Major - II

PRINCIPLES OF ACCOUNTANCY
Unit – I
Introduction to Accounting – Definition – Accounting Rules – Book Keeping –
Objectives of Accounting – Methods of Accounting – Types of Accounts – Basic Accounting
Concepts and Conventions – Double entry system – Journal, Ledger, Subsidiary Books, Trial
Balance.

Unit – II
Final Accounts: Introduction – Trading Account – Profit & Loss Account – Balance
Sheet – Adjustments. Bank Reconciliation Statement: Meaning – Causes for differences
between cash book and pass book – Methods of preparation of Bank Reconciliation
Statement.

Unit – III
Rectification of errors: Classification of errors – Basic Principles for rectification of
errors – Suspense Account. Single entry system: Meaning – Definition – Salient features –
Limitation – Ascertainment of Profit – Net worth method – Conversion method.

Unit – IV
Average due date: Meaning – Practical uses – Basic types of problem – Determination
of due date. Account current: Meaning – Definition – Procedure for calculating days of
interest – Preparation of account current – Product method – Red-ink interest – Daily balance
method.

Unit – V
Consignment Account: Meaning – Distinction between sale and consignment –
Journal entry in the books of consignor – journal entry in the books of consignee. Joint
Venture Account: Meaning – Distinction between joint venture and partnership – Journal
entry when separate set of book is kept.

Text and Reference Books:

1. T.S. Redy & A. Murthy, Financial Accounting, Margham Publications.
2. R.L. Gupta, Advanced Accountancy, Sultan Chand Sons.
3. M.C. Shukla, Advanced Accounts, S. Chand and Co.
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Major II
PRINCIPLES OF ACCOUNTING
UNIT - I
INTRODUCTION TO ACCOUNTING
Objectives
After reading the first units, students can understand how accounting are
maintaining a complete and systematic record of all transactions and analyzing the
financial position of a business. Every individual or a business concern is interested to
know the results of financial transactions and their result are ascertained through the
accounting process.

Need for Accounting

A businessman invests capital with the objective of making profit and
thereby increasing his resources. He incurs various expenses like salaries, rent and
stationery to operate his business. He receives income from different sources like
commission, interest and discount. He deals with several persons in the course of
buying and selling of goods, purchasing and selling of assets and borrowing
money for financing the business. He acquires various properties and assets like
building, machinery, furniture to generate revenue.
Effective management of business requires control over expenses to reduce
the cost of operation and to make the business profitable. Assets must be properly
maintained to increase their productivity. Liabilities of a business have to be
repaid in due time. Dealings with customers and suppliers must be managed
properly to keep them satisfied. In order to maintain property in good condition. to
repay debts in time, to reduce the expenses and to increase sales, the businessman
requires complete information about all his business transactions.
In practice, it is impossible for any businessman to memorise and recollect
all his business dealings. Moreover, he will be interested in knowing at the end of
each year (i) what he owns? (ii) what he owes? (iii) how much profit he has earned?
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(iv) what his financial position is? To relieve businessmen from the burden of
memorising all the business dealings and for providing necessary information,
Accounting was developed.
Businessmen also require accounting records to submit in courts to prove
their claims or to defend in courts against claims made by outsiders. They are
required to produce business records to tax authorities whenever demanded.
Similarly, financiers requires accounting records of businessmen to docide about
sanctioning of loans. Thus, transactions relating to business have come so
important that their recording has become a necessity.
Definition of Accounting
Accounting to the American Institute of Certified Public Accountants
(AICPA) “Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money transactions and events which are of a
financial character and interpreting the results thereof”.
This comprehensive definition highlights in a logical sequence the different
steps in the accounting process and some important attributes of accounting. The
following detailed explanation makes each of them clear.

Book-Keeping Vs Accounting
The terms book-keeping and accounting are used interchangeably by
laymen. In practice, they are different in their nature and scope.
Book-keeping is concerned with the recording of business transactions in a
systematic manner. This work is mechanical and repetitive in nature. It does not
need specialised skill and knowledge. It is usually entrusted to the junior level
employees of the accounts department who are known as Book-keepers.
Book-keeping is responsible for recording business transactions of financial
nature in the books of original entry. Each transaction is recorded with as many
details as possible. The data of the transactions, quantities and prices involved, the
accounts to be debited and credited respectively, the ledger folio number are all
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shown systematically. Each entry is made on the basis of supporting, verifiable

documentary evidence.
Book-keeping is also responsible for posting every transaction to the ledger.
The debit and credit aspects are posted separately to the respective accounts with
the correct amount. In the ledges, the date of the transaction, the journal folio
number and the amount are clearly shown whenever a posting is made into an
account.
Balancing of all the ledger accounts and subsidiary books at the end of the
accounting year, is another major work for book-keeping. Each account in the
ledger has to be balanced by totalling both sides of the account and the balance
may be debit balance or credit balance depending on which side of the account
shows larger total amount. Balances have to be carried forward to the subsequent
accounting period.
Extracting, Trial Balance is also a task for book-keeping. The Trial Balance
ensures arithmetical accuracy of the accounts maintained. When there is any
difference between the debits and credits, verifying the ledger accounts, posting
and balancing is essential to identify mistakes and adjust the trial balance.
Book-keeping prepares the ground for the important steps of finalisation
and interpretation which are usually performed by “accounting”
Accounting includes the designing of suitable accounting system,
preparation of financial statements cost studies, income tax work etc. It is also
responsible for analysing and interpreting the accounting information for internal
as well as external end users. Accounting work requires some skill, imagination
and experience. The person in charge of this work is called the Accountant.
Accounting has to devise a suitable system of maintaining accounts after
studying the requirements and characteristics of the organisation. The various
books of accounts have to be organised as per the needs of the system developed
Different forms, books, sheets etc., have to be designed and printed.
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When accounts are finalised, accounting is responsible for making various

adjustments essential for ascertaining profit or loss for the period, and showing the
financial position of the business. Examples are depreciation of fixed assets
outstanding and prepaid expenses, accrued incomes, provisions etc. Trading and
profit & Loss account is to be prepared in a systematic manner on the basic of
generally accepted accounting practices. Similarly, Balance sheet has to be
prepared, portiaying true and fair picture of the financial position of the business.
The financial statements are to be analysed and interpreted to extract
additional and useful information as per the requirements of the management,
owners creditors etc.
In a broad sense, accounting includes book-keeping also. But in practice,
book-keeping and accounting differ in their scope and nature of their functions. In
small businesses, both the functions may by performed by a single accountant.
bigger firms, the accounts department may be divided into book keeping and
accounting sections.

Objectives of Accounting
Objectives of Accounting may differ from business to business depending
upon their specific requirements. However, the following are the general objectives of
accounting.
1. Maintenance of Accounting Records: Accounting records are the basis
for the accounting work. The records have to be maintained systematically. While
maintaining the concepts have to be followed.
In the years, maintenance of books and records is relegated to the lower
level employees. Still, required guidance has to be provided to them as and when
necessary.
2. Ascertainment of Profit or Loss : Accounting is expected to ascertain
and reveal the net results of the operations of a business. Various interested parties
like owners, management, investors and creditors should be supplied with the
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results of operations as per their specific requirements. While finalizing the accounts,
objective approach is essential, combined with consistency and conservatism.
3. Depiction of financial position: A true and fair view of the financial
position should be presented. The properties and assets possessed by the business
should be shown at appropriate values as per the prevailing practices. The stake of
creditors and owners in the business should be clearly presented. All the material
information must be clearly presented. All the material information must be
clearly disclosed.
4. Providing Information: In the recent years, providing information has
become the most important objective of accounting.
The American Accounting Association (AAA) has listed out the following
purposes for which accounting should provide information.
(a) Making decisions concerning the use of limited resources including
identification of crucial decision areas and determination of objectives and
goals.
(b) Effectively directing the controlling of an organisation’s human and
material resources.
(c) Maintaining and reporting on the custodianship of resources.
(d) Facilitating social functions and control.

Methods of Accounting
Basically all methods of accounting are classified under two headings:-
1. Single entry system
2. Double entry system

Single entry system

The term single entry is vaguely used to define the method of maintaining
accounts which do not conform to strict principles of double entry. It is wrong to
define it as system. The term ‘single entry’ does not mean that there is only one
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entry for each transaction. It simply signifies that principles of double entry book-
keeping have not been observed in all cases. Under this system, only the personal
accounts of the debtors and creditors and cash book of the trader are maintained.
Impersonal accounts such as sales accounts, purchase accounts etc., as well as te
assets accounts are ignored. The absence of the two fold effect of each transaction
makes it impossible to prepare a trial balance and to check the arithmetical
accuracy of the books of accounts, engendering a spirit of laxity and inviting fraud
and misappropriations. Owing to the absence of purchases and sales accounts, the
preparation of trading account is not possible. Again Profit & Loss account and
Balance Sheet cannot be prepared due to the absence of nominal accounts and real
accounts. Hence, Single entry is not only incomplete but the final results are also
not reliable.
Practically this system is followed by those firms whose transactions are
limited and the time, who maintain only the essential records. There is no hard and
fast rule for maintaining records under this system. i.e., it depends on the
circumstances and the needs of the firm.

Double entry system

This system was invented by an Italian named Iuco Pacioli in 1494 A. D.
and it has spread all over the worldd, becoming as popular as Arabic numerals.
According to this system, every transaction has two aspects. One is benefil
receiving aspect or incoming aspect and the other one is benefit giving aspect or
outgoing aspect. The benefit receiving aspect is said to be a ‘debit’ and the benefit
giving aspect is said to be a ‘credit’. For every transaction, one account is to be
debited and another account is to be credited in order to have a complete record of
the transaction. Therefore, every transaction affects two accounts in opposite
direction.
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For example, ‘if furniture is purchased for cash’, it is a monetary

transaction. Furniture is benefit receiving aspect, it is debited. Cash is benefit
giving aspect, it is credited.
Therefore, the basic principle, under this system is that for every debit,
there must be a corresponding and equal credit and for every credit there must be a
corresponding and equal debit.

Meaning of debit and credit

The word Debit is derived from the Latin word Debitum which means Due
for that. In short, the benefit receiving aspect of a transaction is known as debit.
The word Credit is derived from the Latin word Creder which means Due
to that. The benefit giving aspect of a transaction is known as credit.
The abbreviations ‘Dr’ for debit and ‘Cr’ for credit are usually used.
By convention, the left hand side of an account is termed as debit side and
right hand side of an account is termed as credit side.

Advantages of Double Entry System

(i) Complete record: Double entry system enables businessmen to keep a
complete, systematic and accurate record of all business transactions.
Details ofo any transactions or events can be verified at any time.
(ii) Ascertainment of profit or loss: The systematic record maintained under
double entry system enables a business to ascertain the result of business
operations for any given period. The owners can know the profitability of
business operations periodically.
(iii) Knowledge of financial position: With the help of Real and Personal
accounts, the financial position of the business can be ascertained with
accuracy. This is done by preparing balance sheet.
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(iv) A check on the accuracy of accounts: Under the double entry system
‘Every debit has a corresponding credit’. The arithmetical accuracy of the
books can be tested by preparing a statement called ‘Trial Balance’.
(v) No scope for fraud: The firm is saved from frauds and misappropriations
since full information about all assets and liabilities will be available.
(vi) Tax authorities: The businessmen can satisfy the tax authorities if he
maintains his accounts books properly under the double entry system.
(vii) Amount due from customers: The account books will reveal the amount
due by customers, reminders can be sent to the customers who do not settle
their accounts promptly.
(viii) Amount due to suppliers: The trader can ascertain from the books of
accounts the sums he owes his creditors and make proper arrangements to
pay them promptly.
(ix) Comparative study: Results of one year may be compared with those of
previous years and reasons for the change may be ascertined.

Types of Accounts
The object of book keeping is to keep a complete record of all the
transactions that take place in the business.
Practically every business (i) deals with other persons, firms and companies.
(ii) possesses assets like cash, stock, buildings, furniture etc., and receives incomes
such as commission, interest etc.
It is necessary to maintain the following to record all the above dealings.
(1) An account of each person, firm, or company with which the business deals.
The accounts under this class are known as Personal Accounts e.g., if Mr. X, a
cloth dealer, has dealings with four wholesalers and has twenty customers to
whom he sells on credit, he must operate an account for each one of them
separately.
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(2) An account of each type of asset which a business owns. It comes under the
class of Real Accounts.
(3) An account for each expense and gain. The accounts under this class are
known as Nominal or Fictitious Accounts.
An account is a statement in the ledger which records the transactions
relevant to the person, asset, expense or profit named in the heading. Accounts can
be divided into:
(a) Personal Accounts
(b) Impersonal Accounts
Impersonal accounts can be further divided into real and nominal accounts.
Thus, there are three kinds of accounts maintained by a business.
(1) Personal Accounts
(2) Real Accounts
(3) Nominal Accounts
1. Personal Accounts: Accounts of Persons with whom the business has dealings
are known as personal accounts. It takes the following forms:
(a) Natural Persons: The name of an individual – customers or suppliers. (e.g.)
Sudhir’s account, Sharma’s account, Anusha’s account, Priya’s account. Both
males and females are included in it.
(b) Artificial persons or legal bodies: Firms’ accounts, limited companies’ accounts,
educational institutions’ accounts, bank account, co-operative society account
etc., are known as artificial persons’ accounts.
(c) Representative personal accounts: All accounts representing outstanding
expenses and accrued or prepaid incomes are personal accounts. (e.g.) prepaid
insurance, outstanding wages, salary, rent etc.
When a person starts a business, he is called proprietor. This proprietor is
represented by capital account for all that he invests in business and by drawings
account for all that which he withdraws from business. So, capital account and
drawings account are also personal accounts.
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2. Real Accounts: Accounts in which the business records the real things owned
by it. i.e., assets of the business are known as real accounts. Real accounts are
of two types i.e., tangible real accounts and intangible real accounts. Building,
furniture, cash and machinery etc., are examples of tangible real accounts,
because these can be touched and felt and they have a physical shape. There
are some intangible real accounts, which cannot be touched because they have
no physical shape, such as trademark, goodwill, patents and copyright etc.
3. Nominal Accounts: It relates to the items which exist in name only. Expenses,
incomes etc., are there in business activities. Accounts which record expenses,
losses, incomes and gains of the business are known as nominal accounts. e.g.,
rent A/c, salaries A/c, telephone charge A/c, postage A/c, advertising A/c,
commission received A/c, interest received A/c.
Accounting Rules
The double entry system of book-keeping is a scientific and complete
system. Hence, the transactions should be recorded according to the following
rules. As we have already discussed, each transaction must have two aspects. The
benefit receiving aspect and benefit giving aspect. A transaction should be divided
into two aspects.
(1) Debit aspect
(2) Credit aspect
The rules for making entries under double entry system can be summarised
as follows:
1. Personal accounts : Debit the receiver
Credit the giver
2. Real accounts : Debit what comes in
Credit what goes out
3. Nominal accounts : Debit all expenses and losses
Credit all incomes and gains.
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Bases of Accounting
There are three bases of accounting in common usage. Any one of the
following bases may be used to finalise accounts.
(1) Cash basis
(2) Accrual of Mercantile basis
(3) Mixed or Hybrid basis
1. Accounting on ‘Cash basis’ Under cash basis of accounting, all incomes are
considered to be earned only when they are actually received in cash. Expenses
are considered to be incurred only when they are actually paid. The difference
between total income and expenses represents profit. No adjustments are
needed for outstanding and prepaid expenses. Similarly, accrued incomes and
incomes received in advance are also not adjusted.
Thus, income is recognised only when cash is received. Expense is
recognised only when cash is paid.
Government system of accounting is mostly on cash basis. Professionals
like doctors. lawyers, brokers also prefer to follow this method, since it is simple
to understand and easy to practice.
2. Accrual Basis of Accounting or Mercantile system: It is a system in which
accounting entries are made on the basis of amounts having become due for
payment or receipt. Incomes are credited to the period in which they are earned,
whether cash is received or not. Similarly, expenses and losses are debited to
the period in which they are incurred, whether cash is paid or not.
The profit or loss of any accounting period is the difference between
incomes earned and expenses incurred, irrespective of cash payment or receipt.
All outstanding expenses and prepaid expenses, accrued incomes and
incomes received in advance are adjusted while finalising the accounts.
This method is followed by all the merchants, trade and industry. That is
why it is known as Mercantile system.
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3. Mixed or Hybrid Basis of Accounting: This is a system of accounting in

which some items of income are taken on cash basis while most of the
expenses are shown on accrual basis. It is a hybrid system because it combines
both ‘cash basis’ and ‘accrual basis’
In practice, the profit or loss shown will not be realistic. Conservative
people who prefer recognising income when received, but cautious to provide for
all expenses, whether paid or not prefer this system. It is not widely practised due
to its inconsistency.

Meaning and Classification of Accounting Concepts and Conventions

The Generally Accepted Accounting Principles (GAAP) are all termed
Concepts by some experts. Some others call all of them Conventions. However, an
overwhelming majority of authors on accounting distinguish between concepts
and conventions.
Accounting concepts, are the assumptions or postulates or ideas which are
essential to the practice of Accounting and preparation of financial statements. The
following is a generally accepted list of basic Accounting Concepts:
(1) The entity concept
(2) The money measurement concept
(3) Going concern concept
(4) Dual aspect concept
(5) Accounting period concept
(6) Cost concept
(7) Revenue Recognition concept or Realisation concept
(8) Matching concept
(9) Accrual concept
(10) Objective evidence concept
Accounting conventions are the established traditions, customs, methods
and practices which usually act as guidelines for preparation and presentation of
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accounts. Accounting community has accepted their utility and importance in

making the financial statements more realistic, reliable and useful to the end users.
The following are the generally accepted accounting conventions:
(1) Convention of full disclosure
(2) Convention of consistency
(3) Convention of materiality
(4) Convention of conservatism
Accounting concepts are subdivided into fundamental concepts and non
fundamental concepts, based on their importance.
1. Fundamental Concepts
There are two fundamental concepts – The entity concept and the money
measurement concept.
The entity concept states that financial accounting information relates to the
activities of a business entity only and not to the activities of owners of the business.
The money measurement concept limits recognition of activities to those
which can be expressed in terms of money. The alteration of either of these
concepts will change the entire nature of financial accounts.

2. Non fundamental Concepts

These concepts are important for recording and finalising accounts. But any
alterations in them do not affect the basic nature of financial accounting. They
include all other concepts except the entity and money measurement concepts.
Accounting concepts are also classified on the basis of the aspects of
accounting for which they are useful.
(a) Concepts related to income measurement and preparation of financial
statements.
(i) Going concern concept
(ii) Accounting period concept
(iii) Matching concept
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(b) concepts relating to identification, measurement and recording of financial

transactions.
(i) Entity concept
(ii) Dual aspect concept
(iii) Money measurement concept
(iv) Cost concept
(v) Objective evidence concept
(vi) Realisation concept
(vii) Accrual concept
Classification of the accounting concepts reveals their relative importance
and their practical use in the accounting process.
The various accounting concepts and conventions are explained below in
detail.

BASIC ACCOUNTING CONCEPTS

(1) Business Entity Concept
A business entity is an organisation of persons to accomplish an economic
goal. According to the entity concept, the entity that represents the association of
persons is considered distinct and separate from the owners, managers and
employees of the enterprise. The accounting entity may be the business unit itself
(sole proprietorship, partnership firm, joint stock company, co-operative societies
or a government enterprise) or a defined part of business (i.e., a department), or an
amalgamation of related businesses (i.e., a holding company), depending on the
user’s needs. It can be a non-business group like a club, religious body which
engages in economic activities.
The entity concept de-limits the area to be covered by accounting records
and reports. It determines what is to be recorded and what is to be excluded from
the books of accounts. A separate set of books is to be maintained for the
accounting entity. The personal transactions of the owners and managers which
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are not connected to the business unit are excluded from the books of accounts.
All business transactions of financial nature, including transactions with the
owners are recorded in the books of the business. For example, if a sole trader
withdraws money from the business for personal use, it is recorded as drawings by
the owner. If he buys a car with the money withdrawn, it is ignored in the books of
the business.
All the financial transactions are recorded from the point of view of the
entity itself and not from the point of view of the other parties such as customers,
suppliers, partners, owners etc. For example, when a firm sells goods to a
customer it is recorded as ‘sale’ by the firm and not as ‘purchases’ by the customer.
Similarly, when dividend is paid to the shareholders of the company, it is
dividend paid by the company and not dividend received by the shareholders.
The entity concept underlines the accounting concept of profit in which a
sharp distinction is made between the operating expenses of the business and
payment to owners. All payments to owners are recorded as repayment of capital
or drawings or loan or distribution of profits. They are not treated as expenses of
the business. The owners are entitled for the capital invested by them and also for
the profits earned by the business entity.
From legal point of view, a joint stock company is recognised as separate
legal entity from the shareholders. Partnership firms and sole trading businesses do
not have legal entity, but they have business entity for accounting purposes.
The business entity concept implies that accounting has to maintain
financial records of the business, record incomes and expenses of the business,
ascertain profit or loss made by the business entity and show its financial position
periodically. The owners of the business entity have to be treated like financiers
but eligible for profits and responsible for losses.
(2) Going Concern Concept
According to International Accounting Standard-1 (IAS-1) “The enterprise
is normally viewed as a going concern, that is, as continuing in operation for the
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foreseeable future. It is assumed that the enterprise has neither the intention nor
the necessity of liquidation”.
This concept assumes that a business entity has continuity of life. It will
continue for an indefinite period of time. It has no need or intention to close down.
This concept is important for valuation of assets and liabilities. It
recognises the value of assets and liabilities of the business enterprise on the basis
of their productivity and not on the basis of their current realisable value. Many
assets derive their value from employment in the firm. If the firm ceases to operate,
their realisable values may be a fraction of their book values or their value to the
firm in generation of income. For example, approach roads laid to connect a
factory with a highway will be worthless when the factory is closed down. So,
realisable values of assets are ignored. They are valued at cost less depreciation for
the purpose of balance sheet.
Historical cost of the fixed assets is recovered throughout their useful life
by way of charging depreciation. This is based on the assumption that the business
continues for the foreseeable future. The depreciation is an allocation of future cot
and is not based on valuation of asset.
Going concern is the basis for several business transactions. Outsiders
enter into contracts and dealings with a firm. Financial institutions lend money to a
business unit. Creditors supply goods on credit and customers buy goods on credit.
All such transactions are based on the treatment of a business units as a going
concern. Similarly, prepaid expense and accrued incomes are treated as asets on
the presumption of continuation of business.

(3) Money Measurement Concept

All business transactions are measured, expressed and recorded in items of
money. ‘Money’ provides a common denominator or unit of measurement by
means of which heterogeneous facts about a business can be expressed in items
of quantities which can be added or subtracted and summarised. Money, as a
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common denominator helps to quantify a diverse range of data to enable

cetermination of profit or loss and financial position. The ‘Rupee’ is the common
unit of measurement for economic events and transactions in India since it is the
legal tender used a the medium of exchange.
The money measurement concept excludes all business transactions and
events which cannot be measured in terms of money. Thu, quality of the products,
value of killed labour force, working conditions, production policies, disputes etc.,
cannot be recorded in accounts in spite of their importance to the business. The
concept is invaluable in summarising business operations, assets and liabilities.
Buildings in square feet, land in square meter, furniture in numbers, stock of
liquids in litres and bank balance in Rupees cannot be added up for balance sheet
purpose unless they are all expressed in terms of the common measure of money.
Managerial planning and control must also take shape in monetary terms. The
main objective of a business unit is to make profit and planning is directed towards
this end. Optimum production and sales policies, investment decisions become
meaningful and can be better understood with the usage of monetary denomination.
Accounting records provide evidence of the financial dimensions of the
rights and obligations resulting from legal contracts. They have to be kept in the
form of legal currency of the country. The accounting records also are used as a basis
for providing financial information for shareholder, employees, tax authorities etc.
These user of accounts data can comprehend the information which is expressed in
monetary terms alone. The money measurement concept ilnposes certain limitations
on a business unit. Important event, specific strengths and weaknesses of a firm
which cannot be measured in terms of money are not recorded in accounting. This
restricts the availability of data for managerial decision making. All assets and
liabilities are recorded whenever they are acquired or contracted at the value assigned
to them on that date. Any chages in their market prices or the impact of inflation
on their values are not recognised. This renders the value shown unrealistic.
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In spite of its limitations, money measurement concept is indispensable

because it is the common denominator for recording diverse transactions in the
books of accounts.
(4) Dual Aspect Concept
Every business transaction recorded in the books of accounts of a business
has two aspects – receiving of benefit and giving of benefit. Both the aspect of
each transaction must be recorded in appropriate accounts of the business.
For example, when a building i acquired by a firm (receiving of benefit), it
has to pay cash (giving of benefit) or create an obligation for payment in future
(benefit to be given). Recording of the transaction takes place through debiting
the building account and crediting cash account or the personal account of the
seller, thus showing both the benefit receiving and giving aspects.
Dual aspect concept is the basis for double entry system of book-keeping
which is universally used. the governing principle of double entry system is that
‘for every debit there is an equal and corresponding credit’. Dual aspect concept
is also the basis for ‘accounting equation’ developed by American accountants.
The equation is Assets = Equities.
‘Assets’ represents all properties acquired by a business for generating
income in the short run (current assets) or long run (fixed assets). ‘Equities’
represent the claim of different claimants, including the owners, against the assets.
The equities are usually subdivided into capital and liabilities to distinguish
between the claim of owners from the outsiders. Thus, the equation can be
restructured as follows:
Capital + liabilities = Assets
or
Capital = Assets – Liabilities.
Capital denotes the funds provided by the owners of the business and
liabilities represents the funds provided by the outsiders. In the equation, asset and
liabilities are the independent variables and capital is the dependent variable, since
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it is the difference between assets and liabilities. Every business transaction of

financial nature affects the accounting equation through its dual aspect. Increase in
an asset may result in increase of liabilities or capital or decrease of some other
asset. Decrease in a liability may result in decrease of an asset, increase in capital
or another liability. The accounting equation provides an insight into the impact of
each transaction on the assets, liabilities and capital. Dual aspect concept is the
edifice on which modern accountancy is built and developed.
(5) Accounting period Concept of Periodicity Concept
A business unit may continue for an indefinite period. It is possible to
ascertain overall profit or loss of the business when it is liquidated. But practically
it is not possible to wait for an indefinite period. The interested parties like owners
or shareholders, creditors, tax authorities need periodical reports about the
business performance. So, it is necessary to sub-divide the indefinite life span of
firm into smaller time units for measurement of performance and understanding
the financial position. Such smaller and usable time frame is called an accounting
period. The period should not be too short which result in the burden of preparing
financial statements frequently. It should not be too long which renders the
information useless. The usual accounting period is one year as it help to absorb
seasonal fluctuations in business, to assess and pay income tax undertake any
remedial measures to rectify poor performance. Now-a-days the length of the
accounting period is determined by statute.
Accounting period concept is the basis for segregation of capital expenditure
from revenue expenditure. All expenses whose benefit is derived within the
accounting period are revenue expenses. All incomes pertaining to the period are
revenue incomes. All expenses whose benefit is derived over several accounting
periods is capital expenditure.
Accounting period helps to measure the income generated during the
specific accounting period which makes it possible to distribute it to the owners. It
makes comparison of the results of one accounting period with those of another
 20

possible. Leading to comparative performance evaluation. Mercantile system or

accrual system of accounting is needed to show all incomes and expense
pertaining to the accounting period at the time of finalising the accounts.
(6) Cost Concept
Accounting is a historical record of the transactions of a business entity.
According to cost concept, asset are recorded at the price paid to acquire them.
This cost is the basis for all subsequent accounting for the assets. The assets are
gradually depreciated on the basis of cot and the effective life of the asset. The
market values of assets are not considered either for valuation or depreciation of
such assets. This practice is also supported by the going concern concept. Market
values cannot be accurately ascertained. They are also subject to frequent
fluctuations. Subjective estimates of the accountants can distort market values.
Cost concept provides the reliable objective evidence for recording and
depreciating the assets.
Recently the historical cost concept ha been criticised for three reasons.
firstly, the historical cost does not reflect true value of the asset. Secondly, aet
shown on cost basis do not provide a true and fair view of the financial position of
a business unit. Thirdly, the cost concept ignores inflation which erodes the value
of money and the true worth of assets. The traditional accounting system has
undergone a lot of change over the years. Now it is not exclusively based on
historical cost. Different measurement bases like present value of future cash
flows of assets’, ‘current cost’, ‘replacement cost’ are also used according to
suitability to depict true and fair view of the financial position of a business unit.
Cost concept is still the predominantly used basis for valuation and depreciation of
business assets.
(7) Realisation Concept or Revenue Recognition Concept
“Revenue is the gross inflow of cash, receivables or other consideration
arising in the course of an enterprise from the sale of goods, services and from
holding of assets”. According to the realisation concept, revenue is considered as
 21

earned on the date when it is realised. The term ‘realisation’ implies the legal
liability to pay by the buyer or user or customer. The revenue should be
recognised only when it is legally due and realisable. When goods are sold, the
date of placing the order, the date of receiving cash are irrelevant for recognition
of sales income. The date of passing of title to the goods is relevant for income
recognition. Income payable. Advance payment of cash by customers for goods
should be ignored for the purpose of income recognition. In hire purchase
transactions, the down payments and instalments received or due can be taken as
income though title to the goods is passed only when last instalment is paid. Till
such time, the amounts paid or payable are treated as hire charges.
(8) Matching Concept
Primary objective of commercial enterprises is profit making. The
accountants are responsible to match the revenues earned during an accounting
period with the cost associated with the period to ascertain the profit earned.
Matching of revenues and costs relevant to a specific period is called the matching
concept. It is the basis for finding reliable profit for a period which can be safely
distributed to the owners. All the revenue expense and incomes associated with the
accounting period have to be identified. Outstanding and prepaid expenses and
income have to be properly adjusted. Depreciation and necessary provisions have
to be made.
Matching of the costs with revenue has to be done in two stages. Direct
costs are matched with sale revenue to ascertain gross profit. Indirect costs are
matched with gross profit and other incomes to ascertain net profit from operations.
Non operating losses like loss on sale of fixed assets. abnormal losses due to theft,
fire, etc., capital expenses to be written off like preliminary expense, underwriting
commission should also be matched with the operating profit to find disposable
net profit. Mercantile system of accounting facilitates matching of costs with
revenues in order to ascertain profit or lo of an accounting period. Periodical
matching of cost and revenue provides a reliable measure of the progress of an
enterprise.
 22

(9) Accrual Concept

This concept make a distinction between receipt of cash and the right to
receive cash and the legal obligation to pay cash in relation to revenues and
expenses respectively. Revenues and cost are accrued i.e., recognized as they are
earned or incurred and not as money is received or paid. The accrual concept is the
basis ignore the accrual aspect and use paying and receiving of cash as the criteria
for recording expenses and incomes. While finalising accounts, all expenses and
losses pertaining to the accounting period must be listed out. Any outstanding
expense and prepaid expenses must be recorded. Similarly, all incomes associated
with the period should be included. Any accrued incomes and incomes received in
advance must be appropriately recorded.
The accrual concept ensures that the profit or loss shown is on the basis of
full facts relating to all expenses and incomes.

(10) Objective Evidence concept

All accounting entries must be based on objective evidence. ‘Objective’
refers to verifiability, reliability and absence of bias. No transaction must be
recorded in the books of accounts without verifiable documentary evidence.
Examples are cash receipts for payment made, bank paying-in counterfoils of bank
statements for deposits in bank, invoice copies for purchases etc. The confidence
of users of financial statements can be achieved through systematic adherence to
this concept.
Objective evidence concept facilitates auditing of accounts and eliminates
unauthorised entries in the books of accounts improving their reliability.
Management decisions based on such accounts are likely to be more successful.
Accounting achieves authenticity. Accuracy and reliability by following the
concept of objective evidence.
 23

ACCOUNTING CONVENTIONS
(1) Convention of Full Disclosure
According to this convention, all accounting statements should be prepared
honestly. This should be evident through the transparency of the statements. The
statement should disclose fully all the significant information. Fact, figures and the
details which are of material interest to the owners, investors, creditors etc., must
be clearly presented in the financial statements. This type of disclosure needs
proper classification, summariation, aggregation and explanation of the numerous
business transactions.
The convention of disclosure is gaining importance due to the shift in the
growth of business organiations. Modern business world is completely separated
from the management. The Companies Act 1956, has made several provisions for
the disclosure of essential information by companies. Detailed form and schedules
are prescribed by the Act. The basis for valuation of investments and inventories
has to be specifically stated. Contingent liabilities have to be listed out. The scope
for concealment of information by joint stock companies is very limited.
The footnote, comments, descriptive captions, supplementary schedules etc,
in the accounting reports are an invaluable aid for full disclosure, For example,
market value of investments may be given a foot note. Revaluation reserve
included in the reserves and surpluses may be indicated through a separate caption.
The full disclosure does not imply providing any information required by anybody
or revealing trade secret and strategies. But the legitimate demands for information
of the interested parties like shareholders and creditor should be fully satisfied.

(2) Convention of Consistency

The basic aim of the doctrine of consistency is to preserve the
comparability and reliability of financial statements. According to this convention,
the rules, practices and concepts used in accounting should be continuously
observed and applied year after year. Comparisons of results among different
 24

accounting periods can be significant and meaningful only when consistent

practices were followed in ascertaining them. Valuation of stock can be done in
different acceptable ways like average price method or cot price method. It can
also be on the basis of cost or market price whichever is lesser. Similarly,
depreciation can be provided under different methods; investments can be valued
in several way. Whichever method or practice is followed, it should be followed
regularly. If any change is implemented it must be clearly indicated with reasons
for the change.
According to E.L. Kohler, consistency can be at three levels – vertical,
horizontal and dimensional.
Vertical consistency refer to consistency in the various aspect of financial
statements in the same year in a firm.
Horizontal consistency refer to consistency of practices between different
years in a firm.
Dimensional consistency refer to consistent accounting practices in the
financial statements of different firms in the same industry.
Consistency serves the purpose of eliminating personal bias, whims and
fancies of the accountants. They will have to follow consistent rules, practices and
methods. The convention of consistency makes the financial statements more
reliable and comparable for the needs of the end users.

(3) Convention of Materiality

Materiality means ‘relative importance’. All important item and facts
should be disclosed in accounting statements. Unimportant and immaterial details
need not be separately given. Otherwise, the accountant becomes over burdened
with unnecessary detail. For example, a plastic container for drinking water can be
clubbed with general expenses instead of separately being disclosed as an asset.
According to the American Accounting Association (AAA) “An item should
be regarded as material if there is reason to believe that knowledge of it would
 25

influence the decision of informed investor”. The test of materiality can be applied
to three aspects. (i) information (ii) amounts (iii) procedures.
(i) Loans to directors and employees can be material information and should be
separately disclosed, as per Banking Companies Regulation Act.
(ii) Adjusting amounts to the nearest Rupee is based on materiality of amounts.
(iii) Disclosing procedural changes in valuation of inventories is based on
materiality of procedures.
The term ‘Material’ is subjective, amenable for interpretation of individual
accountants. Similarly, what is material in one firm may be immaterial for another
firm. What is material in one accounting year may not be o in the subsequent
years. In spite of thee limitations, maximum possible material details should be
provided in the financial statements.

(4) Convention of conservatism

Conservatism is a policy of caution or ‘playing safe’. It demands taking a
‘gloomy’ view of situation. Conservatism is the defensive accounting mechanism
against ‘uncertainty’. According to Kohler, “Conservatism is a guideline which
choose between acceptable accounting alternatives for recording event and
transactions so that the least favourable immediate effect on assets, income and
owner’s equity is reported”.
Uncertainty is unavoidable in the estimation of useful life of assets,
contingent liabilities, realisation of receivables etc. The convention of conservatim
demands that the least favourable situation to the firm will materialise and
precautions should be taken on that basis.
When stock are valued, the usual principle followed is ‘cost or market price
whichever is lower’. if market price is more than cost, tock is shown at cot only.
All provisions like provision for doubtful debts, provision for discount on debtors.
Provision for contingencies are based on he convention of conservatism.
Conservatism may result in understatement of assets income and overstatement of
 26

provisions and liabilities. This may result in secret reserves. Over emphasis on
conservatism, within limits, serves a useful purpose. It should not be taken to
extreme where it can distort the operating results and financial position of a
business unit.
JOURNAL

The French word ‘Jour’ means ‘day’. Journal, therefore means a daily
record of business transactions.
Journal is a book of ‘primary entry’ or original entry’. All transaction are
initially recorded in the Journal. The ruling of the journal is such that any business
transaction can be analysed under the heads of debit and credit. A thorough
understanding of the principle of debit and credit which are the basis for Journal is
essential for every student of accountancy to get a thorough grasp of the subject.
Journal
Debit Credit
Date Particulars L.F Amount Amount
(Rs.) (Rs.)

Transactions are recorded in the Journal in chronological order, according

to dates. ‘Particular column’ specifies the account to be debited and credited. ‘L.F’
represents ‘Ledger Folio’ which means the page number in Ledger into which the
journal entry is posted. Debit amount and credit amount represent the amount to be
debited and credited to the respective account mentioned in the entry. Every
journal entry is accompanied by a ‘narration’ which explains the detail of
transaction for which the entry is written. The following is a specimen journal entry:
Debit Credit
Date Particulars L.F Amount Amount
(Rs.) (Rs.)
1999 Cash A/c Dr. 20,000
To Raman’s A/c 20,000
Dec.6 [Being amount received from
Raman on account]
 27

The entry written on Dec.6. 1999 specifies that cash account in the ledger is
to be debited R 20,000 and Raman’s account is to be credited Rs.20,000. The
narration explains that the amount received is ‘on account’ which means Raman
has a running account with the business.
The entry declares that cash account is debtor to Raman’s account. So, cash
account received benefit from Raman.
Recording of Journal entries correctly requires full understanding of the
‘Rules for debit and credit’ (given on page No. 1.12).

Transaction Analysis for Journal entries

Any business transaction should be analysed through the following three
step to write correct journal entry.
(a) The accounts affected by the transaction have to be identified.
(b) The identified account should be classified as to personal or real or nominal.
(c) The accounts to be debited and credited should be decided on the basis of
‘Rules’ governing debiting and crediting.

LEDGER

‘Ledger’ is the second important stage in the accounting cycle or process.

In this stage of accounting cycle, all recorded business transaction or entries are
grouped on a predetermined basis. Such classification or grouping takes the form
of ‘Accounts’ in a separate book known as ‘Ledger’. The ‘accounts’ in the ledger
provide identifiable ‘grouping’ to the numerous business transactions.
‘Ledger’ is the main book of accounts in a business. Subsidiary books,
though books of original entry, are of secondary importance only. ‘Ledger and the
accounts it contains’ are the core of accounting process.
The ledger contains various accounts – account relating to persons,
properties and asset, expenses and incomes. A ledger account may be described as
“A summary statement of all the transactions relating to a person, asset, expense
 28

or income which have taken place during a given period of time and how their net
effect”.
In subsidiary books, there is no scope to ‘summarise’ Goods sold to a
customer on credit are entered in sale book; cash received from him is recorded in
cash book; goods returned by him are shown in sale returns book, etc. They are all
grouped in one place in the ledger in his personal account. “Each ledger account
provides the complete picture of the dealings in relation to a particular peron or
property or expense or income”.
The ledger may be a single book, divided into three parts, say, page 1 to
300 – personal accounts; 301 to 500 real account and 501 to 1,000 nominal
accounts etc. But the more popular method is to have three separate books of
ledger. General or impersonal ledger contains all other accounts except those of
debtors and creditor. The Debtors ledger contains the personal accounts of trade
debtors and the Creditors ledger contains the accounts of trade creditors.

Account
An account is usually in the ‘T’ format and contains two sides – the left
hand side called ‘debit’ and the right hand side called ‘credit side’. The heading
mentions the name of the account. On both side of the account, date column is
maintained.
When an entry is written on the left hand side of an account, it is called
‘Debiting’. When an entry is made on the right hand side of an account. It is
known a ‘Crediting’.
All the accounts must be ‘debited’ and credited for relevant transactions as
per the rules for debiting and crediting (see page 1.12).

Posting of Journal to Ledger

‘Ledger being the second stage in the accounting cycle, it is dependent or
‘journal accounts. Thus, one can claim, ‘ledger’ is the ground floor of a building
standing on the ‘foundation’ of journal.
 29

When journal is in the form of entries, each entry specifies the account to
be debited and the account to be credited. A per the ‘instruction’ in the journal
entry, one account is to be ‘debited’ i.e., on the left hand side of the account entry
is to be made; and another account is to be ‘credited’ i.e., on the right hand side of
the account entry is to be made. For example,
Journal entry
Debit Credit
Date Particulars
Rs. Rs.
1.8.99 Raman’ A/c Dr 5,000
To Sale A/c 5,000
[Being credit sales made]

Raman’s Account
Date Particulars Rs. Date Particulars Rs.
1.8.99 To Sales A/c 5,000

Sales Account
Date Particulars Rs. Date Particulars Rs.
1.8.99 By Raman’ A/c 5,000

In the subsidiary book system, one positing to the ledger is made on the day
the transaction is entered in subsidiary book like purchases book, sales book,
return books, cash book, B.R. book and B.P book. However, at the end of the
month, the purchases book, sales book, etc., are totalled and the total is posted to
the respective accounts in the ledger. Thus, one posting is avoided for each
individual transaction resulting in saving of time and effort.
Throughout the accounting year, posting of journal of subsidiary books into
ledger take place in a systematic manner. By the end of the accounting year, ledger
reflects the sum result of all the business transactions of the firm.

SUBSIDIARY BOOKS

Maintaining a single ‘journal book’ in which journal entries are written for
each transaction and posting them to ledger is practicable in small businesses
 30

where a single accountant can maintain accounts or the owner himself can do the
accounts work. In bigger businesses, transactions are o numerous and varied that a
single journal book is absolutely inadequate and cumbersome. Several account
assistants may have to do accounts work as a team and share the burden. It may be
necessary to group similar transactions even at journal stage in the shape of
‘special journals’ to minimise and facilitate ledger work. Thus, the system of
Subsidiary Books as an alternative for ingle journal was developed.]
Subsidiary book comprise of the following:
(a) Purchases book to record credit purchase of goods; ]
(b) Sale book to record credit sales of goods;
(c) Purchase returns book to record return from customers
(d) Sales returns book to record returns from cutomers.
(e) Cash book to record all cash receipts and payments.
(f) Bills receivable book to record bills received.
(g) Bills payable book to record bills received.
(h) General journal or journal proper to record any other transactions which
cannot be entered in the above specialised subsidiary books.

Benefits of Subsidiary Book system

Subsidiary books result in the following benefits:
(a) Reduction in work: Overall work reduce in this system compared to a
single journal because one posting alone is made on the date of the
transactions. Consolidated monthly posting is made for the second aspect.
(b) Permits group work: Single can be written by one person alone. Work on
subsidiary book can be carried on by many accountants.
(c) Accuracy: Accounts will be more accurate because of specialised work and
monthly summarised postings.
(d) Better information: A lot of useful data like total credit sale, credit purchase,
returns, etc., is made available which is not possible in journal system.
 31

(e) Cash book: Cash book itself takes the place of journal as well as ledger
account. Thus, separate cash account is not needed. In case of three column
cash book, even bank A/c is not needed in the ledger.

Basic documents for Subsidiary Books

(a) Inward invoice: This is the document sent by the suppliers of goods giving
detail of goods sent, price, value, discount etc. It is basis for entries in
purchases book.
(b) Outward Invoice: This is a document sent by the firm to the customers,
showing the details of goods supplied, their price and value, discounts, etc.
It is the basis for writing sales book.
(c) Debit note: When good purchased from supplier are returned, a debit note
is sent to them showing the goods returned and their value. It is the basis
for purchase return book.
(d) Credit Note: When customers return goods, a credit note is prepared by the
firm and sent to them mentioning the amount credited to them based on the
goods received as returns. This note is the basis to write sales returns book.
(e) Cash Receipt and Vouchers: These are the vouchers and receipt for cash
received and paid. Entries in cash book are made on the strength of the
vouchers and receipts. They are also useful for auditing purpose.

ILLUSTRATIONS
Journal
Illustration 1
Journalise the following transactions:
1. Purchased goods for cash Rs.10,000
2. Purchased stationery for cash Rs.500
3. Purchased furniture for cash Rs.3,000
4. Sold goods for cash Rs.8,000
5. Sold goods to Jane for cash Rs.3,000
 32

6. Sold goods to James Rs.2,000

7. Paid Rent to Krishnan, the landlord Rs.800
8. Paid salary of Rs.8,000
9. Paid Lokesh, the manage his salary of Rs.3,000
10. Paid freight on goods purchased Rs.300
11. Paid freight on machine purchased Rs.400
12. Paid wages Rs.500
13. Paid wages to erect a machine Rs.1,000
14. Received Rs.800 from Kamal
15. Received Rs.600 from Kamal as interest
16. Received Rs.7,000 from Kamal as loan at 5% interest
Solution:
Journal Entries
Debit Credit
Date Particulars L.F
Rs. Rs.
1. Purchases A/c Dr 10,000
To Cash A/c 10,000
[Being cash purchase of goods]
2. Stationary A/c Dr 500
To Cash A/c 500
[Being purchase of stationary]
3. Furniture A/c Dr 3,000
To Cash A/c 3,000
[Being cash purchase of Furniture]
4. Cash A/c 8,000
To Sales A/c Dr 8,000
[Being cash sales made]
5. Cash A/c Dr 3,000
To Sales A/c 3,000
[Being cash sales to Jane]
6. James A/c Dr 2,000
To Cash A/c 2,000
[Being good sod on credit]
7. Rent A/c Dr 800
To Cash A/c 800
[Being rend paid to Krishnan, the landlord]
 33

8. Salary A/c Dr 8,000

To Cash A/c 8,000
[Being freight paid for goods]
9. Salary A/c Dr 3,000
To Cash A/c 3,000
[Being Manager’s salary paid in cash]
10. Freight A/c Dr 300
To Cash A/c 300
[Being freight paid for goods]
11. Machinery A/c Dr 400
To Cash A/c 400
[Being payment of Freight on machinery]
12. Wages A/c Dr 500
To Cash A/c 500
[Being payment of wages]
13. Machinery A/c Dr 1,000
To Cash A/c 1,000
[Being wages paid to erect machine]
14. Cash A/c 800
To Kamal’s A/c 800
[Being amount received from Kamal on
account]
15. Cash A/c Dr 600
To Interest A/c 600
[Being interest received from Kamal]
16. Cash A/c Dr 7,000
To 5% Loan A/c 7,000
[Being loan from Kamal for interest]

Illustration 2
Journalise the following transaction of M/s. Radha & Sons.
M/s. Radha & Sons
2000 Rs.
Jan 1 Business started with Rs.2,50,000 and cash deposited with Bank 1,50,00
3 Purchased machinery on credit from Rangan 50,000
6 Bought furniture from Ramesh for cash 25,000
12 Goods sold to Yeodha 22,500
13 Goods Returned by Yeodha 2,500
15 Goods sold for cash 50,000
 34

17 Bought goods for cash 25,000,

20 Cash received from Yeodha 10,000
21 Cash paid to Ramola 20,000
25 Cash withdrawn from bank 50,000
29 Paid advertisement expenses 12,500
30 Bought office stationery for cash 5,000
31 Cash withdrawn from bank for personal use of the proprietor 6,250
31 Paid salaries 15,000
31 Paid rent 2,500

Solution:
Books of M/s. Radha & Sons
Journal
Debit Credit
Date Particulars L.F
Rs. Rs.
2000
Jan 1 Cash A/c Dr 2,50,000
To Capital A/c 2,50,000
[Being cash brought in as capital]
1 Bank A/c Dr 1,50,000
To Cash A/c 1,50,000
[Being cash deposited into bank]
3 Machinery A/c Dr 50,000
To Rangan’s A/c 50,000
[Being machinery bought on credit from
Rangan]
6 Furniture A/c Dr 25,000
To Cash A/c 25,000
[Being furniture purchased for cash from
Ramesh]
12 Yeodha’s A/c Dr 22,500
To Sales A/c 22,500
[Being goods sold to Yesodha on credit]
13 Sale A/c Dr 2,500
To Yesodha’s A/c 2,500
[Being goods returned by Yesodha]
15 Cash A/c Dr 50,000
To Sales A/c 50,000
[Being goods sold for cash]
 35

17 Purchase A/c Dr 25,000

To Cash A/c 25,000
[Being goods purchased for cash]
20 Cash A/c Dr 10,000
To Yeodha’s A/c 10,000
[Being cash received from Yesodha]
21 Ramola A/c Dr 20,000
To Cash A/c 20,000
[Being cash paid to Ramola]
25 Cash A/c Dr 50,000
To Bank A/c 50,000
[Being cash withdrawn from bank]
29 Advertisement Expenses A/c Dr 12,500
To Cash A/c 12,500
[Being advertisement expenses paid]
30 Office stationary A/c Dr 5,000
To Cash A/c 5,000
[Being stationery purchased for cash]
31 Drawings A/c Dr 6,250
To Bank A/c 6,250
[Being cash withdrawn from bank for personal
use]
31 Salaries A/c Dr 15,000
Rent A/c Dr 2,500
To Cash A/c 17,500
[Being salaries and rend paid]

Illustration 3
Pass the necessary journal entries in the books of Sakthivel of Chennai for
the following transactions from the following report of transaction written by him
for April 2000.
2000
April 2 Purchased business for Rs.2,00,000
4 Purchased machinery from Kandan Bros, Trichy for Rs.30,000 on
which they paid Rs.300 freight on my behalf.
6 A cahier ha stolen Rs.1,500 and he is absconding
8 Goods costing Rs.12,000 were insured for Rs.10,000 and premium at
8% p.a was paid on them.
 36

10 On claim being made for theft of cash, insurance company paid

Rs.1,500.
12 Received an order from Dayalan for supply of goods worth Rs.4,000.
13 Goods were supplied as per order of Dayanlan and freight of Rs.200
was paid on it.
15 Goods worth Rs.100 were distributed as samples free of charge.
20 Goods, the list price of which is Rs.40,000; are sold to Sugumar at
10% trade discount.
25 Goods worth Rs.300 were spoilt in transit and a claim was made to
the Railway Co., in this respect.
30 Rs.300 was received in cash from Railway Co., in the payment of claim.

Solution:
Books of Sakthivel
Journal Entries
Debit Credit
Date Particulars L.F
Rs. Rs.
April 2 Business purchase A/c Dr 2,00,000
To Cash A/c 2,00,000
[Being purchase of business]
4 Machinery A/c Dr 30,300
To Kandan Bros A/c 30,300
[Being purchase of machinery including
freight]
4 Machinery A/c Dr 900
To Cash 900
[Being payment of erection charges of
machinery]
6 Loss by theft (or Abnormal loss A/c) Dr 1,500
To Cash 1,500
[Being cash stolen by cashier who is not
traceable]
8 Insurance premium A/c Dr 800
To Cash A/c 800
[Being payment of premium @8% on
Rs.10,000]
 37

10 Insurance co., A/c Dr 1,500

To Los by theft A/c 1,500
[Being claim payable by Insurance Co.,]
10 Cash A/c Dr 1,500
To Insurance Co., A/c 1,500
[Being claim payable by Insurance
company on claim for stolen cash]
12 No entry because receipt of an order is not a
transaction’
13 Dayalan A/c Dr 4,200
To Cash A/c 200
To Sale A/c 4,000
[Being supply of goods to Dayalan and
payment of freight theorem]
15 Advertising A/c Dr 100 100
To Purchases A/c
[Being goods distributed as free samples]
20 Sugumar A/c Dr 36,000 36,000
To Sales A/c
[Being ale of goods to sugumar @ 10%
trade discout]
25 Railwary claim A/c Dr 300 300
To Trading A/c
[Being claim made for goods spoilt]
Note: It is assumed that part of goods
purchased are spoilt in transit.
30 Cash A/c Dr 300 300
To Railway Claim A/c
[Being receipt of cash for claim]

LEDGER
Illustration 7
Record the following transactions in the personal account of Kapil:
2000 Rs
Apr. 1 Sold good to Kapil 6,000
5 Cash received from Kapil 5,800
and allowed him discount 200
18 Kapil purchased goods 8,000
30 Received Cash form Kapil on account 4,500
May1 Balance from last month b/d 3,500
12 Sold good to kapil 12,000
 38

22 Received Cash from kapil 4,850

and allowed him discount 150
31 Received Cash in full settlement of
Kapil’s A/c 10,250

Solution:
Kapil’s A/c
Date Particulars Rs. Date Particulars Rs.
2000 2000
Apr.1 To Sales 6,000 Apr.5 By Cash 5,800
18 To Sales 8,000 By Discount allowed 200
30 By Cash 4,500
30 By Balance C/d 3,500
14,000 14,000
May 1 To Balance b/d 3,500 May 22 By Cash 4,850
12 To Sales 12,000 By Discount allowed 150
31 By Cash 10,250
By Discount
allowed (Bal.fig.) 250
15,500 15,500

Illustration 8
Enter the following transaction in the Journal ledger of Hari prasad of
Hyderabad

2000 Rs.
Jan 1 Commenced business with cash 1,80,000
3 Deposited into Bank 55,000
4 Purchases goods for cash 22,000
5 Bought good of Swaminathan 72,000
8 Cash Sales 16,200
11 Cash deposited into Bank 23,000
14 Purchased furniture for cash 4,000
16 Sold goods to Vivek 12,700
17 Received cash from Vivek 12,446
Allowed him discount 254
 39

18 Paid Swaminathan Cash 12,000

Discount allowed by him 240
20 Paid Wage 1,800
21 Sold good to jagadeesan 35,000
22 Paid cash for trade expenses 150
24 Sold good to Rajan 23,280
25 Received from Jagadeesan 21,000
Allowed him discount 525
26 Paid Swaminathan cash on account 24,000
28 Sold goods for cash 9,000
29 Paid cash for stationery 180
30 Paid cash for miscellaneous expenses 150
31 Bought good from Sridhar 17,870
31 Withdrew Cash for private expenses 1,480

BOOKS HARI PRAAD OF HYDERABAD

JOURNAL ENTRIES
Solution:
Debit Credit
Date Particulars L.F
Rs. Rs.
2000
July 1 Cash A/c Dr 1,80,000
To Capital A/c 1,80,000
[Being Cash brought in a capital]
3 Bank A/c Dr 55,000
To Cash A/c 55,000
[Being the amount deposited into
Bank]
4 Purchase A/c Dr 22,000
To Cash A/c 22,000
[Being goods bought for cash]
5 Purchases A/c Dr 72,000
To Swaminathan A/c 72,000
[Being good bought on credit]
8 Cash A/c Dr 16,200
To Sales A/c 16,200
[Being goods sold for cash]
 40

11 Bank A/c Dr 23,000

To Cash A/c 23,000
[Being the amount deposited into
Bank]
14 Furniture A/c Dr 4,000
To Cash A/c 4,000
[Being furniture bought for cash]
16 Vivek A/c Dr 12,700
To Sales A/c 12,700
[Being good sold on credit]
17 Cash A/c Dr 12,446
Discount allowed A/c 254
To Vivek A/c 12,700
[Being amount received from Vivek
and discount allowed to him
18 Swaminathan A/c Dr 12,240
To Cash A/c 12,000
To Discount received A/c 240
[Being part payment made to
Swaminathan and discount received
from him]
20 Wage A/c Dr 1,800
To Cash A/c 1,800
[Being Cash paid for wages]
21 Jagadeesan A/c Dr 3500
To Sales A/c 3500
[Being goods sold on credit]
22 Trade expenses A/c Dr 150
To Cash A/c 150
[Being Cash paid for trade expenses]
24 Ranjan A/c 23,280
Dr 23,280
To Sales A/c
[Being goods old on credit]
25 Cash A/c Dr 21,000
Discount allowed A/c 525
To Jagadeesan A/c 21,525
[Being Part payment received from
Jagadeesan & discount allowed to him]

26 Swaminathan A/c Dr 24,000

To Cash A/c 24,000
[Being Part payment made to
 41

Swaminathan]
28 Cash A/c Dr 9,000
To Sales A/c 9,000
[Being Cash paid for Stationery]
29 Stationary A/c Dr 180
To Cash A/c 180
[Being cash paid for stationery]
30 Miscellaneous expenses A/c Dr 150
To Cash A/c 150
[Being cash paid for Miscellaneous
31 Purchases A/c Dr 17,870
To Sridhar A/c 17,870
[Being goods bought on credit]
31 Drawing A/c Dr 1,480
To Cash A/c 1,480
[Being cash withdrawn for private
expenses]

LEDGER
Cash A/c
Rs. Rs.
1.7.2000 To Capital A/c 1,80,000 3.7.2000 By Bank A/c 55,000
6.7.2000 To Sales A/c 16,200 4.7.2000 By Purchase A/c 22,000
17.7.2000 To Vivek A/c 12,446 11.7.2000 By Bank A/c 23,000
25.7.2000 To Jagadesan A/c 21,000 14.7.2000 By Furniture A/c 4,000
28.7.2000 To Sales A/c 9,000 18.7.2000 By Swaminathan 12,000
A/c
20.7.2000 By Wages A/c 1,800
22.7.2000 By Trade expenses 150
A/c
26.7.2000 By Swaminatham 24,000
A/c
29.7.2000 By Stationery A/c 180
30.7.2000 By Misellancou 150
Expenses A/c
31.7.2000 By Drawings A/c 1,480
By Balance C/d 94,886
2,38,646 2,38,646
1.8.2000 To Balance b/d 94,886
 42

Capital A/c
Rs. Rs.
31.7.2000 To Balance C/d 1,80,000 1.7.2000 By Cash A/c 1,80,000
1,80,000 1,80,000
1.8.2000 By Balance b/d 1,80,000
Bank A/c
Rs. Rs.
3.7.2000 To Cash A/c 55,000
11.7.2000 To Cash A/c 23.000 31.7.2000 By Balance 78,000
C/d
78,000 78,000
1.8.2000 To Balance b/d 78,000

Purchase A/c
Rs. Rs.
4.7.2000 To Cash A/c 22,000
5.7.2000 To Swaminathan 72,000
A/c
31.7.2000 To Sridhar A/c 17,870 31.7.2000 By Balance c/d 1,11,870
1,11,870 1,11,870
1.8.2000 To Balance b/d 1,11,870

Swaminathan A/c
Rs. Rs.
18.7.2000 To Cash A/c 12,000 5.7.2000 By Purchases A/c 72,000
18.7.2000 To Discount 240
received A/c
26.7.2000 To Cash A/c 24,000
31.7.2000 To Balance C/d 35,760
72,000 1.8.2000 By Balance b/d 35,700

Sales A/c
Rs. Rs.
6.7.2000 By Cash A/c 16,200
16.7.2000 By Vivek A/c 12,700
21.7.2000 By Jagadeesan 35,000
A/c
24.7.2000 By Ranjan A/c 23,280
31.7.2000 To Balance C/d 96,180 28.7.2000 By Cash A/c 9,000
 43

96,180 96,180
1.8.2000 By Balance b/d 96,180

Furniture A/c
Rs. Rs.
14.7.2000 To Cash A/c 4,000 31.4.2000 By Balance c/d 4,000
4,000 4,000
1.8.2000 To Bal. b/d 4,000
Vivek A/c
Rs. Rs.
16.7.2000 To Sale A/c 12,700 17.7.2000 By Cash A/c 12,446
By Discount allowed 254
12,700 12,700
Discount Allowed A/c
Rs. Rs.
17.7.2000 To Vivek A/c 254
25.7.2000 To Jagadeesan 525 31.7.2000 By Balance c/d 779
779 779
1.8.2000 To Balance b/d 779
Discount Received A/c
Rs. Rs.
18.7.2000 By Swaminathan A/c 240
31.7.2000 To Balance C/d 240
240 240
1.8.2000 By Balance b/d
Wages A/c
Rs. Rs.
20.7.2000 To Cash A/c 1,800
31.7.2000 By Balance C/d 1,800
1,800 1,800
1.8.2000 To Balance b/d 1,800
Jagadeesan A/c
Rs. Rs.
21.7.2000 To Sales A/c 35,000 25.7.2000 By Cash A/c 21,000
25.7.2000 By Discount allowed A/c 525
 44

31.7.2000 By Balance C/d 13,475

35,000 35,000
1.8.2000 To Balance 13,475
b/d
Traded Expenses A/c
Rs. Rs.
22.7.2000 To Cash A/c 150 31.7.2000 By Balance C/d 150
150 150
1.8.2000 To Balance 150
b/d

Ranjan A/c
Rs. Rs.
24.7.2000 To Sales A/c 23,280 31.7.2000 By Balance C/d 23,280
23,280 23,280
1.8.2000 To Balance 23,280
b/d

Stationery A/c
Rs. Rs.
29.7.2000 To Cash A/c 180 31.7.2000 By Balance C/d 180
180 180
1.8.2000 To Balance b/d 180

Miscellaneous Expenses
Rs. Rs.
30.7.2000 To Cash A/c 150 31.7.2000 By Balance C/d 150
150 150
1.8.2000 To Balance b/d 150

Sridhar A/c
Rs. Rs.
31.7.2000 To Balance 17,870 31.7.2000 By Purchases A/c 17,870
c/d
17,870 17,870
1.8.2000 By Balance b/d 17,870
 45

Drawings A/c
Rs. Rs.
31.7.2000 To Cash A/c 1,480 31.7.2000 By Balance C/d 1,480
1,480 1,480
1.8.2000 To Balance 1,480
b/d
SUBSIDIARY BOOKS
Illustration 10
Record the following transaction for the month of January 1999 in the
purchases book of M/s. Narain electronics:
Jan. 4 Purchased from M/s Brown Electronics:
20 Balck & White T.Vs @ Rs. 5,200 per piece.
10 Colour T.Vs @ Rs.12,000 per piece.
Jan 10 Purchased from M/s Mani Electronics:
12 Veideo tapes @ Rs.600 per piece.
8 Philips tape recorders @ R. 2,500 per piece.
Jan 19 Purchased from M/s Sehgal electonics:
10LG Stereos @ Rs.3,500 per piece
8 LG Colour T.Vs @ Rs.25,000 per piece.
Trade discount @ 15%
Jan 24 Purchased from M/s Gupta Electronics:
200 Audio Casettes @ Rs.25 Per piece
30 Equity toassters @ Rs.500 per piece.
Also show posting of the above transactions into ledger accounts from
purchase book.
 46

Solution:
Books of M/s. NARAIN ELECTRONICS
PURCHAESES BOOK
Inward
Details Amount
Date Name of the Supplier L.F Invoice
Rs. Rs.
No
4.1.99 M/s Brown Electronics:
20B/W T.Vs @ Rs.5,200 per piece. 1,04,000
10 Colour T.Vs at Rs.12,000 per 1,20,000
piece.
2,24,000

Less: Trade discount @ 12% 26,880 1,97,120

10.1.99 M/s Mani Electronics:
12 video tapes @ Rs. 600 per 7,200
piece.
8 Philip tape Recorders
@ Rs. 2,500 per piece. 20,000 27,200
19.1.99 M/s Sehgal Electronics:
10 LG Stereos @ Rs. 3,500 per 35,000
piece.
8 LG Colour T.Vs @ 25,000 2,00,000
per piece.
2,35,000
Les: Trade discount @ 15% 35,250 1,99,750
24.1.99 M/s Gupta Electronics:
200 Audio Cassettes @ Rs.25 5,000
per piece
30 Equity toasters @ Rs. 500 per 15,000 20,000
piece.
Total 4,44,070
Note: Total of purchases book is posted to the debit of Purchases Account in the
ledger at the end of every month. But posting to personal A/c are made on
the same day of a transaction.
 47

LEDGER ACCOUNTS
Purchases A/c
31.1.99 To Sundries (as 4,44,070
per purchases
book)

M/s. Brown Electronics A/c

4.1.99 By Purchases A/c 1,97,120

M/s. Mani Electronics A/c

10.1.99 By Purchases A/c 27,200

M/s Sehgal Electronics A/c

19.1.99 By Purchases A/c 1,99,750

M/s. Gupta Electronics A/c

24.1.99 By Purchase A/c 20,000
Illustration II
Enter the following transactions in the Sales Book of M/. Saran Raj & Sons
and post them into ledger:
1999
May 2 Sold to M/s Ragul Bros:
200 Pieces long cloth at Rs.90 per piece
300 pieces shirting @ Rs.110 per piece
May 5 Sold to M/s Gupta & Verma:
20 Pieces Coating @ Rs.250 per piece
May 16 Sold to M/s Mathur & Jain:
250 blankets @ Rs.50 each
120 blankets @ Rs.75 each
May 20 Sold 20 Shirt to cheap stores @ Rs.30 each for cash.
May 25 Sold old furniture to M/s. Santhosh & Co. on credit Rs.800.
 48

It is the practice followed by M/s Saran Raj & Sons to allow 10% trade
discount on all sales.
Solution:
Books of M/s. SARAN RAJ & SONS
ALES BOOK
Inward
Details Amount
Date Name of the Supplier L.F Invoice
Rs. Rs.
No.
2.5.99 M/s Ragul Bros:
200 Piece long cloth
@ Rs.90 18,000
300 Pieces shirting 33,000
@ Rs.110 51,100
Less: Trade discount
@ 10% 5,100 45,900
5.5.99 M/s Gupta & Verma:
20 pieces coating @ Rs.250 5000
Less: Trade discount @ 10% 500 4,500

16.5.99 M/s Mathur & Jain: 12,500

250 blankets @ Rs.50 9,000
120 blankets @ Rs.75
21,500
Less: Trade discount
@ 10% 2,150 19,350
Total 69,750

Note: (1)
Cash sale and sale of furniture are not entered in sale book. Only credit
sales of goods are recorded in Sales Book.
LEDGER ACCOUNTS
Sales A/c
Rs.
31.5.99 By Sundries (as per
Sales Book) 69,750
 49

M/s Ragul & Sons A/c

Rs.
2.5.99 To Sales A/c 45,900

M/s Mathur & Jain A/c

Rs.
16.5.99 To Sales A/c 19,350

Note: (2)
Total of ale book is posted to the credit of Sales Account in the ledger at the
end of every month. But postings to Personal A/c are made on the same day of a
transaction.

Illustration 12
Prepare Purchase returns Book and Sales returns book from the following
data:
1987 Rs.
Aug.1 Purchased good returned to Senthil 205
3 Received goods returned by Natarajan 300
5 Goods returned to Kannan 500
7 Sales returns of Rs.1,260 by Mathavan
15 returned defective goods to Rajan 1,280
18 Damaged good returned by Murali 1,120
23 Outward returns to Kanagasabal 275
29 Inward return by Swaminathan 750
30 Returned inferior goods to Sanker 890
31 Selvan returned goods to us 1,330

Solution:
Purchase Returns Book
Debit Amount
Date Name of the Supplier L.F.
Note No. Rs.
1.8.87 Senthil 205
5.8.87 Kannan 500
15.8.87 Rajan 1,280
23.8.87 Kanaga Sabai 275
30.8.87 Sankar 890
Total 3,150
 50

Sale Returns Book

Debit Amount
Date Name of the Supplier L.F.
Note No. Rs.
3.8.87 Natarajan 300
7.8.87 Mathavan 1,260
18.8.87 Murali 1,120
29.8.87 Swaminathan 750
31.8.87 Selvan 1,330
Total 4,760
Note: Total of purchase return book and Sales returns book are credited and
debited to the respective accounts in the ledger at the end of every month.
Posting to personal account are made on the same day of a transaction.

TRIAL BALANCE
Meaning
All business transactions are initially recorded in Journal or Subsidiary books.
Then they are transferred to ledger by posting to relevant accounts. After balancing the
ledger accounts of a business enterprise, a statement is prepared to show separately the
debit and credit balances. Such a statement is known as ‘Trial balance’. It is not an
account. It is not an account. It is not an account. It is a statement in which debit and
credit balance of all the accounts in the ledger are shown to test the arithmetical
accuracy of the book-keeping is that every debit has a corresponding credit and Vice
versa. Therefore the total of the debit balance must be equal in aggregate to the total of
the credit balances when the account are balanced. Thus, to find out the arithmetical
correctness of the book-keeping work, we prepare a summary of balances a they appear
in the ledger at some particular date. This summary of balances is known as a ‘Trial
balance’. Or to put in other words, we take a ‘trial’ of ledger balances, like a tailor taking
a trial of a suit, for the purpose of proving doubt it is a useful device and it helps in
preparation of final accounts since it contains all the Personal, Real and nominal accounts.
As it is prepared by taking up the balances of ledger accounts, both debit and credit sides
of a trial balance must always be equal.
 51

ILLUSTRATIONS
Illustration 1
The following balances were extracted from the ledger of Ramakrishna Engineering
Works on 31st March 1997. You are required to prepare a trial balance as on that date in
proper form.
Rs. Rs.
Drawings 6,000 Salaries 9,500
Capital 24,000 Sales Returns 1,000
Sundry creditors 43,000 Purchase Returns 1,100
Bills payable 4,000 Travelling expenses 4,600
Sundry debtors 50,000 Commission paid 100
Bills receivable 5,200 Trading expenses 2,500
Loan from Karthik 10,000 Discount earned 4,000
Furniture & fixtures 4,500 Rent 2,000
Opening stock 47,000 Bank overdraft 6,000
Cash in hand 900 Purchases 70,800
Cash at bank 12,500
Tax 3,500
Sales 1,28,000

Solution:
Trial balance of Ramakrishna Engineering Works as on 31.03.1997
S. Debit balance Credit balance
Name of Account L.F.
No. Rs. Rs.
1. Drawings 6,000 -
2. Capital - 24,000
3. Sundry creditors - 43,000
4. Bills payable - 4,000
5. Sundry debtors 50,000 -
6. Bills receivable 5,200 -
7. Loan from Karthik - 10,000
8. Furniture & Fittings 4,500 -
9. Opening stock 47,000 -
10. Cash in hand 900 -
11. Cash at bank 12,500 -
12. Tax 3,500 -
13. Sales - 1,28,000
14. Salaries 9,500 -
15. Sales returns 1,000 -
16. Purchase returns - 1,100
17. Travelling expenses 4,600 -
18. Commission paid 100 -
19. Trading expenses 2,500 -
 52

20. Discount earned - 4,000

21. Rent 2,000 -
22. Bank overdraft - 6,000
23. Purchases 70,800 -
2,20,100 2,20,100

Illustration 2
Messers. Rajkumar & Bros. started their business on 1st April 1995 with
Rs.50,000 as their capital. Following were the transactions for one month:
Rs.
1995 April 1 Paid into bank 20,000
”2 Purchased furniture from Modern furniture Ltd., on credit 3,000
”5 Purchased goods from Mohan 8,800
”6 Sold goods on credit to Sivakumar 3,500
”8 Paid to Modern furniture Ltd., cash 2,000
” 15 Paid wages in cash 200
” 16 Issued cheque to Mohan 7,000
” 20 Received from Sivakumar 1,500
” 21 Paid into bank 1,500
” 23 Cash sales 3,500
” 25 Cash purchases 1,800
” 27 Goods withdrawn for personal use 500
” 28 Cash withdrawn for personal use 750
” 29 Paid for stationery 100
” 30 Paid salaries by cheque 1,000

Give journal entries and prepare ledger accounts and trial balance as on
30.04.1995.

Solution:
In the books of Messers. Rajkumar & Bros.
Journal Entries
Date Particulars L.F. Debit Credit
Rs. Rs.
1-4-95 Cash A/c Dr. 50,000
To Messers. Rajkumar & Bros. capital A/c 50,000
[Being cash brought in for capital]
1-4-95 Bank A/c Dr. 20,000
To Cash A/c 20,000
[Being amount deposited into bank]
2-4-95 Furniture A/c Dr. 3,000
To Modern Furniture Ltd. A/c 3,000
[Being furniture bought on credit]
 53

5-4-95 Purchases A/c Dr. 8,800

To Mohan A/c 8,800
[Being goods purchased on credit]
6-4-95 Sivakumar A/c Dr. 3,500
To Sales A/c 3,500
[Being goods sold on credit]
8-4-95 Modern Furniture A/c Dr. 2,000
To Cash A/c 2,000
[Being part payment made to Modern Furniture
Ltd.]
15-4-95 Wages A/c Dr. 200
To Cash A/c 200
[Being wages paid]
16-4-95 Mohan A/c Dr. 7,000
To Bank A/c 7,000
[Being payment made to Mohan by cheque]
20-4-95 Cash A/c Dr. 1,500
To Sivakumar A/c 1,500
[Being cash received]
21-4-95 Bank A/c Dr. 1,500
To Cash A/c 1,500
[Being amount deposited]
23-4-95 Cash A/c Dr. 3,500
To Sales A/c 3,500
[Being goods sold for cash]
25-4-95 Purchases A/c Dr. 1,800
To Cash A/c 1,800
[Being goods purchased for cash]
27-4-95 Drawings A/c Dr. 500
To Purchases A/c 500
[Being goods taken away for personal use]
28-4-95 Drawings A/c Dr. 750
To Cash A/c 750
[Being cash taken away for personal use]
29-4-95 Stationery A/c Dr. 100
To Cash A/c 100
[Being stationery purchased for cash]
30-4-95 Salary A/c Dr. 1,000
To Bank A/c 1,000
[Being salary paid by cheque]
 54

Ledger Accounts
Cash A/c
Rs. Rs.
1-4-95 To Messers. Rajkumar 50,000 1-4-95 By Bank A/c 20,000
& Bros. capital
20-4-95 To Sivakumar A/c 1,500 8-4-95 By Modern Furniture 2,000
Ltd.
23-4-95 To Sales A/c 3,500 15-4-95 By Wages A/c 200
21-4-95 By Bank A/c 1,500
25-4-95 By Purchases A/c 1,800
28-4-95 By Drawings A/c 750
29-4-95 By Stationery A/c 100
30-4-95 By Balance c/d 28,650
55,000 55,000
1-5-95 To Balance b/d 28,650
Messers. Rajkumar & Bros. Capital A/c
Rs. Rs.
30-4-95 To Balance c/d 50,000 1-4-95 By Cash A/c 50,000
50,000 50,000
1-5-95 By Balance b/d 50,000
Bank A/c
Rs. Rs.
1-4-95 To Cash A/c 20,000 16-4-95 By Mohan A/c 7,000
21-4-95 To Cash A/c 1,500 30-4-95 By Salary A/c 1,000
30-4-95 By Balance c/d 13,500
21,500 21,500
1-5-95 To Balance b/d 13,500

Furniture A/c
Rs. Rs.
2-4-95 To Modern 3,000 30-4-95 By Balance c/d 3,000
Furniture A/c
3,000 3,000
1-5-95 To Balance b/d 3,000

Modern Furniture Ltd. A/c

Rs. Rs.
8-4-95 To Cash A/c 2,000 2-4-95 By Furniture A/c 3,000
30-4-95 To Balance c/d 1,000
3,000 3,000
1-5-95 By Balance b/d 1,000
 55

Mohan A/c
Rs. Rs.
16-4-95 To Bank A/c 7,000 5-4-95 By Purchase A/c 8,800
30-4-95 To Balance c/d 1,800
8,800 8,800
1-5-95 By Balance b/d 1,800

Sivakumar A/c
Rs. Rs.
6-4-95 To Sales A/c 3,500 20-4-95 By Cash A/c 1,500
30-4-95 By Balance c/d 2,000
3,500 3,500
1-5-95 To Balance b/d 2,000

Sales A/c
Rs. Rs.
30-4-95 To Balance c/d 7,000 6-4-95 By Sivakumar 3,500
A/c
23-4-95 By Cash A/c 3,500
7,000 7,000
1-5-95 By Balance b/d 7,000
Purchases A/c
Rs. Rs.
5-4-95 To Mohan A/c 8,800 27-4-95 By Drawings A/c 500
25-4-95 To Cash A/c 1,800 30-4-95 By Balance c/d 10,100
10,600 10,600
1-5-95 To Balance b/d 10,100
Wages A/c
Rs. Rs.
15-4-95 To Cash A/c 200 30-4-95 By Balance c/d 200
200 200
1-5-95 To Balance b/d 200

Drawings A/c
Rs. Rs.
27-4-95 To Purchases A/c 500 30-4-95 By Balance c/d 1,250
28-4-95 To Cash A/c 750
1,250 1,250
1-5-95 To Balance b/d 1,250
 56

Stationery A/c
Rs. Rs.
29-4-95 To Cash A/c 100 30-4-95 By Balance c/d 100
100 100
1-5-95 To Balance b/d 100

Salary A/c
Rs. Rs.
30-4-95 To Bank A/c 1,000 30-4-95 By Balance c/d 1,000
1,000 1,000
1-5-95 To Balance b/d 1,000

Schedules of Debtors
Rs.
Sivakumar 2,000
Sundry Debtors 2,000

Schedule of Creditors
Rs.
Modern Furniture Ltd. 1,000
Mohan 1,800
Sundry Creditors 2,800

Trial balance of Messers. Rajkumar & Bros. as on 30-4-95

Debit Credit
Name of Account L.F. balance balance
Rs. Rs.
Cash A/c 28,650 -
Messers. Rajkumar & Bros. Capital A/c - 50,000
Bank A/c 13,500 -
Furniture A/c 3,000 -
Sundry Creditors - 2,800
Sundry Debtors 2,000 -
Sales A/c - 7,000
Purchases A/c 10,100 -
Wages A/c 200 -
Drawings A/c 1,250 -
Stationery A/c 100 -
Salary A/c 1,000 -
59,800 59,800
 57

Practical Problems
Practical Problems
1. From the following ledger accounts of Poddar, draw Trial Balance as on 31st
December 2004.
Rs. Rs.
House Property 45,000 Repairs 1,200
Furniture 5,000 Rent Received 4,800
Utensils 6,000 Medical Expenses 1,200
Ornaments 25,000 School Fee 1,800
Cash 630 Conveyance 1,350
Bank Balance: Cosmetics 1,150
Fixed Deposits 20,000 Interest Received 3,000
Savings Bank 3,500 House Building Loan from 20,000
Govt.
Shares & Govt. Securities 12,000 Interest paid 1,870
Claims against persons 1,500 Municipal Taxes 3,000
Salary (Income) 24,000 Income-tax 2,500
Food and Drink 3,750 Accumulated Fund 88,300
Dress and Clothings 2,450
(Tripura H.S.)
[Ans. Total of Trial Balance: Rs.1,0,100]
2. The following Trial Balance was extracted from the books of a Merchant,
although the columns are agreed, yet they are incorrect. You are required to
correct and redraft it.
Trial Balance
Dr. Cr.
Premises 30,000 Capital 36,800
Machinery 8,500 Fixtures 2,800
Bad Debts 1,400 Sales 52,000
Returns Outwards 1,300 Debtors 30,000
Cash 200 Interest Received 1,300
Discount Received 1,500
Bank Overdraft 5,000
Creditors 25,000
 58

Purchases 50,000
1,22,900 1,22,900

[Ans. T.B. Rs.1,22,900]

3. Correct the following Trial Balance:
(Dr.) (Cr.)
Rs. Rs.
Return Outwards 16,000 Debtors 15,000
Opening Stock 34,200 Carriage Outwards 5,000
Salaries 12,000 Capital 55,200
Creditors 28,000 Machinery 18,000
Bank 45,000 Returns Inward 3,000
Carriage Inwards 6,000 Discount Received 4,000
Rent Received 3,000 Trade Expenses 6,000
Discount Allowed 2,000 Building 20,000
Purchases 1,00,000 Sales 1,40,000
Bills Payable 20,000
2,66,200 2,66,200

(H.S.)
[Ans. Correct Total of Trial Balance: Rs.2,66,200]
4. Mr. Blank, a client of yours with whom book-keeping is not a strong point, asks
you to audit his accounts for the year ended 31st December 2004, upon which data
his Closing Stock was valued at Rs.574.
As a basis for your audit Blank furnishes you with the following statements:
Dr. Cr.
Rs. Rs.
Blank Capital --- 1,556
Blank Drawings 564 ---
Leasehold Premises 741 ---
Sales --- 2,756
Due from Customers --- 530
Purchases 1,268 ---
Purchases Return 264 ---
Loan from Bank --- 250
Creditors 528 ---
 59

Trade Expenses 784 ---

Cash at Bank 142 ---
Bills Payable 100 ---
Salaries & Wages 598 ---
Stock (1st January) --- 264
Rent, Rates, etc. 465 ---
Sales Return --- 98
5,454 5,454

If you do not approve this statement, amend it.

(C.A.)
[Ans. Correct total of the Trial Balance Rs.5,454]
5. Set out below in the Trial Balance of Mr. Baby drawn on 31st December 2004.
Redraw it correctly.
Dr. Cr.
Rs. Rs.
Capital 80,000 Debtor 75,800
Bad Debts Received 2,500 Bank Deposit 27,500
Creditors 12,500 Discounts Allowed 400
Return Outwards 3,500 Drawings 6,000
Bank Overdraft 15,700 Returns Inwards 4,500
Rent 3,600 Sales 1,46,900
Salaries 8,500 Bills Payable 13,500
Trade Expenses 3,000
Cash in hand 2,100
Stock Jan. 2004 24,500
Purchases 1,18,700
2,74,600 2,74,600

(H.S.)
[Ans. Corrected T.B. Rs.2,74,600]
 60

UNIT -II
FINAL ACCOUNTS
Objectives
After learning the second unit, the students can understand the organisation’s
financial accounts for a specific period and ensure the accuracy of the balances shown by
the pass book and cash book.
Introduction
The primary function of accounting is to accumulate accounting data in a manner
that the amount of profit made or loss suffered during a period can be determined. The
manner in which the amount of profit or loss has been arrived at is disclosed in the
statement of accounts, prepared at the end of the accounting period are detailed out
therein, grouped under significant heads. It is also accompanied by a balance sheet,
exhibiting assets and liabilities of the business as at the close of the period. In addition,
for showing the nature of economic activity to which the account pertains, the revenue
account as well as different sections in which it is set up are invariably headed as
manufacturing trading and profit and loss account or simply as profit and loss account.
These two statements i.e., trading and profit and loss account and balance sheet are
prepared to give the final results of the business. That is why both are collectively called
final accounts.
Thus, preparation of final accounts is the last step in the accounting cycle. In fact,
final accounts include a number of accounts such as (i) Trading accounts (ii) Profit and
loss account and (iii) balance sheet. Though balance sheet is a statement, for all practical
purposes, it is treated as one of the final accounts.
Once the “trial balance” is extracted and ‘errors’ rectified, a trader prepares the
“final accounts” so as to known the final results (i.e., net profit or loss) and financial
position (i.e., assets and liabilities) of his business. Trading account and profit and loss
account are prepared by transferring from the trial balance, all nominal accounts and
accounts concerning goods by passing entries known as “closing entries”. All remaining
accounts viz., real and personal accounts pertaining to property, assets, debtors and
creditors are just shown in a statement called balance sheet.
This procedure is discussed in detail in the following pages.
 61

Profit & Loss Account

According to Prof. Carter, “Profit and Loss account is an account into which all
gains and losses are collected in order to ascertain the excess of gains over the losses or
vice versa”. Profit and loss account is prepared in order to calculated the net profit or net
loss of the business. This account starts with the credit from the trading account in respect
of gross profit (or debit if there is gross loss). From gross profit, operating and non-
operating expenses are deducted and operating and non-operating income is added in
order to calculated the net profit. When total of all the expenses is more than gross profit
and other income, there remains a deficit and this is called net loss. The net profit or net
loss is ultimately transferred to capital account of the proprietor or to partners’ capital
accounts in case of partnership firm.

Preparation of profit and loss account

As in the case of a trading account the profit and loss account is an account and
hence, its form and construction conform to the rules of ledger account and principles of
double entry system.
Since the profit and loss account is prepared to shown the net profit earned or set
loss incurred during a particular period, it should be headed as under:
Profit and Loss A/c of .......... for the year ended”
The specimen proforma of a profit and loss account is given below:
Profit and Loss A/c of ...... for the year ended.......

Rs Rs
To Gross loss b/d xxx By Gross profit b/d xxx
To Management expenses: By Interest received xxx
Office salaries xxx By Discount received xxx
Rent, rates and taxes xxx By Commission received xxx
Printing & stationery xxx By Rent from tenants xxx
Postage & Telegrams xxx By Income from investments xxx
Telephone charges xxx By Apprenticeship premium xxx
Legal charges xxx By Interest on debentures xxx
Audit fess xxx By Miscellaneous revenue receipts xxx
Insurance xxx By Net loss transferred to capital xxx
A/c
General expenses xxx
Office lighting xxx
 62

To Financial expenses:
Interest on capital xxx
Interest on loans xxx
Discount allowed xxx
Discount on bills xxx
To Selling & Distribution exp:
Advertising xxx
Traveller’s salaries xxx
Expenses & Commission xxx
Bad debts xxx
Godown rent xxx
Carriage outwards xxx
Agent’s commission xxx
Upkeep of motor vans xxx
Export expenses xxx
To Depreciation & Maintenance:
Depreciation xxx
Repairs & maintenance xxx
To Extraordinary expenses:
Loss by fire (not covered by xxx
insurance)
Cash defalcations xxx
To Net profit transferred to
Capital A/c xxx
xxx xxx

(i) Proforma of balance sheet in the order of permanency Balance sheet of.... as on....
Liabilities Rs. Assets Rs.
Capital: xxx Fixed assets:
Add: Net profit xxx Good will xxx
Add: Interest on capital xxx Land & buildings xxx
Loose tools xxx
Less: Drawings xxx Furniture & fixtures xxx
Less: Interest on drawings xxx Vehicles xxx
Less: Loss if any xxx xxx Patents xxx
Trade markes xxx
Long term loans xxx
(Advances)
Long term liabilities:
Loan on mortgage xxx Investments:
Bank loan xxx Current assets:
Current liabilities: Closing stock xxx
Sunday creditors xxx Sunday debtors xxx
Bills payable xxx Bills receivable xxx
Bank overdraft xxx prepaid expenses xxx
Creditors for outstanding xxx Accrued incomes xxx
 63

expenses
Income received in advance xxx Cash at bank xxx
Cash in hand xxx
Fictitious assets:
Preliminary expenses xxx
Advertising expenses xxx
Underwriting commission xxx
Discount on issue of shares xxx
Discount on issue of debentures xxx
xxx xxx

ILLUSTRATIONS
Non-Comprehensive Illustrations
Illustration 1
Prepare Trading Account of Archana for the year ending 31-12-96 from the
following information:
Rs.
Opening Stock 80,000
Purchases 8,60,000
Freight Inward 52,000
Wages 24,000
Sales 14,40,000
Purchase Returns 10,000
Sales Returns 3,16,000
Closing Stock 1,00,000
Import duty 30,000

[Bharathidasan B.Com., Nov.2005] [Periyar BBA., May 2004]

Solution:
Trading Account of Archana for the year ending 31-12-1996
Rs. Rs.
To opening Stock 80,000 By Sales 14,40,000 11,24,000
To Purchases 8,60,000 8,50,000 Less: Sales 3,16,000 11,24,000
returns
Less: Purchase 10,000 By closing Stock 1,00,000
returns
To Freight Inward 52,000
To Wages 24,000
To Import duty 30,000
To Gross Profit c/d 1,88,000
12,24,000 12,24,000
 64

Illustration 2
From the following balances extracted at the close of the year ended 31st Dec.
1996, prepare Profit and loss account of Mr. Raj as at that date:

Rs. Rs.
Gross profit 55,000 Repairs 500
Carriage on sales 500 Telephone expenses 520
Office Rent 500 Interest (Dr.) 480
General expenses 900 Fire Insurance premium 900
Discount to customers 360 Bad debts 2,100
Interest from Bank 200 Apprentice Premium (Cr.) 1,500
Travelling expenses 700 Printing & Stationery 2,500
Salaries 900 Trade expenses 300
Commission 300

Solution:
Profit & Loss Account of Mr. Raj for the year ending 31-12-1996
Rs. Rs.
To Carriage on Sales 500 By Gross profit b/d 55,000
To office Rent 500 By Bank Interest 200
To General expenses 900 By Apprentice Premium 1,500
To Discount to customers 360
To Travelling expenses 700
To Salaries 900
To Commission 300
To Repairs 500
To Telephone expenses 520
To Interest paid 480
To Fire Insurance Premium 900
To Bad debts 2,100
To Printing & Stationery 2,500
To Trade expenses 300
To Net Profit transferred
to Capital A/c 45,240
56,700 56,700

Illustration 3
The following are the balances in the Ledger of Mr. Sherif for the year ended 31st
March 1996.
Rs.
Opening Stock:
Raw materials 20,000
 65

Work-in-progress 3,000
Finished goods 10,800
Purchase of raw materials 50,000
Sales 2,40,000
Fuel and coal 1000
Wages 32,000
Factory expenses 40,000
Office expenses 30,000
Depreciation on Plant & Machinery 3,000
Closing Stock:
Raw materials 20,000
Work-in-progress 4,000
Finished goods 8,000

Prepare manufacturing and Trading Account for the year ended 31st March 1996.
Solution:
Manufacturing and Trading Account of Mr. Sherif for the year ending 31.3.96
Particulars Rs. Particulars Rs.
To opening work-in-progress 3,000 By Closing work-in-progress 4,000
To Cost of Materials consumed: By Cost of goods
Opening Stock 20,000 Manufactured 1,25,000
Add: Purchases 50,000 transferred to
70,000 Trading A/c
Less: Closing Stock 20,000 50,000
To wages 32,000
To Fuel & Coal 1,000
To Factory expenses 40,000
To Depreciation on
Plant & Machinery 3,000
1,29,000 1,29,000
To Opening Stock of
finished goods 10,800 By Sales 2,40,000
To Cost of goods By Closing Stock of finished
manufactured 1,25,000 goods 8,000
To Gross Profit c/d 1,12,200
2,48,000 2,48,000

Illustration 4
From the following adjusted Trial Balance, prepared after Trading and Profit &
Loss Accounts are drafted, prepare Balance Sheet of Ramagopalan as at 31st December
1996. Under:
(a) Permanency order and (b) Liquidity order.
 66

Dr. Cr.
Rs. Rs.
Capital - 1,00,000
Closing Stock 40,000 -
Fixed Assets less depreciation Rs.16,000 72,000 -
Sundry Debtors 1,00,000 -
Provision for Bad debts - 5,000
Profit & Loss Account - 42,000
Sundry Creditors - 80,000
Liabilities for expenses - 11,000
Drawings 6,000
Cash & Bank 20,000
2,38,000 2,38,000

Solution:
(a) Permanency Order
Balance Sheet of Ramagopalan as on 31-12-96
Liabilities Rs. Assets Rs.
Capital opening bal. 1,00,000 Fixed Assets 88,000
Add: Net Profit 42,000 Less: Depreciation 16,000 72,000
1,42,000
Less: Drawing 6,000 1,36,000 Stock 40,000
Debtors 1,00,000
Sundry Creditors 80,000 Less: Provision for
Bad debts 5,000 95,000
Liabilities for 11,000 Cash & Bank 20,000
expenses
2,27,000 2,27,000

(b) Liquidity Order:

Balance Sheet of Ramagopalan as on 31-12-96
Liabilities Rs. Assets Rs
Liabilities for 11,000 Cash & Bank 20,000
expenses
Sundry Creditors 80,000 Debtors 1,00,000
Capital A/c: Less: Provision for
Bed debts 5,000 95,000
Opening Balance 1,00,000
Add: Net Profit 42,000 Stock 40,000
1,42,000 Fixed Assets 88,000
Less: Drawings 6,000 1,36,000 Less: Depreciation 16,000 72,000
2,27,000 2,27,000
 67

Illustration 5
The following is the Trial Balance of Dhandapani of Madras as on 31st December
1996.

Debit Balances Rs. Rs.

Opening Stock 6,200 Carriage on Sales 1,600
Buildings 34,000 Repairs 1,800
Furniture 2,000 Sundry Debtors 12,000
Purchases 42,400 Bad debts 240
Salaries 4,400 Cash in hand 2,600
Rent 1,200 Return inwards 2,040
Miscellaneous Expenses 1,000
1,24,080
Credit Balances
Postage 560 Sales 82,920
Stationery 520 Capital 24,000
Wages 10,400 Bank Loan 6,000
Freight on purchases 1,120 Sundry Creditors 9,840
Return outwards 840
Interest 260
Dividend 220
1,24,080

The Value of stock on 31-12-1996 was estimated at Rs.5,960. You are required to
make the necessary closing entries and prepare Trading and Profit & Loss Account and a
Balance Sheet as on 31st December 1996.

Closing Entries
Dr. Cr.
Date Particulars
Rs. Rs.
1996 Trading A/c Dr. 62,160
Dec. 31 To Opening Stock A/c 6,200
To Purchases A/C 42,400
To Wages A/c 10,400
To Return Inwards A/c 2,040
To Freight on Purchase A/c 1,120
[Being transfer]
Dec.31 Sales A/c Dr. 82,920
Return outwards A/c Dr. 840
To Trading A/c 83,760
[Being Transfer]
 68

Dec. 31 Closing Stock A/c Dr. 5,960

To Trading A/c 5,960
[Being incorporation of closing
stock in Trading A/c]
Dec. 31 Trading A/c Dr. 27,560
To Profit & Loss A/c 27,500
[Being Gross Profit transferred]
Dec.31 Profit & Loss A/c Dr. 11,320
To Salaries A/c 4,400
To Rent A/c 1,200
To Miscellaneous Expenses A/c 1,000
To postage A/c 560
To Stationery A/c 520
To Carriage on Sales A/c 1,600
To Repairs A/c 1,800
To Bad debts A/c 240
Dec. 31 Interest A/c Dr. 260
Dividend A/c Dr. 220
To Profit & Loss A/c 480
[Being interest & dividend transferred]
Dec.31 Profit & Loss A/c Dr. 16,720
To Capital A/c 16,720
[Being net profit transferred]

Trading and P& L A/c of Dhandapani for the year ending 31-12-96
Particulars Rs. Particulars Rs.
To opening Stock 6,200 By Sales 82,920
To Purchases 42,400 Less: Return inward 2,040 80,880
To Returns outward 840 41,560 By Closing Stock 5,960
To wages 10,400
To Freight on purchase 1,120
To Gross Profit c/d 27,560
86,840 86,840
To Salaries 4,400 By Gross Profit b/d 27,560
To Rent 1,200 By Interest 260
To Miscellaneous expenses 1,000 By Dividend 220
To postage 560
To Stationery 520
To Carriage on Sales 1,600
To Repairs 1,800
To Bad Debts 240
To Net Profit 16,720
Transferred to Capital A/c 28,040 28,040
 69

Balance Sheet of Dhandapani as on 31-12-96

Liabilities Rs. Assets Rs.
Sundry Creditors 9,840 Cash in hand 2,600
Bank Loan 6,000 Sundry Debtors 12,000
Capital A/c Stock 5,960
Balance 24,000 Furniture 2,000
Add: Net Profit 16,720 40,720 Buildings 34,000
56,500 56,560
EXCERCISE
Practical
N.B. The figures of net profit given as answer are after interest on capital, if any.
1. Prepare Trading and Profit and Loss Account for the year ended 31st March,
1990 and Balance Sheet as at that date from the following Trial Balance of K. Rama Rao.
Dr. Balances Rs. Cr. Balances Rs.
Drawings 45,000 Capital 1,60,000
Goodwill 80,000 Bills Payable 33,800
Land & Buildings 60,000 Creditors 70,000
Plant & Machinery 40,000 Purchase Returns 2,650
Loose Tools 3,000 Sales 4,18,000
Bills Receivable 3,000
Stock, 1st April, 1989 40,000
Purchases 2,51,000
Wages 20,000
Carriage Outwards 500
Carriage Inwards 1,000
Coal 5,800
Salaries 35,000
Rent, Rates, & Taxes 2,800
Discount 1,500
Cash at Bank 25,000
Cash in hand 400
Sunday Debtors 45,000
Repairs 1,800
Printing & Stationery 500
Bad Debts 1,200
Advertisements 3,500
Sales & Returns 2,000
Furniture 11,200
General Expenses 5,250
 70

Adjustments:
(1) Closing Stock on 31st March, 1990 was Rs. 35,000
(2) Depreciate Plant & Machinery, Tools and Furniture by 10% and Land &
Buildings by 5%
(3) Provide Rs. 1,500 for wages
(4) Advertisements prepaid are Rs. 500
(5) Provide 5% Debtors against bad debts and 2% against discount.
(Gross Profit, Rs. 1,34,350; Net Profit, Rs. 71,275 Total of Balance Sheet, Rs.
2,91,575.)
2. Prepare Trading and profit and Loss Account and Balance Sheet as on 31st
March, 1990 from the following balances:
Rs.
M. Mirza’s Capital Account 1,19,400
M. Mirza’s Drawings Account 10,550
Sundry Creditors 59,630
15% Loan Account (Credit) 20,000
Cash in hand 3,030
Cash at Bank 18,970
Sundry Debtors (including Badri Das for dishonoured 62,000
bill of Rs. 1,000)
Bill Receivable 9,500
Provision for Doubtful Debts 2,500
Fixtures and Fittings 8,970
Plant and Machinery 28,800
Stock, 1st April, 1989 89,680
Purchases 2,56,590
Manufacturing Wages 40,970
Sales 3,56,430
Returns Inwards 2,780
Salaries 11,000
Rent and Taxes 5,620
Interest and Discount (Debit) 5,870
Travelling Expenses 1,880
Insurance (including Premium of Rs. 300 per annum 400
paid up to 30th September, 1990)
Bad Debts 3,620
Commission Received 5,640
 71

Stock in hand on 31st March, 1990 was Rs. 1,28,960. Write off half of Badri Das’s
dishonoured bill. Create a provision of 5% on Sundry Debtors. Charge 10% interest on
Capital. Manufacturing wages include Rs. 1,200 for erection of new machinery purchased
last year. Depreciate Plant and Machinery by 15% and Fixtures and Fittings by 10% per
annum. Commission earned but not received amounts to Rs. 600. Interest on loan for the
last two months is not paid.
(Gross Profit, Rs. 96,570; Net Profit, Rs. 52,313; B/S Totals, Rs. 2,53,233)
8. On 31st March, 1990, the following Trial Balance was extracted from the books of
Chatterji:
Dr. Rs. Cr. Rs.
Capital A/c 90,000
Plant and Machinery 80,000
Sales 4,07,000
Purchase 2,60,000
Returns 6,000 5,750
Opening Stock 30,000
Discount 350
Bank Charges 75
Sundry Creditors 45,000
Sundry Creditors 25,000
Salaries 26,800
Manufacturing Wages 40,000
Carriage In 750
Carriage Out 1,200
Bad Debts Provision 525
Rent, Rates and Taxes 10,000
Advertisements 2,000
Cash in hand 900
Cash in Bank 6,000
Furniture & Fittings 20,000
5,29,075 5,29,075
You are asked to prepare the final accounts for the year ended 31st March, 1990 and the
Balance Sheet as on that date. The following adjustments are required:
(1) Closing Stock Rs. 35,000
(2) Depreciation on Plant and Machinery @ 15% p.a. and on Furniture &
Fittings @ 10% p.a. to be provided.
(3) Bad Debts provision to be adjusted to Rs. 500.
(4) Interest on capital to be allowed at 10% per annum.
 72

(5) 15% of the profits remaining after providing interest on capital is to be

carried to General Reserve.
(Gross Profit, Rs. 1,11,000, Net Profit, Rs. 41,140; Balance Sheet Totals, Rs. 1,72,000).
9. On 31st March, 1990 the following Trial Balance was prepared from the books of
Brown:
Dr. Rs. Cr. Rs
Sundry Debtors .. 30,600
Sundry Creditors .. 10,000
Bills Receivable .. 5,000
Plant and Machinery .. 75,000
Purchases .. 1,90,000
Capital Account .. 70,000
Freehold Premises .. 50,000
Salaries .. 21,000
Wages .. 24,400
Postage and Stationery .. 1,750
Carriage In .. 1,750
Carriage out .. 1,000
Bad Debts .. 950
Bad Debts Provision .. 350
Office General Chages .. 1,500
Cash at Bank .. 5,300
Cash in hand .. 800
Bills payable .. 7,000
Reserve .. 20,000
Sales .. 3,31,700
Closing Stock .. 30,000
4,39,050 4,39,050
The following adjustments are required:
(a) Brown gets a salary of Rs. 12,000 per annum.
(b) Allow 10% interest on Capital
(c) Bad Debts Provision to be adjusted to 2½% on sundry Debtors.
(d) 10% of the net profit is to be credited to the Reserve
(e) It was discovered in April, 1989 that stock sheets as on 31st March, 1989 were
overcast by Rs. 1,000. However, no entry was passed in April, 1989.
(f) Depreciate Plant and Machinery @ 10% p.a. and Freehold Premises @ 2% p.a.
You are asked to prepare the Trading and Profit and Loss Account of the firm for the year
ended 31st March, 1990 and a Balance Sheet as at that date.
(Gross Profit, Rs. 1,16,550; Net Profit, Rs. 55, 291; Balance Sheet, Rs. 1,87,435.)
 73

10. From the undermentioned Trial Balance of Bannerji, prepare the final accounts for
the year ended 31st March, 1990 and the Balance Sheet as at that date:
Dr. Rs. Cr. Rs
Land and Buildings .. 50,000
Purchases .. 2,10,000
Stock on March 31, 1990 .. 45,000
Returns .. 1,500
Wages .. 45,300
Salaries .. 39,000
Office Expenses .. 15,400
Carriage In .. 1,200
Carriage Out .. 2,000
Discounts .. 750 1,200
Bad Debts .. 1,200
Sales (adjusted) .. 3,85,000
Capital .. 1,15,000
Chatterjee Loan A/c (taken on 1/10/89 @ 18% p.a) .. 25,000
Insurance .. 1,500
Commission .. 1,500
Plant and Machinery .. 50,000
Furniture and Fixtures .. 20,000
Bills Receivable .. 20,000
Sundry Debtors .. 40,000
Sundry Creditors .. 25,000
Cash in hand .. 1,500
Cash at Bank .. 14,500
Office Equipment .. 12,000
Bills payable 12,350
Expenses payable .. 3,300
5,70,850 5,70,850

It was the practice of Bannerji be value stock at 10% below cost. The opening
stock (on 1-4-89) was Rs. 49,500. Bannerji desires that the final statement be draw up
according to the cost of the stock. The following adjustments are also required:-
(1) Depreciate Land and Buildings @ 6%, Plant and Machinery @ 10%, office
Equipment @ 20% and Furniture and Fixtures @ 15%.
(2) Raise a Bad and Doubtful Debts Provision of 1¼% on Sundry Debtors.
(3) Insurance Premium includes Rs. 250 paid in advance.
(4) Provide Interest on Capital @ 10% p.a. and Salary to Bannerji @ Rs. 15,000 p.a.
(5) 10% of the final profit is to be kept in General Reserve.
 74

Hints:
Rs
(1) Adjusted purchases as given Add for opening stock increase 2,10,000
10
Rs. 49,500 ×
90
5,500
21,15,500
10 5,000
Less for closing stock increase Rs. 45, 000 ×
90
Amount to be shown in Trading A/c 2,10,500

(2) In Balance Sheet, Closing Stock will appear at

100
Rs. 45, 000 × = Rs.50, 000
90
(3) Amount for transfer to General Reserve will be calculated on profit before
adjustment in respect of opening stock.
(Gross Profit Rs. 1,29,000; Net Profit Rs. 32,005 after transfer to General Reseve of an
amount of Rs. 2,945; Balance sheet Rs. 2,44,350; Capital Account Rs. 1,73,505)

Meaning of bank reconciliation statement

Bank reconciliation statement is a list in which are indicated the various items that
cause a difference between the bank balances as per cash book and pass book on any
given date. This statement bridges the gap between the balance shown by the cash book
and the pass book.

Causes for differences

The bank balance as per cash book may differ from the bank balance as per bank
statement as on a particular date due to a variety of reasons as under:
I. Transactions entered in cash book but not in pass book as on the date of bank
reconciliation statement:
(a) Cheques are issued but are not presented to bank for payment [cash book credited
but pass book not debited].
 75

(b) Cheques and bills are deposited in bank but not collected and credited in pass
book [cash book debited but pass book not credited].
(c) Cheques or cash are debited in cash book but actually not sent to bank [cash book
debited but pass book not credited].
(d) Cheques are deposited but returned dishonoured by bank, but they are not
adjusted in cash book yet [cash book debited but pass book not credited].
Similarly, cheques are issued but the bank returns them dishonoured [cash book
credited but pass book not debited].
(e) Cash book is credited for issue of cheques but they are actually not issued or
money not drawn [cash book credited but pass book not debited].
(f) Dividend, interest, deposits etc. debited in cash book more than once in error.
[Excess debit in cash book but not credited in pass book].
Similarly, bank charges or withdrawals etc. are credited in cash book more than
once, in error [excess credit in cash book but not debited in pass book].
II. Transactions entered in pass book but not in cash book as on the date of bank
reconciliation statement
(a) Cash or cheque is directly deposited in bank by debtors or others and credited by
bank but the depositor has no intimation of the same [pass book credited but cash
book not debited].
(b) Bank has credited the pass book for interest on investments, for dividends on
shares etc. collected by it but the depositor has no intimation of the same [pass
book credited but cash book not debited].
(c) Bank has debited the pass book for direct payments [under standing instructions]
on insurance premiums, interest on loans from others, electricity bills etc., but the
depositor has no intimation of the same [pass book debited but cash book not
credited).
(d) Bank debits the pass book for interest on overdraft or bank loan, for bank charges,
commission, service charges, collection charges etc. [pass book debited but cash
book not credited].
Similarly, bank credits pass book for interest in bank balance on fixed deposits etc.
[pass book credited but cash book not debited].
 76

(e) Cheques or bills discounted previously are dishonoured and or debited in pass
book [pass book debited but cash book not credited].
(f) Bank has credited pass book for cheques deposited and collected; and pass book
has debits for payment of cheques issued; but both have remained unrecorded in
cash book [for deposits: pass book credited but cash book not debited; and for
issues: pass book debited but cash book not credited].
(g) There may be erroneous debits in pass book for bank charges, interest and for
cheques drawn by others [pass book debited but cash book not credited].
Similarly, there may be erroneous credits in pass book for interest on deposits etc.,
and for cheques etc., deposited by others [pass book credited but cash book not
debited].
The various causes mentioned above necessitate the preparation of bank
reconciliation statement which explains the specific reasons for the difference between
the balances shown by the pass book and the cash book.
Proforma of a bank reconciliation statement
The following statements indicate the effect of each ‘difference’ on cash book
balance or pass book balance.
I. If we take cash book balance or overdraft as per pass book as the starting point:
Bank Reconciliation Statement as on ..........
Rs. Rs.
Balance as per cash book or overdraft as per pass book xxx
Add: (i) Cheques issued / drawn but not presented xxx
(ii) Direct deposit made by customers into bank not xxx
recorded in cash book
(iii)Dividend or other incomes collected by the bank not xxx
recorded in cash book
(iv) Interest credited by the bank but not debited in cash xxx xxx
book
xxx
Less: (i) Cheques paid / deposited into bank but not credited xxx
(ii) Payments by the bank as per standing instruction, not xxx
entered in cash book
(iii)Bank charges debited in pass book but not recorded in xxx
cash book
(iv) Cheques deposited but dishonoured, not recorded in xxx
cash book
(v) Cheques issued and recorded in cash book as xxx
 77

deposited into bank but the same was not deposited

into bank
(vi) Cheques issued but not recorded in cash book xxx
(vii) Interest on bank deposits recorded in cash book but xxx xxx
not credited by the bank
Balance as per pass book or overdraft as per cash book xxx

II. If we take pass book balance or overdraft as per cash book as starting point:
Bank Reconciliation Statement as on .........
Rs. Rs.
Balance as per pass book or overdraft as per cash book xxx
Add: (i) Cheques paid / deposited into bank but not credited xxx
(ii) Payment made by the bank as per standing instruction, xxx
not entered in cash book
(iii)Bank charges debited in pass book but not recorded in xxx
cash book
(iv) Cheques deposited but dishonoured not recorded in xxx
cash book
(v) Cheques issued and recorded in cash book as xxx
deposited into the bank but the same was not
deposited into the bank
(vi) Cheques issued but not recorded in cash book xxx
(vii) Interest on bank deposits recorded in cash book but xxx xxx
not credited, by the bank
xxx
Less: (i) Cheques issued / drawn but not presented xxx
(ii) Direct deposit made by customers into bank, not xxx
recorded in cash book
(iii)Dividends or other income collected by the bank but xxx
not recorded in cash book
(iv) Interest credited by the bank but not debited in cash xxx xxx
book
Balance as per cash book or overdraft as per pass book xxx

ILLUSTRATIONS
I. Reconciliation from favourable cash book balance
Illustration 1
From the under-mentioned particulars of Mr. M. Mohan prepare a Bank
Reconciliation Statement as on 31st July 1994.
(i) Cheques paid into Bank on the 28th July 1994 but credited to Mohan’s account in the
first week of August 1994.
 78

(ii) The following cheques were issued by Mohan on 30th July 1994 but presented to bank
for payment after the close of the year. D. David Rs.1,200; H. Hari Rs.1,000; L. Lal
Rs.800.
(iii)A cheque for Rs.300 was credited direct to the account and was not passed through
the cash book.
(iv) The bank balance as per cash book on 31st July 1994 amounted to Rs.30,000.
[C.U. B.Com]
Solution:
Bank Reconciliation Statement of M. Mohan as on 31st July 1994
Rs. Rs.
Bank Balance as per cash book 30,000
Add: (i) Cheques issued but not presented for payment
D. David Rs.1,200
H. Hari Rs.1,000
L. Lal Rs.800 3,000
(ii) Cheque credited direct to the account but not passed 300 3,300
through the cash book
33,300
Less: Cheques paid into bank but not credited in the pass book
K. Kalyan Rs.1,000
J. Joy Rs.800
R. Raghul Rs.1,200 3,000 3,000
Bank balance as per pass book 30,300

II. Reconciliation from favourable pass book balance

Illustration 2
From the following particulars, prepare a bank reconciliation statement as at 31st
December 1992 to find out the balance as per cash book of Ms. Akila.
(i) The following cheques were paid into bank in December 1992 but were credited by
the bank in January 1993.
Maninder – Rs.1,400; Kalyani – Rs.1,600; Rajesh – Rs.1,200.
(ii) The following cheques were issued in December 1992 but were presented for
payment in January 1993.
Shalini – Rs.1,000; Bhagat - Rs.900
(iii)The following charges were made by the bank which were not recorded in the cash
book.
 79

Incidental charges for the half year ended 31-12-1992 Rs.40 collection charges for
outstanding cheques Rs.30.
(iv) The following payments made by the bank direct as per standing instructions were
not entered in the cash book.
Insurance premium – Rs.700; Subscription for commerce – Rs.150
(v) A cheque for Rs.1,000 which was received from a customer was entered in the bank
column of cash book in December 1992 but was omitted to be banked in December
1992.
(vi) A bill for Rs.2,000 was retired by the bank under rebate of Rs.40 but the full amount
of the bill was credited in bank column of the cash book.
The bank balance as per pass book was Rs.31,600 on 31st December 1992.
 80

Solution:
Books of Ms. Akila
Bank Reconciliation Statement as on 31-12-1992
Rs. Rs.
Balance as per pass book 31,600
Add: (i) Cheques paid into bank but not yet cleared and
credited:
Maninder 1,400
Kalyani 1,600
Rajesh 1,200 4,200
(ii) Charges recorded in the pass book but not in the
cash book:
Incidental charges 40
Collection charges 30 70
(iii)Payment made by the bank directly as per standing
instructions, not recorded in the cash book:
Insurance Premium 700
Subscription for commerce 150 850
(iv) Cheques entered in the cash book but omitted to be 1,000 6,120
banked
37,720
Less: Cheques issued but not yet presented for payment
Shalini 1,000
Bhagat 900 1,900
Rebate allowed for the bill retired but not entered in 40 1,940
the cash book
Balance as per cash book 35,780

III. Reconciliation from Overdrawn cash book balance

Illustration 3
The bank overdraft of Rajinin on 31-12-93 as per cash book is Rs.9,000. From the
following particulars, prepare bank reconciliation statement:
Rs.
(i) Unpresented cheque 3,000
(ii) Uncleared cheque 1,700
(iii) Bank interest debited in the pass book only 500
(iv) Bill collected and credited in the pass book only 800
(v) Cheque of Renu dishonoured 500
(vi) Cheques issued to Sekar entered in the Cash column of cash book 300
 81

Solution:
Bank Reconciliation Statement as on 31-12-93
Rs. Rs.
Bank Overdraft as per cash book 9,000
Add: (i) Uncleared cheques 1,700
(ii) Interest debited 500
(iii)Dishonoured cheques 500
(iv) Cheques omitted from the Bank column 300 3,000
12,000
Less: (i) Unpresented cheques 3,000
(ii) Bill collected 800 3,800
Bank overdraft as per pass book 8,200

IV. Reconciliation from overdrawn pass book balance

Illustration 4
Prepare a bank reconciliation statement from the following data as on 30-11-1994:
(i) Balance as per pass book as on 30-11-1994 overdrawn Rs.18,408.
(ii) Cheques drawn on 30-11-1994 but not cashed till 1 Dec. 1994 Rs.6,450; Rs.1,490;
Rs.1,852.
(iii)Bank overdraft interest charged on 28-11-1994 not entered in cash book Rs.3,220.
(iv) Cheques received on 29-11-94 entered in cash book, but not deposited into bank till
31-12-94 Rs.22,644 and Rs.3,460.
(v) Cheque received amounting to Rs.70 entered in the cash book twice.
(vi) Bills receivable due on 29-11-94 was sent to bank for collection on 28-11-94 and was
entered in cash book forthwith but the proceeds were not credited in bank pass book
till 3rd Dec. 1994 Rs.5,960.
(vii) A periodic payment by bank for Rs.160 under standing instruction not entered in
cash book.
(viii) Cheque deposited on 30th Nov. 1994 dishonoured but the entry thereof was not
made in the cash book Rs.3,780.
 82

Solution:
In the books of ................
Bank Reconciliation Statement as on 30th Nov. 1994
Rs. Rs.
Overdraft as per pass book 18,408
Cheques drawn but not cashed
Add: 9,792 9,792
(Rs.6,450 + Rs.1,490 + Rs.1,852)
28,200
Less: (i) Interest on bank overdraft not entered in cash book 3,220
(ii) Cheque received and entered in the cash book as
deposited into bank but actually not deposited till 3rd
26,104
Dec. 1994
(Rs.22,644 + Rs.3,460)
(iii)Cheque received and entered in the cash book twice 70
(iv) Bill sent to bank for collelction but not credited till
5,960
3rd Dec. 1994
(v) Periodic payment made by bank not entered in cash
160
book
(vi) Cheque deposited dishonoured but not entered in
3,780 39,294
cash book
Bank balance as per cash book (Dr.) 11,094

V. When both, pass book and cash book of a period are given
Illustration 5
Prepare a bank reconciliation statement as on 30th June 1993 from the bank pass
book and cash book (Bank column only).
Cash Book (Bank Column Only)
Amount Amount
Date Particulars Date Particulars
Rs. Rs.
1993 1993
June 1 To Balance b/d 23,000 June 10 By Kalyani 1,800
June 1 To Mani 1,500 June 12 By Venkatesh 1,700
June 5 To Sathish 2,000 June 15 By Cash 4,800
June 18 To Rathinam 1,200 June 18 By Venu 1,400
June 26 To Vijay 800 June 25 By Sekar 800
June 28 By Abey Kuruvilla 1,320
June 30 By Balance c/d 16,600
28,500 28,500
 83

Bank Pass Book

Date Particulars Withdrawals Deposits Dr. or Cr. Balance
1993 Rs. Rs. Rs.
June 1 By Balance b/d - - Cr. 23,000
” 4 By Mani’s cheque - 1,500 Cr. 24,500
” 7 By Sathish’s cheque - 2,000 Cr. 26,500
” 14 To Venkatesh 1,700 - Cr. 24,800
” 15 To Cash 4,800 - Cr. 20,000
” 20 By Vani (cash) - 1,000 Cr. 21,000
” 23 To Venu 1,400 - Cr. 19,600
” 26 To Insurance 1,000 - Cr. 18,600
Premium
” 30 To Bank charges 100 - Cr. 18,500
” 30 By Interest - 220 18,720
” 30 By Int. on - 1,280 20,000
investments

Solution:
Bank Reconciliation Statement as on 30th June 1993
Rs. Rs.
Balance as per cash book 16,600
Add: Cheques issued but not yet presented for payment -
Kalyani 1,800
Sekar 880
Abey Kuruvilla 1,320
Interest allowed by the bank as per pass book but 220
not recorded in the cash book
Interest on investments collected by the bank not 1,280
recorded in the cash book
Amount deposited by Vani directly in the bank not 1,000 6,500
recorded in the cash book
23,100
Less: Cheques paid into bank but not yet collected:-
Rathinam 1,200
Vijay 800
Insurance premium paid by the bank not recorded in 1,000
the cash book
Bank charges debited in the pass book but not 100 3,100
recorded in the cash book
Balance as per pass book 20,000
 84

Practical Problems
1. On 31st December 2004, the Cash Book of Prakash showed a balance of Rs.2,000
at bank. He had deposited cheques worth Rs.10,000 in the bank before 31st
December, but cheques worth Rs.4,000 only had been credited before that date.
Similarly, out of cheques for Rs.5,000 issued during December cheques for
Rs.2,500 were presented and paid in January 2005. The Pass Book also showed a
payment of Rs.320 as Insurance premium and Rs.2,000 against a Promissory Note
as per instructions. There was a credit in the Pass Book for Rs.600 for interest on
Investments collected and a debit of Rs.50 for interest and Rs.20 for bank charges.
Prepare a Bank Reconciliation Statement as on 31st December 2004.
(B.Com., Madurai)
[Ans. Overdraft as per Pass Book Rs.3,290]
2. Sunderlal and Sons find that the Bank Balance shown by their Cash Book on 31st
December, 2004 is Rs.10,500 (Credit), but the Pass Book shows a difference due
to the following reasons:
(a) Cheque No. 51 for Rs.540 in favour of Amar has not yet been presented.
(b) A post-dated cheque for Rs.300 has been debited to the bank account in the
Cash Book, but it could not be presented for payment.
(c) Four cheques totalling Rs.1,200 sent to the Bank for collection have not yet
been credited while a fifth cheque for Rs.400 deposited in the account has
been dishonoured.
(d) Fire insurance premium amounting to Rs.50 paid by the Bank understanding
instructions has not been entered in the Cash Book.
(e) A Bill for Rs.1,000 was retired by the Bank under a rebate of Rs.15, but the
full amount of the Bill was credited in the Cash Book.
Prepare a Bank Reconciliation Statement.
(B.Com., Kerala, Delhi, Allahabad)
[Ans. Overdraft as per Pass Book Rs.11,895]
3. Raghunath’s Cash Book showed a credit balance of Rs.800 on 31st December
2004. On examining entries with the Pass Book, it was found that:
 85

(a) Out of the two cheques issued to Rajaram on 27th December one for Rs.860
and another for Rs.680, the cheque for Rs.680 was cashed only on 2nd January
2005.
(b) Out of the three cheques deposited in the Bank for collection on 26th
December for Rs.300, Rs.400 and Rs.500 respectively, the cheque for Rs.400
only was collected by 31st December.
(c) There was a credit in the Pass Book for Rs.75 towards interest collected
directly by the banker on behalf of Raghunath and a debit in the Pass Book for
Rs.15 towards collection charges but not corresponding entries were found in
the Cash Book.
(d) A cheque for Rs.250 being entered in the Cash Book was omitted by oversight
to be deposited in the bank for collection.
(e) A wrong credit for Rs.225 relating to some other account was found in the
Pass Book.
Prepare a Bank Reconciliation Statement as on 31st December showing the Pass
Book.
(B.Com., Madurai, Madras)
[Ans. Overdraft as per Pass Book Rs.8,885]
4. On 31st December 2004, Atmaram’s Pass Book showed an overdraft of Rs.9,700.
From the following further particulars, prepare a Bank Reconciliation Statement:
(a) Cheques paid into Bank but not cleared and credited before 31st December
amounted to Rs.1,700.
(b) Cheques issued prior to 31st December but presented for payment after that
date, amounted to Rs.900.
(c) Interest on Overdraft amounting to Rs.175 debited in the Pass Book is not
entered in the Cash Book.
(d) Rs.600, interest on investment collected by the bankers and credited in the
Pass Book remains to be entered in the Cash Book.
(e) Bank charges Rs.12.50 appear in the Pass Book but not in the Cash Book.
(f) Rs.800 in respect of dishonoured cheque appears in the Pass Book and not in
the Cash Book.
 86

(B.Com., Kerala, MS)

[Ans. Overdraft as per Cash Book Rs.8,512.50]
5. On 31st December 2005, the Bank Pass Book of Naresh & Co. showed an
overdraft of Rs.10,700. From the following particulars, prepare a Bank
Reconciliation Statement.
(a) Cheque issued before 31.12.2005 but presented for payment after that date
amounted to Rs.900.
(b) Cheque paid into the Bank but not collected and credited until 31.12.2005
amounted to Rs.2,200.
(c) Interest on Overdraft amounting to Rs.1,200 did not appear in the cash book.
(d) Rs.5,000 being interest on investments collected by the Bank and credited in
the Pass Book were not shown in the Cash Book.
(e) Bank charges of Rs.50 were not entered in the Cash Book.
(f) Rs.800 in respect of a dishonoured cheque were entered in the Pass Book but
not in the Cash Book.
(B.Com., Jabalpur)
[Ans. Overdraft as per Cash Book Rs.12,350]
 87

UNIT -III
RECTIFICATION OF ERRORS

Objectives
After learning the third unit, the students can understand the accounting process to
provide correct information to the users of financial statements and why single entry
systems are entirely utilized for manual book keeping systems since all modernized
systems use the double entry system.
“To Err is human’ is a familiar proverb. Errors or mistakes may be committed in
different stages of the accounting process. The errors have to be located and corrected at
the earliest to ensure the correctness of accounts. If errors are not rectified, the profit
disclosed by the profit and loss account cannot be relied upon. Similarly, the Balance
sheet also becomes undependable.

Classification of errors
Numerous errors are usually committed in maintaining accounts. Appropriate
classification of all the errors provides the necessary comprehension to rectify them.
There are three ways in which the errors can be classified:

I. Nature of error as Basis

Depending on the nature of error committed, errors can be classified as follows.
A. Errors of omission B. Errors of commission
C. Errors of principle D. Compensating errors

A. Errors of omission
This category includes omission of a transaction either in the journal or subsidiary
books or in the ledger. The omission can be complete or partial.
(i) When a transaction is not at all recorded in journal or subsidiary books, it is
complete omission. Similarly, when a transaction is not at all posted to the ledger,
(both debit and credit) it is also complete omission.
 88

(ii) When a part of a transaction is recorded and the remaining portion is omitted, it is
partial omission. For example, cash received from a customer is entered in the
cash book but not posted to the customer’s account.

B. Errors of commission
‘Commission’ means doing something which should not have bee done. This
applies to all mistakes due to lack of concentration or carelessness.
The following errors of commission are usually committed in subsidiary books.
1. Wrong entry: Entering wrong amount in a subsidiary book.
2. Entry in wrong book: Entering correct amount or wrong amount in a wrong
subsidiary book.
3. Wrong casting: Subsidiary books are to be totalled periodically and posted to the
ledger. The totalling of any particular subsidiary book may be wrong.
Wrong entry and entry in wrong book usually affect both the debit and credit. So,
mistake occurs in two different accounts. Wrong casting affects only one account. There
will not be any mistake in the personal account.
The following errors of commission are usually committed in ledger:
1. Errors of posting and 2. Errors of balancing
Errors of posting may be:
Right amount in the right side of wrong account
Right amount in the wrong side of correct account.
Wrong amount in the right side of correct account.
Wrong amount in the wrong side of correct account.
Wrong amount in the wrong side of wrong account.
Wrong amount in the right side of wrong account, etc.
Errors of balancing can occur in one or more accounts in the ledger while
ascertaining the balance, either periodically or at the time of preparing trial balance.

C. Errors of principle
These mistakes occur due to improper application of principles of accounts.
Errors of principle may relate to different aspects.
 89

1. Capital and revenue items: Purchase of assets may be recorded in purchases book,
treating capital expenditure like a revenue item. Similarly, sale of fixed assets
may be shown in sales book. Expenditure on repairs may be debited to machinery
account. Wages spent for erection of equipment may be debited to wages account.
2. Improper valuation: Valuation of investments and stocks against the recognised
practices.
3. Erratic provisioning: Providing insufficient or excess provisions for depreciation,
provision for doubtful debts, etc.

D. Compensating errors
Errors which neutralise each other are called compensating errors. The error is
usually in unrelated accounts but the amount will be the same. Thus, excess debit in one
account may be compensated by excess credit in another account.

II. Effect on Trial Balance as Basis

If impact on Trial Balance is considered, we have two categories of errors:
1. Errors which are disclosed by trial balance: All errors of commissions are
usually disclosed by trial balance because the mistakes affect the agreement of
trial balance. Errors of posting, casting, balancing, carrying forward etc., affect
the balance of the accounts concerned. Errors of partial omission also affect the
agreement of trial balance because either debit or credit is partially omitted.
2. Errors which are not disclosed by trial balance: Errors of principle result in
equal debit and credit though technically the treatment is wrong. So, trial balance
is not affected. Errors of complete omission ignore both debit and credit and thus
have no effect on trial balance. Errors of duplication occur when the same
transaction is recorded twice. Compensating errors which balance each other etc.,
also do not affect the agreement of trial balance.
Posting to the correct side of wrong accounts, wrong amounts recorded in
subsidiary books etc., also do not affect the agreement of trial balance.

III. Number of accounts affected as basis

 90

From the point of view of rectification whether an error affects a single account or
it affects two or more accounts is very important. On the basis of this criterion, errors are
classified as follows:
1. Single sided errors or errors which affect one account.
2. Double sided errors or errors which affect two or more accounts.
Single sided errors include most of the errors of commission like errors of posting,
casting, carry forward, balancing etc. They can be rectified by an explanatory note in the
account concerned or by passing a journal entry using suspense account.
Double sided errors include errors of complete omission, errors of principle,
posting to wrong account etc. Since these errors affect two or more accounts, they are
usually rectified with the help of a journal entry. Only when it is not possible to pass a
journal entry, ‘explanatory note’ can be written in the account concerned as rectification.

SUSPENSE ACCOUNT

Need for suspense account

Locating and rectifying errors in accounts is a continuing process. It takes place
throughout the year. However, at the end of the accounting year, trial balance is prepared
as a prelude for Final accounts. If the trial balance does not tally, difference is ascertained
and effort is made to locate the errors. However, preparation of final accounts cannot be
delayed beyond a reasonable period. So, any unaccounted difference in trial balance is
placed to a suspense account. After completing the final accounts, mistakes can be
located and rectified gradually.
The balance in suspense account is the net effect of all the errors which affect the
trial balance. If debits are short and credits are in excess in the trial balance, the
difference is placed to suspense account as a debit balance. It appears on the assets side
of the balance sheet. Similarly, if credit is short and debit is in excess in the trial balance
suspense account will be a credit balance and will be shown on the liabilities side of the
balance sheet. Thus ‘suspense account’ helps in tallying the balance sheet.
Whenever mistakes are located entries are passed debiting or crediting the
suspense account. When all the errors are rectified, suspense account is automatically
closed.
 91

If rectification involves debiting and crediting two accounts with the same amount,
then the rectification entry will not involve the suspense account. This a possible in
double sided errors.
In all single sided errors, rectification involve the suspense account because the
error had affected only one account.
It is not possible to debit or credit accounts, which are usually closed by
transferring to trading account or profit and loss account because those accounts were
already closed for the year in which the error was committed. If the nominal accounts or
the goods accounts are debited or credited as a part of rectification, the subsequent years
accounts in which rectification is made, will be unnecessarily affected.
Profit and loss adjustment account or capital account of the owners can be directly
debited or credited for the purpose of rectification, after assessing the impact of
rectification on the profit.
The same guidelines given above for ‘effect of rectification on net profit’ are
applicable to assess the effect of rectification on net profit.
If profit decreases because of rectification of errors, the profit and loss adjustment
account or capital account must be debited. Similarly, when profit increases because of
rectification, the profit and loss adjustment account or capital account must be credited
(refer illustrations 15 and 16).
ILLUSTRATIONS
ONE-SIDED ERRORS
I. Errors of Totalling or Casting
Illustration 1
Rectify the following errors:
(a) Purchases Book is over cast by Rs.300 (for the month of March).
(b) Sales book has been under cast by Rs.200.
(c) Purchase Returns Book has been over cast by Rs.75.
(d) Sales Returns Book has been under cast by Rs.50.
Solution:
Explanation:
S. Effect of
Nature of mistake Rectification
No. mistake
 92

(a) Over casting of Purchases Book Excess Debit Credit the Purchases A/c
(b) Under casting of Sales Book Under Credit Credit Sales A/c
(c) Over casting of Purchase returns Excess Credit Debit Purchase Returns
Book A/c
(d) Under casting of Sales Returns Book Under Debit Give a further debit to
Sales Returns A/c

Rectification: To rectify the errors:

(a) Credit purchases A/c with Rs.300.
(b) Credit Sales A/c with Rs.200.
(c) Debit purchase Returns A/c with Rs.75.
(d) Debit Sales Returns A/c with Rs.50.
II. Errors of Carry Forward
Illustration 2
(i) Purchases book is carried forward Rs.350 less.
(ii) Sales Book total is carried forward Rs.500 more.
(iii) A total of Rs.758 in the Purchases Book has been carried forward as Rs.857.
(iv) The total of the Sales Book Rs.755 on page 20 was carried forward to page 21 as
Rs.557.
(v) Purchase Returns Book was carried forward as Rs.1,520 instead of Rs.5,120.
Solution:
Explanation:
S. Effect of
Nature of mistake Rectification
No. mistake
(i) Carrying forward lower amount in Under debit Give further debit to
Purchases book Purchases A/c
(ii) Carrying forward higher amount in Excess Credit Debit Sales A/c
Sales Book
(iii) Carrying forward higher amount in Excess Debit Credit Purchases A/c
Purchases Book
(iv) Carrying forward lower amount in Under credit Give further credit to
Sales Book Sales A/c
(v) Carrying forward higher amount in Excess Credit Debit Purchase Returns
Purchase Returns Book A/c

Rectification:
(i) Debit Purchases A/c with Rs.350.
(ii) Debit Sales A/c with Rs.500.
 93

(iii) Credit Purchases A/c with Rs.99.

(iv) Credit Sales A/c with Rs.198.
(v) Debit Purchase Returns A/c with Rs.3,600.

III. Errors of Posting

Illustration 3
Rectify the following errors:
(ii) Purchases from Akila for Rs.1,500 has been posted to the debit side of her account.
(iii) Sales to Vijay for Rs.1,520 has been posted to his credit as Rs.1,250.
(iv) Purchases from Chandra for Rs.750 has been omitted to be posted to the personal
A/c.
(v) Sales to Kandan for Rs.780 has been posted to his account as Rs.870.
Solution:
(i) Purchases from Akila should have been posted to the credit of Akila’s A/c,
but it has been debited.
Hence:
Credit Akila’s A/c with double the amount i.e., Rs.3,000.
(ii) Sales to Vijay must find itself on the debit side of Vijay’s account but his
account is credited with Rs.1,250.
Hence:
Debit Vijay’s A/c with Rs.1,250 + Rs.1,520 i.e., Rs.2,770
(iii) This is an omission to post to the Personal A/c. Note that posting must be
to the credit of Chandra’s A/c.
Hence:
Post Rs.750 to the credit of Chandra’s A/c.
(iv) Here Kandan’s A/c has been debited with a wrong amount i.e., with
excess amount. To rectify this error, the excess amount must be credited to
his account.
Hence,
Credit Kandan’s A/c with Rs.90.
 94

Illustration 4
A Trial Balance is prepared and the book keeper finds that it disagrees, there
being an excess debit of Rs.1,270. The time in hand to trace the errors being short, he
places the difference to the credit of a newly opened account called Suspense Account.
He subsequently discovers the following errors. Pass rectifying journal entries
with a view to close the Suspense Account. Show also the Suspense Account.
(i) The Day Book is totalled Rs.50 short.
(ii) Payment of trade expenses Rs.275 entered on the payment side of the cash
book is omitted to be posted.
(iii) Commission Rs.125 paid, has been posted twice to commission account.
(iv) A sale to A. Gopal for Rs.195 though correctly entered in the Day Book is
debited to A. Gopal Account as Rs.465.
(v) Goods bought from L. Lal for Rs.500 though correctly entered in the invoice
book is debited to L. Lal’s personal account instead of being credited to him.
(vi) Discount column on the receipts side of cash book, totalling Rs.615 has been
added up to show Rs.715.
Solution:
Rectifying Journal Entries
Debit Credit
Errors Particulars LF
Rs. Rs.
(i) Suspense A/c Dr. 50
To Sales A/c 50
[Rectifying under credit to sales A/c]
(ii) Trade Expenses A/c Dr. 275
To Suspense A/c 275
[Rectifying omission to debit trade expenses account]
(iii) Suspense A/c Dr. 125
To Commission A/c 125
[Rectifying double posting to commission A/c]
(iv) Suspense A/c Dr. 270
To A. Gopal A/c 270
[Rectifying excess debit to Gopal’s A/c]
(v) Suspense A/c Dr. 1,000
To L. Lal A/c 1,000
[Rectifying wrong debit. instead of credit of Rs.500
to L. Lal’s A/c]
(vi) Suspense A/c Dr. 100
 95

To Discount A/c 100

[Rectifying over debit given to discount account
through error in totalling]

Suspense Account
Rs. Rs.
To A. Gopal A/c 270 By Balance b/d 1,270
To Sales A/c 50 By Trade expenses A/c 275
To L. Lal A/c 1,000
To Commission A/c 125
To Discount A/c 100
1,545 1,545

Illustration 9
Correct the following errors found in the books of Mr. Dhandapani. The Trial
Balance was out by Rs.986, excess credit. The difference has been posted to a suspense
account.
(i) A sale of Rs.400 to Bobby & Co., was wrongly credited to their account.
(ii) A purchase of Rs.134 had been posted to the creditor’s account as Rs.120.
(iii) The total of returns inward book for December had been cast Rs.200 short.
(iv) A cheque for Rs.400 received from Sandhya had been dishonoured and was
posted to the debit of “Allowance Account”.
Solution:
In the Books of Dhandapani
Rectifying Journal Entries
Debit Credit
Errors Particulars LF
Rs. Rs.
(i) Bobby & Co A/c Dr. 800
To Suspense A/c 800
[Being the correction of the mistake by which
the account of Bobby & Co. was credited by
Rs.400 instead of being debited]
(ii) Suspense A/c Dr. 14
To Creditor’s A/c (personal A/c) 14
[Being the mistake in crediting the creditor’s
account less by Rs.14 now corrected]
(iii) Return Inward A/c Dr. 200
To Suspense A/c 200
[Being the mistake of totalling the Return
Inward Book corrected]
 96

(iv) Sandhya A/c Dr. 400

To Allowance A/c 400
[Being the cheque of Sandhya dishonoured
previously debited to Allowances A/c]

Suspense Account
Rs. Rs.
1996 To Difference in Trial 986 1996 By Bobby & Co. A/c 800
Dec. 31 Balance Dec. 31
To Creditors A/c 14 By Returns Inward A/c 200
1,000 1,000

Practical Problems
Provisions for Doubtful Debts and Discounts
1. The following is the extract from the Trial Balance of Mr. A as on 31st December
2004.
Dr. Cr.
Rs. Rs.
Bad Debts 4,000 ---
Sundry Debts 1,50,000 ---
Provision for Doubtful Debts --- 6,000

It is desired to maintain a provision of 5% for Bad and Doubtful Debts.

Give the necessary journal entries. Prepare Bad Debts Account and Provision for
Bad and Doubtful Debts Account. Also show how the relevant items would
appear in the Profit and Loss Account and Balance Sheet.
(B.Com., Madurai)
[Ans. Rs.5,500 to be debited to Profit & Loss A/c]
2. On 1st July 2003, M/s. Purohit and Company had a Provision for Bad Debts of
Rs.6,067 against their maintain the provision for Bad Debts at 4% on book debts
which stood at Rs.1,93,560 without any adjustment for Bad Debts.
Show the Journal entries on 30th June 2004 in the books of the firm to record
these adjustments.
(B.Com., Madras)
[Ans. Rs.7,938 to be debited to Profit and Loss A/c]
 97

3. On 31st December 2003, the Trial Balance of Das showed the following ledger
balances:
Rs.
Reserve for Bad and Doubtful Debts (1.1.2003) 1,000
Reserve for Discount on Debtors Account (1.1.2003) 475
Sundry Debtors Rs.40,400 (of the Debtors, 400 are bad and should be written off.
On 31st December 2004, the Sundry Debtors were Rs.20,500 of which Rs.500 are
bad and should be written off.
It is desired to maintain the Reserve for Bad and Doubtful debts at 5% on Sundry
Debtors and the Reserve for Discount on Debtors at 2.5%.
Show the Reserve for Bad and Doubtful Debts Account and the Reserve for
Discount on Debtors Account as they would appear in the years 2003 and 2004.
(CA Inter)
[Ans. Closing provision for Doubtful Debts Rs.1,000. Closing provision for Discount on
Debtors Rs.475]
4. A Company makes a Provision for Doubtful Debts of 5% on Debtors and a
Provision at the rate of 2.5% for discount on Debtors.
On 1st January 2004, the balances standing in the relevant accounts were
Provision for Doubtful Debts Rs.1,440 and Provision for Discount on Debtors
Rs.684.
During the year, i.e., 2004 the Company incurred bad debts Rs.1,300 and allowed
discounts Rs.750. On 31st December 2004 debtors amounted to Rs.32,400.
Show the appropriate Accounts.
[Ans. Provision for Bad Debts (Closing) Rs.1,620 and transfer from Profit and Loss
Account Rs.1,480. Provision for Discount (Closing) Rs.769.50 and transfer from
Profit and Loss Account Rs.835.50]
5. The following items have been given in the Balance Sheet as on 31st December
2003:
Rs. Rs.
Debtors 20,000
Less: Reserve for Bad debts 1,000
 98

19,000
Less: Reserve for Discount on Debtors 570 18,430

The Debtors were for Rs.36,000 on 31st December 2004. Bad debts incurred in
2004 were Rs.300 and discounts allowed Rs.200.
It is the practice to maintain provisions for bad debts and for discounts on debtors
at 5 per cent and 3 per cent respectively.
Prepare the Provision for Bad Debts a/c and also Provision for Discounts on
Debtors account, showing how such items appear in the Profit & Loss Account
and the Balance Sheet.
(B.Com., Madurai)
[Ans. Debit Profit & Loss A/c Rs.1,100 for provision for Doubtful Debts Debit Profit and
Loss A/c Rs.656 for provision for Discount on Debtors]
 99

SINGLE ENTRY SYSTEM OR ACCOUNTS FROM INCOMPLETE RECORDS

Meaning
There is no system of accounts called ‘Single Entry System’. The term single
entry is vaguely used no refer to any method of maintaining accounts which does not
conform to strict principles of double entry.
Single entry does not mean that there is only one entry for each transaction. In
fact, single entry is combination of (a) Double entry for some transactions like cash
collected from debtors (b) Single entry for transactions like cash sales and (c) No entry
for transactions like depreciation.
In pure single entry, only personal accounts are recorded. In simple single entry,
personal accounts and cash account are maintained. In quasi single entry, personal
accounts, cash account and some subsidiary books are maintained. Thus, single entry
refers to crude accounting methods which do not record nominal accounts and most of
the real accounts. Business people, without systematic accounting knowledge, like small
traders, medical practitioners and other professionals follow this method.

Salient Features or characteristics of Single Entry

(i) Absence of Uniformity: It is not a specific system governed by definite rules of
operation. It is highly flexible according to the capabilities of individuals maintaining the
records.
(ii) Records Maintained: Usually personal accounts are fully written and cash book is
also maintained. Nominal accounts and most of the real accounts are completely omitted.
(i) Mixing of Transactions: Business dealings as well as personal transactions are
mixed while writing the cash book.
(ii) Suitability: Sole traders, partnership firms and professionals who cannot afford a
paid book keeper usually follow this method to write their own accounts. Joint stock
companies have to follow double entry system under the provisions of the
Companies Act, 1956.
(iii) Dependence on Original Vouchers: No entries are made for a large number of
transactions. For example, credit purchases and sales have to be ascertained from the
copies of invoices.
 100

(iv) Finalisation of Accounts: Regular final accounts cannot be prepared. Profit of loss
can be ascertained in a crude way, which is not reliable.

Disadvantages or limitations of Single Entry System

The following are the defects and limitations of single entry methods.
(i) Insufficient Records: Except personal accounts and cash account, all other impersonal
accounts are left out. So, the account serve very little purpose.
(ii) Absence of Trial Balance: Trail Balance cannot be prepared for any period. Hence
arithmetical accuracy of the accounts cannot be verified.
(i) Difficulty in ascertaining profit: Absence of record of expenses and incomes
makes it impossible to ascertain profit in a reliable way.
(ii) Difficulty in ascertaining Financial Position: In the absence of real accounts,
balance sheet cannot be prepared to assess the financial position of the business.
(iii) Lack of Statistical Data: Statistical data relating to increase or decrease in sales,
purchases, different items of expenses, profits etc., cannot be obtained.
(iv) Encouragement to Fraud: Fraud, embezzlement etc., by employees cannot be
detected.
(v) Rectification of errors is difficult: There is no cross verification system like Trial
Balance to detect mistakes. So, rectification of errors is rare.
(vi) Value of business cannot be ascertained: It is difficult for the owners to assess
the value of goodwill of the business in the absence of proper records.
(vii) Planning and decision making are difficult: The owners cannot plan for future
operations and growth, etc., of the business in the absence of reliable information.
(viii) Difficulty in getting institutional loans: Commercial banks do not accept
incomplete records as basis for extending credit.
(ix) Filling tax returns, Preparing claims etc: Tax authorities may charge tax
arbitrarily in the absence of reliable records. Filing claims for loss of stock
becomes difficult.
Ascertainment of Profit
When business records are incomplete, profit or loss can be found through any
one of the following two methods.
 101

(1) Net Worth Method (Statement of affairs method)

(2) Conversion Method

1. Net Worth Method

This method is also called Statement of Affairs method because ‘Net worth’ is
ascertained with the help of statement of affairs.
(i) Net worth is the owners’ share of the assets, after providing for outside liabilities.
(ii) Difference between net worth at the beginning of the year and at the end of the
year represents profit or loss for the year because owners’ worth or share in assets
increases or decreases due to profit or loss respectively.
(iii) Before ascertaining the change in net worth which is the profit or loss, adjustment
must be made for any drawings by the owner or additional capital contributed by
him.
The following five steps are to be followed for ascertaining profit or loss under
net worth method.

Step (i): Calculating Opening Capital

Opening capital can be found by preparing a statement of affairs at the beginning
of the year. A statement of affairs is just like a balance sheet. Assets are shown on the
right hand side and liabilities are shown on the left hand side of the statement of affairs.
The difference between both the sides represents ‘opening capital’.
Since full records are not maintained by the business, the assets and liabilities are
ascertained as follows:
(a) Cash can be physically counted.
(b) Bank balance is obtained from the pass book.
(c) Stock is recorded through physical stock taking.
(d) Debtors and creditors are usually available from the list maintained by the
business.
(e) Other assets can be listed out after an approximate valuation by the owners.
(f) Any other relevant data like outstanding expenses, accrued income should be
listed out from the owner’s memory.
 102

Step (ii): Ascertainment of Drawings during the year

This is difficult task in most of the cases because cash book may show a part of
the withdrawals only. Money may be used for personal purpose out of sale proceeds and
the balance only may be recorded in cash book or deposited in the bank. Still, the owner’s
personal estimate may help in arriving at the rough amount of the drawings.

Step (iii): Ascertaining Capital introduced during the year

Additional capital provided by the owner during the year may be in cash or in the
form of assets or goods. The total amount must be recorded, in whatever form it was
brought in.

Step (iv): Computing closing capital

Closing capital can be found by preparing a statement of affairs at the end of the
year, in the same way as opening statement was prepared. However, all adjustment
relating to depreciation, provision for doubtful debts etc., must be made in the closing
statement of affairs which were not necessary in the opening statement.

Step (v): Preparing Statement of Profit

Statement of profit is prepared as follows:
Statement of Profit or Loss of the year…….
Closing Capital xxx
Add: Drawings xxx
xxx
Less: Additional Capital introduced xxx
Less: Opening Capital xxx xxx
Net Profit/loss for the year xxx

Distinction between Balance Sheet and Statement of Affairs

Though both of then show assets and liabilities, they differ in the following
respects:
(1) Basis of preparation: Balance sheet is based on ledger balances but statement of
affairs is prepared form balances, valuations, information from inquiry, etc.
 103

(2) System: Balance sheet is prepared on the basis of double entry system but
statement of affairs is out of incomplete records.
(3) Trial Balance: Trial balance is prepared before a balance sheet is drawn which
ensures its arithmetic accuracy. Statement of affairs has no foundation like trial
balance.
(4) Omission of assets and liabilities: Omission of any assets or liabilities is
automatically found in balance sheet because the debits and credits will not tally.
Statement of affairs cannot reveal any omissions and commissions in assets and
liabilities.
(5) Objective and Purpose: Balance sheet reveals the financial position of a business
accurately.
Statement of affairs shows only estimated financial position. It is also useful in
ascertaining profit or loss of the business.
(6) Capital: Capital is shown in the balance sheet from the capital account in the
ledger.
Capital, in the statement of affairs, is only a balancing figure in the statement
itself.

2. Conversion Method
Meaning: The process of collecting, computing and recording mission information
along with the available data in the incomplete books of a business is called ‘conversion
method’. Once the books are ‘converted’, all future transactions can be recorded as per
‘double entry system’.
Need for Conversion: The net worth does not provide a clear picture of the
operating results of a business. It does not show sales, purchases, gross, profit, operating
expenses etc. So it is not possible to make a meaningful analysis of the financial
statements and initiate effective steps to improve the financial position of the business.
Conversion to double entry system enables a business to avoid the harassment of
taxation authorities and ensures better management of the business.
The following are the steps to be followed for Conversion of incomplete records
as per the requirements of Double entry system.
 104

Step 1: Statement of affairs at the beginning of the year from which conversion is
to be effected should be prepared. The balance in the statement represents opening capital.
In problems, it may not be possible to complete the statement due to missing
opening balances like Debtors, Creditors, Stock. The statement should be prepared to the
extent possible and can be completed at a later stage.
Step 2: Cash book with Cash and Bank columns or a single column should be
prepared. Careful scrutiny of bank pass book and enquiry relating to cash ‘takings’ used
by the owner for personal expenses and payments are essential.
In problems, opening or closing cash or bank balances may be missing. The
balance in the cash book represents the missing figure. Cash book must be prepared even
when the opening and closing balances of cash and bank are given. Any shortage on the
debit side can be cash sales or additional capital introduced or sundry income. Shortage
on the credit side can be cash purchases or drawings or sundry expenses.
Step 3: Bills receivables account, bills payables account, total debtors account
and total creditors account must be prepared. Preparation of these accounts can help in
finding any missing items like opening or closing debtors, opening or closing creditors,
credit purchases and sales etc.
Total sales and total purchases can be found by adding cash and credit sales and
also cash and credit purchases.
If opening or closing stock is mission, preparation of memorandum trading
account after ascertaining gross profit ratio can reveal the opening or closing stock
whichever is not given.
Step 4: The opening statement of affairs can now be completed, by filling up any
missing figure and opening capital can be ascertained.
Step 5: Appropriate journal entry should be passed in respect of assets and
liabilities included in the opening statement of affairs.
Step 6: Real and nominal accounts must be written from the information recorded
in the cash book, total debtors account, total creditors account, etc. The double effect of
every entry must be posted to the ledger, opening new accounts wherever necessary.
Step 7: All the accounts in the ledger must be balanced now and a trial balance
should be extracted.
 105

Step 8: From the trial balance and any other additional details, trading account,
profit and loss account and balance sheet must be prepared.
Note: Steps 5, 6 and 7 are not needed to solve examination problems.
ILLUSTRATIONS
Net worth (or) Statement of affairs Method
Illustration 1
Find out profit from the following data
Rs.
Capital at the beginning of the year 8,00,000
Drawings during the year 1,80,000
Capital at the end of the year 9,00,000
Capital introduced during the year 50,000
Solution:
Statement of Profit Rs.
Closing Capital 9,00,000
Add: Drawings 1,80,000
10,80,000
Less: Additional capital 50,000
10,30,000
Less: Opening capital 8,00,000
Net Profit 2,30,000

Illustration 2
Mohan, a retail merchant commenced business with a capital of Rs.12,000 on
1.1.94. Subsequently on 1.5.94 he invested further capital of Rs.5,000. During the year,
he has withdrawn Rs.2,000 for his personal use. On 31.12.94, his assets and liabilities
were as follows:
Rs.
Cash at Bank 3,000
Debtors 4,000
Stock 16,000
Furniture 2,000
Creditors 5,000

Calculate the profit (or) loss made during the year 1994.
Solution:
 106

Calculation of Closing Capital

Statement of affairs of Mohan as on 31.12.94
Liabilities Rs. Assets Rs.
Creditors 5,000 Cash at Bank 3,000
Capital (big. Fig) 20,000 Debtors 4,000
Stock 16,000
Furniture 2,000
25,000 25,000

Statement of Profit (or) Loss for the year ended 31.12.94

Rs.
Closing Capital 20,000
Add: Drawings 2,000
22,000
Less: Additional Capital 5,000
17,000
sLess: Opening Capital 12,000
Profit 5,000

Illustration 3
Mr. Mano keeps his books of accounts under single entry system. His financial
position on 31.12.90 and 31.12.91 was as follows:
1990 1991
Rs. Rs.
Cash 9,860 800
Stock 38,520 57,020
Plant & Machinery 54,420 61,000
Bills Receivable - 16,480
Sundry Debtors 24,840 43,940
Sundry Creditors 72,040 80,000
Furniture 4,960 5,220
Drawings - 5,000

During the year he introduced additional capital of Rs.20,000.

From the above particulars prepare a statement of Profit and Loss of Mr. Mano
for the year ended 31.12.91.
 107

Solution:
Calculation of Capital at the Beginning
Statement of affairs of Mano as on 31.12.90
Amount Amount
Liabilities Assets
Rs. Rs.
Sundry Creditors 72,040 Cash 9,860
Capital (big. Fig) 60,560 Stock in Trade 38,520
Plant & Machinery 54,420
Sundry Debtors 24,840
Furniture 4,960
1,32,600 1,32,600

Calculation of Capital at the end

Statement of affairs of Mano as on 31.12.91
Amount Amount
Liabilities Assets
Rs. Rs.
Sundry Creditors 80,000 Cash 800
Capital (bal.fig) 1,04,460 Stock in Trade 57,020
Plant & Machinery 61,000
Sundry Debtors 43,940
Furniture 5,220
Bills receivable 16,480
1,84,460 1,84,460

Statement of Profit/loss for the year ended 31.12.91

Rs.
Closing Capital 1,04,460
Add: Drawings 5,000
1,09,460
Less: Additional Capital 20,000
89,460
Less: Opening Capital 60,560
Profit made during the year 28,900

Illustration 4
Ramesh keeps his books on single entry basis. Prepare a statement of affairs as on
31.10.1982 and a statement of profit (or) loss for the period ending 31.10.1982.
 108

1.11.81 31.10.82
Assets & Liabilities
Rs. Rs
Bank Balance 560 (Cr) 350 (Cr)
Cash on Hold 10 50
Debtors 4,500 3,600
Stock 2,700 2,900
Plant 4,000 4,000
Furniture 1,000 1,000

Ramesh had withdrawn Rs.2,000 during the year and had introduced fresh capital
of Rs.4,200 on 1.7.1982. A provision of 5% on debtors is necessary. Write off
Depreciation on plant at 10% and furniture at 15%. Interest on capital is to be allowed at
5%.
Solution:
Calculation of Opening Capital
Statement of affairs of Ramesh as on 1.11.81
Amount Amount
Liabilities Assets
Rs. Rs.
Bank O/d 560 Cash in hand 10
Capital (bal.fig) 11,650 Debtors 4,500
Stock 2,700
Plant 4,000
Furniture 1,000
12,210 12,210

Calculation of Closing Capital

Statement of affairs of Ramesh as on 31.10.82
Amount Amount
Liabilities Assets
Rs. Rs.
Capital
11,170 Bank Balance (Dr) 350
(bal.fig)
Cash in Hand 50
Debtors 3,600
Less: 5% provision 180 3,420
Stock 2,900
Plant 4,000
Less: 10% Depreciation 400 3,600
Furniture 1,000
Less: 15% Depreciation 150 850
11,170 11,170
 109

Statement showing Profit/Loss for the period ended 31.10.82

Rs.
Closing Capital 11,170
Add: Drawings 2,000
13,170
Less: Additional Capital 4,200
8,970
Less: Opening Capital 11,650.00
(+) Interest on Capital (11,650 × 5%) 582.50
5 4 12,235.50
4,200 × × 70.00
100 12
Loss 3,262.50

Illustration 5
The position of a businessman who keeps his books on Single entry was as under
on 31.12.90 and 31.12.91.
1990 1991
Rs. Rs
Cash in Hand 400 480
Cash at Bank 6,000 2,500
Stock 6,500 5,000
Debtors 4,000 5,200
Furniture 300 350
Sundry Creditors 4,100 3,100

He withdraws Rs.7,500 from business on 2.1.91 out of which he spent Rs.5,200

for purchase of a motor truck for the business.

Adjustments
(a) Depreciation on closing balance of furniture and truck at 10%
(b) Write off Rs.220 as bad debts
(c) 5% Provision for bad and doubtful debts is needed
Find out the profit or loss for the year.
 110

Solution
Calculation of Opening Capital
Statement of affairs as on 31.12.90
Amount Amount
Liabilities Assets
Rs. Rs.
Sundry Creditors 4,100 Cash in Hand 400
Capital (bal.fig) 13,100 Cash at bank 6,000
Stock 6,500
Debtors 4,000
Furniture 300
17,200 17,200

Calculation of Closing Capital

Statement of affairs as on 31.12.91
Amount Amount
Liabilities Assets
Rs. Rs.
Sundry Creditors 3,100 Cash in hand 480
Capital (bal. fig) 14,606 Cash at bank 2,500
Stock 5,000
Debtors 5,200
Less: Bad debts 220
4,980
Less: 5% Provision for bad debits
4,731
249
Furniture 350
Less: 10% Depreciation 35 315
Motor truck 5,200
Less: 10% Depreciation 520 4,680
17,706 17,706

Statement of Profit (or) Loss for the year ended 31.12.91

Rs.
Closing Capital 14,606
Add: Drawings (7,500 – 5,200) 2,300
16,906
Less: Opening capital 13,100
Net Profit 3,806
 111

Illustration 1. The following is the balance sheet of M/s P,Q and R as on March 31,
1989
Balance Sheet
Liabilities Rs. Assets Rs.
Sundry Creditors 14,200 Cash in hand 400
Bills Payable 12,800 Cash at Bank 3,800
P’s Fixed Capital 15,000 Sundry Debtors 8,400
Q’s Fixed Capital 10,000 Stock 16,700
R’s Fixed Capital 5,000 Furniture and Fittings 12,000
P’s Current Account 480 Machinery and Plant 16,000
Q’s Current Account 340 R’s Current Account 520
57,820 57,820

The partners share profits in the ratio of 3 : 2 : 1 after charging 12% interest on
capitals. During 1989-90, the drawings were: P at Rs. 800 per month; Q at Rs. 600 per
month and R at Rs. 500 per month.
On 31st March. 1990, the various assets were: Cash in hand, Rs. 300; Sundry
Debrors, Rs. 8,600; stock, Rs. 22,750 at selling price which was fixed at cost plus 25%;
Fumiture and Fittings, Rs. 10,800; and Machinery and Plant, Rs. 28,000. Liabilities were;
Sundry Creditors, Rs. 13,400; Bills Payable Rs. 12,400 and Bank Overdraft, Rs. 6,000 as
per Pass Book which showed that a cheque of Rs. 1,000 deposited had been retumed
dishonoured. Ascertain the profit or loss made by the firm in 1989-90 and show the
Balance Sheet as on 31st March, 1990.
Statement of Affairs as on March 31, 1990.
Liabilities Rs. Assets Rs.
Sundry Creditors 13,400 Cash in hand 300
Bills Payable 12,400 Sundry Debtors (Rs. 8,600 + Rs. 1,000) 9,600
Bank overdraft 6,000 Stock (Rs. 22,750 × 100/125) 18,200
Fixed Capitals of P,Q, and Furniture and Fittings 10,800
R Combined Current
Accounts of
P,Q and R (balcncing 5,100 Machinery and Plant 28,000
figure )
66,900 66,900
 112

Statement of Profit or Loss

Rs
Combined Current Accounts of P, Q and R on March 31, 1990 Rs. 5,100
Add Drawings :
P 9,600
Q 7,200
R 6,000 22,800
27,900
Less Combined Current Accounts of P, Q and R on 300
31st March, 1989 (Rs. 408+Rs.340-Rs.520)
27,600
Profit subjects to interest
Less Interest on Capital at 12%
P 1,800
Q 1,200
R 600 3,600
24,000
Profits divided among, P, Q and R:
P 1/2 12,000
Q 1/3 8,000
R 1/6 4,000
Balance Sheet of P, Q and R as on March 31, 1990
Liabilities Rs Rs Assets Rs. Rs.
Sundry Creditors 13,400 Current Assets:
Bills Payable 12,400 Cash in hand 300
Bank Overdraft 6,000 Sundry Debtors 9,600
Capitals (Fixed): Stock 18,200
P 15,000 Fixed Assets:
Q 10,000 Furniture and Fittings 10,800
R 5,000 30,000 Machinery and Plant 28,000
Current Accounts: R’s Current Account :
P: Balance on April 1, 480 Balance on April 1, 520
1989 1989
Add: Interest 1,800 Add: Drawings 6,000
Profit 12,000 6,520
14,280 Less: Interest 600 1,920
Profit 4,000 4,600
Less Drawings 9,600 4,680
Q: Balance on April 1, 340
1989
Add : Interest 1,200
Profit 8,000
Less Drawings 72,000 2,340
Total 68,820 Total 68,820
 113

3. CONVERSION OF SINGLE ENTRY INTO DOUBLE ENTRY

If, at the end of a trading period, it is desired that the books should be written up
so as to give complete information, as is the case under the Double Entry System, the
following steps will be necessary:
(1) Take up the Statement of Affairs at the end of the previous trading period and
open all those accounts which have not been opened already. Generally, under
the Single Entry System, cash, bank and personal accounts are maintained.
Now it will be necessary to open the remaining accounts and debit or credit
them with the opening balances as the case may be.
(2) From the debit side of the Cash Account. accounts other than the bank account
and accounts of customers (on the presumption that such accounts are already
maintained) should be credited. For example, if one finds that Rs. 500 was
received by sale of furniture, one should credit Furniture Account with Rs.
500. If an entry shows that Rs. 450 was received from X, no further treatment
will be necessary. A frequent item will be cash sales. One shall have to open a
Cash Sales Account and credit it with the amounts concerned.
(3) From the credit side of the Cash Account, various accounts (other than the
bank account and accounts of creditors) should be debited. On this side of the
Cash Account, will be found, amounts paid for cash purchases, for various
expenses and for various assets acquired. All these accounts will be debited.
(4) Treatment similar to (2) and (3) above will be required for the Bank Account.
Cash paid in or cash drawn for office use, payment made to suppliers by
cheque or receipts from debtors will already have been entered in these
accounts; hence, double entry will be required to be completed only in other
accounts that may figure. For instance, one will known from the Bank
Account what bills have been discounted and what bills have been
dishonoured, or what are the bank charges.
(5) If a Petty Cash Book is maintained, the monthly analysis will have to be
posted in the ledger-various accounts for expenses debited and the total
credited to Petty Cash Account. The debit to the Petty Cash Account must
already have been completed from the Cash or Bank Account.
(6) A complete analysis of the customers’ accounts will to be prepared. This will
give vital information regarding credit sales, sales returns, discounts allowed,
bills received, bills dishonoured, etc. Suppose, the following are the various
customers’ accounts:-
 114

Dr. Cr.
Rs. Rs
Apr. 1 To Balance b/d 760 Mar. 31 By Cash 1,240
To Sales 3,480 By Discount 30
By Bills 2,400
Receivable
By Balance c/d 570
4,240 4,240
Next To Balance b/d 570
year
Apr. 1
Dr. B Cr.
Apr. 1 To Balance b/d 600 By Cash 400
By Bad Debts 200
600 600
Dr. C Cr.
Rs. Rs.
Apr. 1 To Balance b/d 1,480 Mar. 31 By Bills 1,480
Receivable
To Sales 3,750 By Cash 2,000
To Bills Receivable – 1,480 By Retums Inwards 200
dishonoured
To Cash (Noting 20 Mar. 31 By Balance c/d 1,550
Charges)
6,730 6,730
Next To Balance b/d 1,550
year
Apr. 1
Dr. D Cr.
To Sales 2,400 By Retums Inwards 200
By Cash 2,100
By Allowance for 50
breakages
By Discount 50
2,400 2,400
Dr. E Cr.
To Sales 4,560 By Cash 1,000
To Freight 140 By Bills 2,600
Receivable (two
bills)
To Bank (Bill 610 Mar. 31 By Cash 610
dishonoured plus
nothing charges)
By Balance c/d 1,100
5,310 5,310
Next To Balance b/d 1,100
year
Apr. 1
 115

The accounts have been analysed below:

Analysis
Dr. Cr.
Name Opg.Bal Sales Charges Bills Cash Cash Dis- Bills Returns Allow- Bad Clg.
dishonoured or or Count Recd. ances Debts Bal.
Bank Bank
Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs
A 760 3,340 1,240 30 2,400 570
B 600 400 200
C 1,480 3,750 1,480 20 2,000 1,480 200 1,550
1,500
D 2,400 2,100 50 200 50
E 4,560 140 610 1,000 2,600
610 1,100
Total 2,840 14,190 140 1,480 630 8,850 80 6,480 400 50 200 3,220

To complete double entry now, what is required is to (i) credit Sales Account with
Rs. 14,190, Freight (or charges) Account with Rs. 140 and Bills Receivable Account with
Rs. 1,480 : and (ii) debit Discount Account with Rs. 80, Bills Receivable Account with
Rs. 6,480, Returns Inwards Account with Rs. 400, Allowances Account with Rs. 50 and
Bad Debts Account with Rs. 200. No further entry is required regarding cash or bank, as
this must already have been completed.
(7) A similar analysis of suppliers’ will reveal Purchases made, Bills Payable
dishonoured or other charges debited by the suppliers (from the credit side of
the accounts) and discounts earned, returns outwards, bills issued to creditors.
etc. (from the debit side of the accounts). Accounts other than those relating to
cash paid or cheques issued will be debited or credited, as the case may be.
(8) The proprietor will have to remember other items which require entries in
books. To take an example, if a piece of machinery has been disposed of, any
loss or profit resulting from such disposal will have to be brought into the
books.
(9) A trial balance should than be prepared to see that there is no arithmetical
mistake.
4. ABRIDGED CONVERSION
The steps, detailed in the preceding pages, will completely transform the books
and will require good deal of labour, which will seem to be more than proportionate to
results obtained because it will have to be expended all at once, at the end of the trading
period. There is a way to obtain final results by a sort of short cut. this involves
 116

preparation of a Summary Receipts and Payments Account or a Summary of the Cash

Book. This might well look as follows:-
Dr. Cash Book (Summary) Cr.
Rs. Rs.
To Balance b/fd By Salaries and Wages 6,400
Cash in hand 430 By Rent, Rates and Taxes 2,500
Cash at Bank 3,470 By Insurance 450
To Receipts from Customers 67,540 By Stationery 340
To Cash Sales 16,830 By Payments to Creditors 34,580
To Sales of Furniture 400 By Cash Purchases 18,470
To Interest on Investments 300 By General Expenses 1,240
By Machinery Purchased 15,000
By Drawings 6,000
By Balance b/d
Cash in hand 270
Cash at Bank 3,720
88,970 88,970
To Balance b/d
Cash in hand 270
Cash at Bank 3,720

From such an account, it is easy to know the various expenses incurred or assets
acquired. This information is obtained from the credit side of the summary of cash book.
From the debit side, information is obtained regarding incomes or any assets disposed of.
In the above example, one would know (looking at the debit side) that during the year,
furniture was sold for Rs. 400 and that interest on investments was received amounting to
Rs. 300. But, in orde to complete trading and profit and loss accounts, one requires to
know credit sales and credit purchases in addition to cash sales and cash purchases
(which information the cash book will give).
Ascertaining credit sales and purchases:
 117

In order to find out credit sales, one has to prepare a Total Debtors Account. To
take a simple example, suppose, the debtors in the beginning of the year amounted to Rs.
11,500 and at the end to Rs. 9,600. The cash book gives the amount received from
debtors; suppose, it is Rs. 67,540/ Then credit sales must be Rs. 67,540 + Rs. 9,600 – Rs.
11,500 or Rs. 65,640. Thus:-
Total Debtors Account
Rs. Rs.
To Balance 11,500 By Cash 67,540
To Credit Sales 65,640 By Balance c/d 9,600
77,140 77,140
To Balance 9,600

The key to find out credit sales is the preparation of the Total Debtors Account,
Similarly, the preparation of Total Creditors Account will give credit purchases.
If a Total Debtors Account is prepared and the given information is put on its
proper sides together with opening balance and closing balance, the credit sales can be
ascertained by deducting the total of the debit side from the total of the credit side. On the
debit side will be put-
Opening balance,
any debit for charges, etc.,
any cash paid (say, to those who have returned goods).
any bills receivable dishonoured, etc.
On the credit side will be:
cash received,
discounts allowed,
bills receivable received,
returns inwards,
bas debts,
any allowances made, etc.
In the case of Total Creditors, the skeleton account will be as follows:
 118

Total Creditors Account

Rs Rs
To Cash .. By Balance b/fd
To Discount .. By Cash (received against
returms, etc.)
To Bills Payable ... By Bills Payable, dishonoured
To Retums Outwards ... By Purchases (balancing figure)
To Allowances, etc ...
To Balance c/d ...
Example : From the following find out the credit sales and credit purchases for the year
ended 31st March, 1991.
Rs
Total Debtors on April, 1, 1990 14,750
Total Creditors on April 1, 1990 8,970
Cash received during the year from Sundry Debtors 57,450
Discounts Allowed during the year 580
Bad Debts written off 850
Retums Inwards 1,150
Bills received from customers 9,600
Cash paid to Sundry Creditors 29,780
Discounts Received from them 430
Retums to suppliers 520
Bills issued to them 6,400
Total Debtors on March 31, 1991 13,890
Total Creditors on March 31, 1991 9,450

Solution:
Dr. Total Debtors Account Cr.
1990 Rs. Rs.
Apr. 1 To Balance 14,750 April 1, 1990 By Cash 57,450
Apr. 1, 90 to b/fd to Mar. 31, 91 (balancing
Mar. 31 91 figure)
To Credit 68,770 By Discounts 580
Sales
 119

By Bad Debits 850

By Bills 9,600
Receivable
By Retums 1, 150
Inwards
1991 Mar. 31 By Balance 13, 890
b/d
83, 520 83, 520
1991 Apr. 1 To Balance b/d 13, 890

Dr. Total Creditors Account Cr.

Apr.1, 1990 Rs 1990 Rs
to Mar. 31,
91
To Cash 29,780 Apr. 1 By Balance b/fd 8,970
To Discounts 430 Apr. 1
To Retums 520 1990 to By Credit 37,610
Outwards Mar. 31 Purchases
1991 (balancing figure )
To Bills Payable 6,400
To Balance c/d 9, 450
46, 580 46, 580
1991 By Balance 9, 450
Apr. 1

Bills Receivable and Payable:

If, in addition to total debtors, there are bills receivable, one should prepare the
bills Receivable Account. This will disclose the amount of bills received from customers
during the year. Suppose, (a) Bills Receivable on April 1 were Rs. 9, 000, (b) the Cash
Book shows that total bills realised were Rs. 45,000 and the Bills in hand on March 31
next year total Rs. 8,000. Then Rs. 44,00 worth of bills must have been received from
customers. This amount must be credited to Total Debtors Account. Similarly, the
preparation of Bills Payable Account will show what bills have to be debited to Total
Creditors Account.
Thus, one completes the missing links and together with the information given by
the statement of affairs in the beginning of the year, one can prepare the Trading and
profit and Loss Account. The opening stock will be known from the opening statement of
affairs, credit purchases from the Total Creditors Account, wages paid and other
manufacturing expenses from the credit side of the Summary Cash Book, credit sales
 120

from the Total Debtors Account and, of course, the value of the closing stock will be
known as always, from the stock sheets. The Trading Account is complets. The Cash
Book will also show the items that go into the Profit and Loss Account. (Theses items
will have to be adjusted for sums outstanding and paid in advance). The Balance Sheet
can also be prepared with the help of the opening balances (shown in the opening
Statement of Affairs) adjusted for changes that the Cash Book, etc., may disclose.
(Note to Examinees. A questions on Single Entry will conceal many items of
information. If a regular Cash Book is not given, the student is advised to prepare one
before proceeding with the questions. This applies also to opening balance sheet and total
debtors and total creditors accounts.)
Illustration 2. Mr. Eden who keeps his books by single entry gives you the following
information for the year ended 31st March, 1991.
Dr. Summary of Cash Book Cr.
Rs. Rs.
To Balance at Bank 4,350 By Eden’s Drawing 15,520
To Sundry Debtors 38,400 By Trade Creditors 27,100
To Bills Receivable realised 12,000 By Bills Payable 9,300
To Commission received 1,500 By Wages 32,000
To Cash Sales 48,600 By Salaries 16,500
To Balance c/d 3,350 By Rent and Taxes 4,400
By Insurance 800
By Carriage 1,250
By Advertising 1,330
1,08,200 1,08,200
By Balance b/d 3,350

Particulars of other assets and liabilities:-

Apr. 1, 1990 Mar. 31, 1991
Rs. Rs.
Stock on hand 18,700 23,400
Debtors 12,000 14,400
Creditors 9,000 1,500
Bills Receivable 4,000 5,000
 121

Bills Payable 1,000 1,200

Fumiture 600 600
Machinery 12,000 12,000

A provision of Rs. 1,450 is required for doubtful debts and depreciation at 5% is

to be written off on Machinery and Fumiture. Rs. 3,000 is outstanding for wages and Rs.
1,200 for salaries. Insurance has been prepaid to the extent of Rs. 250. Legal Expenses
are outstanding to the extent of Rs. 700.
Find out in two different ways the profit or loss made by Mr. Eden during 1990-
91. Also prepare his balance sheet at the end of the year.
Soultion
First Method
Liabilities Rs. Assets Rs.
Sundry Creditors 9,000 Cash at Bank 4,350
Bills Payable 1,000 Stock on hand 18,700
Capital (balancing figure) 41,650 Sundry Debtors 12,000
Bills Receivable 4,000
Furniture 600
Machinery 12,000
51,650 51,650

Statement of Affairs of Mr. Eden as on March 31, 1991

Liabilities Rs. Assets Rs.
Current Assets:
Sundry Creditors 1,500 Stock on hand 23, 400
Bills Payable 1,200 Sundry Debtors 14,000
Bank Overdraft 3,350 Less Provision for 12,550

Wages Outstanding 3,000 Bad Debts 1,450 12, 550

Salaries Outstanding 1,200 Bills Receivable 5,000
Legal Expenses Outstanding 700 Prepaid Insurance 250
Capital (balancing figure) 42,220 Fixed Assets:
Furniture 600
Less Depreciation 30 570
Machinery 12,000
Less Depreciation 600 11,400
53,170 53,170
 122

Statement of Profit or Loss made by Mr. Eden in 1990-91

Rs
Capital on March 31, 1991 42,220
Add Drawing during the year 15,520
57,740
Less Capital on April 1, 1990 41,650
Profit during the year 16,090

Alternative Method:
Dr. Total Debtors Account Cr.
Rs
1990 Apr. 1 To Balance 12,000 Apr. 1, 1990
Apr. 1, 1990 to Mar. 31 By Cash 38,400
to Mar. 31, 1991 By Bills 13,000
1991 Receivable A/c
To Credit 53,400 1991 Mar. 31 By Balance c/d 14,000
Sales
(balancing
figure)
65,400 65,400
1991 Apr. 1 To Balance 14,000
b/d

Dr. Bill Receivable Account Cr.

1990 Rs. 1990 Rs.
Apr. 1 To Balance b/fd 4,000 Apr. 1 By Cash 12,000

Apr. 1 To total Debtors 1991

A/C
1990 to ... bills received Mar. 31 By Balance c/d 5,000
Mar. 31, 13,000
1991
17,000 17,000
1991
Apr. To Balance b/d 5,000
 123

Dr. Total Creditors Account Cr.

Apr. 1 Rs. 1990 Rs.
1990 to Apr. 1 By Balance 9,000
Mar. 31 To cash 27,100 Apr. 1
1991 To Bills 9,500 1990 to
Payable Mar. 31
Mar. 31 To Balance 1,500 1991 By Credit
c/d Purchases
(balancing 29,100
figure)
38,100 38,100
1991
Apr.1 By Balance 1,500
b/d

Dr. Total Creditors Account Cr.

Apr. 1 Rs. 1990 Rs.
1990 to Apr. 1 By Balance 9,000
b/fd
Mar. 31 To Cash 27,100 Apr. 1
1991 To Bills 9,500 1990 to
Payable Mar. 31
1991 1991 By Credit
Purchases
(balancing 29,100
figure)
38,100 38,100
1991
Apr. 1 By Balance 1,500
b/d
 124

Dr. Bills Payable Account Cr.

Apr. 1 Rs. 1990 Rs.
1990 to Apr. 1 By Balance 1,000
b/fd
Mar. 31 To Cash 9,300 Apr. 1,
1991 1990 to
Mar. 31 To Balance 1,200 Mar. 31
c/d
1991 By Sundry
Creditors
... bills
issued
(balancing 9,500
figure)
10,500 10,500
1991 By Balance 1,200
Apr. 1 b/d

Trading and Profit and Loss Account for the year ending March 31, 1991
Rs Rs
To Opening Stock 18,700 By Sales: Credit 53,400
To Purchases 29,100 Cash 48,600 1,02,000
To Wages : Paid 32,000
Add Outstanding Wages 3,000 35,000 By Closing Stock 23,400
To Carriage 1,250
To Gross Profit c/d 41,350
1,25,400 1,25,400
To Salaries: Paid 16,500 By Gross Profit b/d 41,350
Add Unpaid Salaries 1,200 17,700 By Commission 1,500
To Rent and Taxes 4,400
To Legal Expenses, Unpaid 700
to Insurance: Paid 800
Less Prepaid Insurance 250 550
To Advertising 1,330
To Provision for Bad Debts 1,450
To Depreciation:
Furniture 5% 30
Machinery 5% 600 630
To Net Profit transferred to 16,090
Capital A/c
42,850 42,850
 125

Balance Sheet of Mr. Eden as on March 31, 1991

Liabilities Rs. Rs. Assets Rs. Rs.
Current Assets :
Sundry Creditors 1,500 Stock on hand 23,400
Bills Payable 1,200 Sundry Debtors : 14,000
Bank Overdraft 3,350 Less Provision for Bad 1,450
Debts
Expenses
Outstanding:
Wages 3,000 Bills Receivable 5,000
Salaries 1,200 Insurance Prepaid 250
Legal Expenses 700 4,900 Fixed Assets:
Fumiture 600
Capital: Opening 41,650 Less Depreciation 30 570
Balance
Add Profit for the 16,090 Machinery 12,000
year
Less Drawings 57,740 42,220
Total 53,170 Total 53,170

Ascertaining debtors and creditors, etc., sales and purchases being given:
Sometimes, full information is available regarding sales and purchases, but the
totals of debtors, creditors, bills receivable and bills payable are not given and have to be
found out. This is not difficult because what is required is the preparation of these four
accounts. The opening balances will be given in the opening balance sheet, the cash
received and paid can be ascertained from the Cash Book, the other transactions will be
posted in the usual manner (e.g., sales will be debited to Total Debtors Account,
purchases credited to Total Creditors Account, bills receivable debited to Bills
Receivable Account and credited to Total Debtors Account, discount allowed, credited to
Total Debtors Account, etc.). The accounts will then be balanced and the balances taken
to the Balance Sheet. The skeleton Total Debtors Account will appear as follows:-
 126

Total Debtors Account

To Balance b/d By Cash received (Dr. side of Cash Book)
(from opening Balance Sheet) By Discount allowed
To Credit Sales (given) By Bills Receivable received
To Cash paid (Credit side of Cash Book) By Bad Debts
To etc. By etc.
By balance c/d
(balancing figure )

Illustration 3. You are given: (d) The Balance Sheet of A on 1st April, 1989
(b) The cash transactions for the year up to March 31,
1990.
(c) A Summary of the remaining transactions.
(a) Rs. Rs.
Bank Overdraft 500 Cash in hand 70
Sundry Creditors 3,600 Bills Receivable 2,500
Bills Payable 1,600 Sundry Debtors 3,900
Capital 40,000 Stock of Goods 17,530
Furniture 7,000
Machinery 14,700
45, 700 45, 700
(b) Rs. Rs.
To Balance b/d 70 By Bank Overdraft 500
To Receipts from
29,000 By Salaries 24,900
Debtors
To Bills Receivable 10,000 By Wages 21,580
To Cash Sales 73,700 By Bills/Payable 14,300
By Payment to Creditors 14,700
By Rent 12,000
By Office Expenses 1,800
By Drawings 14,500
By Investments at par
(9% Govt. Bonds on 1st 4,000
December, 1989)
By Balances on 31st
March, 1990 –
Cash 40
Bank 4,490 4.490
1, 12, 1, 12,
770 770
(c) Rs.
 127

Sales (credit) 40,700

Discount to customers 200
Purchase 30,000
Discount received 100
Bill Receivable
10,900
received
Bills Payable issued 15,000
Strock of Goods on
15,300
March 31, 1990

Provide for doubtful debts at 5% debtors outstanding. Provide for depreciation on

Furniture at 5% and on Machinery @ 10%.
Prepare the Trading and profit and loss Account and the Balance Sheet.
Solution:
Note. The students is given there all the transactions but not the closing balances
of debtors, bills receivable, creditors and bills payable. Without these balances the
balance sheet cannot be prepared on March 31, 1990. Hence the following four accounts.
Dr Sundry Debtors Account Cr.
1989 Rs. 1990 Rs.
April To Balance b/fd 3,900 Mar. By Cash 29,000
1 31
1990 By Discount 200
Mar. To Sales (Credit) 40,700 By Bills 10,900
31 Receivable
By Balance c/d 4,500
44,600 44,600
1990 April To Balance b/d 4,500
1
Bills Receivable Account
1989 Rs. 1990 Rs.
April To Balance b/fd 2,500 Mar. By Cash 10,000
1 31
1990
Mar. To Sundry Debtors 10,900 By Balance b/d 3,400
31
13,400 13,400
1990
April To Balance b/d 3, 400
1

Sundry Creditors Accounts

1990 Rs. 1989 Rs.
 128

Mar. To Cash 14,700 April 1 By Balance B/d 3,600

31
To discount 100 1990
To bills Payable 15,000 Mar. 31 By Purchases 30,000
To Balance c/d 3,800
33,600 33,600
1990
April 1 By Balance b/d 3,800
Dr. Bills Payable Account Cr.
1990 Rs. 1989
March To Cash 14,300 April 1 By Balance b/fd 1,600
31
To Balance c/d 2,300 1990
Mar.31 By Sundry 15,000
Creditors
16,600 16,600
1990
April 1 By Balance b/d 2,300

Trading and Profit and Loss Account of ‘A’ for the year ended March 31, 1990.
Rs. Rs.
To Opening Stock 17, 530 By Sales : Credit 40,700
To Purchases 30,000 Cash 73,700 1,14,400
To Wages 21,580
To Gross Profit c/d 60,590 By Closing Stock 15,300
1,29,700 1,29,700
To Salaries 24,900 By Gross Profit b/d 60,590
To Discount 200 By Discount Received
To Rent 12,000 By Interest Accrued on
Investments
To Office Expenses 1,800 (On Rs. 4,000 for 4 months @ 120
9% p.a.)
To Provision for Doubtful
Debts (5% on Rs. 4, 500) 225
To Depreciation on:
Furniture @ 5% 350
Machinery @ 10% 1,470
To Net Profit transferred 19,865
to Capital Account
60,810 60,810

Balance Sheet of ‘A’as on March 31, 1990

Liabilities Rs. Rs. Rs. Rs.
Sundry Creditors Current Assets:
Bills Payable 3,800 Cash in hand 40
 129

Capital: 2,300 Cash at Bank 4,450

Balance on 1st 40,000 Investments 4,000
April, 1989
Add Net Profit for 19,865 Interest Accrued on above 120
the year
59,865 Bills receivable 3,400
Less Drawings 14,500 45,365 Sundry Debtors 4,500
Less Provision for Doubtful
Debts 225 4,275
Stock of Goods
Fixed Assets:
Furniture:
Balance 7,000 6,650
Less Depreciation 350
Machinery:
Balance 14,700
Less Depreciation 1,470 13,230
51,465 51,465

Illustration 4: The following information is supplied form which you are required to
prepare Trading and Profit and Loss Account for the year ended and Balance Sheet as on
31st March 1991.
April 1, 1990 March 31, 1991
Creditors .. 15,770 12,400
General Expenses Owing .. 600 330
Sundry Fixed Assets .. 11,610 12,040
Stock .. 8,040 11,120
Cash in hand and at Bank .. 6,960 8,080
Debtors .. 7 17,870
Other Transactions:
Cash and Discount credited to .. 64,000
Debtors
Returns from Debtors .. 1,450
Bad Debts .. 420
Sales -- Cash and Credit 81,810
Discounts allowed by Creditors .. 700
Returns to Creditors .. 400
Capital introduced (paid into Bank) .. 8,500
Receipts from debtors (paid into .. 62,500
Bank)
Cash Purchases .. 1,030
Expenses paid in case .. 9,570
Purchase of Furniture by cheque .. 430
Drawings by cheque .. 13,180
 130

Cash payments into Bank .. 15,000

Cash withdrawn form Bank .. 9,240
Payments to Creditors by cheque .. 60,270
Cash in hand on 31st March, 1991 .. 1,200

Solution:
It will be noted that since the capital in the beginning is not given, opening
balance sheet will be necessary. For this, the figure for debtors in the beginning will have
to be found out. This requires information regarding credit sales. But the question gives
information regarding cash and credit sales combined. Hence, it is necessary to prepare
the Cash Book.

Dr. Columnar Cash Book Cr.

Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/fd (2) 2,960 4,000 By Purchases 1,030
To Capital Account 8,500 By Expenses 9,570
To Sundry Debtors 62,500 By Furniture 430
To Cash 15,000 By Drawings 13,180
To Bank 9,240 9,240 By Bank 15,000
To Cash Sales By Cash 9,240
(balancing figure) 14,600 14,600 By Sundry Creditors 60,270
By Balance c/d (1) 1,200 6,880
26,800 90,000 26,800 90,000

Notes: (1) Cash in hand is given to be Rs. 1, 200; hence balance at Bank must be Rs.
8,080 – Rs. 1,200 i.e. Rs. 6,880.
(2) These are balancing figures. First the opening balance at bank is found out
by
deducting the debits from the credits in the bank columns. Then cash
balance is found.
 131

1900 Rs. APr. 1, Rs.

Apr. 1 To Balance b/fd 1990
(balancing figure) to
Mar.31
1991 By Cash 62,000
Apr. 1, Ti Credit Sales 67,210 1991 By Discounts 1,500
1990 to (81, 810 -14,600) Mar.31 By Returns 1,450
Mar. 31 By Bad Debs 420
1991 To Credit Sales 67,210 1991
(81,810 – 14, 600) Mar.31 By Balance c/d 17,870
83,740 83,740
1991
Apr. To Balance b/d 17,870
1

Dr. Sundry Creditors Account Cr.

Apr. 1 Rs. 1990 Rs.
1990 to To Bank 60,270 Apr. 1 By Balance b/fd 15,
Mar. 31 To Returns 770
Outwards
1991 To Discounts 400 Apr. 1
1991 1990 to By Credit Purchases 58,
Mar. 31 (balancing figure) 000
1991
Mar. 31 To Balance c/d 12,400 1991 By Credit Purchases 58,000
(balancing figure)
73, 770 73,770
1991 By Balance b/d 12,400
Apr. 1

Capital on 1st April, 1990 Rs.

Total of Sundry Assets 11,610
Assets:
Stock 8, 040
Cash in hand and at Bank 6, 960
Debtors 16, 530
Less: Sundry Creditors 15, 770
Expenses owing 600 16, 370
Capital on 1st April, 1990 26, 770

Dr. Trading and Profit and Loss Account of … for the year ended Cr.
March 31, 1991
Rs. Rs. Rs. Rs.
To Opening Stock 8, 040 By Sales: Credit 67,210
To Purchases: Cash 14, 600
 132

Credit 58,000 81, 810

Cash 1,030 Less Returns from Debtors 1,450 80,360
59, 030
Less Returns to 400 58,630 By Closing Stock 11, 120
Creditors
To Gross 24,810
Profit/c/d
91, 480 91,480
To General By Gross Profit b/d 24,810
Expenses:
(9,570+330 – 600) 9,300 By Discounts earned 700
To Discounts 1,500
allowed
To Bad Debts 420
To Net Profit
transferred to
Capital Account 14, 290
25,510 25, 510

Balance Sheet of ……….. as on March 31, 1991

Liabilities Rs. Assets Rs.
Sundry Creditors 12,400 Sundry Fixed Assets:
Expenses Owing 330 Balance 11,610
Capital: Balance Additions 430 12,040
on
April 1, 1990 26, 770 Stock 11, 120
Add Addition 8, 500 Sundry Debtors 17, 870
Net Profit 14, 290 Cash in hand 1,200
49,290 Cash at Bank 6,880
Less Drawings 13, 180 36, 380
49, 110 49, 110
Ascertaining sales from stock figures and purchases:
Sometimes, one may come across a case where even the cash record is defective;
in that case, it would be difficult to know exactly the cash received and hence the figure
of total sales. In such a case, there is no option but to estimate. The method is to find out
the cost of goods sold which is ascertained by adding opening stock to purchases and
deducting the closing stock. To the cost of goods sold should be added the estimated
gross profit. The total then will be the total sales.
If the opening stock is Rs.1,00,000, closing stock, Rs.1,00,000 and purchases,
Rs.7,00,000 the cost of goods sold is Rs.6,90,000. Thus
 133

Rs
Opening Stock .. 1,00,000
Add Purchases .. 7,00,000
8,00,000
Less closing Stock .. 1,10,000
Cost of goods Sold .. 6,90,000

If the rate of gross profit is 30% on cost, the total gross profit Rs.6,90,000 ×
30/100 or Rs.2,07,000 and the total sales Rs.6,90,000 × 30/100 or Rs. 2,07, 000 or Rs. 8,
97, 000.
Conversely, if sales and the rate of gross profit are given, the cost of goods sold
can be ascertained which then help in finding out any of the figures-opening stock,
closing stock or purchases-provided the other two are given.
Suppose, Sales are Rs. 12,00,000, the rate of gross profit is 25% on sales, the
purchases are Rs. 9,80,000 and the closing stock is Rs. 1,80,000. Then the opening stock
will be ascertained as follows: -

Rs
Sales .. 12,00,000
Less gross profit at 25% .. 3,00,000
Cost of goods sold .. 9,00,000
Add closing stock .. 1,80,000
Total of Purchases and Opening stock .. 10,80,000
Less Purchases .. 9,80,000
Opening Stock .. 1,00,000

Illustration 5. While you are dealing with a case of preparation of accounts from
incomplete records, you find that the cash Account (Abstract) is out of balance to such an
extent that it is obvious that the record of cash takings is wholly unreliable. Accordingly,
you decide to ignore the takings figure as recorded and arrive at your sales figure on the
basis of purchases ad shown and the gross profit percentage ration applicable to the trade
concerned which is in the neighbourhood of 25 per cent on sales. From the information
below, you are required to prepare a Trading and Profit and Loss Account for the year
ended 31st March, 1990 and the statement of affairs on that date:-
Statement of Affairs on March 31, 1989
Rs. Rs.
Creditors 90,000 Cash in hand 1,87,500
Excess of assets over 3,80,000 Stock in trade 20,000
liabilities
Plant and Machinery, at cost 75,000
Building 1,75,000
Furniture 12,500
4,70,000 4,70,000
 134

Cash Abstract (1989-90)

Rs. Rs.
Sale of Plant (1st January 1990) 25,000 Office Salaries 1,26,000
(Cost on 31.3.1989, Rs. Drawings 52,000
30,000)
Further capital added 1,50,000 Creditors 5,75,000
Loans 49,000 Charges – General 37,500
Unexplained Receipts 23,000 Plant Purchased (1st July 1988) 1,00,000
2,40,000 8,90,500

Purchase Ledger (1989-90)

Rs. Rs.
Payment to Parties 5,75,000 Brought forward from last year 90,000
Return to Parties 15,000 Purchases 5,00,000
5,90,000 5,90,000

Stock on hand on 31st March, 1990 was valued at Rs. 1,63,000. Opening and
closing debtors would be nil as all sales (as a matter of fact all transactions) are for cash.
Provide for depreciation on plant at 10% per annum.
Solution:
Calculation of Sales: Rs.
Opening Stock 20,000
Add Purchases 5,00,000
Less Returns 15,000 4,85,000
5,05,000
Less closing Stock 1,63,000
Cost of goods sold 3,42,000
Gross profit – 331/3%on cost 1,14,000
(which is the same as 25% on sales)
Total sales 4,56,00

Dr. Cash Abstract for 1989.99 Cr.

Rs. Rs.
To Balance b/d 1,87,500 By Office 1,26,000
Salaries
To Sale of Plant By Drawings 52,000
(1st Jan. 1990-Cost on
31.3.89 Rs. 30,000) 25,000
To Further Capital 1,50,000 By creditors 5,75,000
added
To Loans 49,000 By Charges – 37,500
General
To Unexplained 23,000 By Plant 1,00,000
Receipts Purchased
st
(1 July, 1988)
To Cash Sales 4,56,000
 135

8, 90, 500 8, 90, 500

Dr. Trading and profit and Loss Account of …….. Cr.

For the year ended March 31,1991
Rs. Rs. Rs.
To Opening Stock 20,000 By Sales 4,56,000
To Purchases 5,00,000 By Stock (closing) 1,63,000
Less Returns 15,000 4,85,000
To Gross Profit c/d 1,14,000
6,19,000 6,19,000
To Office Salaries 1,26,000 By Gross Profit 1,14,000
To-General 37,500 By Net Loss Transferred to 76, 500
Charges Capital Account
Cost on April. 1, 30,000
1989
Less Dep. Up to 1st 2,250
Jan, 1990
27,750
Less Sale Proceeds 25,000 2,750
To Depreciation on 2,250
Plant:
On Rs. 30,000 for 2,250
9 months
On Rs. 45,000 for 4,500
one year
On Rs. 1,00,000 17,500 24,250
1,90,500 1,90,500

Balance Sheet of …. As on March 31, 1990

Liabilities Rs. Rs. Rs. Rs.
Loans 49,000 Stock in trade 1,63,000
Suspense Account Plant and
(unexplained) Machinery:
Capital Account: Balance on 1st 75,000
Apr., 1989
Balance on 1st 3,80,000 Addition 1,00,000
Apr., 1989
Addition 1,50,000 1,75,000
5,30,000 Less Sales (cost) 30,000
Less Drawings 52,000 1,45,000
4,78,000 Less Depreciation 22,000 1,23,000
Less Net Loss 74,500 4,01,500 Building 1,75,000
Furniture 12,500
Total 4,73,500 Total 4,73,500
 136

Practical Problems
Capital Comparison Method
1. X keeps his book on the Single Entry System and the following information is
available:
1.1.2004 31.12.2004
Rs. Rs.
Furniture 200 200
Stock 2,800 3,050
Debtors 2,100 3,400
Cash 150 200
Creditors 1,750 1,900
Bills Payable 300
Loan --- 500
Investments --- 1,000
He has drawn out of the business Rs.500 during the year. Prepare a Statement
showing his profit for the year ended 31st December 2004 after writing off 10%
depreciation on Furniture and making a provision for bad debts at 10% on Sundry
Debtors.
(B.Com. Punjab, Madurai)
[Ans. Capital on 1.1.2004 Rs.3,500
Capital on 31.12.2004 Rs.4,790
Profit for the year 2004 Rs.1,790]
2. Mr. Ram keeps his books by Single Entry System. His assets and liabilities were
as under:
1.1.2004 31.12.2004
Rs. Rs.
Cash at Bank 4,000 ---
Sundry Debtors 2,000 3,000
Bank (Overdraft) --- 2,000
Office Equipment 2,000 2,000
Sundry Creditors 1,400 2,800
Furniture 4,000 2,000
Cash in Hand 5,000 500
Expenses Outstanding --- 400
 137

Ram has withdrawn Rs.500 per month for personal use. He had introduced
Rs.2,000 as additional capital on 14th August 2004. Provision for Doubtful Debts
@ 5% on Sundry Debtors is to be provided. Charge depreciation @ 10% on
Furniture and Office Equipment. Ascertain the profit or loss for the year.
(B.Com., Madurai)
[Ans. Statement of Affairs (1.1.2004) Total Rs.15,000
Capital (1.1.2004) Rs.13,600
Statement of Affairs (31.12.2004) Total Rs.6,950
Capital (31.12.2004) Rs.1,750
Loss: Rs.7,850]
3. A Retail Trader had not kept proper books of accounts, but from the following
details, you are required to ascertain the Profit or Loss for the year ended 30th
June 2004 and also to prepare his Statement of Affairs as at that date
1st July 2003 30th June 2004
Rs. Rs.
Stock 16,700 18,100
Sundry Creditors 15,400 16,200
Sundry Debtors 11,200 10,600
Cash in Hand 250 1,400
Bank Overdraft 19,200 Nil
Bills Receivable 16,000 5,000
Fixtures & Fittings 1,500 1,500
Scooter 1,900 Nil
Bank Balance Nil 2,500

The drawings during the year amounted to Rs.2,400. Depreciate Fixtures and
Fittings by 10%. Rs.600 is irrecoverable from Debtors. Provide 5% Reserve for
Doubtful Debts and a Reserve of Rs.200 in respect of Bills Receivable.
(B.Com., Karnataka)
[Ans. Statement of Affairs (1.7.2003) Total Rs.47,550. Capital Rs.12,950.
Statement of Affairs (30.6.2004) Total Rs.39,500. Capital Rs.23,300.
 138

Net Profit Rs.11,300.

Adjusted Statement of Affairs (30.06.2004) Rs.38,050]
Conversion Method
4. Fixed out Credit Purchases from the following:
Rs.
st
Balance of Creditors on 1 January 7,600
Returns Outward 2,400
Cash paid to Creditors 20,000
Bills Accepted 4,600
Discount allowed by them 500
st
Balance of Creditors on 31 December 9,500
[Ans. Credit Purchases Rs.29,400]
5. Find out Credit sales from the following:
Rs.
st
Balance of Debtors on 1 Jan. 12,000
Returns Inward 5,000
Cash received from Customers 45,000
Discount allowed to them 3,000
Bills Receivable received from Customers 17,000
Bad Debts 1,500
Bills Receivable Dishonoured 3,500
Balance of Debtors on 31st December 10,000
[Ans. Credit Sales Rs.66,000]
 139

UNIT -IV
AVERAGE DUE DATE
After reading the unit four, the students can understand how to simplify the calculation of
interest involved in accounting transactions and how the businessman to conduct their
business transactions smoothly.
Meaning
Average due date is an ‘equated’ or ‘mean’ date on which a single payment of a
consolidated amount can be made in lieu of several payments due on different dates.
In the normal course of business, a person may be required to pay several
amounts to another person on different future dates. It is inconvenient for both of them to
settle each amount due separately. Payment of the total amount due on the average due
date protects both the debtor and creditor from ‘loss of interest’.
The mathematical process involved in the computation of average due date is
known as “Equation of Payments”. In the process of single payment on Average Due
Date, certain dues are paid after their actual due dates and some other dues are paid
before their actual due dates. Thus, average due date is the ‘arithmetic average’ of various
payments, giving proper weightage to the amount and period of the dues.
Actual payment of the total amount may be made on the average due date.
Payment can also be postponed or preponed, based on compensation in the form of
‘interest’ for the period involved.

Practical uses of Average Due Dates

a) In the settlement of running accounts between traders or traders and customers.
b) In the settlement of transactions between a principal and agent.
c) In settling a series of bills of exchange or post dated cheques.
d) In the calculation of interest on drawings of partners.
e) In the computation of interest on book debts realised piecemeal during
dissolution of partnership firms.

Basic types of Problems

 140

Though average due date concept can be used in numerous situations, the
following are the two basic types of problems.
a) Average due date for amounts lent in different instalments to be repaid in a single
instalment.
b) Average due date for amounts lent in one instalment, repayable in several instalments.
(a) Where amount is lent in different instalments
The following steps are necessary to find the average due date:
Steps:
(i) Selecting one of the due dates as the ‘base date’. Any one of the available due dates
can be taken as base date. However, it is ‘preferable’ to choose the earliest of the due
dates as ‘base date’.
(ii) Calculation of the number of days from the base date to the due date of each
transaction.
(iii)Multiplication of the amount of each transaction with the number of days from the
base date, as shown in step (ii) to obtain products.
(iv) Adding the amounts of all payments and all products separately.
(v) Dividing the total of the products with the total of the payments to get a number [any
fraction must be approximated to the nearest digit].
(vi) If the above numbers is positive, the average due date is ahead of the base date by that
number of days. If however the above number is negative, [this is possible only when
the base date is not the earliest of the due dates] the average due date is the date
obtained by subtracting the above number of days from the base date.
Total of products
∴ Average Due Date = Base Date ± days
Total of amounts

Determination of Due Date

Due dates of transactions are essential for ascertaining number of days from base
date of each transaction. The following guidelines are important for determination of due
dates.
(i) In the case of running account between traders or other individuals, the date of a
transaction is its due date, unless otherwise given.
 141

(ii) In case of bills of exchange, bills payable ‘on demand’ or ‘at sight’ or ‘on
presentation’ are due on the date they are presented for payment.
(iii)Bills of exchange payable at a predetermined time in future are due on the third day
from the day they are payable. This is due to the customary ‘three days of grace’.
(iv) Due date of a bill drawn in terms of days must be determined by actual count of days
(adding grace days, if applicable).
(v) Due date of a bill drawn in terms of months must be computed in terms of months
irrespective of actual number of days in each month.
(vi) If due date of a bill falls on a public holiday, the previous day becomes the day of due
date.
(vii) Due date of bills payable days or months after sight should be computed from the
date of acceptance, if given. Due date of bills payable after date should be computed
from the date of drawing of the bill, if given.
(viii) While counting the number of days from base date for each transaction, the base
date itself should be omitted.
ILLUSTRATIONS
(a) Where the amount is lent in different Instalments:
Illustration 1
Kannan purchased goods from Raman, the due dates for payment in cash being as
follows:
Rs.
Mar. 15 1,000 Due 18th April
Apr. 21 1,500 Due 24th May
Apr. 27 500 Due 30th June
May 15 600 Due 18th July

Raman agreed to draw a bill for the total amount due on the average due date.
Ascertain that date.
[Madras B.Com. (CS) Nov. 2008 (2 Times)]
Solution:
Computation of Average due date
Base date 18th April
Amount No. of days from Product
Due date
Rs. Base date Rs.
4
1 2 3
× 3)
(2×
 142

18th April 1,000 0 0

24th May 1,500 36 54,000
30th June 500 73 36,500
18th July 600 91 54,600
3,600 1,45,100
Total of products
Average due date = Base date + days
Total of amounts
1, 45,100
= 18 th April + days
3, 600
= 18th April + 40 days
∴ Average due date = May 28

Calculation of Interest
Illustration 2
R owes S the following sums of money due from him on the dates stated:
Rs.300 due on March 9, 1993
Rs.1,000 due on April 2, 1993
Rs.4,000 due on April 30, 1993
Rs.100 due on June 1, 1993
He wants to make the complete payment on 30-6-93. Calculate interest at 5% p.a.
with the help of Average due date method.
[Madras, BCS (SYIA) Nov. 2006 (10 Times) B.Com. (ICE) Oct. 2000; BCS (ICE)
Oct. 2000; M.U. Financial A/c Sep. 1995]
Solution:
Computation of Average due date
Base date 9-3-93
Amount No. of days from Product
Due date
Rs. base date Rs.
4
1 2 3
(2 × 3)
9-3-93 300 0 0
2-4-93 1,000 24 24,000
30-4-93 4,000 52 2,08,000
1-6-93 100 84 8,400
5,400 2,40,400
 143

Total of products
Average due date = Base date + days
Total of amounts
2, 40, 400
= 93.93 + days
5, 400
= 93.93 + 45 days
∴ Average due date = 23.4.93
Therefore, interest is chargeable from 23-4-93 to 30-6-93 i.e., 68 days.
68 5
Interest for 68 days = 5, 400× ×
365 100
Interest payable = Rs.50.30

When due dates fall on Gazetted government holidays

Illustration 3
The following amounts are due to Ezil by Satya. Satya wants to pay off
(i) on 18-3-97 or (ii) on 14-7-97
Interest rate of 8% p.a. is taken into consideration.
Due dates Rs.
10-1-97 1,000
26-1-97 (Republic day) 2,000
23-3-97 6,000
18-8-97 (Sunday) 8,000

Determine the amount to be paid in (i) and in (ii).

Solution:
Computation of Average due date
Base date 10-1-97
No. of days from
Due date Due date Amount Product
base date i.e., 10-1-
(Nominal) (Actual) Rs. Rs.
97
5
1 2 3 4
(3 × 4)
10-1-97 10-1-97 0 1,000 0
26-1-97 25-1-97 15 2,000 30,000
23-3-97 23-3-97 72 6,000 4,32,000
18-8-97 17-8-97 219 8,000 17,52,000
17,000 22,14,000
 144

Total of products
Average due date = Base date + (days)
Total of amounts
22,14, 000
Average due date = 10 -1- 97 + days
17, 000
= 10-1-97 + 130 days
Average due date = 20-5-97
(x) If the payment is made on 18-3-97, rebate will be allowed for unexpired time from
18-3-97 to 20-5-97 i.e., for 63 days. He has to pay the discounted value of the total
amount.
8 63
Discount = 17, 000× × = 234.74
100 365
∴ Amount to be paid on 18-3-97: 17,000 – 234.74
= Rs.16,765.26
(xi) If the payment is deferred to 14-7-97, interest is to be paid from 20-5-97 to 14-7-97
(i.e., for 55 days)
8 55
Interest = 17, 000× × = 204.93
100 365
∴ Amount to be paid on 14-7-97 = Rs.17,000 + 204.93
= Rs.17,204.93
When due dates of bills are given
Illustration 4
Find out the average due date of the following bills accepted by a trader who
wishes to settle them with one single payment.
Amount of bill
Date of Bill Due date
Rs.
1-4-90 800 6-6-90
30-4-90 1,000 3-8-90
3-6-90 400 6-7-90
15-6-90 600 18-9-90

[Periyar, BBA, May 2004]

[Periyar B.Com., April 2004; BCS (SYIA) AP 2007; Madras, B.Com., Sep. 1996]
[Ans: 13-4-95; Interest: Rs.91.89]
 145

Solution:
Calculation of Average due date
Base date 6-6-90
Amount No. of days Product
Due date
Rs. from base date Rs.
4
1 2 3
(2 × 3)
6-6-90 800 0 0
3-8-90 1,000 58 58,000
6-7-90 400 30 12,000
18-9-90 600 104 62,400
2,800 1,32,400

Total of products
Average due date = Base date + days
Total of amounts
1, 32, 400
= 6 - 6 - 90 + days
2,800
= 6-6-90 + 47 days
Average due date = 23-7-90

Calculation of due date of bills payable after so many months after date (or) sight:
Illustration 5
Ramesh drew upon Vinod several bills of exchange due for payment on different
dates as under:
Amount
Date of the Bill Tenure of the Bill
Rs.
1-6-88 1,200 3 months
19-6-88 1,600 2 months
10-7-88 2,000 3 months
27-7-88 1,500 3 months
7-8-88 1,800 1 month
15-8-88 2,400 2 months

Find out average due date on which payment may be made in one single amount.
Solution:
Computation of Average due date
Base date 22-8-88
Due date Amount No. of days Product
 146

Rs. from Base Rs.

Date
4
1 2 3
(2 × 3)
4-9-88 1,200 13 15,600
22-8-88 1,600 0 0
13-10-88 2,000 52 1,04,000
30-10-88 1,500 69 1,03,500
10-9-88 1,800 19 34,200
18-10-88 2,400 57 1,36,800
10,500 3,94,100

Total of products
Average due date = Base date + days
Total of amounts
3, 94,100
= 22 - 8 - 88 + days
10,500
= 22-8-88 + 38 days
Average due date = 29-9-88
ACCOUNT CURRENT
Meaning
An account current is a running statement of transaction between two parties for a
given period of time and includes interest allowed or charged on various items. It takes
the form of an account. Particularly, when two parties have numerous transactions
between themselves and settlement of each transaction is not separately made, it becomes
necessary. Firstly, to take into account the loss or gain on account of interest and
secondly, to ensure that there is no dispute regarding the net amount due. For this purpose,
a statement is prepared by one party and sent to the other. Transactions between the two
parties during a particular period are recorded. Such a statement is called ‘Account
current’. Thus, an account current is a copy of ledger account of the other party in the
books of the party who sends it and contains an additional column on each side (for
calculating interest) besides the usual amount columns. An example is of a payments
from him in instalments at different intervals and charges interest on the amount which
remains outstanding. Such a statement is generally rendered (i) by one trader to another
(ii) by a banker to his client (iii) by an agent to his principal (iv) by a consignee to
consignor and (v) by one co-venturer to another.
 147

While preparing the account current, the transactions are arranged date wise
(chronologically) and the interest is charged or allowed at an agreed rate. The party to
whom the account current is sent, is named first. Interest may be calculated for each
transaction separately or only the net amount of the interest may be entered. Usually,
interest is calculated on the basis of number of days.

Procedure for calculating days of interest

There are three methods of calculating the number of days for account current
purpose:
(i) Forward Method: Under this method, the days are counted from the date of
transaction (if there is no credit period) or from the due date of transaction (where a
period of credit is granted or bill is used) to the closing date or date of settlement of
account current. It includes product method and interest table method.
(ii) Backward or Epoque Method: In this method, days are counted from the due date
of transaction to the opening date of the account current. (This method is useful
where the opening date of the account current is given).
(iii)Daily Balance Method or Periodical Balance Method: This method is generally
followed in banks. In this method, days are calculated from the due date of one
transaction to the due date of the next transaction.

Points to remember regarding counting of days

(1) The date of the transaction is left out of calculation. For example, the number of days
between 10th February and 28th February will be 18. 10th February will not be counted.
(2) In case of bills transactions, due date should be computed after adding ‘grace days’,
wherever applicable.
(3) In the case of balance brought forward from the previous period, the first day of the
new period will also be counted. Suppose, the opening balance on 1st January 1990 is
Rs.10,000. Upto 10th February 1990, the number of days will be 41 (January 31 +
February 10). If a new transaction is entered, say, on 1st January, then this day will
not be counted.
(4) Where goods are bought or sold on ‘some days credit’ counting should be made from
the due date of the transaction, after the period of credit is completed.
 148

(5) Sometimes the date of the settlement of the transaction is different from the date of
transaction itself. In that case the settlement date is to be considered.

Preparation of Account Current

There are four ways of preparing an account current. They are discussed in detail
below.

(1) Product Method

In this method, separate columns for number of days, amount and products are to
be opened on the both sides of the account. The number of days in respect of each
transaction to the closing date is ascertained. The number of days is multiplied by the
amount of the transaction, in order to get the product.
The products are entered in a separate column on both sides of the account. Then
the product column is balanced and interest is calculated for one day on the balance. It
has to be entered in the amount column on the side which has the larger of the total
products.
The logic behind this method is simple. Interest on Rs.1,000 for 5 days will be the
same as on Rs.5,000 for one day.
The interest is ascertained by the formula:
Balance of the products × Rate of interest
Interest=
365×100
In case products are in terms of months,
Balance of the products × Rate of interest
Interest=
12×100
Red-ink Interest: Many a time an account current contains transactions the due dates of
which fall after the settlement date i.e., the closing date of the account current. For
example, an account current is prepared for the half year ended 30th June 1990. X
receives a bill of exchange from Y for Rs.2,000 on 15th June due one month after date.
The due date of the transaction is, therefore, 18th July 1990, i.e., 18 days after the closing
date of the account current. In such a case, one of the following methods is adopted:
(v) The days of such transaction are calculated from – the settlement date to the due date
of the transaction and put in the days column with (-) sign. The product of this is also
 149

marked with (-) sign. It is called Red-ink Interest because it is written in red ink the
books. Hence, the product of this type of transaction is to be deducted from the total
of the products. [See Illustration 3]
(vi) To avoid the confusion of red-ink figures in totalling the products, the products of
such otherwise, red-ink transactions are written in blue ink o n the opposite sides and
are considered as usual.
Though the amounts of red-ink transactions are payable / receivable after the
settlement date, these amounts are recorded within the account current. Therefore,
interest for days beyond the settlement date is to be waived. Hence, the products of such
transactions are deducted from the total of other products, the due dates of which are
within the settlement date. The red-ink interest adjustments are not necessary in case of
Epoque method.
(3) Daily Balance Method or Periodical Balance Method
This method is usually adopted in banks where the balance of an account is found
after every transaction. In this case, the number of days written against each transaction
are the days counted from its date or due date to the date of the following transaction. In
the case of the last transaction, the number of days are counted to the closing date of the
period.
Each amount is multiplied with the number of days. If the amount represents a
debit balance, the product is written in the ‘Dr. product column’ and if it represents a
credit balance, the product is written in the ‘Cr. product column’. The Dr. product and Cr.
product columns are then totalled up. Interest is calculated on each total at the given rate
of interest and the net interest is ascertained. If the net interest is payable to the customer,
it will appear as “By Interest A/c” under deposits and if it is due from the customer, it
will appear as “To Interest A/c” under withdrawals. [See Illustration 2]

ILLUSTRATIONS
Interest Calculation Under Product Method
Illustration 1
The following transactions took place between Ram and Krishna from 1-1-09 to
30-6-09.
2009 Rs.
Jan. 1 Sold goods to Ram 2,240
Jan. 10 Received Ram’s acceptance at 2 months 1,000
Feb. 15 Received cash from Ram 1,200
 150

Mar. 2 Bought goods from Ram 5,500

Mar. 3 Accepted Ram’s bill at 1 month 2,000
Apr. 11 Paid cash to Ram 2,000
Apr. 30 Sold goods to Ram payable up to 31st May 2,400
May 11 Bought goods from Ram 1,500
May 31 Sold goods to Ram payable up to 10th June 2,200
June 15 Bought goods from Ram 3,000

Prepare the account current to be sent by Krishna on 30th June 2009. The rate of
interest is 5%.
[Madras, B.Com. (PZA) Nov. 2006; Periyar BBA May 2006]
Solution:
Books of Krishna
Ram in Account Current with Krishna as on 30-6-2009
Date Amount Products Date Amount Product
Particulas Days Particulars Days
2009 Rs. Rs. 2009 Rs. Rs.
Jan. 1 To Sales 2,240.00 180 4,03,200 Jan. 10 By B/R (due on march 13) 1,000.00 109 1,09,000
Mar. 3 To B/P (due on April 6) 2,000.00 85 1,70,000 Feb. By Cash 1,200.00 135 1,62,000
15
Apr. 11 To Cash 2,000.00 80 1,60,000 Mar. 2 By Purchases 5,500.00 120 6,60,000
Apr. 30 To Sales (due on 2,400.00 30 72,000 May By Purchases 1,500.00 50 75,000
May 31) 11
May 31 To Sales (due on 2,200.00 20 44,000 June By Purchases 3,000.00 15 45,000
June 10) 15
June 30 To Balance of 2,01,800 June By Interest on bal. of 27.64
products 30 products
 5 1 
 2, 01, 800 × × 
 100 365 
June 30 To Bal. c/d 1,387.64
12,227.64 10,51,000 12,227.64 10,51,000
July 1 By Balance b/d 1,387.64

Daily Balance Method

Illustration 5
On 2-1-92 Gopal opened an account with Canara Bank depositing Rs.5,000. His
further deposits were: 20th Jan. Rs.2,500; 20th March Rs.3,000; 20th May Rs.3,500.
His withdrawals were: Rs.6,000 on 20th February Rs.5,000 on 20th April and
Rs.2,500 on 20th June.
Prepare the account current to be rendered by the bank for the period 30th June
1992 charging interest at 5% p.a. on customer’s debit balance and 2% p.a. on customer’s
credit balance.
[Periyar B.Com., April 2001]
[Madras, B.Com., Sep. 1993]
 151

Solution:
Gopal in Account Current with Canara Bank as on 30th June 1992
Dr. Cr. Dr.
Date Dr. Cr.
Particulars Withdrawals Deposits or Balance Days
1992 Product Product
Rs. Rs. Cr.
Jan. 2 By Cash - 5,000 Cr. 5,000 18 - 90,000
Jan. 20 By Cash - 2,500 Cr. 7,500 31 - 2,32,500
Feb. To Cash 6,000 - Cr. 1,5000 29 - 43,500
20
Mar. By Cash - 3,000 Cr. 4,500 31 - 1,39,500
20
Apr. To Cash 5,000 - Dr. 500 30 15,000 -
20
May By Cash - 3,500 Cr. 3,000 31 - 93,000
20
June To Cash 2,500 - Cr. 500 10 0 5,000
20
June By Interest - 31 Cr. 531
30
June To Bal. c/d 531 - Cr. 531
30
14,031 14,031 15,000 6,03,500
July 1 By Bal. b/d - 531 Cr. 531

Working Notes:
Interest Calculation:
Interest on credit balances,
Interest @ 2% on 6,03, 500 for 1 day
2 1
6, 03, 500× × = 32.98
100 366
Less: Interest on debit balances
Interest @ 5% on 15,000 for 1 day
5 1
15, 000× × = 2.05
100 366
Net interest to be credited: 30.93 or 31 (approx.)
 152

Practical Problems
Account Current
1. The following are the particulars of transaction that have taken place between A
and B for a period of six months. In the books of A.
Rs.
July 1 Balance (Dr.) 4,000
10 Purchased goods from B 3,000
25 Paid cash by B 1,000
August 10 Sold goods to B 10,000
25 Given two months acceptance to B 5,000
Sept. 10 Paid cash to B 3,000
20 Purchased goods from B 7,000

You are required to prepare an Account Current to be rendered by A to B for the

period upto Dec. 31, 2004. Interest is to be charged at an agreed rate of 12% p.a.
(B.Com., Madurai, Bangalore)
[Ans. Interest Rs.467.87]
2. The following is the account of Anand in the ledger of Kamlesh:
2003 Rs. 2003 Rs.
Jan. 1 To Balance b/d 15,000 Mar. 25 By Returns 1,000
Mar. 9 To Sales 30,000 Apr. 10 By Cash 15,000
May 25 To Sales 7,000 June 3 By Cash 20,000
June 30 By Balance c/d 16,000
52,000 52,000

Calculate average due date and the amount of interest payable or receivable by
Anand at 6% p.a. to 30th June 2003.
(B.Com., Kurukshetra)
[Ans. Average Due Date – 22nd September 2002 Interest Rs.739]
3. On 1st January 2004, X owed Rs.5,000 to Y on account. During the three months
ended 31st March 2004, the transactions were as follows in the books of Y:
Rs.
Jan. 10 Received two Bills for 2 months and 3 months 4,000
 153

respectively from X (Rs.2,000 each)

20 Mat a Bill for 2 months (due this day) drawn by X on 1,000
November 17, 2003
Feb. 9 Paid Cash to X 1,000
19 Received cash from X 1,000
Mar. 1 Sold goods to X 1,000
13 X’s acceptance due this day dishonoured

Prepare Account Current to be rendered to X on 31st March 2004, interest to be

reckoned at 9% p.a.
(B.Com., Punjab, MS)
[Ans. Interest Rs. 128.12
Amount Due: 4,128.12]
4. Mehra owed Rs.3,000 on 1st Jan. 2004 to Somesh. The following are the
transactions that took place between them during 2004. It is agreed between the
parties that interest @ 12% per annum is to be calculated on all transactions.
2004 Rs.
Jan. 16 Somesh sold goods to Mehra 2,000
Jan. 29 Somesh purchased goods from Mehra 1,500
Feb. 10 Somesh pays cash 1,500
Mar. 7 Mehra accepts a bill drawn for one month 2,000

They desire to settle their accounts by one single payment on 15th March 2004.
Ascertain the amount to be paid to the nearest rupee. Ignore days of grace.
(B.Com., Madras)
[Ans. Amount to be paid Rs.3,123.60]
5. Mr. A had the following transactions with B:
2004 Rs.
January 1 Balance (Dr.) 1,000
January 10 Goods sold 600
February 20 Cash received 900
 154

March 5 Goods purchased 1,200

April 25 Cash paid 400
May 16 Goods sold 500
May 16 Received a Bill for Rs.300 at one month and discounted 290
for

Make out an Account Current to be submitted by A to B on 30th June 2004

charging interest @ 16% p.a. on debit items and allowing interest @ 12% on
credit items.
(B.Com., Andhra)
[Ans. Amount due Rs.160.33]
Practical Problems

Average Due Date

1. A purchased goods from B, the due dates are as follows:
Rs.600 due on January 1, 2004
Rs.500 due on February 6, 2004
Rs.400 due on March 16, 2004
Rs.300 due on April 25, 2004
Rs.200 due on May 25, 2004
You are required to calculate the average due date.
(B.Com., Madras)
[Ans. Average Due Date: 26th February 2004]
2. A purchased from B, for which he accepted bills drawn by B and the bills were to
be honoured after three months from the respective dates of the invoice as per the
details given below.
Date of Invoice Value of Goods
10th Jan. 2004 6,000
th
20 Feb. 2004 10,000
30th Mar. 2004 5,000
st
1 May 2004 15,000
10th Jun. 2004 12,000
 155

A preferred to honour all the bills on 15th Oct. 2004 and interest @ 8% p.a. should
be calculated with the help of the average due date.
(B.Com., Kerala, MS, MK)
[Ans. Average Due Date: 12th July 2004
Interest Rs.996.72]
3. A trader having accepted the following several bills falling due on different dates,
now desires to have these bills cancelled and to accept a new bill for the whole
amount payable on the average due date:
S. No. Date of Bills Amount Usance of the Bill
Rs.
1. 1st Mach 2004 400 2 months
th
2. 10 March 2004 300 3 months
3. 5th April 2004 200 2 months
4. 20th April 2004 375 1 month
5. 10th May 2004 500 2 months

You are required to find the said average due date.

(B.Com., Kerala)
[Ans. Average Due Date: 7th June 2004]
4. A partner has withdrawn the following sum of money during the half year ending
30th June 2004:
2004 Rs.
January 17 300
January 20 400
February 18 240
March 5 160
March 15 200
April 24 400
May 2 300
May 16 200
June 30 300

Interest is to be charged at 10% per annum. Find out the Average due date and
calculate the interest.
 156

(B.Com., Kerala, Madurai)

[Ans. Average Due Date: 26th March 2004
Interest Rs.65.57]
5. A trader has accepted the following bills falling due on the dates noted against
each. He now wishes to have these bills cancelled and to accept a new bill for the
whole amount payable on the average due date.
Amount of the Bills Rs. Due Date
th
1. 740 7 May 2004
2. 1,340 20th May 2004
3. 600 22nd May 2004
4. 1,500 23rd June 2004
5. 800 18th Aug. 2004
6. 900 10th Sept. 2004
7. 500 15th Sept. 2004

(B.Com., Madurai, MK)

[Ans. Average Due Date: 30th June 2004]
 157

UNIT -V
CONSIGNMENT ACCOUNTS

After reading the Fifth unit, the students can understand how to make large consignment
and increase sales volume by attracting customers. To launch a new product and create
and capture the market for the same and understand how to enter foreign market and even
new or emerging market.
Meaning of Consignment
In the modern age of competition, manufacturers and wholesalers have to use all
possible means to push their sales. Consignment is one such method resorted to by them
to secure sale of their goods in different and distant places without opening branches
there. Consignment is nothing but an agency agreement under which a manufacturer or a
wholesaler sends his good at his own risk to his agent in a different place for the purpose
of sale. The person sending or forwarding goods for sale is known as “Consignor” or
“Principal” and the person to whom the goods are sent is known as “Consignee” or “Agent”.
For example, if Vidya of Chennai sends 500T.V. sets to Malathy of Trichy to sell
on her (Vidya’s) behalf and at her (Vidya’s) risk, the transaction between Vidya and
Malathy is a consignment transaction. Vidya is the consignor and Malathy is the
consignee. In this case, Vidya continues to be the owner of the goods. Malathy is simply
an agent of Vidya. She has not purchased the goods. She has agreed to sell the goods of
Vidya to the best of her ability and capacity. She will, therefore, be responsible to Vidya
for payment only when she has sold away the goods. Ofcourse, she will be reimbursed by
Vidya for any expenses incurred by her in receiving and selling goods besides
remuneration for selling the goods as per the agreed terms.

Distinction between sale and consignment

As mentioned earlier, a consignment is not a sale by the consignor to the
consignee. The goods are held by the consignee for sale. There is a charge only in the
location of the goods. The points of distinction between a sale and a consignment are as
follows:
 158

(i) A sale involves two parties viz., seller and buyer, whereas consignment involves
three parties viz., Consignor, Consignee and the buyer;
(ii) Sale is a contract between the seller and the buyer, whereas consignment is a
contract between the consignor and the consignee;
(iii) In a sale, the property in the goods passes to the buyer as soon as the sale is
complete. In a consignment the legal ownership of the goods remains with the
consignor. The ownership passes only to the ultimate buyer when a sale takes
place and in no case does the ownership pass to the consignee. Hence, the person
to whom goods are sold is a debtor but the person to whom goods are consigned is
merely an agent.
(iv) In case of sale, the buyer can dispose of the good in any way he like as the
property in the goods passes to him; but in the case consignment, the consignee
has to dispose of the goods as per instructions of the consignor.
(v) In case of sale, risk is transferred from the seller to the buyer as soon as the
transaction takes place. Hence, any loss, if incurred, is to be borne by the buyer.
But in case of consignment, loss is to borne by the consignor and not by the
consignee since he is only an agent.
(vi) In a contract of sale, the buyer cannot return the goods to the seller, but in
consignment, the consignee can do so if he thinks that the goods are not
marketable.
(vii) In sale, the profit is realized when goods are sold to the buyer, whereas in
consignment the profit is realized when the goods are sold by the consignee to the
buyer;
(viii) The consideration for sale is termed as ‘Price’ while in the case consignment, it is
termed as ‘Commission’. While the price in the case of a sale may also be fixed
by a third party, Commission which is a fixed percentage on the sale value of
goods consigned, is determined by the parties themselves.

Model Journal Entries – Consignor’s Books

The detailed entries for recording consignment transactions in these accounts
when the consignment is sent at cost price and at invoice price are as follows:
 159

(i) On despatch of goods to Consignee :

Consignment A/c Dr xxx
To Goods sent on Consignment A/c xxx
Note: (a) If a consignor has more than one agent, separate consignment account is
prepared for each consignee. Each consignment account is identified with
the name of place, for example, ‘Consignment to Trichy A/c’ or
‘Consignment to Salem A/c’.
(b) If goods have been sent to Consignee at a price above cost, adjustment
shall be made with the difference between cost and invoice price of goods.
(ii) For adjustment of ‘Load’ in goods sent :
Goods sent on consignment Dr xxx
To Consignment A/c xxx
[Being excess of invoice price over cost price of goods send adjusted]
(iii) For expenses incurred by Consignor :
Consignment A/c Dr xxx
To Cash or Bank A/c (if paid) xxx
To Creditors for expenses A/c (if unpaid) xxx
(iv) For receipt of advance from the Consignee :
(a) When Payment is received in Cash or Bank draft.
Cash or Bank A/c Dr xxx
To Consignee A/c xxx
(b) When a bill is accepted by the Consignee :
Bills receivable A/c Dr xxx
To Consignee A/c xxx
(v) For Discounting of the bill sent by consignee as advance
Bank A/c Dr xxx
Consignment A/c (Discount) Dr xxx
To Bills Receivable A/c xxx
Note: Discount on bill may also be debited to discount account and later on transferred
to P & L A/c, if it is decided that it should not be treated as consignment expense.
(vi) For sale of goods by the Consignee, as reported in ‘Account sale’
Consignee A/c Dr (Gross sales proceeds) xxx
 160

To Consignment A/c xxx

[Being sales effected - both cash and credit
- by consignee]
(vii) For expenses incurred by the consignee :
Consignment A/c Dr xxx
To Consignee A/c xxx
Note : If any of the expenses is borne by the consignee personally, such expenses will
not be debited in consignment A/c. Consignor will not make any entry for such
expenses. These will be debited to the profit & loss account in the books of
consignee.
(viii) For the Commission payable to the consignee :
Consignment A/c Dr xxx
To Consignee A/c xxx
[Being commission, del credere
commission, over riding commission
payable to consignee]
(ix) For stock in the hands of the Consignee :
(a) If the goods were sent at cost :
Stock on Consignment A/c Dr xxx
(with cost price)
To Consignment A/c xxx
(b) If the goods were sent at invoice price :
(i) Stock on Consignment A/c Dr xxx
(with invoice price)
To Consignment A/c xxx
(ii) Consignment A/c Dr xxx
(with the difference between
invoice price of stock & cost price)
To Consignment stock Reserve A/c xxx
(x) For cost of any abnormal loss due to accident, fire, theft etc.
Abnormal loss A/c Dr xxx
To Consignment A/c xxx
 161

(xi) For the insurance claim received by Consignor :

Insurance company A/c Dr xxx
(If claim is accepted but not yet paid)
Cash or Bank A/c Dr xxx
(If claim is received in cash)
To Abnormal loss A/c xxx
(xii) For the insurance claim received by Consignee:
Consignee A/c Dr xxx
To Abnormal loss A/c xxx
(xiii) For irrecoverable abnormal loss:
Profit & Loss A/c Dr xxx
To Abnormal loss A/c xxx
(xiv) For Loss due to Bad debts when there is no del-credere commission :
Consignment A/c Dr xxx
To Consignee A/c xxx
(xv) For profit on Consignment:
Consignment A/c Dr xxx
To Profit & Loss A/c xxx
Note : In case of loss (Total Debits of consignment A/c exceeds Total Credits), reverse
entry will be made.
(xvi) For receiving remittance from the consignee:
Cash or Bank or B/R A/c Dr xxx
To Consignee A/c xxx
(xvii) For transferring goods sent on consignment A/c:
(a) If the Consignor is a manufacturer:
Goods sent on consignment A/c Dr xxx
To Trading A/c xxx
(b) If the Consignor is a wholesale trader:
Goods sent on consignment A/c Dr xxx
To purchases A/c xxx

Books of Consignee
 162

Consignee is the agent to the consignor and not the owner of the goods received
by him. He is to sell the goods on behalf of and at the risk of consignor. He is not
concerned with the profit or loss on goods sold. He passes journal entries only for those
transactions which find place in ‘Account sales’. On receipt of goods, the consignee will
only make entries in respect of the inwards consignment. He will make no entries in his
books of accounts because the receipt is clearly not a purchase, but merely placing the
goods in the custody of the consignee.

Model Journal entries

Consignee’s Books
(i) For goods received on Consignment:
No entry
(ii) For advance made to the Consignor:
(a) When payment is made by Cash or Bank draft:
Consignor A/c Dr
To Cash or Bank A/c
(b) When a bill of exchange is accepted:
Consignor A/c
To Bills payable A/c
(iii) For payment of expenses in respect of consignment:
Consignor A/c Dr
To Cash or Bank A/c (if paid in cash)
To Creditors for expenses A/c (if still unpaid)
(iv) For sale goods:
(a) When goods are sold for Cash:
Cash or Bank A/c Dr
To Consignor A/c
(b) When goods are sold for Credit:
Debtors A/c Dr
To Consignor A/c
(v) For money received from Consignment debtors:
 163

Cash or Bank A/c Dr

To Debtors A/c
(vi) For the Cash discount and allowances allowed to the customer by the consignee:
Consignor A/c Dr
To Debtors A/c
(vii) For Bad debts on account of credit sales:
(a) If ‘Del credere’ Commission is not Receivable:
Consignor A/c Dr
To Debtors A/c
(b) If ‘Del credere’ Commission is Receivable:
Bad debts A/c Dr
To Debtors A/c
Note : Bad debts from consignment debtors is transferred to del credere commission
account and the balance of del credere commission account along with
commission account is transferred to his profit & loss account.
(c) For closing bad debts:
Del credere Commission A/c Dr
To Bad debts A/c
(vii) For Commission on sales:
Consignor A/c Dr
To Commission A/c
To Del credere Commission A/c
(ix) For closing del credere Commission and Commission A/cs:
Commission A/c Dr
Del credere commission A/c Dr
To Profit & Loss A/c
(x) For remittance sent to the Consignor in full settlement:
Consignor A/c Dr
To Cash or Bank or B/P A/c
(xi) For unsold stock lying with Consignee:
No entry
After passing the above entries. The consignee will prepare consignor’s personal
account and other accounts in his books in the following form:
 164

Consignor’s Personal A/c

Particulars Rs. Particulars Rs.
To Cash / Bank / B/P A/c By Cash / Debtors (Cash & Credit
xxx xxx
(advance) Sales)
To Cash A/c (Expenses) xxx
To Commission xxx
To Bank (Bal. fig) xxx
xxx xxx

Consignor’s Personal A/c

Particulars Rs. Particulars Rs.
To Debtors A/c xxx By Consignor’s personal A/c xxx
To Profit & Loss A/c xxx
xxx xxx

Debtors A/c
Particulars Rs. Particulars Rs.
To Consignor’s personal A/c
xxx By Bank A/c xxx
(Credit Sale)
To Profit & Loss A/c xxx By Commission A/c xxx
xxx xxx

ILLUSTRATIONS
I. Goods sent on consignment cost
Illustration 1 (Consignment at Cost-entirely sold)
Jain of Delhi consigned 300 tins of coconut oil to Narang of Chandigarh, invoiced
at Rs.200 per tin. Jain paid Rs.2,000 as carriage and other expenses. The consignor drew
a bill of exchange for Rs.16,000 which was later discounted at Rs.15,700. The consignee
rendered an account sales showing the following details:
280 tins sold at Rs.250 per tin
20 tins sold at Rs.260 per tin
Storage and selling expenses Rs.5,000
Clearing and cartage Rs.1,600
Commission at 6% on sales.
The consignee sent a sight draft for the balance.
Show the entries and important ledger accounts in the books of both the parties.
 165

Solution
In the Books of Jain (Consignor)
Journal Entries
Debit Credit
Date Particulars L.F.
Rs. Rs.
Consignment A/c Dr 60,000
To Goods sent on Consignment A/c 60,000
[300 tins of coconut oil consigned to
Narang at Rs.200 per tin]
Consignment A/c Dr 2,000
To Bank A/c 2,000
[Carriage and other expenses paid]
Bills Receivable A/c Dr 16,000
To Narang A/c 16,000
[B/R received from Narang Bank A/c]
Bank A/c Dr 15,700
Consignment (Discount) A/c 300
To Bills Receivable A/c 16,000
[The bill discounted and the discount charged to
consignment A/c]
Narang A/c Dr 75,200
To Consignment A/c 75,200
[The gross proceeds of sales as per A/c sales]
Consignment A/c Dr 6,600
To Narang A/c 6,600
[Expenses paid by the consignee:
Storage & Selling expenses Rs.5,000;
Clearing & Cartage Rs.1,600]
Consignment A/c Dr 4,512
To Narang A/c 4,512
[Commission due to the consignee @ 6% on
75,200]
Consignment A/c Dr 1,788
To Profit & Loss A/c 1,788
[Profit on Consignment transferred]
Bank A/c Dr 48,088
To Narang A/c 48,088
[Sight draft received from the consignee for the
balance due]
Goods sent on consignment A/c Dr 60,000
To Purchases A/c 60,000
[Goods sent on consignment A/c is closed by
transfer to purchase A/c]
 166

Note: It is assumed that Narang is a trader and not a manufacturer. So, goods sent on
consignment are credited to purchases.
Consignment A/c
Date Particulars Rs. Date Particulars Rs.
To Goods sent on 60,000 By Narang 75,200
Consignment A/c A/c (Sales)
To Bank A/c (Expenses) 2,000
To Bills Receivable A/c 300
(Discount)
To Narang A/c 6,600
(Consignee Expenses)
To Narang A/c 4,512
(Commission)
To Profit & Loss A/c 1,788
(Transfer of profit)
75,200 75,200

Narang A/c
To Consignment A/c 75,200 By Bills Receivable A/c 16,000
By Consignment A/c 6,600
By Consignment A/c 4,512
By Bank A/c (Bal. fig) 48,088
75,200 75,200

Goods sent on Consignment A/c

To Purchases A/c 60,000 By Consignment A/c 60,000
60,000 60,000

In the Books of Narang (Consignor)

Journal Entries
Debit Credit
Date Particulars L.F.
Rs. Rs.
Jain A/c Dr 16,000
To Bills Payable A/c 16,000
[Jain’s bill accepted and sent]
Jain A/c Dr 6,600
To Cash A/c 6,600
[Expenses incurred on Consignment
Storage etc. Rs.5,000 &
Clearing etc., Rs.1,600]
Cash A/c Dr 75,200
To Jain A/c 75,200
[Gross proceeds of sale of the consignment]
 167

Jain A/c Dr 4,512

To Commission A/c 4,512
[Commission due at 6% on 75,200]
Jain A/c Dr 48,088
To Bank A/c 48,088
[Sight draft sent in final settlement Bills payable
A/c]
Bill Payable A/c Dr 16,000
To Cash A/c 16,000
[Payment of the bill on maturity]

Jain A/c
Date Particulars Rs. Date Particulars Rs.
To Bills payable A/c 16,000 By Cash A/c 75,200
(Sales)
To Cash A/c 6,600
To Commission A/c 4,512
To Bank A/c (Bal. fig) 48,088
75,200 75,200

Commission A/c
To P & L A/c (Transfer) 4,512 By Jain A/c 4,512
4,512 4,512
Note: Consignee’s Account in Consignor’s Books and Consignor’s account in Consignee’s
books show the same balance (on opposite sides). This is so because what is due
from consignee is the same as what is payable to consignor.
Illustration 2 (Consignment at cost - fully sold - for cash and credit without del credere
commission
Balan of Bangalore consigned 190 bags of sugar to Raghu of Chennai, invoicing
goods at Rs.180 per bag. Balan paid Rs.1,200 as cartage and other expenses. The
consignor drew a bill of exchange of Rs.12,000 which was later discounted at 11,800.
The consignee rendered an account sales showing the following details:
100 bags sold at Rs.240 each on credit
90 bags sold at Rs.230 each for cash
Freight & Carriage Rs.2,000
Transit insurance Rs.600
Storage & Insurance Rs.1,000
Commission at 5%
 168

The consignee sent a sight draft for the amount due. You are required to prepare
ledger accounts in the books of both the parties assuming that the consignee incurred a
bad debt of Rs.400.
Book of Balan (Consignor)
Consignment A/c
Particulars Rs. Particulars Rs.
To Goods sent on Consignment A/c 34,200 By Raghu A/c (Sales : (100× 44,700
(190 × Rs.180) Rs.140 + 90 × Rs.230)
To Bank (Expenses) 1,200
To B/R A/c (Discount) 200
To Raghu A/c (Commission) 2,235
(44,700 × 5%)
To Raghu A/c (Bad debts) 400
To Profit & Loss A/c (Profit) (Bal. fig) 2,865
44,700 44,700
Note: The consignor will have to bear the loss of bad debts as consignee is not given del
creder commission.
Raghu A/c
Particulars Rs. Particulars Rs.
To Consignment A/c (Sales) 44,700 By B/R A/c 12,000
By Consignment A/c (Express) 3,600
By Consignment A/c 2,235
(Commission)
By Consignment A/c (Bad debts) 400
By Bank A/c (Bal. fig) 26,465
44,700 44,700

Books of Raghu (Consignee)

Balan A/c
Particulars Rs. Particulars Rs.
To B/P A/c 12,000 By Bank A/c (Cash Sales 24,000
100 × Rs.240)
To Bank A/c (Expenses) 3,600 By Sundry debtors A/c 20,700
(Credit sales
90 × Rs.230)
To Commission A/c 2,235
To Sundry Debtors A/c (Bad debts) 400
To Bank (Final Payment Bal.fig) 26,465
44,700 44,700
 169

Commission A/c
Particulars Rs. Particulars Rs.
To Profit & Loss A/c (transfer) 2,235 By Balan A/c 2,235
2,235 2,235

Illustration 3 (Valuation of unsold stock)

Prem consigned 200 boxes of Medicines @ Rs.100 per Box to Ram. He incurred
the following expenses:
Insurance Rs.1,000
Loading charges Rs.1,600
Freight Rs.1,400
An account sales was received from Ram which shoed that 160 boxes were sold
@ Rs.200 per box. Ram incurred the following expenses:
Clearing charges Rs.1,000
Godown rent Rs.400
Advertisement Rs.600
Other selling expenses Rs.1,000
Ascertain the value of stock on consignment and show also the relevant entry.
Solution
Computation of value of unsold stock
Particulars Rs. Rs.
Value of unsold stock as per proforma invoice (40 boxes @ 4,000
Rs.100 each)
40 1
Add: or th of non-recurring expenses :
200 5
Consignor’s (Prem) expenses :
Insurance 1,000
Loading charges 1,600
Freight 1,400
Consignee’s (Ram) expenses:
Clearing charges 1,000
1 1,000
5,000×
5
Value of unsold stock 5,000
Note: (i) It should be ensured that this value of Rs.5,000 is not higher that their
market value.
 170

(ii) Only non-recurring expenses of the consignee and consignor should be

consigned while valuing unsold stock on consignment. In the present case,
Godown rent, Advertisement, Selling expenses are recurring in nature and
omitted for the purpose of valuing stock.
Journal Entry
Debit Credit
Date Particulars L.F.
Rs. Rs.
Stock on Consignment A/c Dr. 5,000
To Consignment A/c 5,000
[Unsold stock valued at cost and
brought into books]

Illustration 1
Raja Mills Ltd. of Ahmedabad sent 500 pieces shirting to Fancy Stores, Delhi, on
consignment basis. The consignees are entitled to receive 5 per cent commission plus
expenses. The cost to RRaja Mills Ltd. is Rs.120 per piece. Fancy Stores, Delhi, pay the
following expenses:
Railway Freight, etc. Rs.1,000
Godown Rent and Insurance Rs.1,500
Raja Mills Ltd., draw on the consignees a draft for Rs.30,000 which is duly
accepted. It is discounted for Rs.28,650. Later, Fancy Stores, Delhi, report that the entire
consignment has been sold for Rs.78,000. Show journal entries and the important ledger
accounts in the books of the consignor.
Solution:
Journal
Dr. Cr.
Rs. Rs.
? Consignment to Delhi Account ... 60,000
Dr.
To Goods Sent on Consignment Account 60,000
500 pieces shirting consigned to Fancy Stores, Delhi, to
be sold on our behalf
? Bills Receivable Account ... 30,000
Dr.
To Fancy Stores, Delhi 30,000
The bill of exchange received from Fancy Stores,
Delhi.
 171

? Bank Account ... 28,650

Dr.
Discount Account ... 1,350
Dr.
To Bills Receivable Account 30,000
The bill discounted for Rs.28,650
? Fancy Stores, Delhi ... 78,000
Dr.
To Consignment to Delhi Account 78,000
Gross proceeds of sales by the consignee
? Consignment to Delhi Account ... 2,500
Dr.
To Fancy Stores, Delhi 2,500
Expenses incurred by Fancy Stores, Delhi, in
connection with the consignment
? Consignment to Delhi Account ... 3,900
Dr.
To Fancy Stores, Delhi 3,900
Commission due to Fancy Stores, Delhi, being 5 per
cent of Rs.78,000
? Consignment to Delhi Account ... 11,600
Dr.
To Profit and Loss Account 11,600
Transfer of the profit on consignment
End Goods Sent on Consignment Account ... 60,000
of Dr.
year
Trading Account 60,000
Transfer of Goods Sent on Consignment Account to
Trading Account

LEDGER ACCOUNT
Dr. Consignment (to Delhi) Account Cr.
Rs. Rs.
? To Goods Sent on 60,000 ? By Fancy Stores, 28,000
Consignment Account Delhi (sale proceeds)
To Fancy Stores, 2,500
Delhi (expenses)
To Fancy Stores, 3,900
Delhi (commission)
To Profit & Loss A/c – 11,600
transfer of profit
78,000 78,000
Fancy Stores, Delhi
? To Consignment A/c 78,000 ? By Bills Receivable 30,000
(sale proceeds) A/c
 172

By Consignment A/c 2,500

(expenses)
By Consignment A/c 3,900
(commission)
By Balance c/d 41,600
78,000 78,000
To Balance b/d 41,600

Goods Sent on Consignment Account

Rs. Rs.
End of To Trading 60,000 By Consignment 60,000
year Account – transfer A/c.

Books of the Consignee

No entry is passed by the consignee when he receives goods from the consigner.
Also, he does not record the expenses incurred by the consignor in connection with
despatch of goods. The consignee makes entries only when he accepts a bill drawn on
him by the consignor, when he (the consignee) incurs some expenses on the consignment,
when the goods are sold, for the commission earned and when he makes payment either
on account or in full settlement of his account with the consignor. Hence, the entries
made by the consignee are as follows:
(1) On despatch of goods by the consignor no entry
(2) On payment of expenses by the consignor no entry
(3) On the consignee accepting a bill of exchange:
Consignor’s Personal Account ... Dr. with the amount of the
bill
To Bills Payable Account
(4) On expenses incurred by the consignee on the consignment:
Consignor’s Personal Account ... Dr.
To Cash Account
(5) On sales being affected:
Cash (or Bank) Account ... Dr.
To Consignor’s Personal Account
(6) On commission being earned:
Consignor’s Personal Account ... Dr.
 173

To Commission Account
(7) On making payment to the consignor:
Consignor’s Personal Account ... Dr.
Notes: 1. The above entries are based on the fact that all that the consignee spends or
receives in respect of the consignment is on behalf of the consignor.
2. The consignee is not concerned with how much profit or loss the consignor has
make on the consignment and hence he makes no entry for it.
3. The consignee will also pass entry for honouring his Bill Payable on the date of
maturity.
For the illustration given on the above the consignee, Fancy Stores, Delhi, will
make the following entries:
Journal
Dr. Cr.
Rs. Rs.
? Raja Mills Ltd. ... Dr. 30,000
To Bills Payable Account 30,000
The bill of exchange accepted and sent to Raja Mills
Ltd.
? Raja Mills Ltd., ... Dr. 2,500
To Cash Account 2,500
The amount spent on the consignment received
? Cash Account ... Dr. 78,000
To Raja Mills Ltd. 78,000
Sale proceeds of the goods received on consignment
? Raja Mills Ltd. ... Dr. 3,900
To Commission Account 3,900
5 per cent commission due on gross sale proceeds
On Bills Payable Account ... Dr. 30,000
maturity
To Bank 30,000
Payment of the bill due

The ledger accounts will be as follows:

Dr. Raja Mills Ltd., Ahmedabad Cr.
Rs. Rs.
? To Bills Payable 30,000 ? By Cash A/c 78,000
Account (sale proceeds)
? To Cash A/c 2,500
(expenses)
? To Commission A/c 3,900
 174

? To Balance c/d 41,600

78,000 78,000
By Balance 41,600
b/d

Bills Payable Account

Rs.
On To Bank 30,000 ? By Raja Mills 30,000
maturity Ltd.,
Ahmedabad

Commission Account

Rs. Rs.
End of To Profit and Loss 3,900 ? By Raja Mills 3,900
Year A/c – transfer Ltd.

Cash Book (relevant portions only)

Cash Bank Cash Bank

Rs. Rs. Rs. Rs.
To Raja Mills Ltd. (sale 78,000 By Raja Mills Ltd. 2,500
proceeds) (expenses)
By Bills Payable A/c 30,000
(payment on maturity)

Valuation of Stock
When the consignor closes his books of account for an accounting year, he may
find that some of the goods sent on consignment have not yet been sold by the consignee
and they are still lying with the consignee. These goods must be valued and brought into
account just like the closing stock for preparation of the Trading Account. The stock is
usually valued at cost. But “cost” should not mean merely the cost at which the consignor
invoices the goods. If such expenses as normally increase the value of goods have been
incurred, a proportion of such expenses should be included in the cost. Freight, customs
duty, insurance in transit and loading and unloading charges are all added to the value of
goods. If one orders goods from London worth Rs.10,000 and has to pay Rs.2,000 as
freight and Rs.2,500 as customs duty, the real vale of the goods is Rs.14,500. It is on this
basis that the cost of the closing stock should be calculated. It does not matter who pays
the expenses. If such expenses have been incurred (whether by the consignor or by the
 175

consignee), they form part of cost, since they bring the goods to the place and the
condition in which they are to be sold.
But there are some other expenses which are incurred while the consignment is
being disposed of, but which do not increase the value of goods. Examples of such
expenses are godown rent, insurance of godown, advertisement, salaries of salesmen, etc.
Hence at the time of valuation of stock, such expenses should be ignored. The main
principle of valuing closing stock at cost or market price, whichever is less, is also
applicable here. Hence if the stock with the consignee can be disposed of at a price lower
than the cost, the closing stock should not be valued at anything higher than the selling
price.
Suppose B of Calcutta sent 100 sewing machines to G of Singapore, on
consignment. Each machine costs Rs.900. B paid Rs.3,000 as shipping freight and Rs.400
as insurance. G paid Rs.4,000 as customs duty and Rs.200 as dock dues. He also paid
Rs.600 as godown rent and Rs.1,500 as salary to his salesmen for disposing of the
machines. At the end of the year, 20 machines remained with G. The selling price of each
machine in Singapore fell to Rs.1,240 on the last day of the year. The value of the stock
lying with G will be ascertained as follows:
Cost Rs. Rs.
Invoice cost of 20 machines at Rs.900 18,000
20
1/5, that is , of:
100
freight 600
insurance 80
customs duty 800
dock dues 40 1,520
19,520

Selling price: Rs.1,240 × 20 = Rs.24,800

Cost being less, the 20 machines should be valued at Rs.19,520.
Note: In examinations, in the absence of details of the expenditure incurred by the
consignor and the consignee, the student is advised to include the due properties
of the expenses incurred by the consignor only.
Entry in Books:
 176

Only the consignor makes an entry for the stock – the consignee makes no entry.
The entry is:
Stock on Consignment Account ... Dr.
To Consignment Account
The stock on consignment account is an asset and will appear in the balance sheet.
Next year, it will be transferred to the debit of Consignment Account as opening stock.
Alternatively, no entry may be passed. The value of the stock will be credited in
the Consignment Account as “By Balance c/d” and then shown as “To Balance b/d” in
the consignment account itself (and shown in the Balance Sheet).
Loss of Goods – Abnormal
Abnormal loss of goods occurs due to accident, mischief or carelessness. For
example, goods may be destroyed by fire or there may be a theft of goods. Such a loss
does not occur often. In order to ascertain the normal profitability of a consignment,
abnormal loss should be debited to Abnormal Loss Account and credited to Consignment
Account. The amount of the loss is ascertained like the value of closing stock at cost
except that expenses incurred on the remaining goods after the loss have to be ignored
while calculating the amount of the loss because no part of such expenses can be said to
have been incurred on the goods lost. For example, suppose 200 packets of a commodity
are consigned, cost being Rs.400 per packet, the consignor spending Rs.600 by way of
cartage and railway freight. Suppose, five packets of the commodity are lost in transit and
the consignee takes delivery of 195 packets only which he brings to his godown paying
cartage amounting to Rs.150. In this case, Abnormal Loss Account will be debited and
Consignment Account credited with Rs.2,015 calculated as follows:
Rs.
Invoice price of 5 packets = Rs.400 × 5 2,000
Add: Proportionate cartage and railway freight paid by consignor Rs.600 × 15
5
200
2,015

Cartage amounting to Rs.150 paid by the consignee has been ignored because no
part of this cartage has been spent on goods lost.
 177

Even when abnormal loss is fully or partly covered by insurance, Abnormal Loss
Account may be debited and Consignment Account credited with the full cost of the
goods involved in the loss; the amount recovered from the insurance company will be
credited to Abnormal Loss Account and the balance, if any, left in Abnormal Loss
Account will be transferred to Profit & Loss Account.
Alternatively, Abnormal Loss Account may not be opened; entries relating to
goods lost in abnormal manner will all, then be passed in the Consignment Account itself,
the final abnormal loss being debited to Profit & Loss Account and credited to
Consignment Account.
If abnormal loss is ignored, the final net profit is not affected. But it is desirable to
record the abnormal loss so that normal profitability of the consignment may be revealed.
Illustration 2
1,000 toys were consigned by Roy & Co. of Calcutta to T. Nu of Rangoon at an
invoice cost of Rs.150 each. Roy & Co. paid freight Rs.10,000 and insurance Rs.1,500.
During the voyage 100 toys were totally damaged by fire and had to be thrown overboard.
T. Nu took delivery of the remaining toys and paid Rs.14,400 as customs duty.
T. Nu had sent a bank draft to Roy & Co. for Rs.50,000 as advanced payment and
later sent an account sales showing that 800 toys were sold at Rs.220 each. Expenses
incurred by T. Nu on godown rent and advertisement, etc., amounted to Rs.2,000. T. Nu
is entitled to commission of 5 per cent. One of the credit customers could not pay for 5
toys. Prepare the Consignment Account, T. Nu’s account and Profit and Loss Account in
the books of Roy & Co., assuming that nothing has been recovered from the insurers due
to a defect in the policy. T. Nu settled his account immediately.
Solution:
Consignment to Rangoon Account
Dr. Cr.
Rs. Rs.
? To Goods Sent on 1,50,000 ? By T. Nu (Sales) 1,76,000
Consignment Account
To Cash Account: By Abnormal Loss 16,150
A/c / Profit & Loss
A/c (loss by fire) (1)
Freight 10,000 By Stock on 17,750
Consignment
 178

Account (2)
Insurance 1,500 11,500
To T. Nu: Customs 14,400
Duty
Sundry Expenses 2,000
Commission 8,800
Bad Debt (5 × Rs.220) 1,100
To Profit & Loss A/c 22,100
(Profit)
2,09,900 2,09,900
T. Nu
Dr. Cr.
? To Consignment to 1,76,000 ? By Bank (bank draft as 50,000
Rangoon A/c advance)
To Balance c/d 5,000 By Consignment A/c:
(amount of advance
relating to 100 toys)
Customs duty 14,400
Sundry Expenses 2,000
Bad Debit 1,100 17,500
By Consignment A/c 8,800
(commission)
By Bank 1,04,700
1,81,000 1,81,000
By Balance b/d 5,000

Profit and Loss Account

Rs. Rs.
To Abnormal Loss A/c or 16,150 By Consignment to 23,200
Consignment to Rangoon Rangoon Account (3)
A/c (loss by fire) (3)

If Abnormal Loss Account is opened, it will appear as follows:

Abnormal Loss Account
Rs. Rs.
? To Consignment to 16,150 At By Profit & Loss Account 16,150
Rangoon Account (loss the – transfer
by fire) end
of the
year

Notes: (1) The value of the abnormal loss has been calculated as follows: Rs.
100 toys @ Rs.150 each 15,000
 179

100
Add: of freight and insurance 1,150
1000
(2) The value of closing stock has been calculated as follows:
100 toys @ Rs.150 each 15,000
100
of freight and insurance 1,150
1000
100
of customs duty 1,600
900
17,750
(3) The profit shows by the Profit and Loss Account is Rs.23,200 – Rs.16,150
or Rs.7,050. Had the abnormal loss not been taken into account, the credit
of Rs.16,150 to the Consignment Account and debit to the Profit and Loss
Account would have been omitted. In that case, the Consignment Account
itself would have shown a profit of Rs.7,050.
Normal Loss:
In certain cases, some loss is inherent and unavoidable. For instance, if a certain
quantity of coal is consigned, some of it is bound to be lost because of loading and
unloading and because of some of it turning into dust. Such inherent unavoidable loss is
known as normal loss and should be allowed while calculating the cost of the stock on
hand. Suppose 200 tonnes of coal are consigned at Rs.1,000 per tonne, freight being
Rs.10,000. By the end of the year, the consignee has sold 130 tonnes of coal and is left
with 65 tonnes of coal, the remaining 5 tonnes of coal having been lost due to normal
wastage. The closing stock of 65 tonnes will be valued at Rs.70,000; calculating being
made as follows:
Total Cost:
Invoice price of 200 tonnes = Rs.1,000 ×200 = Rs.2,00,000
Add: Freight Rs.10,000

Rs.2,10,000

Total quantity – normal wastage = 200 tonnes – 5 tonnes = 195 tonnes

 180

Considering Rs.2,10,000 to be the value of 195 tonnes, value of 65 tonnes =

Rs.2,10,000 × 65/195 = Rs.70,000.
(It will be a mistake to value the closing stock as Rs.2,10,000 × 65/200 or
Rs.68,250).
Illustration 3
The Swastik Oil Mills, Bombay consigned 10,000 kg of castor oil to Dass of
Calcutta on 1st January, 1990. The cost of the oil was Rs.23 per kg. The Swastik Oil Mills
paid Rs.20,000 for packing, freight and insurance. During transmit 250 kg. were
accidentally destroyed for which the insurers paid, directly to the consignors, Rs.4,500 in
full settlement of the claim.
Dass took delivery of the consignment on the 10th January. On 31st March, 1990.
Dass reported that 7,500 kg were sold at Rs.30, the expenses being on godown rent
Rs.3,000, on advertisement Rs.4,000 and on salesmen’s salaries Rs.6,400. Dass is entitled
to a commission of 3 per cent plus 1 ½ per cent del credere. A party which had bought
1,000 kg. was able to pay only 80% of the amount due from it.
Dass reported a loss of 100 kg. due to leakage. Assuming that Dass paid the
amount due by bank draft, show the accounts in the books of both the parties. The
Swastik Oil Mills Ltd. closes books on 31st March.
Solution:
BOOKS OF SWASTIK OIL MILLS, BOMBAY
Consignment to Calcutta Account
Dr. Cr.
Rs. Rs.
1990 Jan. To Goods Sent on 2,30,000 1990 By 6,250
1 Consignment Jan. 10 Abnormal
Account Loss (1)
” ” To Bank – Package, 20,000 By Dass – 2,25,000
Freight and Insurance Sale
proceeds
March 31 To Dass: Rs.
Godown Rent 3,000
Advertisement 4,000
Salesmen’s 6,400 13,400
Salaries
” ” To Dass:
Commission – 6,750
 181

Ordinary 3%
Del Credere 1 3,375 10,125
½%
” ” To Profit & Loss A/c 12,032
– transfer of profit
on consignment
2,85,557 2,85,557

Goods Sent on Consignment Account

Rs. Rs.
1990 March To Purchase
31 Account –
transfer
2,30,000 1990 Jan. 1 By Consignment 2,30,000
to Calcutta
Account

Abnormal Loss Account

Dr. Cr.
Rs. Rs.
1990 Jan. 10 To Consignment to 6,250 1990 March By Insurance 4,500
Calcutta Account 31 Co/Bank
By Profit and Loss 1,750
Account – transfer
6,250 6,250

Stock on Consignment Account

Rs. Rs.
1990 March To Consignment to 54,307 1990 March By Balance c/d 54,307
31 Calcutta Account 31
April, 1 To Balance b/d 54,307

Dass, Calcutta

Rs. Rs.
To
Consignment to By Consignment
1990 1990
Calcutta 2,25,000 to Calcutta
March 31 March 31
Account – Sales Account -
Proceeds
Godown Rent 3,000
Advertisement 4,000
Salesmen’s 6,400 13,400
Salaries
 182

By Consignment
to Calcutta
Account –
Commission:
Ordinary @ 3% 6,750
Del Credere @ 1 3,375 10,125
½%
By Bank – Draft 2,01,475
in settlement
2,25,000 2,25,000

Profit and Loss Account (relevant portion)

Rs. Rs.
To Abnormal Loss 1,750 By Consignment to 12,032
Account Calcutta Account (profit
on consignment)

Notes: (1) Abnormal Loss has been calculated as follows:

Rs.
Cost of 10,000 kg. @ Rs.23 2,30,000
Packing, Freight and Insurance 20,000

Total cost of 10,000 kg. 2,50,000

250
Hence, cost of 250 kg. = Rs.2,50,000 × = Rs.6,250
10, 000
Cost of Goods involved in Abnormal Loss = Rs.6,250
Cost of remaining 9,750 kg. = Rs.2,50,000 – Rs.6,250 = Rs.2,43,750
(2) The value of closing stock has been calculated as follows:
Quantity that reached Calcutta = 10,000 kg. – 250 kg. = 9,750 kg.
Quantity lost by normal leakage = 100 kg.
Quantity available for sale = 9,750 kg. – 100 kg. = 9,650 kg.
Total cost of 9,650 kg. = Rs.2,43,750
2,150
Hence, cost of 2,150 kg. = 2,43,750 × = Rs.54,307.
7, 650
 183

BOOKS OF DASS
Swastik Oil Mills, Bombay
Dr. Cr.
Rs. Rs.
1990 ? To Bank A/c – 1990 ? By Bank / 2,25,000
expenses: Consignment
Debtors (sales)
Godown Rent 3,000
Advertisement 4,000
Salaries 6,400 13,400
March 31 To Commission 6,750
A/c
” ” To Del Credere 3,375
Commission A/c
” ” To Bank – draft 2,01,475
2,25,000 2,25,000

Commission Account

Rs. Rs.
1990 To Profit & Loss 6,750 1990 By Swastik Oil 6,750
March A/c – transfer Mar. 31 Mills, Bombay
31

Del Credere Commission Account

Rs. Rs.
1990 To Profit & Loss 3,375 1990 By Swastik Oil 3,375
March A/c – transfer Mar. 31 Mills, Bombay
31

Consignment Bad Debts Account

Rs. Rs.
1990 To Consignment 6,000 1990 By Profit & Loss 6,000
March Debtors (20% of Mar. 31 Account – transfer
31 Rs.30,000)

Invoicing Goods Higher than Cost:

Sometimes, the consignee is sent the proforma invoice at selling (or near selling)
price. The main purpose is to keep the real profit a secret from the consignee. It must be
understood at the very outset that this cannot make any difference to the real profit (or
loss), since that is always the difference between price and cost. However, the entries
 184

made in this case are a little different from those if goods are invoiced at cost. The
difference in entries is in respect of goods sent on consignment and stock. When goods
are invoiced at a figure higher than cost, the following entries are made:
(1) On sending the goods:
Consignment Account ... Dr. with invoice value of
To Goods Sent on Consignment goods sent
Account
(2) On expenses being incurred by the consignor:
Consignment Account ... Dr. with expenses incurred
To Cash (or Bank)
(3) On the consignee sending Account Sales:
(a) For sales: ... Dr. with sale proceeds
Consignee’s Personal Account
To Consignment Account
(b) For expenses incurred by the consignee:
Consignment Account ... Dr. with expenses incurred
To Consignee’s Personal Account
(c) For commission:
Consignment Account ... Dr. with commission
To Consignee’s Personal Account payable to consignee
(4) For the stock lying unsold:
Stock on Consignment Account ... Dr. with the proportionate
To Consignment Account invoice value and those
expenses which add to
the value of goods.
(5) To bring the value of goods sent down to cost:
Goods Sent on Consignment Account ... Dr. with the difference
To Consignment Account between the invoice
value and cost.
(6) To adjust the value of stock lying with the
consignee:
Consignment Account ... Dr. with the difference
To Stock Reserve Account between the value of
stock computed as in
(4) and at cost plus
proportionate expenses

The whole idea of entries (5) and (6) is to really construct the account on cost
basis. Entry (1) was made at selling price. Entry (5) is made to bring it down to cost.
Similarly, entry (4) for stock is also on the basis of invoice price, whereas it should have
been on the basis of cost; entry (6) ensures that.
 185

The balance of the Goods Sent on Consignment Account will be transferred to the
Trading Account (in case of manufacturing concerns) or Purchases Account (in case of
trading concerns). The balance in the stock on Consignment Account will be carried
down. The balance in the Consignment Stock Reserve Account will also be carried down.
In the balance sheet, the Consignment Stock will appear on the asset side as reduced by
the balance in the Consignment Stock Reserve Account. Thus:
Balance Sheet
Rs.
Stock on Consignment ...
Less: Consignment Stock Reserve Account ...

Next year, the Stock on Consignment Account will be transferred to the debit side
of the Consignment Account and the Consignment Stock Reserve Account will be
transferred to the credit side of the Consignment Account.
Illustration 4
H Ltd. forwarded on 1st December, 1989, 100 bicycles to Kale of Bombay to be
sold on behalf of H Ltd. The cost of one bicycle was Rs.600 but the invoice price was
Rs.800. H Ltd. incurred Rs.2,000 on freight and insurance. Kale received the
consignment on 14th December, 1989 and accepted a 3 months draft drawn upon him by
H Ltd. for Rs.40,000. Kale paid Rs.1,050 as rent and Rs.250 as insurance and by 31st
March had disposed of 80 bicycles at Rs.820 each. Kale is entitled to a commission of 5
per cent on sales including a del credere commission of 1%. Kale sold 20 bicycles on
credit and was not able to recover sale proceeds of 2 bicycles because of insolvency of
the debtor.
Give journal entries to record the above transactions in the books of H Ltd. and of
Kale. Also give ledger accounts in the books of H Ltd. who close their accounts on 31st
March.
Solution:
 186

BOOKS OF H LTD.
Journal
Dr. Cr.
1989 Consignment to Bombay Account ... 80,000
Dec. 1 Dr.
To Goods Sent on Consignment Account 80,000
100 bicycles sent to Kale at Bombay on
consignment basis and invoiced at the rate of
Rs.800 each.
” Consignment to Bombay Account ... 2,000
Dr.
To Bank Account 2,000
Freight and insurance paid on the consignment
14 Bills Receivable Account ... 40,000
Dr.
To Kale 40,000
The Bill of Exchange accepted by Kale
1990 Bank Account ... 40,000
March 17 Dr.
To Bills Receivable Account 40,000
The amount received on G. Kale’s acceptance on
maturity
31 Kale ... 65,600
Dr.
To Consignment to Bombay Account 65,000
Sale proceeds of 80 bicycles at Rs.820 each as per
Account
Sales rendered by Kale
” Consignment to Bombay Account ... 1,300
Dr.
To Kale 1,300
Expenses incurred by Kale as per Account Sales
” Consignment to Bombay Account ... 3,280
Dr.
To Kale 3,280
Commission due to Kale at the rate of 5% on
Rs.65,000
” Goods Sent on Consignment Account ... 20,000
Dr.
To Consignment to Bombay Account 20,000
The difference between invoice price and cost –
Rs.200 per bicycle adjusted
” Consignment Stock Account ... 16,400
Dr.
To Consignment to Bombay Account 16,400
 187

Invoice price of closing consignment stock plus

proportionate expenses
” Consignment to Bombay Account ... 4,000
Dr.
To Consignment Stock Reserve Account 4,000
The ‘over-valuation’ of closing stock on
consignment, viz., Rs.200 per bicycle in respect of
20 bicycles put to Consignment Stock Reserve
March 31 Consignment to Bombay Account ... 11,420
Dr.
To Profit and Loss Account 11,420
Profit on consignment transferred to Profit and
Loss Account
” Goods Sent on Consignment Account ... 60,000
Dr.
To Trading Account 60,000
Transfer of balance of Goods Sent on
Consignment Account to Trading Account

LEDGER ACCOUNTS
Consignment to Bombay Account
Dr. Cr.
Rs. Rs.
1989 To Goods Sent on 80,000 1990 By Kale (sales 65,600
Dec. 1 Consignment A/c March proceeds)
(invoice value) 31
” 1 To Bank (freight 2,000 ” ” By Goods Sent 20,000
and insurance) on Consignment
A/c (loading)
March To Kale: ” ” By Consignment 16,400
31 Stock
Rent 1,050
Insurance 250 1,300
” ” To Kale 3,280
(commission)
” ” To Consignment 4,000
Stock Reserve
A/c
To Profit & Loss 11,420
A/c – transfer of
profit
1,02,000 1,02,000
 188

Goods Sent on Consignment Account

Rs. Rs.
1990 To Consignment to 20,000 1989 By Consignment to 80,000
March Bombay A/c Dec. 1 Bombay A/c
31 (difference between (invoice value)
invoice value and
cost)
” ” To Trading Account – 60,000
transfer
80,000 80,000

Consignment Stock Account

Rs. Rs.
1990 To Consignment to 16,400 1990 By Balance c/d 16,400
March Bombay Account Mar. 31
31
1990 To Balance b/d 16,400
Apr. 1

Consignment Stock Reserve Account

Rs. Rs.
1990 To Balance c/d 4,000 1990 By Consignment to 4,000
Mar. 31 Mar. 31 Bombay A/c
1990 By Balance b/d 4,000
Apr. 1

Bills Receivable Account

Rs. Rs.
1989 To Kale 40,000 1990 By Bank 40,000
Dec. 14 Mar. 17

Kale

Dr. Cr.
Rs. Rs.
1990 To Consignment to 65,600 1989 By Bills Receivable 40,000
Mar. 31 Bombay A/c (sale Dec. 14 A/c
proceeds)
Mar. 31 By Consignment to 1,300
Bombay A/c
(expenses)
 189

1989 By Consignment to 3,280

Mar. 31 Bombay A/c
(commission)
” ” By Balance c/d 21,020
65,600 65,600
1990 To Balance b/d 21,020
April 1
\Journal of Kale
Dr. Cr.
Rs. Rs.
1989 14 H Ltd. ... 40,000
Dec. Dr.
To Bills Payable Account 40,000
The draft drawn by H Ltd., accepted on receipt of
100 bicycles to be sold on their behalf
? H Ltd. ... 1,050
Dr.
To Bank 1,050
Payment of godown rent on the consignment
received from H Ltd.
? H Ltd. ... 250
Dr.
To Bank 250
Payment of insurance premium on the
consignment received from H Ltd.
? Consignment Debtors ... 16,400
Dr.
Bank ... 49,200
Dr.
To H Ltd. 65,000
Sale proceeds of 60 bicycles sold for cash and 20
bicycles on credit @ Rs.820 each on behalf of H
Ltd.
Mar. 17 Bills Payable Account ... 3,280
Dr.
To Commission Account 2,624
To Del Credere Commission Account 656
Commission @ 4% and del credere commission
@ 1% on sales affected on behalf of H Ltd.
Cash/Bank ... 14,760
Dr.
Consignment Bad Debts Account ... 1,640
Dr.
To Consignment Debtors 16,400
Amount received from consignment debtors and
bad debts written off
 190

Memorandum Columns
The illustration given above can, of course, be solved by using only the cost price
of goods sent on consignment and valuing the closing stock at cost in the very first
instance (instead of making entries first on the basis of invoice price and then adjusting
the difference between the invoice price and the cost). In such a case, it is advisable to
add one column on each side of the accounts concerned to show invoice value of goods
also. This column is meant for information and will not enter into accounts and will make
no difference in the profit or loss on the consignment. Ledger accounts in the above
illustration will appear as follows in the books of the consignor, H Ltd.
Consignment to Bombay Account
Dr. Cr.
Memo Amount Memo Amount
Date Particulars L.F. Date Particulars L.F.
Rs. Rs. Rs. Rs.
Dec. To Goods 80,000 60,000 Mar. By Kale 65,600 65,600
1 Sent on 31
Consignment
” ” To Bank 2,000 2,000 ” ” By Loss 4,580
1990 To Kale 1,300 1,300 ” ” By 16,400 12,400
Mar. Consignment
31 Stock
” ” To Kale 3,280 3,280
” ” To Profit & 11,420
Loss
Account
86,580 1,02,000 86,580 78,000

Goods Sent on Consignment Account

Rs. Rs. Rs. Rs.

1990 To Trading 80,000 60,000 1989 By 80,000 60,000
Mar. A/c – Dec. Consignment
31 transfer 1 to Bombay
A/c

Consignment Stock Reserve Account will not be prepared. There will be no

change in other accounts, nor will there be any change in the books of the consignee.
Consignment Stock Account
 191

Some concerns prefer not to mix cost of goods sent on consignment, sales and
expenses in the same account. In such a case, an account, called Consignment Stock
Account, is opened and debited by the cots of opening stock in the hands of the consignee
and the cost of goods sent. The closing stock in the hands of the consignee is carried
down as a balance to the next year (by entering the amount on the credit side as “By
Balance c/d”). The cost of goods lost in an abnormal manner is also entered on the credit
side of this account. The difference in the two sides will then be cost of goods sold. For
instance:
Consignment Stock Account
(all figures assumed)
Rs. Rs.
1989 To Balance b/d 11,000 1990 By Cost of 38,500
Apr. 1 Mar. 31 Goods Sold
(balancing
figure)
May 1 To Goods Sent on 39,600 ” ” By Abnormal 3,900
Consignment A/c Loss A/c
” ” By Balance c/d 8,200
(cost of stock)
50,600 50,600
1990 To Balance b/d 8,200
Apr. 1

Memorandum columns to record goods at invoice value may be added. The cost
of goods sold is then debited to another account, called Consignment Trading Account to
which sales are credited. Consignment Trading Account then discloses gross profit or
loss which is then transferred to Consignment Profit and Loss Account. Alternatively,
sales may be credited directly to Consignment Stock Account which will then reveal
gross profit or loss. In this case, it will not be necessary to have Consignment Trading
Account.
All expenses incurred are debited to Consignment Expenses Account. The
proportion of expenses applicable to goods lost abnormally is credited to the
Consignment Expenses Account (debiting the Abnormal Loss Account) and the
proportion of expenses applicable to unsold stock is carried down as a balance. The
remaining balance in this account is transferred to the Consignment Profit & Loss
 192

Account which will then reveal profit or loss on consignment, to be transferred to the
(General) Profit and Loss Account.
Illustration 5
The Cochin Consignment Account in the books of Ranaji of Bombay showed a
debit balance of Rs.1,500 representing the cost of 10 pieces of fancy goods on 1st April,
1990. The invoice value of each piece was Rs.175. On 1st May, 1990 Ranaji sent a further
consignment to Cochin of 40 pieces, costing Rs.160 each, invoiced proforma at Rs.180
each. The freight and other charges amounted to Rs.210. On 21st March, 1991, the
Cochin Agent sent an Account Sales showing that 8 pieces from the old stock realised
Rs.140 each and 25 pieces from the second consignment realised Rs.200 each and 15
pieces remained in stock unsold. Two pieces from the old stock, being unsaleable at
Cochin, were returned to Bombay, for which the Cochin Agent sent a separate debit note
for Rs.30 being expenses incurred by him as packing and freight.
The Cochin Agent is entitled to a selling commission of 10 per cent which covers
all out-of-pocket expense in respect of the consignment. Show the necessary accounts in
the books of the consigner, supposing that he closes his accounts on 31st March.
Solution:
(The usual method)
Cochin Consignment Account
Dr. Cr.
Memo Amount Memo Amount
Date Particulars Units Date Particulars Units
Rs. Rs. Rs. Rs.
1990 To 10 1,750 1,500 1991 By Cochin 8 1,120 1,120
Apr. Consignment Mar. Agent 25 5,000 5,000
1 Stock A/c 21
(opg.
balance)
May To Goods 40 7,200 6,400 ” By 15 2,779 2,479
1 Sent on 31 Consignment
Consignment Stock A/c
A/c
” ” To Bank – 210 210 ” ? By Goods 2 350 300
expenses Sent on
Consignment
(returns)
1991 To Cochin 612 612 ” By Loss 553
Mar. Agent – 31
 193

21 commission
” ? To Cochin 30 30
Agent –
exps. on 2
pieces
returned
” To Profit and 147
31 Loss A/c
50 9,802 8,899 50 9,802 8,899

Goods Sent on Consignment Account

1991 To Cochin 2 350

300 1991 By Cochin 40 7,200 6,400
Mar. ? Consignment Mar. Consignment
A/c – returns 21 A/c
” 31 To Trading 38 6,850 6,100
A/c – transfer
40 7,200 6,400 40 7,200 6,400

Cochin Consignment Stock Account

1990 To Balance 10 1,750 1,500 1990 By Transfer to 10 1,750 1,500

Apr. b/d Apr. Cochin
1 21 Consignment
A/c
1991 To Cochin 15 2,779 2,479 1991 By Balance c/d 15 2,779 2,479
Mar. Consignment Mar.
31 A/c 31
1991 To Balance 15 2,779 2,479
Apr. b/d
1

Cochin Agent Account

Dr. Cr.
1991 To Cochin 6,120 1991 By Cochin 612
Mar. 21 Consignment A/c Mar. 21 Consignment A/c
(commission)
” ? By Cochin 30
Consignment A/c
(expenses)
” 31 By Balance c/d 5,478
6,120 6,120
1991 To Balance b/d 5,478
April 1
(Alternative Method)
 194

Cochin Consignment Stock Account

Memo Amount Memo Amount
Date Particulars Units Date Particulars Units
Rs. Rs. Rs. Rs.
1990 To Balance 10 1,750 1,500 1991 By Cochin 8 1,120 1,120
Apr. b/d Mar. Agent (sales) 25 5,000 5,000
1 21
May To Goods 40 7,200 6,400 ” ? By Goods 2 350 300
1 Sent on Sent on
Consignment Consignment
A/c A/c
1991 To Cochin 220 920 ” 31 By Balance 15 2,700 2,400
Mar. Consignment c/d (Stock,
31 A/c – gross 15 × 180 and
profit 15 × 160)
50 9,170 8,820 50 9,170 8,820
1991 To Balance 15 2,700 2,400
April b/d
1

Cochin Consignment Account

Rs. Rs. Rs. Rs.

1990 To Bank (expenses) 210 210 1991 By Cochin 220 920
May 1 Mar. 31 Consignment Stock
A/c – gross profit
1991 To Cochin Agent 612 612 Mar. 31 By Balance c/d 79 79
Mar. 21 (commission) (proportionate
expenses on 15
pieces, Rs.210
×15/40)
” ? To Cochin Agent 30 30 Mar. 31 By Loss 553
(expenses on 2
pieces returned)
” 31 To Profit and Loss 147
A/c
852 999 852 999
1991 To Balance b/d 79 79
Apr. 1

Goods Sent on Consignment Account

Rs. Rs. Rs. Rs.

1991 To Cochin 2 350 300 1990 By Cochin 40 7,200 6,400
Mar. ? Consignment May Consignment
Stock A/c 1 Stock A/c
 195

Mar. To Trading 38 6,850 6,100

31 A/c –
transfer
40 7,200 6,400 40 7,200 6,400
(Another Alternative Method)
Cochin Consignment Stock Account

Rs. Rs. Rs. Rs.

1990 To Balance 10 1,750 1,500 1991 By Goods 2 350 300
Apr. b/d Mar. ? Consignment
1 A/c
May To Goods Sent 40 7,200 6,400 Mar. By Cost of 33 5,900 5,200
1 on 31 Goods Sold
Consignment (balancing
A/c figure)
” 31 By Balance 15 2,700 2,400
c/d
50 8,950 7,900 50 8,950 7,900

Cochin Consignment Trading Account

Rs. Rs. Rs. Rs.

1991 To Cost of 33 5,900 5,200 1991 By Cochin 33 6,120 6,120
Mar. Goods Sold Mar. Agent – Sales
31 21
” ” To Gross 20 920
Profit
33 6,120 6,120 33 6,120 6,120

Cochin Consignment Expenses Account

Rs. Rs. Rs. Rs.

1990 To Bank 210 210 1991 By Cochin 773 773
May 1 Mar. Consignment
31 Profit and
Loss A/c
1991 To Cochin 612 612 Mar. By Balance 79 79
Mar. Agent – 31 c/d
21 commission
Mar. ? To Cochin 30 30
Agent –
expenses
852 852 852 852
1991 To Balance 79 79
Apr. 1 b/d
 196

Cochin Consignment Profit and Loss Account

1991 To Cochin 773 773 1991 By Gross 220 920

Mar. Consignment Mar. Profit
31 Expenses Account 31
” ” To Profit and Loss 147 By Loss 553
Account – Profit
773 920 773 920

Practical Problems
1. Mr. Ram of Nagercoil consigned on 10th April, 50 cases of fruit juice, costing
Rs.50,000 to Fruit Stall, Trivandrum, for sale on commission of 10% on sale
proceeds. Ram paid freight, packing etc. amounting to Rs.800.
The goods arrived at Trivandrum on 11th April and the Fruit Stall paid clearing
charges Rs.300; Sundry expenses Rs.200, carriage Rs.150 and godown charges
Rs.100. On the same day, Fruit Stall paid an advance of Rs.10,000 to Ram of
Nagercoil.
The goods were sold by the Fruit Stall as under:
10 cases @ Rs.1,300 per case
17 cases @ Rs.1,290 per case
8 cases @ Rs.1,150 per case
Balance cases for Rs.20,500
On 25th April, Fruit Stall spent an Account Sale to Ram along with a draft for the
balance.
Prepare the Account Sales, Journal entries and Ledger Accounts in the books of
Ram and Fruit Stall.
[Ans: Net amount as per Account Sales: Rs.47,417
Profit Rs.6,617]
2. Mr. Krishna of Bombay consigned goods of the value of Rs.15,000 to their agent,
Mr. Gopal, at Madras Mr. Krishna paid freight, insurance and other charges
Rs.550 and drew a bill of exchange on Mr. Gopal for Rs.13,000 at three months.
The bill was discounted with the bankers at Rs.12,850. Mr. Krishna received
 197

account sales of the consignment for Rs.17,290 less agent’s commission Rs.710
and a bank draft for the balance.
Pass journal entries in the books of Mr. Krishna and Gopal.
(B.Com., Andhra)
[Ans: Profit Rs.1,590
Balance due Rs.4,290]
3. A consigned to B on 1st January 2004, 500 bales of cotton costing Rs.100 per bale.
Freight charges incurred in the consignment were Rs.5,000. A drew a bill on B for
Rs.50,000 payable on 30th June 2004 which B accepted. The bill was discounted
by A with his bankers on 31st January, 2004 at 12% p.a.
B rendered account to A on 31st March, 1004 showing sales of 300 bales for
Rs.80,000 and selling expenses of Rs.5,000. B’s commission was 10 per cent. On
this date B remitted to A the net amount due to him.
On 31st May, 2004 B sold the balance stock for Rs.30,000 after incurring
expenses of Rs.4,000. He remitted Rs.20,000 to A, the balance being treated as
commission earned by him. On 30th June 2004 the bill accepted by B was
dishonoured by him and the amount due to the bank was paid off by A along with
incident charges of Rs.200.
Pass journal entries in the books of A (including bank transactions).
(C.A Inter)
[Ans: Profit Rs.32,000
Balance due Rs.50,200]
4. The Cochin Consignment Account in the books of Ranaji of Bombay showed a
debit balance of Rs.1,500 representing the cost of 10 bicycles on 1st January. On
March 1, Ranaji sent a further consignment to Cochin of 40 bicycles costing
Rs.150 each. The freighted and other charges amounted to Rs.210. On 1st June,
the Cochin Agent sent an Account Sales showing that 8 bicycles from the old
stock realised Rs.140 each and 25 bicycles from the second consignment realised
Rs.200 each and 15 bicycles remained in stock unsold. Two bicycles from the old
stock being unsaleable at Cochin were returned to Bombay, for which the Cochin
Agent sent a separate debit note for Rs.30 being expenses incurred by him.
 198

The Cochin agent is entitled to a selling commission of 5 per cent which covers
all out-of-pocket expenses in respect of the consignment. Show the necessary
accounts in the books of the consignor, supposing that he closes his accounts on
30th June.
(B.Com., Punjab)
[Ans: Profit Rs.453
Balance due Rs.5,784]
5. Mahesh Oil Company consigned 200 tins of vegetable oil (one tin contains 10 kgs
of oil) to Manohar Dealer costing Rs.25 per kilogram. The consignors paid
Rs.4,000 for forwarding charges and Rs.6,000 for freight. 5 tins of oil were totally
damaged during transit and nothing could be realised from the Insurance
Company.
Manohar took delivery of the oil and sent an Account Sales showing that 150 tins
were sold for Rs.60,000. The expenses incurred by them were customs duty and
clearing charges Rs.3,580 and selling expenses Rs.1,000. They are entitled to a
commission of 5% on sales.
Manohar also reported that 10 kilograms of oil were lost due to leakage.
Show the necessary ledger accounts in the books of Mahesh Oil Company.
[Ans: Profit Rs.8,000; Amount payable by Manohar Rs.52,420;
Abnormal loss Rs.1,500; Consignment Stock Rs.14,080]
 199

JOINT VENTURE ACCOUNTS

Meaning
When two or more persons undertake to get involved in a particular venture other
than normal business activities, for a temporary period to which they contribute capital
and share profits or losses on some agreed ration, it is called joint venture and it ceases
with the completion of the task undertaken. It is regarded as temporary partnership
without a firm name. For example, if X and undertake the job of construction of a cinema
theatre for a sum of Rs.20,00,000 their coming together for this specific job can be
termed as joint venture and each one of them may be called a ‘Co-venturer’. The venture
will be over as soon as this transaction is over i.e., the construction of cinema theatre is
completed. Joint venture agreements can be made for similar other transactions, e.g., joint
consignment of goods, purchase and sale of properties and stocks of liquidated business,
underwriting shares or debentures of joint stock companies speculation in shares etc.
There are many reasons for a joint venture agreement. A joint venture is undertaken when
different persons have mutual advantages to tackle a particular business venture together,
without doing it separately. For example, an individual may be in a particular advantageous
position to buy goods exceptionally cheap but lacks capital. An associate may agree to
provide capital to finance the whole operation. When respective advantages of the parties
are people together, they can undertake a joint venture for mutual profit.

The main points of distinction between joint venture and partnership are as follows
(i) A partnership firm has a firm name, but a joint venture has none.
(ii) A partnership is a continuing business which is not restricted to any particular
venture. On the contrary, a joint venture is purely temporary in nature and the
same is restricted to a particular venture.
(iii) Persons carrying on partnership business are called ‘Partners’. However, persons
who carry on a joint venture are called ‘Co-ventures’.
(iv) Joint ventures are not governed by any specific statute of the Government,
whereas partnership are governed by the Indian partnership Act, 1932.
(v) Partnership concerns maintain their accounts on the ‘accrual’ basis, whereas a
Joint venture business follows the ‘Cash’ basis.
 200

(vi) Profit or loss is ascertained at the end of the year i.e., annually is case of partnership,
while in case of joint venture, profit or loss is ascertained on completion of the
venture.
(vii) A partnership can sue and be sued in its own name if it is registered. A joint
venture is, however, devoid of this feature.
(viii) Normally partners would not indulge in competing business but in case of
Co-venturers the chances of them being in competing businesses is very high. It is
a rule rather than an exception.
(ix) In case of partnership, the partners have joint and several liability, while in case of
joint venture, the liability depends on the mode of contract i.e., certain liabilities
may be joint and certain others may be individual.
(x) The doctrine of implied authority is not applicable to the Co-venturers.

Accounting for Joint Ventures

In accounting for a joint venture, it is necessary to identify the interest of the
several venturers. However, the distinguishing feature of joint venture accounting is the
measurement of profit on a transaction or a group of transactions, i.e., on the venture - not
the profit for a period. There are two possible ways of recording transactions: (I) Keeping
a separate set of books and (II) without keeping a separate set of books.

I. When a separate set of Books is kept

When the size of the venture is large and duration of the venture is protracted, a
completely separate set of books of accounts may be maintained under double entry
system for recording all joint venture transactions. Under this system, the following
accounts are commonly maintained in the ledger:
(i) Joint venture A/c; (ii) Co-venturer’s Accounts; (iii) Joint Bank A/c.
(i) Joint venture Account: This account is a nominal account in nature and is like profit
and loss account of the venture. It is debited with the goods purchased/contributed by the
Co-venturers for the venture as well as expenses incurred for the venture. It is credited
with the good sold on the venture or taken away by the Co-venturers. For ventures
continuing for more than one year, the account is further credited with the value of
closing stock. The final balance represents profit or loss on venture which is transferred
 201

to the Co-venturers’ accounts in the profit sharing ratio. It is interesting to note that no
separate accounts for purchases, Sales and expenses are maintained; they are directly
entered in the joint venture account.
(ii) Co-venture’s Account: These accounts are personal accounts in nature. They are
debited with the goods taken away from the venture as well as sales done for the venture
and proceeds kept by the venturers. They are credited with the contribution of the Co-
venturers as well as expense incurred by them for the venture. The profit or loss on
venture is credited or debited respectively in these accounts which are ultimately closed
by cash payment from the joint bank.
(iii) Joint Bank Account: This account is also personal account in nature. It is debited
with the amount contributed by the on-venturers as well as sale of goods in the venture. It
is credited with the purchase of goods for the venture as well as expenses incurred. It is
finally closed by payment to the co-venturers.

Model Journal Entries

(i) For cash contributed by each venturer towards the joint venture:
Joint Bank A/c Dr xxx
To Respective Co-venturer’s A/c
(ii) On making purchases for joint Venture operations:
(a) Cash purchases:
Joint Venture A/c Dr xxx
To joint Bank A/c
(b) Credit purchases:
Joint Venture A/c Dr xxx
To Creditor’s A/c
(c) For Materials supplied by a Venturer:
Joint Venture A/c Dr xxx
To Respective Venturer’s A/c
(iii) On incurring expenses for joint Venturer:
(a) When they are paid from joint funds:
Joint Venturere A/c Dr xxx
 202

To Joint Bank A/c

(b) When they are paid by Venturer:
Joint Venture A/c Dr xxx
To Respective Venturer’s A/c
(iv) On sale of goods or collection of contract ‘price’:
(a) When collected as joint funds:
Joint Bank A/c Dr xxx
To Joint Venture A/c
(b) When collected by a Venturer Privately:
Respective Venture’s A/c Dr xxx
To Joint Venture A/c
(v) For goods sold on credit:
Debtors A/c Dr xxx
To Joint Venture A/c
(vi) For payment made to the creditors
Creditors A/c Dr (with the amount due)
To Joint Bank A/c (with payment made)
To Joint Bank (with discount received)
(vii) For Payment received from debtors
Joint Bank A/c Dr xxx
(with amount received)
Joint venture A/c Dr xxx
(with discount allowed)
To Debtors A/c xxx
(viii) For bill accepted by a Co-venturer for Mutual Accommodation
Bills receivable A/c Dr xxx
To respective Co-Venturer A/c xxx
(ix) For discounting of the bill
Joint Bank A/c Dr xxx
(with the amount received)
Joint Venture A/c Dr xxx
(with discounting charges)
 203

To Bills Receivable A/c

(with the amount of the bill) xxx
(x) For goods taken over by a Co-venturer
Respective Co-Venturer’s A/c Dr xxx
To Joint Venture A/c xxx
(xi) For allocation of the result of the Venturer
If Profit
Joint Venture A/c Dr xxx
To each Venturer’s A/c xxx
(In the agreed ratio)
If Loss
Each Venturer’s A/c Dr xxx
To Joint Venture A/c xxx
(In the agreed ratio)
(xii) For settlement of accounts with the Co-venturers
Each Co-Venturer’s A/c Dr xxx
To Joint Bank A/c xxx
(for the Co-venturer with credit balance)
(Or)
Joint Back A/c Dr xxx
To Each Co-Venturer’s A/c xxx
(for the Co-Venturer, with debit balance)

ILLUSTRATIONS
I. Separate set of books or Joint Bank Account Method
Illustration 1
S and P entered into a joint venture and agreed to divided the profit as to S 60%
and P 40%. S and P contributed Rs.1,80,000 and Rs.1,20,000 respectively for carrying on
transactions relating to the venture. They opened a joint bank account with the above
contributions. They purchased three old state buses for Rs.2,40,000. S and P personally
paid Rs.45,000 and Rs.30,000 respectively for repairs and renewals. They purchased a
few tyres and tubes costing Rs.54,000. Two buses were sold for Rs.2,70,000 and the third
 204

one was taken by P at cost price. Pass necessary journal entries and prepare joint venture
account, joint bank account and close the accounts of the venture.
In the Books of Joint Venture
Journal entries
Date Particulars L.F. Dr. Cr.
Joint Bank A/c Dr 3,00,000
To S A/c 1,80,000
To P A/c 1,20,000
[Being the Capital contributed by covertures]
Joint Venture A/c Dr 2,40,000
To Joint Bank A/c 2,40,000
[Being purchase of Three Old buses]
Joint Venture A/c Dr 75,000
To S A/c 45,000
To P A/c 30,000
[Being repairs and renewals expenses paid by
S and P]
Joint Venture A/c Dr 54,000
To Joint Bank A/c 54,000
[Being Purchase of tyres and tubes]
Joint Bank A/c Dr 2,70,000
To Joint Venture A/c 2,70,000
[Being sale of two buses]
P A/c Dr 1,23,000
To Joint Venture A/c (W.N.I) 1,23,000
[Being the remaining one bus taken over by P
at cost]
Joint Venture A/c Dr 24,000
To S A/c (24,000 × 60%) 14,400
To P A/c (24,000 × 40%) 9,600
[Being profit of venture transferred to Capital
A/c of S & P in the ratio 6 : 4]
S A/c Dr 2,39,400
P A/c Dr 36,600
To Joint Bank A/c 2,76,000
[Being the final settlement between the
Co-Venturers]

Joint Venture A/c

Particulars Rs. Particulars Rs.
To Joint Bank A/c 2,40,000 By Joint Bank A/c 2,70,000
To S A/c 45,000 By P A/c (Bus taken) 1,23,000
To P A/c 30,000
To Joint Bank A/c 54,000
To S A/c (Profit) 14,400
 205

To P A/c (Profit) 9,600

24,000
3,93,000 3,93,000

Co. Venturer’s Accounts

S P S P
Particulars Particulars
Rs. Rs. Rs. Rs.
To Joint Venture A/c 1,23,000 By Joint Bank A/c 1,80,000 1,20,000
To Joint Bank A/c 2,39,400 36,600 By Joint venture A/c 45,000 30,000
(Bal.fig)
By Joint venture A/c 14,400 9,600
(Profit)
2,39,400 1,59,600 2,39,400 1,59,600

Joint Bank A/c

Particulars Rs. Particulars Rs.
To S A/c 1,80,000 By Joint Venture A/c 2,40,000
To P A/c 1,20,000 By Joint Venture A/c 54,000
To Joint Venture A/c 2,70,000 By S A/c 2,39,400
By P A/c 36,600
5,70,000 5,70,000

Working Note: Value of Bus taken over by P

Rs.
2, 40, 000 80,000
Purchase Price, =
3
54, 000 18,000
Add Cost of Tyres and Tubes =
3
75, 000 25,000
Add Cost of Repairs & Renewals =
3
1,23,000

Illustration 2
Das and Krishnan entered into a Joint venture sharing profits and losses as 3 : 2.
They opened a Bank A/c by depositing Rs.40,000 each.
Das purchased 800 kg. of an item @ Rs.60 per kg, and his expenses were
Rs.13,000. Krishnan purchased a second item of 10,000 kg. @ Rs.2.10 per kg. and his
expenses were Rs.11,000. Expenses were met from private sources and purchases were
paid from Bank Account.
Krishnan sold 600 kg. of the first item @ Rs.100 per kg. and his selling expenses
were Rs.5,500. Das sold 8,000 kg. of the second item @ Rs.5 per kg. and his selling
 206

expenses were Rs.6,000. All the sale proceeds were deposited in Bank Account and
expenses were met form private sources.
Write up necessary accounts in the books of the venture. Also prepare a Balance
sheet of the venture.
Solution
In the Books of Joint Venture – Ledger Accounts
Joint Venturer A/c
Particulars Rs. Particulars Rs.
To Joint Bank A/c (800 × 60) 48,000 By Joint Bank A/c 1,00,000
(600 × 100) + (8000 × 5)
To Das A/c (13,000 + 6,000) 19,000
To Joint Bank A/c (10,000 + 2.10) 21,000 By Stock on Joint venture:
To Krishnan A/c (11,000 + 5,500) 16,500 First item (W.N.) 15,250
To Profit transferred to Second item (W.N.) 6,400 21,650
3
Das : 17,150 × = 10,290
5
3 17,150
Krishnan: 17,150 × = 6,860
5
1,21,650 1,21,650

Co-Venturer’s Accounts
Das Krishnana Das Krishnan
Particulars Particulars
Rs. Rs. Rs. Rs.
By Joint Bank A/c 40,000 40,000
By Joint Venture A/c 19,000 16,500
Balance c/d 69,290 63,360 By Joint Venture A/c 10,290 6,860
(Bal.fig) (Profit)
69,290 63,360 69,290 63,360

Joint Bank A/c

Particulars Rs. Particulars Rs.
To Das A/c 40,000 By Joint Venture A/c 48,000
To Krishnan A/c 40,000 By Joint Venture A/c 21,000
To Joint Venture A/c (Sales) 1,00,000 By Balanced c/d 1,11,000
1,80,000 1,80,000

Balance Sheet
Liabilities Rs. Assets Rs.
Das A/c 69,290 Joint Bank 1,11,000
Krishnan A/c 63,360 Stock at Cost 21,650
1,32,650 1,32,650
 207

Working Note 1
Calculation of Closing Stock:
48, 000 +13, 000
Cost per unit of first item = = Rs.76.25
800 kgs

Stock of First item = 200 × 76.25 = Rs.15,250.

21, 000 +11, 000
Cost per unit of second item = = Rs.3.20
10, 000 kgs

Stock of second item = 2,000 × 3.20 = Rs.6,400.

Total Stock = 15,250 + 6,400 = Rs.21,650.

Illustration 3
A and B doing business separately as building contractors, undertake jointly to
construct a building for a newly started joint stock company for a contract price of
Rs.1,00,000 payable as to Rs.80,000 by instalments in cash and Rs.20,000 in fully paid
shares of the company. A banking account is opened in their joint names, A paying
Rs.25,000 and B Rs.15,000. They are to share profits and losses in the propositions of
2 1
and respectively. Their transactions were as follows:
3 3
Rs.
Paid wages 30,000
Bought materials 70,000
Materials supplied by A 5,000
Materials supplied by B 4,000
Architect’s fees paid by A 2,000
The contract was completed and the price (Cash and shares) duly received. The
joint venture was closed by ‘A’ taking up all the shares of the company at an agreed
valuation of Rs.16,000 and ‘B’ taking up the stock of materials at an agreed valuation of
Rs.3,000.
Show the necessary ledger Accounts.
Solution
In the Books of Joint Venture – Ledger Accounts
Joint Venture A/c
 208

Particulars Rs. Particulars Rs.

To Joint Bank A/c (Materials) 70,000 By Joint Bank A/c (Contract 80,000
Price)
To Joint Bank A/c (Wages) 30,000
To A A/c (Materials) 5,000 By Shares A/c (Contract price 20,000
in shares)
To B A/c (Materials) 4,000
To A A/c (Architect’s fees) 2,000 By B A/c (Stock taken over) 3,000
To Shares A/c (Loss) 4,000 By Loss transferred to
2
A : 12,000 × = Rs.8,000
3
1
B : 12,000 × = Rs.4,000 12,000
3
1,15,000 1,15,000
Co-venturer’s A/c
A B A B
Particulars Particulars
Rs. Rs. Rs. Rs.
To Join venture A/c - 3,000 By Joint Bank A/c 25,000 15,000
(Stock)
To Shares A/c 16,000 - By Joint Venture 5,000 4,000
A/c (Materials)
To Joint venture A/c 8,000 4,000 By Joint venture A/c 2,000 -
(Loss) (Architect’s fees)
To Joint Bank A/c (Bal. 8,000 12,000
fig)
32,000 19,000 32,000 19,000

Joint Bank A/c

Particulars Rs. Particulars Rs.
To A A/c 25,000 By Joint venture A/c 70,000
(Materials)
To B A/c 15,000 By joint venture A/c (wages) 30,000
To Joint venture A/c By A A/c (Final payment) 8,000
(contract price in cash) 80,000
By B A/c (Final payment) 12,000
20,000 20,000

Shares A/c
Particulars Rs. Particulars Rs.
To Joint venture A/c 20,000 By Joint venture A/c (Loss) 4,000
(Part of contract price)
By A A/c (Shares taken over) 16,000
20,000 20,000
 209

Illustration 4
Sheela and Mala entered into a Joint venture agreement to underwrite the
subscription of 50,000 equity shares of Rs.10 each issued by a newly formed Limited
company at a premium of Rs.2 per share. The underwriting commission is 4% as
provided in the Articles.
Public subscriptions were received for 38,000 shares and the underwriters duly
discharged their obligation by taking by taking up the remaining shares. Sheela and Mala
contributed Rs.80,000 each and deposited the same in a joint bank account. Sundry
expenses incurred out of the joint bank amounted to Rs.5,000. Underwriting Commission
was received by cheque.
Towards the end of the venture, 10,000 shares were sold by them in the open
market @ Rs.14 per share and the rest of the shares were taken up by them equally at
Rs.13 per share.
Profits of the venture were shared equally.
You are required to prepare the Joint Venture Account, Joint Bank Account and
the Personal Accounts of the Co-venturers recording the above mentioned transactions.
 210

Solution
In the Books of Joint Venture – Ledger Accounts
Joint Venture A/c
Particulars Rs. Particulars Rs.
To Joint Bank A/c 1,44,000 By Joint Bank A/c 24,000
(12,000 shares × 12) (underwriting commission –
6,00,000 × 4%)
To Joint Bank A/c 5,000 By Joint Bank A/c (Sale of 1,40,000
(Sundry expenses) shares-10,000 × 14)
To Profit transferred to :
1
Sheela : 41,000 × =20,500 By Sheela A/c
2
1 41,000 (1,000 shares × 13) 13,000
Mala : 41,000 × =20,500
2
By Mala A/c (1,000 shares × 13,000
13)
1,90,000 1,90,000

Co-Venturers’ Accounts
Sheela Mala Sheela Mala
Particulars Particulars
Rs. Rs. Rs. Rs.
To Joint venture 13,000 13,000 By Joint Bank A/c 80,000 80,000
A/c (Shares
takenover)
To Joint Bank A/c 87,500 87,500 By Joint venture A/c 20,500 20,500
(Bal.fig) (Profit)
1,00,500 1,00,500 1,00,500 1,00,500

Joint Bank A/c

Particulars Rs. Particulars Rs.
To Sheela A/c 80,000 By Joint venture A/c 5,000
(Sundry expenses)
To Mala A/c 80,000 By Joint venture A/c (Cost of 1,44,000
shares)
To Joint venture A/c (Sale of 1,40,000 By Sheela A/c 87,500
shares)
To Joint venture A/c 24,000 By Mala A/c 87,500
(underwriting commission)
50,000 shares × 12 = 6,00,000 ×
4%)
3,24,000 3,24,000
 211

Illustration 8
Adarji and Bomanji were partners in a joint venture sharing profits and losses in
the proportion of four-fifths and one-fifth respectively. Adarji supplies goods to the value
of Rs.50,000 and incurs expenses amounting to Rs.5,400. Bomanji supplies goods to the
value of Rs.14,000 and his expenses amount to Rs.800. Bomanji sells goods on behalf of
are joint venture and realises Rs.92,000. Bomanji is entitled to a commission of 5 per cent
on sales. Bomanji settles his account by bank draft. Give the journal entries and the
necessary accounts in the books of Adarji and only the important ledger accounts in the
book of Bomanji.
Solution:
BOOKS OF ADARJI
Journal
Dr. Cr.
Rs. Rs.
Joint Venture Account ... Dr. 55,400
To Trading Account 50,000
To Bank 5,400
Goods sent to Bomanji – to be sold by him on joint account
- and expenses incurred.
Joint Venture Account ... Dr. 14,800
To Bomanji 14,800
The value of goods supplied and expenses incurred by
Bomanji on joint Account
Bomanji ... Dr. 92,000
To Joint Venture Account 92,000
Sale proceeds on joint account received by Bomanji
Joint Venture Account ... Dr. 4,600
To Bomanji 4,600
The commission due to Bomanji on the joint venture sales
at the rate of 5%
Joint Venture Account ... Dr. 17,200
To Bomanji 3,440
To Profit and Loss Account 13,760
The profit of Rs.17,200 divided as to 1/5th to Bomanji and
4/5ths to self-transferred to Profit and Loss Account
Bank ... Dr. 69,160
To Bomanji 69,160
The draft received from Bomanji in settlement.
 212

LEDGER ACCOUNTS
Joint Venture Account
Dr. Cr.
Rs. Rs.
To Trading Account 50,000 By Bomanji (sales) 92,000
(goods)
To Bank (expenses) 5,400
To Bomanji:
Goods 14,000
Expenses 800
To Bomanji (commission) 4,600
To Bomanji (1/5th profit) 3,440
To Profit & Loss A/c 13,760
(4/5ths profit)
92,000 92,000

Bomanji

Dr. Cr.
Rs. Rs.
To Joint Venture Account 92,000 By Joint Venture Account:
(sales)
Goods 14,000
Expenses 800
By Joint Venture Account:
Commission 4,600
Profit 5,440
By Bank – bank draw in 69,160
settlement

92,000 92,000

BOMANJI’S LEDGER
Joint Venture Account

Dr. Cr.
Rs. Rs. Rs.
To Trading Account 14,000 By Bank (sales) 92,000
(goods)
To Bank (expenses) 800
To Adarji:
Goods 50,000
Expenses 5,400 55,400
To Commission 4,600
 213

Account
To Adarji (4/5th 13,760
profit)
To Profit & Loss A/c 3,440
(1/5th profit)
92,000 92,000

Adarji

Rs. Rs.
To Bank (bank draft in 69,160 By Joint Venture Account -
settlement)
Goods 50,000
Expenses 5,400
By Joint Venture Account – 13,760
Profit
69,160 69,160
Alternative Method:
An alternative to the above method is to make out the Joint Venture Account on
memorandum basis, just to find out the profit or loss make but not as part of ledger. The
goods sent or expenses incurred on joint venture are debited to the account of the other
party. The account may be styled as ‘... in Joint Venture Account’. No account is taken of
goods supplied or expenses incurred on joint venture by the other party. That account is
debited with one’s share of the profit made on the joint venture (ascertained by the
Memorandum Joint Venture Account), crediting the Profit and Loss Account. The other
party will be credited with one’s share off loss, if any.
The party receiving the sales proceeds on joint venture must credit the other party
with the full amount. The solution of the above illustration will be as follows:
Memorandum Joint Venture Account
Dr. Cr.
Rs. Rs.
To Adarji (goods) 50,000 By Bomanji (sale 92,000
proceeds)
To Adarji (expenses) 5,400
To Bomanji (goods) 14,000
To Bomanji (expenses) 800
To Bomanji (commission) 4,600
To Adarji (4/5ths profit) 13,760
To Bomanji (1/5th Profit) 3,440
92,000 92,000
 214

In the books of Adarji, the account with Bomanji will be as follows:

Bomanji in Joint Venture Account
Rs. Rs.
To Trading Account (goods) 50,000 By Bank (bank draft in 69,160
settlement)
To Bank (expenses) 5,400
To Profit & Loss Account 13,760
(4/5ths share of profit on joint
venture)
69,160 69,160

Illustration 9. Maneck and Nari decided to work in partnership the following scheme,
agreeing to share profits as under:-
Maneck to take 3/4ths share
Nari to take 1/4th share
They guaranteed the subscription at par of 10,000 shares of Rs. 10 each in Shele
Ltd. and to pay all expenses up to allotment in consideration of the Shela Ltd. issuing to
them 50,000 shares (other than 10,00,000 shares issued to public) of Rs. 10 each, fully
paid.
Maneck introduced cash into the business to meet the following expenses:
Rs
Stamp Charge and Registration Fees 48,500
Advertising Charges 28,500
Printing Charges of Memorandum of Association, Articles of
Association and prospectus, etc.
Nari introduced cash to meet the following expenses:-
Rent 37,000
Solicitor’s 13,000

Applications fell short of the 10,00,000 shares by 30,000 shares. Nari introduced
further cash on joint account for the said 30,000 shares and paid to the company.
The guarantee having been fulfilled, Shela Ltd. handed over the Maneck and Nari
50,000 shares.
 215

The partnership, sold all the shares. Nari received the sale proceeds of 20,000
shares amouniting Rs. 1,80,000 and Maneck of the remaining 60,000 shares amounting to
Rs. 5,00,000.
Give the necessary accounts in the books of both the parties.
(Adapted from C.A., Final)
Solution:
Dr. Memorandum Jolnt Venture Account Cr.
Rs. Rs. Rs.
To Maneck --- By Maneck --
Stamps, etc. 48,000 Sale proceeds of 60,000 shares 5,00,000
Advertising 28,500 By Nari
Printing 23,000 1,00,000
To Nari-- Sales proceeds of 20,000 1,80,000
Rent 37,000
Solicitor’s
Charges 13,000 50,000
To Nari – Subscription 3,00,000
of Unapplied for shares
To Maneck (3/4ths 1,72,500
profit)
To Nari (1/4th profit) 57,500
6,80,000 6,80,000

Note: The student should be careful to make no entry for the shares received from
the company as consideration for the guarantee.
In the books of Maneck, the account with Nari will be as follows:-
Dr. Nari in Joint Venture Account Cr.
Rs. Rs.
To Bank- By Bank
Stamp charges 48,500 Sale proceeds of 60,000 5,00,000
shares
Advertising 28,500
Printing 23,000
 216

To Profit and Loss Account – 1,72,500

2/3ths share of profit
To Bank 2,27,500
5,00,000 5,00,000

Maneck’s account in the books of Nari will be as follows:

Cr. Maneck in Joint Venture Account Dr.
Rs. Rs.
To Bank- By Bank
Rent 37,000 Sale proceeds of 20,000 1,80,000
shares
Solicitor’s charge 13,000
To Bank By Bank
Subscription of unapplied for 3,00,000 Settlement 2,27,500
shares
To Profit and Loss Account 57,500
1/4th share of profits
4,07,500 4,07,500

Separate Books
The method considered so far involves the maintenance of accounts in respect of
the joint venture in the books of the parties to the venture. Transactions can, however, be
recorded in a, completely separate set of books. This gencrally means that a separate joint
bank account is also opened. The parties first pay their contribution to joint funds into the
joint bank account and then payments on joint account are made out of the joint bank
account. Accounts of the parties concerned are also opened. Profit or loss on joint venture
is transferred in due proportions to the accounts of the parties who, at the close of the
venture, receive the amounts due to them from the joint bank account. The books are thus
closed.
Each party will maintain in its own books an account styled as “Joint Venture
Investment Account.” It will be debited with the amount invested (each or equivalent) by
the party concemed and with the profit due to it-in case of loss the party’s sharre will be
credited. The account will be credited with cash (or equivalent) received.
 217

Illustration 10. A and b doing business separately as building contractors, undertake

jointly to construct a building for a new joint stock company for a contract price of Rs.
10,00,000 payable as to Rs. 8,00,000 by instalments in cash and Rs. 2,00,000 in fully paic
shares of the company. A banking account is opened in their joint names, A paying in Rs.
2,50,000 and B Rs. 1,50,000. They are to share profit or less in the proportion of 2/3 and
1/3 respectively. Their transactions were as follows:-
Rs
Paid wages 3,30,000
Bought materials 6,70,000
Material supplied by A 45,000
Material supplied by B 24,000
Architect’s fees paid by A 20,000

The contract was completed and the price duly received. The joint venture was closed by
A taking up all the shares of the company at an agreed valuation of Rs. 1,70,000 and b
taking up the stock of materials at an agreed valuations of Rs. 17,000.
Show the necessary accounts.
Solution
Dr. Joint Bank Account Cr.
? Rs. ? Rs.
To A (contribution) 2,50,000 By Joint Venture Account -
To B (contribution) 1,50,000 Wages 3,30,000
To Joint Venture Materials 6,70,000
Account
(in instalments) 8,00,000 By A (settlement) 77,000
By B (settlement) 1,23,000
12,00,000 12,00,000
 218

Dr. Joint Venture Account Cr.

? Rs. ? Rs.
To A (contribution) By Joint Venture Account -
Wages 3,30,000 Cash received 8,00,000
Materials 6,70,000 By Shares Account 2,00,000
To A (materials) 45,000 By B (materials) 17,000
To B (materials) 24,000 By Less transferred to:
To A (Architect’s fees) 20,000 A (2/3) 68,000
To Shares Account 30,000 B (1/3) 34,000 1,02,000
11,19,000 11,19,000

Shares Account
? Rs. ? Rs.
To Joint Venture Account 2,00,000 By A 1,70,000
By joint Venture Account 30,000
transfer of loss on dispsal
2,00,000 2,00,000

A
? Rs. ? Rs.
To Shares Account 1,70,000 By Joint Bank Account 2,50,000
To Joint Venture 68,000 By Joint Venture Account 45,000
Account – loss materials
To Joint Bank Account 77,000 By Joint Venture Account 20,000
settlement architect’s fees
3,15,000 3,15,000
 219

B
? Rs. ? Rs.
To Joint Venture 17,000 By Joint Bank Account 1,50,000
Account – materials
To joint Venture 34,000 By Joint Venture Account 24,000
Account loss Materials
To Joint Bank Account 1,23,000
settlement
1,74,000 1,74,000

In his books, A will have a Joint Venture Investment Account, which will appear
as under.
? Rs. ? Rs.
To Bank (contribution) 2,50,000 By Shares Account 1,70,000
To Purchases Account By Profit and Loss Account 68,000
(less)
(materials used on joint 45,000 By Bank (settlement) 77,000
venture)
To Bank (architect’s 20,000
fees)
3,15,000 3,15,000
B’s Joint Venture Investment Account will be as follows:
Joint Venture Investment Account
? Rs. ? Rs.
To Bank (contribution) 1,50,000 By Purchases Account
To Purchases Account (Materials taken over) 17,000
(materials used on 24,000 By Profit and Loss Account 34,000
joint venture ) (less)
By Bank (settlement) 1,23,000
1,74,000 1,74,000
 220

Illustration 11. T Ltd. and S. Ltd. are both firms of shipping agents whose places of
business are Calcutta and Dacca respectively. The two companies decided to enter into
joint venture by exporting from Calcuta a consignment of furniture in look down form for
assembly and sale in Dacca where the currency is takka.
It was agreed that:
(1) The joint venture was to be financed by bills of exchange.
(2) As the rate of exchange between India and Bangladesh was fluctuating daily
around its nominal parity of 80 P to a takka, and there was talk of devaluation,
all bills of exchange should be covered by forward purchases of currency?
(3) The venture was to be completed by 30th September 1990 on which date all
bills of exchange were to mature.
(4) S Ltd. was to receive a del credae commission of 5% on sales and after
charging that commission, the profit remaining including any profit on
exchange was to be divided equally between the two venturers.
You ascertain that the following transactions took place:-
1990
1st July T Ltd shipped to S Ltd. a load of furniture which cost Rs. 10,000, the
transport, freight and insurance costs being Rs. 992
10th July S. Ltd. accepted a bill of exchange for Rs. 10,992 drawn by T Ltd. and
entered into a forward contract to buy Rs. 10,992 for delivery in Calcutta
on 30th Sept. 1990 at Re. 0.96 to a takka.
15th July T Ltd. discounted the bill of exchange with their bankers receiving Rs.
10,672.
30th July T Ltd. accepted a bill of exchange drawn by S Ltd. for Takka, 1,650 being
the cost incurred by them of import duty, dock charges and wages to
assemble the furniture and then entered into a forward contract to but
takka 1,650 for delivery in Dacca on 30th Sept. 1990 at Takka 1.10 to Re.1
th
15 August S. Ltd. discounted the bill of exchange with their bankers receiving Takka
1,580
20th August T. Ltd. received Rs. 800 in settlement of a claim for damages in transit.
 221

30th August S. Ltd. having received Rs. 800 in settelment of a claim for damages in
transit.
10th sep S. Ltd. having received Takka 10,000 in respect of sales, sent a bankers’
sight draft to T Ltd. for Takka 5,000 having paid their bankers Takka
5,025 for the draft.
th
15 Sep S. Ltd. received a notice that apurchaser of Takka 500 worth of fumiture
had been declared bankrupt and that there was little hope of any divident
being paid.
th
16 Sep T Ltd. received Rs. 4,960 from their bankers on collection of Takka 5,000
draft.
25th Sep S Ltd. having received a further Takka 11,500 in respect of sales and a
copy of T Ltd’s account with them, prepared the Joint Venture Account
and sent T. Ltd. a bankers’ sight draft in Takka and settled the venture
buying the necessary Takka at Rs. 0.85 to a Takka.
You are required to prepare Joint Account with S Ltd. Account in the books of T Ltd.
Solutions
Dr. Books of T Ltd. Cr.
Joint Venture Account with S Ltd.
Rs. Rs.
1990 1990
July 1 To Purchase Account- 10,000 July 1 By Bills Receivable 10,992
cost of furniture Account
To Bank (expenses) 992 Aug. 20 By Bank – loss in transit 800
July 15 To Discount Account Sept. 16 By Bank 4,960
on bill accepted by S Ltd. 320
July 30 To Bills Payable 1,500 Sept. 25 By Bank (amount 2
(Takka 1,650 at 1.10) received in settlement)
(Takka 3 at 0.85)
Sept. 30 To Profit and Loss 3,942
Account
(balancing figure)
16,754 16,754
 222

Working Notes:
Dr. Memorandum Joint Venture Account Cr.
(Prepared by S Ltd)
Rs Takka Takka
To cost of Furniture 10,000 By Sales 22,000
Transport Freight, Insurance 992
Discount on the Bills 320
11,312
Less Claim for Damages in transit 800
at Rs. 0.96 to 1 Takka 10,512 10,950
Takka
To Import Duty, Dock Charge 1,650
and Labour
accepted by T Ltd. 70 1,720
To Storage and Transport
Charge 500
To Bank Charges 25
To Del Credere Commission 1,100
To Profit: T Ltd. 3,853
3,852 7,705
22,000 22,000

Joint Venture Account with T Ltd. (in S Ltd.’s Ledger)

Takka Takka
To Bank-costs 1,650 By Bills Receivable 1,650
Account
To Bills Payable Account 11,450 By Sales Account 22,000
(Rs. 10,992 at 0.96)
To Discount Account 70
To Bank-storage, etc. 500
To Bank-sight draft and charges 5,025
To Profit and Loss Account 4,952
(Rs. 3,852 + Rs. 1,100
commission)
To Bank-balance remitted to T
Ltd.
23,650 23,650
 223

Illustration 12. On 1st January, 1990, patna. The cost of each watch is Rs. 120 but is
invoiced at Rs. 140. Expenses incurred by Bhalla were Rs. 200. A case containing 10
watches was lost against which Bhalla recovered, on 31st March 1990, Rs. 950 from the
railway authorities. Sinha paid Rs. 540 as freight and Rs. 300 for sales commission. etc.
Sinha also accepted a bill of exchange drawn by Bhalla for two months (beginning 1st
January, 1990) for Rs. 10,000. Bhalla got is discounted for Rs. 9,700. On 31st March
1990, Sinha reported that he had sold 75 watches at Rs. 180 per watch and remitted the
balance due from him.
After making up accounts on 31st March, 1990 it was decided that the relationship
between Bhalla and Sinha should be one of joint venture, the cost of the watch being
taken as Rs. 140, Sinha being entitled to 8% commission on sales and Bhalla being
entitled to interest at 16% p.a. on his outlay.
Prepare the accounts relating to the consignment in the books of Bhalla and give
the adjusting entries required on conversion of the consignment to joint venture.
Solution:
BOOKS OF BHALLA
Dr. Consignment to Patna Account Cr.
1990 Rs. 1990 Rs.
Jan. 1 To Goods Sent on 14,000 Mar. 31 By Sinha-Sales 13,500
Consignment Account
Jan. 1 To Bank-Expenses 200 Mar. 31 By Abnormal Loss Account 1,220
Mar. To Sinha- Freight 540 By Stock on Consignment 2,220
31 Account
Mar. To Sinha-Commission 2,025 By Goods sent on 2,000
31 Consignment Account –
Loading
Mar. To Consignment Stock 300
31 Reserver on 15 watches
@ Rs. 20
Mar. To Profit and Loss 1,875
31 Account
18,940 18,940
 224

Goods Sent on Consignment Account

1990 Rs. 1990 Rs.
Mar. To Consignment to 2,000 Jan. 1 By Consignment to Patna 14,000
31 Patna Account – Account
Loading
Mar. To Trading Account – 12,000
31 Transfer
14,000 14,000
Abnormal Loss Account
1990 Rs. 1990 Rs.
Mar. To Consignment to 1,220 Mar. 31 By Cash/Bank 950
31 Patna Account
By Profit and Loss Account 270
1,220 1,220
Sinha
1990 Rs. 1990 Rs.
Mar. To Consignment to 13,500 Jan. 1 By Bills Receivable Account 10,000
31 Patna Account
Mar. To Balance c/d 1,500 Mar. 31 By Consignment to Patna
31 (Advance on 15 unsold
watches)
Account 540
Freight 2,025
Commission 2,435
Mar. 31 By Cash/
15,000 15,000
1990
Apr. 1 By Balance b/d 1,500

On conversion into joint venture: -

Memorandum Joint Venture Account
Rs. Rs.
To Bhalla (goods) 14,000 By Sinha (Sales) 13,500
To Bhalla (expenses) 200 By Bhaalla (claim) 950
To Sinha (freight) 540 By Sinha (closing stock) 2,220
To Sinha (sales commission) 300 By Loss to:-
To Bhalla (discount on bill) 300 Bhalla (1/2) 115
To Sinha (8% commission on sales) 1,080 Sinha (1/2) 115 230
To Bhalla* (interest on outlay for 3 180
months)
To Sinha (stock reserve) 300
16,900 16,900
 225

Sinha now stands to get Rs. 1,080 (commission) less Rs. 115 (loss) or Rs. 965.
Previously, he received Rs. 1,725, i.e., commission less expenses bome by him.
Therefore, he has to be debited by Rs. 760. Bhalla will now credit the Trading Account
by Rs. 2,000 extra, at Rs. 140 per watch instead of Rs. 120 per watch. He has to credit his
account for discounts, Rs. 300 and interest, Rs. 180, Previously his profit was Rs. 1,875
less Rs. 270 (abnormal loss) or Rs. 1,605. Now there is a loss of Rs. 115. Therefore,
Profit & Loss Account should be debited by Rs. 1,720. The entry is:-
Rs. Rs.
Profit & Less Account ... Dr. 1,720
Sinha ... Dr. 760
To Trading Account 2,000
To Discount Account 300
To Interest Account 180
Adjustment of accounts on conversion of consignment to Patna to
joint venture with Sinha.

Note: It can be argues that as far as Sinha is concemed, no stock reserve is required-for
joint venture purposes, the cost of the watch is Rs. 140 each. In that case, the
Memorandum Joint Venture Account will show a profit of Rs. 70 and Sinha
would be entitled to Rs. 35 as his share. Bhalla, in that case, should create a stock
reserve equal to his share of the difference between the actual cost and Rs. 140;
the amount will be Rs. 150.
 226

Practical Problems
No Separate Books
1. A and B entered into a Joint Venture for the purchase and sale of an old house.
They purchased one old house for an amount of Rs.30,000, each contributing
Rs.15,000. A had to manage the disposal of the property. Since he was unable to
sell the property as a whole, he decided to demolish the house and sell the
property piece by piece. He sold the doors, windows and other wooden fittings to
the extent of Rs.12,000. The iron materials were sold at Rs.4,000. He could secure
an amount of Rs.2,300 through the sale of other miscellaneous items in the
building. He spent an amount of Rs.1,400 for demolishing the house. He also paid
certain sundry expenses Rs.350 in this connection. The site of building was sold
at Rs.25,000. Both the parties shared the profits to the extent of A 2/3 and B 1/3.
A paid his share by cheque.
Journalise the abovementioned transactions and prepare a Joint Venture Account
and B’s Account in A’s Ledger.
[Ans: Share of Profit: A = Rs.7,700 and B = Rs.3,850
B receive Rs.18,850]
2. C of Calcutta entered into a joint venture with A of Amritsar and M of Mirzapur
on the following arrangements:
(a) A would purchase blankets and M would purchase carpets, both of whom
would send the goods to C for sale.
(b) C would sell the goods at the best possible price and would send the
remittances to A and M in accordance with their respective dues.
(c) Profits would be shared equally between the parties.
A purchased 500 blankets at Rs.50 each and spent Rs.600 for freight etc. M
purchased 100 carpets at Rs.350 each and spent Rs.800 for freight, etc.
C sold all the blankets and carpets at Rs.75,000 and his expenses amounted to
Rs.1,600.
Show the Joint Venture Account and the Co-venturer’s Accounts in the books of
C.
(I.C.W.A.)
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[Ans: Profit Rs.4,000 each, A receives Rs.29,600 and B receives Rs.39,800]

3. A of Ahmedabad and B of Mumbai enter into a joint venture to consign 100 bales
of C at Kolkatta to be sold on their joint account. They agreed to share profits or
losses equally.
A sent 50 bales valued at Rs.60,000 and pays freight and expenses Rs.1,200. B
sent 50 bales valued at Rs.55,000 and pays expenses Rs.900.
All the bales reached Kolkata in time. However, 5 bales were found to have been
tampered with during the transit. A recovered Rs.3,000 from the insurance
company. C sold the remaining bales for Rs.1,35,000. He charged 3% as selling
commission and deducted Rs.1,500 towards expenses.
He remitted the balance amount to A by D/D on State Bank of India payable at
Ahmedabad.
Record the above transactions in the books of A and B.
(Institute of Bankers)
[Ans: Share of Profit: A = Rs.7,675 and B = Rs.7,675, C pays A Rs.1,29,450]
4. A of Bangalore and B of Madras entered into a joint venture for purchase and sale
of novelty goods. A agreed to finance the venture and B to undertake the sale of
goods on a commission of 7% on gross sales. Both agreed to share profits and
losses in the proportion of 3:2.
A had incurred an expenditure of Rs.40,000 for the purchase of goods and also
gave an amount of Rs.1,600 to B for meeting the selling expenses. B actually
incurred an expenditure of Rs.1,200 for Carriage and Insurance. In addition, he
also spent an amount of Rs.2,100 for selling the goods. He sold all the goods for
Rs.47,000. Both the parties settled their accounts.
Write up necessary Ledger Accounts in the books of both the parties for their
Joint Venture.
[Ans: Share of Profit: A – Rs.246, B – Rs.164. B pays to A – Rs.41,846]
5. Mohan and Nathan enter into a Joint Venture for the purchase and sale of second-
hand scooters, and to share profits and losses in the ratio of 3:2.
On 15th January, Mohan bought five scooters for Rs.43,000 and on 20th January,
he paid taxes and insurance Rs.1,600. On 31st January, he sold these scooters for
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Rs.58,000 out of which he remitted Rs.11,000 to Nathan, paying the balance into
his own bank account.
On 20th January, Nathan bought three scooters for Rs.36,000 and on 25th January,
he paid taxes and insurance Rs.1,400 and repairing charges amounting to
Rs.2,000. He sold one scooter on 2nd February for Rs.14,000 which he paid into
his own bank account. Mohan then took over the other scooters at a valuation of
Rs.26,000, and the venture was closed on 10th February.
Prepare the Memorandum Joint Venture and the Account of the Joint Venture
with Nathan in the books of Mohan.
(B.Com., Calcutta)
[Ans: Profit Rs.8,400 (Mohan) Rs.5,600 (Nathan)]