MC4104 - FUNDAMENTALS OF ACCOUNTING

UNIT II MANAGEMENT ACCOUNTING AND BOOK KEEPING

Meaning-Objectives of Management Accounting-Accounting System – Preparation of
Journal, Ledger, Cash Book and Trial Balance – Errors disclosed and not disclosed by
Trial Balance –Final Accounts - Ratio Analysis.

2.1. Meaning of Management Accounting:

Management accounting involves furnishing of the accounting data to the management
in such a way that it facilitates the decision making and improves the efficiency within
the organization and finally helps in achieving the goals of the organization.
Definitions – Management Accounting
• According to American Accounting Association: Management Accounting includes the
methods and concepts necessary for control through the evaluation and interpretations
of performances.
• According to Robert N. Anthony: Management Accounting is concerned with accounting
information that is useful to the management.
2.1.1 Objectives of Management Accounting:
 Assistance in Planning and Formulation of Future Policies
 Helps in the Interpretation of Financial Information
 Helps in Controlling Performance 4. Helps in Organizing
 Helps in the Solution of Strategic Business Problems
 Helps in Coordinating Operations
 Helps in Motivating Employees
 Communicating Up-to-date Information
 Helps in Evaluating the Efficiency and Effectiveness of Policies
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2.2 : Accounting System
The systems of recording transactions in the book of accounts are generally classified
into two types, viz. Double entry system and Single entry system.
Double entry system is based on the principle of “Dual Aspect” which states that every
transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each
transaction, therefore, involves two or more accounts and is recorded at different places
in the ledger. The basic principle followed is that every debit must have a corresponding
credit. Thus, one account is debited and the other is credited. Double entry system is a
complete system as both the aspects of a transaction are recorded in the book of
accounts. The system is accurate and more reliable as the possibilities of frauds and mis-
appropriations are minimised. The arithmetic inaccuracies in records can mostly be
checked by preparing the trial balance. The system of double entry can be implemented
by big as well as small organisations.
Single entry system is not a complete system of maintaining records of financial
transactions. It does not record two-fold effect of each and every transaction. Instead of
maintaining all the accounts, only personal accounts and cash book are maintained under
this system. In fact, this is not a system but a lack of system as no uniformity is
maintained in the recording of transactions. For some transactions, only one aspect is
recorded, for others, both the aspects are recorded. The accounts maintained under this
system are incomplete and unsystematic and therefore, not reliable. The system is,
however, followed by small business firms as it is very simple and flexible.
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2.3 : Preparation of Journal, Ledger, Cash Book and Trial Balance
Basic Terms in Accounting
1. Entity
Entity means a reality that has a definite individual existence. Business entity means a
specifically identifiable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited,
etc. An accounting system is always devised for a specific business entity (also called
accounting entity).
2. Transaction
A Transaction is an event involving some value between two or more entities. It can be a
purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It
can be a cash transaction or a credit transaction.
3. Assets
Assets are the property or legal rights owned by an individual or business to which
money value can be attached. According to Finny, “Assets are future economic benefits,
the rights, which are owned or controlled by an organization or individual”.
Assets can be classified as follows:
(a) Tangible assets: Tangible items are those which can be touched and their physical
presence can be noted/felt e.g. furniture, machine etc.
(b) Intangible assets: Intangible rights are those rights which one possesses but
cannot see e.g. Patent rights, copyrights, goodwill etc.
(c) Fixed Assets: Fixed assets are those assets which are purchased for the purpose of
operating the business and not for resale. Example: land and building, machinery and
furniture.
(d) Current Assets: Current assets are those assets of a business which are kept for
short-term with a purpose to convert them into cash or for resale. Example: bank,
debtors, unsold goods.
4. Liabilities
A liability means the amount which the business owes to outsiders, except the
proprietor. According to Finny and Miller, “Liabilities are debts, they are amounts owed to
creditors”. Liabilities can be classified as under:
(a) Long-term Liabilities: These are those liabilities which are payable after a
long-term (after 12 months). Example: long-term loans, debentures.
(b) Current liabilities: These are liabilities which are payable in the near future
(within a year). Example: creditors, bank overdraft, bills payable, outstanding expenses.
5. Capital
It is the amount invested in an enterprise by its owners e.g. paid up share capital in a
corporate enterprise. It also refers to the interest of owners in the assets of an
enterprise. It is the claim against the assets of the business. Any amount contributed by
the owner towards the business unit is a liability for the business enterprise. This liability
is also termed as capital which may be brought in the form of cash or assets by the
owner.
6. Expense
Costs incurred by a business in the process of earning revenue are called expenses. In
general, expenses are measured by the cost of assets consumed or services used during
the accounting period. The common items of expenses are: Depreciation, Rent, Wages,
Salaries, Interest, Cost of Heating, Light and water and Telephone, etc.
7. Income
The difference between revenue and expense is called income. For example, goods
costing Rs.25000 are sold for Rs.35000, the cost of goods sold, i.e. Rs.25000 is expense,
the sale of goods, and i.e. Rs.35000 is revenue and the difference. i.e. Rs.10000 is
income. In other words, we can state that
Income = Revenue - Expense.
8. Expenditure
Expenditure is the amount spent or liability incurred for the value received. Expenditure
is a payment for a benefit received. Expenditure may be categorized into:
(a) Capital Expenditure: Capital expenditure is the amount spent in purchasing
assets which will give benefits over a number of accounting periods. Capital expenditure
is that expenditure incurred to acquire fixed assets or its improvement.
(b) Revenue expenditure: Revenue expenditure is the amount spent to purchase
goods and services that are consumed during the accounting period. Revenue
expenditure does not increase the earning capacity but it maintains the earning capacity
in the current year. These expenses are shown on the debit side of the profit and loss
account.
9. Revenue
Revenue means the amount, which as a result of operations, i.e. sale of goods or
services, is added to the capital. Revenue is the inflow of assets, which results in an
increase in the owner’s equity. Other items of revenue common to many businesses are:
Commission, Interest, Dividends, Royalties, and Rent received, etc. Revenue is also
called Income.

10. Debtor
Persons who are to pay for goods sold or services rendered or in respect of contractual
obligations. It is also termed as debtor, trade debtor, and accounts receivable. Example:
when goods are sold to a person on credit that person is called debtor.
11. Creditor
Creditors are persons who have to be paid by an enterprise an amount for providing
goods and services on credit. Example: Mohan is a creditor of a firm when goods are
purchased on credit from him.
12. Goods
Goods are the items forming part of the stock-in-trade of an enterprise, which are
purchased or manufactured with a purpose of selling. Example: Enterprise dealing in
home appliances such as T.V, fridge, Air conditioner, etc is goods.
13. Costs
It is the amount of expenditure incurred on or attributable to a specified article, product
or activity.
14. Gains
Gain is a profit that arises from transactions which are incidental to business such as sale
of investments or fixed assets at more than their book values. Gain may be operating
gain or non-operating gain.
15. Purchases
This term is used for goods to be dealt-in i.e. goods are purchased for resale or for
producing the finished products which are meant for sale. Goods purchased may be Cash
Purchases or Credit Purchases. Thus, Purchase of goods is the sum of cash purchases
and credit purchases.
16. Sales
Sales are total revenues from goods or services provided to customers. Sales may be in
cash or in credit.
17. Profit
It is the excess of revenue of a business over its costs. It may be gross profit and net
profit. Gross profit is the difference between sales revenue and the proceeds of goods
sold and/or services provided over its direct cost of the goods sold. Net profit is the profit
made after allowing for all types of expenses. There may be a net loss if the-expenses
exceed the revenue.
18. Drawings
It is the amount of money or the value of goods which the proprietor takes for his
personal use. Drawing reduces the investment of the owners.
19. Voucher
Voucher is an evidence of a business transaction. Examples of voucher are: cash memo,
invoice or bill.
20. Book Value
This is the amount at which an item appears in the books of accounts of financial
statements.
Double Entry Book Keeping
The double entry system of bookkeeping can be traced back to early middle age and if
records are to be believed, it’s been in practice even before the 12th century. The man
behind this popular method of booking was the Italian mathematician Luca Pacioli who
first published his comprehensive thesis on the principles of Double Entry System in
1494.
Since then, the double entry system is widely practised, and it made it possible for the
business to record all sorts of business transactions, unlike only cash events.
Today, the double entry system of accounting is one of the widely used methods of
booking as it proves to be the most accurate method of record keeping. You can talk
about the history of double entry system for hours, that how the system has evolved
over the years but let’s keeps it simple and understands how double entry system works.
What is Double Entry Accounting System?
Double entry system of booking is an accounting system which recognizes the fact that
every transaction has two aspects and both aspects of the transaction are recorded in
the books of accounts. In other words, it recognizes that in order to receive some value,
an equal value needs to be given.
Confused! Think like this, if you are buying a computer by paying 20,000 Rs in cash.
If you closely look at the above example, the transaction as two parts in it: You are
receiving a computer which can be called as receiving aspect. The second one, you are
paying cash which can be termed as giving aspect.
Now when you apply the double entry system of bookkeeping, it recognizes and records
both the aspect; receiving and giving aspect in the books of accounts.
Considering the above definition, every transaction will have at least two accounts which
are impacted. In the above example, computer is one account and cash is the other
account.
So, when books are maintained using double entry accounting system, every transaction
involves a debit entry in one account and credit entry in another account. This because,
you have an account which receives the value and another account which has given the
value.
When you look at the above example, computer account will be debited since it has
received the value (inward) and cash account will be credited because it has given the
value (outward).
To summarize, under double entry accounting system, in every transaction an account is
debited, and some other account is credited.
Before you record, find out two accounts affected by a particular transaction and next,
out of these two accounts which account is required to be debited and credited.
Features of Double Entry Accounting system
1. A transaction has two-fold aspects i.e. one giving the benefit and the other
receiving the benefit.
2. A transaction is divided into two aspects, Debit and Credit. One account
needs to be debited and the other is to be credited.
3. Every debit must have its corresponding and equal credit.

Advantages of Double Entry Accounting system

 As both the personal and impersonal accounts are maintained under the
double entry system, both the effects of the transactions are recorded.
 It assures arithmetical accuracy of the books of accounts, for every debit, there is
a corresponding and equal credit. This is arrived by preparing a trial
balance periodically or at the end of the financial year.
 Prevents and minimizes frauds. Frauds can be even detected early.
 Errors can be checked and rectified easily.
 The outstanding balances of receivables and payables are determined easily
since the personal accounts are maintained.
 Businesses can compare the financial position of the current year with that of
the past year/s.
 Helps to justify the standing of business on the valuation date in comparison with
the previous years' purchase, sales, and stocks, incomes, and expenses
with that of the current year figures.
 The calculated net operating results can be ascertained by preparing the trading
and profit and loss A/c for the year ended and the financial position
can be ascertained by the preparation of the balance sheet.
 Government can easily decide on the tax to be calculated on the business's
net earnings.
 Outsiders and stakeholders like suppliers, banks, holders of equity, etc take a
proper decision regarding grants of credit or loans or subscribing for the shares.

Understanding Debit and Credit just got Easier

Got stuck in figuring what to Debit and Credit? Yes, like some of you, even I used to get
puzzled as well in my early days. By the time I would settle my understanding on golden
rules of accounting: debit and credit, one or the other scenarios would again lead me
back to zero and start my understanding afresh.
After following some of logics below, I settled my understanding on debit and credit and
after that, I got it right every time. Let’s clear the confusion once and for all!
Instead of beginning with golden rules of accounting, let me register debit and credit as
shown in the table.

Debit Credit

Positive (+) Negative (-)

Come Go

Receive Give

Receiver Giver

Deposit Withdraw

Increasing Decreasing

From the above table, it’s clear that it is neither a theory nor a puzzling topic anymore -
it’s just logic and reasoning. To summarize - Debit is all about incoming/deposits and
Credit is all about outgoing/withdrawal.
For example, you purchased a computer by paying 25,000 by cash. Here, you are
receiving a computer so it should be debited, and cash should be credited since it is
going out.
Types of Accounts
For all those who are still curious to know the definition of a real account, personal
account and nominal account, here is the brief about it.

Account
Definition Examples
Type

Real accounts are those accounts which Plant and Machinery, Stock, Cash,
are related to assets or properties or Vehicle, Goodwill, Trademark,
Real Account
possessions. It includes both tangible Patents & Copyrights, Intellectual
and intangible. Property Rights etc.
 This includes all accounts related persons
Personal Mr Ram’s a/c, A&B Bros trading
consist of natural, artificial and
Account a/c, salary payable etc.
representative accounts.

Nominal accounts are those accounts Wages, Salaries, Rent, Travelling

Nominal
that are related to expenses or losses Expenses, Commission received,
Account
and incomes or gains. Loss by fire etc.

Golden Rules of Accounting

With the above understanding, let us introduce the golden rules of accounting. Golden
rules of accounting refer to a set of pre-defined principles which guides the sequential
way of recording the transactions using double entry system of bookkeeping.

Golden Rules of Accounting

Real Account Personal Account Nominal Account
Debit What Comes In The Receiver All Expenses & Losses
Credit What Goes Out The Giver All Income & Gains
Looks bookish? Let us make it simpler with What, Who and Why -

What (Real) Who (Personal) Why (Nominal)

Examples Goods, Furniture, Firm, Person, Interest, Commission,
Money Company Discount
Debit Comes In Receiver For expenses
Credit Goes Out Giver From Income
Any scenarios of accounting entry must fall under any of these three broad categories
– What (Real), who (Personal) and Why (Nominal).
So basically, it covers why (Nominal) a transaction has happened; what (Real) commodi
ties are coming in or going out and who (Personal) is receiving or giving.
Going by this logic, the above transaction of computer purchase in simple language
becomes –
 Received What?
Computer, hence debited
 Paid What?
Cash, hence credited
Let’s take one more example to be sure about it. Paid electricity bill of 5,000 in cash.
 Why money has been paid?
For Electricity expenses, hence debited.
  Paid What?
Cash, hence credited
Next time you are confused about debit and credit, just remember ‘What, Who and Why’
Example of the Golden Rules of Accounting
In the below example, we have listed different type of transactions along with the type of
accounts and details of debit/credit after applying the accounting rules.

Sl Accounting Transaction Accounts Type of Debit/ Credit

No. Involved account
1. Mr Sham started a business Cash A/c Real Debit what comes in
with Rs.60,000 cash. Capital A/c Personal Credit the giver
2. Purchased goods for cash Purchase A/c Real Debit what comes in
Rs.25,000 Cash A/c Real Credit what goes out

3. Sold goods for cash Cash A/c Real Debit what comes in
Rs.20,000 Sales A/c Real Credit what goes out
( Inventory sold )
4. Purchased goods from Mr Purchase A/c Real Debit what comes in
Bhasha for cash Rs.10,000 (Inventory Real Credit what goes out
Purchased)
Cash A/c
5. Sold goods to Mr Sam Mr Sam A/c Personal Debit the receiver
Rs.8,000 on credit. Sales A/c Real Credit what goes out
( Inventory sold )
6. Purchased furniture for Furniture A/c Real Debit what comes in
Rs.6,000 Cash A/c Real Credit what goes out
7. Paid rent Rs.1,500 Rent A/c Nominal Debit expenses
Cash A/c Real Credit what goes out
8. Paid wages Rs.10,000 from Wages A/c Nominal Debit expenses
Bank Bank A/c Real Credit what goes out
9. Purchased goods from Ali Purchase A/c Real Debit what comes in
Ltd on credit ( Inventory Personal Credit the giver
purchased )
Ali Ltd
10. Dividend received in cash Cash A/c Real Debit what comes in
Dividend Nominal Credit income
11. Salary outstanding Salary A/c Nominal Debit expenses
 Salary Representa Credit the representative
Outstanding A/c tive personal account
personal

I. JOURNAL
A Journal is the basic book of prime entry in which transactions are first recorded in the
books of accounts in chronological order.
Journal is a book employed to classify or sort out transaction in a form convenient for
their subsequent entries in Ledger Journal keeps record of daily financial transaction.
It is also known as Book of Original Entry.
When the Journal transactions are recorded in the Journal it becomes Journal entry.
Journal entries consist of the name of debit and name of credit involved in the financial
transaction with a brief narration.

Specimen/ Format/ Ruling/ Proforma of Journal is given below-

Journal of ____________________________________________________

Date Particulars L.F. Debit Credit

AmountRs. Amount

Year Name of the account debited Dr.

Month/ To Name of account credited
Date (Being……………. )
Explanation of columns:
1) Date: In this column of Journal records of the year, month and date of every
transaction is written. The year should be written at the top and below that
the month and date should be written.
2) Particulars: In particular column the Journal entry is passed in three
parts
i) Debit A/c : It records the name of the account to be debited
ii) Credit A/c : It records the name of the account to be credited
This is decided by applying the rules of Debit and Credit. The account to be debited is
always written first. The word “Dr” is written in front of debited account just near L.F.
Column. The account to be credited is written on the next line beginning with the word
“To” after leaving short space just near date column. Narration is to be written just
below the journal entry.
iii) “Narration is a brief explanation of the Journal Entry”. It is written in the
bracket and begins with word, ‘Being’
3) Ledger Folio Number: It means page number of the ledger.
The transactions entered in the journal are posted to the Ledger. In this column the page
number should be recorded against each and every account at the time of posting in
ledger. The Folio number may be written in ‘red ink’ to distinguish them from the
amount
4) Debit Amount: In this column the amount of debit account is written.
5) Credit Amount : In this column the amount of credit account is written
Casting of Journal: At the end of each page of Journal, the total of debit amount and
credit amount column is taken to check arithmetical accuracy of the transaction. The
totals of both the columns must be equal.
After recording Journal Entries, at the end of each page the total of amount columns is
carried forward to the next page by writing the words Total c/f in particulars column. The
next page will begin with the total brought forward from previous page, by writing the
words Total b/f, on the last page of journal ‘Grand Total’ is casting.
Journalising:
The process of entering or recording the transaction in a Journal is called as journalising.
Steps for Journalising:
1) Find out the accounts involved in a particular transaction.
2) Find out the types of account involved.
3) Apply the rules of debit and credit for each of the accounts involved.
4) Find out the account to be debited and the account to be credited.
5) Record the date of the transaction in the “Date column”.
6) The name of the account to be debited is to be written in “Particulars”
column. On first it is written close to the date column and name of the
account to be credited is written on the next line after leaving short space
from the date column.
7) The word ‘Dr.’ is written against the name of the account debited and the
name of the account to be credited is preceded by the word ‘To’.
8) Write the amount of transaction in debit column and credit column.
9) A brief explanation of the entry is given in the bracket just below the
entry.
10) After each Journal entry a line is to be drawn in particulars column only to
keep the entries of the transactions distinctly separate from each other.
11) L.F.(Ledger Folio) The page number on which the particular account is
opened in the Ledger is stated under the L.F. Column to facilitate easy
reference.

PROCESS OF JOURNALISING:
Preparation of a Journal requires following steps to be followed:
(a)Identify the Accounts: First of all, the affected accounts of an accounting
transaction are identified. For example, if the transaction of “goods worth
Rs.10000 are purchased for Cash”, then ‘Purchases’ A/c and ‘Cash’ A/c are the two
affected accounts.
 (b)Recognize the type of Accounts: Next we determine the type of the affected
accounts e.g. in the above case, ‘Purchases A/c and Cash A/c are both asset
accounts.
(c) Apply the Rules of Debit and Credit: Then the rules of ‘debit’ and ‘credit’ are
applied to the affected accounts.

ILLUSTRATION:
Enter the following transactions in the Journal of Tarun and sons.
2006 Amount (Rs)
January 1 Tarun started business with cash 1,00,000
January 2 Goods purchased for cash 20,000
January 4 Machinery Purchased from Vibhu 30,000
January 6 Rent paid in cash 10,000
January 8 Goods purchased on credit from Anil 25,000
January 10 Goods sold for cash 40,000
January 15 Goods sold on credit to Gurmeet 30,000
January 18 Salaries paid 12,000
January 20 Cash withdrawn for personal use 5,000

SOLUTION:
JOURNAL OF TARUN AND SONS for the month of January 2006
DATE PARTICULARS L.F. Dr. Cr.
AMOUNT Amount
(Rs) (Rs)

2006
January 1 Cash A/c Dr. 1,00,000
To Tarun Capital A/c 1,00,000
(Being Capital brought in by Tarun)

January 2 Purchase A/c Dr. 20,000

To Cash A/c 20,000
(Being goods purchased for cash)

January 4 Machinery A/c Dr. 30,000

To Vibhu’s A/c 30,000
(Being machinery purchased from
Vibhu on credit)
 January 6 Rent A/c Dr. 10,000
To Cash A/c 10,000
(Being Rent paid)

January 8 Purchases A/c Dr. 25,000

To Anil’s A/c 25,000
(Being Capital brought in by tarun)

January Cash A/c Dr. 40,000

10 To Sales A/c 40,000
(Being goods sold for cash)

January Gurmeet’s A/c Dr. 30,000

15 To Sales A/c 30,000
(Being goods sold on credit to
Gurmeet)

January Salaries A/c Dr. 12,000

18 To Cash A/c 12,000
(Being salaries paid)

January Drawings A/c Dr. 5,000

20 To Cash A/c 5,000
(Being cash withdrawn by the owner
for personal use)
Illustration-2
Journalise the following transactions in the books of Sankalp General Stores
2019
July 1 Started business with Cash Rs. 1,00,000, Stock of Goods worth Rs. 50,000, and
Computer Rs. 50,000.
4 Purchased goods from Karina on credit Rs. 10,000 at 5% trade discount.
10 Sold goods to Priyanka Rs. 20,000 at 10% trade discount.
13 Paid into State Bank of India Rs. 50,000.
15 Goods worth Rs. 2,000 lost by theft.
18 Paid for Rent Rs. 4,000.
20 Received Cash of Rs. 17,500 from Priyanka in full settlement of her account.
25 Paid for Stationery purchased Rs. 8,000.
Solution:
Journal of Sankalp General Stores for the month of July 2019

Date Particulars L.F. Debit Credit

Amount Amount
(Rs.) (Rs.)
2017
July 1 Cash A/c Dr. 1,00,000
 Stock of Goods A/c Dr. 50,000
Computer A/c Dr. 50,000
To Capital A/c 2,00,000
(Being started business with Cash, Goods
and Computer)
4 Purchases A/c Dr. 9,500
To Karina's A/c 9,500
(Being purchased goods from Karina on
credit at 5% trade discount)
10 Priyanka's A/c Dr. 18,000
To Sales A/c 18,000
(Being goods sold to Priyanka on credit at
10% trade discount)
13 State Bank of India A/c Dr. 50,000
To Cash A/c 50,000
(Being cash deposited into State Bank of
India)
15 Loss by theft A/c Dr. 2,000
To Goods Lost A/c or 2,000
Purchases A/c
(Being goods lost by theft)
18 Rent A/c Dr. 4,000
To Cash A/c 4,000
(Being paid for Rent)
20 Cash A/c Dr. 17,500
Discount Allowed A/c Dr. 500
To Priyanka's A/c 18,000
(Being cash received from Priyanka and
discount allowed)
25 Stationery A/c 8000
Dr. 8,000
To Cash A/c
(Being paid for stationery)
Total 3,09,500 3,09,500

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II. LEDGER
Each transaction affects two accounts. In each account transactions related to that
account are recorded. For example, sale of goods taking place number of times in a year
will be put under one Account i.e. Sales Account.
All the accounts identified on the basis of transactions recorded in different
journals/books such as Cash Book, Purchase Book, Sales Book etc. will be opened and
maintained in a separate book called Ledger.
So a ledger is a book of account; in which all types of accounts relating to assets,
liabilities, capital, expenses and revenues are maintained. It is a complete set of accounts
of a business enterprise.
Features of ledger:
(a)Ledger is an account book that contains various accounts to which various business
transactions of a business enterprise are posted.
(b) It is a book of final entry because the transactions that are first entered in the
journal or special purpose Books are finally posted in the ledger. It is also called
the Principal Book of Accounts.
(c) In the ledger all types of accounts relating to assets, liabilities, capital, revenue and
expenses are maintained.
(d) It is a permanent record of business transactions classified into relevant accounts.
(e) It is the ‘reference book of accounting system and is used to classify and
summarize transactions to facilitate the preparation of financial statements.
Types of Ledger
In large scale business organisations, the number of accounts may run into hundreds. It
is not always possible for a businessman to accommodate all these accounts in one
ledger. They, therefore, maintain more than one ledger.
1. Assets Ledger: It contains accounts relating to assets only e.g. Machinery accounts,
Building account, Furniture account, etc.
2. Liabilities Ledger: It contains the accounts of various liabilities e.g. Capital (Owner or
partner), Loan‘account, Bank overdraft, etc.
3. Revenue Ledger: It contains the revenue accounts e.g.. Sales account, Commission
earned account, Rent received account, interest received account, etc.
4. Expenses Ledger: It contains the various accounts of expenses incurred, e.g. Wages
account, Rent paid account, Electricity charges account, etc.
5. Debtors Ledger: It contains the accounts of the individual trade debtors of the
business. Individuals, firms and institutions to whom goods and services are sold on
credit by business become the ‘trade debtors’ of the business.
6. Creditors Ledger: It contains the accounts of the individual trade Creditors of the
business. Individuals, firms and institutions from whom a business purchases goods and
services on credit are called ‘trade creditors’ of the business.
7. General Ledger: It contains all those accounts which are not covered under any of
the above types of ledger. For example Landlord A/c, Prepaid insurance A/c etc.

Contents of Ledger
Ledger is a bound book which contains several pages. Each page of a ledger is serially
numbered. For each account separate page is allotted. The page number of the ledger is
called as 'Ledger Folio' (L.F.) Each ledger account is divided into two sides. The left side
is known as debit side and the right side is known as credit side. This is indicated by
writing the abbreviations ‘Dr.’ on the left side top corner and ‘Cr.’ on the right side top
corner.
Every Ledger has an index. Index is prepared in the alphabetical order. The page number
on which a particular account appears is shown against the name of the account shown
in index. This facilitates quick reference.
Both the sides of the ledger have four columns. These columns are:-
1) Date: In this column the date of the transaction is written. The year,
month and date should be clearly mentioned.
2) Particulars: In this column, the name of the account in which the
corresponding credit or debit is found under double entry principle will be
mentioned. The posting on the debit side begins with ‘To’ and on the
credit side with ’By’.
3) Journal Folio (J.F.): Folio means page number. In Journal Folio (J.F.)
column, page number of journal from where we have transferred the
entry into Ledger is to be written.
4) Amount: In the column, the amount for which an account is debited or
credited is entered.
Specimen of Ledger
Specimen of the ledger in ‘T’ form is given below:
In the books of ………………..
Dr. Name of the Account Rs.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)

POSTING OF JOURNAL INTO LEDGER

The purpose of opening an account in the ledger is to bring all related items of this
account which might have been recorded in different books of accounts on different
dates at one place. The process involved in this exercise is called posting in the ledger.
This procedure is adopted for each account.
To take the items from the journal to the relevant account in the ledger is called posting
of journal
Following procedure is followed for posting of journal to ledger:
1. Identify both the accounts ‘debit’ and credit of the journal entry. Open the two
accounts in the ledger.
2. Post the item in the first account by writing date in the date column, name of the
account to be credited in the particulars column and the amount in the amount column
of the ‘debit’ side of the account.
3. Write the page number of the journal from which the item is taken to the ledger in
Folio column and write the page number of the ledger from which account is written in
L.F. column of the journal.
4. Now take the second Account and give the similar treatment. Write the date in the
‘date’ column, name of the account in the ‘amount’ column of the account on its credit
side in the ledger.
5. Write page number of journal in the ‘folio’ column of the ledger and page number of
the ledger in the ‘L/F’ of column of the journal.
ILLUSTRATION:
Journalise the following transactions and post them in ledger for January 2006:
1 Jan Commenced business with Cash Rs. 50,000
3 Jan paid into bank Rs. 25,000
5 Jan Purchased furniture for cash Rs. 5,000
8 Jan purchased goods and paid by cheque Rs. 15,000
8 Jan Paid for carriage Rs.500
14 Jan purchased goods from K. Murthy Rs. 35,000
18 Jan Cash sales Rs. 32,000
20 Jan Sold goods to Ashok on credit Rs. 28,000
25 Jan Paid cash to K. Murthy in full settlement Rs. 34,200
28 Jan Cash received from Ashok Rs. 20,000
31 Jan paid rent for the month Rs. 2,000
31 Jan Withdrew from bank for private use Rs. 2,500
Answer:
Journal

Date Particulars LF Dr. Amount Cr. Amount

(Rs.) (Rs.)

2006
Jan1 Cash A/c Dr. 50,000
 To Capital A/c 50,000
(Being commenced business with
cash)

Jan 3 Bank A/c Dr. 25,000

To Cash A/c 25,000
(Being cash paid in the bank)

Jan 5 Furniture A/c Dr. 5000

To Cash A/c 5000
(Being purchased furniture for
cash)

Jan 8 Purchases A/c Dr. 15000

To Bank A/c 15000
(Being purchased goods and paid
by cheque)

Jan 8 Carriage A/c Dr. 500

To Cash A/c 500
(Being cash paid for carriage
charges)

Jan Purchases A/c Dr. 35000

14 To K.Murthy A/c 35000
(Being goods purchases on credit)

Jan Cash A/c Dr. 32000

18 To Sales A/c 32000
(Being goods sold for cash)

Jan Ashok A/c Dr. 28000

20 To Sales A/c 28000
(Being goods sold to Ashok on
credit)

Jan K. Murthy A/c Dr. 35000

25 To Discount A/c 800
To Cash A/c 34200
(Being cash paid to K.Murthy and
discount allowed by him)

Jan Cash A/c Dr. 20000

28 To Ashok A/c 20000
 (Being cash received from Ashok)

Jan Rent A/c Dr. 2000

31 To Cash A/c 2000
(Being cash paid for rent)

Jan Drawings A/c Dr. 2500

31 To Bank A/c 2500
(Being cash withdrawn from bank
for domestic use)

Ledger Accounts of M/S ____ for the Month of January 2006

Dr. 1. CASH A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
2006 2006
Jan 1 To Capital A/c 50000 Jan 3 By bank A/c 25000
Jan 18 To Sales A/c 32000 Jan5 By furniture A/c 5000
Jan 28 To Ashok A/c 20000 Jan8 By carriage 500
Jan25 By K. Murthy 34200
Jan31 By Rent A/c 2000
Jan31 By Balance c/d 35300
2006 102000 102000
Feb 1 To Balance b/d
35300
Dr. 2. Capital A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2006 2006
Jan 31 To Balance c/d 50000 Jan 1 By Cash A/c 50000

50000 2006 50000

Feb 1 By Balance b/d
50000

Dr. 3. Bank A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

 (Rs) (Rs)

2006 2006
Jan 2 Cash A/c 25000 Jan31 By Drawings A/c 2500
Jan 8 By Purchases A/c 15000
Jan 31 By Balance c/d 7500

2006 25000 25000

Feb 1 To Balance b/d
7500

Dr. 4. Furniture A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2006 2006
Jan 2 To Cash A/c 5000 Jan 31 By Balance c/d 5000

2006 5000 5000

Feb1 To Balance b/d
5000
Dr. 5. Purchases A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
2006 2006
Jan 8 To Bank A/c 15000 Jan 31 By Trading A/c 50000
Jan14 To K. Murthy A/c 35000
50000 50000
Dr. 6. Carriage A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
2006 2006
Jan 8 To Cash A/c 500 Jan 31 By Trading A/c 500
500 500
Dr. 7. K. Murthy A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
 2006 2006
Jan 25 To Cash A/c 34200 Jan14 By Purchases A/c 35000
Jan 25 To Discount A/c 800
35000 35000
Dr. 8. Sales A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
2006 2006
Jan 31 To Trading A/c 60000 Jan 18 By Cash A/c 32000
Jan 20 By Ashok A/c 28000

60000 60000

Dr. 9. Ashok A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2006 2006
Jan 20 To Sales A/c 28000 Jan28 By Cash A/c 20000
Jan31 By Balance c/d 8000

2006 28000 28000

Feb 1 To Balance b/d
8000

Dr. 10. Rent A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2006 2006
Jan 3 To Cash A/c 2000 Jan31 By Profit and Loss 2000
A/c

2000 2000

Dr. 11. Drawings A/c Cr.

 Date Particulars JF Amount Date Particulars JF Amount
(Rs) (Rs)

2006 2006
Jan 8 To Bank A/c 2500 Jan31 By Balance c/d 2500

2500 2500

2006 To Balance b/d 2500

Feb 1
❆❆❆❆❆❆❆❆
III. CASH BOOK
Cash Book is a Book in which all cash receipts and cash payments are recorded. It is also
one of the books of original entry. It starts with the cash or bank balance at the
beginning of the period. In case of new business, there is no cash balance to start with.
It is prepared by all organisations. When a cash book is maintained, cash transactions
are not recorded in the Journal, and no cash or bank account is required to be
maintained in the ledger as Cash Book serves the purpose of Cash Account.

Cash Book: Types and Preparation: Cash Books may be of the following Types:
(a) Simple Cash Book
(b) Bank Column Cash Book
(c) Petty Cash Book

Simple Cash Book: A Simple Cash Book records only cash receipts and cash
(a)
payments. It has two sides, namely debit and credit. Cash receipts are recorded on
the debit side i.e. left hand side and cash payments are recorded on the credit side
i.e. right hand side. In this book there is only one amount column on its debit side
and on the credit side. The format of a Simple Cash Book is as under:
Format of a simple cash book
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

Column-wise explanation is as follows:

 (a)Date: In this column Year, Month and Date of transactions are recorded in
chronological order.
(b)Particulars: In this column, the name of the account in respect of which cash has
been received or payment has been made is written. Account pertaining to the
receipts of cash is recorded on the debit side and those pertaining to cash
payments on the credit side.
(c) Ledger Folio: In this column, it records the page number of the ledger book on
which relevant account is prepared.
(d)Amount: In this column, it records the amount received on debit side and cash
paid on its credit side.

Preparation of Simple Cash Book: Cash Book is in a way, a cash account with debit
and credit side and Cash account is an asset account, so the rule followed is Increase in
assets to be debited and Decrease in asset is to be credited. This implies that Cash Book
is a book where all the receipts in terms of cash are recorded on the debit side of the
Cash Book and all the payments in terms of cash are recorded on its credit side.

On the debit side in the particulars column, the name of the account, for which cash is
received, is recorded. Similarly, on the credit side, the name of account for which cash is
paid, is recorded. In the amount column the actual cash paid or received is recorded.
At the end of the month, cash book is balanced. The cash book is balanced in the same
manner an account is balanced in the ledger. The total of the debit side of the cash book
is compared with the total of the credit side and the difference if any is entered on the
credit side of the cash book under the particulars column as balance c/d.
In case of Simple Cash Book, the total of debit side is always more than the total of the
credit side, since the payment can never exceed the available cash. The difference is
written in the amount column and total of the both sides of the cash book becomes
equal. The closing balance of the credit side becomes the opening balance for the next
period and is written as Balance b/d on the Debit side of the Cash Book for the following
period.
Recording of cash transactions in the Simple Cash Book and its balancing is illustrated
with the help of the following illustration:
Illustration 1
Enter the following transactions in the cash book of M/s. Shanthi Traders:
2011
December 01 Cash in Hand 27,500
December 05 Cash received from Nitu 12,000
December 08 Insurance Premium paid 2,000
December 10 Furniture purchased 6,000
December 14 Sold Goods for cash 16,500
December 18 Purchased Goods from Naman for cash 26,000
December 22 Cash paid to Rohini 3,200
December 25 Sold Goods to Kanika for cash 18,700
December 28 Cash Deposited into Bank 5,000
December 30 Rent paid 4,000
December 31 Salary paid 7,000
Books of M/s. Shanthi Traders Cash Book
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Dec01 To Balance b/d 27,500 Dec08 By Insurance Premium 2,000
Dec05 To Nitu 12,000 Dec10 By Furniture 6,000
Dec14 To Sales 16,500 Dec18 By Purchases 26,000
Dec25 To Sales 18,700 Dec22 By Rohini 3,200
Dec28 By Bank 5,000
Dec30 By Rent 4,000
Dec31 By Salary 7,000
Dec31 By Balance c/d 21,500

2012 74,700 74,700

Jan01 To Balance b/d
21,500
llustration 2
Prepare Cash Book for the month of April 2011 from the following particulars:

April 01 Cash in hand 17,600

April 03 Purchased Goods for cash from Rena 7,500
April 06 Sold Goods to Rohan 6,000
April 10 Wages paid in cash 500
April 15 Cash paid to Neena 3,500
April 17 Cash Sales 10,000
April 19 Commission paid 700
April 21 Cash received from Teena 1,500
April 25 Furniture Purchased for cash 1,700
April 28 Rent paid 3,000
April 30 Paid Electricity bill in cash 1,300
Dr. CASH A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Apr 01 To Balance c/d 17600 Apr03 By Purchases 7500
Apr 17 To Sales 10000 Apr10 By Wages 500
Apr 21 To Teena 1500 Apr15 By Neena 3500
Apr19 By Commission 700
Apr25 By Furniture 1700
Apr28 By Rent 3000
Apr30 By Electricity Bill 1300
Apr30 By Balance c/d 10900

2011 29100 29100

May 01 To Balance b/d
10900
Illustration - 3
Enter the following transactions in the Simple Cash Book of M/s Sourabh Traders
2019 July 1 Started business with cash Rs. 1,00,000
3 Deposited cash into Bank Rs. 80,000
5 Purchased Stationery for cash Rs. 2,000
7 Cash Purchases Rs. 15,000
8 Sold goods for cash Rs. 20,000 at 8% Trade Discount

10 Paid InsuranceRs.5,000
Premium
12 Paid cash to Dixit Rs.10,00
0
15 Received cash fromRs.80,00
Saxena 0
17 Received Commission Rs.2,000
18 Drew for domestic use Rs.4,000
22 Sold old Furniture Rs.5,000
25 Paid Salary to Ram Rs.6,000
30 Received Interest Rs.4,000
Solution :
In the books of M/s Sourabh Traders
Dr. Simple Cash Book Cr.
Date Receipts R. L. Amount Date Payments V. L. Amount
No. F. Rs. No. F. Rs.
2019 2019
July July
1 To Capital A/c 1,00,000 3 By Bank A/c 80,000
(Being (Being Cash
business deposited in
started) Bank)
8 To Sales A/c 18,400 5 By Stationery 2,000
(Being cash A/c (Being
15 sales) 80,000 Stationery
To Saxena A/c 7 purchased) 15,000
(Being By Purchase
17 received cash) 2,000 A/c (Being
To Commission 10 goods 5,000
A/c purchased)
(Being By Insurance
22 commission Premium A/c
received) (Being
Insurance
30
Premium paid)
To Furniture 5,000 12 By Dixit A/c 10,000
A/c (Being old (Being Cash
Furniture sold) 18 paid) 4,000
4,000 By Drawings
To Interest A/c A/c (Being
(Being Interest 25 Drawings 6000
received) made)
By Salary A/c
(Being Salary
paid)
31 By Balance c/d 87,400
2,09,400 2,09,400
Aug.
1 To Balance b/d 87,400

Illustration – 4:
 Enter the following transactions in a Simple Cash Book of Kamal
Traders.

2018 Aug 1 Cash in hand Rs .37,400

4 Cash received from Sakshi Rs .25,000
5 Cash purchases Rs .25,000 at 12%
T.D.
8 Invested in Shares Rs .25,000
10 Paid for Sundry Expenses Rs. 3,000
12 Paid Life Insurance Premium Rs. 8,000
16 Received Dividend Rs. 2,000
20 Paid Telephone Bill Rs. 6,000
22 Received Interest Rs. 1,000
25 Cash Sales Rs. 25,000 at 20%
T.D.
28 Paid Electricity Bill Rs. 4,500

Solution : In the books of Kamal Traders

Dr. Simple Cash Book Cr.
Date Receipts R. L. Amoun Date Payments V. L. Amount
No. F. t No. F. Rs.
Rs.
2018 2018
Aug.1 To Balance 37,400 Aug. 5 By Purchases 22,000
b/d A/c
(Being Cash
4 To Sakshi's purchased)
A/c (Being
Cash 25,000
received) 8 By Investment 25,000
in Shares A/c
(Being shares
purchased)
To Dividend
16 A/c (Being 2,000
Dividend
received) 10 By Sundry 3,000
Expenses A/c
(Being Sundry
To Interest expenses paid)
22 A/c (Being 1,000
Interest
received)
25 To Sales A/c 20,000 12 By Drawings A/c 8,000
(Being Cash (Being Life
sales) Insurance paid)

20 By Telephone
Bill 6,000
A/c
(Being
Telephone
bill paid)
28 By Electricity Bill 4,500
A/c
(Being
Electricity
bill paid)
31 By Balance c/d 16,900
85,400 85,400
Sept.
1 To Balance 16,900
b/d
(b) BANK COLUMN CASH BOOK: [ Two column Cash Book (Cash Book with Cash
and Bank column]
When the number of bank transactions is large in an organization, it is necessary to have
a separate book to record bank transactions. Instead of having a separate book to record
bank transactions a column is added on each side of the Simple Cash Book. This type of
cash book is known as Bank column Cash Book. All payments into bank are recorded on
the debit side and all withdrawals/payments through the bank are recorded on the credit
side of the cash book. The format of a Bank column cash Book is as under:
Format of a Bank Column Cash Book
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)

Preparation of Bank column cash book:

In Bank column Cash Book, the cash transactions are recorded in a similar manner as
are recorded in the Simple cash book. The difference is that Bank column cash book
records transactions relating to Bank also. There are some special business transactions
which need special treatment in the Bank
Column of the Cash Book:
(i) Opening balance
(ii) Receipt of cheques
(iii) Contra entries
(iv) Endorsement of cheque
(v) Bank charges

(i) Opening Balance

The opening cash and bank balances are recorded on the debit side of the cash book.
Sometimes a businessman withdraws excess amount from the bank (from his bank
account) and the closing bank balance of a month is a credit balance. This balance
amount is called ‘Bank overdraft’. It is written on the credit side of the bank column of
the cash book as opening balance. For example, if a business firm has Rs.12, 000 as
cash in hand and Rs.15, 000 as overdraft (credit balance) in the bank, it will be recorded
as under:
Bank Column Cash Book
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)

To Balance b/d 12000 By Balance b/d 15000

(ii) Receipt of Cheques:

All cash receipts are entered in the cash column and cheques received in the bank
column of Cash Book. If the cheques deposited in bank on the same date, it is entered
on the debit side of bank column of the cash book. If the cheques received from
customer are not deposited in the bank on same day, they are included in cash and
written on the debit side in the cash column of cash book. For example: On May 2, 2006
a cheque received from Kumar for Rs.7,000 and deposited on same date.
Bank Column Cash Book
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)

2006
May 2 To Kumar 7000

(iii) Contra entries: When there is a transaction that relates to both cash and bank,
this will be written on one side of Bank Column and on other side of Cash Column, Such
transactions are known as ‘Contra entries’. In case cash is withdrawn from bank for office
use, it is entered on the credit side of bank column and also in the debit side of cash
column of the cash Book. In case cash is deposited in the bank, the amount is recorded
on the debit side of bank column and on the credit side of cash column of the cash book.
The letter ‘C’ is written in the LF column on both sides against these entries. These
entries are not to be posted into ledger. For example: On May 15, 2006 Cash withdrawn
from bank for office use is Rs.2, 000. In this case the transaction recorded is as under:
Bank Column Cash Book
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)
 2006 2006
May 15 To Bank C 2000 May15 By cash C 2000

(iv) Endorsement of Cheque: When cheque received from customer is given to some
other party i.e. endorsed, on receipt, it is recorded on the debit side of cash column. On
endorsement of cheque, the amount is recorded on the credit side of the cash column of
Cash Book. For example, on May 22, 2006 a cheque of Rs.8,000 is received from M/s J.P
Traders. On May 27, 2006 it was endorsed in favour of M/s Kapila Traders. In this case
the transaction recorded is as under:
Bank Column Cash Book
Dr. Cr.

Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)

2006
May 22 To J.P. Traders 8000 May27 By Kapila 8000
(cheque) Traders
(cheque)
(v) Bank Charges: If bank charges any interest, outstation cheque collection charges
etc. are entered on the credit side of the Bank column of the Cash Book. Similarly, if
bank gives interest, collects commission etc., these will be recorded on the debit side on
the Bank column Cash Book.
ILLUSTRATION:1
Record the following transactions in the Bank column Cash Book of M/s Time Zone for
the month of January 2011:

January 01 Bank Balance 32,500

01 Cash Balance 12,300
03 Purchased Goods by cheque 5,300
08 Goods Sold for cash 9,500
10 Purchased Typewriter by Cheque 5,400
15 Sold Goods and received Cheque 7,900 (deposited on the same day)
17 Purchased Stationery by Cheque 1,000
20 Cash deposited into bank 10,000
22 Paid Cartage 500
24 Cheque given to Muthu 7,000
28 Rent paid by Cheque 3,000
30 Paid Salary 3,500
Bank Column Cash Book
Dr. Cr.
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
(Rs) (Rs) (Rs) (Rs)

2011 2011
Jan1 To Balance b/d 12300 32500 Jan3 By Purchases 5300
Jan8 To Sales 9500 Jan10 By Typewriter 5400
Jan1 To Sales 7900 Jan17 By Stationery 1000
5 To Cash C 10000 Jan20 By Bank C 10000
Jan2 Jan22 By Cartage 500
0 Jan24 By Muthu 7000
Jan28 By Rent 3000
Jan30 By Salary 3500
Jan31 By Balance c/d 7800 28700

2011 21800 50400 21800 50400

Feb1 To Balance b/d
7800 28700

Illustration:2
From following transactions related to Sundar and Co. Prepare Cash
Book with two columns

Date Details Amount

(Rs.)
2018 Sept Bank Balance 52,000
01
01 Cash Balance 15,000
04 Purchased goods and payment made by cheque 15,000
08 Sold goods for cash 8,000
13 Purchased Machinery and payment made by 10,000
cheque
16 Sold goods and received cheque (deposited 12,000
same day)
17 Purchased goods for cash from Mrunal 18,000
20 Purchased Stationery and paid by cheque 2,100
24 Cheque given to Avadhut 1,800
27 Cash withdrawn from Bank 12,000
30 Paid Rent by cheque 500
30 Paid Salary 4,000

Solution : In the books of Sundar and Co.

Dr. Cash Book with two columns Cr.

Date Receipts R. L. Cash Bank Date Payments V. L. Cash Bank

N. F. Rs. Rs. N. F. Rs. Rs.
2018 2018
Sept Sept
1 To Balance 15,000 52,000 4 By Purchase A/c 15,000
b/d (Being cash
8 To Sales A/c 8,000 - purchases)
(Being goods 13 By Machinery A/c 10,000
sold for cash) (Being Machinery
16 To Sales A/c 12,000 purchased)
(Being goods 17 By Purchases A/c 18,000
sold against (Being cash
cheque) purchased)
27 To Bank A/c C 12,000 - 20 By Stationery A/c 2,100
(Being cash (Being Stationery
withdrawn purchased)
for office 24 By Avadhut A/c 1,800
use) (Being cheque
issued)
27 By Cash A/c C 12,000
(Being Cash
withdrawn for
office use)
By Rent A/c
30 (Being Rent paid) 500
By Salary A/c
30 (Being Salary paid) 4,000
By Balance c/d
30 13,000 22,600
35,000 64,000 35,000 64,000
Oct.
1 To Balance b/d 13,000 22,600
 Illustration:3
Enter the following transactions in cash book with cash and bank
columns of Mehta Brothers.

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

Date Receipts R. L. Cash Bank Date Payments V. L. Cash Bank

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

Working Note :
Transaction dated 5th Oct. 2018
Net cash purchases = Cash purchases 10% T.D.
= 60,000  6,000 = 54,000
Amount paid = Net Cash purchases - 5% C..D.
= 54000  5% of 54,000
= 54,000  2,700 = 51,300
1/2 Amount paid in cash = 51,300 x 1/2 = 25,650
Remaining amount paid by cheque = 51,300  25,650 = 25,650
❈❈❈❈❈❈❈❈❈❈

IV. TRIAL BALANCE

All the transaction are first entered in the Journal and Special purpose books like cash
book, purchases book, sales book, etc. . From these books items are posted in the ledger
in their respective accounts. Finally, at the end of the accounting year these accounts are
balanced. To check the accuracy of posting in the ledger a statement is prepared with
two columns i.e. debit column and credit column which contain debit balances of
accounts and credit balances of accounts respectively. Total of the two columns are if
equal, it means the ledger posting is arithmetically correct. This statement is called Trial
Balance.

Trial Balance may be defined as a statement which contains balances of all ledger
accounts on a particular date. Trial Balance consists of a debit column with all debit
balances of accounts and credit column with all credit balances of accounts. The totals of
these columns if tally it is presumed that ledger has been maintained correctly. However,
Trial Balance proves only the arithmetical accuracy of posting in the ledger.
Objectives of Preparing a Trial Balance
Following are the objectives of preparing Trial Balance:
(i) To check arithmetical accuracy:
Arithmetical accuracy in ledger posting means writing correct amount, in the correct
account and on its correct side while posting transactions from various original books of
accounts, such as Cash Book, Purchases Book, Sales Book, etc. It also means not only
the correct balance of ledger account but also the totals of the special purpose Books.
(ii) To help in preparing Financial Statements:
The ultimate objective of the accounting is to prepare financial statements i.e. Trading
and Profit and Loss Account, and Balance sheet of a business enterprise at the end of an
accounting year. These statements contain balances of various ledger accounts. As Trial
Balance contains balances of all ledger accounts, in financial statements the balances of
ledger accounts are carried from the Trial balance for proper analysis.

(iii) Helps in locating errors:

If total of two columns of the trial balance agrees it is a proof of arithmetical accuracy in
the ledger posting. However, if the totals of the two columns do not tally it indicates that
there is some mistake
in the ledger accounts. This prompts the accountant to find out the errors.
(iv) Helps in comparison:
Comparison of ledger account balances of one year with the corresponding balances with
the previous year helps the management taking some important decisions. This is
possible by using the Trial Balances of the two years.
(v) Helps in making adjustments:
While making financial statements adjustments regarding closing stock, prepaid
expenses, outstanding expenses etc are to be made. Trial balance helps in identifying the
items requiring adjustments in preparing the financial statements. Trial Balance is
generally prepared at the end of the year. However
it can be prepared at any time during the accounting year to check the accuracy of the
posting.
PREPARATION OF TRIAL BALANCE
Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts
including cash and bank balances. It is prepared on a particular date. The accounts
having a debit balance are entered in the debit amount column and credit balance
accounts are entered in the credit amount column. The totals of the two sides of the
accounts may also be used to prepare trial balance. The sum of each column should be
equal. The standard format of a trial balance is given below:
Trial Balance of………………..
As at…………… (closing date)

Name of the Account LF Dr. Balance (Rs) Cr. Balance (Rs.)

The name of the business firm is written on the top of the statement with Trial Balance.
Under this we write the date on which Trial Balance is prepared. Trial Balance has three
columns: Name of the Ledger Account, Debit Amount and Credit Amount. In the ledger
account column we write the name of the account. In the Debit amount column we write
the amount of debit balance of the account (or the total of the debit side of the account).
Similarly in the credit amount column we write the amount of credit balance of the
account (or the total of the credit side of the account.

Steps to prepare Trial Balance:

(i) At first ascertain the balance account wise of all the ledger accounts.
(ii) Write the name of the ledger account in the ledger account column.
(iii) Write against the name of the ledger account, the balance amount/total amount,
debit balance/total in the debit column; and credit balance/ total in the credit column.
(iv) Add the debit balance/total amount column and credit balance/total amount column.

There are three methods of preparing Trial Balance

(i) Balance Method
(ii) Total Method
(ii) Balance Totals Method
(i) Balance Method
In this Balance method, the balance of each account (which may be debit balance or
credit balance) is extracted and written against each account; we write debit balance in
the debit column and credit balance in the credit column.
(ii) Total Method
In this method the total of both sides of every account in the ledger is written against the
name of the respective account without balancing them in the form of debit and credit
balances respectively.
(iii) Balance totals Method
Trial Balance is prepared by combining the first and second methods. However, in
practice the trial balance is prepared with debit and credit balances of various accounts in
the ledger. Normally balance method is used.

ILLUSTRATION:1
From the following ledger accounts of a trader closed as on 31 st January, 2011, prepare
Trial Balance:
Dr. CAPITAL A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan31 To Balance c/d 100000 Jan 1 By bank A/c 100000

100000 100000
Feb 1 By Balance b/d
100000

Dr. Sales A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan31 To balance 70000 Jan 8 By bank A/c 70000
transferred to Jan15 By vikram’s A/c 46000
Trading A/c
70000 70000

Dr. Purchases A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan 05 To Pranaya’s A/c 40000 Jan31 By Stock A/c 15000
Jan 14 To Bank A/c 55000 Jan31 By Balance 80000
transferred to
95000 95000
Trading A/c
Dr. Vikram’s A/c Cr.
 Date Particulars JF Amount Date Particulars JF Amount
(Rs) (Rs)

2011 2011
Jan15 To Sales A/c 46000 Jan31 By Balance c/d 46000

46000 46000
2011
Feb1 To Balance b/d 46000

Dr. Pranaya’s A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan31 To Balance c/d 40000 Jan31 By Purchases A/c 40000

40000 40000
2011
Feb1 By Balance b/d 40000

Dr. Rent Received A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan To Balance 1500 Jan31 By Bank A/c 1500
31 transferred to
1500 1500
P&L A/c

Dr. Bank A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan 31 To Capital A/c 100000 Jan31 By Purchases A/c 55000
 To Sales A/c 24000 By Commission A/c 18000
To Rent received 1500 By Drawings A/c 2200
By Balance c/d 66700

125500 125500

2011 To Balance b/d 66700

Feb 1

Dr. Commission A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)

2011 2011
Jan 20 To Bank A/c 1800 Jan31 By Balance 1800
transferred to P&L
1800 1800
A/c

Dr. Stock A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(Rs) (Rs)
2011 2011
Jan31 To Purchases A/c 15000 Jan31 By Balance c/d 15000
15000 15000
2011
Feb 1 To Balance b/d 15000
Dr. Drawings A/c Cr.

Date Particulars JF Amount Date Particulars JF Amount

(rs) (Rs)
2011 2011
Jan31 To Bank A/c 2000 Jan31 By Balance c/d 2000
2000 2000
2011
Feb 1 To Balance b/d 2000

SOLUTION:
TRIAL BALANCE
 Name of the Ledger Account Dr. Amount Cr. Amount
(Rs.) (Rs.)
Capital 100000
Sales 70000
Purchases 80000
Vikram 46000
Pranaya 40000
Commission 1800
Rent Received 1500
Drawings 2000
Closing Stock 15000
Cash at Bank 66700
Total 211500 211500

Illustration : 2
Journalise the following transactions in the books of Virat traders, open necessary ledger
accounts, balance the accounts and prepare a Trial Balance as on 31st March 2019.
2019 March 1 Virat started business with Cash Rs. 50,000, Cash at Bank of India Rs.
7,000, Furniture Rs. 10,000.
3 Purchased goods from Rohit worth Rs. 10,000 less 10% T.D.
7 Sold goods to Sunil Rs. 5,000 less 5% T.D.
10 Deposited Cash with Bank Of India Rs. 5,000.
12 Purchased Furniture from Varma on credit worth Rs. 20,000.
15 Paid to Varma by net banking Rs. 8,000.
17 Paid Printing expenses Rs. 200.
20 Received Commission Rs. 200.
25 Withdrew Cash from Bank Rs. 1,000 by ATM
28 Paid to Varma Rs. 11,500 in full settlement of his account.
30 Paid Advertisement bill Rs. 500

Solution : In the books of Virat Traders

Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
2019
Mar. 1 Cash A/c Dr. 50,000
Bank of India A/c Dr. 7,000
Furniture A/c Dr. 10,000
To Virat's Capital A/c 67,000
(Being started business with cash, bank
and furniture)
3 Purchases A/c Dr. 9,000
To Rohit's A/c 9,000
(Being purchased goods from Rohit less
10% T.D.)
7 Sunil's A/c Dr. 4,750
To Sales A/c 4,750
(Being goods sold to Sunil less 5% T.D.)
10 Bank of India A/c Dr. 5,000
To Cash A/c 5,000
(Being cash deposited with Bank)
12 Furniture A/c Dr. 20,000
To Varma's A/c 20,000
(Being purchased furniture from Varma)
15 Varma's A/c Dr. 8,000
To Bank of India's A/c 8,000
(Being purchased furniture by
netbanking)
17 Printing Expenses A/c Dr. 200
To Cash A/c 200
(Being paid printing bill)
20 Cash A/c Dr. 200
To Commission A/c 200
(Being received commission)
25 Cash A/c Dr. 1,000
To Bank of India's A/c 1,000
(Being withdraw cash from Bank)
28 Varma's A/c Dr. 12,000
To Cash A/c 11,500
To Discount received A/c 500
(Being paid to Varma in full settlement)
30 Advertisement A/c Dr. 500
To Cash A/c 500
(Being paid Advertisement bill)
Total 1,27,650 1,27,650

Ledger Accounts
Dr. Virat's Capital Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt (Rs.)

(Rs.)
2019 2019
Mar. 31 To Balance c/d 67,000 Mar. 1 By Cash A/c 50,000
1 By Bank of 7,000
India's
A/c
1 By Furniture A/c 10,000
67,000 67,000
April 1 By Balance b/d 67,000

Dr. Cash Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar. 1 To Virat's Capital 50,000 Mar. By Bank of India 5,000
A/c 10 A/c
20 To Commission 200 17 By Printing A/c 200
A/c
25 To Bank of India 1,000 28 By Varma's A/c 11,500
A/c
30 By Advertisement 500
A/c
31 By Balance c/d 34,000
51,200 51,200
April 1 To Balance b/d 34,000

Dr. Bank of India's Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar. 1 To Virat's Capital 7,000 Mar. By Varma's A/c 8,000
A/c 15
10 To Cash A/c 5,000 25 By Cash A/c 1,000
31 By Balance c/d 3,000
12,000 12,000
April 1 To Balance b/d 3,000

Dr. Furniture Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar. 1 To Virat's Capital 10,000 Mar. By Balance c/d 30,000
A/c 31
10 To Varma's A/c 20,000
30,000 30,000
April 1 To Balance b/d 30,000

Dr. Purchases Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar. 3 To Rohit's A/c 9,000 Mar. By Balance c/d 9,000
9,000 31 9,000
9,000
April 1 To Balance b/d

Dr. Rohit's Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt
(Rs.) (Rs.)
2019 2019
Mar.31 To Balance c/d 9,000 Mar. 3 By Purchases A/c 9,000
9,000 9,000
9,000
April 1 By Balance b/d

Dr. Sunil's Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar. 7 To Sales A/c 4,750 Mar. By Balance c/d 4,750
4,750 31 4,750
4,750
April 1 To Balance b/d

Dr. Sales Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.31 To Balance c/d 4,750 Mar. By Sunil's A/c 4,750
4,750 31 4,750
4,750
By Balance b/d
April 1
Dr. Varma's Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.15 To Bank of India's 8,000 Mar. 1 By Furniture A/c 20,000
A/c
28 To Cash A/c 11,500
28 To Discount 500
received
A/c
20,000 20,000

Dr. Printing Expenses Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.17 To Cash A/c 200 Mar. By Balance c/d 200
200 31 200
200
April 1 To Balance b/d

Dr. Commission Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.31 To Balance c/d 200 Mar. By Cash A/c 200
200 20 200
April 1 By Balance b/d
200

Dr. Discount Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.31 To Balance c/d 500 Mar. By Varma's A/c 500
500 28 500
April 1 By Balance b/d
500

Dr. Advertisement Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2019 2019
Mar.30 To Cash A/c 500 Mar. By Balance c/d 500
500 31 500
April 1 To Balance b/d
500

Trial Balance of Mr. VIRAT as on 31st March 2019

Debit balances Amt (Rs.) Credit balances Amt (Rs.)

Cash 34,000 Virat’s capital 67,000

Bank of India 3,000 Rohit 9,000
Furniture 30,000 Sales 4,750
Purchases 9,000 Commission 200
Sunil 4,750 Discount 500
Printing Expenses 200
Advertisement 500
81,450 81,450
Illustration : 3
The following balances appeared in the ledger of Karan on 1st January 2018.

Debit balances Amount Credit Balances Amount

(Rs.) (Rs.)
Cash Account 60,000 Karan's Capital A/.c 2,00,000
Purchases Account 80,000 Sales A/c 40,000
Bank of Maharashtra A/c 1,00,000

January5 Bought goods from Rushi Rs. 10,000.

10 Drew from Bank Rs. 20,000 for office and Rs. 6,000
for self use.
17 Return goods to Rushi 2,000.
19 Cash Purchases Rs. 14,000.
22 Cash Sales Rs. 20,000.
26 Deposited into Bank Rs. 16,000.
28 Interest collected by Bank Rs. 7,000 on our behalf.
Pass Journal Entries, prepare necessary Ledger Accounts and prepare a Trial
Balance as on 31st January 2018
Journal entries

Date Particulars L.F. Debit Credit

Amount Amount
(Rs.) (Rs.)
2018
Jan. 1 Purchases A/c Dr. 10,000
To Rushi's A/c 10,000
(Being goods purchased on
credit )
10 Cash A/c Dr. 20,000
Karan's Drawings A/c Dr. 6,000
To Bank of Maharashtra's A/c 26,000
(Being Amount withdrawn for personal
use and office use.)
17 Rushi's A/c Dr. 2,000
To Purchases Return A/c 2,000
(Being goods returned to Rushi)
19 Purchases A/c Dr. 14,000
To Cash A/c 14,000
(Being goods purchased for cash

22 Cash A/c Dr. 20,000

To Sales A/c 20,000
(Being goods sold for cash)
26 Bank of Maharashtra's A/c Dr. 16,000
To Cash A/c 16,000
(Being cash deposited into bank)

28 Bank of Mahrarashtra A/c Dr. 7,000

To Interest A/c 7,000
(Being interest collected by bank on our
behalf)
Total 95,000 95,000

Ledger Accounts
Dr. Purchases Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan. 1 To Balance b/d 80,000 Jan. 31 By Balance c/d 1,04,000
5 To Rushi's A/c 10,000
19 To Cash A/c 14,000
1,04,000 1,04,000
Feb 1 To Balance b/d 1,04,000

Dr. Rushi Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

 (Rs.) (Rs.)
2018 2018
Jan.1 To Purchases 2,000 Jan. 5 By Purchases A/c 10,000
7 Return A/c

31 To Balance c/d 8,000

10,000 10,000
Feb. 1 By Balance b/d 8,000

Dr. Cash Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

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

1,00,000 1,00,000
Feb. 1 To Balance b/d 70,000

Dr. Karan's Drawings Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan.10 To Bank of 6,000 Jan.31 By Balance c/d 6,000
Maharashtra's A/c
6,000 6,000
6,000
Feb. 1 To Balance b/d
Dr. Purchases Return Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan.3 To Balance c/d 2,000 Jan. 17 By Rushi's A/c 2,000
1 2,000 2,000
2,000
Feb. 1 By Balance b/d

Dr. Sales account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan.3 To Balance c/d 60,000 Jan. 1 By Balance b/d 40,000
1
22 By Cash A/c 20,000
60,000 60,000
Feb. 1 By Balance b/d 60,000

Dr. Bank of Maharashtra's Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

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

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan.3 To Balance c/d 7,000 Jan. 28 By Bank of 7,000
1 Maharashtra's A/c
7,000 7,000
Feb. 1 By Balance b/d 7,000
 Dr. Karan's Capital Account Cr.

Date Particulars J.F. Amt Date Particulars J.F. Amt

(Rs.) (Rs.)
2018 2018
Jan. To Balance b/d 2,00,000 Jan. 1 By Balance c/d 2,00,000
31
2,00,000 Feb. 1 2,00,000
By Balance b/d 2,00,000

Trial Balance of Mr. KARAN as on 31st Jan. 2018

Sr. No. Name of Account L.F. Debit Credit

Amount Amount
(Rs.) (Rs.)
1. Cash 70,000
2. Purchases 1,04,000
3. Purchase Return 2,000
4. Rushi 8,000
5. Bank of Maharashtra 97,000
6. Karan's Capital 2,00,000
7. Karan's Drawings 6,000
8. Sales 60,000
9. Interest 7,000
Total 2,77,000 2,77,000

2.5 – FINAL ACCOUNTS

Meaning of Final Accounts :
The primary aim of accounting is assessment of business performance for the benefit of
all stakeholders (such as owners, employees, suppliers, customers, financiers etc.)
which will also help them to form their opinions on the financial position of their
business concerns. For this purpose, various accounting reports are prepared in the
form of Final Accounts at the end of every financial year. In brief, Final Accounts are
financial statements that validate and explain working results and financial status for a
specific period of time on a particular date. It is a set of Trading Account, Profit and
Loss Account and Balance Sheet. Balancing figure of Trading Account is Gross Profit or
Gross Loss. In case of Profit and Loss Account the balancing figure is Net Profit or Net
Loss. Whereas Balance Sheet shows financial position of assets and liabilities at a given
period of time.
 The basic objectives of Final Accounts are to determine Gross Profit /Gross
Loss and Net Profit or Net Loss of the business during the financial year.
 Final Accounts shows the true and correct financial position of business.
 It informs the operating results and exact financial position of the business to
the stake holders to take financial decisions.
 It enables to control financial activities of business effectively.
A) Importance of Final Accounts :
1) Final Accounts are the basis on which management or businessmen decides
business policies and take financial decisions.
2) Final Accounts gives a true picture of the financial status of business for the
financial year.
3) Final Accounts are useful for accurate accounting records.
4) Transparencies in business dealings are possible due to financial statements.
5) Final Accounts help to get a clear break-up of amounts payable to government
as various taxes, e.g. Income tax, GST etc.
6) It is a mandatory requirement to maintain records of financial state of any
business establishment.

How to Prepare Final accounts? -

Every time a business transaction takes place, the detail of it is made in Primary books.
These entries are then posted to the ledger. At the end of a financial year the ledger
accounts are balanced and closing balance of each ledger account is determined. There
may be a debit or credit balance. With the help of all these balances, a Trial Balance is
prepared. This in turn helps in preparing Trading Account, Profit and Loss Account and
Balance Sheet, which is known as Final Accounts.
Trading Account
Trading Account is an account which gives the overall preview of all trading activities.
The expenses and losses relating to trading activities are debited to this account and all
outward movements of goods and stock of goods at the end of the year are recorded to
the credit side of this account.
Debit side of Trading Account includes activities such as opening stock, purchases and
all direct expenses - e.g. Wages, Freight, Carriage Inward, Coal, Gas, Fuel, Water,
Manufacturing or Direct expenses. Similarly credit side of trading includes Closing
Stock, Sales, less returns (sales returns) any kind of goods that is used for promotions
as Free Samples, goods withdrawn by proprietor for personal reasons etc. Therefore it
is said Trading Account is prepared to ascertain gross profit or loss for a given period of
time. When there is credit balance, it is referred to as Gross Profit and when there is
debit balance it refered to a Gross Loss which is transferred to profit and loss account.
Trading Account is a Nominal Account.
Important terms of Trading Account:
1) Stock: Goods that are unsold are called Stock. Stocks are of two types :
(i) Opening stock: It refers to unsold goods at the beginning of the year.
(ii) Closing Stock: The unsold goods on the last day of accounting period is
referred to as Closing Stock. This is always valued at cost or market price,
whichever is less. Closing Stock is credited to the Trading Account. It is
also recorded on the asset side of Balance Sheet.
2) Purchases: This includes the purchases of goods and not purchases of assets.
Purchase of goods may be on the basis of cash or credit. Purchase Returns are
deducted from total purchases and thereafter net purchases are recorded on
the debit side of Trading Account.
3) Sales: Sales includes the sales of goods and not sale of Assets. Sale of goods
may be on the basis of cash or credit. Sales returns are deducted from total
sales and thereafter net sales are recorded on the credit side of Trading
Account.
4) Direct Expenses: Direct expenses are those expenses which are incurred for
purchase of goods, production of goods and purchase expenses. All nominal
accounts e.g. Wages, Manufacturing expenses, Factory lighting, Coal, Gas,
Fuel, Water. Dock dues, Carriage inward etc.
Specimen of Trading Account
Trading Account of M/s ____________for the year ended __________
Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock xxxx By Sales xxxx
To Purchases xxxx Less : Sales Return xxxx xxxx
Less : Purchase xxxx xxxx (Return Inward)
Return xxxx
 (Return outwards) xxxx By Goods distributed
To Direct Expenses xxxx as free sample xxxx
To Freight & xxxx By Goods taken by
Carriage Inward xxxx proprietor for
To Custom Duty xxxx personal use xxxx
To Wages xxxx By Closing Stock xxxx
To Power, Coal, Gas, By Gross Loss c/d xxxx
Fuel etc. xxxx
To Royalties xxxx
To Factory expenses xxxx
To Heating and
Lighting xxxx
To Factory Rent xxxx
To Works Managers’
Salary xxxx
To Gross Profit c/d xxxx
xxxx xxxx

Illustration 1
From the following information prepare Trading Account of Akash Traders for 31st
March, 2019.

Particulars Amt (Rs.) Particulars Amt (Rs.)

Wages 16,000Stock (1.04.2018) 22,000
Royalties 11,000Sales 3,80,000
Sales Returns 24,000Purchases 1,90,000
Goods withdrawn by Purchases Returns 6,400
Akash for Personal Use 16,000 Manufacturing Expenses 8,400

Factory Rent 4,200Motive Power 16,000

Stock (31.03.2019) 36,000Freight 7,400
Solution :
Trading Account of Akash Traders for the year ended 31st March 2019
Dr. Cr.

Amount Amount Amount Amount

Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening stock 22,000By Sales 3,80,000
To Purchases 1,90,000 Less : Sales Return 24,000 3,56,000
6,400
 Less : Purchase 1,83,600
Return 16,000 By Drawings 16000
To Wages To 11,000 By Closing stock 36,000
Royalties 4,200
To Factory Rent 8,400
To Manufacturing
Expenses 16,000
To Motive Power 7,400
To Freight 1,39,400
To Gross Profit c/d
(Balancing figure)
4,08,000 4,08,000

Profit and Loss Account

Trading account is prepared to ascertain the Gross profit or Gross loss of the
trading activities of the business. But these are not the final results of business
operations of an enterprise.
Apart from direct expenses, there are indirect expenses also. These may be
divided into office and administrative expenses, selling and distribution expenses,
financial expenses, depreciation and maintenance charges etc.
Similarly, there can be income from sources other than sales revenue. These may
be interest on investments, discount received from creditors, commission received, etc.
Another account is prepared in which all indirect expenses and revenues from sources
other than sales are written. This account when balanced shows profit (or loss). This
account is termed as Profit and Loss Account.
When the credit side of this account is greater than debit side it is called Net
Profit and when debit side of this account is greater than credit side it is called as Net
Loss. Net Profit/Loss is transferred to Capital Account. Profit and Loss Account is a
Nominal Account.
Specimen of Profit and Loss Account:
Profit and Loss A/c of M/s ................for the year ended ...............
Dr.
Cr.

Amount Amount Amount Amount

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

To Bad Debts (old)

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

Illustration 1

From the following Trial balance of Raju & Sons, you are required to prepare
Trading Account and Profit & Loss A/c for the year ended 31st March, 2018.
Debit balance Amt (Rs.) Credit balance Amt (Rs.)
 Wages 9,200 Purchases Returns 6,520
Purchases 66,800 Sales 1,52,900
Carriage Inward 3,350 Commission received 18,000
Sales returns 4,800 Rent Received 9,000
Opening Stock 31300 Discount Received 4,600
Salary 17,400
Royalty 4,800
Rent, Rates & Taxes 12,680
Bad debts 500
Carriage Outward 3,720
Printing & Stationery 2,400
Advertisement 18,000
Discount Allowed 1,520
Insurance 5,750
Factory Rent 7,000
Commission paid 1,800
1,91,020 1,91,020
Adjustment : 1) Closing stock Rs. 56,850

Solution : In the Books of Raju & Sons

Trading Account for the year ended 31st March, 2018

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening stock 31,300 By Sales 1,52,900
To Purchases 66,800 Less : Sales Return 4,800 1,48,100
Less : Purchase Return 6,520 60,280 (Return Inward)
(Return outwards) By Closing stock 56,850
To Wages 9,200
To Carriage Inward 3,350
To Royalty 4,800
To Factory Rent 7,000
To Gross Profit c/d 89,020
(Balancing figure)
2,04,950 2,04,950
 Profit & Loss Account for the year ended 31st March, 2018

Dr. Cr.

Particulars Amount Amount Particulars Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)
To Salary 17,400 By Gross Profit b/d 89,020
To Advertisement 18,000 By Commission received 18,000
To Discount 1,520 By Rent Received 9,000
To Rent, Rates and Taxes 12,680 By Discount Received 4,600
To Insurance 5,750
To Bad Debts 500
To Carriage Outward 3,720
To Commission 1,800
To Printing & Stationery 2,400
To Net Profit 56,850
(Transfer to Capital A/c)
1,20,620 1,20,620

Balance Sheet
Balance Sheet is a statement prepared on a particular date, generally at the end
of accounting year to ascertain the financial position of a business concern. It consists
of assets on the one hand and liabilities on the other. Financial position of a business is
the list of assets owned by the business and the claims of various parties against these
assets. The statement prepared to show the financial position is termed as Balance
Sheet
Balance Sheet has no debit or credit side as it is a statement and not an account.
Left hand side of Balance sheet is "Liability side" and Right hand side is "Asset side".
Both sides of Balance Sheet should be of equal amount. A Balance sheet shows assets
& liabilities of the business.
All Debit balances of Personal and Real Accounts are shown on the Asset Side
and All Credit Balances of Personal Accounts are shown on Liability side. No Nominal
Account will appear in the Balance Sheet.

Specimen of Balance Sheet:

Balance Sheet of M/s_______ as on ________

Liabilities Amt Amt Assets Amt Amt

(Rs. (Rs. (Rs. (Rs.
 ) ) ) )
Capital (opening) xx Cash in hand xx
Add : Net Profit xx Cash at Bank xx
Add : Interest on capital xx Bills Receivable xx
xxx Sundry Debtors xx
Goodwill xx
Less : Drawings Furniture xx
Less : Interest on Drawings xx
xx Plant & Machinery xx
Less : Net Loss xx
xx Land & Building xx
Prepaid expenses xx
Bank Loan xx
Outstanding Income xx
Bank Overdraft xx
Closing Stock xx
Sundry Creditors xx
Bills Payable xx
Outstanding Expenses xx
Pre-received Income xx

Total xxx Total xxx

Illustration 1
From the following Trial Balance of Bharathi & Sons prepare Trading and Profit & Loss
Account for the year ended and Balance Sheet as on 31st March, 2022.

Debit balance Amt (Rs.) Credit balance Amt (Rs.)

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

Additional Information :
Closing Stock - Rs. 54,000
Solution: In the Books of Bharathi & Sons
Trading Account and Profit and loss Account for the year ended 31st March 2022

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 24,000 By Sales 81,000
To Purchases 71,000 Less : Sales Return 5,000 76,000
Less : Purchase Return 3,000 68,000
To Royalties 4,000
To Wages 6,000 By Closing Stock 54,000
To Carriage Inward 400
To Gross Profit c/d 27,600
1,30,000 1,30,000
To Salaries 16,000 By Gross Profit b/d 27,600
To Rent 1,000
To Sundry Expenses 3,000
To Insurance 1,000
To Bad debts 1,000
To Travelling Expenses 2,000
To Carriage Outwards 1,600
To Net Profit 2,000
(Transferred to Capital A/c)
27,600 27,600

Balance Sheet as on 31st March, 2022

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

ADJUSTMENTS AND THEIR INCORPORATION

The number and nature of adjustments differ from organisation to organisation. It

depends upon the volume and nature of activities in the organisation, However, certain
adjustments are common in all types of organisations. Moreover, while making
adjustments you will have to follow the general principle of double entry i.e. the
amount is to be debited to one account and credited to another account. Thus in the
financial statements the item to be adjusted should appear at two places one
representing the debit and the other representing the credit.

Name of Adjustment Journal Entries Two Effects

1) Closing Stock Closing Stock A/c............Dr 1) Credit side of Trading A/c
To Trading A/c 2) Shown on Assets side of Balance
Sheet
2) Depreciation 1) Depreciation A/c.........Dr 1) Debit side of Profit & Loss A/c
To Asset A/c
2) Profit & Loss A/c........Dr 2) Deducted from particular Assets on
To Depreciation A/c assets side of Balance sheet
3) Outstanding or Expenses A/c...................Dr 1) Add to particular expenses on
Unpaid Expenses To Outstanding expenses A/c Trading or Profit and Loss A/c
2) Shown on Liability side of Balance
Sheet.
4) Prepaid Expenses Prepaid Expenses A/c......Dr 1) Less from that particular expenses
To Expenses A/c on Trading or Profit & Loss A/c
2) Shown on Assets side of Balance
sheet
5) Accrued Income/ Accrued Income A/c……Dr 1) Add to particular income on credit
Outstanding Income To Income A/c side of Profit & Loss A/c
2) Shown on Assets side of
Balance sheet.
6) Pre-received Income Income A/c.......................Dr 1) Less from particular income on
To Pre-received Income /c credit side of Profit & Loss
A/c
2) Shown on Liabilities side of
Balance sheet
7) Bad debts 1) Bad debts A/c.............Dr 1) Debit side of Profit & Loss A/c
To Debtors A/c (New R.D.D + Bad debts)
2) Profit & Loss A/c........Dr 2) Deducted from Sundry debtors on
To Bad debts A/c assets side.
8) R.D.D (Reserve for Profit & Loss A/c.............Dr 1) Debit side of Profit & Loss A/c
doubtful debts) To R.D.D. A/c 2) Deducted from Sundry debtors on
assets side.

9) Provision for Profit & Loss A/c.............Dr 1) Debit side of Profit & Loss A/c
Discount on Debtors To Provision for discount on 2) Deducted from Sundry debtors on
debtors A/c Assets Side of Balance Sheet.

10) Provision for Provision for discount on 1) Credit side of Profit & Loss A/c
Discount on Creditors creditors A/c.....................Dr 2) Deducted from Sundry creditors on
To Profit & Loss A/c liabilities side of Balance sheet

11) Goods taken by 1) Drawings A/c..............Dr 1) Credit side of Trading or

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

14) Interest on Capital A/c.......................Dr 1) Credit side of Profit & Loss A/c
Drawings To Profit & Loss A/c 2) Add to Drawings/Less from Capital.
Illustration 2
From the following Trial Balance of Mahesh Traders you are required to prepare Final Accounts.

Trial Balance as on 31st March, 2020

Particulars Debit (Rs.) Credit (Rs.)

Opening stock 32,750
Purchases 55,000
Sales 89,500
Purchases Returns 2,630
Sales Returns 4,480
Royalties 4,000
Wages & Salaries 8,000
Office Salaries 11,000
Bills Receivable 19,250
Bills Payable 12,500
Office Equipments 20,000
Motor Van 30,400
Plant and Machinery 25,000
Bad Debts 2,500
Advertisement 6,000
Cash in Hand 5,000
Sundry Debtors 31,250
Reserve for Bad debts 1,000
Sundry Creditors 24,000
Capital 1,25,000
2,54,630 2,54,630
Adjustments :

1) Closing Stock on 31st March, 2020 was valued at cost price Rs. 19,000, Market price Rs. 20,000
2) Office Salaries outstanding Rs. 1,000
3) Prepaid Wages Rs.1,000
4) Provide depreciation @ 5%, 10% and 15% on Office Equipments, Motor Van and Plant and
Machinery respectively.

Solution : In the Books of Mahesh Traders

Trading Account and Profit and loss Account for the year ended 31st March 2020

Dr. Cr.
 Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 32,750 By Sales 89,500
To Purchases 55,000 Less : Sales Return 4,480 85,020
Less : Purchase Return 2,630 52,370

To Wages and Salaries 8,000 By Closing Stock 19,000

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

28,290 28,290
 Balance Sheet as on 31st March, 2020

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 1,25,000 Office Equipments 20,000
Less : Net Loss 19,390 1,05610 Less : Depreciation 5% 1,000 19,000

Outstanding Salaries 1,000 Motor Van 30,400

Bills Payable 12,500 Less : 10% Depreciation 3,040 27,360
Sundry Creditors 24,000 Bills Receivable 19,250
Plant & Machinery 25,000
Less : 10% Depreciation 3,750 21,250

Debtors 31,250
Closing Stock 19,000
Prepaid Wages 1,000
Cash in hand 5,000
1,43,110 1,43,110

Depreciation :
1) 5% on Rs. 20,000 (Office Equipments) 20,000 x
5/100, So Depreciation on Office Equipments is Rs.
1,000

2) 10% on Rs. 30,400 (Motor Van 30,400 x 10/100,

So Depreciation on Motor van is Rs. 3,040
3) 15% on Rs. 25,000 (Plant and Machinery) 25,000 x
15/100, So Depreciation on Plant and Machinery is Rs.
3,750
Illustration 03
From the following Trial Balance of Kayal Enterprises you are require to prepare Trading Account,
Profit & Loss Account for the year ending on 31st March, 2019 and Balance Sheet as on that date
Trial Balance as on 31st March, 2019
Particulars Debit (Rs.) Credit (Rs.)
Opening Stock 45,200
Capital 3,00,000
Drawings 20,000
Furniture 60,000
Prepaid Insurance 1,770
Debtors & Creditors 70,000 1,29.250
Purchases & Sales 57,000 1,20,000
Plant & Machinery 50,000
Investment 68,000
Factory Insurance 26,000
Audit Fees 21,000
Carriage Inward 1,800
Land & Building 1,40,000
Rent 7,120
Reserve for Bad debts 6,000
Carriage Outward 8,360
Returns 2,000 9,000
Discount 1,000 7,000
Commission Received 8,000
5,79,250 5,79,250

Adjustments :

1) Write off Bad debts Rs. 2,000 and Provide 2.5% reserve for bad debts on debtors.
2) Closing stock valued at Cost Price Rs. 46,000 and Market price Rs. 40,000
3) Provide Depreciation @ 5% on Building and 10% on Machinery.
4) Rent prepaid Rs. 3,560
5) Outstanding Carriage Inward is Rs. 1,200
Solution : In the Books of Kayal Enterprises
Dr. Trading Account and Profit and loss Account for the year ended 31st March 2019 Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 45,200 By Sales 1,20,000
To Purchases 57,000 Less : Sales Return 2,000 1,18,000
Less : Purchase Return 9,000 48,000
To Factory Insurance 26,000
To Carriage Inward 1,800 By Closing Stock 40,000
Add : Outstanding 1,200 3,000
To Gross Profit c/d 35,800
1,58,000 1,58,000
To Audit fees 21,000 By Gross Profit b/d 35,800
To Rent 7,120 By Discount 7,000
Less : Prepaid Rent 3,560 3,560 By R.D.D. (Old) 6,000
To Depreciation Less : R.D.D. (New) 1,700
- Land & Building 7,000 4,300
- Plant & Machinery 5,000 12,000 Less : Bad Debts 2,000 2,300
(New)
To Carriage Outward 8,360 By Commission 8,000
To Discount 1,000 Received
To Net Profit 7,180
(Transfered to Capital A/c)
53,100 53,100
Balance Sheet as on 31st March, 2019
Amount Amount Amount Amount
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 3,00,000 Sundry Debtors 70,000
Add: Net Profit 7,180 Less : Bad Debts 2,000
3,07,180 68,000
Less : Drawings 20,000 2,87,180 Less : 2.5% R.D.D. 1,700 66,300
Creditors 1,29,250 Land & Building 1,40,000
Outstanding Carriage 1,200 Less : 5% Depreciation 7,000 1,33,000
Inward Plant & Machinery 50,000
Less : 10% Depreciation 5,000 45,000
Prepaid Rent 3,560
Prepaid Insurance 1,770
Furniture 60,000
Investment 68,000
Closing Stock 40,000
4,17,630 4,17,630
llustration 4

From the following Trial Balance of Krishna Enterprises prepare Final Accounts.
Trial Balance as on 31st March, 2018
Particulars Debit (Rs.) Credit (Rs.)
Capital 55,000
Drawings 3,000
Opening stock 16,400
Purchases 31,100
Direct Expenses 2,500
Sales 50,000
Returns 1,980
Rent & taxes 6,000
Bad Debts 400
Reserve for bad debts 1,500
Discount 2,375
Commission received 255
Debtors and Creditors 20,250 18,500
Furniture 6,000
Machinery 12,000
Goodwill 7,500
Wages & Salaries 7,000
Salaries (for 10 months) 5,000
Advertisement 9,000
Investment in Debentures 8,500
Loans and Advances 13,750
1,39,005 1,39,005

Adjustments :

1) Closing Stock Rs.17,250

2) Rent of Rs. 4,000 has been prepaid
3) Provide 2% reserve for Bad Debts on Debtors. It was realised that our Debtor worth Rs.
1,000
proved to be bad and has to be written off.
4) Write off Depreciation @ 7.5% on Machinery and 15% on Furniture.
5) Create discount on Creditors @ 3%
Solution : In the Books of Krishna Enterprises
Dr. Trading Account and Profit and loss Account for the year ended 31st March 2018 Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening 16,400 By Sales 50,000
Stock To 31,100 Less : Sales Return 1,980 48,020
Purchases 2,500
To Direct Expenses 7,000
To Wages & 8,270 By Closing Stock 17,250
Salaries To Gross 65,270 65,270
Profit c/d 5,000 By Gross Profit 8,270
1,000 6,000 b/d By Discount 555
To Salaries 6,000 on Creditors
Add : Outstanding salaries 4,000 2,000 By Commission 255
To Rent & Taxes received
Less : Prepaid Rent 900 By Net Loss 12,380
To Depreciation on 900 1,800 (Transferred to
- Machinery 2,375 Capital A/c)
- Furniture 9,000
To Discount 400
To Advertisement 1,000
To Bad Debts (Old) 385
Add : Bad Debts (New) 1,785
Add : R.D.D. (New) 1,500 285

Less : R.D.D. (Old)

21,460 21,460

Balance Sheet as on 31st March, 2018

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

1) In Trial Balance Salaries are given Rs. 5,000 for 10 months and 2 months are
outstanding.
Therefore 2 months outstanding amount will be Rs. 1,000
Salaries Rs. 5,000
Add : outstanding Rs. 1,000 Rs. 6,000
2) R.D.D. - 2% on 19,250 = Rs. 385
3) 3% Reserve for discount on creditors - 3% on 18,500 = Rs. 555
Illustration 5
From the following Trial Balance of Alpha Traders you are required to prepare Trading Account and
Profit and Loss Account for the year ending on 31st March 2022 and Balance Sheet as on that date.
Trial Balance as on 31st March, 2022
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Debtors 45,000 Capital 1,20,000
Opening Stock 11,550 Sales 60,750
Purchases 53,250 Return Outward 450
Sales Return 1,050 Dividend Received 2,250
Bad debts 600 Creditors 37,500
Rent. Rates & taxes 2,670 Bank Overdraft 24,000
Insurance 2,400 R.D.D. 1,200
Office Equipments 42,900
Furniture & Fixtures 28,500
Cash at Bank 32,280
Legal Expenses 3,000
Advertisement 1,800
Brokerage 2,100
Drawings 3,000
Wages 2,250
Coal, Gas, Fuel & Water 1,800
Machinery 12,000

2,46,150 2,46,150
Adjustments :

1) Closing Stock valued at Rs. 42,000.

2) Write off Rs. 1,200 Bad Debts and create a provision for bad & doubtful debts at 2% on
debtors.
3) Outstanding expenses - Legal Expenses Rs. 750 and Wages Rs. 225
4) Charge depreciation on Office Equipments 2.5% and Machinery 5%.
5) Prepaid - Insurance Rs. 900
Solution : In the Books of Alpha Traders
Trading Account and Profit and loss Account for the year ended 31st March 2022

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 11,550 By Sales 60,750
To Purchases 53,250 Less : Sales Return 1,050 59,700
Less : Purchase Return 450 52,800
To Wages 2,250
Add : Outstanding Wages 225 2,475 By Closing Stock 42,000
To Coal, Gas, Fuel & Water 1,800
To Gross Profit c/d 33,075
1,01,700 1,01,700
To Legal Expenses 3,000 By Gross Profit b/d 33,075
Add : Outstanding 750 3,750 By Dividend Received 2,250
To Insurance 2,400
Less : Prepaid 900 1,500
To Depreciation
Office Equipments 1,073
Machinery 600 1,673
To Rent, Rates and Taxes 2,670
To Advertisement 1,800
To Bad Debts (New) 1,200
Add : Bad debts (Old) 600
Add : R.D.D. (New) 876
2,676
Less : R.D.D. (Old) 1,200 1,476
To Brokerage 2,100
To Net Profit 20,356
(Transfered to Capital A/c)
35,325 35,325
. Balance Sheet as on 31st March, 2022

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 1,20,000 Office Equipments 42,900
Add: Net Profit 20,356 Less : Depreciation 2.5% 1,073 41,827
1,40,356 Machinery 12,000
Less : Drawings 3,000 1,37,356 Less : 5% Depreciation 600 11,400
Creditors 37,500 Furniture & Fixtures 28,500
Outstanding Exp. Debtors 45,000
Legal Expenses 750 Less : Bad Debts (New) 1,200
Wages 225 975 43,800
Bank Overdraft 24,000 Less : 2% R.D.D. (New) 876 42,924
Prepaid Insurance 900
Cash at Bank 32,280
Closing Stock 42,000
1,99,831 1,99,831
Illustration 6
From the following Trial Balance and information given to you, prepare Trading Account, Profit &
Loss Account & Balance Sheet as on 31st March, 2018 in the books of M/s Abinav.
Trial Balance as on 31st March, 2019
Debit Balances Amt (Rs.) Amt (Rs.)
Capital 2,28,000
Furniture 40,000
Insurance 10,000
Salaries 17,000
Carriage Inward 1,000
Rent. Rates and Taxes 7,000
Machinery 50,000
Wages 8,000
Drawings 14,000
Carriage Outward 5,600
Purchases & Sales 62,000 1,71,000
Stock (1/4/2017) 31,000
Returns 5,000 6,300
Rent received 6,000
Discount Received 1700
 R.D.D. 5,000
Bad debts 2,000
Advertisements 10,900
Debtors and Creditors 90,000 54,000
Bills Receivable 36,000
Cash at Bank 8,500
6% Bank Loan (taken on 1/10/2018) 50,000
Brokerage 4,000
Loose Tools 36,000
Bills Payable 16,000
Goodwill 1,00,000
5,38,000 5,38,000

Adjustments :

1) Closing Stock cost price Rs. 37,000 and Market price Rs. 40,000
2) Provide for R.D.D. @ 5% on Sundry Debtors.
3) Outstanding expenses - Wages - Rs. 3,000, Salary - Rs. 3,600
4) Provide depreciation on Machinery @ 10% and Furniture 5%.
5) Allowed Interest on Capital 5% p.a.
6) Prepaid Insurance Rs. 2,000
Solution : In the Books of M/s Abinav
Trading Account and Profit and loss Account for the year ended 31st March 2019

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 31,000 By Sales 1,71,000
To Purchases 62,000 Less : Sales Return 5,000 1,66,000
Less : Purchase Return 6,300 55,700
To Wages 8,000 By Closing Stock 37,000
Add : Outstanding 3,000 11,000
To Carriage Inward 1,000

To Gross Profit c/d 1,04,300

2,03,000 2,03,000
To Salaries 17,000 By Gross Profit b/d 1,04,300
Add : Outstanding Salaries 3,600 20,600 By Discount Received 1,700
To Int. on Capital 11,400 By Rent Received 6,000
To Bad debts (Old) 2,000
Add : R.D.D. (New) 4,500
6,500
Less : R.D.D. (old) 5,000 1,500
To Depreciation on
Machinery 5,000
Furniture 2,000 7,000
To Insurance 10,000
Less : Prepaid Insurance 2,000 8,000
To Rent, Rates and Taxes 7,000
To Carriage Outward 5,600
To Advertisement 10,900
To Int. on Bank Loan 1,500
To Brokerage 4,000
To Net Profit 34,500
(Transferred to Capital A/c)
1,12,000 1,12,000

Balance Sheet as on 31st March, 2019

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 2,28,000 Machinery 50,000
Add : Int on Capital 11,400 Less 10% : Depreciation 5,000 45,000
2,39,400 Furniture 40,000
Add: Net Profit 34,500 Less 5% : Depreciation 2,000 38,000
2,73,900 Bills Receivable 36,000
Less : Drawings 14,000 2,59,900 Closing Stock 37,000
6% Bank Loan 50,000 90,000
Sundry Debtors
Add :Outstanding Int. 1,500 51,500 4,500
Less 5% : R.D.D. 85,500
Creditors 54,000
Cash at Bank 8,500
Outstanding Exp :
Loose Tools 36,000
Salaries 3,600
Goodwill 1,00,000
Wages 3,000 6,600
Prepaid Insurance 2,000
Bills Payable 16,000
3,88,000 3,88,000
Working Note :
1) Interest on Capital 5% p.a. on Rs. 2,28,000 = Rs. 11,400
2) Hidden Adjustment in Trial Balance
6% Bank Loan, taken on 1st Oct, 2017 - Rs. 50,000
Interest should be charged for 6 months only.
6% on Rs. 50,000 for 6 months = Rs. 1,500
Illustration 7
From the following Trial Balance and additional information given of M/s Laxmi Enterprises you
are required to prepare Trading Account. Profit & Loss Account for the year ending 31st March, 2019
and Balance Sheet as on that date.
Trial Balance as on 31st March, 2019
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Machinery 1,00,000 Discount 2,000
Sundry Debtors 1,20,800 Sales 77,500
Furniture 36,000 Purchases Returns 4,800
Stock (1st April, 2018) 20,000 Creditors 52,000
Wages 1,800 10% Bank Loan (taken 76,000
Electricity Charges 4,600 on 1st Oct. 2018)
Insurance 5,000 R.D.D. 1,600
Factory Rent 4,600 Bank Overdraft 53,300
Travelling Expenses 3,600 Capital 1,00,000
Advertisement 2,500
Office Rent 3,000
Purchases 49,300
Sales Returns 2,800
Bad Debts 1,200
Drawings 12,000
3,67,200 3,67,200
Adjustments :

1) Stock as on 31st March 2019, amounted to Rs. 57,000

2) Depreciate Machinery and Furniture @ 5%
3) Unexpired Insurance Rs. 1,000.
4) Rs. 800 are written off as bad debts and create a Provision for Reserve for Doubtful Debts 5%
on Sundry Debtors and Reserve for Discount on Debtors 2% and discount on Creditors 3%.
5) Outstanding Expenses - Wages Rs. 2,200 and Office Rent Rs. 1,400.
6) Goods withdrawn worth Rs. 2,000 by owner for personal use.
Solution : In the Books of M/s Laxmi Enterprises
Trading Account and Profit and loss Account for the year ended 31st March 2019

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 20,000 By Sales 77,500
To Purchases 49,300 Less : Sales Return 2,800 74,700
Less : Purchase Return 4,800 44,500
To Wages 1,800 By Goods withdrawn 2,000
Add : Outstanding 2,200 4,000 for personal use
Wages To Factory Rent 4,600 By Closing Stock 57,000
To Gross Profit c/d 60.600
1,33,700 1,33,700
To Office Rent 3,000 By Gross Profit b/d 60,600
Add : Outstanding Rent 1,400 4,400 By Discount received 2,000
To Electricity Charges 4,600 By Provision for 1,560
To Insurance 5,000 Discount on Creditors
Less : Prepaid Insurance 1,000 4,000
To Travelling Expenses 3,600
To Depreciation on :
Machinery 5,000
Furniture 1,800 6,800
1,200
To Bad debts (Old)
800
Add : Bad debts (New)
6,000
Add : R.D.D. (New)
8,000
1,600 6,400
Less : R.D.D. (Old)
To Provision for Discount 2,280
on Debtors
To Advertisement 2,500
To Interest on Bank 3,800
Loan To Net Profit 25,780
(Transferred to Capital A/c)
64,160 64,160
 Balance Sheet as on 31st March, 2019
Amount Amount Amount Amount
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 1.00.000 Machinery 1,00,000
Add : Net Profit 25,780 Less 5% : Depreciation 5,000 95.000
1,25,780 Furniture 36,000
Less : Drawings 14,000 1,11,780 Less : 5% Depreciation 1,800 34,200
(12,000 + 2,000) Prepaid Insurance 1,000
Outstanding Exp : Sundry Debtors 1,20,800
Wages 2,200 Less : Bad debts 800
Office Rent 1,400 3,600 1,20,000
Creditors 52,000 Less 5% : RDD. 6,000
less 3% : Discount on 1,560 50,440 1,14,000
Creditors Less 2% Provision for 2,280 1,11,720
10% Bank Loan 76,000 discount
Add : Interest 3,800 79,800 Closing Stock 57,000
Outstanding
Bank Overdraft 53,300
2,98,920 2,98,920
Illustration 8
Shaans Enterprises requested you, to prepare Trading Account, Profit & Loss Account for the year ended
on 31st, March 2022. and Balance Sheet as on that date.
Trial Balance as on 31st March, 2022
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Opening Stock 14,400 Creditors 19,300
Debtors 30,000 Returns outward 750
Returns Inward 1,650 Sales 20,000
Rent, Rates & Insurance 2,250 Discount 365
Productive Wages 2,525 Capital 75,000
Discount 390 Outstanding Interest 650
Interest 475 Loan 7,500
Loss by fire 1,650
Salaries 1,850
Purchases 24,350
Drawings 2,500
Carriage Outward 1,275
Loose Tools 17,500
Plant & Machinery 14,000
Cash in hand 1,250
Cash at Bank 7,500
1,23,565 1,23,565
Adjustments :

1) Stock as on 31st March 2022, amounted to Rs.48,500

2) Charge depreciation on Loose Tools @ 10% and on Plant & Machinery @ 15%
3) Prepaid Insurance amounted to Rs. 500 and outstanding Rent Rs. 400.
4) Charge Interest on Capital @ 5% and on Drawings 7%
5) Outstanding Salary Rs. 650
Solution : In the Books of Shaans Enterprises
Trading Account and Profit and loss Account for the year ended 31st March 2022

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 14,400 By Sales 20,000
To Purchases 24,350 Less : Sales Return 1,650 18,350
Less : Purchase Return 750 23,600
To Productive 2,525 By Closing Stock
48,500
Wages To Gross 26,325
Profit c/d

66,850 66,850
To Rent, Rates & Insurance 2,250 By Gross Profit c/d 26,325
Add : Outstanding Rent 400 365
By Discount
2,650 88
Received By Interest
Less : Prepaid Insurance 500 2,150
on
To Discount 390
Drawings
To Interest on Capital 3,750
To Depreciation on :
Loose Tools 1,750
Plant & Machinery 2,100 3,850
To Interest 475
To Salaries 1,850
Add : Outstanding Salary 650 2,500
To Loss by Fire 1,650
To Carriage Outwards 1,275
To Net Profit 10,738
(Transferred to Capital A/c)

26,778 26,778
 Balance Sheet as on 31st March, 2022

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 75,000 Loose Tools 17,500
Add : Net Profit 10,738 Less 10% : Depreciation 1,750 15,750
Add : Interest 5% on 3,750 Plant & Machinery 14,000
Capital 89,488 Less 15% : Depreciation 2,100 11,900
Less : Drawings 2,500 Cash at Bank 7,500
86988 Closing Stock 48.500
Less : Int on Drawings 88 86,900 Prepaid Insurance 500
Creditors 19,300 Debtors 30,000

Loan 7,500 Cash in hand 1,250

Outstanding Interest 650
Outstanding Rent 400
Outstanding Salary 650
1,15,400 1,15,400
Note : Interest on Drawing is charged for 6 months only as date of Drawing is not given.
Amount of Drawing given in Trial Balance is Rs. 2,500, So 7% on 2500 = 175
Interest on Drawing is charged for 6 months only; Therefore 175/2 = 88.
It means, Drawings Rs. 2,500 + 88 = 2,588
Illustration 9
From the following Trial Balance of Kisan Traders prepare Trading Account, Profit & Loss Account
for the year ended on 31st, March 2019. and Balance Sheet as on that date.
Trial Balance as on 31st March, 2019
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Stock (1.4.2018) 1,50,000 Sundry Creditors 2,00,000
Purchases 8,50,000 Bank Overdraft 1,80,000
Wages 1,20,000 Interest Received 60,000
Indirect Expenses 80,000 Reserve for doubtful debts 10,000
Return Inward 20,000 Sales 13,95,300
Power & Fuel 95,000 Returns Outward 30,000
Advertisement 70,000 Capital 6,00,000
Travelling Expenses 30,000
Sundry Debtors 2,20,000
Plant & Machinery 1,80,000
Printing & Stationery 18,000
Computers & Printers 5,20,000
Insurance Premium 20,000
Cash in hand 42,300
Bad Debts 11,000
Drawings 49,000
24,75,300 24,75,300
Adjustments :

1) Closing Stock is valued at Rs. 2,80,000

2) Wages unpaid Rs. 30,000, Indirect Expenses outstanding Rs. 22,000.
3) Machinery includes Rs. 40,000 for the purchase of a new Machinery on 1st Oct, 2018
depreciate Plant and Machinery at 10% and Computers & Printers at 10%.
4) Reserve for doubtful debts is to be maintained at 5%.
5) Insurance Premium is paid for one year up to 30th June, 2019.
6) Travelling expenses include Rs. 10,000 for personal travelling expenses of owner.
Solution : In the Books of Kisan Traders
Trading Account and Profit and loss Account for the year ended 31st March 2019

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening 1,50,000 By Sales 13,95,300
Stock To 8,50,000 Less : Sales Return 20,000 13,75,300
Purchases 30,000 8,20,000
Less : Purchase Return 1,20,000
To Wages 30,000 2,80,000
1,50,000 By Closing Stock
Add : Unpaid wages 95,000
To Power & Fuel 4,40,300
To Gross Profit c/d
16,55,300 16,55,300
80,000 By Gross Profit 4,40,300
To Indirect 22,000 1,02,000 b/d By Interest 60,000
Expenses Add : 70,000 Received
Outstanding To 30,000
Advertisement 10,000 20,000
To Travelling
expenses 18,000
Less :Personal 20,000
Trravelling 5,000 15,000
To Printing & 11,000
Stationery To Insurance 11,000
Premium Less : Prepaid 22,000
10,000 12,000
Insurance To Bad Debts
Add : New R.D.D.
16,000
52,000 68,000
Less : Old R.D.D.
To Depreciation on 1,95,300
: Plant & Machinery
Computers & printers
To Net Profit
(Transfer to Capital A/c)
5,00,300 5,00,300
 Balance Sheet of Kishan Traders as on 31st March, 2019

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 6,00,000 Cash in hand 42,300
Add Net Profit 1,95,300 Sundry Debtors 2,20,000
Less Drawings 7,95,300 Less : 5% New R.D.D. 11,000 2,09,000
( 49,000 + 10,000 ) 59,000 Plant & Machinery 1,80,000
7,36,300 Less : Depreciation 16,000 1,64,000
Sundry Creditors 2,00,000 (WN)
Bank Overdraft 1,80,000 Computers & Printers 5,20,000

Outstanding expenses Less : 10% Depreciation 52,000 4,68,000

2,80,000
Wages 30,000 Closing Stock
Indirect Expenses 22,000 52,000 Prepaid Insurance 5,000

11,68,300 11,68,300

Working Note :
1) Insurance Premium for 1 year Rs. 20,000 paid upt 30th June
2019. Prepaid Insurance for 3 months 20,000/1 x 3/12 = Rs.
5,000
2) New R.D.D. is 5% on Debtors i.e.
2,20,000/1 x 5/100 = 11,000
3) Balance on Machinery A/c Rs. 1,80,000
Cost of New Machinery
Purchased on 1st Oct. 2018 Rs. 40,000
Balance of old Machinery Rs. 1,40,000
a) Depreciation on old Machinery for 12 months
1,40,000/1 x 10/100 Rs.
14,000
Add : b) Depreciation on New Machinery
(for 6 months)
40,000/1 x 10/100 x 6/12 Rs. 2,000
Rs. 16,000
Total Depreciation on Machinery is Rs. 16,000
Illustration 10
Prepare Trading, Profit and Loss Account and Balance Sheet in the Books of Arun J. with the help of
following information and Trial Balance given below for the year ending 31st March, 2019.
Trial Balance as on 31st March, 2019
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Debtors 24,000 Capital 25,000
Opening Stock 8,000 Sales 20,000
Royalties 1,500 Creditors 10,000
Wages 1,000 Returns 1,000
Salaries 2,500 Loans & Advances 8,000
Drawings 3,000 Bills Payable 12,000
Goodwill 8,000 Interest Received 1,000
Returns 500
Telephone Charges 1,000
Carriage Inwards 1,000
Carriage Outward 1,000
Trade Expenses 500
Insurance 2,000
Plant & Machinery 6,000
Furniture 5,000
Purchases 12,000
77,000 77,000

Adjustments :

1) Closing Stock is valued at Cost Price Rs. 13,000 where as Market Price Rs. 15,000
2) Depreciate Plant & Machinery by 5% and Furniture by 10%
3) Insurance Rs. 700 is unexpired.
4) Outstanding Salary and Wages Rs. 800 and Rs. 1,000 respectively.
5) R.D.D. is to be created 5% on Sundry Debtors
6) Goods of Rs. 3,000 distributed as free sample

Solution : In the Books of Arun

Dr. Trading Account and Profit and loss Account for the year ended 31st March 2019 Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 8,000 By Sales 20,000
To Purchases 12,000 Less : Sales Return 500 19,500
Less : Returns 11,000
To Royalties 1,000 1,500

To Wages 1,000 By Closing Stock 13,000

Add : Outstanding 1,000 2,000 By Goods 3,000
To Carriage Inwards 1,000 distributed as free

To Gross Profit c/d 12,000 sample

35,500 35,500
To Insurance 2,000 By Gross Profit b/d 12,000
Less : Prepaid 700 1,300 By Interest 1,000
To Salaries 2,500 Received
Add : Outstanding 800 3,300
To Depreciation on :
Plant & Machinery 300
Furniture 500 800
To R.D.D. 1,200
To Telephone Charges 1,000
To Carriage Outward 1,000
To Trade Expenses 500
To Advertisements 3,000
(Goods distributed as
free sample)
To Net Profit 900
(Transfer to Capital A/c)
13,000 13,000
Balance Sheet as on 31st March, 2019
Amount Amount Amount Amount
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 25,000 Closing Stock 13,000
Add : Net Profit 900 Plant & Machinery 6,000
25,900 Less : depreciation 5% 300 5,700
Less : Drawings 3,000 22,900 Furniture 5,000
Creditors 10,000 Less : Depreciation 10% 500 4,500

Outstanding Expenses Prepaid Insurance 700

Salaries 800 Goodwill 8,000
Wages 1,000 1,800 Debtors 24,000
Loans & Advances 8,000 Less : R.D.D. 5% 1,200 22,800

Bills Payables 12,000

54,700 54,700
Illustration 11

From the following Trial Balance of Pravin & Sons prepare Trading Account, Profit & Loss Account
for the year ended on 31st, March 2019. and Balance Sheet as on that date.
Trial Balance as on 31st March, 2019
Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Cash 4,000 R.D.D. 1,600
Wages 6,000 Creditors 50,280
Interest 3,000 Sales 62,000
Salaries 12,000 Purchase Returns 1,720
Drawings 10,000 Bank Overdraft 20,000
Advertisement 1,200 Commission Received 2,800
Machinery 51,000 Capital 1,00,000
Printing & Stationery 1,200
Debtors 76,000
Sales Returns 1,500
Opening Stock 10,000
Purchases 54,500
Bad Debts 1,920
Discount 2,080
Rent 4,000
2,38,400 2,38,400

Adjustments :

1) Closing Stock is valued at Rs. 84,000

2) Wages include Rs. 800 being advance given to workers.
3) Outstanding expenses Salaries Rs. 3,600 and Rent Rs. 3,000
4) Write off Rs. 2,000 as bad debts, and create a provision for doubtful debts 3% on Debtors.
5) Amount of Machinery is reduced to Rs. 48,000
6) Charge Interest on Capital 5% p.a.
Solution : In the Books of Pravin & Sons
Dr. Trading Account and Profit and loss Account for the year ended 31st March 2019 Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening 10,000 By Sales 62,000
Stock To 54,500 Less : Sales Return 1,500 60,500
Purchases 1,720 52,780
Less : Purchase Return 6,000 By Closing Stock 84,000
To Wages 800 5,200
Less : Advance paid 76,520
To Gross Profit c/d 1,44,500 1,44,500
4,000 By Gross Profit 76,520
To Rent 3,000 7,000 b/d By 2,800
Add : Outstanding Rent Commission
To Depreciation on 3,000 Received
Machinery 12,000
To Salaries 3,600 15,600
Add : Outstanding Salary 1,920
Add : Bad Debts (old) 2,000
To Bad Debts 3,920
(New) Add : R.D.D. 2,220
(New) 6,140
1,600 4,540
Less : R.D.D. (Old) 5,000
To Interest on capital 3,000
To Interest 1,200
To Advertisement 1,200
To Printing & 2,080
Stationery To Discount 36,700
To Net Profit
(Transfer to Capital A/c)
79,320 79,320

Balance Sheet as on 31st March, 2019

Amount Amount Amount Amount
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 1,00,000 Machinery 51,000
Add : Interest on 5,000 Less : Depreciation 3,000 48,000
Capital Debtors
1,05,000 76,000
Less : Bad debts (New)
Add : Net Profit 36,700 2,000
1,41,700 74,000
Less : Drawings 10,000 1,31,700 Less : New R.D.D. 3% 2,220 71,780
Creditors 50,280 Closing Stock 84,000
Outstanding Expenses Advance to worker 800
- Salaries 3,600 Cash 4,000
- Rent 3,000 6,600
Bank Overdraft 20,000
2,08,580 2,08,580
Working Notes :

1) New Bad debts Rs. 2,000 and R.D.D. is 3%

So Debtors Rs. 76,000
Less : Bad debts (New) Rs. 2,000
Rs. 74,000
Therefore R.D.D. 3% on 74,000
New R.D.D. 2,220
74,000/1 x 3/100 = Rs. 2,220
2) Interest on Capital 5% p.a.
So 1,00,000/1 x 5/100 = Rs. 5,000
Therefore Interest on Capital is Rs. 5,000

Illustration 12
Following is a Trial Balance of Vijay Traders, You are required to prepare Trading Account and
Profit & Loss Account for the year ended 31st March, 2018 and Balance Sheet as on that date

Trial Balance as on 31st March, 2018

Debit Balances Amt (Rs.) Credit Balances Amt (Rs.)
Rent, Rates & Taxes 3,500 R.D.D. 2,500
Insurance 1,000 Loan from Prakash 34,700
Wages 6,000 Sales 92,300
Repairs 9,400 Capital 45,000
Drawings 3,000 Sundry Creditors 18,000
Sundry Debtors 15,000 Sundry Income 7,500
Purchases 40,000 Bills Payable 17,000
Discount 900 Discount Received 3,000
General Expenses 3,600
Furniture 40,000
Plant & Machinery 50,000
Stock (1.4.2017) 12,000
Bank 7,500
Bad Debts 600
Bills Receivable 27,500
2,20,000 2,20,000
Adjustments :

1) Prepaid Insurance Rs. 400

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

Solution : In the Books of Vijay Traders

Trading Account and Profit and loss Account for the year ended 31st March 2018

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 12,000 By Sales 92,300
To Purchases 40,000
To Wages 6,000 By Closing Stock 30,000
Add : Outstanding 1,000 7,000
To Gross Profit c/d 63,300
1,22,300 1,22,300
To Rent, Rates and Taxes 3,500 By Gross Profit b/d 63,300
To Insurance 1,000 By R.D.D. (old) 2,500
Less : Prepaid 400 600 Less : R.D.D. (New) 1500
1,000
To General 3,600 Less : Bad Debts (old) 600 400
Expenses Add : 1,400 5,000 By Sundry Income 7,500
Outstanding To Less : Received in 1,500
Depreciation on : 4,000 Advance 6,000
Furniture 2,000 By Discount Received 3,000
6,000
Machinery 900
To Discount 810
1,710
Add : Reserve for
Discount on Debtors 9,400
To Repairs 46,490
To Net Profit
transfered to Capital A/c
72,700 72,700
 Balance Sheet as on 31st March, 2018

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 45,000 Furniture 40,000
Add : Net Profit 46,490 Less : Deprecation 10% 4,000 36,000
91,490 Plant & Machinery 50,000
Less : Drawings -3,000 88,490 Less : Deprecation 4% 2,000 48,000
Sundry Creditors 18,000 Sundry Debtors 15,000
Loan from Prakash 34,700 Less : R.D.D. (New) 10% 1,500
Outstanding Expenses : 13,500
General Expenses 1,400 Less : 6% Discount on 810 12,690
Wages 1,000 2,400 Debotrs

Sundry Income 1,500 Prepaid Insurance 400

-recieved in advance Closing Stock 30,000

Bills Payable 17,000 Bank 7,500
Bills Receivable 27,500
1,62,090 1,62,090

Working Note :
Old R.D.D. (i.e. Provision for Doubtful debts given inTrial Balance) is more than the new R.D.D.
So excess provision for doubtful debts (Rs. 400) is shown on the credit side of Profit and Loss A/c.
It is treated as gain.

Illustration 13
Following is a Trial Balance of Ajay Enterprises, You are required to prepare Trading Account and
Profit & Loss Account for the year ended 31st March, 2019 and Balance Sheet as on that date
Trial Balance as on 31st March, 2019

Particulars Debit Amt (Rs.) Credit Amt (Rs.)

Debtors 52,835
Opening Stock 8,605
Purchases 25,375
Fuel and Power 1,818
Creditors 42,860
Carriage Outwards 1,860
Drawings 5,000
Capital 1,60,000
Sales 39,472
Returns 860 1,375
 Cash at Bank 16,375
Furniture (Purchased on 1/7/2018) 39,500
Salaries 7,000
Motor car 20,500
Wages 7,000
General Expenses 7,295
8% Loan (taken on 1/10/2018) 15,000
Bad debts 2,000
R.D.D. 800
Bills Payable 6,866
Machinery 40,800
Insurance 5,000
Commission Received 1,450
Investments 26,000
2,67,823 2,67,823

Adjustments :

1) Stock on hand 31st March 2019, amounted to Rs. 28,000

2) Write off Rs. 1,500 as Bad debts and create a Provision for doubtful debts @ 5% on Debtor.
3) Depreciation on Furniture, Motor car, and Machinery @ 10%, 7% and 5% respectively.
4) Commission Rs. 550 is due but not received.
5) Outstanding Expenses General Expenses Rs. 1,000 and Wages Rs. 500.
6) Prepaid expenses Insurance Rs. 2,000

Solution : In the Books of Ajay Enterprises

Trading and Profit and loss Account for the year ended 31st March 2019

Dr. Cr.
Amount Amount Amount Amount
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock 8,605 By Sales 39,472
To Purchases 25,375 Less : Returns 860
Less : Returns 1,375 24,000 38,612
To Wages 7,000 By Closing Stock 28,000
Add : Outstanding 500 7,500
To Fuel & Power 1,818
To Gross Profit c/d 24,689
66,612 66,612
To Salaries 7,000 By Gross Profit 24,689
To Insurance 5,000 b/d By 1,450
Less : Prepaid 2,000 3,000 Commission Add : 550 2000
To Carriage 1,860 Accrued
Outward To Gen. 7,295 commission
Expenses Add : 1,000 8,295 5,771
Outstanding To bad 2,000 By Net Loss
debts (old) 1,500 (Transferd to
Add : Bad debts (New) 2,567 Capital A/c)
Add : R.D.D. (New) 6,067
800 5,267
Less : R.D.D. (Old)
To Depreciation on 1,435
: Motor Car 2,963
Furniture 2,040 6,438
Machinery 600
To Interest on Loan
32,460 32,460

Balance Sheet as on 31st March, 2019

Amount Amount Amount Amount

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capital 1,60,000 Furniture 39,500
Less : Net Loss 5,771 Less : 10% Depreciation 2,963 36,537
1,54,229 (9 Months)
Less : Drawings 5,000 1,49,229 Motor Car 20,500
Bills Payable 6,866 Less : 7% Depreciation 1,435 19,065
Creditors 42,860 Machinery 40,800
Outstanding Expenses : Less : 5% Depreciation 2,040 38,760
General Expeses 1,000 Sundry Debtors 52,835
Wages 500 1,500 Less : Bad Debts (New) 1,500
8% Loan 15,000 51,335
Add : Interest 600 15,600 Less : 5% R.D.D. (New) 2,567 48,768
Closing Stock 28,000
Accrued Commission 550
Prepaid Insurance 2,000
Cash at bank 16,375
Investment 26,000
2,16,055 2,16,055
❂❂❂❂❂❂❂❂❂❂
 2.6 – RATIO ANALYSIS
A ratio shows the relationship between two numbers. Accounting ratio shows the
relationship between two accounting figures.
Ratio analysis is the process of computing and presenting the relationships
between the items in the financial statement.
It is an important tool of financial analysis, because it helps to study the financial
performance and position of a concern. Ratios show strengths and weaknesses of the
business.
❖ OBJECTIVES OF RATIO ANALYSIS
Intercompany comparison is a technique of comparing the information of other
similar concerns for Assessing Company’s own performance. Reasons for any difference
in efficiency can be ascertained with the help of such comparison.
Ratio Analysis has been widely used as a tool for analyzing the performance of
the company over the years. Trend of the ratios indicates whether the company is
moving in the right direction or not.
There are certain ratios for which no standard is available to compare the
performance with e.g. Gross Profit ratio, operating ratio etc. These ratios can be
studied & interpreted only when they compared with the last years' ratios. Such
comparison is known as inter-period comparison of the same company.
• To show the firm’s relative strengths and weaknesses.
• To help to analyze the past performance of the firm and to make future projections.
• To allow interested parties like shareholders, investors, creditors and the government
to analyze and make evaluation of certain aspects of firm’s performance.
• To concentrate on inter-relationship among the figures appearing in the financial
statements.
• To provide an easy way to compare present performance with the past.
• To depict the areas in which the business is competitively advantageous and
disadvantageous.
• To determine the financial condition and performance of the firm.
• To help to make suitable corrective measures when the financial conditions and
financial performance are unfavourable to the firm.
❖ ADVANTAGES OF RATIO ANALYSIS
Simplifies Financial Statements
Ratio analysis simplifies the comprehension of financial statements. Ratios tell the
whole story of changes in the financial condition of a business.
Analyze Past and Forecast Future
It helps to analyze and understand the financial health and trend of a business,
indicating past performance and making it possible to forecast the future trends.
Decision-Making and Cost Control
It serves as a useful tool in management control process for decision-making and cost
control purpose.
Summaries Accounting Figures
It makes the accounting figures easy to understand and highlight the inter-relationship
between various segments of the business.
Overall Profitability
Different users of accounting information make use of specific ratios to meet or satisfy
their requirements. But the management is always interested in overall profitability and
efficiency of the business enterprise.
Liquidity Position
The short-term creditors are more interested in the liquidity position of a firm in the
sense that their money would be repaid on due dates. The ability of the firm to pay
short-term obligations can be found by computing liquidity ratios.
Long term Solvency
This is required by long-term creditors, security analyst and the present and potential
shareholders of the company. The help of capital structure ratios kept the above in
assessing the financial status of the organization.
❖ LIMITATIONS OF RATIO ANALYSIS
The ratio analysis is not a full-proof method in financial statement analysis. It suffers
from a number of limitations. Some of the important ones are:
Ratios ignore qualitative factors
Ratios are obtained from the figures expressed in monetary terms. In this way,
qualitative factors, which may be important, are ignored.
Trends are not the actual ratios
The different ratios calculated from the financial statements of a business enterprise for
one single year are of limited value. It would be more useful to calculate the important
figures in the case of income, dividends, working capital, etc., for a number of years.
Such trends are more useful than absolute ratios.
Defective accounting information
The ratios are calculated from accounted data in the financial statements. It means if
the information is defective then the calculation of ratios would be wrong. Thus, the
deliberate omissions would affect the ratios too.
Change in accounting procedures
A comparison of result of two firms becomes difficult when we find that the firms are
using different procedures related to certain items, such as inventory valuation and
treatment of intangible assets.
Variations in general operating conditions
While interpreting the results based on ratio analysis, all business enterprises have to
work within given general economic conditions, state of the industry in which the firms
are operating and the position of the individual companies within the industry. For
example, if the firm is forced by the government to sell their products at a fixed price,
its comparison with other firms would become impossible.
Single ratio not sufficient
It is very necessary to take into account the combined effect of various ratios so that
the results are correctly interpreted regarding the financial condition and the profit-
making performance of the business. Each ratio plays a part in interpreting the financial
statement.
The use of standard ratio
The financial statements represent historical data and, therefore, the ratios based on
them would only disclose what happened in the past.
Expression of ratios: Ratios are expressed in following four ways:
Pure Ratio Like 2:1. All liquidity and solvency ratios are expressed in pure form.
Percentage e.g. 15%. All profitability ratios are presented in percentage form.
Times Like 4 times. All turnover ratios and Interest Coverage Ratio are presented in
this form.
Fraction like 3/4.
Classification or Types of Ratios:
I. Liquidity Ratios
1. Current Ratio
Current Ratio = Current Assets / Current Liabilities
2. Liquid or Quick or Acid Test Ratio
Liquid Ratio = Liquid Assets / Current Liabilities (OR) Liquid Assets / Liquid Liabilities
Supporting Formulae
1. Current Assets = Current Investments (also known as Marketable Securities or S.T.
Investment) + Inventories (except Loose Tools & Stores and Spares) + Trade
Receivables (Debtors and B.R.) Net after provision for bdd. + Cash and Cash
Equivalents (Cash and Bank Balances) + Short Term Loans and Advances+ Other
Current Assets (Prepaid Expenses, Accrued Income & Advance Tax)
2. Current Liabilities = Short Term Borrowings (Bank Overdraft and Cash Credit)+
Trade Payables (Creditors and B.P.)+ Other Current Liabilities (O/s Expenses, Income
Received in Advance, Unpaid or Un claimed Dividend)+ Short Term Provisions
(Provision for Tax, Proposed Dividend)
3. Liquid Assets = Current Assets- [Inventory (closing) + Other Current assets (Prepaid
Expenses, Accrued Income & Advance Tax)]
4. Liquid Liabilities = Current Liabilities – Bank Overdraft
5. Working Capital = Current Assets - Current Liabilities
6. Total Assets = Non-Current Assets + Current Assets
7. Total Liabilities = Non-Current Liabilities + Current Liabilities
8. Non-Current Assets = Fixed Assets (tangible and intangible) + Non-Current
Investments + Long Term Loans & Advances (Capital Advances, Security Deposits)
9. Non-Current Liabilities = Long Term Loans (Debentures, Bank Loans, Bonds) + Long
Term Provisions (Provision for employee benefit & Warranties)
10. Capital Employed = Shareholders Fund + Borrowed Fund (Non-Current Liabilities)
11. Capital Employed = Total Assets - Current Liabilities
= Non-Current Assets + Working Capital
12. Shareholders Fund = Share Capital + Reserves and Surplus
Non-Current Non Trade Investments
Shareholders Fund = Total Assets - Non Current Liabilities - Current liabilities
II. Solvency Ratios
1. Debt - Equity Ratio
Debt - Equity Ratio = Debt (Non Current Liabilities) / Equity (Shareholders Fund)
2. Proprietary Ratio
Proprietary Ratio = Shareholders Fund / Total Assets
3. Total Asset to Debt Ratio
Total Asset to Debt Ratio = Total Assets / Debt (Non Current Liabilities)
4. Interest Coverage Ratio
Interest Coverage Ratio = Profit BEFORE Interest, Tax and Dividend / Interest on Long
Term Loans
III. Activity or Turnover Ratios
1. Working Capital Turnover Ratio
Working Capital Turnover Ratio = Revenue from Operation / Working Capital
2. Inventory Turnover Ratio (Stock Turnover Ratio)
Inventory Turnover Ratio = Cost of Revenue from Operation / Average Inventory
3. Receivable Turnover Ratio
Receivable Turnover Ratio = Net Credit Revenue from Operation / (Average
Debtors + Average BR)
Receivable Turnover Ratio = 12 months or 365 days or 52 weeks / Debt or
Average Collection Period
4. Payable Turnover Ratio
Payable Turnover Ratio = Net Credit Purchases / (Average Creditors + Average
B.P.)
Payable Turnover Ratio = 12 months or 365 days or 52 weeks / Average
Payment Period
Supporting Formulae
a) Revenue from Operation (Net Sales) = Total Revenue from Operation - Return of
Revenue from Operation
b) Total Revenue from Operation = Cash Revenue from Operation + Credit Revenue
from Operation
c) Net Credit Revenue from Operation = Credit Revenue from Operation - Return of
Revenue from Operation
d) Cost Of Revenue From Operation (COGS) = Opening Inventory + Net Purchases +
Direct Expenses - Closing Inventory
e) Cost Of Revenue From Operation (COGS) = Revenue From Operation - Gross Profit
f) Cost Of Revenue From Operation (COGS) = Cost of Raw Material Consumed +
Purchases of Stock in Trade + Change in Inventory of Finished Goods, WIP, Stock in
Trade + Direct Expenses
g) Average Inventory = (Opening Inventory + Closing Inventory) / 2
h) Average Debtors = (Opening Debtors + Closing Debtors) / 2
i) Average B.R. = (Opening B.R. + Closing B.R.) / 2
j) Average Creditors = (Opening Creditors + Closing Creditors) / 2
k) Average B.P. = (Opening BP + Closing B. P.) / 2
I) Average Receivable = Average Debtors + Average B.R.
m) Average Payable = Average Creditors + Average B.P.
In absence of Information
• Debtors = Opening Debtors = Closing Debtors = Average = Debtors
 • B.R. = Opening B.R. = Closing B.R. = Average B.R.
• Creditors = Opening Creditors = Closing Creditors = Average Creditors
• B.P. = Opening B.P. = Closing B.P. = Average B.P.
IV. Profitability Ratios
1. Gross Profit Ratio
Gross Profit Ratio = (Gross Profit / Revenue from Operation) × 100
2. Net Profit Ratio
Net Profit Ratio = (Net Profit After Tax / Revenue from Operation) × 100
3. Operating Ratio or Operating Cost Ratio
Operating Ratio = (Operating Cost / Revenue from Operation) × 100

4. Operating Profit Ratio

Operating Profit Ratio = (Operating Profit / Revenue from Operation) × 100
5. Return on Investment or Return on Capital employed
ROI = (Profit BEFORE Interest, Tax and Dividend / Capital Employed) × 100
Supporting Formulae
• Net Profit = Gross Profit + Indirect Incomes - Indirect Expenses
= Gros profit + Non-Operating Income – (Operating Expenses + Non-
Operating Expenses)
= (Gross profit + Non-Operating Incomes) – (Operating Expenses - Non
Operating Expenses)
= (Gross profit – Operating Expenses) + (Non-Operating Incomes - Non
Operating Expenses)
• Net Profit = Operating Profit + (Non-Operating Incomes - Non Operating Expenses)
• Indirect Expenses = Operating Expenses + Non-Operating Expenses
• Non-Operating expenses Example Interest Paid on loans a finance cost
• Operating Expenses = Office and Administrative Expenses + Selling and Distribution
Expenses + General Expenses + Depreciation
• Operating Expenses = Employee Benefit Expenses + Other Operating Expenses
• Indirect Incomes (also known Non-Operating Incomes)
Example: Interest Received on Investment
• Operating Cost = Cost of Revenue from Operation + Operating Expenses
• Operating Profit = Gross Profit - Operating Expenses
= Revenue from Operation - Cost of Revenue - Operating Expenses
= Revenue from Operation - (Cost of Revenue + Operating
Expenses)
• Operating Profit = Revenue from Operation-Operating Cost
• Operating Profit = Net Profit - Non Operating Incomes + Non-Operating
Expenses
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY
Illustration 1
Calculate Current Ratio from the following information:
Particulars (Rs.)
Inventories 50,000
Trade receivables 50,000
Advance tax 4,000
Cash and cash equivalents 30,000
Trade payables 1,00,000
Short-term borrowings (bank overdraft) 4,000
Solution:
Current Ratio = Current Assets / Current Liabilities
Current Assets = Inventories + Trade receivables + Advance tax + Cash and cash
equivalents
= Rs. 50,000 + Rs. 50,000 + Rs. 4,000 + Rs. 30,000 = Rs. 1,34,000
Current Liabilities = Trade payables + Short-term borrowings
= Rs. 1,00,000 + Rs. 4,000 = Rs. 1,04,000
Current Ratio = Rs.1,34,000 / Rs.1,04,000
= 1.29 :1
Illustration 2
Calculate quick ratio from the information given in illustration 1.
Solution:
Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Current assets – (Inventories + Advance tax)
= Rs. 1,34,000 – (Rs. 50,000 + Rs. 4,000) = Rs. 80,000
Current Liabilities = Rs. 1,04,000
Quick Ratio = Rs. 80,000 / Rs. 1,04,000
= 0.77 :1
Illustration 3
Calculate ‘Liquid Ratio’ from the following information:
Current liabilities = Rs. 50,000
Current assets = Rs. 80,000
Inventories = Rs. 20,000
Advance tax = Rs. 5,000
Prepaid expenses = Rs. 5,000
Solution
Liquid Ratio = Liquid Assets / Current Liabilities
Liquid Assets = Current assets – (Inventories + Prepaid expenses + Advance tax)
= Rs. 80,000 – (Rs. 20,000 + Rs. 5,000 + Rs. 5,000) = Rs. 50,000
Liquid Ratio = Rs. 50,000 / Rs. 50,000 = 1:1
Illustration 4
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY
X Ltd., has a current ratio of 3.5:1 and quick ratio of 2:1. If excess of current
assets over quick assets represented by inventories is Rs. 24,000, calculate
current assets and current liabilities.
Solution:
Current Ratio = 3.5:1
Quick Ratio = 2:1
Let Current liabilities = x
Current assets = 3.5x
and Quick assets = 2x
Inventories = Current assets – Quick assets
24,000 = 3.5x – 2x
24,000 = 1.5x
x = Rs.16,000
Current Liabilities = Rs.16,000
Current Assets = 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000.
Verification :
Current Ratio = Current assets : Current liabilities
= Rs. 56,000 : Rs. 16,000
= 3.5 : 1
Quick Ratio = Quick assets : Current liabilities
= Rs. 32,000 : Rs. 16,000
=2:1

Illustration 5
Calculate the current ratio from the following information:
Total assets = Rs. 3,00,000
Non-current liabilities = Rs. 80,000
Shareholders’ Funds = Rs. 2,00,000
Non-Current Assets:
Fixed assets = Rs. 1,60,000
Non-current Investments = Rs. 1,00,000
Solution:
Total assets = Non-current assets + Current assets
Rs. 3,00,000 = Rs. 2,60,000 + Current assets
Current assets = Rs. 3,00,000 – Rs. 2,60,000 = Rs. 40,000
Total assets = Equity and Liabilities
= Shareholders’ Funds + Non-current liabilities + Current liabilities
Rs. 3,00,000 = Rs. 2,00,000 + Rs. 80,000 + Current Liabilities
Current liabilities = Rs. 3,00,000 – Rs. 2,80,000 = Rs. 20,000
Current Ratio = Current Assets / Current Liabilities
= Rs. 40,000 / Rs. 20,000 = 2 :1
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY
Illustration 6
From the following information, calculate inventory turnover ratio:
Rs.
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
Carriage inwards = 4,000
Solution:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
Cost of Revenue from Operations = Inventory in the beginning + Net Purchases +
Wages + Carriage inwards– Inventory at the end
= Rs. 18,000 + Rs. 46,000 + Rs. 14,000 + Rs. 4,000 – Rs. 22,000 = Rs. 60,000
Average Inventory = (Inventory in the beginning + Inventory at the end) / 2
= (Rs. 18,000 + Rs. 22,000) / 2
= Rs. 20,000
∴ Inventory Turnover Ratio = Rs. 60,000 / Rs. 20,000 = 3 Times
Illustration 7
From the following information, calculate inventory turnover ratio:
Rs.
Revenue from operations = 4,00,000
Average Inventory = 55,000
Gross Profit Ratio = 10%
Solution:
Revenue from operations = Rs. 4,00,000
Gross Profit = 10% of Rs. 4,00,000 = Rs. 40,000
Cost of Revenue from operations = Revenue from operations – Gross Profit
= Rs. 4,00,000 – Rs. 40,000 = Rs. 3,60,000
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
= Rs. 3,60,000 / Rs. 55,000 = 6.55 times
Illustration 8
A trader carries an average inventory of Rs. 40,000. His inventory turnover ratio
is 8 times. If he sells goods at a profit of 20% on Revenue from operations, find
out the gross profit.
Solution:
Inventory Turnover Ratio = Cost of Revenue from Operations / Average Inventory
8 = Cost of Revenue from Operations / Rs. 40,000
∴ Cost of Revenue from operations = 8 × Rs. 40,000 = Rs. 3,20,000
Revenue from operations = Cost of Revenue from operations × (100/80)
= Rs. 3,20,000 ×(100/80) = = Rs. 4,00,000
Gross Profit = Revenue from operations – Cost of Revenue from operations
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY
= Rs. 4,00,000 – Rs. 3,20,000 = Rs. 80,000

Illustration 9
Calculate the Trade receivables turnover ratio from the following information:
Total Revenue from operations Rs.4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2016 Rs.40,000
Trade receivables as at 31.3.2017 Rs.1,20,000
Solution:
Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average
Trade Receivables
Credit Revenue from operations = Total revenue from operations – Cash revenue from
operations
Cash Revenue from operations = 20% of Rs. 4,00,000 = Rs. 4,00,000 × (20/100)
= Rs. 80,000
Credit Revenue from operations = Rs. 4,00,000 – Rs. 80,000 = Rs. 3,20,000
Average Trade Receivables = (Opening Trade Receivables + Closing Trade
Receivables)/2
= (Rs. 40,000 + Rs. 1,20,000) / 2 = Rs. 80,000
Trade Receivables Turnover Ratio = Net Credit Revenue from Operations / Average
Inventory
Trade Receivables Turnover Ratio = Rs. 3,20,000 / Rs. 80,000 = 4 times.
Illustration 10
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY

following ratio:

Proprietary ratio

Mortgage

= 0.722 or 72.2 %
+ current Assets

Ratio
.
mortgage
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY
50,000

1,50,000
Depreciation Investment i.e., balance in

Asset

– 1,50,000

Return
 JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY

Int.
(10% of 1,20000)

16,20,000 – 10,20,000

(–) Surplus Balance

balance Davi

(b) Reserve & Surplus

JAYARAM COLLEGE OF ENGINEERING AND TECHNOLOGY