs.Chitra.

Rs. Rs.
Capital 2,49,000 Drawings 24,000
General expenses 97,000 Building 78,000
Machinery 1,18,680 Stock 1,32,400
Wages 14,400 Insurance 2,610
Bad debts 1,100 Creditors 5,000
Sales 3,30,720 Loan (Cr.) 75,000
Commission 5,500 Purchases 2,10,800
Bills payable 7,700 Reserve Fund 15,000
Bank overdraft 28,600 Cash in hand 25,320
Discount 1,210
[Answer : Rs. 7,11,020]
4. Prepare Trial Balance as on 31.12.2002 from the following balances of
Ms. Fathima.
Rs. Rs.
Drawings 74,800 Purchases 2,95,700
Stock (1.1.2000) 30,000 Discount received 1,000
Capital 2,50,000 Discount allowed 950
Furniture 33,000 Sales 3,35,350
Sundry creditors 75,000 Rent 72,500
Printing charges 1,500 Sundry expenses 21,000
Bank loan 1,20,000 Bills receivable 52,500
Freight 3,500 Carriage outwards 1,500

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Income tax 9,500 Insurance 1,200

Machinery 2,15,400 Bills payable 31,700
[Answer : Rs. 8,13,050]
5. Prepare trial balance as on 31.3.2003 from the following balances of
Mrs.Sujatha.
Rs. Rs.
Drawings 43,000 Purchases 2,98,000
Capital 2,12,000 Sales 3,64,000
Sundry creditors 61,500 Salaries 44,950
Bills Payable 22,000 Sales return 500
Sundry Debtors 55,000 Purchases return 2,550
Bills Receivable 72,600 Travelling expenses 12,300
Loan from Shameem 2,50,000 Commission paid 250
Furniture & Fittings 12,250 Discount earned 2,000
Opening stock 2,23,500 Cash in hand 65,450
Cash at bank 86,250
[Answer : Rs. 9,14,050]
6. Prepare Trial Balance from the following balances of Mrs.Dilshad as on
31.12.2002.
Rs. Rs.
Capital 4,20,000 Cash in hand 25,000
Building 1,15,000 Cash at bank 84,700
Machinery 60,000 Salaries 94,000
Furniture 11,000 Rent 48,000
Car 68,000 Commission 1,400
Opening stock 86,000 Rates and Taxes 2,600
Purchases 94,000 Bad debts 3,200
Sales 1,96,000 Insurance 2,400
Sundry debtors 16,200 General Expenses 800
Reserve for doubtful debts 7
,300 Sundry Creditors 68,000

[Answer : Suspense account (credit) Rs.21,000]

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7. Rectify the following journal entries.

Rs. Rs.

i. Purchases A/c Dr. 6,000

To Cash A/c 6,000

(Purchase of furniture)

Rs. Rs.

ii. Arul A/c Dr. 10,000

To Cash A/c 10,000

(Salary paid to Arul)

Rs. Rs.

iii. Ravi A/c Dr. 1,500

To Cash A/c 1,500

(Rent paid)

Rs. Rs.

iv. Sales A/c Dr. 12,000

To Cash A/c 12,000

(Credit sale to Navin)

Rs. Rs.

v. Cash A/c Dr. 8,000

To Babu A/c 8,000

(Cash sales)

8. Rectify the following errors which are located in the books of Mr.Ganesh.

i. The purchases return book overcast by Rs.1,500.

ii. Received Rs.2,000 from Shankar debited to his account.

iii. The sales book undercast by Rs.1,500.

iv. Rs.1,500 received from Geetha was entered on the debit side of the
cash book. No posting was done to Geetha’s A/c.

v. Sale of old furniture for Rs.2,000 treated as sale of goods.

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9. Rectify the following errors:

i. Rs.12,000 paid of salary to cashier Govind, stands debited to his

personal account.

ii. An amount of Rs.5,000 withdrawn by the proprietor for his personal

use has been debited to trade expenses A/c.

iii Cash received from Bala Rs.300 was credited to Balu.

iv. A credit sale of Rs.2,000 to Janakiram has been wrongly passed

through the purchases book.

10. Rectify the following errors :

i. Repairs made were debited to building account Rs.5,000.

ii. Mahesh returned goods worth Rs.2,000. No entry was passed in the
books to this effect.

iii. Purchase of goods from Antony amounting to Rs.1,500 has been

debited to his account.

iv. Rs.5,200 paid for the purchase of typewriter was charged to office
expenses account.

11. Rectify the following errors :

i. Credit purchase of goods from Madhan of Rs.300 has been wrongly

entered in the sales book.

ii. Rs.500 received from Selvam has been credited to Selvi’s account.

iii. Rs.1,000 received as interest was credited to commission account.

iv. Sales book total Rs.878 was wrongly totalled as Rs.788.

v. The total of the discount column, on the debit side of the cash book
has been added short by Rs.400.

12. Rectify the following errors without using a suspense account:

i. Purchases Rs.5,000 from Sheela wrongly entered in the sales book.

ii. Goods taken by the proprietor Rs.1,000 not recorded in the books at
all.

iii. Discount Rs.50 allowed to Mala has been credited to discount

account.

iv. Credit sales to Leela Rs.1,500 wrongly posted to the credit of her
account.

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13. A bookkeeper found his Trial Balance not balanced, placed the difference
amount in the Suspense Account and subsequently found the following
errors:

a) Sales Book was overcast by Rs.1,500.

b) Rs.2900 received from Vani in full settlement of his account of Rs.3,000

was posted in cash book but omitted to be entered in her account.

c) The total of the sales book Rs.12,000 was debited to sales returns
account.

d) Rs.1,000 received as interest was credited to interest account as

Rs.100.

Give rectifying entries and show the Suspense Account.

14. An Accountant could not tally the trial balance. The difference of Rs.520
was temporarily placed to the credit of suspense account and subsequently
found the following errors.

a) The total of the Discount column on the credit side of the Cash Book
Rs.230 was not posted in the ledger.
b) The total of the Discount Column on the debit side of the Cash Book
Rs.150 was omitted to be posted in the ledger.

c) The total of the purchases book was short by Rs.600.

d) A sale of Rs.675 to Kalpana was entered in the Sales book as Rs.975.

e) A sale of Rs.500 to Vimala has been entered in the Purchase Book.

Rectify the above errors through Suspense Account. Also give journal
entries for rectification.

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Chapter - 11
CAPITAL AND REVENUE TRANSACTIONS

Learning Objectives

After studying this chapter, you will be able to:

 identify Capital, Revenue and Deferred Revenue Expenditures.

 understand Capital and Revenue receipts

_________________________________________________________________

Once the trial balance is prepared the next step is to find out the net result
(profit or loss account) and financial position (balance sheet) of the business
concern. The business concern’s financial position is bound to be affected by the
result of its operations. ‘Matching Principle’ governs the preparation of these two
statements. According to this principle the revenues and relevant expenditures
incurred during a particular period should be matched. Thus a proper distinction
must be accounted for between capital and revenue transactions. Business
transactions can be capital transactions or revenue transactions.

11.1 Capital Transactions

The business transactions, which provide benefits or supply services to the
business concern for more than one year or one operating cycle of the business,
are known as capital transactions.
The transactions which relate to capital are again sub-divided into capital
expenditure and capital receipt.
11.1.1 Capital Expenditure

Capital expenditure consist of those expenditures, the benefit of which is

carried over to several accounting periods. In other words the benefit of which
is not consumed within one accounting period. It is non-recurring in nature.
Characteristics

In other words, it refers to the expenditure, which may be

i. purchase of a fixed asset.

ii. not acquired for sale.

iii. it is non-recurring in nature.

iv. incurred to increase the operational efficiency of the business

concern.
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Examples

i. Expenses incurred in the acquisition of Land, Building, Machinery,

Furniture, Car, Goodwill, Copyright, Trade Mark, Patent Right, etc.

ii. Expenses incurred for increasing the seating accommodation in a cinema

hall.

iii. Expenses incurred for installation of fixed assets like wages paid for
installing a plant.

iv. Expenses incurred for remodelling and reconditioning an existing asset

like remodeling a building.
11.1.2. Capital Receipt

Capital receipt is one which is invested in the business for a long period. It
includes long term loans obtained from others and any amount realised on sale
of fixed assets. It is generally non-recurring in nature.
Characteristics

i. Amount is not received in the normal course of business.

ii. It is non-recurring in nature.

Examples

i. Capital introduced by the owner

ii. Borrowed loans

iii. Sale of fixed asset

11.2 Revenue Transactions

The business transactions, which provide benefits or supplies services
to a business concern for an accounting period only, are known as revenue
transactions. Revenue transactions can be Revenue Expenditure or Revenue
Receipt.
11.2.1 Revenue Expenditure

Revenue expenditures consist of those expenditures, which are incurred

in the normal course of business. They are incurred in order to maintain the
existing earning capacity of the business. It helps in the upkeep of fixed assets.
Generally it is recurring in nature.
Characteristics

i. It helps in maintaining the earning capacity of the business concern.

ii. It is recurring in nature.

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Examples

i. Cost of goods purchased for resale.

ii. Office and administrative expenses.

iii. Selling and distribution expenses.

iv. Depreciation of fixed assets, interest on borrowings etc.

v. Repairs, renewals, etc.

11.2.2 Revenue Receipt

Revenue receipt is the receipt of income which is earned during the normal
course of business. It is recurring in nature.
Characteristics

i. It is received in the normal course of business.

ii. It is recurring in nature.

Examples

i. Sale of goods or services.

ii. Commission and Discount received.

iii. Dividend and interest received on investments etc.

11.3 Deferred Revenue Expenditure

A heavy revenue expenditure, the benefit of which may be extended over
a number of years, and not for the current year alone is called deferred revenue
expenditure. For example, a new firm may advertise very heavily in the beginning
to capture a position in the market. The benefit of this advertisement campaign
will last for quite a few years. It will be better to write off the expenditure in three
or four years and not only in the first year.
Characteristics

i. Benefit is enjoyed for more than one year

ii. It is non-recurring in nature

Examples

i. Expenses incurred on research and development

ii. Abnormal loss arising out of fire or lightning (in case the asset has
not been insured).

iii. Huge amount spent on advertisement.

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11.4 Revenue expenditure, Capital Expenditure and Deferred

revenue expenditure – Distinction
S.No. Basis of Capital Revenue Deferred
Revenue
Distinction Expenditure Expenditure
Expenditure
1. Period of benefit Benefit is Benefit is Benefit enjoyed
enjoyed beyond consumed for more than
the accounting during the one year.
year, lasts for a current year
long time. only.
2. Purpose Relates to the Incurred for Relates to the
acquisition of the purpose capturing or
fixed assets. of generating retaining the
revenue. market.
3. Nature of Non-recurring in Recurring in Non-recurring in
occurance nature. nature nature.
4. Aim Helps to Helps to earn Helps to
increase the the existing increase the
earning capacity revenue. earning capacity
of the business. of the business.
5. Convertibility Converted into Cannot Cannot be
cash. converted into converted into
cash. cash.

11.5 Capital profit and Revenue profit

In order to find out the correct profit and the true financial position, there
must be a clear distinction between capital profit and revenue profit.
11.5.1 Capital profits

Capital profit is the profit which arises not from the normal course of the
business. Profit on sale of fixed asset is an example for capital profit.
11.5.2 Revenue profits
Revenue profit is the profit which arises from the normal course of the
business. i.e, Net Profit – the excess of revenue receipts over revenue expenditures.

11.6 Capital loss and Revenue loss

In order to ascertain the loss incurred by a firm it is important to distinguish
between capital losses and revenue losses.

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11.6.1 Capital Losses

Capital losses are the losses which arise not from the normal course of
business. Loss on sale of fixed asset is an example for capital loss.
11.6.2 Revenue Losses

Revenue losses are the losses that arise from the normal course of the
business. In other words, ‘net loss’ – i.e., excess of revenue expenditures over
revenue receipts.

Illuatration 1:

Shyam & Co., incurred the following expenses during the year 2003.Classify
the following items under capital or revenue

i. Purchase of furniture Rs.1,000.

ii. Purchase of second hand machinery Rs.4,000.

iii. Rs.50 paid for carriage on goods purchased.

iv. Rs.175 paid for repairs on second hand machinery as soon as it was
purchased.

v. Rs.600 wages paid for installation of plant.

Solution
i. Capital expenditure – as it results in the acquisition of fixed asset.

ii. Capital expenditure – as it results in the acquisition of fixed asset.

iii. Revenue expenditure – expenses incurred on purchases of goods for

sale.

iv. Capital expenditure – as it is spent for bringing the asset into working
condition.

v. Capital expenditure – as it is spent for bringing the asset into working

condition.

Illustration 2

Prasad Pictures Ltd. constructed a cinema house and incurred the following
expenditures during the year ended 31.12.2003.

i. Second hand furniture purchased worth Rs.3,00,000.

ii. Expenses in connection with obtaining a license were Rs.30,000.

iii. Fire insurance, Rs.2500 was paid on 1st January 2003 for one year.
iv. During the first week after the release of the cinema, free tickets worth
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Rs.30,000 were distributed to increase the publicity of the cinema

house.
v. The manager’s salary for the year was Rs.60,000.
Classify the above transactions into capital, revenue and deferred
revenue expenditures.
Solution
i. Capital expenditure – as the amount spent results in acquisition of
fixed assets.
ii. Capital expenditure – as the amount was spent on acquiring a right
to carry on business.
iii. Revenue expenditure – amount spent relates to only one year.
iv. Deferred revenue expenditure – it is a heavy advertising expenditure
as the benefit will last more than one year.
v. Revenue expenditure–incurred for the functioning of business.
Illustration 3
Hari & Co. incurred the following expenses during the year 2003 Classify
the expenses as capital and revenue.
i. Rs.750 spent towards replacement of a worn out part in a
machinery.
ii. Rs.1,500 spent for legal expenses in relation to raising of a loan for
the business.
iii. Rs.300 spent for ordinary repairs of plant.
iv. Rs.6,000 spent on replacing a petrol driven engine by a diesel driven
engine.
v. Electricity charges Rs.1,200 per month.
Solution
i. Capital expenditure – as it helps to increase the working condition of
the machinery.
ii. Capital expenditure – as it is spent as it helps to get a capital
receipt.
iii. Revenue expenditure – as it is spent for the maintenance of the
asset.
iv. Capital expenditure – as it helps to reduce cost of production.
v. Revenue expenditure – expenditure incurred in the normal course of
the business.

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Illustration 4
Fashion Textiles gives the following transactions of their firm during the
year 2003, you are required to classify the transactions into capital or revenue.
i. Rs.2,500 spent on purchasing a tyre for their lorry.
ii. They had old machinery of value Rs.10,000 was sold for Rs.9,500.
iii. They received Rs.5000 towards dividend form their investments in
shares.
iv. They were able to sell cotton ‘T’ shirts ( cost Rs. 1,200 ) for Rs.1,500.
v. Rs.600 was spent on alteration of a machinery in order to reduce
power consumption.
Solution
i. Revenue expenditure – as it spent to replace a part of the lorry.
ii. Capital loss Rs.500 – as they have incurred a loss on sale of fixed
asset and Rs.9,500 will be a capital receipt as it is a sale of fixed
asset.
iii. Revenue receipt – earned in the ordinary course of business.
iv. Revenue receipt – Rs.300 is received in the ordinary course of
business.
v. Capital expenditure – as it reduces cost of production.
Illustration 5
Bharat company has incurred the following expenditure you are required
to identify the capital, revenue and deferred revenue expenses.
i. Rs.60,000 travelling expenses of their sales manager who travelled to
Japan to attend a meeting in order to increase sales – trip was quite
successful.
ii. Rs.500 spent for installing machinery.
iii. Rs.6,00,000 spent on research and development.
iv. Rs.500 paid for fuel.
Solution
i. Deferred revenue expenditure – benefit likely to be enjoyed for more
than one year
ii. Capital expenditure- amount is spent to bring the asset into use.
iii. Deferred revenue expenditure – the benefit can be spread for more
than one year
iv. Revenue expenditure- spent for the normal functioning of the firm

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QUESTIONS
I. Objective Type
a) Fill in the blanks:

1. Amount spent on acquiring a copy right is an example for _________.

2. Capital expenditure is _________ in nature.

3. Revenue transactions can be _________ or _________.

4. Depreciation on fixed asset is a _________ expenditure.

5. Expenses on research and development will be classified under _________.

[Answers : 1. capital expenditure, 2. non-recurring, 3. revenue expenditure,

revenue receipt, 4. revenue expenditure, 5.deferred revenue expenditure.
b) Choose the correct answer:
1. Transaction which provide benefit to the business for more than one year
is called as
a) capital transaction b) revenue transaction
c) neither of the two.
2. Amount spent on remodelling an old car is example of
a) deferred revenue expenditure b) revenue expenditure
c) capital expenditure
3. Shankar introduces Rs.50,000 as additional capital in the business. This
amount will be considered as __________.
a) capital receipt b) revenue receipt c) both
4. Revenue receipts are ___________ in the business.
a) non-recurring b) recurring c) neither of the above.
5. Venkatesh purchases goods worth Rs.80,000 for the purpose of selling.
This amount will be treated as
a) capital expenditure b) revenue expenditure
c) deferred revenue expenditure

6. Expenses on advertisement will be classified under

a) capital expenditure b) revenue expenditure

c) deferred revenue expenditure

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7. An plant worth Rs.8,000 is sold for 8,500 the capital receipt amounts to

a) Rs. 8,000 b) Rs. 8,500 c) Rs. 500

8. Revenue expenditure is intended to benefit.

a) subsequent year b) previous year c) current year

9. An asset worth Rs.1,00,000 is sold for Rs.85,000 the capital loss amounts
to

a) Rs. 85,000 b) Rs. 1,00,000 c) Rs. 15,000

10. The net loss which arises in a business is an example of

a) revenue loss b) capital loss c) neither of the two

[Answers : 1.(a), 2. (c), 3. (a), 4. (b), 5. (b), 6. (c), 7. (b), 8. (c), 9. (c), 10. (a)]
II. Other Questions:

1. Write the characteristics of Capital Expenditure.

2. What is a revenue expenditure?

3. Write a note on deferred revenue expenditure.

4. Differenciate Capital, Revenue & Deferred revnue expenditure.

5. What are Capital profits?

6. What is revenue loss?

III. Problems:

1. Classify the following into capital and revenue

i. Rs.560 spent on replacement of a worn our part of a plant

ii. Rs.1,500 spent on complete overhauling of a second hand machinery
just bought.
iii. Carriage expenses Rs.230
iv. Profit on sale of asset Rs.700
v. Rs.250 loss on sale of furniture
[Answers : Capital expenditure – (i), (ii); Revenue expenditure – (iii);
Capital profit – (iv); Capital loss – (v)]

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2. Raju gives you the following expenses which were incurred in his business
during the year 2003, classify them into capital, revenue or deferred
revenue

i. Rs.12,000 spent on purchasing a patent right

ii. Freight charges paid on new plant amounts to Rs.700

iii. Repairs of Rs.575 for furniture

iv. Rs.5,000 spent towards expenses connected with rain water harvesting
as per Government orders

v. Rs.7,500 spent towadrs initial advertsing expenses

[Answers : Capital expenditure–(i), (ii), (iv); Revenue expenditure–

(iii); Deferred revenue expenditure – (v)]

3. Vasudevan gives you the following transactions in his business, classify

into capital or revenue

i. Purchases of goods worth Rs.7,000 for the purpose of selling.

ii. Rs.1200 fire insurance for the building for business.

iii. Renewal of magazine subscription fee Rs.75.

iv. Cost of Rs.1,00,000 on building a godown.

v. Purchased land for Rs.1,00,000.

[Answers : Capital expenditure–(iv), (v);

Revenue expenditure – (i), (ii), (iii)]

4. Classify the following expenses into Capital and revenue.

i. registration expenses incurred for the purchase of land.

ii. repairing charges paid for remodelling the purchased old building.

iii. profit earned on the sale of old furniture.

[Answers : Capital expenditure – (i), (ii); Capital profit – (iii)]

5. State whether the following are capital or revenue

i. repairs made on second hand plant purchased

ii. wages paid to workmen for setting up a new plant

iii. replacement of old furniture

iv. salary paid to staff

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v. amount received as rent during the year for letting out a portion on
sub rent

[Answers : Capital expenditure – (i), (ii), (iii); Revenue receipts – (v);

Revenue expenditure –(iv)]

6. Classify as capital and revenue

i. carriage paid on goods purchased

ii. legal expenses paid for raising of loans

iii. cost of maintenance of building

iv. investments costing Rs 40,000 were purchased a few years back,

were sold for Rs 50,000
v. annual white washing charges amounted to Rs 1,000

[Answers : Capital expenditure – (ii); Revenue expenditure –(i), (iii),

(v); Capital profit (iv)]

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Chapter - 12
FINAL ACCOUNTS

Learning Objectives

After learning this Chapter, you will be able to:


know the Meaning, Purpose, Content and Format of Trading, Prof
it and Loss Account and Balance Sheet.


understand the Differences between Trial Balance and Balance
Sheet.

 prepare the Final Accounts

_________________________________________________________________
Trial balance proves the arithmetical accuracy of the business transactions,
but it is not the end. The businessman is interested in knowing whether the
business has resulted in profit or loss and what the financial position of the
business is at a given period. In short, he wants to know the profitability and the
financial soundness of the business. The trader can ascertain these by preparing
the final accounts. The final accounts are prepared at the end of the year from
the trial balance. Hence the trial balance is said to be the connecting link between
the ledger accounts and the final accounts

Final Accounts

Trading and Balance Sheet

Profit and Loss Account

12.1 Parts of Final Accounts

The final accounts of business concern generally includes two parts. The
first part is Trading and Profit and Loss Account. This is prepared to find out the
net result of the business. The second part is Balance Sheet which is prepared
to know the financial position of the business. However manufacturing concerns,
will prepare a Manufacturing Account prior to the preparation of trading account,
to find out cost of production

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12.2 Trading Account

Trading means buying and selling. The trading account shows the result
of buying and selling of goods.
12.2.1 Need

At the end of each year, it is necessary to ascertain the net profit or net
loss. For this purpose, it is first necessary to know the gross profit or gross loss.
The trading account is prepared to ascertain this. The difference between the
selling price and the cost price of the goods is the gross earning of the business
concern. Such gross earning is called as gross profit. However, when the selling
price is less than the cost of goods purchased, the result is gross loss.
12.2.2 Format

Trading Account for the year ending 31st March 2003

Dr. Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening Stock xxx By Sales xxx
To Purchases xxx Less : Returns
Less: Returns Inward xxx xxx

outward xxx xxx

By Closing stock xxx
To Wages xxx By Gross Loss c/d xxx
(transferred to P&L A/c)
To Freight xxx

To Carriage Inwards xxx

To Clearing charges xxx
To Packing charges xxx
To Dock dues xxx
To Power (factory) xxx
To Octroi Duty xxx
To Gross Profit c/d xxx
(transferred to P&L
A/c)
xxx xxx

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Items appearing in the debit side

1. Opening stock: Stock on hand at the beginning of the year is termed as

opening stock. The closing stock of the previous accounting year is brought
forward as opening stock of the current accounting year. In the case of new
business, there will not be any opening stock.

2. Purchases: Purchases made during the year, includes both cash and credit
purchases of goods. Purchase returns must be deducted from the total
purchases to get net purchases.

3. Direct Expenses: Expenses which are incurred from the stage of purchase
to the stage of making the goods in saleable condition are termed as direct
expenses. Some of the direct expenses are:

i. Wages: It means remuneration paid to workers.

ii. Carriage or carriage inwards: It means the transportation charges

paid to bring the goods from the place of purchase to the place of
business.

iii. Octroi Duty: Amount paid to bring the goods within the municipal
limits.

iv. Customs duty, dock dues, clearing charges, import duty etc.: These
expenses are paid to the Government on the goods imported.

v. Other expenses : Fuel, power, lighting charges, oil, grease, waste

related to production and packing expenses.
Items appearing in the credit side

i. Sales: This includes both cash and credit sale made during the year. Net
sales is derived by deducting sales return from the total sales.

ii. Closing stock: Closing stock is the value of goods which remain in the hands
of the trader at the end of the year. It does not appear in the trial balance. It
appears outside the trial balance. (As it appears outside the trial balance, first
it will be recorded in the credit side of the trading account and then shown in
the assets side of the balance sheet).
Illustration 1

Prepare a Trading Account from the following information of a trader.

Total purchases made during the year 2003 Rs.2,00,000.

Total sales made during the year 2003 Rs.2,50,000

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Solution:

Trading Account for the year ending 31st March 2003

Dr. Cr.

Particulars Rs. Particulars Rs.

To Purchases 2,00,000 By Sales 2,50,000
To Gross profit c/d 50,000
(transferred to P&L A/c)
2,50,000 2,50,000
Illustration 2

From the following information, prepare a Trading Account for the year ended
31.12.2003.

2003 Jan 1 Opening stock Rs.15,000

2003 Dec 31 Purchases Rs.16,500

Sales Rs. 30,600

Closing stock Rs. 13,500

Solution:

Trading Account for the year ending 31.12.2003

Particulars Rs. Particulars Rs.

To Opening stock 15,000 By Sales 30,600

To Purchases 16,500 By Closing stock 13,500

To Gross profit c/d 12,600

(transferred to P&L A/c)

44,100 44,100
Illustration 3

Prepare Trading Account for the year ending 31st March 2002 from the following
information.

Opening stock Rs. 1,70,000 Purchases return Rs. 10,000

Sales Rs.2,50,000 Wages Rs. 50,000

Sales return Rs. 20,000 Purchases Rs. 1,00,000

Carriage inward Rs. 20,000 Closing stock Rs. 1,60,000

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Solution:

Trading Account for the year ending 31st March 2002

Dr. Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening stock 1,70,000 By Sales 2,50,000
To Purchases 1,00,000
Less Purchases 20,000
10,000 Less Sales return 2,30,000
return
90,000 By closing stock 1,60,000
To Wages 50,000
To Carriage 20,000
inwards
To Gross profit 60,000
c/d (transferred
to P&L A/c)
3,90,000 3,90,000
12.2.3 Balancing

The difference between the two sides of the Trading Account, indicates
either Gross Profit or Gross Loss. If the credit side total is more, the difference
represents Gross Profit. On the other hand, if the total of the debit side is more, the
difference represents Gross Loss. The Gross Profit or Gross Loss is transferred
to Profit & Loss Account.
12.2.4 Closing Entries

Like ledger accounts, trading account will be closed by transferring the

gross profit or gross loss to the profit and loss account.
i. If gross profit
Trading A/c.............Dr x x x
To profit and loss account x x x
(Gross Profit transferred to
Profit and loss A/c)
ii. If gross loss.
Profit and loss A/c.........Dr x x x
To Trading A/c x x x
(Gross Loss transferred to
Profit and loss A/c)
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12.3 Profit and Loss Account

After calculating the gross profit or gross loss the next step is to prepare
the profit and loss account. To earn net profit a trader has to incur many expenses
apart from those spent for purchases and manufacturing of goods. If such expenses
are less than gross profit, the result will be net profit. When total of all these
expenses are more than gross profit the result will be net loss
12.3.1 Need:

The aim of profit and loss account is to ascertain the net profit earned or
net loss suffered during a particular period.
12.3.2 Format

Profit and Loss Account

for the year ended ......................

Dr. Cr.

Particulars Rs. Particulars Rs.

To Trading A/c x x x By Trading A/c x x x
(Gross Loss) (Gross profit)
To Salaries x x x By Commission earned x x x
To Rent & rates x x x By Rent received x x x
To Stationeries x x x By Interest received x x x
To Postage expenses x x x By Discount received x x x
To Insurance x x x By Net Loss
To Repairs x x x (Transferred to
To Trading expenses x x x Capital A/c) x x x
To Office expenses x x x
To Interest paid x x x
To Bank charges x x x
To Sundry expenses x x x
To Commission paid x x x
To Discount allowed x x x
To Advertisement x x x
To Carriage outwards x x x
To Travelling expenses x x x
To Distribution expenses x x x
To Repacking charges x x x
To Bad debts x x x
To Depreciation x x x
To Net Profit (transferred
to Capital A/c) x x x
x x x x x x

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Items appearing in the debit side

Those expenses which are chargeable to the normal activities of the

business are recorded in the debit side of profit and loss account. They are
termed as indirect expenses.

i. Office and Administrative Expenses : Expenses incurred for the functioning

of an office are office and administrative expenses – office salaries, office
rent, office lighting, printing and stationery, postages, telephone charges etc.

ii. R
epairs and Maintenance Expenses : These expenses relates to the
maintenance of assets - repairs and renewals, depreciation etc.

iii. Financial Expenses : Expenses incurred on borrowings – Interest paid on

loan.

iv. Selling and Distribution Expenses : All expenses relating to sales and
distribution of goods - advertising, travelling expenses, salesmen salary,
commission paid to salesmen, discount allowed, repacking charges etc.
Items appearing in the credit side

Besides the gross profit, other gains and incomes of the business are
shown on the credit side. The following are some of the incomes and gains.
i. Interest received on investment

ii. Interest received on fixed deposits.

iii. Discount earned.

iv. Commission earned.

v. Rent Received
Illustration 4

Prepare Profit and Loss Account, from the following balances of Mr.Kandan for
the year ending 31.12.2003.

Office rent Rs. 30,000 Salaries Rs. 80,000

Printing expenses Rs. 2,000 Stationeries Rs. 3,000

Tax, Insurance Rs. 4,000 Discount allowed Rs. 6,000

Advertisement Rs. 36,000 Travelling expenses Rs. 26,000

Gross Profit Rs.2,50,000 Discount received Rs. 4,000

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Solution:

Profit and Loss Account of Mr. Kandan

for the year ending 31st Dec 2003

Dr. Cr.

Particulars Rs. Particulars Rs.

To Salaries 80,000 By Gross profit 2,50,000
To Office rent 30,000 (transferred from the
To Stationaries 3,000 Trading A/c)
To Printing expenses 2,000 By Discount received 4,000
To Tax, insurance 4,000
To Discount allowed 6,000
To Travelling expenses 26,000
To Advertisement 36,000
To Net profit (transferred 67,000
to capital A/c)
2,54,000 2,54,000

Illustration 5

Prepare Trading and Profit Loss Account for the year ending 31st March 2002
from the books of Mr. Siva Subramanian.

Rs. Rs.
Stock (31.3.2001) 15,000 Carriage outwards 4,000
Purchases 1,65,000 Wages 30,000
Purchases return 10,000 Sales return 5,000
Postage 3,000 Salaries 20,000
Discount received 5,000 Stationeries 2,000
Bad debts 1,000 Interest 8,000
Sales 3,00,000 Insurance 4,000
Stock (31.3.2002) 80,000

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Solution :

Trading and Profit & Loss A/c of Mr. Siva Subramanian

for the year ended 31st March 2002

Dr. Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Opening stock 15,000 By Sales 3,00,000

To Purchases 1,65,000 Less returns 5,000 2,95,000

Less returns 10,000 1,55,000
To Wages 30,000 By Closing stock 80,000
To Gross profit
(transferred to 1,75,000
P&L A/c)
3,75,000 3,75,000

To Salaries 20,000 By Gross profit 1,75,000

(transferred from
trading A/c)
To Postage 3,000 By Discount received 5,000

To Bad debts 1,000

To Carriage outwards 4,000
To Stationeries 2,000
To Interest 8,000
To Insurance 4,000
To Net profit 1,38,000
(transferred
Capital A/c)
1,80,000 1,80,000

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Illustration 6

From the following trial balance of Mr.John, prepare Trading, Profit and Loss
Account for the year ending 31.12.2002.

Debit Credit
Particulars Particulars
Rs. Rs.

Purchases 5,40,000 Sales 10,40,000

Salaries & wages 3,50,000 Returns outward 12,000
Office expenses 4,000 Discount received 6,000
Trading expenses 8,000 Interest received 3,000
Factory expenses 11,000 Capital 1,78,000
Carriage inwards 8,000
Returns inward 12,000
Discount allowed 4,000
Commission 2,000
Stock 60,000
Income tax 40,000
Cash in hand 2,00,000
12,39,000 12,39,000

Closing stock is valued at Rs. 1,35,000.

Solution:
Trading, Profit & Loss Account of Mr. John
for the year ending 31.12.2002
Dr. Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Stock 60,000 By Sales 10,40,000
To Purchases 5,40,000 Less Sales return 12,000 10,28,000
Less Purchases
12,000 5,28,000
return
To Trading expenses 8,000 By Closing stock 1,35,000
To Factory expenses 11,000
To Carriage inwards 8,000
To Gross profit
(transferred to 5,48,000
P&L A/c)
11,63,000 11,63,000

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To Salaries & wages 3,50,000 By Gross profit

(transferred from 5,48,000
trading A/c)
By Discount
To Office expenses 4,000 6,000
received
By Interest
To Discount allowed 4,000 3,000
received
To Commission 2,000
To Net profit 1,97,000
(transferred to capital
A/c)
5,57,000 5,57,000
Note:

i. If trial balance shows both trading expenses as well as office expenses, the
trading expenses should be shown in the trading account and office expenses
should be shown in profit & loss account. On the other hand, if the trial balance
shows only trading expenses, it should be shown in the profit & loss account.

ii. If in the trial balance, wages are clubbed with salaries and shown as ‘wages
and salaries’. This item is shown in trading account. On the other hand, if
it appears as ‘salaries and wages’, this item is recorded in the profit & loss
account.

iii. Income tax paid by a proprietor is considered as personal expenses. So it

should be deducted from the capital.
12.3.3 Balancing

The difference between the two sides of profit and loss account indicates
either net profit or net loss.If the total on the credit side is more the difference is
called net profit. On the other hand if the total of debit side is more the difference
represents net loss. The net profit or net loss is transferred to capital account.
12.3.4 Closing Entries

Profit and loss account should be closed by transferring the net profit or
net loss to capital account.

i. If net profit

Profit and Loss A/c.............Dr x x x

To Capital A/c x x x

(Net profit transferred to capital A/c)

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ii. If net loss

Capital A/c....................Dr. x x x

To Profit and loss A/c x x x

(Net loss transferred to capital A/c)

12.4 Balance Sheet:

This forms the second part of the final accounts. It is a statement showing
the financial position of a business. Balance sheet is prepared by taking up all
personal accounts and real accounts (assets and properties) together with the
net result obtained from profit and loss account. On the left hand side of the
statement, the liabilities and capital are shown. On the right hand side, all the
assets are shown. Balance sheet is not an account but it is a statement prepared
from the ledger balances. So we should not prefix the accounts with the words
‘To’ and ‘By’.

Balance sheet is defined as ‘a statement which sets out the assets and
liabilities of a business firm and which serves to ascertain the financial position
of the same on any particular date’.
12.4.1 Need :
The need for preparing a Balance sheet is as follows:

i. To know the nature and value of assets of the business

ii. To ascertain the total liabilities of the business.

iii. To know the position of owner’s equity.

12.4.2 Format

The Balance sheet of a business concern can be presented in the following

two forms

i. Horizontal form or the Account form

ii. Vertical form or Report form
i) Horizontal form of Balance Sheet:

The right hand side of the balance sheet is asset side and the left hand
side is liabilities side. All accounts having debit balance will appear in the asset
side and all those having credit balance will appear in the liability side.

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Balance Sheet of ................

as on ..................
Liabilities Rs. Rs. Assets Rs. Rs.

Sundry creditors xxx Cash in hand xxx

Bills payable xxx Cash at bank xxx
Bank overdraft xxx Bills receivable xxx
Outstanding expenses xxx Sundry debtors xxx
Mortgage loans xxx Investments xxx
Reserve fund xxx Closing stock xxx
Capital xxx Prepaid expenses xxx
Add: Net profit (or) Furniture & fittings xxx
Less: Net loss xxx Plant & machinery xxx
Land & buildings xxx
xxx Business premises xxx
Less: Drawings xxx Patents & trade xxx
marks xxx
xxx Good will
Less: Income tax xxx xxx

x x x x x x
ii) Vertical form of Balance Sheet

In this, Balance Sheet is presented in a statement form.

Balance Sheet as on ..............................

Particulars Rs. Rs.
Current Assets:
Stock-in-Trade xxx
Sundry Debtors xxx
Prepaid Expenses xxx
Accrued Income xxx
Bills Receivable xxx
Cash at Bank xxx
Cash in Hand xxx
Total Current Assets xxx

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Less: Current Liabilities:

Sundry Creditors xxx
Bills Payable xxx
Bank Overdraft xxx
Outstanding Expenses xxx
Total Current Liabilities xxx
Net Working Capital: xxx
Add: Fixed Assets:
Goodwill xxx
Land and Building xxx
Plant and Machinery xxx
Furniture xxx
Investment xxx
Total Fixed Assets xxx
Capital Employed xxx
(Both owner’s and outsiders)
Less: Long Term Liabilities
Debentures xxx
Loans xxx
Total Long Term Liabilities xxx
Net Assets xxx
Represented by:
Owner’s Capital xxx
Reserves and surplus xxx
Shareholders Funds xxx
12.4.3 Classification of Assets and Liabilities Assets
Assets
Assets represents everything which a business owns and has money value.
In other words, asset includes possessions and properties of the business. Asset
are classified as follows:
Assets

Tangible Intangible Fictitious

Fixed Current
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a) Tangible Assets:

Assets which have some physical existence are known as tangible assets.
They can be seen, touched and felt, e.g. Plant and Machinery Tangible assets
are classified into
i. Fixed assets :

Assets which are permanent in nature having long period of life and cannot
be converted into cash in a short period are termed as fixed assets.
ii. Current assets :

Assets which can be converted into cash in the ordinary course of business
and are held for a short period is known as current assets. This is also termed
as floating assets. For example, cash in hand, cash at bank, sundry debtors
etc
b) Intangible Assets

The assets which have no physical existence and cannot be seen or felt.
They help to generate revenue in future, e.g. goodwill, patents, trademarks etc.
c) Fictitious Assets

These assets are nothing but the unwritten off losses or non-recoupable
expenses. They are really not assets but are worthless items. For example,
Preliminary expenses.
Liabilities

The amount which a business owes to others is liabilities. Credit balance

of personal and real accounts together with the capital account are liabilities.

Liabilities

Long Term Current Contigent

a) Long Term Liabilities

Liabilities which are repayable after a long period of time are known as
Long Term Liabilities. For example, capital, long term loans etc.
b) Current Liabilities

Current liabilities are those which are repayable within a year. For example,
creditors for goods purchased, short term loans etc.

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c) Contingent liabilities

It is an anticipated liability which may or may not arise in future. For

example, liability arising for bills discounted. Contigent liabilities will not appear
in the balance sheet. But shown as foot note.
12.4.4 Marshalling of Assets and Liabilities

The term ‘Marshalling’ refers to the order in which the various assets
and liabilities are shown in the balance sheet. The assets and liabilities can be
shown either in the order of liquidity or in the order of permanence.
a) In order of liquidity

Liquidity means convertability into cash. Assets will be said to be liquid if

it can be converted into cash easily, they are placed at the top of the balance
sheet. Liabilities are arranged in the order of their urgency of payment. The most
urgent payment to be made is listed at the top of the balance sheet.
b) In order of permanence

This order is exactly the reverse of the above. Assets and liabilities are
recorded in the order of their life in the business concern.
12.4.5 Balance Sheet Equation
An important thing to note about the Balance Sheet is that, the total value
of the assets is always equal to the total value of the liabilities. This is because
the liability to the owner - capital, is always made up of the difference between
assets and liabilities. Thus,
Assets = Liabilities + Capital
or
Capital = Assets - Liabilities

While preparing the trial balance in case it does not tally the difference
is transferred to an imaginary account called as suspense account. In case the
suspense account is not closed before the preparation of the final accounts then it
has to be placed in the balance sheet, so that it can be rectified later. If suspense
account has a debit balance it will appear as the last item in the asset side. In
case it shows a credit balance it will appear as the last item in the liability side.

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12.5 Difference between Trial Balance and Balance Sheet

S. Basis Trial balance Balance sheet
No. Distinction
1. Objective To know the arithmetical To know the true and fair
accuracy of the accounting work. financial position of a
business.
2. Format The columns are debit balances The two sides are assets
and credit balances. and liabilities.
3. Content It is a summary of all the ledger It is a statement showing
balances – personal, real and closing balances of
nominal accounts. personal & real accounts.
4. Stage It is the middle stage in the It is the last stage in the
preparation of accounts. preparation of accounts.
5. Period It can be prepared periodically, It is generally prepared at
say at the end of the month, the end of the accounting
quarterly or half yearly, etc. period.
6. Preparation It is prepared before the It is prepared after the
preparation of trading, profit and preparation of trading,
loss account. profit and loss account.
7. Stock It shows opening stock only. It shows closing stock
only.
8. Order Balances shown in the trial Balances shown in the
balance are not in order. balance sheet must be in
order.
9. Evidence It cannot be produced as a It can be produced as a
documentary evidence in the documentary evidence.
court.
10. Compulsion Preparation of trial balance is not Preparation of the balance
compulsary. sheet is a must.

Illustration 7

From the following Trial Balance of M/s. Ram & Sons, prepare trading and
profit and loss account for the year ending on 31st March 2002 and the balance
sheet as on the date:

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Trial Balance as on 31st March 2002

Debit Credit
Particulars
Rs. Rs.

Opening Stock (1.4.2001) 5,000

Purchases 16,750
Discount allowed 1,300
Wages 6,500
Sales 30,000
Salaries 2,000
Travelling expenses 400
Commission 425
Carriage inward 275
Administration expenses 105
Trade expenses 600
Interest 250
Building 5,000
Furniture 200
Debtors 4,250
Creditors 2,100
Capital 13,000
Cash 2,045
45,100 45,100
Stock on 31st March 2002 was Rs. 6,000.
Solution :

M/s. Ram & Sons

Trading and Profit and Loss Account
for the year ending 31st March 2002

Dr. Cr.

Particulars Rs. Particulars Rs.

To Opening stock 5,000 By Sales 30,000
To Purchases 16,750 By Closing stock 6,000
To Wages 6,500
To Carriage inward 275
To Gross profit c/d 7,475
(transferred to P&L A/c)

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36,000 36,000
To Discount 1,300 By Gross profit 7,475
To Salaries 2,000 (transferred from
To Travelling expenses 400 P&L A/c)
To Commission 425
To Administration expenses 105
To Trade expenses 600
To Interest 250
To Net profit
2,395
(transferred to capital A/c)
7,475 7,475

Balance Sheet as on 31st March 2002

Liabilities Rs. Rs. Assets Rs. Rs.

Creditors 2,100 Cash 2,045
Capital 13,000 Debtors 4,250
Add Net profit 2,395 Stock 6,000
15,395 Furniture 200
Building 5,000
17,495 17,495

QUESTIONS
I. Objective Type:
a) Fill in the blanks:

1. __________ account enables the trader to findout gross profit or loss.

2. By preparing profit and loss account __________ can be find out.

3. Closing stock is __________ in the trading account.

4. Direct expenses appears in the debit side of the __________ account.

5. Indirect expenses appears in the__________ side of the profit and loss

account.

6. All incomes are__________ in the profit and loss account.

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7. Bad debt is a__________ expense.

8. ‘Salaries and wages’ appear on the __________ account.

9. Balance sheet shows the __________ of a business

[Answers: 1. Trading, 2. net profit or loss, 3. credited, 4. Trading, 5. debit,

6. credited, 7. selling, 8. profit and loss account, 9. financial position]

b) Choose the correct answer:

1. Trading account is prepared to findout

a) gross profit or loss b) net profit or loss c) financial position
2. Wages is an example of
a) capital expenses b) indirect expenses c) direct expenses
3. Opening stock is
a) debited in trading account b) credited in trading account
c) credit in profit and loss account
4. Balance sheet is a
a) statement b) account c) ledger
5. Fixed assets have
a) short life b) long life c) no life
6. Cash in hand is an example of
a) current assets b) fixed assets c) current liability
7. Capital is a __________
a) income b) assets c) liability
8. Drawing must be deducted from
a) net profit b) capital c) gross profit
9. Current liabilities are recorded in the balance sheet on
a) not recorded b) liability side c) assets side

10. Net profit is added to

a) gross profit b) drawings c) capital
[Answers:1.(a), 2.(c), 3.(a), 4.(a), 5.(b), 6. (a), 7.(c), 8.(b), 9.(b), 10.(c)]

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II. Other Questions:

1. Explain the need of trading account.
2. What is trading account? What are its uses?
3. What are the items appearing in the debit and credit side of trading
account?
4. What are the merits of profit and loss account?
5. What are direct and indirect expenses?
6. Write the difference between trial balance and balance sheet.
7. What do you mean by current assets.
8. Explain the term liabilities.
9. Draw the format of vertical balance sheet.
10. What do you mean by Assets? Classify the assets with suitable
examples.
III. Problems:

1. Prepare a trading account of Mr.Vasu from the following figures.

Rs.

Opening stock 500

Purchases 2,500

Sales 3,600

Closing stock 300

[Answer : Gross profit Rs.900]

2. Prepare a trading account of Mr.Devan for the year ended 31st December
2002.
Rs.
Opening stock 5,700
Purchases 1,58,000
Purchases returns 900
Sales 2,62,000
Sales returns 600

Closing stock was valued at Rs.8,600.

[Answer : Gross profit Rs. 1,07,200]

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3. The following are some of the balances extracted from the ledger of
Mr.Sundaram as on 31st December 2000. Prepare a trading account.

Debit Credit
Particulars
Rs. Rs.
Stock 1.1.2000 12,500
Purchases 1,00,000
Sales 1,50,000
Returns outwards 5,000
Returns inwards 10,000
Salaries 4,400
Wages 7,500
Rent 2,750
Carriage inwards 2,500
Carriage outwards 750
Power, coal, gas 1,000

Stock on 31.12.2000 was valued at Rs.14,000.

[Answer : Gross profit Rs. 35,500]

4. Prepare profit and loss account of Mrs.Nalini for the year ended 31st Dec.
2001 from the following.

Rs.
Gross profit 1,25,000 Discount paid 600
Salaries 15,000 Discount received 1,000
Rent 5,000 Interest paid 500
Carriage outwards 1,000 interest received 700
Selling expenses 500 Commission earned 2,000
Income from investment 1,500

[Answer : Net profit Rs.1,07,600]

5. The following balances are taken from the books of M/s. RSP Ltd. Prepare
profit and loss account for the year ended 31st March 2002.

Gross profit 5,25,000 Salaries & wages 1,00,000

Rent 10,000 Depreciation 5,000

Interest on loan 5,000 Office expenses 1,500

Distribution charges 2,500 Salesman salary 8,000

Bad debts 2,200 Stationery and printing 500

Commission received 3,000 Discount received 2,000

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Interest received 5,000 Advertising 9,000

Taxes and insurance 2,000

[Answer : Net profit Rs. 3,89,300]

6. From the following particulars, prepare a balance sheet of Mr.Venugopal

as on 31st December 2003.

Capital 40,000 Drawings 4,400

Debtors 6,400 Creditors 4,200
Cash in hand 360 Cash at bank 7,200
Furniture 3,700 Plant 10,000
Net profit 1,660 General reserve 1,000
Closing stock 14,800

[Answer : Balance sheet Rs. 42,460]

7. From the following information prepare balance sheet of Mrs.Nasreen Khan

as at 31st Dec. 2003.
Rs. Rs.
Goodwill 10,000 Sundry debtors 25,000
Capital 90,000 Drawings 15,000
Cash in hand 10,000 Land & Buildings 30,000
Investment 500 Bank 10,000
Net profit 46,900 Creditors 31,500
Bills receivable 6,500 Plant & machinery 20,000
Bills payable 5,350 Closing stock 40,000
Furniture 6,750
[Answer : Balance Sheet Rs.1,58,750]

8. Given below is the trial balance of Shri.Hari Prakash. Prepare trading and
profit and loss account for the year ended 31st March 2002.
Dr. Cr.
Particulars
Rs. Rs.
Stock as on 1.4.2001 50,000
Sales 2,90,000
Sales returns 10,000
Purchases 2,45,000
Purchase returns 5,000
Carriage inwards 4,000
Carriage outwards 6,000
Wages 12,000

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Dr. Cr.
Particulars
Rs. Rs.
Salaries 18,000
Printing and stationary 900
Discount allowed 900
Discount received 600
Depreciation 3,000
Buildings 2,08,100
Trade Expenses 5,600
Capital 2,72,900
Bills receivables 20,000
Bills Payable 15,000
5,83,500 5,83,500
Closing Stock on 31.3.2002 Rs. 65,000.

[Answre: Gross Profit Rs. 39,000, Net Profit 5,200]

9. The following information was extracted from the books of M/s.Sudha Ltd.
Prepare final accounts on 31.3.2002.
Particulars Debit Particulars Credit

Rs. Rs.
Opening stock 12,500 Sales 1,89,000
Depreciation 7,000 Commission 2,000
Carriage inwards 700 Capital 1,71,300
Furniture 8,000 Creditors 17,500
Carriage outwards 500 Bills payable 5,000
Plant & machinery 2,00,000 Return outwards 13,800
Cash 8,900
Salaries 7,500
Debtors 19,000
Discount 1,500
Bills receivable 17,000
Wages 16,000
Sales returns 14,000
Purchase 86,000
3,98,600 3,98,600
Closing stock on 31.12.2002 Rs.45,000.

[Answer : Gross profit Rs. 1,18,600, Net profit Rs.1,04,100,

Balance sheet Rs. 2,97,900]

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10. The trial balances of Mr.Uma Shankar shows the following balances on
31st March 2000. Prepare final accounts.
Debit Balance Rs. Credit Balance Rs.
Purchases 70,000 Capital account 56,000
Sales returns 5,000 Sales 1,50,000
Opening stock 20,000 Purchase returns 4,000
Discount allowed 2,000 Discount received 1,000
Bank charges 500 Sundry creditors 30,000
Salaries 4,500
Wages 5,000
Freight inwards 4,000
Freight outwards 1,000
Rent, rates and taxes 5,000
Advertising 6,000
Cash in hand 1,000
Plant and machinery 50,000
Sundry debtors 60,000
Cash at bank 7,000
2,41,000 2,41,000
Closing stock on 31st March 2000 was Rs. 30,000.

[Answer: Gross profit Rs.80,000, Net profit Rs.62,000,

Balance sheet Rs. 1,48,000]

11. The following trial balance extracted from the books of Murugan, prepare
trading, profit and loss a/c for the year ended 31st Dec. 2001 and balance
sheet as on that date.
Debit Credit
Particulars
Rs. Rs.
Drawings 20,000
Capital 1,89,000
Plant & machinery 80,000
Sundry debtors 70,000
Sundry creditors 50,000
Purchases 1,03,000
Sales 2,20,000
Sales returns 10,000
Wages 40,000
Cash in hand 5,000
Cash at bank 10,000

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Salaries 38,000
Stock 45,000
Rent 10,000
Manufacturing expenses 7,000
Bills receivable 12,000
Bills payable 20,000
Bad debts 5,000
Carriage inwards 9,000
Furniture 15,000
4,79,000 4,79,000
Closing stock as on 31.12.2001 Rs. 50,000.

[Answer : Gross profit Rs. 56,000, Net profit Rs. 3,000,

Balance sheet Rs.2,42,000]

12. The following balances were extracted from the books of Mr.Chandran on
31.3.2001.
Debit Credit
Particulars
Rs. Rs.
Capital 1,41,000
Buildings 80,000
Machinery 70,000
Furniture 15,000
Stock 50,000
Power 10,000
Wages 70,000
Carriage 8,000
Rent and rates 17,000
Salaries 35,000
Bank Charges 1,000
Income tax 2,000
Bad debts 5,000
Commission received 9,000
Purchases 1,50,000
Sales 3,40,000
Bills receivable 20,000
Bank overdraft 50,000
Cash in hand 2,000
Purchase returns 10,000
Sales returns 15,000
5,50,000 5,50,000
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The closing stock was valued at Rs.60,000. You are required to prepare
final accounts for the year ended 31st March 2001.

[Answer : Gross profit Rs.1,07,000, Net profit Rs.58,000,

Balance sheet Rs.2,47,000]

13. The following balances are extracted from the books of Mr.Ramasamy
on 31.12.2001. Prepare final accounts

Debit Credit
Particulars Particulars
Rs. Rs.

Stock on 1.1.2001 17,000 Sales 60,000

Manufacturing wages 10,000 Creditors 20,000
Factory rent 2,000 Bills payable 10,000
Factory lighting 3,000 Capital 43,000
Purchase 30,000
Carriage 3,000
Salary 2,000
Office rent 2,000
Printing & stationery 1,000
Bad debts 1,000
Land 10,000
Buildings 20,000
Plant & machinery 15,000
Furniture 5,000
Depreciation 2,000
Debtors 5,000
Cash in hand 5,000

1,33,000 1,33,000

Closing stock was valued at Rs.19,000.

[Answer : Gross profit Rs. 14,000, Net profit Rs.6,000,

Balance sheet Rs.79,000]

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14. Prepare Trading and Profit and Loss Account and Balance Sheet of
Mr.Venkat as on 31st March 2000.
Debit Credit
Particulars
Rs. Rs.
Venkat Capital 35,000
Free hold premises 45,000
Goodwill 20,000
Machinery and plant 17,000
Opening stock 18,000
Bills receivable and payable 4,000 6,000
Sundry debtors and creditors 16,000 24,000
Purchases and sales 80,000 1,50,000
Returns 1,000 2,000
Carriage outwards 500
Freight, duty etc 1,200
Manufacturing wages 22,800
Factory expenses 6,000
Salaries 24,000
Commission 2,500
Discount 9,000
Stationery and printing 4,500
Trading expenses 1,800
Cash in hand 700
Suspense A/c 39,000
2,65,000 2,65,000
Closing stock was valued at Rs.70,000.

[Answer : Gross profit Rs.93,000, Net profit Rs.68,700,

Balance sheet Rs.1,72,700]

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15. From the following balances extracted from the books of Mrs.Mala,
prepare final accounts for the year ending 31st March 2003. Closing stock
as on 31.03.2003 was Rs.72,500.
Debit Credit
Particulars
Rs. Rs.
Mrs.Mala’s Capital 95,000
Plant & Machinery 37,000
Repairs to Machinery 9,150
Wages 42,000
Salaries 6,000
Income tax 750
Cash and bank balances 3,000
Land and building 1,11,750
Purchases 1,80,000
Purchase Returns 3,000
Sales 3,75,000
Interest 2,250
Bills receivable 15,000
Bills payable 4,500
Commission (Cr) 6,000
Debtors 52,500
Creditors 40,650
Opening Stock as on 1.4.2003 55,500
Drawings 12,000
Suspense account 2,750
5,26,900 5,26,900
[Answers : Gross profit Rs.1,73,000; Net profit Rs.1,61,600; Balance sheet
Total Rs. 2,91,750]

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Books for further reference:

1. T.S.Grewal – Double Entry Book Keeping.

2. R.L. Gupta – Principles and Practice of Accountancy

3. T.S.Grewal – Introduction to Accountancy

4. Patil & Korlahalli – Principles and Practices of Accountancy

5. S.Kr.Paul – Accountancy Vol. I.

6. M.P.Vithal, S.K.Sharma & S.S.Sehrawart – Accountancy Textbook for Class XI

NCERT.

7. Institute of Company Secretaries of India – Principle of Accountancy.

8. Vinayagam, P.L.Mani, K.L.Nagarajan – Principles of Accountancy.

9. P.C.Tulsian, S.D.Tulsian – ISC Accountancy for Class XI.

10. M.Jambunthan, S.Arokiasamy, V.M.Gopala Krishna, P.Natrajan – Book-

keeping and Principles of Commerce.

11. Narayan Vaish – Book-keeping and Accounts.

12. Tamil Nadu Textbook Corporation – Accountancy Higher Secondary First

Year.

13. L.S.Porwal, R.G.Saxena, B.Banerjee, Man Mohan, N.K.Agarwal – Accounting

A Textbook for Class XI Part I, NCERT.

14. Jain & Narang – Financial Accounting.

15. R.L.Gupta, Radha Swamy – Financial Accounting.

16. R.K.Gupta, V.K.Gupta – Financial Accounting.

17. Basu Das – Practice in Accountancy.

18. S.Kr.Paul – Practical Accounts Vol.I.

19. Ghose Dostidar Das – Graded Accounting Problems.

20. M.C.Shukla – Advanced Accountancy.

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