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CHAPTER 2
ACCOUNTING PROCESS
UNIT 1 : BASIC ACCOUNTING PROCEDURES - JOURNAL ENTRIES
LEARNING OUTCOMES
After studying this unit, you will be able to:
w Understand meaning and significance of Double Entry System.
w Familiarize with the term ‘account’ and understand the classification of accounts into personal, real and
nominal.
w Note the utility of such classification and sub-classifications.
w Understand how debits and credits are determined from transactions and events.
w Observe the points to be taken care of while recording a transaction in the journal .

UNIT Source • All documents in books which contain financial records and
OVERVIEW Documents act as evidence of transactions.

• Purchase day book, Cash book, Sales day book and

Books of original Purchases return book
entry and Ledger
Accounts
• Accounts where information relating to a particular asset/
liability, capital , income and expenses are recorded.

• It contains the totals from various ledger accounts and act

Trial as preliminary check on accounts before producing final
Balance
accounts.

Accounts

Personal Impersonal
Accounts Accounts

Natural Artificial Repre-

Real Nominal
(legal) sentative

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2.2 PRINCIPLES AND PRACTICE OF ACCOUNTING

1.1 DOUBLE ENTRY SYSTEM

Double entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar & mathematician
published Summa de Arithmetica, Geometria, Proportioni, et Proportionalita (“Everything about
Arithemetic Geometry and proportions”). The first book that described a double entry accounting system.
Double entry system of book-keeping has emerged in the process of evolution of various accounting
techniques. It is the only scientific system of accounting. According to it, every transaction has two-fold
aspects–debit and credit and both the aspects are to be recorded in the books of accounts. Therefore, in
every transaction at least two accounts are effected.
For example, on purchase of furniture either the cash balance will be reduced or a liability to the supplier
will arise. and new asset furniture is acquired . This has been made clear already, the Double Entry System
records both the aspects. It may be defined as the system which recognises and records both the aspects
of transactions. This system has proved to be systematic and has been found of great use for recording the
financial affairs for all institutions requiring use of money.

1.2 ADVANTAGES OF DOUBLE ENTRY SYSTEM

This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be established, through the device of
the trial balance.
(ii) The profit earned or loss suffered during a period can be ascertained together with details.
(iii) The financial position of the firm or the institution concerned can be ascertained at the end of each
period, through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details as necessary and, therefore affords significant
information for the purposes of control etc.
(v) Result of one year may be compared with those of previous years and reasons for the change may be
ascertained.
It is because of these advantages that the system has been used extensively in all countries.

1.3 ACCOUNT
We have seen how the accounting equation becomes true in all cases. A person starts his business with
say, ` 10,00,000; capital and cash are both ` 10,00,000. Transactions entered into by the firm will alter the
cash balance in two ways, one will increase the cash balance and other will reduce it. Payment for goods
purchased, for salaries and rent, etc., will reduce it; sales of goods for cash and collection from customers
will increase it.
We can change the cash balance with every transaction but this will be cumbersome. Instead it would be
better if all the transactions that lead to an increase are recorded in one column and those that reduce
the cash balance in another column; then the net result can be ascertained. If we add all increases to the
opening balance of cash and then deduct the total of all decreases we shall know the closing balance. In this
manner, significant information will be available relating to cash.

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ACCOUNTING PROCESS 2.3

The two columns which we referred above are put usually in the form of an account, called the ‘T’ form. This
is illustrated below by taking imaginary figures:
Cash
Increase Decrease
(Receipt) (Payment)
` `
Opening Balance (1) 10,00,000 (7) 1,00,000
(2) 2,50,000 (8) 3,00,000
(3) 2,00,000 (9) 2,00,000
(4) 5,00,000 (10) 5,00,000
(5) 1,35,000
(6) 4,00,000 (11) 12,00,000
New or Closing Balance 1,85,000
24,85,000 24,85,000
Since, each T-account shows only amounts and not transaction descriptions, we key each transaction in
some way, such as by numbering used in this illustration. However, one can use date also for this purpose.
What we have done is to put the increase of cash on the left hand side and the decrease on the right hand
side; the closing balance has been ascertained by deducting the total of payments, ` 23,00,000 from the
total of the left - hand side. Such a treatment of receipts and payments of cash is very convenient.
Here we talked about only one account namely cash, now let us see how to make T-accounts when asset as
well as liabilities are effected from a particular transaction.
Now, let us take some more examples:-
Transaction 1 :
Initial investment by owners ` 25,00,000 in cash.
This will effect two accounts namely cash and capital. The asset cash increases and the stock holders’ equity
paid up capital also increases.
CASH
Increase Decrease
(1) 25,00,000
CAPITAL
Decrease Increase
(1) 25,00,000
Transaction 2:-
Paid cash to the creditors ` 14,00,000
This will effect cash account which will decrease and creditors account which is a liability will also decrease.
CASH
Increase Decrease
(2) 14,00,000
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2.4 PRINCIPLES AND PRACTICE OF ACCOUNTING

CREDITORS
Decrease Increase
(2) 14,00,000

The proper form of an account is as follows:

Account
Date Particulars Ref. Amount Date Particulars Ref. Amount

The columns are self-explanatory except that the column for reference (Ref.) is meant to indicate the sources
where information about the entry is available.

1.4 DEBIT AND CREDIT

We have seen that in T-accounts increase and decrease entries are made on the left and right side of the
accounts for assets respectively and vice-versa for liabilities. But, formally accountants use the term Debit
(Dr.) to denote an entry on the left side of any account and Credit (Cr.) to denote an entry on the right side
of any account.
We know that by deducting the total of liabilities from the total of assets the amount of capital is ascertained,
as is indicated by the accounting equation.

Assets = Liabilities + Capital

or
Assets – Liabilities = Capital
To understand the equation better , let us expand it:-
Assets = Liabilities + Stockholders’ Equity

Assets = Liabilities + ( contributed capital + beginning retained earnings + revenue - expense - dividends)
Here,
Contributed capital = the original capital introduced by the owner.
Beginning retained earnings = previous earnings not distributed to the shareholders.
Revenue = generated from the ongoing activities of the business
Expenses = cost incurred for the operations of the company.
Dividends = earnings distributed to the shareholders of the company

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ACCOUNTING PROCESS 2.5

We have also seen that if there is any change on one side of the equation, there is bound to be similar
change on the other side of the equation or amongst items covered by it or an opposite change on the same
side of the equation. This is illustrated below:

Transactions Total = Liabilities + Owner’s

Assets ` Capital
` `
(1) Started business with cash ` 10,00,000 10,00,000 10,00,000
(2) Borrowed ` 5,00,000 + 5,00,000 + 5,00,000
(3) Withdrew cash from business ` 2,00,000 - 2,00,000 - 2,00,000
(4) Loan repaid to the extent of ` 1,00,000 - 1,00,000 - 1,00,000
Balance 12,00,000 = 4,00,000 + 8,00,000
As has been seen previously, what has been given above is suitable only if the number of transactions
is small. But if the number is large, a different procedure of putting increases and decreases in different
columns will be useful and this will also yield significant information. The transactions given above are
being shown below according to this method.

Total Assets = Liabilities + Owner’s Capital

Decrease Decrease Increase Decrease Increase
` ` ` ` `

(1) 10,00,000 10,00,000

(2) 5,00,000 5,00,000
(3) 2,00,000 2,00,000
(4) 1,00,000 1,00,000
Total 15,00,000 3,00,000 1,00,000 5,00,000 2,00,000 10,00,000
Balance 12,00,000 4,00,000 + 8,00,000
It is a tradition that:
(i) increases in assets are recorded on the left-hand side and decreases in them on the right-hand side; and
(ii) in the case of liabilities and capital, increases are recorded on the right-hand side and decreases on the
left-hand side.
When two sides are put together in T form, the left-hand side is called the ‘debit side’ and the right hand
side is ‘credit side’. When in an account a record is made on the debit or left-hand side, one says that one
has debited that account; similarly to record an amount on the right-hand side is to credit it.
From the above, the following rules can be obtained:
(i) When there is an increase in the amount of an asset, its account is debited; the account will be credited
if there is a reduction in the amount of the asset concerned : Suppose a firm purchases furniture for
` 8,00,000 the furniture account will be debited by ` 8,00,000 since the asset has increased by this
amount. Suppose later the firm sells furniture to the extent of ` 3,00,000 the reduction will be recorded
by crediting the furniture account by ` 3,00,000.

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2.6 PRINCIPLES AND PRACTICE OF ACCOUNTING

FURNITURE
Increase Decrease
(1) 8,00,000 (2) 3,00,000
Balance 5,00,000

ii) If the amount of a liability increases, the increase will be entered on the credit side of the liability account,
i.e. the account will be credited: similarly, a liability account will be debited if there is a reduction in the
amount of the liability. Suppose a firm borrows ` 5,00,000 from Mohan; Mohan’s account will be credited
since ` 5,00,000 is now owing to him. If, later, the loan is repaid, Mohan’s account will be debited since
the liability no longer exists.

MOHAN
Decrease Increase
(2) 5,00,000 (1) 5,00,000

(iii) An increase in the owner’s capital is recorded by crediting the capital account: Suppose the proprietor
introduces additional capital, the capital account will be credited. If the owner withdraws some money,
i.e., makes a drawing, the capital account will be debited.
(iv) Profit leads to an increase in the capital and a loss to reduction: According to the rule mentioned in (iii)
above, profit & incomes may be directly credited to the capital account and losses & expenses may be
similarly debited.
However, it is more useful to record all incomes, gains, expenses and losses separately. By doing so, very
useful information will be available regarding the factors which have contributed to the year’s profits
and losses. Later the net result of all these is ascertained and adjusted in the capital account.
(v) Expenses are debited and Incomes are credited: Since incomes and gains increase capital, the rule is to
credit all gains and incomes in the accounts concerned and since expenses and losses decrease capital,
the rule is to debit all expenses and losses. Of course, if there is a reduction in any income or gain, the
account concerned will be debited; similarly, for any reduction in an expenses or loss the concerned
account will be credited.
The rules given above are summarised below:
(i) Increases in assets are debits; decreases are credits;
(ii) Increases in liabilities are credits; decreases are debits;
(iii) Increases in owner’s capital are credits; decreases are debits;
(iv) Increases in expenses are debits; decreases are credits; and
(v) Increases in revenue or incomes are credits; decreases are debits.
The terms debit and credit should not be taken to mean, respectively, favourable and unfavourable things.
They merely describe the two sides of accounts.

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ACCOUNTING PROCESS 2.7

? ILLUSTRATION 1

Following are the transactions entered into by R after he started his business. Show how various accounts will be
affected by these transactions:

2017 (` in 000)
April
1. R started business with 5,000
2. He purchased furniture for 1,200
3. Paid salary to his clerk 1,100
4. Paid rent 1,150
5. Received interest 2,000

 SOLUTION
2017 Explanation Accounts Nature of How Debit Credit
April Involved Accounts affected (` in 000) (` in 000)
1. ` 5,000 cash Bank and R’s Asset Increased 5,000
invested in business Capital Capital Increased 5,000
2. Purchased furniture Furniture and Asset Increased 1,200
for ` 1,200 Bank Asset Decreased 1,200
3. Paid ` 1,100 to Salary & Bank Expense Increased 1,100
employee for salary Asset Decreased 1,100
4. Paid Rent ` 1,150 Rent & Bank Expense Increased 1,150
Asset Decreased 1,150
5. Received interest Cash & Interest Asset Increased 2,000
` 2,000 Income Increased 2,000

1.5 TRANSACTIONS
In the system of book-keeping, students can notice that transactions are recorded in the books of accounts. A
transaction is a type of event, which is generally external in nature and can be determined in terms of money.
In an accounting period, every business has huge number of transactions which are analysed in financial
terms and then recorded individually, followed by classification and summarisation process, to know their
impact on the financial statements. A transaction is a two way process in which value is transferred from
one party to another. In it either a party receives a value in terms of goods etc. and passes the value in terms
of money or vice versa. Therefore, one can easily make out that in a transaction, a party receives as well as
passes the value to other party. For recording transaction it is very important that they are supported by a
substantial document like purchasing invoices, bills, pay-slips, cash-memos, passbook etc.
Transactions analysed in terms of money and supported by proper documents are recorded in the books of
accounts under double entry system. To analyse the dual aspect of each transaction, two approaches can
be followed:
(1) Accounting Equation Approach.
(2) Traditional Approach.

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2.8 PRINCIPLES AND PRACTICE OF ACCOUNTING

1.6 ACCOUNTING EQUATION APPROACH

The relationship of assets with that of liabilities and owners’ equity in the equation form is known as
‘Accounting Equation’. Basic accounting equation comes into picture when sum total of capital and liabilities
equalises assets, where assets are what the business owns and capital and liabilities are what the business
owes. Under double entry system, every business transaction has two-fold effect on the business enterprise
where each transaction affects changes in assets, liabilities or capital in such a way that an accounting
equation is completed and equated. This accounting equation holds good at all points of time and for any
number of transactions and events except when there are errors in accounting process.
Let us suppose that an individual started business by contributing ` 50,00,000 and taking loan of `10,00,000
from a bank to be repayable, after 5 years. He purchased furniture costing ` 10,00,000, and merchandise
worth ` 50,00,000. For purchasing the merchandise he paid ` 40,00,000 to the suppliers and agreed to pay
balance after 3 months. Assume that all these transactions and events occurred at to, base point of time.
The contribution by the owner is termed as capital; the borrowings are termed as loans or liabilities.
Whenever the loan is repayable in the short-run, say within one year, it is called short-term loan or liability.
On the other hand, if the loan is repayable within say 4 or 5 years or more, it would be termed as long term
loan or liability.
Some other short-term liabilities relating to credit purchase of merchandise are popularly called as trade
payables, and for other purchases and services received on credit as expense payables. These short-term
liabilities are also termed as current liabilities.
On the other hand, money raised has been invested in two types of assets–fixed assets and current assets.
Furniture is a fixed asset, if it lasts long, say more than one year, and has utility to the business, while inventory
and cash balance will not remain fixed for long as soon as the business starts to roll-these are current assets.
Often the owner’s claim or fund in the business is called equity. Owner’s claim implies capital invested plus
any profit earned minus any loss sustained.
Now at to we have an equation:
Equity + Liabilities = Assets
or, Equity + Long-Term Liabilities = Fixed Assets + Current Assets - Current Liabilities
Check : L.H.S. (` in ‘000)

Equity ` 5,000
Long–term Liabilities ` 1,000
Current Liabilities ` 1,000
` 7,000
R.H.S.
Fixed Assets:
Furniture ` 1,000
Current Assets:
Inventory ` 5,000
Cash ` 1,000
` 7,000

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ACCOUNTING PROCESS 2.9

Cash = Capital + Loan - Furniture - Payment to Trade payables (`’ 000 )

= ` 5,000 + ` 1,000 - ` 1,000 - ` 4,000 = ` 1,000
Let us use E0, L0 and A0 to mean Equity, Liabilities and Assets respectively at t0. Thus the basic accounting
equation becomes
E0 + L0 = A0
or E0 = A0 - L0 ...(Eq. 1)
(`’ 000 )
Now, let us suppose that at the end of period inventory valuing ` 2,500 is in hand, cash
` 2,000; trade payables ` 500; bank loan ` 1,000 (interest was properly paid); furniture ` 800
(` 200 is taken as loss of value due to use). So at t1 -

Assets: (`’ 000 )

Fixed assets/ Furniture ` 800
Current assets/ inventory ` 2,500
Cash ` 2,000
(A1) ` 5,300
Liabilities:
Long-term Liabilities ` 1,000
Current Liabilities ` 500
(L1) ` 1,500
Equity (A1 - L1) ` 3,800
Equity = Assets - Liabilities
i.e., E1 = A1 - L1
or E1 + L1 = A1 ...(Eq. 2)
Let us compare E1 with E0. Equity is reduced by ` 12,00,000 (50,00,000 - 38,00,000). Reduction in equity is
termed as loss.
Since the business sustained loss during the period, E1 becomes less than E0.
E1< E0 implies loss during t01
Similarly, E2< E1 implies loss during t12 and so on.
On the other hand, E1> E0 implies profit earned by business during t01, E2> E1 implies profit earned during t12
and so on.
So if En> En-1, in general terms, equity has increased, while En< En-1 implies that equity has declined.
Increase in equity is termed as profit while decrease in equity is termed as loss.

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2.10 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 2
Develop the accounting equation from following information available at the beginning of accounting period:

Particulars (` in 000)
Capital 51,000
Loan 11,500
Trade payables 5,700
Fixed Assets 12,800
Inventory 22,600
Trade receivables 17,500
Cash and Bank 15,300
At the end of the accounting period the balances appear as follows:

(` in 000)
Capital ?
Loan 11,500
Trade payables 5,800
Fixed Assets 12,720
Inventory 22,900
Trade receivables 17,500
Cash at Bank 15,600
(a) Reset the equation and find out profit.
(b) Prepare Balance Sheet at the end of the accounting period.

 SOLUTION
(All the figures in solution are in ` 000)
(a) Accounting equation is given by
Equity + Liabilities = Assets
Let us use E0, L0 and A0 to mean equity, liabilities and assets respectively at the beginning of the accounting
period.
E0 = ` 51,000
L0 = Loan + Trade payables
= ` 11,500 + ` 5,700
= ` 17,200
A0 = Fixed Assets + Inventories + Trade receivables + Cash at Bank
= ` 12,800 + ` 22,600 + ` 17,500 + ` 15,300
= ` 68,200
So, at the beginning of accounting period
E0 + L0 = A0
i.e., ` 51,000 + ` 17,200 = ` 68,200
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ACCOUNTING PROCESS 2.11

Let us use E1, L1, A1 to mean equity, liabilities and assets respectively at the end of the accounting period.
L1 = Loan + Trade payables
= ` 11,500 + ` 5,800
= ` 17,300
A1 = Fixed Assets + Inventories + Trade receivables + Cash at Bank
= ` 12,720 + ` 22,900 + ` 17,500 + ` 15,600
= ` 68,720
E1 = A1 - L1 = ` 68,720 - ` 17,300 = ` 51,420
Profit = E1 - E0 = ` 51,420 - ` 51,000 = ` 420
(b) Balance Sheet

Liabilities ` ` Assets `
Capital Fixed Assets 12,720
Balance 51,000 Inventories 22,900
Add: Profit 420 51,420 Trade receivables 17,500
Loan 11,500 Cash at Bank 15,600
Trade payables 5,800
68,720 68,720

? ILLUSTRATION 3

Mr. Dravid. has provided following details related to his financials. Find out the missing figures:

Particulars (` in’000)
Profits carved during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000

 SOLUTION

Computing opening capital: (All figure in `’ 000 )

Closing capital - profits earned during the year
= 35,000 - 5,000
= 30,000
We also know:
Assets = liabilities + capital
Therefore, opening assets (A) = 12,000 + 30,000
= 42,000
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2.12 PRINCIPLES AND PRACTICE OF ACCOUNTING

Computation of liabilities at the end of the year:

Total liabilities including capital = 50,000
Less: closing capital = (35,000)
Liabilities at the end of the year (C) = 15,000
Also assets at the end of the year (B) = closing capital + liabilities at the end of the year
= 35,000 + 15,000
= 50,000

1.7 TRADITIONAL APPROACH

Under traditional approach of recording transactions one should first understand the term debit and credit
and their rules. The term debit and credit have already been explained in para 1.4 of this Unit.
Transactions in the journal are recorded on the basis of the rules of debit and credit only. For the purpose of
recording, these transactions are classified in three groups:
(i) Personal transactions.
(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.
1.7.1 Classification of Accounts
(i) Personal Accounts: Personal accounts relate to persons, trade receivables or trade payables. Example
would be the account of Ram & Co., a credit customer or the account of Jhaveri & Co., a supplier of goods.
The capital account is the account of the proprietor and, therefore, it is also personal but adjustment on
account of profits and losses are made in it. This account is further classified into three categories:
(a) Natural personal accounts: It relates to transactions of human beings like Ram, Rita, etc.
(b) Artificial (legal) personal accounts: For business purpose, business entities are treated to have
separate entity. They are recognised as persons in the eye of law for dealing with other persons. For
example: Government, Companies (private or limited), Clubs, Co-operative societies etc.
(c) Representative personal accounts: These are not in the name of any person or organisation
but are represented as personal accounts. For example: outstanding liability account or prepaid
account, capital account, drawings account.
(ii) Impersonal Accounts: Accounts which are not personal such as machinery account, cash account, rent
account etc. These can be further sub-divided as follows:
(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For example, accounts
regarding land, building, investment, fixed deposits etc., are real accounts. Cash in hand and Cash
at the bank accounts are also real.
(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue, etc. like salary
account, interest paid account, commission received account. The net result of all the nominal
accounts is reflected as profit or loss which is transferred to the capital account. Nominal accounts
are, therefore, temporary.

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ACCOUNTING PROCESS 2.13

1.7.2 Golden Rules of Accounting

All the above classified accounts have two rules each, one related to Debit and one related to Credit for
recording the transactions which are termed as golden rules of accounting, as transactions are recorded on
the basis of double entry system.

Types of Account Account to be Debited Account to be Credited

Personal Account Receiver Giver
Real Account What comes in What goes out
Nominal Account Expense and losses Income and gains
Example:-
From the following information , state the nature of account and state which account will be debited and
which will be credited.
1. Started business with a capital of ` 50,00,000.
2. Wages and salaries paid ` 50,000
3. Rent received ` 2,00,000
4. Purchased goods on credit ` 9,00,000
5. Sold goods for ` 8,16,000 and received payment in cheque.

 SOLUTION

Transaction ACCOUNTS NATURE DEBIT OR CREDIT Journal Entry

INVOLVED
Started business Bank account Personal Debit (Receiver) Bank A/c Dr.
with capital of Capital account Personal Credit (giver) To Capital A/c
` 50,00,000
Wages and salaries
Wages/salaries Nominal Debit (expense) Wages/ Salaries Dr.
paid Bank Personal Credit (giver) To Bank A/c
Rent received Bank Personal Debit (Receiver) Bank A/c Dr.
Rent Nominal Credit (income) To Rent A/c
Purchases made on Purchases Nominal Debit (expense) Purchases A/c Dr.
credit Creditor Personal Credit (giver) To Creditor A/c
Goods sold and Bank Personal Debit (Receiver) Bank A/c Dr.
payment received Sales Nominal Credit (gains) To Sales A/c
in cheque

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2.14 PRINCIPLES AND PRACTICE OF ACCOUNTING

1.8 MODERN CLASSIFICATION OF ACCOUNTS

Real, nominal and personal accounts is the traditional classification of accounts. Now, let us see the modern
and more acceptable classification of accounts:-
Types of account Normal balance of Account to be debited Account to be credited
account when there is: when there is:
Asset account Debit Increase Decrease
Liabilities account Credit Decrease Increase
Capital account Credit Decrease Increase
Revenue account Credit Decrease Increase
Expenditure account Debit Increase Decrease
Drawing account Debit Increase Decrease
Let us solve the same example with the modern approach now:-
Accounts involved Nature Debit/Credit Reason
Bank Asset Debit Increase
Capital Liability Credit Increase
Wages/salaries Expense Debit Increase
Bank Asset Credit Decrease
Bank Asset Debit Increase
Rent Revenue Credit Increase
Purchase Expense Debit Increase
Creditor Liability Credit Increase
Bank Asset Debit Increase
Sales Revenue Credit Increase

1.9 JOURNAL
Transactions are first entered in this book to show which accounts should be debited and which credited.
Journal is also called subsidiary book. Recording of transactions in journal is termed as journalizing the
entries. It is the book of original entry in which transactions are entered on a daily basis in a chronological
order.
1.9.1Journalising Process
All transactions may be first recorded in the journal as and when they occur; the record is chronological;
otherwise it would be difficult to maintain the records in an orderly manner. Debits and credits are listed
along with the appropriate explanations. There are basically two types of journals:-
1. General journal
2. Specialized journal
The latter is used when there are many repetitive transactions of the same nature. The form of the
journal is given below:

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ACCOUNTING PROCESS 2.15

JOURNAL

Dr. Cr.
Date Particulars L.F. Amount Amount
` ` ` `
(1) (2) (3) (4) (5)
The columns have been numbered only to make clear the following but otherwise they are not numbered.
The following points should be noted:
(i) In the first column the date of the transaction is entered-the year is written at the top, then the month
and in the narrow part of the column the particular date is entered.
(ii) In the second column, the names of the accounts involved are written; first the account to be debited,
with the word “Dr” written towards the end of the column. In the next line, after leaving a little space,
the name of the account to be credited is written preceded by the word “To” (the modern practice
shows inclination towards omitting “Dr.” and “To”). Then in the next line the explanation for the entry
together with necessary details is given-this is called narration.
(iii) In the third column the number of the page in the ledger on which the account is written up is entered.
(iv) In the fourth column the amounts to be debited to the various accounts concerned are entered.
(v) In the fifth column, the amount to be credited to various accounts is entered.
1.9.2 Points to be taken into care while recording a Transaction in the Journal
1. Journal entries can be single entry (i.e. one debit and one credit) or compound entry (i.e. one debit and
two or more credits or two or more debits and one credit or two or more debits and credits). In such
cases, it is important to check that the total of both debits and credits are equal.
2. If journal entries are recorded in several pages then both the amount column of each page should be
totalled and the balance should be written at the end of that page and also that the same total should
be carried forward at the beginning of the next page.
An entry in the journal may appear as follows:

` `
May 5 Bank Account Dr. 14,50,000
To Mohan 14,50,000
(Being the amount received from
Mohan in payment of the amount due
from him)
We will now consider some individual transactions.
(i) Mohan commences business with ` 50,00,000 in his bank account. This means that the firm has
` 50,00,000 in bank. According to the rules given above, the increase in an asset has to be debited to it.
The firm also now owes ` 50,00,000 to the proprietor, Mohan as capital. The rule given above also shows
that the increase in capital should be credited to it. Therefore, the journal entry will be:

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2.16 PRINCIPLES AND PRACTICE OF ACCOUNTING

Bank Account Dr. ` 50,00,000

To Capital Account ` 50,00,000
(Being capital introduced by Shri Mohan)
(ii) Out of the above, ` 25,000 is withdrawn from the bank. By this transaction the bank balance is reduced
by ` 25,000 and another asset, cash account, comes into existence. Since increase in assets is debited
and decrease is credited, the journal entry will be:

Cash Account Dr. ` 25,000

To Bank Account ` 25,000
(Being cash withdraw from Bank)
(iii) Furniture is purchased for ` 12,00,000. Applying the same reasoning as above the entry will be:

Furniture Account Dr. ` 12,00,000

To Bank Account ` 12,00,000
(Being Furniture purchased vide CM No....)
(iv) Purchased goods for cash ` 4,00,000. The student can see that the required entry is:

Purchases Account Dr. ` 4,00,000

To Bank Account ` 4,00,000
(Being goods purchased vide CM No....)
(v) Purchased goods for ` 10,00,000 on credit from M/s Ram Narain Bros. Purchase of merchandise is
an expense item so it is to be debited. ` 10,00,000 is now owing to the supplier; his account should
therefore be credited, since the amount of liabilities has increased. The entry will be:

Purchases Account Dr. ` 10,00,000

To M/s Ram Narain Bros. ` 10,00,000
(Being goods purchased vide Bill No.....)
(vi) Sold goods to M/s Ram & Co. for ` 6,00,000. Amount is received in cheque. The amount of bank increases
and therefore, the bank amount should be debited; sale of merchandise is revenue item so it is to be
credited. The entry will be:
Bank Account Dr. ` 6,00,000
To Sales Account ` 6,00,000
(Being goods sold vide CM No....)
(vii) Sold goods to Ramesh on credit for ` 13,00,000. The Inventories of goods has decreased and therefore,
the goods account has to be credited. Ramesh now owes ` 13,00,000; that is an asset and therefore,
Ramesh should be debited. The entry is:

Ramesh Dr. ` 13,00,000

To Sales Account ` 13,00,000
(Being goods sold vide Bill No....)

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ACCOUNTING PROCESS 2.17

Note: There are two views on classification of “Purchase Account” and “Sales Account”. One view is that
they represents “flow of goods”, so they should be classified as ‘Real A/c’. However, others are of the
opinion that only nominal a/cs are closed by transferring to ‘Trading or Profit and Loss A/c’. Therefore,
purchases and sales shall be classified as Nominal A/cs. However, in both the views, there will be debit
balance of Purchase A/c and credit balance of Sales A/c.
(viii) Received cheque from Ramesh ` 13,00,000. The amount of bank increased therefore the bank account
has to be debited. Ramesh’s liability towards firm has decreased infact in this case he no longer owes
any amount to the firm, i.e., this particular form of assets has disappeared; therefore, the account of
Ramesh should be credited. The entry is:

Bank Account Dr. ` 13,00,000

To Ramesh ` 13,00,000
(Being cheque received against Bill No....)

(x) Paid rent ` 1,00,000. The bank balance has decreased and therefore, the bank account should be
credited. No asset has come into existence because the payment is for services enjoyed and is an
expense. Expenses are debited. Therefore, the entry should be:

Rent Account Dr. ` 1,00,000

To Bank Account ` 1,00,000
(Being rent paid for the month of .......)
(xi) Paid ` 22,000 to the clerk as salary. Applying the reasons given in (x) above, the required entry is:

Salary Account Dr. ` 22,000

To Bank Account ` 22,000
(Being salary paid to Mr..... for the month of ...........)
(xii) Received ` 2,20,000 interest. The bank account should be debited since there is an increase in the bank
balance. There is no increase in any liability; since the amount is not returnable to any one, the amount
is an income, incomes are credited. The entry is :

Bank Account Dr. ` 2,20,000

To Interest Account ` 2,20,000
(Being interest received from........ for the period ............)
When transactions of similar nature take place on the same date, they may be combined while they are
journalised. For example, entries (x) and (xi) may be combined as follows:
Rent Account Dr. ` 1,00,000
Salary Account Dr. ` 22,000
To Bank Account ` 1,22,000
(Being expenses done as per detail attached)
When journal entry for two or more transactions are combined, it is called composite journal entry. Usually,
the transactions in a firm are so numerous that to record the transactions for a month will require many
pages in the journal. At the bottom of one page the totals of the two columns are written together with the
words “Carried forward” in the particulars column. The next page is started with the respective totals in the
two columns with the words “Brought forward” in the particulars column.
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2.18 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 4

Analyse transactions of M/s Sahil & Co. for the month of March, 2017 on the basis of double entry system by
adopting the following approaches:
(A) Accounting Equation Approach.
(B) Traditional Approach.
Transactions for the month of March, 2017 were as follows (figures are in ‘000):
1. Sahil introduced capital through bank of ` 4,000.
2. Cash withdrawn from the City Bank ` 200.
3. Loan of ` 500 taken from Mr. Y.
4. Salaries paid for the month of March, 2017, ` 300 and ` 100 is still payable for the month of March, 2017.
5. Furniture purchased ` 500.
Required
What conclusion one can draw from the above analysis?

 SOLUTION

(A) Analysis of Business Transaction: Accounting Equation Approach

The accounting equation is
Assets = Liabilities + Capital
(` in ‘000)
ASSETS = CAPITAL + LIABILITIES
CASH + BANK + FURNITURE = CAPITAL + LIABILITIES
(a) - + 4,000 + - = 4,000 + -
(b) +200 + -200 + - = - + -
(c) - + 500 + - = - + 500
(d) - + -300 + - = -400 + 100
(e) - + -500 + 500 = - + -
Balance 200 + 3,500 + 500 = 3,600 + 600
4,200 4,200
(B) Analysis of Business Transactions: Traditional Approach
Transaction Analysis Account Affected Rule Entry
and Nature of
Account
Introduction of Bank has received Bank–Personal Debit the receiver Debit Bank
` 4,000 through the money; Owner
Capital–Personal Credit the giver Credit Capital
bank by the has given Bank
proprietor balance
Cash Withdrawn Cash comes into Cash–Real Debit what comes Debit Cash
from Bank ` 200 business; Bank in Credit the giver
Bank–Personal Credit Bank
gives out cash

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ACCOUNTING PROCESS 2.19

Loan from Y Bank receives the Bank–Personal Debit the receiver Debit Bank
` 500 amount :Y pays
Y’s Loan–Personal Credit the giver Credit Y’s Loan
through bank
Salary paid ` 300 Cost of services Salary Nominal Debit all expenses Debit Salary (` 400)
and still payable used ` 400; Bank
Bank–Personal Credit the giver Credit Bank (`300)
` 100 gives out `300;
Still payable or Salary Outstanding Credit the giver Credit Salary
outstanding for Personal outstanding
services received (` 100)
` 100
Furniture Furniture is Furniture Real Debit what comes Debit Furniture
purchased purchased; in Credit the giver
Bank–Personal Credit Bank
` 500 Bank gives out
money
Conclusion:
It is evident from above analysis that procedure for analysis of transactions, classification of accounts and
rules for recording business transactions under accounting equation approach and traditional approach are
different. But the accounts affected and entries in affected accounts remain same under both approaches.
Thus, the recording of transactions in affected accounts on the basis of double entry system is independent
of the method of analysis followed by a business enterprise. In other words, accounts to be debited and
credited to record the dual aspect remain same under both the approaches.

? ILLUSTRATION 5

Journalise the following transactions. Also state the nature of each account involved in the Journal entry.
Following figures are given in (‘00)
1. December 1, 2016, Ajit started business with capital ` 4,00,000
2. December 3, he withdrew cash for business from the Bank ` 2,000.
3. December 5, he purchased goods making payment through bank` 15,000.
4. December 8, he sold goods` 16,000 and received payment through bank.
5. December 10, he purchased furniture and paid by cheque ` 2,500.
6. December 12, he sold goods to Arvind ` 2,400.
7. December 14, he purchased goods from Amrit ` 10,000.
8. December 15, he returned goods to Amrit ` 500.
9. December 16, he received from Arvind ` 2,300 in full settlement.
10. December 18, he withdrew goods for personal use ` 1,000.
11. December 20, he withdrew cash from business for personal use ` 2,000.
12. December 24, he paid telephone charges ` 110.
13. December 26, amount paid to Amrit in full settlement ` 9,450.

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2.20 PRINCIPLES AND PRACTICE OF ACCOUNTING

14. December 31, paid for stationery ` 200, rent `5,000 and salaries to staff ` 2,000.
15. December 31, goods distributed by way of free samples ` 2,000.

 SOLUTION

JOURNAL (` in ‘00)
Dr. Cr.
Sl. Date Particulars Nature of L.F. Debit Credit
No Account (`) (`)
1. Dec. 1 Bank Account Dr. Personal A/c 4,00,000
To Capital Account Personal A/c 4,00,000
(Being commencement
of business)
2. Dec. 3 Cash Account Dr. Real A/c 2,000
To Bank Account Personal A/c 2,000
(Being cash withdrawn
from the Bank)
3. Dec. 5 Purchases Account Dr. Real A/c 15,000
To Bank Account Personal A/c 15,000
(Being purchase of
goods for cash)
4. Dec. 8 Bank Account Dr. Personal A/c 16,000
To Sales Account Real A/c 16,000
(Being goods sold for cash)
5. Dec. 10 Furniture Account Dr. Real A/c 2,500
To Bank Account Personal A/c 2,500
(Being purchase of
furniture, paid by cheque)
6. Dec. 12 Arvind Dr. Personal A/c 2,400
To Sales Account Real A/c 2,400
(Being sale of goods)
7. Dec. 14 Purchases Account Dr. Real A/c 10,000
To Amrit Personal A/c 10,000
(Being purchase of
goods from Amrit )
8. Dec. 15 Amrit Dr. Personal A/c 500
To Purchases
Returns Account Real A/c 500
(Being goods
returned to Amrit)

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ACCOUNTING PROCESS 2.21

9. Dec. 16 Bank Account Dr. Personal A/c 2,300

Discount Account Dr. Nominal A/c 100
To Arvind Personal A/c 2,400
(Being cash received from
Arvind in full settlement
and allowed him ` 100
as discount)
10. Dec. 18 Drawings Account Dr. Personal A/c 1,000
To Purchases Account Real A/c 1,000
(Being withdrawal of
goods for personal use)
11. Dec. 20 Drawings Account Dr. Personal A/c 2,000
To Cash Account Real A/c 2,000
(Being cash withdrawal
from the business for
personal use)
12. Dec. 24 Telephone Expenses Dr. Nominal A/c 110
Account
To Bank Account Personal A/c 110
(Being telephone
expenses paid)
13. Dec 26 Amrit Dr. Personal A/c 9,500
To Bank Account Personal A/c 9,450
To Discount Account Nominal A/c 50
(Being cash paid to
Amrit and he allowed
` 50 as discount)
14. Dec. 31 Stationery Expenses Dr. Nominal A/c 200
Rent Account Dr. Nominal A/c 5,000
Salaries Account Dr. Nominal A/c 2,000
To Bank Account Personal A/c 7,200
(Being expenses paid)
15. Dec. 31 Advertisement
Expenses Account Dr. Nominal A/c 2,000
To Purchases Account Real A/c 2,000
(Being distribution of
goods by way of
free samples)

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2.22 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 6

Show the classification of the following Accounts under traditional and accounting equation approach:
(a) Building; (b) Purchases; (c) Sales; (d) Bank Fixed Deposit; (e) Rent; (f) Rent Outstanding; (g) Cash; (h) Adjusted
Purchases; (i) Closing Inventory; (j) Investments; (k) Trade receivables; (l) Sales Tax Payable, (m) Discount Allowed;
(n) Bad Debts; (o) Capital; (p) Drawings; (q) Interest Receivable account; (r) Rent received in advance account;
(s) Prepaid salary account; (t) Bad debts recovered account; (u) Depreciation account, (v) Personal income-tax
account.

 SOLUTION
Nature of Account
Sl. Title of Account Traditional Approach Accounting Equation Approach
No.
(a) Building Real Asset
(b) Purchases Real Asset
(c) Sales Real Revenue
(d) Bank Fixed Deposit Personal Asset
(e) Rent Nominal (Expense) Expense
(f ) Rent Outstanding Personal Liability
(g) Cash Real Asset
(h) Adjusted Purchases Nominal (Expense) Expense
(i) Closing Inventory Real Asset
(j) Investment Real Asset
(k) Trade receivables Personal Asset
(l) Sales Tax Payable Personal Liability
(m) Discount Allowed Nominal (Expense) Temporary Capital (Expense)
(n) Bad Debts Nominal (Expense) Temporary Capital (Expense)
(o) Capital Personal Capital
(p) Drawings Personal Temporary Capital (Drawings)
(q) Interest receivable Personal Asset
(r) Rent received in advance Personal Liability
(s) Prepaid salary Personal Asset
(t) Bad debts recovered Nominal (Gain) Temporary Capital (Gain)
(u) Depreciation Nominal (Expense) Temporary Capital (Expense)
(v) Personal Income Tax Personal (Drawing) Temporary Capital (Drawings)

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ACCOUNTING PROCESS 2.23

? ILLUSTRATION 7

Transactions of Ramesh for April are given below. Journalise them.

2017 `
April 1 Ramesh started business with 10,00,000
“ 3 Bought goods for cash 50,000
“ 5 Drew cash from bank 10,000
“ 13 Sold to Krishna- goods on credit 1,50,000
“ 20 Bought from Shyam goods on credit 2,25,000
“ 24 Received from Krishna 1,45,000
“ Allowed him discount 5,000
“ 28 Paid Shyam cash 2,15,000
“ Discount allowed 10,000
“ 30 Cash sales for the month 8,00,000
Paid Rent 50,000
Paid Salary 1,00,000

 SOLUTION
JOURNAL

Dr. Cr.
Date Particulars L.F. Amount Amount
2017
April 1 Bank Account Dr. 1 10,00,000
To Capital Account 4 10,00,000
(Being the amount invested by Ramesh in
the business as capital)
“3 Purchases Account Dr. 7 50,000
To Bank Account 1 50,000
(Being goods purchased for cash)
“5 Cash Account Dr. 5 10,000
To Bank Account 1 10,000
(Being cash withdrawn from bank)
“ 13 Krishna Dr. 9 1,50,000
To Sales Account 11 1,50,000
(Being goods sold to Krishna on credit)
“ 20 Purchases Account Dr. 7 2,25,000
To Shyam 10 2,25,000
(Being goods bought from Shyam on credit)
“ 24 Bank Account Dr. 1 1,45,000
Discount Account Dr. 12 5,000
To Krishna 9 1,50,000
(Being cash received from Krishna and
discount allowed to him)
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2.24 PRINCIPLES AND PRACTICE OF ACCOUNTING

“ 28 Shyam Dr. 10 2,25,000

To Bank Account 1 2,15,000
To Discount Account 12 10,000
(Being cash paid to Shyam and discount
allowed by him)
“ 30 Bank Account Dr. 1 8,00,000
To Sales Account 11 8,00,000
(Being goods sold for cash)
“ 30 Rent Account Dr. 15 50,000
Salaries Account Dr. 14 1,00,000
To Bank Account 1 1,50,000
(Being the amount paid for rent and salary)
Total 27,60,000 27,60,000
(Ledger Folio imaginary)
1.10 ADVANTAGES OF JOURNAL
In journal, transactions recorded on the basis of double entry system, fetch following advantages:
1. As transactions are recorded on chronological order, one can get complete information about the
business transactions on time basis.
2. Entries recorded in the journal are supported by a note termed as narration, which is a precise explanation
of the transaction for the proper understanding of the entry. One can know the correctness of the entry
through these narrations.
3. Journal forms the basis for posting the entries in the ledger. This eases the accountant in their work and
reduces the chances of error.

SUMMARY
• The accounting process starts with the recording of transactions in the form of journal entries.
• The recording is based on double entry system. This book or register called journal is the book of first
or original entry.
• Next step is to post the entries in the ledger covered in the next unit.

TEST YOUR KNOWLEDGE

Multiple Choice Question
1. The rent paid to landlord is credited to
(a) Landlord’s account.
(b) Rent account.
(c) Cash account.
2. In case of a debt becoming bad, the amount should be credited to
(a) Trade receivables account.
(b) Bad debts account.
(c) Cash account.

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ACCOUNTING PROCESS 2.25

3. A Ltd. has a ` 35,000 account receivable from Mohan. On January 20, Mohan makes a partial payment
of ` 21,000 to A Ltd. The journal entry made on January 20 by A Ltd. to record this transaction includes:
(a) A credit to the cash received account of ` 21,000.
(b) A credit to the Accounts receivable account of ` 21,000.
(c) A debit to the cash account of ` 14,000.
4. Which financial statement represents the accounting equation -
Assets = Liabilities + Owner’s equity:
(a) Income Statement
(b) Statement of Cash flows
(c) Balance Sheet.
5. Which account is the odd one out?
(a) Office furniture & Equipment.
(b) Freehold land and Buildings.
(c) Inventory of materials.
6. The debts written off as bad, if recovered subsequently are
(a) Credited to Bad Debts Recovered Account
(b) Credited to Trade receivables Account.
(c) Debited to Profit and Loss Account.
7. In Double Entry System of Book-keeping every business transaction affects:
(a) Two accounts
(b) Two sides of the same account.
(c) The same account on two different dates.
8. A sale of goods to Ram for cash should be debited to:
(a) Ram
(b) Cash
(c) Sales
Theory Questions
1. Write short note on classification of accounts.
2. Distinguish between Real account and nominal account.
Practical Questions
1. Show the classification of the following Accounts under traditional and accounting equation approach:
a Rent outstanding g Capital
b Closing Inventory h Sales Tax Payable
c Sales i Trade receivables
d Bank Fixed Deposit j Depreciation
e Cash k Drawings
f Bad Debts

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2.26 PRINCIPLES AND PRACTICE OF ACCOUNTING

2. Pass Journal Entries for the following transactions in the books of Gamma Bros.
(i) Employees had taken inventory worth ` 1,00,000 (Cost price ` 75,000) on the eve of Deepawali and
the same was deducted from their salaries in the subsequent month.
(ii) Wages paid for erection of Machinery ` 18,000.
(iii) Income tax liability of proprietor ` 1,17000 was paid out of petty cash.
(iv) Purchase of goods from Naveen of the list price of ` 2,00,000. He allowed 10% trade discount, `
5,000 cash discount was also allowed for quick payment.
3. Calculate the missing amount for the following.

Assets Liabilities Capital

(a) 15,00,000 2,50,000 ?
(b) ? 1,50,000 75,000
(c) 14,50,000 ? 13,75,000
(d) 57,00,000 - 2,80,000 ?
4. Show the effect of increase = (+), decrease = (-) and no change=(0) on the assets of the following
transactions:
a. Purchased office furniture, payment to be made next month.
b. Collected cash for repair services
c. Goods sold on credit.
d. Withdrawl of cash by the owner for personal use.
e. Hired an employee as sales manager of the north wing.
f. Returned goods worth ` 50,000.
g. One of our debtor agreed to pay his dues to Mr. C who is a creditor of the company with the same
amount being due to him.
h. Entered into an agreement with Mehta & Co. to purchase all raw materials from their company from
next year.
Also give reasons for your answers.
5. Following is the information provided by Mr. Gopi pertaining to year ended 31st March 2017. Find the
unknowns, showing computation to support your answer:

Particulars ` Particulars `
Machinery 12,00,000 Trade Receivables B
Accounts Payable 1,00,000 Loans C
Inventory 60,000 Closing Capital D
Total Liabilities including 14,15,000 Opening Capital 10,00,000
capital
Cash A Loss incurred during the 35,000
year
Bank 80,000 Capital Introduced during 1,00,000
the year

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ACCOUNTING PROCESS 2.27

Additional Information: During the year sales of ` 15,55,000 was made of which ` 15,00,000 have
been received.
ANSWERS/HINTS
MCQs

1. (c) 2. (a) 3. (b) 4. (c) 5. (c) 6. (a) 7. (a) 8. (b)

Theoretical Questions
1 a. Accounts are broadly classified into assets, liabilities and capital. The basic accounting equation
specifies broad categories, which are as follows:
(i) Assets: These are resources controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise, namely cash, stock of
goods, land, buildings, machinery etc.
(ii) Liabilities: These are financial obligations of an enterprise other than owner’s equity namely
long term loans, creditors, outstanding expenses etc.
(iii) Capital: It generally refer to the amounts invested in an enterprise by its owner(s), the accretion
to it or a reduction in it. Since capital is affected by expenses and incomes of revenue nature,
there are two more categories of accounts, namely expenses and incomes. The difference
between incomes and expenses are taken into capital account.
Ø Expenses: These represents those accounts which show the amount spent or even lost in
carrying on operations.
Ø Incomes: These represent those accounts which show the revenue amounts earned by
the enterprise.
However, traditionally accounts are classified as follows:
(i) Personal Accounts: These accounts relate to persons, institutions, debtors or creditors.
(ii) Impersonal Accounts: These represent accounts which are not personal. These can be further
sub-divided as follows:
Ø Real Accounts: These accounts relate to assets of the firm but not debt e.g. accounts
relating to land, buildings, cash in hand etc.
Ø Nominal accounts: These accounts relate to expenses, losses, gains, revenues etc.
2. A real account is an account relating to properties and assets, other than personal accounts of the firm.
Examples are land, buildings, machinery, cash, investments etc. Nominal accounts relate to expenses
or losses, incomes and gains. Examples are: wages, salaries, rent, depreciation etc. The net result of all
the nominal accounts is reflected as profit or loss which is transferred to the capital account. Nominal
accounts are therefore, temporary. The real accounts are shown in the balance sheet along with personal
accounts.

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2.28 PRINCIPLES AND PRACTICE OF ACCOUNTING

Practical Problems
Answer 1
Nature of Account

Sl. Title of Account Traditional Approach Accounting Equation

No. Approach
a Rent Outstanding Personal Liability
b Closing Inventory Real Asset
c Sales Nominal Revenue
d Bank Fixed Deposit Personal Asset
e Cash Real Asset
f Bad Debts Nominal (Expense) Temporary Capital (Expense)
g Capital Personal Capital
h Sales Tax Payable Personal Liability
i Trade receivables Personal Asset
j Depreciation Nominal (Expense) Temporary Capital (Expense)
k Drawings Personal Temporary Capital (Drawings)
Answer 2
Journal Entries in the books of Gamma Bros.

Particulars Dr. Cr.

Amount Amount
` `
(i) Salaries A/c Dr. 75,000
To Purchase A/c 75,000
(Being entry made for inventory taken by employees)
(ii) Machinery A/c Dr. 18,000
To Cash A/c 18,000
(Being wages paid for erection of machinery)
(iii) Drawings A/c Dr. 1,17,000
To Petty Cash A/c 1,17,000
(Being the income tax of proprietor paid out of
business money)
(iv) Purchase A/c Dr. 1,80,000
To Cash A/c 1,75,000
To Discount Received A/c 5,000
(Being the goods purchased from Naveen for
` 2,00,000 @ 10% trade discount and cash discount
of ` 5,000)
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ACCOUNTING PROCESS 2.29

Note:
i. Here wages paid on erection of machinery have been capitalised therefore machinery account has
been debited directly instead of wages being recorded as an expenditure.
ii. The students may also note that trade discount is allowed on the list price of goods. It is deducted
to find out the invoice amount of the goods to be recorded in the books. Cash discount is a discount
allowed in case of early payments to the seller. The entry is made in the books of accounts for cash
discount.
Answer 3
(a) 12,50,000
(b) 2,25,000
(c) 75,000
(d) 59,80,000
These have been solved using the Accounting Equation:
Assets = Capital + Liabilities
Answer 4

S.No. Increase (+) / Decrease (-) / Reasons

No Change (0) in Assets
(a) Furniture has been purchased making it an increase in assets and
also it being purchased on credit it increases liability and there is no
+
outflow of assets like cash or bank.
(b) + Cash has flowed in for services provided making it an increase in
assets.
(c) + Here with goods sold there is a decrease in inventory (assets) but
given there is an increase in debtors there will be a net increase in
assets.
Though if goods are sold at cost it will result in no change whereas
sale at below cost will result in decrease in assets.
(d) - Here cash has been withdrawn from business resulting in decrease
in assets and capital.
(e) 0 Only hiring of employee has been done resulting in no change in
assets.
(f ) - Outflow of goods has resulted in decrease in assets while money
owed to creditors reduce on the liability side.
(g) - Here both assets and liabilities reduce by same amounts meaning a
decrease in assets.
(h) 0 Only a purchase agreement has been entered into with no
transaction taking place yet.

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2.30 PRINCIPLES AND PRACTICE OF ACCOUNTING

Answer 5
Trade Receivable Balance (B) = Sales- Amount received during the year
= ` (15,55,000 - 15,00,000)
= ` 55,000.
Since, we know Assets = Capital + Liabilities
Therefore, balance of assets is also ` 14,15,000
So, total assets:

Particulars `
Total Assets 14,15,000
Less: Machinery (12,00,000)
Less: Inventory (60,000)
Less: Bank (80,000)
Less: Receivables (55,000)
Cash (A) 20,000

Computation of Closing Capital (D):

Particulars `
Opening Capital 10,00,000
Add: Introduced during the year 1,00,000
Less: Loss incurred during the year (35,000)
Closing Capital 10,65,000
So, Loan amount (C) = Total Liabilities and capital - Closing Capital - Trade Payables
= ` (14,15,000 - 10,65,000 - 1,00,000)
= ` 2,50,000

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ACCOUNTING PROCESS 2.31

UNIT 2 : LEDGERS
LEARNING OUTCOMES
After studying this unit, you will be able to :

w Understand the concept of Ledgers.

w Learn the technique of ledger posting and how to balance an account.

w Learn the technique of opening accounts each year taking closing balances of the previous year. Note
also the use of ‘balance c/d’ and ‘balance b/d’.

Process of
transferring
journal entries
in the accounts

Difference
between the Ledger Remaining
totals of debits known as balances
UNIT OVERVIEW and credit sides is principle are carried
found out as the books of forward to the
balance account next year

Some of the
balances are
transferred to
the profit and
loss account

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2.32 PRINCIPLES AND PRACTICE OF ACCOUNTING

2.1 INTRODUCTION
After recording the transactions in the journal, recorded entries are classified and grouped into by preparation
of accounts. The book which contains all set of accounts (viz. personal, real and nominal accounts), is known
as Ledger. It is known as principal books of account in which account-wise balance of each account is
determined.

2.2 SPECIMEN OF LEDGER ACCOUNTS

A ledger account has two sides-debit (left part of the account) and credit (right part of the account). Each of
the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal folio i.e. page from where the
entries are taken for posting and (iv) Amount.
Dr. Account Cr.
Date Particulars J.F. Amount (`) Date Particulars J.F. Amount (`)

2.3 POSTING
The process of transferring the debit and credit items from journal to classified accounts in the ledger is
known as posting.
2.1 RULES REGARDING POSTING OF ENTRIES IN THE LEDGER
1. Separate account is opened in ledger book for each account and entries from ledger posted to respective
account accordingly.
2. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is used in
the particular column with the accounts written on the debit side while ‘By’ is used with the accounts
written in the particular column of the credit side. These ‘To’ and ‘By’ do not have any meanings but are
used to the account debited and credited.
3. The concerned account debited in the journal should also be debited in the ledger but reference should
be of the respective credit account.

2.4 BALANCING AN ACCOUNT

At the end of the each month or year or any particular day it may be necessary to ascertain the balance in
an account. This is not a too difficult thing to do; suppose a person has bought goods worth `1,000 and has
paid only ` 850; he owes `150 and that is balance in his account. To ascertain the balance in any account,
what is done is to total the sides and ascertain the difference; the difference is the balance. If the credit side

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ACCOUNTING PROCESS 2.33

is bigger than the debit side, it is a credit balance. In the other case it is a debit balance. The credit balance
is written on the debit side as, “To Balance c/d”; c/d means “carried down”. By doing this, two sides will be
equal. The totals are written on the two sides opposite one another.
Then the credit balance is written on the credit side as “By balance b/d (i.e., brought down)”. This is the
opening balance for the new period. The debit balance similarly is written on the credit side as “By Balance
c/d”, the totals then are written on the two sides as shown above as then the debit balance written on the
debit side as, “To Balance b/d”, as the opening balance of the new period.
It should be noted that nominal accounts are not balanced; the balance in the end are transferred to the
profit and loss account. Only personal and real accounts ultimately show balances. In the illustrations given,
you will have notice that the capital account, the purchases account, sales account, the discount account,
the rent account and the salary account have not been balanced. The capital account will have to be adjusted
for profit or loss and that is why it has not been balanced yet.

? ILLUSTRATION 1
Prepare the Stationery Account of a firm for the year ended 31.12.2015 duly balanced off, from the following
details:

2015 `
Jan. 1 Inventory of stationery 480
April 5 Purchase of stationery by cheque 800
Nov. 15 Purchase of stationery on credit from Five Star Stationery Mart 1,280
Dec. 31 Inventory of stationery 240

 SOLUTION

Dr. Stationery Account Cr.

Date Particulars ` Date Particulars `
1.1.2015 To Balance b/d 480 31.12.2015 By Balance c/d 2,560
5.4.2015 To Bank A/c 800
15.11.2015
To Five Star Stationery
Mart A/c 1,280
2,560 2,560
1.1.2016 To Balance b/d 2,560

? ILLUSTRATION 2
Prepare the ledger accounts on the basis of following transactions in the books of a trader.
Debit Balances on January 1, 2015:
Cash in Hand ` 8,000, Cash at Bank ` 25,000, inventory of Goods ` 20,000, Building ` 10,000. Trade receivables:
Vijay ` 2,000 and Madhu ` 2,000.
Credit Balances on January 1, 2015:

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2.34 PRINCIPLES AND PRACTICE OF ACCOUNTING

Trade payables: Anand ` 5,000, Capital ` 55,000

Following were further transactions in the month of January, 2015:
Jan. 1 Purchased goods worth ` 5,000 (payable at later date) for cash less 20% trade discount and 5% cash
discount.
Jan. 4 Received ` 1,980 from Vijay and allowed him ` 20 as discount.
Jan. 8 Purchased plant from Mukesh for `5,000 and paid `100 as cartage for bringing the plant to the factory
and another `200 as installation charges.
Jan. 12 Sold goods to Rahim on credit `600.
Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash `1,000.
SOLUTION
Dr. Cash Account Cr.
Date Particulars L.F. ` Date Particulars L.F. `
2015 2015
Jan. 1 To Balance b/d 8,000 Jan. 1 By Purchases A/c 3,800
Jan. 4 To Vijay 1,980 Jan. 8 By Plant A/c 300
Jan. 15 To Rahim 300 Jan. 31 By Balance c/d 7,180
Jan. 18 To Sales A/c 1,000
11,280 11,280
Feb. 1 To Balance b/d 7,180

Dr. Bank Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Balance c/d 25,000 Jan. 31 By Balance c/d 25,000
25,000 25,000
Feb. 1 To Balance b/d 25,000

Dr. Inventory Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Balance b/d 20,000 Jan. 31 By Balance c/d 20,000
20,000 20,000
Feb. 1 To Balance b/d 20,000

Dr. Building Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Balance b/d 10,000 Jan. 31 By Balance c/d 10,000
10,000 10,000
Feb. 1 To Balance b/d 10,000

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ACCOUNTING PROCESS 2.35

Dr. Vijay Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Balance b/d 2,000 Jan. 4 By Cash A/c 1,980
By Discount A/c 20
2,000 2,000

Dr. Madhu Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Balance b/d 2,000 Jan. 31 By Balance c/d 2,000
2,000 2,000
Feb. 1 To Balance b/d 2,000

Dr. Capital Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 31 To Balance c/d 55,000 Jan. 1 By Balance b/d 55,000
55,000 55,000
Feb. 1 By Balance b/d 55,000

Dr. Purchases Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 1 To Cash 3,800
Jan. 1 To Cash Discount 200 Jan. 31 By Balance c/d 4,000
4,000 4,000
Feb. 1 To Balance b/d 4,000

Dr. Discount Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 4 To Vijay 20 Jan. 1 By Purchases A/c 200
Jan.31 To Balance c/d 180
200 200
Feb. 1 By Balance b/d 180

Dr. Plant Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 8 To Mukesh 5,000 Jan. 31 By Balance c/d 5,300
Jan. 8 To Cash A/c 300
5,300 5,300
Feb. 1 To Balance b/d 5,300

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2.36 PRINCIPLES AND PRACTICE OF ACCOUNTING

Dr. Mukesh Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 31 To Balance c/d 5,000 Jan. 8 By Plant A/c 5,000
5,000 5,000
Feb. 1 By Balance b/d 5,000

Dr. Sales Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 31 To Balance c/d 1,600 Jan. 12 By Rahim 600
Jan. 18 By Cash A/c 1,000
1,600 1,600
Feb. 1 By Balance b/d 1,600

Dr. Rahim Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 12 To Sales A/c 600 Jan. 15 By Cash A/c 300
Jan. 15 By Bad Debts A/c 300
600 600

Dr. Bad Debts Account Cr.

Date Particulars L.F. ` Date Particulars L.F. `
Jan. 15 To Rahim 300 Jan. 31 By Balance c/d 300
300 300
Feb. 1 To Balance b/d 300

? ILLUSTRATION 3
The following data is given by Mr. S, the owner, with a request to compile only the two personal accounts of Mr. H
and Mr. R, in his ledger, for the month of April, 2015.
1 Mr. S owes Mr. R ` 15,000; Mr. H owes Mr. S ` 20,000.
4 Mr. R sold goods worth ` 60,000 @ 10% trade discount to Mr. S.
5 Mr. S sold to Mr. H goods prices at ` 30,000.
17 Record a purchase of ` 25,000 net from R, which were sold to H at a profit of `15,000.
18 Mr. S rejected 10% of Mr. R’s goods of 4th April.
19 Mr. S issued a cash memo for `10,000 to Mr. H who came personally for this consignment of goods, urgently
needed by him.
22 Mr. H cleared half his total dues to Mr. S, enjoying a ½% cash discount (of the payment received,
` 20,000 was by cheque).
26 R’s total dues (less `10,000 held back) were cleared by cheque, enjoying a cash discount of `1,000 on the
payment made.
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ACCOUNTING PROCESS 2.37

29 Close H’s Account to record the fact that all but ` 5,000 was cleared by him, by a cheque, because he was
declared bankrupt.
30 Balance R’s Account.

 SOLUTION
In the books of Mr. S
Dr. Mr. H Account Cr.
Date Particulars ` Date Particulars `
1.4.2015 To Balance b/d 20,000 22.4.2015 By Bank A/c 20,000
5.4.2015 To Sales A/c 30,000 22.4.2015 By Cash A/c (Note 2) 24,775
17.4.2015 To Sales A/c 40,000 29.4.2015 By Discount Allowed A/c 225
29.4.2015 By Bank A/c 40,000
29.4.2015 By Bad Debts A/c 5,000
90,000 90,000

Dr. Mr. R Account Cr.

Date Particulars ` Date Particulars `
18.4.2015 To Purchase 5,400 1.4.2015 By Balance b/d 15,000
To Returns A/c 4.4.2015 By Purchases A/c 54,000
26.4.2015 To Bank A/c 77,600 17.4.2015 Purchases A/c 25,000
26.4.2015 To Discount
Received A/c 1,000
30.4.2015 To Balance c/d 10,000
94,000 94,000
1.5.2015 By Balance b/d 10,000

Working Notes:
(1) Sale of `10,000 on 19th April is a cash sales, therefore, it will not be recorded in the Personal Account of
Mr. H; and (2) On 22nd April, Mr. H owes Mr. S ` 90,000, amount paid by Mr. H ½ of ` 90,000 less ½% discount
i.e., ` 45,000– ` 225 = ` 44,775. Out of this amount, ` 20,000 paid by cheque and the balance of ` 24,775 in
cash.

SUMMARY
w Process of transferring journal entries in the accounts opened in Ledger is called posting.
w Ledger is known as principal books of accounts and it provides full information regarding all the
transactions pertaining to any individual account.
w The difference between the totals of debits and credit sides is found out as the balance. Some of these
balances are transferred to the profit and loss account and some are carried forward to the next year i.e.,
shown in the balance sheet, depending upon the nature of the account.

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2.38 PRINCIPLES AND PRACTICE OF ACCOUNTING

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. The process of transferring the debit and credit items from a Journal to their respective accounts in the
ledger is termed as
(a) Posting
(b) Purchase
(c) Balancing of an account
2. The technique of finding the net balance of an account after considering the totals of both debits and
credits appearing in the account is known as
(a) Posting
(b) Purchase
(c) Balancing of an account
3. Journal and ledger records transactions in
(a) A chronological order and analytical order respectively.
(b) An analytical order and chronological order respectively.
(c) A chronological order only
4. Ledger book is popularly known as
(a) Secondary book of accounts
(b) Principal book of accounts
(c) Subsidiary book of accounts
5. At the end of the accounting year all the nominal accounts of the ledger book are
(a) Balanced but not transferred to profit and loss account
(b) Not balanced and also the balance is not transferred to the profit and loss account
(c) Not balanced and their balance is transferred to the profit and loss account.
Theory Questions
1 What do you mean by principal books of accounts?
2 What are the rules of posting of journal entries into the Ledger?
Practical Questions
1. Journalize the following transactions, post them in the Ledger and balance the accounts on 31st
December.
1. X started business with a capital of ` 20,000
2. He purchased goods from Y on credit ` 4,000
3. He paid cash to Y ` 2,000
4. He sold goods to Z ` 4,000
5. He received cash from Z ` 6,000
6. He further purchased goods from Y ` 4,000
7. He paid cash to Y ` 2,000
8. He further sold goods to Z ` 4,000
9 He received cash form Z ` 2,000

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ACCOUNTING PROCESS 2.39

ANSWERS/HINTS
MCQ’s
1. (a) 2. (c) 3. (a) 4. (b) 5. (c)
Theoretical Questions
1. Ledger is known as principal books of accounts and it provides full information regarding all the
transactions pertaining to any individual account. Ledger contains all set of accounts (viz. personal,
real and nominal accounts).
2. Rules regarding posting of entries in the ledger:
a. Separate account is opened in ledger book for each account and entries from ledger posted to
respective account accordingly.
b. It is a practice to use words ‘To’ and ‘By’ while posting transactions in the ledger. The word ‘To’ is
used in the particular column with the accounts written on the debit side while ‘By’ is used with
the accounts written in the particular column of the credit side. These ‘To’ and ‘By’ do not have any
meanings but are used to the account debited and credited.
c. The concerned account debited in the journal should also be debited in the ledger but reference
should be of the respective credit account.
Practical Questions
Answer 1
Journal
Particulars L.F. Debit ` Credit `
Cash Account Dr. 20,000
To Capital Account 20,000
(Being commencement of business)
Purchase Account Dr. 4,000
To Y 4,000
(Being purchase of goods on credit)
Y Dr. 2,000
To Cash 2,000
(Being payment of cash to Y)
Z Dr. 4,000
To Sales 4,000
(Being goods sold to Z)
Cash Account Dr. 6,000
To Z 6,000
(Being cash received form Z)
Purchase Account Dr. 4,000
To Y 4,000
(Being payment of goods from Y)
Y Dr. 2,000
To Cash Account 2,000
(Being payment of cash to Y)
Z Dr. 4,000
To Sales Account 4,000
(Being goods sold to Z)

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2.40 PRINCIPLES AND PRACTICE OF ACCOUNTING

Cash Account Dr. 2,000

To Z 2,000
(Being cash received from Z)
TOTAL 48,000 48,000

Dr. Cash Account Cr.

Date Particulars ` Date Particulars `
To Capital A/c 20,000 By Y 2,000
To Z 6,000 By Y 2,000
To Z 2,000 Jan. 31 By Balance c/d 24,000
28,000 28,000
Feb. 1 To Balance b/d 24,000
Dr. Capital Account Cr.
Date Particulars ` Date Particulars `
Jan. 31 To Balance c/d 20,000 By Cash A/c 20,000
20,000 20,000
Feb. 1 By Balance b/d 20,000
Dr. Purchase Account Cr.
Date Particulars ` Date Particulars `
To Y 4,000 Jan 31. By Balance c/d 8,000
To Y 4,000
8,000 8,000
Feb.1 To Balance b/d 8,000
Dr. Y’s Account Cr.
Date Particulars ` Date Particulars `
To Cash 2,000 By Purchases 4,000
To Cash 2,000 By Purchases 4,000
Jan. 31 To Balance c/d 4,000
8,000 8,000
Feb. 1 By Balance b/d 4,000
Dr. Z’s Account Cr.
Date Particulars ` Date Particulars `
To Sales 4,000 By Cash A/c 6,000
To Sales 4,000 By Cash A/c 2,000
8,000 8,000
Dr. Sales Account Cr.
Date Particulars ` Date Particulars `
Jan. 31 To Balance c/d 8,000 By Z 4,000
By Z 4,000
8,000 8,000
Feb. 1 By Balance b/d 8,000
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ACCOUNTING PROCESS 2.41

UNIT 3 : TRIAL BALANCE

LEARNING OUTCOMES
After studying this unit, you will be able to :
w Learn the technique of taking balances from ledger accounts to prepare trial balance.
w Understand what is trial balance and what purposes it can serve.

Phase of
the accounting
process

Basis for
Ledger balances
Preparing final Trial
on a particular
UNIT OVERVIEW accounts i.e. P& L A/c Balance
date
and Balance sheet

Checks
arithmetical
accuracy of the
books

Trial balance contains various ledger balances on a particular date. It forms the basis for preparing final
statement i.e. profit and loss statement and balance sheet. If it tallies, it means that the accounts are
arithmetically accurate but certain errors may still remain undetected. Therefore, it is very important to
carefully journalise and post the entries, following the rules of accounting.

3.1 INTRODUCTION
Preparation of trial balance is the third phase in the accounting process. After posting the accounts in the
ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known
as the trial balance. It may also be prepared by listing each and every account and entering in separate
columns the totals of the debit and credit sides. Whichever way it is prepared, the totals of the two columns
should agree. An agreement indicates reasonable accuracy of the accounting work; if the two sides do not
agree, then there is simply an arithmetic error(s).

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2.42 PRINCIPLES AND PRACTICE OF ACCOUNTING

This follows from the fact that under the Double Entry System, the amount written on the debit sides of
various accounts is always equal to the amounts entered on the credit sides of other accounts and vice
versa. Hence the totals of the debit sides must be equal to the totals of the credit sides. Also total of the
debit balances will be equal to the total of the credit balances. Once this agreement is established, there is
reasonable confidence that the accounting work is free from clerical errors, though it is not proof of cent
per cent accuracy, because some errors of principle and compensating errors may still remain. Generally,
to check the arithmetic accuracy of accounts, trial balance is prepared at monthly intervals. But because
double entry system is followed, one can prepare a trial balance any time. Though a trial balance can be
prepared any time but it is preferable to prepare it at the end of the accounting year to ensure the arithmetic
accuracy of all the accounts before the preparation of the financial statements. It may be noted that trial
balance is a statement and not an account.

3.2. OBJECTIVES OF PREPARING THE TRIAL BALANCE

The preparation of trial balance has the following objectives:
(i) Trial balance enables one to establish whether the posting and other accounting processes have been
carried out without committing arithmetical errors. In other words, the trial balance helps to establish
arithmetical accuracy of the books.
(ii) Financial statements are normally prepared on the basis of agreed trial balance; otherwise the work
may be cumbersome. Preparation of financial statements, therefore, is the second objective.
(iii) The trial balance serves as a summary of what is contained in the ledger; the ledger may have to be seen
only when details are required in respect of an account.
The form of the trial balance is simple as shown below:

Trial Balance
as at.......................

S.No Ledger Accounts L.F. Dr. Amount Cr. Amount

(Total or Balance) (Total or Balance)
` `

The under mentioned points may be noted:

(i) A trial balance is prepared as on a particular date which should be mentioned at the top.
(ii) In the second column the name of the account is written.
(iii) In the fourth column the total of the debit side of the account concerned or the debit balance, if any is
entered.
(iv) In the next column, the total of the credit side or the credit balance is written.
(v) The two columns are totalled at the end.
(vi) The first and third column needs no explanation.

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ACCOUNTING PROCESS 2.43

3.3 LIMITATIONS OF TRIAL BALANCE

One should note that the agreement of Trial Balance is not a conclusive proof of accuracy. In other words,
in spite of the agreement of the trial balance some errors may remain. These may be of the following types:

(i) Transaction has not been entered at all in the journal.

(ii) A wrong amount has been written in both columns of the journal.

(iii) A wrong account has been mentioned in the journal.

(iv) An entry has not at all been posted in the ledger.

(v) Entry is posted twice in the ledger.

Still, the preparation of the trial balance is very useful; without it, the preparation of financial statement, the
profit and loss account and the balance sheet, would be difficult.

3.4 METHODS OF PREPARATION OF TRIAL BALANCE

1. TOTAL METHOD
Under this method, every ledger account is totalled and that total amount (both of debit side and credit
side) is transferred to trial balance. In this method, trial balance can be prepared as soon as ledger account
is totalled. Time taken to balance the ledger accounts is saved under this method as balance can be found
out in the trial balance itself. The difference of totals of each ledger account is the balance of that particular
account. This method is not commonly used as it cannot help in the preparation of the financial statements.

? ILLUSTRATION 1
Given below is a ledger extract relating to the business of X and Co. as on March, 31, 2016. You are required to
prepare the Trial Balance by the Total Amount Method.
Dr. Cash Account Cr.

Particulars ` Particulars `

To Capital A/c 10,000 By Furniture A/c 3,000

To Ram’s A/c 25,000 By Salaries A/c 2,500

To Cash Sales 500 By Shyam’s A/c 21,000

By Cash Purchases 1,000

By Capital A/c 500

By Balance c/d 7,500

35,500 35,500

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2.44 PRINCIPLES AND PRACTICE OF ACCOUNTING

Dr. Furniture Account Cr.

Particulars ` Particulars `
To Cash A/c 3,000 By Balance c/d 3,000
3,000 3,000

Dr. Salaries Account Cr.

Particulars ` Particulars `
To Cash A/c 2,500 By Balance c/d 2,500
2,500 2,500

Dr. Shyam’s Account Cr.

Particulars ` Particulars `
To Cash A/c 21,000 By Purchases A/c 25,000
To Purchase Returns A/c 500 (Credit Purchases)
To Balance c/d 3,500 –
25,000 25,000

Dr. Purchases Account Cr.

Particulars ` Particulars `
To Cash A/c (Cash Purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases Book
(Credit Purchases) 25,000 –
26,000 26,000

Dr. Purchases Returns Account Cr.

Particulars ` Particulars `
To Balance c/d 500 By Sundries as per Purchases Return Book 500
500 500

Dr. Ram’s Account Cr.

Particulars ` Particulars `
To Sales A/c (Credit Sales) 30,000 By Sales Returns A/c 100
By Cash A/c 25,000
By Balance c/d 4,900
30,000 30,000

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ACCOUNTING PROCESS 2.45

Dr. Sales Account Cr.

Particulars ` Particulars `
To Balance c/d 30,500 By Cash A/c (Cash Sales) 500
By Sundries as per Sales Book
(Credit sales) 30,000
30,500 30,500

Dr. Sales Returns Account Cr.

Particulars ` Particulars `
To Sundries as per Sales By Balance c/d 100
Returns Book 100
100 100

Dr. Capital Account Cr.

Particulars ` Particulars `
To Cash A/c 500 By Cash A/c 10,000
To Balance c/d 9,500
10,000 10,000

 SOLUTION
Trial Balance of X and Co. as at 31.03.2016
Sl. Name of Account Total Debit Total
No. Items Credit Items
` `
1. Cash A/c 35,500 28,000
2. Furniture A/c 3,000
3. Salaries A/c 2,500
4. Shyam’s A/c 21,500 25,000
5. Purchases A/c 26,000
6. Purchases Returns A/c 500
7. Ram’s A/c 30,000 25,100
8. Sales A/c 30,500
9. Sales Returns A/c 100
10. Capital A/c 500 10,000
1,19,100 1,19,100
2. BALANCE METHOD
Under this method, every ledger account is balanced and those balances only are carried forward to the trial
balance. This method is used commonly by the accountants and helps in the preparation of the financial
statements. Financial statements are prepared on the basis of the balances of the ledger accounts.

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2.46 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 2
Taking the same information as given in Illustration 1, prepare the Trial Balance by Balance Method.

 SOLUTION
Trial Balance of X and Co. as at 31.03.2016

Sl. Name of Account Debit Credit

No. Balance Balance
` `
1. Cash A/c 7,500
2. Furniture A/c 3,000
3. Salaries A/c 2,500
4. Shyam’s A/c 3,500
5. Purchases A/c 26,000
6. Purchases Returns A/c 500
7. Ram’s A/c 4,900
8. Sales A/c 30,500
9. Sales Returns A/c 100
10. Capital A/c – 9,500
44,000 44,000

3. TOTAL AND BALANCE METHOD

Under this method, the above two explained methods are combined. Under this method statement of
trial balance contains seven columns instead of five columns. This has been explained with the help of the
following example using the data given in illustration 1:
Trial Balance of X and Co. as at 31.03.2016

Sl. Heads of Account L.F. Debit Credit Debit Credit

No. Balance Balance Total Total
(`) (`) (`) (`)
1. Cash Account 7,500 35,500 28,000
2. Furniture Account 3,000 3,000
3. Salaries Account 2,500 2,500
4. Shyam’s Account 3,500 21,500 25,000
5. Purchases Account 26,000 26,000
6. Purchase Returns Account 500 500
7. Ram’s Account 4,900 30,000 25,100
8. Sales Account 30,500 30,500
9. Sale Returns Account 100 100
10. Capital Account 9,500 500 10,000
Total 44,000 44,000 1,19,100 1,19,100

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ACCOUNTING PROCESS 2.47

3.5 ADJUSTED TRIAL BALANCE (THROUGH SUSPENSE ACCOUNT)

If the trial balance does not agree after transferring the balance of all ledger accounts including cash and
bank balance and also errors are not located timely, then the trial balance is tallied by transferring the
difference of debit and credit side to an account known as suspense account. This is a temporary account
opened to proceed further and to prepare the financial statements timely.

3.6 RULES OF PREPARING THE TRIAL BALANCE

While preparing the trial balance from the given list of ledger balances, following rules should be taken into
care:
1. The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings (v) cash and bank
balances are placed in the debit column of the trial balance.
2. The balances of all (i) liabilities accounts (ii) income accounts (iii) profits (iv) capital are placed in the
credit column of the trial balance.

? ILLUSTRATION 3
From the following ledger balances, prepare a trial balance of Anuradha Traders as on 31st March, 2016:

Account Head `
Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000
Sales return 1,000
Discount allowed 2,000
Expenses 10,000
Trade receivables 75,000
Trade payables 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500

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2.48 PRINCIPLES AND PRACTICE OF ACCOUNTING

 SOLUTION
Trial Balance of Anuradha Traders as on 31.03.2016

Dr. balance ` Cr. balance `

Purchases 1,50,000 Capital 1,00,000
Sales return 1,000 Sales 1,66,000
Discount allowed 2,000 Trade payables 25,000
Expenses 10,000 Interest received on investments 1,500
Trade receivables 75,000
Investments 15,000
Cash at bank and in hand 37,000
Insurance paid 2,500
Total 2,92,500 2,92,500

? ILLUSTRATION 4
One of your clients, Mr. Singhania has asked you to finalise his accounts for the year ended 31st March, 2016. Till
date, he himself has recorded the transactions in books of accounts. As a basis for audit, Mr. Singhania furnished
you with the following statement.

Dr. Balance (`) Cr. Balance (`)

Singhania’s Capital 1,556
Singhania’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1,259
Purchases return 264
Loan from bank 256
Trade payables 528
Trade expenses 700
Cash at bank 226
Bills payable 100
Salaries and wages 600
Inventories (1.4.2015) 264
Rent and rates 463
Sales return 98
5,454 5,454
The closing inventory on 31st March, 2016 was valued at ` 574. Mr. Singhania claims that he has recorded every
transaction correctly as the trial balance is tallied. Check the accuracy of the above trial balance.

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ACCOUNTING PROCESS 2.49

 SOLUTION
Corrected Trial Balance of Mr. Singhania as on 31st March, 2016
Particulars Dr. Cr.
Amount Amount
` `
Singhania’s Capital 1,556
Singhania’s Drawings 564
Leasehold premises 750
Sales 2,750
Due from customers 530
Purchases 1,259
Purchases returns 264
Loan from Bank 256
Creditor/Suppliers 528
Trade expenses 700
Cash at Bank 226
Bills payable 100
Salaries and Wages 600
Inventory (1.4.2015) 264
Rent and rates 463
Sales return 98
5,454 5,454
Reasons:
1. Due from customers is an asset, so its balance will be a debit balance.
2. Purchases return account always shows a credit balance because assets go out.
3. Balance in Creditors Account is a liability, so its balance will be a credit balance.
4. Bills payable is a liability, so its balance will be a credit balance.
5. Inventory (opening) represents assets, so it will have a debit balance.
6. Sales return account always shows a debit balance because assets come.

SUMMARY
w Trial balance contains various ledger balances on a particular date.
w It forms the basis for preparing final statement i.e. profit and loss statement and balance sheet.
w If it tallies, it means that the accounts are arithmetically accurate but certain errors may still remain
undetected.
w It is very important to carefully journalize and post the entries, following the rules of accounting.

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2.50 PRINCIPLES AND PRACTICE OF ACCOUNTING

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. A trial balance will not balance if _____________________________
(a) Correct journal entry is posted twice.
(b) The purchase on credit basis is debited to purchases and credited to cash.
(c) ` 500 cash payment to creditor is debited to Trade payables for ` 50 and credited to cash as ` 500.
2. ` 1, 500 received from sub-tenant for rent and entered correctly in the cash book is posted to the debit
of the rent account. In the trial balance _____________________________
(a) The debit total will be greater by ` 3,000 than the credit total.
(b) The debit total will be greater by ` 1,500 than the credit total.
(c) Subject to other entries being correct the total will agree.
3. After the preparation of ledgers, the next step is the preparation of _____________________________
(a) Trading accounts
(b) Trial balance
(c) Profit and loss account
4. After preparing the trial balance the accountant finds that the total of debit side is short by ` 1,500. This
difference will be _____________________________
(a) Credited to suspense account
(b) Debited to suspense account
(c) Adjusted to any of the debit balance account

5. S.No. Account heads Debit (`) Credit (`)

1. Sales 15,000
2. Purchases 10,000
3. Miscellaneous expenses 2,500
4. Salaries 2,500
Total 12,500 17,500
The difference in trial balance is due to _____________________________
(a) Wrong placing of sales account
(b) Wrong placing of salaries account
(c) Wrong placing of miscellaneous expenses account
Theory Questions
1. What is the trial balance? And how it is prepared?
2. Explain objectives of preparation of trial balance.
3. Even if the trial balance agrees, some errors may remain. Do you agree? Explain.

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ACCOUNTING PROCESS 2.51

Practical Question
1. An inexperienced bookkeeper has drawn up a Trial Balance for the year ended 30th June, 2017.

Debit (`) Credit (`)

Provision For Doubtful Debts 200 –
Bank Overdraft 1,654 –
Capital – 4,591
Trade payables – 1,637
Trade receivables 2,983 –
Discount Received 252 –
Discount Allowed – 733
Drawings 1,200 –
Office Furniture 2,155 –
General Expenses – 829
Purchases 10,923 –
Returns Inward – 330
Rent & Rates 314 –
Salaries 2,520 –
Sales – 16,882
Inventory 2,418 –
Provision for Depreciation on Furniture 364 –
Total 24,983 25,002
Required:
Draw up a ‘Corrected’ Trial Balance, debiting or crediting any residual errors to a Suspense Account.
ANSWERS/HINTS
MCQs

1. (c) 2. (a) 3. (b) 4. (b) 5. (b)

Theoretical Questions
1. Preparation of trial balance is the third phase in the accounting process. After posting the accounts in
the ledger, a statement is prepared to show separately the debit and credit balances. Such a statement
is known as the trial balance.
Trial balance contains various ledger balances on a particular date. It forms the basis for preparing final
statement i.e. profit and loss statement and balance sheet. It is tallies, it means that the accounts are
arithmetically accurate but certain errors may still remain undetected. Therefore, it is very important to
carefully journalise and post the entries, following are rules of accounting.

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2.52 PRINCIPLES AND PRACTICE OF ACCOUNTING

2. The preparation of trial balance has the following objectives:

(i) Trial balance enables one to establish whether the posting and other accounting processes have
been carried out without committing arithmetical errors. In other words, the trial balance helps to
establish arithmetical accuracy of the books.
(ii) Financial statements are normally prepared on the basis of agreed trial balance; otherwise the work
may be cumbersome. Preparation of financial statements, therefore, is the second objective.
(iii) The trial balance serves as a summary of what is contained in the ledger; the ledger may have to be
seen only when details are required in respect of an account.
3. In spite of the agreement of the trial balance some errors may remain. These may be of the following
types:
(i) Transaction has not been entered at all in the journal.
(ii) A wrong amount has been written in both columns of the journal.
(iii) A wrong account has been mentioned in the journal.
(iv) An entry has not at all been posted in the ledger.
(v) Entry is posted twice in the ledger.

Practical Question
ANSWER 1
Trial Balance as on 30th June, 2017
Heads of Accounts Debit ` Credit `
Provision for Doubtful Debts – 200
Bank overdraft – 1,654
Capital – 4,591
Trade payables – 1,637
Trade receivables 2,983 –
Discount Received – 252
Discount allowed 733 –
Drawings 1,200 –
Office furniture 2,155 –
General Expenses 829 –
Purchases 10,923 –
Returns Inward 330 –
Rent & Rates 314 –
Salaries 2,520 –
Inventory 2,418 –
Provision for Depreciation on Furniture – 364
Sales – 16,882
Suspense Account (Balancing figure) 1,175 –
Total 25,580 25,580

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ACCOUNTING PROCESS 2.53

UNIT 4 : SUBSIDIARY BOOKS

LEARNING OUTCOMES
After studying this unit, you will be able to :

w Understand the techniques of recording transactions in Purchase Book, Sales Book; Returns Inward Book
and Returns Outward Book; Bills Receivable and Bills Payable Book.

w Learn the technique of posting from Subsidiary Books to Ledger.

w Understand that even if subsidiary books are maintained, journalisation is required for many other
transactions and events.

w Learn the difference between the subsidiary books and principal books.

Principle • Ledger

books • Cash books

UNIT OVERVIEW

• Purchases and Sales book, Purchase

Subsidiary and Sales return books

books • Bill payable and Bills receivable books

• Journal Proper

4.1 INTRODUCTION
In a business, most of the transactions generally relate to receipts and payments of cash, sale of goods and
their purchase. It is convenient to keep a separate register for each such class of transactions one for receipts
and payments of cash, one for purchase of goods and one for sale of goods. A register of this type is called
a book of original entry or of prime entry. For transactions recorded in such books there will be no journal
entry. The system by which transactions of a class are first recorded in the book, specially meant for it and
on the basis of which ledger accounts are then prepared is known as the Practical System of Book keeping
or even the English System. It should be noted that in this system, there is no departure from the rules of
the double entry system.
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2.54 PRINCIPLES AND PRACTICE OF ACCOUNTING

These books of original or prime entry are also called subsidiary books since ledger accounts are prepared on
their basis and, without the further process of ledger posting, a trial balance cannot be taken out. Normally,
the following subsidiary books are used in a business:
(i) Cash book to record receipts and payments of cash, including receipts into and payments out of the
bank.

(ii) Purchases book to record credit purchases of goods dealt in or of the materials and stores required in
the factory.

(iii) Purchase Returns Books to record the returns of goods and materials previously purchased.

(iv) Sales Book to record the sales of the goods dealt in by the firm.

(v) Sale Returns Book to record the returns made by the customers.

(vi) Bills Receivable Books to record the receipts of promissory notes or hundies from various parties.

(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.

(viii) Journal (proper) to record the transactions which cannot be recorded in any of the seven books
mentioned above.

It may be noted that in all the above cases the word “Journal” may be used for the word “book”
Advantages of Subsidiary Books
The use of subsidiary books affords the undermentioned advantages:
(i) Division of work: Since in the place of one journal there will be so many subsidiary books, the
accounting work may be divided amongst a number of clerks.
(ii) Specialization and efficiency: When the same work is allotted to a particular person over a period of
time, he acquires full knowledge of it and becomes efficient in handling it. Thus the accounting work
will be done efficiently.
(iii) Saving of the time: Various accounting processes can be undertaken simultaneously because of the
use of a number of books. This will lead to the work being completed quickly.
(iv) Availability of information: Since a separate register or book is kept for each class of transactions, the
information relating to each transactions will be available at one place.
(v) Facility in checking: When the trial balance does not agree, the location of the error or errors is
facilitated by the existence of separate books. Even the commission of errors and frauds will be checked
by the use of various subsidiary books.

4.2 DISTINCTION BETWEEN SUBSIDIARY BOOKS AND PRINCIPAL

BOOKS
The books in which transactions are first recorded to enable processing are called subsidiary books. The
ledger and the cash book are the principle books since they furnish information for preparation of the trial
balance and financial statements. The following table will help you in understanding the difference between
Subsidiary Books and Principal Books.
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ACCOUNTING PROCESS 2.55

Principal Ledger
Books

Simple Cash Book

Cash book with

Discount Column

Cash Book with

Cash Bank & Dis. Column
Books

Petty Cash Book

Financial
Books For Credit
Purchase Purchase Book

For Credit
Sales Sales Book

For Credit
Purchase Return Book
Purchases
Returns
For Credit
Sales Return Book
Sales Returns

For Bills
Bill Receivable Book
Receivable
Subsidiary
Received
Books
For Bills Bill Payable Book
Accepted

For record of
transactions Journal Paper
not recorded
elsewhere

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2.56 PRINCIPLES AND PRACTICE OF ACCOUNTING

4.3 PURCHASES BOOK

To record the credit purchases of goods dealt in or materials and stores used in the factory, a separate
register called the Purchases Book or the Purchases Journal, is usually maintained by firms. The ruling is
given below:

Date Particulars L.F. Details Amount

` `

It should be remembered that :

(i) Cash purchases are not entered in this book since these will be entered in the cash book; and
(ii) Credit purchases of things other than goods or materials, such as office furniture or typewriters are
journalised - they also are not entered in the Purchases Book.
The particulars column is meant to record the name of the supplier and name of the articles purchased
and the respective quantities. The amount in respect of each article is entered in the details column. After
totaling the various amounts included in a single purchase, the amount for packing, or other charges is
added and the amount for trade discount is deducted. The net amount is entered in the extreme right-hand
column. The total in this column shows the total purchase made in a period.

? ILLUSTRATION 1
The Rough Book of M/s. Narain & Co. contains the following :
2016
Feb. 1. Purchased from Brown & Co. on credit :
5 gross pencils @ `100 per gross,
1 gross registers @ ` 240 per doz.
Less : Trade Discount @ 10%
2. Purchased for cash from the Stationery Mart;
10 gross exercise books @ ` 300 per doz.
3. Purchased computer for office use from M/s. office
Goods Co. on credit for ` 30,000.
4. Purchased on credit from The Paper Co.
5 reams of white paper @ `100 per ream.
10 reams of ruled paper @ `150 per ream.
Less : Trade Discount @ 10%
5. Purchased one dozen gel pens @ `15 each from
M/s. Verma Bros. on credit.
Make out the Purchase Book of M/s. Narain & Co.
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ACCOUNTING PROCESS 2.57

 SOLUTION
Purchases Book
Date Particulars L.F. Amount
2016 ` `
Feb. 1 M/s. Brown & Co.
5 gross pencils @ `100 per gross 500.00
1 gross registers @ `240 per doz. 2880.00
3380.00
Less : 10% trade discount (338) 3,042
“4 The Paper Co.
5 reams white paper @ `100 per ream 500.00
10 reams ruled paper @ `150 per ream 1500.00
2,000.00
Less : 10% trade discount (200.00) 1,800
5 M/s. Verma Bros.
1 doz. gel pens @ `15 each 180 180
Total 5022
Note : Purchases of cash and purchase of computer cannot be entered in the Purchase Book.

? ILLUSTRATION 2
Enter the following transactions in Purchase Book and post them into ledger.
2017
April 4 Purchased from Ajay Enterprises, Delhi
100 Doz. Rexona Hawai Chappal
@ `120 per doz.
200 Doz. Palki Leather Chappal
@ `300 per Doz.
Less : Trade discount @ 10%
Freight charged `150.
April 15 Purchased from Balaji Traders, Delhi
50 doz. Max Shoes
@ `400 per doz.
100 pair Sports Shoes.
@ `140 per paid.
Less : Trade discount @ 10%.
Freight charged `200.
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April 28 Purchased from Tripti Industries, Bahadurgarh

40 pair leather shoes
@ `400 per pair
100 doz. Rosy Hawai Chappal
@ `180 per doz.
Less : Trade discount @ 10%.
Freight charged `100.

 SOLUTION

Purchase Book

Date Particulars Gross Trade Net Freight Total

2017 Amount Discount Price Amount
April 4 Ajay Enterprises
100 doz chappal
@ `120 per doz - `12,000
200 doz Palki Leather Chappal @ `300
per doz -
` 60,000
Less: trade discount @ 10% 72,000 7,200 64,800 150 64,950
April 15 Balaji Traders, Delhi
50 doz max Shoes
@ `400 per doz - `20,000
100 pair Sports shoes
@ `140 per pair - `14,000
Less: Trade discount @ 10% 34,000 3,400 30,600 200 30,800
April 28 Tripti Industries, Bahadurgarh
40 pair Leather shoes
@ `400 per pair - `16,000
100 doz Rosy Hawai Chappal : @ `180
per doz - ` 18,000
Less: Trade discount @ 10% 34,000 3,400 30,600 100 30,700
1,40,000 14,000 1,26,000 450 1,26,450

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ACCOUNTING PROCESS 2.59

Ledgers
Dr. Purchases A/c Cr.

2017 ` 2017 `
April 30 To amount as per purchase book 1,26,000

Dr. Freight A/c Cr.

2017 ` 2017 `
April 30 To amount as per purchase book 450

Dr. Ajay Enterprises Cr.

2017 ` 2017 `
April 30 By Purchase A/c 64,800
By Freight A/c 150

Dr. Balaji Traders Cr.

2017 ` 2017 `
April 15 By Purchase A/c 30,600
By Freight A/c 200

Dr. Tripti Industries Cr.

2017 ` 2017 `
April 28 By Purchase A/c 30,600
By Freight A/c 100

POSTING THE PURCHASES BOOK

The Purchases Book shows the names of the parties from whom goods have been purchased on credit.
These parties are now trade payables. Their accounts have to be credited for the respective amounts shown
in the purchase book. The total of the amounts column shows the total purchases made in a period. The
amount is debited to the Purchase Account to indicate receipt of goods. In Illustration 1, the Purchases
Account is debited by ` 5,022, M/s. Brown & Co. is credited by ` 3,042, The Paper Company by `1,800 and
M/s. Verma Bros. by `180. The total of the amounts put on the credit side equals the debit. Thus the double
entry is completed.

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2.60 PRINCIPLES AND PRACTICE OF ACCOUNTING

4.4 SALES BOOK

The Sales Book is a register specially kept to record credit sales of goods dealt in by the firm, cash sales are
entered in the Cash Book and not in the Sales Book. Credit sales of things, other than the goods dealt in by
the firm are not entered in the Sales Book; they are journalised. The ruling is the same as for the Purchases
Book.
Entries in the Sales Book are also made in the same manner as in the Purchase Book. The particulars column
will record the name of the customers concerned together with particulars and quantities of the goods sold.
For each item, the amount is entered in the details column; after totalling the amounts for one sale, charges
for packing etc; are added and the trade discount, if any is deducted: the net amount is put in the outer
column. The total of this column will show the total credit sales for a period.

? ILLUSTRATION 3
The following are some of the transaction of M/s Kishore & Sons of the year 2017 as per their Waste Book.
Make out their Sales Book.
Sold to M/s. Gupta & Verma on credit:
30 shirts @ ` 800 per shirt.
20 trousers @ `1,000 per trouser.
Less : Trade Discount @ 10%
Sold furniture to M/s. Sehgal & Co. on credit `8,000.
Sold 50 shirts of M/s. Jain & Sons @ `800 per shirt.
Sold 13 shirts to Cheap Stores @ `750 each for cash.
Sold on credit to M/s. Mathur & Jain.
100 shirts @ `750 per shirt
10 overcoats @ `5,000 per overcoat.
Less: Trade Discount @ 10%

 SOLUTION

Sales Book

Date Particulars Details L.F. Amount

` `
2017 M/s. Gupta & Verma
30 shirts @ `800 24,000
20 Trousers @ `1,000 20,000
44,000
Less : 10% Trade discount (4,400)

Sales as per invoice no. dated ..... 39,600

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ACCOUNTING PROCESS 2.61

M/s. Jain & Sons

50 shirts @ `800
Sale as per invoice no. dated ...... 40,000
M/s Mathur & Jain
100 shirts @ `750 75,000
10 overcoats @ `5,000 50,000
1,25,000
Less : 10% (12,500)
Sales as per invoice no. dated...... 1,12,500
Total 1,92,100
Note : Cash sale and sale of furniture are not entered in Sales Book.

POSTING THE SALES BOOK

The names appearing in the Sales Book are of those parties which have received the goods. The accounts
of the parties have to be debited with the respective amounts. The total of the Sales Book shows the credit
sales made during the period concerned; the amount is credited to the Sales Account. In the Illustration 3,
` 1,92,100 is credited to the Sales Account; `39,600 is debited to M/s. Gupta and Verma `40,000 to M/s Jain
and Sons and `1,12,500 to M/s Mathur & Jain. The amount put on the credit side is equal to the total of the
amount put on the debit side. Thus, the double entry principle is followed correctly.

4.5 SALES RETURNS BOOK OR RETURNS INWARD BOOK

If customers frequently return the goods sold to them, it would be convenient to record the returns in a
separate book, which is named as the Sales Returns Book or the Returns Inward Book. The ruling of the book
is similar to the Purchases or the Sales Book and entries are also made in the same manner. The following,
assumed figures, will illustrate this:
Returns Inward Book
Date Particulars Details L.F. Amount
2017 `
June 7 Sunil Bank & Co.
6 Copies-Double Entry
Bookkeeping by T.S. Grewal @ ` 7 42.00
Less : Trade Discount 10% (4.20) 37.80
(returns as per debit note no.......)
Kailash & Co.
1 Copy-Business Methods by R.K. Gupta 3.50
(returns as per debit note no.......) Total 41.30

4.6 PURCHASE RETURNS OR RETURNS OUTWARD BOOK

Such a book conveniently records return of goods or material purchased to the suppliers if however, the
returns are not frequent, it may be sufficient to record the transaction in the journal. The ruling of the
Purchase Returns or Returns Outward Book is similar to that of the Purchase Book; entries are also similarly
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2.62 PRINCIPLES AND PRACTICE OF ACCOUNTING

made, as the illustration given below shows:

Returns Outward Book
Date Particulars ` Amount
2017
`
June 2 Premier Electric Co. 175.00
One 36” Usha Ceiling Fan
“ 28 Mohan Electric Co.
Ten Iron Heaters 150.00
Less : Discount (15.00) 135.00
Total 310.00

POSTING OF THE RETURN BOOKS

The Sales Return Book will show the total of the returns made by customers. Really, the total of the returns is
in reduction of the sales. Properly, therefore, the amount may be debited to the Sales Account but, usually,
a separate account called Returns Inward Account is opened and the total of the sales returns is debited to
this accounts. The customers who have returned the goods are credited with the respective amounts.
It should be noted that on goods being received and accepted back from the customers, a credit note is
issued to the customers concerned. This shows the amount to be credited to the customer’s account.
Similarly, when goods are returned to suppliers they will issue the necessary credit note; also the firm
returning the goods will issue a debit note to the supplier, indicating the amount for which the supplier is
liable on account of the return.
The total of Returns Outwards Book shows the total returns made. The amount can be credited to the
Purchase Account, but in practice, is credited to a separate account called Purchase Returns or Returns
Outward Account. The suppliers whose names appear in the Book have received the goods, so their accounts
have to be debited. This is shown in the illustration given below :

? ILLUSTRATION 5
Post the following into the ledger
Returns Outward Book

Date Particulars L.F. Details Amount

2017 ` `
Nov. 20 Rajindra Prakash & Sons
One 36” Usha Ceiling Fan 200.00
Less : Trade Discount @ 10% (20.00) 180.00
“ 30 Modern Electric Company 100.00
Total 280.00

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ACCOUNTING PROCESS 2.63

 SOLUTION
Ledger
Dr. Rajindra Parkash & Sons Cr.
Date Particulars Folio Amount Date Particulars Folio Amount
2017

Nov. 20 To Returns Outward A/c 180.00

Dr. Modern Electric Co. Cr.

Date Particulars Folio Amount Date Particulars Folio Amount
2017

Nov. 30 To Returns Outward A/c 100.00

Dr. Returns Outward Account Cr.

Date Particulars Folio Amount Date Particulars Folio Amount
2017

Nov. 30 By Sundries as per 280.00

Returns Outward
A/c

BILLS RECEIVABLE BOOKS AND BILLS PAYABLE BOOKS

If the firm usually receives a number of promissory notes or hundies, it would be convenient to record the
transaction in a separate book called the Bills Receivable Book. Similarly, if promissory notes or hundies are
frequently issued, the Bills Payable Book will be convenient. This will be discussed later.

4.7 IMPORTANCE OF JOURNAL

Students are now familiar with the journal. They also know that :
(i) Cash transactions are recorded in the cash book;
(ii) Credit purchases of goods or materials are recorded in the purchases book;
(iii) Credit sales of goods are recorded in the sales book;
(iv) Returns from customers are recorded in the sale returns book; and
(v) Returns to suppliers are entered in the purchase returns book.
Bill transactions are entered in the bills receivable books or the bills payable books, if these are maintained.
Apart from the transactions mentioned above, there are some entries also which have to be recorded. For
them the proper place is the journal. In fact, if there is no special book meant to record a transaction, it is
recorded in the journal (proper). The role of the journal is thus restricted to the following types of entries :

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2.64 PRINCIPLES AND PRACTICE OF ACCOUNTING

(i) Opening entries : When books are started for the new year, the opening balance of assets and liabilities
are journalised.
(ii) Closing entries : At the end of the year the profit and loss account has to be prepared. For this purpose,
the nominal accounts are transferred to this account. This is done through journal entries called closing
entries.
(iii) Rectification entries : If an error has been committed, it is rectified through a journal entry.
(iv) Transfer entries : If some amount is to be transferred from one account to another, the transfer will be
made through a journal entry.
(v) Adjusting entries : At the end of the year the amount of expenses or income may have to be adjusted
for amounts received in advance or for amounts not yet settled in cash. Such an adjustment is also
made through journal entries. Usually, the entries pertain to the following:
(a) Outstanding expenses, i.e., expenses incurred but not yet paid;
(b) Prepared expenses, i.e., expenses paid in advance for some period in the future;
(c) Interest on capital, i.e., the interest on proprietor’s investment in the business entity investment; and
(d) Depreciation, i.e., fall in the value of the assets used on account of wear and tear.
For all these, journal entries are necessary.
(vi) Entries on dishonour of Bills : If someone who accepted a promissory note (or bill) is not able to pay
in on the due date, a journal entry will be necessary to record the non-payment or dishonour.
(vii) Miscellaneous entries : The following entries will also require journalising:
(a) Credit purchase of things other than goods dealt in or materials required for production of goods
e.g. credit purchase of furniture or machinery will be journalised.
(b) An allowance to be given to the customers or a charge to be made to them after the issue of the
invoice.
(c) Receipt of promissory notes or issue to them if separate bill books have not been maintained.
(d) On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
(e) Effects of accidents such as loss of property by fire.
(f ) Transfer of net profit to capital account.

? ILLUSTRATION 6
From the following transactions, prepare the Purchases Returns Book of Alpha & Co., a saree dealer and post
them to ledger :

Date Debit Note No. Particulars

04.01.2016 101 Returned to Goyal Mills, Surat - 5 polyester sarees @ ` 1,000.
09.01.2016 Garg Mills, Kota - accepted the return of goods (which were purchased
for cash) from us - 5 Kota sarees @ ` 400.

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ACCOUNTING PROCESS 2.65

16.01.2016 102 Returned to Mittal Mills, Bangalore - 5 silk sarees @ `2,600.

30.01.2016 Returned one computer (being defective) @ `35,000 to B & Co.

 SOLUTION

Purchase Returns Book

Date Debit Note No. Name of supplier L.F. Amount

2016
Jan. 4 101 Goyal Mills, Surat 5,000
Jan. 16 102 Mittal Mills, Bangalore 13,000
Jan. 31 Purchases Returns Account (Cr.) 18,000

SUMMARY
w Instead of recording all journal entries in one register, it is better to categorize the entries on the basis
of type of transactions.
w Various subsidiary books are maintained so as to record transactions of one type in each register. These
are also called books of original entry or prime entry.
w Example of subsidiary books are purchases book, sales book, purchase returns books, sales returns
book, bills receivable book etc. On the basis of these subsidiary books, the ledger accounts are prepared.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. In Purchases Book the record is in respect of ___________________________
(a) Cash purchase of goods.
(b) Credit purchase of goods dealt in.
(c) All purchases of goods.

2. The Sales Returns Book records ___________________________

(a) The return of goods purchased.
(b) Return of anything purchased.
(c) Return of goods sold.

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2.66 PRINCIPLES AND PRACTICE OF ACCOUNTING

3. The Sales Book ___________________________

(a) Is a part of journal.
(b) Is a part of the ledger.
(c) Is a part of the balance sheet.
4. The weekly or monthly total of the Purchase Book is ___________________________
(a) Posted to the debit of the Purchases Account.
(b) Posted to the debit of the Sales Account.
(c) Posted to the credit of the Purchases Account.

5. The total of the Sales Book is posted to ___________________________

(a) Credit of the Sale s Account.
(b) Credit of the Purchases Account.
(c) Credit of the Capital Account.

6. In which book of original entry, will you record an allowance of `50 was offered for an early payment of
cash of `1,050 ___________________________.
(a) Sales Book
(b) Cash Book
(c) Journal Proper (General Journal)

7. A second hand motor car was purchased on credit from B Brothers for `10,000 will be recorded in
___________________________.
(a) Journal Proper (General Journal)
(b) Sales Book
(c) Cash Book
(d) Purchase Book

8. In which book of original entry, will you record a bills receivable of `1,000, which was received from a
debtor in full settlement for a claim of `1,100, is dishonoured ____________________.
(a) Purchases Return Book
(b) Bills Receivable Book
(c) Journal Proper (General Journal)
Theory Questions
1 Which subsidiary books are normally used in a business?
2. What are the advantages of subsidiary books?

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ACCOUNTING PROCESS 2.67

Practical Questions
1. Enter the following transactions in Sales Book of M/s. Pranat Engineers Ltd., Delhi.
2016
Jan. 2. Sold to M/s. Ajanta Electricals, Delhi 5 pieces of Ovens @ `6,000/- each less Trade discount
@ 10%.
8 Sold to M/s. Ajanta Electricals Plaza, 10 pieces of Tablets @ ` 8,000/- each less trade discount
5%.
15 Sold to M/s. Haryana Traders, 5 pieces of Juicers @ `3,500/- each less trade discount @ 10%.
2. Post into the ledger the entries of Sales Book prepared in Question1.

ANSWERS/HINTS
MCQs

1. (b) 2. (c) 3. (a) 4. (a) 5. (a) 6. (b) 7. (a) 8. (c)

Theoretical Questions
1. Normally, the following subsidiary books are used in a business:
(i) Cash Book to record receipts and payments of cash, including receipts into and payments out of
the bank.
(ii) Purchases Book to record credit purchases of goods dealt in or of the materials and stores required
in the factory.
(iii) Purchase Returns Books to record the returns of goods and materials previously purchased.
(iv) Sales Book to record the sales of the goods dealt in by the firm.
(v) Sale Returns Book to record the returns made by the customers.
(vi) Bills Receivable Books to record the receipts of promissory notes or hundies from various parties.
(vii) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
(viii) Journal (proper) to record the transactions which cannot be recorded in any of the seven books
mentioned above.
2. For advantages of Subsidiary Books, refer para 4.1.

PRACTICAL PROBLEMS
ANSWERS 1
Sales Book

Date Particulars Gross Trade Net

Amount Discount Price
2016
Jan. 2 Ajanta Electricals 5 pieces of

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2.68 PRINCIPLES AND PRACTICE OF ACCOUNTING

Ovens @ ` 6,000 each

Less: 10% discount 30,000 3,000 27,000
8 Electronics Plaza 10 pieces of
Tablets @ ` 8,000 each,
Less: 5% trade discount 80,000 4,000 76,000
15 Haryana Traders 5 pieces of
Juicers @ ` 3,500 each,
Less 10% trade discount 17,500 1,750 15,750
1,27,500 8,750 1,18,750
ANSWERS 2
Ledger
Ajanta Electricals

Date Particulars L.F. Amount Date Particulars L.F. Amount

2016 (` ) 2016 (` )

Jan. 2 To Sales A/c 27,000

Electronics Plaza

Date Particulars L.F. Amount Date Particulars L.F. Amount

2016 (` ) 2016 (` )
Jan. 8 To Sales A/c 76,000

Haryana Traders

Date Particulars L.F. Amount Date Particulars L.F. Amount

2016 (` ) 2016 (` )
Jan. 15 To Sales A/c 15,750

Sales Account

Date Particulars L.F. Amount Date Particulars L.F. Amount

2016 (` ) 2016 (` )
Jan. 31 By Sundries 1,18,750
(As per Sales Book)

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ACCOUNTING PROCESS 2.69

UNIT 5 : CASH BOOK

LEARNING OUTCOMES
After studying this unit, you will be able to:
w Understand that a Cash Book is a type of subsidiary book but treated as a principal book.
w Be familiar with various kinds of Cash Books, viz., Simple Cash Book, Two-column Cash Book and Three-
column Cash Book.
w Learn the technique of preparation of Simple Cash Book and how to balance it.
w See how Double-Column Cash Book is a prepared adding discount column alongwith cash column.
w Understand the techniques of preparing Three-column Cash Book.
w Understand what is a Petty Cash Book and the Imprest System of Petty Cash.
w Note the advantages of the Petty Cash Book.
w Learn how to maintain a Petty Cash Book and how to post the entries of the Petty Cash Book in the
ledger.
w Understand the accounting of credit/debit sales transactions

Subsidiary
book as well as
Principal book

UNIT OVERVIEW
Simple Cash Three column
cash book
Book cash book

Two column
cash book

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2.70 PRINCIPLES AND PRACTICE OF ACCOUNTING

5.1 CASH BOOK - A SUBSIDIARY BOOK AND A PRINCIPAL BOOK

Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger
accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the
cash account and the bank account; the balances are entered in the trial balance directly. The Cash Book,
therefore, is part of the ledger also. Hence, it has also to be treated as the principal book. The Cash Book is
thus both a subsidiary book and a principal book.

5.2 KINDS OF CASH BOOK

The main Cash Book may be of the three types:
(i) Simple Cash Book;
(ii) Two-column Cash Book;
(iii) Three-column Cash Book.
In addition to the main Cash Book, firms also generally maintain a petty cash book but that is purely a
subsidiary book.
SIMPLE CASH BOOK
Such a cash book appears like an ordinary account, with one amount column on each side. The left-hand
side records receipts of cash and the right-hand side the payments.
Balancing of the Cash Book: The cash book is balanced like other accounts. The total of receipts column is
always greater than total of payments column. The difference is written on the credit side as ‘By balance c/d’.
The totals are then entered in the two columns opposite one another and then on the debit side the balance
is written as “To Balance b/d”, to show cash balance in hand in the beginning of next period.

? ILLUSTRATION 1
Enter the following transactions in a Simple Cash Book:

2016 `
Jan.1 Cash in hand 1,200
“5 Received from Ram 300
“7 Paid Rent 30
“8 Sold goods for cash 300
“ 10 Paid to Shyam 700
“ 27 Purchased Furniture 200
“ 31 Paid Salaries 100
“ 31 Rent due, not yet paid, for January 30

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ACCOUNTING PROCESS 2.71

 SOLUTION
Dr. Cash Book Cr.

Date Receipts L.F. Amount Date Payments L.F. Amount

2016 ` 2016 `
Jan. 1 To Balance b/d 1,200 Jan. 07 By Rent A/c 30
“5 To Ram A/c 300 “ 10 By Shyam A/c 700
“8 To Sales A/c 300 “ 27 By Furniture A/c 200
“ 31 By Salaries A/c 100
“ 31 By Balance c/d 770
1,800 1,800
2016
Feb. 1 To Balance b/d 770
Note: One can see the following:
(i) In the simple cash book only the cash receipts and cash payments are recorded.
(ii) The total of debit side is always greater than the total of credit side since the payment cannot exceed
the available cash.
(iii) The simple cash book is like an ordinary account.

DOUBLE-COLUMN CASH BOOK

If along with columns for amounts to record cash receipts and cash payments another column is added
on each side to record the cash discount allowed or the discount received, or a column on the debit side
showing bank receipts and another column on the credit side showing payments through bank. It is a
double-column cash book.
Cash discount is an allowance which often accompanies cash payments. For example, if a customer owes
` 500 but is promised that 2% will be deducted if payment is made within a certain period, the customer
can clear his account by paying promptly ` 490. Cash received will be ` 490 and ` 10 will be the discount for
the firm receiving the payment discount is a loss; for the person making the payment it is a gain. Since cash
discount is allowed only if cash is paid, it is convenient to add a column for discount allowed on the receipt
side of the cash book and a column for discount received on the payment side of the cash book.
In the cash column on the debit side, actual cash received is entered; the amount of the discount allowed,
if any, to the customer concerned is entered in the discount column. Similarly, actual cash paid is entered in
the cash column on the payments side and discount received in the discount column. Also the bank column
on the debit side records all receipts through bank and the same column on the credit side shows payment
through bank.
Balancing: It should be noted that the discount columns are not balanced. They are merely totalled. The
total of the discount column on the receipts side shows total discount allowed to customers and is debited
to the Discount Account. The total of the column on the payments side shows total discount received and is
credited to the Discount Account. The Cash columns are balanced, as already shown. The bank columns are
also balanced and the balancing figure is called bank balance. Thus a double column cash book should have
two columns on each side comprising of either cash and discount transaction or cash and bank transactions.

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2.72 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 2
Ganesh commenced business on 1st April, 2017 with ` 2,000 as capital. He had the following cash transactions
in the month of April 2017:

` `
April 1 Purchased furniture April 7 Paid for petty expenses 15
and paid cash 250 “ 8 Cash purchases 150
“2 Purchased goods 500
“4 Sold goods for cash 950
13 Paid for labour 1,000
“5 Paid cash to Ram Mohan 560
“6 He allowed discount 10 “” Paid Ali & Sons 400
“6 Received cash from They allowed discount 8
Krishna & Co. 600 “”
Allowed discount 20
Make out the two-column Cash Book (Cash and discount column) for the month of April, 2017.

 SOLUTION

Cash Book

Dr. Receipts L.F. Discount Amount Date Payments L.F. Discount Cr.
Date ` ` 2017 ` Amount
2017 `
April 1 To Capital A/c 2,000 April 1 By Furniture A/c 250
“ 4 To Sales A/c 950 “ 2 By Purchases A/c 500
“ 6 To Krishna A/c 20 600
“ 5 By Ram Mohan 10 560
“ 7 By Petty
Expenses A/c 15
“ 8 By Purchases A/c 150
“ 13 By wages A/c 1,000
“ 13 By Ali & Sons 8 400
“ 30 By Balance c/d 675
20 3,550 18 3,550
May 1 To Balance b/d 675

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ACCOUNTING PROCESS 2.73

To summarise:
(i) the discount columns in the cash book are totalled;
(ii) they are not balanced; and
(iii) their totals are entered in the discount received/paid account in the ledger.
Note: The person who pays, is credited by both the cash paid by him and the discount allowed to him.
Similarly, the person to whom payment is made, is debited with both the amount paid and the discount
allowed by him.

THREE-COLUMN CASH BOOK

A firm normally keeps the bulk of its funds at a bank; money can be deposited and withdrawn at will if
it is current account. Probably payments into and out of the bank are more numerous than strict cash
transactions. There is only a little difference between cash in hand and money at bank. Therefore, it is very
convenient if, on each side in the cash book, another column is added to record cash deposited at bank (on
the receipt side of the cash book) and payments out of the bank (on the payment side of the cash book).
For writing up the three-column cash book the under mentioned points should be noted:
1. While commencing a new business, the amount is written in the cash column if cash is introduced and
in the bank column if it is directly put into the bank with the description “To Capital Account”. If a new
cash book is being started for an existing business, the opening balances are written as : “To Balance
b/d”.
2. All receipts are written on the receipts side, cash in the cash column and cheques in the bank column. If
any discount is allowed to the party paying the amount, the discount is entered in the discount column.
In the particulars column the name of the account in respect of which payment has been received is
written.
3. All payments are written on the payments side, cash payment in the cash column and payments by
cheques in the bank column. If some discount has been received from the party receiving the payment,
it is entered in the discount column.
4. Contra Entries: Often cash is withdrawn from bank for use in the office. In such a case the amount is
entered in the bank column on the payments side and also in the cash column on the receipts side.
In the reverse case of cash being sent to the bank, the amount is recorded in the bank column on the
receipts side and in cash column on payment side. Against such entries, the letter “C” should be written
in the LF. column, to indicate that these are contra transaction and no further posting is required for
them.
Note: If initially cheques received are entered in the cash column and then sent to the bank, the entry is
as if cash has been sent to the bank.
While recording contra entries, the basic but important rules should be followed -
(a) The Receiver Dr.
The Giver Cr.

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2.74 PRINCIPLES AND PRACTICE OF ACCOUNTING

(b) All what comes in Dr.

All what goes out Cr.
e.g. where a Cash Book with separate columns for Bank Account is maintained.
(a) If cash is deposited in Bank Account, the Bank will be the Receiver, hence it will be Debited and as
the cash is going out, cash will be credited.
(b) If cash is withdrawn from the Bank Account, the Bank will be the Giver, hence it will be Credited and,
as the cash is coming in, cash will be Debited.
5. If some cheque sent to the bank is dishonoured, i.e., the bank is not able to collect the amount, it is
entered in the bank column on the credit side with the name of the related party in the particulars
column.
6. If some cheque issued by the firm is not paid on presentation, it is entered in the Bank column on the
debit side with the name of the party to whom the cheque was given.
7. In a rare case, a cheque received may be given to some other party, i.e., endorsed. On receipt, it must
have been entered in the bank column on the debit side; on endorsement the amount will be written
in the bank column on the credit side.
The advantages of such type of Cash Book are that -
(a) the Cash Account and the Bank Account are prepared simultaneously, therefore the double entry
is completed in the Cash Book itself. Thus the contra entries can be easily cross-checked in Cash
column in one side and the Bank column in the other side of the Cash Book. Also the chances of
error are reduced.
(b) the information regarding Cash in Hand and the Bank Balance can be obtained very easily and
quickly as there is no need to prepare Ledger of the Bank Account.
In case of maintaining more than one Bank Account, separate column can be add for each Bank Account.
Transactions between these two or more Bank Accounts can be recorded and tallied with a much less
effort.
Suppose, there are two Bank Accounts namely PNB Current Account and SBI-Cash Credit Account. Now,
if a cheque is deposited of PNB to SBI Account, the receiver - i.e., SBI Account will be debited and the
giver i.e. the PNB Account shall be credited.
Balancing: The discount columns are totalled but not balanced. The cash columns are balanced exactly
in the same manner as indicated for the simple cash book. The process is similar for balancing the
bank columns also. It is possible, however, that the bank may allow the firm to withdraw more than the
amount deposited i.e., to have an overdraft, In such a case, the total of the bank column on the credit
side is bigger than the one on the debit side. The difference is written on the debit side as “To Balance
c/d.” Then the totals are written on the two sides opposite one another, the balance is then entered on
the credit side as “By Balance b/d.”
However, the usual case is that payments into the bank will exceed the withdrawals or payments out of
the bank. Then the bank columns are balanced just like the cash columns.

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ACCOUNTING PROCESS 2.75

? ILLUSTRATION 3
Enter the following transactions in Cash Book with Discount and Bank Columns. Cheques are first treated as cash
receipt.

2016 `
Jan.1 Chandrika commences business with Cash 20,000
“3 He paid into Current A/c 19,000
“4 He received cheque from Kirti & Co. on account 600
“7 He pays in bank Kirty & Co.’s cheque 600
“10 He pays Rattan & Co. by cheque and is allowed discount ` 20 330
“12 Tripathi & Co. pays into his Bank A/c 475
“15 He receives cheque from Warshi and allows him discount ` 35 450
“20 He receives cash ` 75 and cheque ` 100 for cash sale
“25 He pays into Bank, including cheques received on 15th and 20th 1,000
“27 He pays by cheque for cash purchase 275
“30 He pays sundry expenses in cash 50

 SOLUTION

Dr. Cash Book Cr.

Date Receipts L.F. Discount Cash Bank Date Payments L.F. Discount Cash Bank
` ` ` ` ` `
2016 2016
Jan. 1 To Capital A/c 20,000 Jan. 3 By Bank A/c C 19,000
3 To Cash C 19,000 7 By Bank A/c C 600
4 To Kirti & Co. 600 10 By Ratan & Co. 20 330
7 To Cash C 600 25 By Bank A/c C 1,000
12 To Tripathi & 475 27 By Purchases 275
Co. A/c
15 To Warshi 35 450 30 By S. Exp. A/c 50
20 To Sales A/c 175
25 To Cash C 1,000
31 By Balance c/d 300 20,745
35 21,225 21,075 20 21,225 21,075
Feb. 1 To Balance b/d 300 20,745

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2.76 PRINCIPLES AND PRACTICE OF ACCOUNTING

5.3 POSTING THE CASH BOOK ENTRIES

Students would have seen that the cash columns in the cash book is actually the cash account and the bank
column is actually bank account. Also, the discount columns are memorandum columns, meant only to
provide information about the total discount allowed and total discount received.
The debit side columns for cash and bank indicate receipts. Therefore, the amounts debited in the cash
book should be put to the credit of the account in respect of which cash or cheque has been received. For
instance, in the cash book given above we see that `175 have been received for sale of goods. For posting,
the amount is credited to the Sales Account as “By Cash `175.” We also see M/s. Warsi have paid `450 and
also they have been allowed ` 35 as discount; thus they have discharged a debt of `485. In the account of
M/s. Warsi, the posting is on the credit side as
By Cash ` 450
By Discount ` 35
or as:
By Sundries ` 485
All payments are recorded on the credit side. The particulars columns show on what account
payments have been made. In the ledger accounts concerned the amount is put on the
debit side. For example, the cash book shows that a cheque for ` 330 has been issued to
M/s. Ratan & Co. and also that they have allowed a discount of ` 20; thus an obligation of ` 350 has been
met. In the account of M/s. Ratan & Co. the posting is:
To Bank ` 330
To Discount ` 20
Or
To Sundries ` 350
The rule thus develops: From the debit side of the cash book credit the various accounts with their respective
amounts (including any discount that may have been allowed); from the credit side of cash book the posting
will be to the debit of the accounts mentioned in the particular column with their respective amounts
(including the discount which may have been received).
As has been shown already, the total of the discount columns on the debit side is debited to the discount
account; the total of the column on the credit side is credited to the discount account. From the cash book
given on the previous page ` 35 is debited and ` 20 be credited to the discount account.

5.4 PETTY CASH BOOK

In a business house a number of small payments, such as for telegrams, taxi fare, cartage, etc., have to be
made. If all these payments are recorded in the cash book, it will become unnecessarily heavy. Also, the main
cashier will be overburdened with work. Therefore, it is usual for firms to appoint a person as ‘Petty Cashier’
and to entrust the task of making small payments say below ` 200, to him. Of course he will be reimbursed
for the payments made. Later, on an analysis, the respective account may be debited.

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ACCOUNTING PROCESS 2.77

IMPREST SYSTEM OF PETTY CASH

It is convenient to entrust a definite sum of money to the petty cashier in the beginning of a period and to
reimburse him for payments made at the end of the period. Thus, he will have again the fixed amount in the
beginning of the new period. Such a system is known as the imprest system of petty cash.
The system is very useful specially if an analytical Petty Cash Book is used. The book has one column to record
receipt of cash (which is only from the main cashier) and other columns to record payments of various types.
The total of the various columns show why payments have been made and then the relevant accounts can
be debited.
(i) The amount fixed for petty cash should be sufficient for the likely small payments for a relatively short
period, say for a week or a fortnight.
(ii) The reimbursement should be made only when petty cashier prepares a statement showing total
payments supported by vouchers, i.e., documentary evidence and should be limited to the amount of
actual disbursements.
(iii) The vouchers should be filed in order.
(iv) No payment should be made without proper authorization. Also, payments above a certain specified
limit should be made only by the main cashier.
(v) The petty cashier should not be allowed to receive any cash except for reimbursement.
In the petty cash book the extreme left-hand column records receipts of cash. The money column towards
the right hand shows total payments for various purposes; a column is usually provided for sundries to
record infrequent payments. The sundries column is analysed. At the end of the week or the fortnight the
petty cash book is balanced. The method of balancing is the same as for the simple cash book.

? ILLUSTRATION 4
Prepare a Petty Cash Book on the imprest System from the following:

2016 `
Jan. 1 Received `100 for petty cash
“ 2 Paid bus fare .50
“ 2 Paid cartage 2.50
“ 3 Paid for Postage & Telegrams 5.00
“ 3 Paid wages for casual labourers 6.00
“ 4 Paid for stationery 4.00
“ 4 Paid tonga charges 2.00
“ 5 Paid for the repairs to chairs 15.00
“ 5 Bus fare 1.00
“ 5 Cartage 4.00
“ 6 Postage and Telegrams 7.00
“ 6 Tonga charges 3.00
“ 6 Cartage 3.00
“ 6 Stationery 2.00
“ 6 Refreshments to customers 5.00
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2.78 PRINCIPLES AND PRACTICE OF ACCOUNTING

 SOLUTION
Petty Cash Book
Receipts Date V. Particulars Total Con- Cartage Statio- Postage & Wages Sundries
` 2016 No. ` veyance ` nery Telegrams ` `
` ` `
100 Jan.1 To Cash
2 1 By Conveyance .50 .50
2 By Cartage 2.50 2.50
3 3 By Postage and 5.00 5.00
Telegrams
4 By Wages 6.00 6.00
4 5 By Stationery 4.00 4.00
6 By Conveyance 2.00 2.00
5 7 By Repairs to 15.00 15.00
Furniture
8 By Conveyance 1.00 1.00
9 By Cartage 4.00 4.00
6 10 By Postage and 7.00 7.00
Telegrams
“ 11 By Conveyance 3.00 3.00
“ 12 By Cartage 3.00 3.00
“ 13 By Stationery 2.00 2.00
“ 14 By General 5.00 5.00
Expenses
60.00 6.50 9.50 6.00 12.00 6.00 20.00
By Balance c/d 40.00
100 100.00
40.00 To Balance b/d
60.00 8 To Cash

ADVANTAGES OF PETTY CASH BOOK

There are mainly three advantages:
(i) Saving of time of the chief cashier;
(ii) Saving in labour in writing up the cash book and posting into the ledger; and
(iii) Control over small payments.

POSTING THE PETTY CASH BOOK

In the ledger, a petty cash account is maintained; when an amount is given to the petty cashier, the petty
cash account is debited. Each week or forthnight, the total of the payments made is credited to this account.
The petty cash account will then show the balance in the hand of the cashier; on demand he should be able
to produce it for counting. At the end of the year, the balance is shown in the balance sheet as part of cash
balance.
Of course, the payments must be debited to their respective amounts as shown by the petty cash book. For
this two methods may be used:
(i) From the petty cash book the total of the various columns may be directly debited to the concerned
accounts; or
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ACCOUNTING PROCESS 2.79

(ii) A journal entry may first be prepared on the basis of the petty cash book, debiting the accounts shown
by the various analysis columns, and crediting the total of the payment of the petty cash accounts.
For Illustration 4 the journal entry and relevant accounts are as follows:

2016 ` `
Jan. 6 Conveyance Account Dr. 6.50
Cartage account Dr. 9.50
Stationery account Dr. 6.00
Postage and Telegrams account Dr. 12.00
Wages Account Dr. 6.00
Repairs Account Dr. 15.00
General Expenses Account Dr. 5.00
To Petty Cash Account 60.00
(Being the analysis of the Petty Cash Book for
the week ending Jan. 6)
Entry for cash handed over to the Petty Cashier
Petty Cash Account Dr. 100
To Cash Account 100
(Being Cash received)

Petty Cash Account

Date Particulars Folio Amount Date Particulars Folio Amount
2016 ` 2016 `
Jan.1 To Cash 100.00 Jan. 6 By Sundries:
“8 To Cash 60.00 Conveyance 6.50
Cartage 9.50
Stationery 6.00
Postage and 12.00
Telegrams
Wages 6.00
Repairs 15.00
General Expenses 5.00

5.5 ENTRIES FOR SALE THROUGH CREDIT/DEBIT CARDS

Now-a-days sales through Credit/Debit Cards are issued by almost every Bank in India either directly or
with collaboration of some other agencies. HSBC Card, SBI Card, BOB Card, ICICI Bank Card, HDFC Card and
Andhra Bank Card are some of the popular Cards.
The procedure for issuing Credit/Debit Cards are as follows -
1. A small Plastic Card, called Credit Card is issued by bank to a prospective customer, after verifying his
credibility, which is generally measured by his income sources. Debit Card is issued by bank to a customer
who has an account with the bank, maintaining a minimum balance. Now a days ATM Card issued by

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2.80 PRINCIPLES AND PRACTICE OF ACCOUNTING

the bank can also be used as Debit Card. This card would contain an embossed 16 digit number and also
the name of the cardholder.
2. Generally Bank charges annual subscription fees from the credit card holder. No fee is charged in case
of Debit Card, though some banks charge a nominal fee on Debit Card.
3. When the Card holder intends to buy some goods or services through Credit or Debit Card, the seller
fills in a form, generally in triplicate, the details of the goods a with the amount of sales and uses
the embossed card with the help of the Credit Card machine to print the data on that form. Also the
customer has to countersign the form. One carbon copy of the form is given to the customer for the
record.
4. The seller sums up the different amounts sold like this and submits, generally everyday, to his bank all
the forms. The amount is credited by the bank to the seller’s account and debited to the account of the
Bank or the company issuing the Credit/Debit Card.
5. The bank issuing the Card, charges commission for each such transaction, which varies between 1% to
4% and is immediately debited to seller’s bank account.
6. The bank sends a monthly statement to the card holder. In case of Debit Card the account is immediately
debited to the card holder’s account, whereas in case of Credit Card, card holder has to pay the amount
in full or part. However, if not paid in full, the interest is charged.
ACCOUNTING FOR CREDIT/DEBIT CARD SALE
From the seller’s point of view, this type of sale is equivalent to a cash sale. Commission charged by the
bank will be treated as selling expenses. The following journal entries will be made in the seller’s books of
accounts.
1. Bank A/c Dr.
To Sales Account
(Sales made through Credit/Debit Card)

2. Commission Account Dr.

To Bank Account
(Commission charged by bank)

? ILLUSTRATION 5
Enter the following transaction in Cash Bank with Discount and Bank columns. Cheques are first treated as cash
receipts -

2016 `
March 1 Cash in Hand 15,000
Overdraft in Bank 500
2 Cash Sales 3,000
3 Paid to Sushil Bros. by cheque 3,400
Discount received 100
5 Sales through credit card 2,800
6 Received cheque from Srijan 6,200

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ACCOUNTING PROCESS 2.81

7 Endorsed Srijan’s cheque in favour of Adit

9 Deposit into Bank 6,800
10 Received cheque from Aviral and deposited the same into Bank
by allowing discount of `50 3,600
12 Adit informed that Srijan’s cheque is dishonoured. Now cash is received from Srijan
and amount is paid to Adit through own cheque
15 Sales through Debit Card 3,200
24 Withdrawn from Bank 1,800
28 Paid to Sanchit by cheque 3,000
30 Bank charged 1% commission on sales through
Debit/Credit Cards

 SOLUTION
Dr. Cash Book Cr.

Date Particulars L.F. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
` ` ` ` ` `

2016 2016
March 1 To Balance b/d 15,000 March 1 By Balance b/d 500
2 To Sales 3,000 3 By Sushil Bros. 100 3,400
5 To Sales 2,800 7 By Adit 6,200
6 To Srijan 6,200 9 By Bank C 6,800
9 To Cash A/c C 6,800 12 By Adit 6,200
10 To Aviral 50 3,600 24 By Cash A/c C 1,800
12 To Srijan 6,200 28 By Sanchit 3,000
15 To Sales A/c 3,200 30 By Commission 60
24 To Bank A/c C 1,800 31 By Balance c/d 19,200 1,440
50 32,200 16,400 100 32,200 16,400

If the received cheque is endorsed to other party on the same day then no entry is required. However in the
above case posting has been done through cash coloum as the endorsement is done on the next day.

SUMMARY
w Cash book contains cash transactions and also bank transactions, if it has a separate book column. It is
both a subsidiary book and a principal book.
w Cash book can be prepared adding discount column also.

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2.82 PRINCIPLES AND PRACTICE OF ACCOUNTING

w For small payments, petty cash book is maintained separately recording the particulars of payment and
its amount. The fixed amount is given to the petty cashier for making small payments in the beginning
of the period. The amount spent is replenished so that he will have again the fixed sum in the beginning
of the next period. This system is known as imprest system of petty cash book.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. The total of discounts column on the debit side of the cash book, recording cash discount deducted by
customers when paying their accounts, is posted to the __________________________
(a) Credit of the discount allowed account.
(b) Debit of the discount allowed account
(c) Credit of the discount received account.
2. Cash book is a type of __________ but treated as a ____________ of accounts.
(a) Subsidiary book, principal book
(b) Principal book, subsidiary book
(c) Subsidiary book, subsidiary book
3. Which of the following is not a column of a three-column cash book?
(a) Cash column
(b) Bank column
(c) Petty cash column
4. Contra entries are passed only when __________________________
(a) Double-column cash book is prepared
(b) Three-column cash book is prepared
(c) Simple cash book is prepared
5. The Cash Book records __________________________
(a) All cash receipts
(b) All cash payments
(c) All cash receipts and payments
6. The balance in the petty cash book is __________________________
(a) An expense
(b) A profit
(c) An asset

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ACCOUNTING PROCESS 2.83

7. If Ram has sold goods for cash, the entry will be recorded __________________________
(a) In the Cash Book
(b) In the Sales Book
(c) In the Journal
Theory Questions
1. Is cash book a subsidiary book or a principal book? Explain.
2. What are the various kinds of cash book?
3. What are the advantages of a three column cash book?
Practical Questions
1. Shri Ramaswamy maintains a Columnar Petty Cash Book on the Imprest System. The imprest amount is
` 500. From the following information, show how his Petty Cash Book would appear for the week ended
12th September, 2015:
`

7-9-2015 Balance in hand 134.90

Received Cash reimbursement to make up the imprest 365.10
Stationery 49.80
8-9-2015 Miscellaneous Expenses 20.90
9-9-2015 Repairs 156.70
10-9-2015 Travelling 68.50
11-9-2015 Stationery 71.40
12-9-2015 Miscellaneous Expenses 6.30
Repairs 48.30
ANSWERS/HINTS
MCQs

1. (b) 2. (a) 3. (c) 4. (b) 5. (c) 6. (c) 7. (a)

Theoretical Questions
1. Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger
accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as
the cash account and the bank account; the balances are entered in the trial balance directly. The Cash
Book, therefore, is part of the ledger also. Hence, it has also to be treated as the principal book. The Cash
Book is thus both a subsidiary book and a principal book.
2. The main Cash Book may be of the three types:
(i) Simple Cash Book;

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2.84 PRINCIPLES AND PRACTICE OF ACCOUNTING

(ii) Two-column Cash Book;

(iii) Three-column Cash Book.
In addition to the main Cash Book, firms also generally maintain a petty cash book but that is purely a
subsidiary book.
3. The advantages of three column Cash Book are that -
(a) the Cash Account and the Bank Account are prepared simultaneously, therefore the double entry
is completed in the Cash Book itself. Thus the contra entries can be easily cross-checked in Cash
column in one side and the Bank column in the other side of the Cash Book. Also the chances of
error are reduced.
(b) the information regarding Cash in Hand and the Bank Balance can be obtained very easily and
quickly as there is no need to prepare Ledger of the Bank Account.

Practical Problems
Answer 1
Petty Cash Book

Date Receipts Amount Date Payments Total Stationery Travelling Misc Repairs
2015 ` 2015 Amount ` ` Exps. `
` `
Sept. 7 To Balance b/d 134.90 7 By Stationery 49.80 49.80
To Reimbursement 365.10 8 By Misc. Expenses 20.90 20.90
9 By Repairs 156.70 156.70
10 By Travelling 68.50 68.50
11 By Stationery 71.40 71.40
12 By Misc. Expenses 6.30 6.30
By Repairs 48.30 48.30
421.90 121.20 68.50 27.20 205.00
By Balance c/d 78.10
500.00 500.00
13 To Balance b/d 78.10

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ACCOUNTING PROCESS 2.85

UNIT 6 : RECTIFICATION OF ERRORS

LEARNING OUTCOMES
After studying this unit, you will be able to:
w Understand different types of errors which may occur in course of recording transactions and events.
w Be familiar with the steps involved in locating errors.
w Learn the nature of one-sided errors and two-sided errors.
w Understand why suspense account is opened for rectification of errors.
w Understand the technique of correcting errors of one period in the next accounting period.

Errors of
Principle

UNIT OVERVIEW Errors of Types of Errors of

Omission Commission
Errors

Compensating
Errors

6.1 INTRODUCTION
Unintentional omission or commission of amounts and accounts in the process of recording the transactions
are commonly known as errors. These various unintentional errors can be committed at the stage of
collecting financial information/data on the basis of which financial statements are drawn or at the stage of
recording this information. Also errors may occur as a result of mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, or oversight. To check the arithmetic accuracy of the journal
and ledger accounts, trial balance is prepared. If the trial balance does not tally, then it can be said that
there are errors in the accounts which require rectification thereof. Some of these errors may affect the Trial
Balance and some of these do not have any impact on the Trial Balance although such errors may affect the
determination of profit or loss, assets and liabilities of the business.
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2.86 PRINCIPLES AND PRACTICE OF ACCOUNTING

Illustrative Case of Errors and their Nature

We have seen that after preparing ledger accounts a trial balance is taken out where debit and credit
balances are separately listed and totalled. If the two totals do not agree, it is definite that there have been
some errors We shall now study the types of errors which may be committed and how they may be rectified.
For this purpose, the working of the following illustrative cases should be carefully seen.
Illustrative Cases of Errors
(a) Wrong Entry: Let us start from the first phase in the accounting process. Wrong entry of the value of
transactions and events in the subsidiary books, Journal Proper and Cash Book may occur.
Example 1: Credit purchases `17,270 are entered in the Purchases Day Book as `17,720. Credit sales of
`15,000 gross less 1% trade discount are wrongly entered in Sales Day Book at `15,000. Cheque issued
`19,920 are wrongly entered in the credit of bank column in the Cash Book as `19,290.
(b) Wrong casting of subsidiary books: Subsidiary books are totalled periodically and posted to the
appropriate ledger accounts. There may arise totalling errors. Totalling errors may arise due to wrong
entry or simply these may be independent errors.
Example 2: For the month of January, 2016 total of credit sales are `1,75,700, this is wrongly totalled as
`1,76,700 and posted to sales account as `1,76,700.
(c) In case of cash book, wrong castings result in wrong calculation of the balance c/d.
Example 3: The following cash transactions of M/s. Tularam & Co. occurred:
2017

Jan. 1 Balance - cash `1,200 bank `16,000;

Jan. 2 Cheque issued to M/s. Bholaram & Co., a supplier, for `22,500;
Jan. 6 Cheque collected from M/s. Scindia & Bros. `42,240 and deposited for clearance;
Jan. 7 Cash sales `27,200 paid wages `12,400;
Jan. 8 Cash sales ` 37,730 cash deposited to bank ` 35,000.
The following Cash Book entries are passed:
Dr. Cash Book Cr.

Date Particulars Cash Bank Date Particulars Cash Bank

2017 ` ` 2017 ` `
Jan. 1 To Balance b/d 1,200 16,000 Jan. 2 By M/s Bholaram & Co. A/c 22,500

Jan. 6 To M/s. Scindia & Bros. A/c 42,420 By Wages A/c 12,200
Jan. 7 To Sales A/c 27,200 By Bank A/c 34,500
Jan. 8 To Sales A/c 37,370 By Balance c/d 19,070 71,420

Jan. 8 To Cash A/c 34,500

65,770 93,920 65,770 93,920

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ACCOUNTING PROCESS 2.87

Wrong entries and wrong casting are shown in bold prints. However, errors of cash entries generally are not
carried. Usually cash balances are tallied daily. So errors are identified at an early stage. But bank balance
cannot be checked daily and thus errors may be carried until bank reconciliation is made. In the above
example, there are four wrong entries and one wrong casting. Bank and cash balances are affected by these
errors.
(d) Wrong posting from subsidiary books: In this case, the wrong amount may be posted to the ledger
account or the amount may posted to the wrong side or to the wrong account. For example, purchases
from A may be posted to B’s account.
(e) Wrong casting of ledger balances: Likewise Cash Book, any ledger account balance may be cast
wrongly. Obviously wrong postings make the balance wrong; but that is not wrong casting of balances.
Whenever there arises independent casting error as in the case of bank column in the Cash Book of
example (4), that is called wrong casting of ledger balances.
Example 4: The following are the credit purchases of M/s. Ballav Bros.:
2017
Jan. 1 Purchases from M/s. Saurabh & Co.- gross `1,00,000 less 1% trade discount.
Jan. 3 Purchases from M/s. Netai & Co.- gross ` 70,000 less 1% trade discount.
Jan. 6 Purchases from M/s. Saurabh & Co.- gross ` 60,000 less 1% trade discount
Let us cast M/s. Saurabh & Co.’s Account:
Dr. M/s Saurabh & Co. Account Cr.

Date Particulars Amount ` Date Particulars Amount `

2017 2017
Jan. 1 To Balance c/d 1,55,000 Jan. 1 By Purchases A/c 99,000
Jan. 6 By Purchases A/c 59,400
1,55,000 *1,55,000
*While casting the credit side an error has been committed and so the account is wrongly balanced.
Example 5: Goods are purchased on credit from M/s. Saurabh & Co. for ` 27,030 and from M/s. Karnataka
Suppliers for ` 28,050. The following Day Book is prepared:
Purchases Day Book

Date Particulars Amount

`
M/s. Saurabh & Co. 27,050
M/s. Karnataka Suppliers 28,030
55,080
In the Day Book both the transactions are entered wrongly but the first error has been compensated by the
second. Even if these errors are not rectified Trial Balance would tally.

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2.88 PRINCIPLES AND PRACTICE OF ACCOUNTING

Trial Balance

Particulars Dr. Cr.

` `
M/s. Saurabh & Co. 27,050
M/s. Karnataka Suppliers 28,030
Purchases Account 55,080
55,080 55,080

6.2 STAGES OF ERRORS

Errors may occur at any of the following stages of the accounting process:
AT THE STAGE OF RECORDING THE TRANSACTIONS IN JOURNAL
Following types of errors may happen at this stage:
(i) Errors of principle,
(ii) Errors of omission,
(iii) Errors of commission.
AT THE STAGE OF POSTING THE ENTRIES IN LEDGER
(i) Errors of omission:
(a) Partial omission,
(b) Complete omission.
(ii) Errors of commission:
(a) Posting to wrong account,
(b) Posting on the wrong side,
(c) Posting of wrong amount.
AT THE STAGE OF BALANCING THE LEDGER ACCOUNTS
(a) Wrong Totalling of accounts,
(b) Wrong Balancing of accounts.
AT THE STAGE OF PREPARING THE TRIAL BALANCE
(a) Errors of omission,
(b) Errors of commission:
1. Taking wrong account,
2. Taking wrong amount,
3. Taking to the wrong side.
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ACCOUNTING PROCESS 2.89

On the above basis, we can classify the errors in four broad categories:
1. Errors of Principle,
2. Errors of Omission,
3. Errors of Commission,
4. Compensating Errors.

6.3 TYPES OF ERRORS

Basically errors are of two types:
(a) Errors of principle: When a transaction is recorded in contravention of accounting principles, like
treating the purchase of an asset as an expense, it is an error of principle. In this case there is no effect on
the trial balance since the amounts are placed on the correct side, though in a wrong account. Suppose
on the purchase of a computer, the office expenses account is debited; the trial balance will still agree.
(b) Clerical errors: These errors arise because of mistake committed in the ordinary course of the accounting
work. These are of three types:
(i) Errors of Omission: If a transaction is completely or partially omitted from the books of account, it
will be a case of omission. Examples would be: not recording a credit purchase of furniture or not
posting an entry into the ledger.
(ii) Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong side
or the totals are wrong or a wrong balance is struck, it will be a case of “errors of commission.”
(iii) Compensating Errors: If the effect of errors committed cancel out, the errors will be called
compensating errors. The trial balance will agree. Suppose an amount of `10 received from A is not
credited to his account and the total of the sales book is `10 in excess. The omission of credit to A’s
account will be made up by the increased credit to the Sales Account.
From another point of view, error may be divided into two categories:
(a) Those that affect the trial balance - because of these errors ,trial balance does not agree; these are the
following:
(i) Wrong casting of the subsidiary books.
(ii) Wrong balancing of an account.
(iii) Posting an amount on the wrong side.
(iv) Posting the wrong amount.
(v) Omitting to post an amount from a subsidiary book.
(vi) Omitting to post the totals of subsidiary book.
(vii) Omitting to write the cash book balances in the trial balance.
(viii) Omitting to write the balance of an account in the trial balance.
(ix) Writing a balance in wrong column of the trial balance.
(x) Totalling the trial balance wrongly.

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2.90 PRINCIPLES AND PRACTICE OF ACCOUNTING

(b) The errors that do not affect the trial balance are the following:
(i) Omitting an entry altogether from the subsidiary book.
(ii) Making an entry with the wrong amount in the subsidiary book .
(iii) Posting an amount in a wrong account but on the correct side, e.g., an amount to be debited to A
is debited to B, the trial balance will still agree.
Errors

Errors of Principle (Treating a revenue Clerical Errors

expenses as capital expenditure or vice versa
or the sale of a fixed asset as ordinary sale).
Trial Balance will agree. Errors of Omission Errors of Commission Compensating Errors
Trial Balance will
agree.

Omitting an Entry completely Omitting to post the ledger account

from the subsidiary books. from the subsidiary books. Trial
Trial Balance will agree. Balance will not agree.

Writing the wrong Wrong casting of Posting the wrong Posting an amount on Wrong balancing of
amount in the subsidiary books. amount in the ledger. the wrong side. an account.
subsidiary books. Trial
Balance will agree.

Types Balance will not agree

6.4 STEPS TO LOCATE ERRORS

Even if there is only a very small difference in the trial balance, the errors leading to it must be located and
rectified. A small difference may be the result of a number of errors. The following steps will be useful in
locating errors :
(i) The two columns of the trial balance should be totalled again. If in place of a number of accounts,
only one amount has been written in the trial balance the list of such accounts should be checked and
totalled again. List of Trade receivables is the example from which Trade receivable balance is derived.
(ii) It should be seen that the cash and bank balances have been written in the trial balance.
(iii) The exact difference in the trial balance should be established. The ledger should be gone through; it is
possible that a balance equal to the difference has been omitted from the trial balance. The difference
should also be halved; it is possible that balance equal to half the difference has been written in the
wrong column.
(iv) The ledger accounts should be balanced again.
(v) The casting of subsidiary books should be checked again, especially if the difference is
` 1, ` 100 etc.

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ACCOUNTING PROCESS 2.91

(vi) If the difference is very big, the balance in various accounts should be compared with the corresponding
accounts in the previous period. If the figures differ materially the cases should be seen; it is possible
that an error has been committed. Suppose the sales account for the current year shows a balance of
` 32,53,000 whereas it was ` 36,45,000 last year; it is possible that there is an error in the Sales Account.
(vii) Postings of the amounts equal to the difference or half the difference should be checked. It is possible
that an amount has been omitted to be posted or has been posted on the wrong side.
(viii) If there is still a difference in the trial balance, a complete checking will be necessary. The posting of all
the entries including the opening entry should be checked. It may be better to begin with the nominal
accounts.

6.5 RECTIFICATION OF ERRORS

Errors should never be corrected by overwriting. If immediately after making an entry it is clear that an error
has been committed, it may be corrected by neatly crossing out the wrong entry and making the correct
entry. If however the errors are located after some time, the correction should be made by making another
suitable entry, called rectification entry. In fact the rectification of an error depends on at which stage it is
detected. An error can be detected at any one of the following stages:
(a) Before preparation of Trial Balance.
(b) After Trial Balance but before the final accounts are drawn.
(c) After final accounts, i.e., in the next accounting period.

6.5.1 Before preparation of Trial Balance

There are some errors which affect one side of an account or which affect more than one account in such a
way that it is not possible to pass a complete rectification entry. In other words, there are some errors which
can be corrected, if detected at this stage, by making rectification statement in the appropriate side(s) of
concerned account(s). It is important to note here that such errors may involve only one account or more
than one account. Read the following illustrations:
(i) The sales book for November is undercast by ` 200. The effect of this error is that the Sales Account has
been credited short by ` 200. Since the account is posted by the total of the sales book, there is no error
in the accounts of the customers since they are posted with amounts of individual sales. Hence only the
Sales Accounts is to be corrected. This will be done by making an entry for ` 200 on the credit side: “By
undercasting of Sales Book for November ` 200”.
(ii) While posting the discount column on the debit side of the cash book the discount of
` 10 allowed to Ramesh has not been posted. There is no error in the cash book, the total of discount
column presumably has been posted to the discount account on the debit side. The error is in not
crediting Ramesh by ` 10. This should now be done by the entry “By omission of posting of discount on
----- `10”.
(iii) ` 200 received from Ram has been entered by mistake on the debit side of his account. Since the cash
book seems to have been correctly written, the error is only in the account of Ram - he should have
been credited and not debited by ` 200. Not only is the wrong debit to be removed but also a credit of
` 200 is to be given. This can be done now by entering ` 400 on the credit side of his account. The entry
will be “By Posting on the wrong side - ` 400”.

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(iv) ` 50 was received from Mahesh and entered on the debit side of the cash book but was not posted to
his account. By the error, which affects only the account of Mahesh, ` 50 has been omitted from the
credit side of his account. The rectification will be by the entry. “By Omission of posting on the ` 50.”
(v) ` 51 paid to Mohan has been posted as `15 to the debit of his account. Mohan has been debited short
by ` 36. The rectifying entry is “To mistake in posting on ` 36”.
(vi) Goods sold to Ram for `1,000 was wrongly posted from sales day book to the debit of purchase account.
Ram has however been correctly debited. Here the error affects two accounts, viz., purchases account
and sales account but we cannot pass a journal entry for its rectification because both the accounts
need to be credited. The rectification will be by the entry “By wrong posting on ` 1,000” in the credit of
purchases account and also “By omission of posting on - ` 1,000” in the credit sales account.
(vii) Bills receivable from Mr. A of ` 500 was posted to the credit of Bills payable Account and also credited to
A account. Here also although two accounts are involved we cannot pass a complete journal entry for
rectification. The rectification will be by the entry “To wrong posting on ` 500” in debit of Bills payable
Account and also “To omission of posting on ` 500” in the debit of Bills Receivable Account.
(viii) Goods purchased from Vinod for ` 1,000 was wrongly credited to Vimal account by ` 100. Again we
cannot pass a complete journal entry for rectification even though two accounts are involved. The
rectification will be done by the entry “To wrong posting on `100” in the debit of Vimal account and “By
omission of posting on ` 1,000” in the credit of Vinod account.
Thus, from the above illustrations we are convinced that the general rule that errors affecting two accounts
can always be corrected by a journal entry is not always valid.

? ILLUSTRATION 1
How would you rectify the following errors in the book of Rama & Co.?
1. The total to the Purchases Book has been undercast by `100.
2. The Returns Inward Book has been undercast by ` 50.
3. A sum of ` 250 written off as depreciation on Machinery has not been debited to Depreciation Account.
4. A payment of ` 75 for salaries (to Mohan) has been posted twice to Salaries Account.
5. The total of Bills Receivable Book ` 1,500 has been posted to the credit of Bills Receivable Account.
6. An amount of `151 for a credit sale to Hari, although correctly entered in the Sales Book, has been posted as
` 115.
7. Discount allowed to Satish ` 25 has not been entered in the Discount Column of the Cash Book. the amount
has been postedcorrectly to the credit of his personal account.

 SOLUTION

1. The Purchases Account should receive another debit of `100 since it was debited short previously:
“To Undercasting of Purchases Book for the month of --- `100.”
2. Due to this error the Returns Inward Account has been posted short by ` 50 : the correct entry will be:
“To Undercasting of Returns Inward Book for the month of --- `50.”
3. The omission of the debit to the Depreciation Account will be rectified by the entry:
“To Omission of posting on ` 250”.
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ACCOUNTING PROCESS 2.93

4. The excess debit will be removed by a credit in the Salaries Account by the entry:
“By double posting on ` 75”.
5. `1,500 should have been debited to the Bills Receivable Account and not credited. To correct the
mistake, the Bills Receivable Account should be debited by ` 3,000 by the entry:
“To Wrong posting of B/R received on ` 3,000”
6. Hari’s personal A/c is debited ` 36 short. The rectification entry will be:
“To Wrong posting ` 36”.
7. Due to this error, the discount account has been debited short by ` 25. The required entry is :
“To Omission of discount allowed to Satish on ` 25.”
So far we have discussed the correction of errors which affected only one Account or more than one account
but for which rectifying entries were not complete journal entries.We shall now take up the correction of
errors which affect more than one account in such a way that complete journal entries are possible for their
rectification. Read the following illustrations:
(i) The purchase of machinery for ` 2,000 has been entered in the purchases book. The effect of the entry
is that the account of the supplier Ram & Co. has been credited by ` 2,000 which is quite correct. But the
debit to the Purchases Account is wrong : the debit should be to Machinery Account. To rectify the error,
the debit in the purchases Account has to be transferred to the Machinery Account. The correcting
entry will be to Credit Purchases Account and debit the Machinery Account. Please see the three entries
made below: the last entry rectifies the error:
Wrong Entry: ` `
Purchases Account Dr. 2,000
To Ram & Co. 2,000
Correct Entry:
Machinery Account Dr. 2,000
To Ram & Co. 2,000
Rectifying Entry:
Machinery Account Dr. 2,000
To Purchases Account 2,000
(ii) `100 received from Kamal Kishore has been credited in the account of Krishan Kishore. The error is that
there is a wrong credit in the account of Krishan Kishore and omission of credit in the account of Kamal
Kishore; Krishan Kishore should be debited and Kamal Kishore be credited. The following three entries
make this clear:
Wrong Entry: ` `
Cash Account Dr. 100
To Krishan Kishore 100
Correct Entry:
Cash Account Dr. 100
To Kamal Kishore 100
Rectifying Entry:
Krishan Kishore Dr. 100
To Kamal Kishore 100

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(iii) The sale of old machinery, `1,000 has been entered in the sales book. By this entry the account of
the buyer has been correctly debited by `1,000. But instead of crediting the Machinery Account. Sales
Account has been credited. To rectify the error this account should be debited and the Machinery
Account credited. See the three entries given below:

Wrong Entry: ` `
Buyer’s Account Dr. 1,000
To Sales Account 1,000
Correct Entry:
Buyer’s Account Dr. 1,000
To Machinery Account 1,000
Rectifying Entry:
Sales Account Dr. 1,000
To Machinery Account 1,000

? ILLUSTRATION 2
The following errors were found in the book of Ram Prasad & Sons. Give the necessary entries to correct them.
(1) ` 500 paid for furniture purchased has been charged to ordinary Purchases Account.
(2) Repairs made were debited to Building Account for ` 50.
(3) An amount of `100 withdrawn by the proprietor for his personal use has been debited to Trade Expenses
Account.
(4) `100 paid for rent debited to Landlord’s Account.
(5) Salary `125 paid to a clerk due to him has been debited to his personal account.
(6) `100 received from Shah & Co. has been wrongly entered as from Shaw & Co.
(7) ` 700 paid in cash for a typewriter was charged to Office Expenses Account.

 SOLUTION
Journal

Particulars L.F. Dr. Cr.

` `
(1) Furniture A/c Dr. 500
To Purchases A/c 500
(Correction of wrong debit to Purchases A/c for furniture
purchased)

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ACCOUNTING PROCESS 2.95

(2) Repairs A/c Dr. 50

To Building A/c 50
(Correction of wrong debit to building A/c for repairs made)
(3) Drawings A/c. Dr. 100
To Trade Expenses A/c 100
(Correction of wrong debit to Trade Expenses A/c for cash
withdrawn by the proprietor for his personal use)
(4) Rent A/c Dr. 100
To Landlord’s Personal A/c 100
(Correction of wrong debit to landlord’s A/c for rent paid)
(5) Salaries A/c Dr. 125
To Clerk’s (Personal) A/c 125
(Correction of wrong debit to Clerk’s personal A/c for salaries paid)
(6) Shaw & Co. Dr. 100
To Shah & Co. 100
(Correction of wrong credit to Shaw & Co. Instead of Shah & Co.)
(7) Typewriter A/c Dr. 700
To Office Expenses A/c 700
(Correction of wrong debit to Office Expenses A/c for purchase of
typewriter)

? ILLUSTRATION 3
Give journal entries to rectify the following:
(1) A purchase of goods from Ram amounting to `150 has been wrongly entered through the Sales Book.
(2) A Credit sale of goods amounting `120 to Ramesh has been wrongly passed through the Purchase Book.
(3) On 31st December, 2016 goods of the value of `300 were returned by Hari Saran and were taken inventory
on the same date but no entry was passed in the books.
(4) An amount of ` 200 due from Mahesh Chand, which had been written off as a Bad Debt in a previous year,
was unexpectedly recovered, and had been posted to the personal account of Mahesh Chand.
(5) A Cheque for `100 received from Man Mohan was dishonoured and had been posted to the debit of Sales
Returns Account.

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 SOLUTION
Journal
Particulars L.F. Dr. Cr.
` `
(1) Purchases A/c Dr. 150
Sales A/c Dr. 150
To Ram 300
(Correction of wrong entry in the sales Book for a purchases of
goods from Ram)
(2) Ramesh Dr. 240
To Purchases A/c 120
To Sales A/c 120
(Correction of wrong entry in the Purchases Book of a credit sale
of goods to Ram)
(3) Returns Inwards A/c Dr. 300
To Hari Saran 300
(Entry of goods returned by him and taken in inventory omitted
from records)
(4) Mahesh Chand Dr. 200
To Bad Debts Recovered A/c 200
(Correction of wrong credit to Personal A/c in respect of recovery
of previously written off bad debts)
(5) Man Mohan Dr. 100
To Sales Return A/c 100
(Correction of wrong debit to Sales Returns A/c for dishonour of
cheque received from Man Mohan)
Thus it can be said that errors detected before the preparation of trial balance can be rectified either through
rectification statements (not entries) or through rectification entries.
6.5.2 After Trial Balance but before Final Accounts
The method of correction of error indicated so far is appropriate when the errors have been located before
the end of the accounting period. After the corrections the trial balance will agree. Sometimes the trial
balance is artificially made to agree inspire of errors by opening a suspense account and putting the
difference in the trial balance to the account - the suspense account will be debited if the total of the credit
column in the trial balance exceeds the total of the debit column; it will be credited in the other case.
One must note that such agreement of the trial balance will not be real. Effort must be made to locate the
errors.
The rule of rectifying errors detected at this stage is simple. Those errors for which complete journal entries
were not possible in the earlier stage of rectification (i.e., before trial balance) can now be rectified by way
of journal entry(s) with the help of suspense account, for it these errors which gave rise to the suspense
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ACCOUNTING PROCESS 2.97

account in the trial balance. The rectification entry for other type of error i.e. error affecting more than one
account in such a way that a complete journal entry is possible for its rectification, can be rectified in the
same way as in the earlier stage (i.e. before trial balance).
In a nutshell, it can be said that each and every error detected at this stage can only be corrected by a
complete journal entry. Those errors for which journal entries were not possible at the earlier stage will now
be rectified by a journal entry(s), the difference or the unknown side is being taken care of by suspense
account. Those errors for which entries were possible even at the first stage will now be rectified in the same
way.
Suppose, the sales book for November, 2015 is cast `100 short; as a consequence the trial balance will not
agree. The credit column of the trial balance will be `100 short and a Suspense Account will be credited by
`100. To rectify the error the Sales Account will be credited (to increase the credit to the right figure. Since
now one error remains, the Suspense Account must be closed- it will be debiting the Suspense Account. The
entry will be:
Suspense Account Dr. `100
To Sales Account `100
(Correction of error of undercasting the sales
Book for November 2015)

? ILLUSTRATION 4
Correct the following errors (i) without opening a Suspense Account and (ii) opening a Suspense Account:
(a) The Sales Book has been totalled `100 short.
(b) Goods worth `150 returned by Green & Co. have not been recorded anywhere.
(c) Goods purchased `250 have been posted to the debit of the supplier Gupta & Co.
(d) Furniture purchased from Gulab & Bros, `1,000 has been entered in Purchases Day Book.
(e) Discount received from Red & Black `15 has not been entered in the Discount Column of the Cash Book.
(f) Discount allowed to G. Mohan & Co. `18 has not been entered in the Discount Column of the Cash Book. The
account of G. Mohan & Co. has, however, been correctly posted.

 SOLUTION

If a Suspense Account is not opened.

(a) Since sales book has been cast `100 short, the Sales Account has been similarly credited `100 short. The
correcting entry is to credit the Sales Account by `100 as “By wrong totalling of the Sales Book `100”.
(b) To rectify the omission, the Returns Inwards Account has to be debited and the account of Green & Co.
credited. The entry:
Returns Inward Account Dr. `150
To Green & Co. `150
(Goods returned by the firm, previously
omitted from the Returns Inward Book)

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2.98 PRINCIPLES AND PRACTICE OF ACCOUNTING

(c) Gupta & Co. have been debited `250 instead of being credited. This account should now be credited by
500 to remove the wrong debit and to give the correct debit. The entry will be on the credit side... “By
errors in posting `500”.
(d) By this error Purchases Account has to be debited by `1,000 whereas the debit should have been to the
Furniture Account. The correcting entry will be:

Furniture Account Dr. `1,000

To Purchases Account `1,000
(Correction of the mistake by which of the
Furniture Account)

(e) The discount of `15 received from Red & Black should have been entered on the credit side of the cash
book. Had this been done, the Discount Account would have been credited (through the total of the
discount column) and Red & Black would have been debited. This entry should not be made:

Red & Black Dr. `15

To Discount Account `15
(Rectification of the error by which the
discount allowed by the firm was not entered
in Cash Book)

(f ) In this case the account of the customer has been correctly posted; the Discount Account has been
debited `18 short since it has been omitted from the discount column on the debit side of the cash
book. The discount account should now be debited by the entry; “To Omission of entry in the Cash Book
`18.”
If a Suspense Account is opened :

Particulars L.F. Dr. Cr.

` `
(a) Suspense Account Dr. 100
To Sales Account 100
(Being the correction arising from under- casting of Sales Day
Book)
(b) Return Inward Account Dr. 150
To Green & Co . 150
(Being the recording of unrecorded returns)
(c) Suspense Account Dr. 500
To Gupta & Co. 500
(Being the correction of the error by which Gupta & Co. was
debited instead of being credited by ` 250).

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ACCOUNTING PROCESS 2.99

(d) Furniture Account Dr. 1,000

To Purchases Account 1,000
(Being the correction of recording purchase of furniture as
ordinary purchases)

(e) Red & black Dr. 15

To Discount Account 15
(Being the recording of discount omitted to be recorded)
(f ) Discount Account Dr. 18
To Suspense Account 18
(Being the correction of omission of the discount allowed
from Cash Book customer’s account already posted correctly).

Suspense Account

Dr. Particulars Amount Date Particulars Cr.

Date ` Amount
`
To Sales A/c 100 By Difference in
To Gupta & Co. 500 Trial Balance 582
By Discount A/c 18
600 600
Notes:
(i) One should note that the opening balance in the Suspense Account will be equal to the difference in
the trial balance.
(ii) If the question is silent as to whether a Suspense Account has been opened, the student should make
his assumption, state it clearly and then proceed.

? ILLUSTRATION 5
Correct the following errors found in the books of Mr. Dutt. The Trial Balance was out by ` 493 excess credit. The
difference thus has been posted to a Suspense Account.
(a) An amount of `100 was received from D. Das on 31st December, 2015 but has been omitted to enter in the
Cash Book.
(b) The total of Returns Inward Book for December has been cast `100 short.
(c) The purchase of an office table costing ` 300 has been passed through the Purchases Day Book.
(d) ` 375 paid for Wages to workmen for making show-cases had been charged to “Wages Account”.
(e) A purchase of ` 67 had been posted to the trade payables’ account as ` 60.
(f) A cheque for ` 200 received from P. C. Joshi had been dishonoured and was passed to the debit of “Allowances
Account”.

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2.100 PRINCIPLES AND PRACTICE OF ACCOUNTING

(g) ` 1,000 paid for the purchase of a motor cycle for Mr. Dutt had been charged to “Miscellaneous Expenses
Account”.
(h) Goods amounting to `100 had been returned by customer and were taken in to inventory, but no entry in
respect there of, was made into the books.
(i) A sale of ` 200 to Singh & Co. was wrongly credited to their account. Entry was made correctly made in sales
book.

 SOLUTION

(a) Journal Entries

Particulars L.F. ` `
(a) Cash Account Dr. 100
To D. Das 100
(Being the amount received)
(b) Returns Inward Account Dr. 100
To Suspense Account 100
(Being the mistake in totalling the Returns Inward Book
corrected)
(c) Furniture Account Dr. 300
To Purchases Account 300
(Being the rectification of mistake by which purchase of
furniture was entered in Purchases book and hence debited
to Purchases Account)
(d) Furniture Account Dr. 375
To Wages Account 375
(Being the wages paid to workmen for making show-cases
which should be capitalised and not to be charged to Wages
Account)
(e) Suspense Account Dr. 7
To Creditors (personal) Account 7
(Being the mistake in crediting the Trade payables Account
less by ` 7, now corrected)
(f ) P.C. Joshi Dr. 200
To Allowances Account 200
(Being the cheque of P.C. Joshi dishonoured, previously
debited to Allowances Account)

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ACCOUNTING PROCESS 2.101

(g) Drawings Account Dr. 1,000

To Miscellaneous Expenses 1,000
(Being the motor cycle purchased for Mr. Dutt debited to
his Drawings Account instead of Miscellaneous Expenses
Account as previously done by mistake)
(h) Returns Inward Account Dr. 100
To Debtors (Personal) Account 100
(Correction of the omission to record return of goods by
customers)
(i) Singh & Co. Dr. 400
To Suspense Account 400
(Being the correction of mistake by which the account of
Singh & Co. was credited by ` 200 instead of being debited)

Suspense Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
2015 ` 2015 `
Dec.31 To Difference in Dec. 31 By Returns
Trial Balance 493 Inwards A/c 100
““ To Trade Payables A/c 7 ““ By Singh & Co. 400
500 500

? ILLUSTRATION 6
The following errors, affecting the account for the year 2015 were detected in the books of Jain Brothers, Delhi:
(1) Sale of old Furniture `150 treated as sale of goods.
(2) Receipt of ` 500 from Ram Mohan credited to Shyam Sunder.
(3) Goods worth `100 brought from Mohan Narain have remained unrecorded so far.
(4) A return of `120 from Mukesh posted to his debit.
(5) A return of ` 90 to Shyam Sunder posted as ` 9 in his account.
(6) Rent of proprietor’s residence, ` 600 debited to rent A/c.
(7) A payment of ` 215 to Mohammad Sadiq posted to his credit as `125.
(8) Sales Book added ` 900 short.
(9) The total of Bills Receivable Book ` 1,500 left unposted.
You are required to pass the necessary rectifying entries and show how the trial balance would be affected by the
errors.

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2.102 PRINCIPLES AND PRACTICE OF ACCOUNTING

 SOLUTION
Journal

Particulars L.F. Dr. Cr.

Amount Amount
` `
(1) Sales Account Dr. 150
To Furniture Account 150
(Rectification of sales of furniture treated as sales of
goods)
(2) Shyam Sunder Dr. 500
To Rama Mohan 500
(Rectification of a receipt from Ram Mohan credited
to Shyam Sunder)
(3) Purchases Account Dr. 100
To Mohan Narain 100
(Purchases of goods from Mohan Narain unrecorded)
(6) Drawing Account Dr. 600
To Rent Account 600
(Rectification of Payment of rent of proprietor’s
residence treated as payment of office rent)
N.B. : For 4, 5, 7, 8, 9 no journal entry can be passed as they affect a single account. The correction will be as
under:
(4) Credit Mukesh’s Account with ` 240.
(5) Debit the account of Shyam Sunder by ` 81.
(7) Debit the account of Mohammad Sadiq by ` 340.
(8) Credit Sales Account by ` 900.
(9) Debit Bills Receivable Account with `1,500.
Effect of the Errors on Trial Balance
1. No effect
2. No effect
3. No effect
4. Trial Balance credit total short by ` 240.
5. Trial Balance debit total short by ` 81.
6. No effect
7. Trial Balance debit total short by ` 340.
8. Trial Balance credit total short by ` 900.
9. Trial Balance debit total short by ` 1,500.

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ACCOUNTING PROCESS 2.103

? ILLUSTRATION 7
Write out the Journal Entries to rectify the following errors, using a Suspense Account.
(1) Goods of the value of `100 returned by Mr. Sharma were entered in the Sales Day Book and posted therefrom
to the credit of his account;
(2) An amount of `150 entered in the Sales Returns Book, has been posted to the debit of Mr. Philip, who returned
the goods;
(3) A sale of ` 200 made to Mr. Ghanshyam was correctly entered in the Sales Day Book but wrongly posted to
the debit of Mr. Radheshyam as ` 20;
(4) Bad Debts aggregating `450 were written off during the year in the Sales ledger but were not adjusted in the
General Ledger; and
(5) The total of “Discount Allowed” column in the Cash Book for the month of September, 2015 amounting to
` 250 was not posted.

 SOLUTION
Journal
Particulars L.F. Dr. Cr.
` `
(1) Sales Account Dr. 100
Sales Returns Account Dr. 100
To Suspense Account 200
(The value of goods returned by Mr. Sharma
wrongly posted to Sales and omission of debit to
Sales Returns Account, now rectified)
(2) Suspense Account Dr. 300
To Mr. Philip 300
(Wrong debit to Mr. Philip for goods returned by
him, now rectified)
(3) Mr. Ghanshyam Dr. 200
To Mr. Radheshyam 20
To Suspense Account 180
(Omission of debit to Mr. Ghanshyam and wrong
credit to Mr. Radhesham for sale of ` 200, now
rectified)
(4) Bad Debts Account Dr. 450
To Suspense Account 450
(The amount of Bad Debts written off not adjusted
in General Ledger, now rectified)
(5) Discount Account Dr. 250
To Suspense Account 250
(The total of Discount allowed during September,
2015 not posted from the Cash Book; error now
rectified)

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2.104 PRINCIPLES AND PRACTICE OF ACCOUNTING

6.5.3 Correction in the next Accounting Period

Rectification of errors discussed so far assumes that it was carried out before the books were closed for
the concerned year. However, sometimes, the rectification is carried out in the next year, carrying forward
the balance in the Suspense Account or even transferring it to the Capital Account. Suppose, the Purchase
Book was cast short by `1,000 in December, 2015 and a Suspense Account was opened with the difference
in the trial balance. If the error is rectified next year and the entry passed is to debit Purchase Account (and
credit Suspense Account), it will mean that the Purchases Account for year 2016 will be `1,000 more than
the amount relating to year 2016 and thus the profit that year 2016 will be less than the actual for that year.
Thus, correction of errors in this manner will ‘falsify’ the Profit and Loss Account.
To avoid this, correction of all amounts concerning nominal accounts, i.e., expenses and incomes should
be through a special account styled as “Prior Period Items” or “Profit and Loss Adjustment Account”. The
balance in the account should be transferred to the Profit and Loss Account. However, these Prior Period
Items should be charged after deriving net profit of the current year. ‘Prior Period items’ are material income
or expenses which arise in the current period as a result of errors or omissions in the preparation of the
financial statements of one or more periods. Prior Period Items should be separately disclosed in the current
statement of profit and loss together with their nature and amount in a manner that their impact on current
profit or loss can be perceived.

? ILLUSTRATION 8
Mr. Roy was unable to agree the Trial Balance last year and wrote off the difference to the Profit and Loss Account
of that year. Next Year, he appointed a Chartered Accountant who examined the old books and found the
following mistakes:
(1) Purchase of a scooter was debited to conveyance account `3,000.

(2) Purchase account was over-cast by `10,000.

(3) A credit purchase of goods from Mr. P for `2,000 entered as a sale.

(4) Receipt of cash from Mr. A was posted to the account of Mr. B `1,000.

(5) Receipt of cash from Mr. C was posted to the debit of his account, `500.

(6) ` 500 due by Mr. Q was omitted to be taken to the trial balance.

(7) Sale of goods to Mr. R for `2,000 was omitted to be recorded.

(8) Amount of `2,395 ofpurchase was wrongly posted as `2,593.

Mr. Roy used 10% depreciation on vehicles. Suggest the necessary rectification entries.

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ACCOUNTING PROCESS 2.105

 SOLUTION
Journal Entries in the books of Mr. Roy
Date Particulars Dr. Cr.
` `
(1) Motor Vehicles Account Dr. 2,700
To Profit and Loss Adjustment A/c 2,700
(Purchase of scooter wrongly debited to conveyance
account now rectified-capitalisation of ` 2,700, i.e.,
` 3,000 less 10% depreciation)
(2) Suspense Account Dr. 10,000
To Profit & Loss Adjustment A/c 10,000
(Purchase Account overcast in the previous year; error
now rectified).
(3) Profit & Loss Adjustment A/c Dr. 4,000
To P’s Account 4,000
(Credit purchase from P ` 2,000, enteredas sales last
year; now rectified)
(4) B’s Account Dr. 1,000
To A’s Account 1,000
(Amount received from A wrongly posted to the
account of B; now rectified)
(5) Suspense Account Dr. 1,000
To C’s Account 1,000
(` 500 received from C wrongly debited to his account;
now rectified)
(6) Trade receivables Dr. 500
To Suspense Account 500
(` 500 due by Q not taken into trialbalance; now
rectified)
(7) R’s Account Dr. 2,000
To Profit & Loss Adjustment A/c 2,000
(Sales to R omitted last year; now adjusted)
(8) Suspense Account Dr. 198
To Profit & Loss Adjustment A/c 198
(Excess posting to purchase account last year, ` 2,593,
instead of ` 2,395, now adjusted)
(9) Profit & Loss Adjustment A/c Dr. 10,898
To Roy’s Capital Account 10,898
(Balance of Profit & Loss Adjustment A/c transferred to
Capital Account)
(10) Roy’s Capital Account Dr. 10,698
To Suspense Account 10,698
(Balance of Suspense Account transferred to the
Capital Account)
Note : Entries No. (2) and (8) may even be omitted; but this is not advocated.
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2.106 PRINCIPLES AND PRACTICE OF ACCOUNTING

Profit and Loss Adjustment Account

(Prior Period Items)
` `
To P 4,000 By Motor Vehicles A/c 2,700
To Roy’s Capital (transfer) 10,898 By Suspense A/c 10,000
By R 2,000
By Suspense Account 198
14,898 14,898

Suspense Account

` `
To Profit & Loss Adjustment Account 10,000 By Trade Receivables (Q) 500
To C 1,000 By Roy’s Capital Account (Transfer) 10,698
To Profit & Loss Adjustment Account 198
11,198 11,198

SUMMARY
w Unintentional omission or commission of amounts and accounts in the process of recording the
transactions are commonly known as errors.
w Accounting errors are generally of four types-
(a) Errors of Principle;
(b) Errors of Omission;
(c) Errors of Commission;
(d) Compensating Errors.
w Some errors may affect the Trial Balance and some of these do not.
w The method of rectification of errors depends on the stage at which the errors are detected. If the error
is detected before the preparation of trial balance, rectification is carried out by making the statement
in the appropriate side of the concerned account.
w In case of the errors detected after the preparation of the trial balance, we open a suspense account
with the amount of difference in the trial balance. Then complete journal entries can be passed for
rectifying the errors.
w For rectifying the errors detected in the next accounting period, a special account ‘Profit and Loss
Adjustment Account’ is opened for correction of amounts relating to expenses and incomes.

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ACCOUNTING PROCESS 2.107

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. Goods purchased from A for `10,000 passed through the sales book. The error will result in
(a) Increase in gross profit.
(b) Decrease in gross profit.
(c) No effect on gross profit.
2. If a purchase return of `1,000 has been wrongly posted to the debit of the sales returns account, but has
been correctly entered in the suppliers’ account, the total of the
(a) Trial balance would show the debit side to be `1,000 more than the credit.
(b) Trial balance would show the credit side to be `1,000 more than the debit.
(c) The debit side of the trial balance will be `2,000 more than the credit side.
3. If the amount is posted in the wrong account or it is written on the wrong side of the account, it is called
(a) Error of omission.
(b) Error of commission.
(c) Error of principle.
4. `200 paid as wages for erecting a machine should be debited to
(a) Repair account.
(b) Machine account.
(c) Capital account.
5. On purchase of old furniture, the amount of `1,000 spent on its repair should be debited to
(a) Repair account.
(b) Furniture account.
(c) Cash account.
6. Goods worth `50 given as charity should be credited to
(a) Charity account.
(b) Sales account.
(c) Purchase account.
7. Goods worth `100 taken by proprietor for domestic use should be credited to
(a) Sales account.
(b) Proprietor’s personal expenses.
(c) Purchases account.

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2.108 PRINCIPLES AND PRACTICE OF ACCOUNTING

8. Sales of office furniture should be credited to

(a) Sales Account.
(b) Furniture Account.
(c) Purchase Account.
9. The preparation of a trial balance is for:
(a) Locating errors of commission.
(b) Locating errors of principle.
(c) Locating clerical errors.
10. `200 received from Smith whose account, was written off as a bad debt should be credited to:
(a) Bad Debts Recovered account.
(b) Smith’s account.
(c) Cash account.
11. Purchase of office furniture `1,200 has been debited to General Expense Account. It is:
(a) A clerical error.
(b) An error of principle.
(c) An error of omission.

Theory Questions
1. How does errors of omission differ from errors of commission?
2. What is error of principle and how does it affect Trial Balance?
3. When and how is Suspense account used to rectify errors?
Practical Questions
1. The trial balance of Mr. W & H failed to agree and the difference `20,570 was put into suspense pending
investigation which disclosed that:
(i) Purchase returns day book had been correctly entered and totalled at `6,160, but had not been
posted to the ledger.
(ii) Discounts received `1,320 had been debited to discounts allowed.
(iii) The Sales account had been under added by `10,000.
(iv) A credit sale of `1,470 had been debited to a customer account at `1,740.
(v) A vehicle bought originally for `7,000 four years ago and depreciated to `1,200 had been sold for
`1,500 in the beginning of the year but no entries, other than in the bank account had been passed
through the books.
(vi) An accrual of `560 for telephone charges had been completely omitted.

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ACCOUNTING PROCESS 2.109

(vii) A bad debt of `1,560 had not been written off and provision for doubtful debts should have been
maintained at 10% of Trade receivables which are shown in the trial balance at `23,390 with a credit
provision for bad debts at `2,320.
(viii) Tools bought for `1,200 had been inadvertently debited to purchases.
(ix) The proprietor had withdrawn, for personal use, goods worth `1,960. No entries had been made in
the books.
Required:
(i) Pass rectification entries without narration to correct the above errors before preparing annual accounts.
(ii) Prepare a statement showing effect of rectification on the reported net profit before correction of these
errors.
2. On going through the Trial balance of Ball Bearings Co. Ltd. you find that the debit is in excess by `150.
This was credited to “Suspense Account”. On a close scrutiny of the books the following mistakes were
noticed:
(1) The totals of debit side of “Expenses Account” have beeen cast in excess by ` 50.
(2) The “Sales Account” has been totalled in short by `100.
(3) One item of purchase of `25 has been posted from the day book to ledger as `250.
(4) The sale return of `100 from a party has not been posted to that account though the Party’s account
has been credited.
(5) A cheque of `500 issued to the Suppliers’ account (shown under Trade payables) towards his dues
has been wrongly debited to the purchases.
(6) A credit sale of `50 has been credited to the Sales and also to the Trade receivables Account.
You are required to
(i) Pass necessary journal entries for correcting the above;
(ii) Show how they affect the Profits; and
(iii) Prepare the “Suspense Account” as it would appear in the ledger.
3. Mr. A closed his books of account on September 30, 2016 in spite of a difference in the trial balance.
The difference was `830 the credits being short; it was carried forward in a Suspense Account. In 2017
following errors were located:
(i) A sale of `2,300 to Mr. Lala was posted to the credit of Mrs. Mala.
(ii) The total of the Returns Inward Book for July, 2016 `1,240 was not posted in the ledger.
(iii) Freight paid on a machine `5,600 was posted to the Freight Account as `6,500.
(iv) White carrying forward the total in the Purchases Account to the next page, `65,590 was written
instead of `56,950.
(v) A sale of machine on credit to Mr. Mehta for `9,000 on 30th sept. 2016 was not entered in the books
at all. The book value of the machine was `6,750.
Pass journal entries to rectify the errors. Have you any comments to make?

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2.110 PRINCIPLES AND PRACTICE OF ACCOUNTING

4. A merchant’s trial balance as on June 30, 2017 did not agree. The difference was put to a Suspense
Account. During the next trading period, the following errors were discovered:
(i) The total of the Purchases Book of one page, `4,539 was carried forward to the next page as `4,593.
(ii) A sale of `573 was entered in the Sales Book as `753 and posted to the credit of the customer.
(iii) A return to a creditor, `510 was entered in the Returns Inward Book; however, the creditor’s account
was correctly posted.
(iv) Cash received from C. Dass, `620 was posted to the debit of G. Dass.
(v) Goods worth `840 were despatched to a customer before the close of the year but no invoice was
made out.
(vi) Goods worth `1,000 were sent on sale or return basis to a customer and entered in the Sales Book.
At the close of the year, the customer still had the option to return the goods. The sale price was
25% above cost.
You are required to give journal entries to rectify the errors in a way so as to show the current year’s
profit or loss correctly.
ANSWERS/HINTS
MCQs

1. (a) 2. (c) 3. (b) 4. (b) 5. (b) 6. (c)

7. (c) 8. (b) 9. (c) 10. (a) 11. (b)
Theoretical Questions
1. (i) Errors of Omission: If a transaction is completely or partially omitted from the books of account, it
will be a case of omission. Examples would be: not recording a credit purchase of furniture or not
posting an entry into the ledger.
(ii) Errors of Commission: If an amount is posted in the wrong account or it is written on the wrong side
or the totals are wrong or a wrong balance is struck, it will be a case of “errors of commission.”
2. Errors of principle: When a transaction is recorded in contravention of accounting principles, like
treating the purchase of an asset as an expense, it is an error of principle. In this case there is no effect on
the trial balance since the amounts are placed on the correct side, though in a wrong account. Suppose
on the purchase of a typewriter, the office expenses account is debited; the trial balance will still agree.
The method of correction of error indicated so far is appropriate when the errors have been located
before the end of the accounting period. After the corrections the trial balance will agree. Sometimes
the trial balance is artificially made to agree inspite of errors by opening a suspense account and
putting the difference in the trial balance to the account - the suspense account will be debited if the
total of the credit column in the trial balance exceeds the total of the debit column; it will be credited in
the other case. Each and every error detected can only be corrected by a complete journal entry. Those
errors for which journal entries were not possible at the earlier stage will now be rectified by a journal
entry(s), the difference or the unknown side is being taken care of by suspense account. Those errors for
which entries were possible even at the first stage will now be rectified in the same way.

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ACCOUNTING PROCESS 2.111

Practical Questions
Answer 1

Particulars Dr. Cr.

(i) Suspense Account Dr. 6,160
To Return Outward A/c 6,160
(ii) Suspense Account Dr. 2,640
To Discount Allowed Account 1,320
To Discount Received Account 1,320
(iii) Suspense Account Dr. 10,000
To Sales Account 10,000
(iv) Suspense Account Dr. 270
To Customer Account 270
(v) Suspense Account Dr. 1,500
To Vehicle Account 1,200
To Profit on Sale of Vehicle Account 300
(vi) Telephone Charges Account Dr. 560
To Outstanding Expenses Account 560
(vii) Bad Debts Account Dr. 1,560
To Trade receivables Account 1,560
Provision for Doubtful Debts Account Dr. 1,642
To Profit and Loss Account 1,642
(viii) Loose Tools Account Dr. 1,200
To Purchases Account 1,200
(ix) Drawings Account Dr. 1,960
To Purchases Account 1,960
1. Bad debts will be debited in the profit and loss account.
2. Provision @ 10% of `21,560 i.e. 2,156; Excess provision `164 (2320 - 2156 = 164).
Working Notes :

(i) Trade receivables as per books 23,390

Deduction vide item (iv) 270 270

Bad Debts 1,560 1,830

21,560

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2.112 PRINCIPLES AND PRACTICE OF ACCOUNTING

(ii) Suspense Account

` `
To Return outward Account 6,160 By balance b/d 20,570
To Discount allowed Account 1,320
To Discount Received Account 1,320
To Sales Account 10,000
To Customers Account 270
To Vehicles Account 1,200
To Profit on Sale of Vehicle 300
20,570 20,570
Answer 2
Journal Entries

Particulars L.F. Dr. Cr.

` `
Suspense Account Dr. 50
To Expenses Account 50
(Being the mistake in totalling of Expenses Account,
rectified)
Suspense Account Dr. 100
To Sales Account 100
(Being the mistake in totalling of Sales Accounts rectified)
Supplier Dr. 225
To Suspense Account 225
(Being the mistake in posting from Day Book to Ledger
rectified)
Sales Returns Account Dr. 100
To Suspense Account 100
(Being the sales return from a party not posted to “Sales
Returns” now rectified)
Trade payables Account Dr. 500
To Purchases Account 500
(Being the payments made to supplier wrongly posted to
purchases now rectified)

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ACCOUNTING PROCESS 2.113

Trade receivables Account Dr. 100

To Suspense Account 100
(Being the sales wrongly credited to Customer’s Account
now rectified)

Suspense Account

Dr. ` Cr.
`
To Expenses Account 50 By Difference in Trial Balance 150
To Sales Account 100 By Trade payables 225
To Balance c/d 425 By Sales Returns Account 100
By Trade receivables 100
575 575
By Balance b/d 425
Since the Suspense Account does not balance, it is clear that all the errors have not been traced. As a result
of the above corrections the Net Profit will be:
Increased by Decreased by
` `
Mistake in totalling in “Expenses” 50
Mistake in totalling in “Sales” 100
Mistake in posting from day book to Ledger under
“Purchases” 500
Omission in posting under “Sales Returns” 100
650 100
Net Increase 550

As a result of these adjustments, the Profits will be increased by `550.

Answer 3
Journal of Mr. A

Date Particulars L.F. Dr. Cr.

` `
2017 (i) Mrs. Mala Dr. 2,300
Mr. Lala Dr. 2,300
To Suspense A/c 4,600
(Correction of error by which a sale of ` 2,300

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2.114 PRINCIPLES AND PRACTICE OF ACCOUNTING

to Mr. Lala was posted to the Credit of Mrs. Mala)

(ii) Profit and Loss Adjustment A/c Dr. 1,240
To Suspense A/c 1,240
(Rectification of omission to post the total of
Returns Inward Book for July, 2016)
(iii) (a) Machinery A/c Dr. 5,600
Suspense A/c Dr. 900
To Profit & Loss Adjustment A/c 6,500
(Correction of error by which freight paid for
a machine ` 5,600 was posted to Freight
Account at ` 6,500 instead of capitalising it)
(b) Profit & Loss Adjustment A/c Dr. 560 560
To Plant and Machinery A/c
(Depreciation @ 10% charged on freight paid
on a machine capitalised)
(iv) Suspense A/c Dr. 8,640
To Profit & Loss Adjustment A/c 8,640
(Correction of wrong carry forward of total in
the purchase Account to the next page ` 65,590
instead of ` 56,950)
(v) Mr. Mehta Dr. 9,000
To Plant & Machinery A/c 6,750
To Profit & Loss Adjustment A/c 2,250
(Correction of omission of a sale of machine on
credit to Mr. Mehta for ` 9,000 )
Comments
The Suspense Account will now appear as shown below:
Suspense Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
` `
2017 To Profit and Loss 2016 By Balance b/d 830
Adjustment A/c 900 Oct. 1 By Sundries
To Profit and Loss Mrs. Mala 2,300
Adjustment A/c 8,640 Mr. Lala 2,300

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ACCOUNTING PROCESS 2.115

By Profit and Loss

Adjustment A/c 1,240
By balance c/d 2,870
9,540 9,540
Since the Suspense Account still shows a balance, it is obvious that there are still some errors left in the
books.
Profit & Loss Adjustment A/c
(For Prior Period Items)

Dr. Cr.
Date Particulars Amount Date Particulars Amount
2017 ` 2017 `
To Suspense A/c 1,240 By Machinery A/c 5,600
To Plant and Machinery A/c 560 By Suspense A/c 900
To Balance c/d 15,590 By Suspense A/c 8,640
By Mr. Mehta 2,250
17,390 17,390

Answer 4
Journal Entries

Particulars L.F. Dr. Cr.

` `
(i) Suspense Account Dr. 54
To Profit and Loss Adjustment A/c 54
(Correction of error by which Purchase Account
was over debited last year- `4,593 carried forward
instead of `4,539)
(ii) Profit & Loss Adjustment A/c Dr. 180
Customer’s Account Dr. 1,326
To Suspense Account 1,506
(Correction of the entry by which (a) Sales A/c was
over credited by `180 (b) customer was credited
by `753 instead of being debited by `573)
(iii) Suspense Account Dr. 1,020
To Profit & Loss Adjustment A/c 1,020
(Correction of error by which Returns Inward
Account was debited by `510 instead of Returns
Outwards Account being credited by ` 510)

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2.116 PRINCIPLES AND PRACTICE OF ACCOUNTING

(iv) Suspense Account Dr. 1,240

To C. Dass 620
To G. Dass 620
(Removal or wrong debit to G. Dass and giving
credit to C. Dass from whom cash was received).
(v) Customer’s Account Dr. 840
To Profit & Loss Adjustment A/c 840
(Rectification of the error arising from non-
preparation of invoice for goods delivered)
(vi) Profit & Loss Adjustment A/c Dr. 200
Inventory Account Dr. 800
To Customer’s Account 1,000
(The Customer’s A/c credited with `1,000 for
goods not yet purchased by him; cost of the
goods debited to inventory and “Profit” debited
to Profit & Loss Adjustment Account)
(vii) Profit & Loss Adjustment A/c Dr. 1,534
To Capital Account 1,534
(Transfer of Profit & Loss Adjustment A/c balance
to the Capital Account)

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