Financial Accounting

INTRODUCTION

In all activities (whether business activities or non-business activities) and in

all organizations (whether business organizations like a manufacturing entity or
trading entity or non-business organizations like schools, colleges, hospitals, libraries,
clubs, temples, political parties) which require money and other economic resources,
accounting is required to account for these resources. In other words, wherever money
is involved, accounting is required to account for it. Accounting is often called the
language of business. The basic function of any language is to serve as a means of
communication. Accounting also serves this function.

MEANING AND DEFINITION OF BOOK- KEEPING

Meaning

Book- keeping includes recording of journal, posting in ledgers and balancing

of accounts. All the records before the preparation of trail balance is the whole subject
matter of book- keeping. Thus, book- keeping many be defined as the science and art
of recording transactions in money or money’s worth so accurately and systematically,
in a certain set of books, regularly that the true state of businessman’s affairs can be
correctly ascertained. Here it is important to note that only those transactions related
to business are recorded which can be expressed in terms of money.

Definition

“Book- keeping is the art of recording business transactions in a systematic

manner”. A.H.Rosenkamph.

“Book- keeping is the science and art of correctly recording in books of

account all those business transactions that result in the transfer of money or money’s
worth”. R.N.Carter

Objectives of Book- keeping

i) Book- keeping provides a permanent record of each transactions.

ii) Soundness of a firm can be assessed from the records of assets and abilities
on a particular date.
iii) Entries related to incomes and expenditures of a concern facilitate to know
the profit and loss for a given period.
iv) It enables to prepare a list of customers and suppliers to ascertain the
amount to be received or paid.
v) It is a method gives opportunities to review the business policies in the light
of the past records.
 vi) Amendment of business laws, provision of licenses, assessment of taxes etc.,
are based on records.

ACCOUNTING

Meaning of Accounting

Accounting, as an information system is the process of identifying, measuring

and communicating the economic information of an organization to its users who need
the information for decision making. It identifies transactions and events of a specific
entity. A transaction is an exchange in which each participant receives or sacrifices
value (e.g. purchase of raw material). An event (whether internal or external) is a
happening of consequence to an entity (e.g. use of raw material for production). An
entity means an economic unit that performs economic activities.

Definition of Accounting

American Institute of Certified Public Accountants (AICPA) which defines

accounting as “the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are, in part at least, of a
financial character and interpreting the results thereof”.

Objective of Accounting

Objective of accounting may differ from business to business depending upon

their specific requirements. However, the following are the general objectives of
accounting.

i) To keeping systematic record:

It is very difficult to remember all the business transactions that take place.
Accounting serves this purpose of record keeping by promptly recording all the
business transactions in the books of account.

ii) To ascertain the results of the operation:

Accounting helps in ascertaining result i.e., profit earned or loss suffered in

business during a particular period. For this purpose, a business entity prepares either
a Trading and Profit and Loss account or an Income and Expenditure account which
shows the profit or loss of the business by matching the items of revenue and
expenditure of the some period.

iii) To ascertain the financial position of the business:

In addition to profit, a businessman must know his financial position i.e.,

availability of cash, position of assets and liabilities etc. This helps the businessman to
know his financial strength. Financial statements are barometers of health of a
business entity.

iv) To portray the liquidity position:

Financial reporting should provide information about how an enterprise obtains

and spends cash, about its borrowing and repayment of borrowing, about its capital
transactions, cash dividends and other distributions of resources by the enterprise to
owners and about other factors that may affect an enterprise’s liquidity and solvency.

v) To protect business properties:

Accounting provides upto date information about the various assets that the
firm possesses and the liabilities the firmmowes, so that nobody can claim a
payment which is not due to him.

vi) To facilitate rational decision – making:

Accounting records and financial statements provide financial information which

help the business in making rational decisions about the steps to be taken in respect of
various aspects of business.

vii) To satisfy the requirements of law:

Entities such as companies, societies, public trusts are compulsorily required to

maintain accounts as per the law governing their operations such as the Companies
Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also
compulsory under the Sales Tax Act and Income Tax Act.

Importance of Accounting

i) Owners:

The owners provide funds or capital for the organization. They possess curiosity
in knowing whether the business is being conducted on sound lines or not and whether
the capital is being employed properly or not. Owners, being businessmen, always
keep an eye on the returns from the investment. Comparing the accounts of various
years helps in getting good pieces of information.

ii) Management:

The management of the business is greatly interested in knowing the position of

the firm. The accounts are the basis, the management can study the merits and
demerits of the business activity. Thus, the management is interested in financial
accounting to find whether the business carried on is profitable or not. The financial
accounting is the “eyes and ears of management and facilitates in drawing future
course of action, further expansion etc.”

iii) Creditors:

Creditors are the persons who supply goods on credit, or bankers or lenders of
money. It is usual that these groups are interested to know the financial soundness
before granting credit. The progress and prosperity of the firm, two which credits are
extended, are largely watched by creditors from the point of view of security and
further credit. Profit and Loss Account and Balance Sheet are nerve centres to know
the soundness of the firm.

iv) Employees:

Payment of bonus depends upon the size of profit earned by the firm. The more
important point is that the workers expect regular income for the bread. The demand
for wage rise, bonus, better working conditions etc. depend upon the profitability of
the firm and in turn depends upon financial position. For these reasons, this group is
interested in accounting.

v) Investors:

The prospective investors, who want to invest their money in a firm, of course
wish to see the progress and prosperity of the firm, before investing their amount, by
going through the financial statements of the firm. This is to safeguard the investment.
For this, this group is eager to go through the accounting which enables them to know
the safety of investment.

vi) Government:

Government keeps a close watch on the firms which yield good amount of profits.
The state and central Governments are interested in the financial statements to know
the earnings for the purpose of taxation. To compile national accounting is essential.

vii) Consumers:

These groups are interested in getting the goods at reduced price. Therefore, they
wish to know the establishment of a proper accounting control, which in turn will
reduce to cost of production, in turn less price to be paid by the consumers.
Researchers are also interested in accounting for interpretation.

viii) Research Scholars:

Accounting information, being a mirror of the financial performance of a business

organization, is of immense value to the research scholar who wants to make a study
into the financial operations of a particular firm. To make a study into the financial
operations of a particular firm, the research scholar needs detailed accounting
information relating to purchases, sales, expenses, cost of materials used, current
assets, current liabilities, fixed assets, long-term liabilities and share.
Functions of Accounting

i) Record Keeping Function:

The primary function of accounting relates to recording, classification and

summary of financial transactions-journalisation, posting, and preparation of final
statements. These facilitate to know operating results and financial positions. The
purpose of this function is to report regularly to the interested parties by means of
financial statements. Thus accounting performs historical function i.e., attention on the
past performance of a business; and this facilitates decision making programme for
future activities.

ii) Managerial Function:

Decision making programme is greatly assisted by accounting. The managerial

function and decision making programmes, without accounting, may mislead. The
day-to-day operations are compared with some predetermined standard. The variations
of actual operations with pre-determined standards and their analysis is possible only
with the help of accounting.

iii) Legal Requirement function:

Auditing is compulsory in ca s e o f registered firms. Auditing is not possible

without accounting. Thus accounting becomes compulsory to comply with legal
requirements. Accounting is a base and with its help various returns, documents,
statements etc., are prepared.

iv) Language of Business:

Accounting is the language of business. Various transactions are communicated

through accounting. There are many parties-owners, creditors, government, employees
etc., who are interested in knowing the results of the firm and this can be
communicated only through accounting. The accounting shows a real and true
position of the firm or the business.

Advantages of Accounting

The following are the advantages of accounting to a business:

i) It helps in having complete record of business transactions.

ii) It gives information about the profit or loss made by the business at the
close of a year and its financial conditions. The basic function of
 accounting is to supply meaningful information about the financial
activities of the business to the owners and the managers.
iii) It provides useful information form making economic decisions,
iv) It facilitates comparative study of current year’s profit, sales, expenses
etc., with those of the previous years.
v) It supplies information useful in judging the management’s ability to
utilise enterprise resources effectively in achieving primary enterprise goals.
vi) It provides users with factual and interpretive information about transactions and
other events which are useful for predicting, comparing and evaluation the
enterprise’s earning power.
vii) It helps in complying with certain legal formalities like filing of incometax
and sales-tax returns. If the accounts are properly maintained, the assessment of
taxes is greatly facilitated.

Limitations of Accounting

i) Accounting is historical in nature: It does not reflect the current financial

position or worth of a business.

ii) Transactions of non-monetary mature do not find place in accounting. Accounting

is limited to monetary transactions only. It excludes qualitative elements like
management, reputation, employee morale, labour strike etc.

iii) Facts recorded in financial statements are greatly influenced by accounting

conventions and personal judgements of the Accountant or Management.
Valuation of inventory, provision for doubtful debts and assumption about useful
life of an asset may, therefore, differ from one business house to another.

iv) Accounting principles are not static or unchanging-alternative accounting

procedures are often equally acceptable. Therefore, accounting statements do not
always present comparable data

v) Cost concept is found in accounting. Price changes are not considered. Money
value is bound to change often from time to time. This is a strong limitation of
accounting.

vi) Accounting statements do not show the impact of inflation.

viii) The accounting statements do not reflect those increase in net asset values
that are not considered realized.
Methods of Accounting

Business transactions are recorded in two different ways.

Single Entry
Double Entry

Single Entry:

It is incomplete system of recording business transactions. The business

organization maintains only cash book and personal accounts of debtors and creditors.
So the complete recording of transactions cannot be made and trail balance cannot be
prepared.

Double Entry:

It this system every business transaction is having a two fold effect of benefits
giving and benefit receiving aspects. The recording is made on the basis of both these
aspects. Double Entry is an accounting system that records the effects of transactions
and other events in at least two accounts with equal debits and credits.

Steps involved in Double entry system

(a) Preparation of Journal:

Journal is called the book of original entry. It records the effect of all transactions
for the first time. Here the job of recording takes place.

(b) Preparation of Ledger:

Ledger is the collection of all accounts used by a business. Here the grouping of
accounts is performed. Journal is posted to ledger.

(c) Trial Balance preparation:

Summarizing. It is a summary of ledge balances prepared in the form of a list.

(d) Preparation of Final Account:

At the end of the accounting period to know the achievements of the

organization and its financial state of affairs, the final accounts are prepared.
Advantages of Double Entry System

i) Scientific system:

This system is the only scientific system of recording business transactions in a

set of accounting records. It helps to attain the objectives of accounting.

ii) Complete record of transactions:

This system maintains a complete record of all business transactions.

iii) A check on the accuracy of accounts:

By use of this system the accuracy of accounting book can be established through
the device called a Trail balance.

iv) Ascertainment of profit or loss:

The profit earned or loss suffered during a period can be ascertained together with
details by the preparation of Profit and Loss Account.

v) Knowledge of the financial position of the business:

The financial position of the firm can be ascertained at the end of each period,
through the preparation of balance sheet.

vi) Full details for purposes of control:

This system permits accounts to be prepared or kept in as much detail as necessary

and, therefore, affords significant information for purposes of control etc.

vii) Comparative study is possible:

Results of one year may be compared with those of the precious year and reasons
for the change may be ascertained.

viii) Helps management in decision making:

The management may be also to obtain good information for its work, specially for
making decisions.

ix) No scope for fraud:

The firm is saved from frauds and misappropriations since full information about
all assets and liabilities will be available.
Meaning of Debit and Credit

The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’
from ‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit.
Recording of transactions require a thorough understanding of the rules of debit and
credit relating to accounts. Both debit and credit may represent either increase or
decrease, depending upon the nature of account.

Types of Accounting

Types of Accounts

The object of book-keeping is to keep a complete record of all the transactions

that place in the business. To achieve this object, business transactions have been
classified into three categories:

(i) Transactions relating to persons.

(ii) Transactions relating to properties and assets
(iii) Transactions relating to incomes and expenses.

The accounts falling under the first heading are known as ‘personal Accounts’.
The accounts falling under the second heading are known as ‘Real Accounts’, The
accounts falling under the third heading are called ‘Nominal Accounts’. The accounts
can also be classified as personal and impersonal. The following chart will show the
various types of accounts:

Personal Accounts:

Accounts recording transactions with a person or group of persons are known

as personal accounts. These accounts are necessary, in particular, to record credit
transactions. Personal accounts are of the following types:

(a) Natural persons:

An account recording transactions with an individual human being is termed as a

natural persons’ personal account. eg., Kamal’s account, Mala’s account, Sharma’s
accounts. Both males and females are included in it.

(b) Artificial or legal persons:

An account recording financial transactions with an artificial person created by law

or otherwise is termed as an artificial person, personal account, e.g. Firms’ accounts,
limited companies’ accounts, educational institutions’ accounts, Co-operative society
account.

(c) Groups/Representative personal Accounts:

 An account indirectly representing a person or persons is known as representative
personal account. When accounts are of a similar nature and their number is large, it is
better tot group them under one head and open a representative personal accounts.
e.g., prepaid insurance, outstanding salaries, rent, wages etc. When a person starts a
business, he is known as proprietor. This proprietor is represented by capital account
for all that he invests in business and by drawings accounts for all that which he
withdraws from business. So, capital accounts and drawings account are also personal
accounts. The rule for personal accounts is:

Debit the receiver

Credit the giver

Real Accounts

Accounts relating to properties or assets are known as ‘Real Accounts’, A

separate account is maintained for each asset e.g., Cash Machinery, Building, etc.,
Real accounts can be further classified into tangible and intangible.

(a) Tangible Real Accounts:

These accounts represent assets and properties which can be seen, touched, felt,
measured, purchased and sold. e.g. Machinery account Cash account, Furniture
account, stock account etc.

(b) Intangible Real Accounts:

These accounts represent assets and properties which cannot be seen, touched or
felt but they can be measured in terms of money. e.g., Goodwill accounts, patents
account, Trademarks account, Copyrights account, etc.
The rule for Real accounts is:
Debit what comes in
Credit what goes out

Nominal Accounts

Accounts relating to income, revenue, gain expenses and losses are termed as
nominal accounts. These accounts are also known as fictitious accounts as they do not
represent any tangible asset. A separate account is maintained for each head or
expense or loss and gain or income. Wages account, Rent account Commission
account, Interest received account are some examples of nominal account
The rule for Nominal accounts is:

Debit all expenses and losses

Credit all incomes and gains
Basis of Book-keeping Accounting
difference
Transactions Recording of transactions To examine these
in books of original entry. recorded transactions in
order to find out their
accuracy.
Posting To make posting in ledger To examine this
posting in order to
ascertain its accuracy.
Total and To make total of the To prepare trial balance
Balance amount in journal and with the help of
accounts of ledger. To balances of ledger
ascertain balance in all the accounts.
accounts.

Income Preparation of trading, Preparation of trading,

Statement and Profit & loss account and profits and loss account
Balance Sheet balance sheet is not book and balance sheet is
keeping included in it.

Rectification of These are not included in These are included in

errors book-keeping accounting.

Special skill It does not require any It requires special skill

and special skill and knowledge and knowledge.
knowledge as in advanced countries
this work is done by
machines.

Liability A book-keeper is not liable An accountant is liable

for accountancy work. for the work of bookkeeper
BRANCHES OF ACCOUNTING

The changing business scenario over the centuries gave rise to specialized
branches of accounting which could cater to the changing requirements. The branches
of accounting are;

i) Financial accounting;
ii) Cost accounting; and
iii) Management accounting.

Now, let us understand these terms.

Financial Accounting

The accounting system concerned only with the financial state of affairs and
financial results of operations is known as Financial Accounting. It is the original
from of accounting. It is mainly concerned with the preparation of financial
statements for the use of outsiders like creditors, debenture holders, investors and
financial institutions. The financial statements i.e., the profit and loss account and the
balance sheet, show them the manner in which operations of the business have been
conducted during a specified period.

Cost Accounting

In view of the limitations of financial accounting in respect of information

relating to the cost of individual products, cost accounting was developed. It is that
branch of accounting which is concerned with the accumulation and assignment of
historical costs to units of product and department, primarily for the purpose of
valuation of stock and measurement of profits. Cost accounting seeks to ascertain the
cost of unit produced and sold or the services rendered by the business unit with a
view to exercising control over these costs to assess profitability and efficiency of the
enterprise. It generally relates to the future and involves an estimation of future costs
to be incurred. The process of cost accounting based on the data provided by the
financial accounting.

Management Accounting

It is an accounting for the management i.e., accounting which provides

necessary information to the management for discharging its functions. According to
the Anglo-American Council on productivity, “Management accounting is the
presentation of accounting information is such a way as to assist management in the
creation of policy and the day-to-day operation of an undertaking.” It covers all
arrangements and combinations or adjustments of the orthodox information to provide
the Chief Executive with the information from which he can control the business e.g.
Information about funds, costs, profits etc.

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting concepts:

The term ‘concept’ is used to denote accounting postulates, i.e., basic

assumptions or conditions upon the edifice of which the accounting super-structure is
based. The following are the common accounting concepts adopted by many business
concerns.

1. Business Entity Concept

2. Going Concern Concept
3. Money Measurement Concept
4. Historical Cost Concept
5. Dual Aspect Concept
6. Realisation Concept
7. Matching Concept
8. Accounting period Concept
9. Accrual Concept
10. Objective Evidence Concept

1. . Business Entity Concepts:

According to these concepts, a business is treated as separate

Entity distinct from its owner. This means that in accounting the business and owner must be
treated separately. Thus, when one person invests amount in to the business, it will be
deemed to the liability of the business. The concept of separate entity is applicable to all form
of business.

2. Going concern concepts:

According to this, it is assumed that business will exist for a long

time. There is no intention t o liquidate the business in the immediate future.

3. Money measurement concepts:

Accounting records only those transactions which are expressed in monetary terms.
Transactions which cannot be expressed in money do not find place in the books of accounts.

4. Cost Concepts:

According to this concept, all transactions are recorded in the books of

accounts at actual price involved.
 5. Dual aspect Concepts:

according to this concept, every transaction has two aspects. These two aspects are
receiving aspect and giving aspect. These two aspects have to be recorded. The basis of this
principle is that for every debit, there is an equal and corresponding credit.

6. Realization Concept:

According to this principle revenue is said to be realized when goods or services are sold
to be a customer. It emphasizes the fact that the mere receipt of an order for goods or services
cannot be taken for the realization of revenue. So advanced payment received from a
customer cannot be considered as revenue earned.

7. Matching Concept:

According to this concept, cost of a business of a particular period is compared with the
revenue of that period in order to ascertain net profit or net loss.

8. Accounting period Concept:

According to this assumption, the life of a business is divided in to different periods for
preparing financial statements. Generally business concern adopt twelve months period for
measuring the income of the concern. This time interval is known as accounting period.

9. Accrual Concept:

According to this concept the revenue is recognized on its realization and not on its actual
receipt. Similarly the costs are recognized when they are incurred and not when payment is
made.

10. Objective Evidence Concept:

This concept ensures that all accounting must be based on objective evidence, i.e., every
transaction recorded in the books of account must have a verifiable document in support of
its, existence.

Accounting conventions

Accounting conventions are the customs and traditions which guide the accountant
while preparing accounting statements. Some of the accounting conventions are:-

(1) Convention of consistency: -

This convention follows that the basis followed in several accounting periods should be
consistent. This means the methods adopted in one accounting year should not be changed in
another year. Then only comparison of results is possible.

(2) Convention of conservatism: -

 This is a convention of playing safe, which is followed while preparing the financial
statements. The idea of this convention is to consider all possible losses and
to ignore all probable profits.

(3) Convention of Materiality: -

Materiality means relevance or importance or significance. It is generally accepted in

the accounting circle that the accounting statements and records must reveal all material facts.

(4) Convention of full disclosure: -

The accounting convention of full disclosure implies that accounts must be honestly
prepared and all material information must be disclosed therein.

REFERENCES

1. Gneval, T.B. Double Entry Book Keeping.

2. Jain & Navang – Advanced Accountancy.
JOURNAL AND LEDGER

A book of original entry in which transactions are recorded in the order of their
occurrence is called journal. Journal is a primary record of business transactions. Recording
of transactions in the journal is known as journalizing and recorded transactions are called
journal entries.

ADVANTAGES OF JOURNAL

The following are the inherent advantages of using journal, though the
transactions can also be directly recorded in the respective ledger accounts;

1. As all the transactions are entered in the journal chronologically, a date

wise record can easily be maintained;

2. All the necessary information and the required explanations regarding all
transactions can be obtained from the journal; and The journal has five columns, viz.
(1) Date;
(2) Particulars;
(3) Ledger Folio;
(4) Amount (Debit); and
(5) Amount (Credit) and a brief explanation of the transaction by way of narration is
given after passing the journal entry.

(1) Date:

In each page of the journal at the top of the date column, the year is written and in
the next line, month and date of the first entry are written. The year and month need
not be repeated until a new page is begun or the month or the year changes. Thus, in
this column, the date on which the transaction takes place is alone written.

(2) Particulars:

In this column, the details regarding account titles and description are recorded.
The name of the account to be debited is entered first at the extreme left of the
particulars column next to the date and the abbreviation ‘Dr.’ is written at the right
extreme of the same column in the same line. The name of the account to be credited
is entered in the next line preceded by the word “To” leaving a few spaces away from
the extreme left of the particulars column. In the next line immediately to the account
credited, a short about the transaction is given which is known as “Narration”.
“Narration” may include particulars required to identify and understand the
transaction and should be adequate enough to explain the transaction. It usually starts
with the word “Being” which means what it is and is written within parentheses. The
use of the word “Being” is completely dispense with, in modern parlance. To indicate
the completion of the entry for a transaction, a line is usually drawn all through the
particulars column.

(3) Ledger Folio:

This column is meant to record the reference of the main book, i.e., ledger and
is not filled in when the transactions are recorded in the journal. The page
number of the ledger in which the accounts are appearing is indicated in this
column, while the debits and credits are posted o the ledger accounts.

(4) Amount (Debit):

The amount to be debited along with its unit of measurement at the top of this
column on each page is written against the account debited.

(5) Amount (Credit):

The amount to be credited along with its unit of measurement at the top of this
column on each page is written against the account credited.

LEDGER

Ledger is a book, which contains various accounts it is said to be secondary books of

account. It is a collection of all accounts debited or credited in journal. Ledger is defined as,”
a book in which all the personal, real, and nominal accounts of business are kept for
permanent records so that up to date statement of an account can be easily known”.

Sub-division of ledger

In a big business, the number of accounts is numerous and it is found

necessary to maintain a separate ledger for customers, suppliers and for others.
Usually, the following three types of ledgers are maintained in such big business
concerns.

(i) Debtors’ Ledger:

It contains accounts of all customers to whom goods have been sold on credit.
From the Sales Day Book, Sales Returns Book and Cash Book, the entries are made in
this ledger. This ledger is also known as sales ledger.

(ii) Creditors’ Ledger:

It contains accounts of all suppliers from whom goods have been bought on credit.
From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries
are made in this ledger. This ledger is also known as Purchase Ledger.

(iii) General Ledger:

 It contains all the residual accounts of real and nominal nature. It is also known as
Nominal Ledger.
Distinction between journal and ledger

(i) Journal is a book of prime entry, whereas ledger is a book of final entry.
(ii) Transactions are recorded daily in the journal, whereas posting in the
ledger is made periodically.
(iii) In the journal, information about a particular account is not found at one
place, whereas in the ledger information about a particular account is found
at one place only.
(iv) Recording of transactions in the journal is called journalising and recording
of transactions in the ledger is called posting.
(v) A journal entry shows both the aspects debit as well as credit but each
entry in the ledger shows only one aspect.
(vi) Narration is written after each entry in the journal but no narration is given
in the ledger.
(vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents
form journal entry, whereas journal constitutes basic record for ledger
entries.

Illustration: 1

From the following transactions find out the nature of account and also state which account
should be debited and which account should be credited:
(1) Salary paid
(2) Interest received
(3) Machinery purchased for cash
(4) Building sold
(5) Outstanding salary
(6) Received cash from Ramesh
(7) Proprietor introduced capital
(8) Dividend received
(9) Commission paid
( 10) Furniture purchased for cash

Illustration: 2

Classify the following under Personal, Real and Nominal accounts:

1. Stock. 7. Salary 13. Capital.

2. Interest. Outstanding. 14. Drawing.
3. Prepaid Interest. 8. Bank 15. Bank Overdraft.
4. Salary Prepaid. 9. Loan. 16. Bills Receivable.
5. Building. 10. Insurance. 17. Goodwill.
6. Fixtures 11. Salary.
12. Cash.
ILLUSTRATIONS 3

1. Journalise the following transactions in the books of Shankar & Co. 1998 Rs.
June 1 Started business with a capital of 60,000
June 2 Paid into bank 30,000
June 4 Purchased goods from Kamal on credit 10,000
June 6 Paid to Shiram 4,920
June 6 Discount allowed by him 80
June 8 Cash Sales 20,000
June 12 Sold to Hameed 5,000
June 15 Purchased goods from Bharat on credit 7,500
June 18 Paid Salaries 4,000
June 20 Received from Prem 2,480
June 20 Allowed him discount 20
June 25 Withdrew from bank for office use 5,000
June 28 Withdraw for personal use 1,000
June 30 Paid Hanif by cheque 3,000
Illustration - 4
Journalise the following transactions, post the same in relevant ledger account
and balance the same. 1998
June 1 Karthik commenced business with Rs.20,000.
June 2 Paid into bank Rs.5,000.
June 3 Purchased Plant worth Rs.10,000 from Modi & Co.
June 4 Purchased goods worth Rs. 5,000 form Anwar.
June 6 Goods worth Rs.4,000 sold to Anbu
June 8 Sold goods worth Rs.2,000 for cash.
June 10 Goods returned by Anbu Rs.50.
June 15 Paid rent Rs.250.
June 18 Withdrawn from bank for office use Rs. 2,500.
June 20 Paid Salaries Rs.1,800.
June 25 Withdrawn for personal use Rs.250.
June 26 Goods returned to Anwar Rs.100.
June 27 Paid for office furniture Rs.1,500 by cheque.
June 28 Received Rs.3,900 cash from Anbu and discount allowed Rs.50.
June 29 Paid Anwar on account Rs.4,800 and discount allowed by him Rs.100.

Illustration - 5
Journalize the following transactions in the books of Mr.Chandran: 2001 Apr.
1 Started business with cash Rs.40,000 and furniture Rs.10,000.
5 Paid tuition fee of the son Rs.1,000
8 Paid household expenses Rs.1,400.
10 Sold personal car for Rs.18,000 and the amount is brought into the business.
15 Withdrew goods for personal use Rs.2,000.
16 Sold goods to Navin on credit Rs.8,000.
18 Sold old typewriter Rs.1,000.
 19 Purchase goods on credit from Ramesh Rs.20,000
20 Received interest on investment Rs.6,000.
22 Received commission from Manohar Rs.2,000.
23 Receive a cheque from Navin Rs.5,000.
25 Issued a cheque to Ramesh Rs.12,000
26 Received cash from Anand on account Rs.4,000
27 Paid cash to Bhagwan on account Rs.1,000.
28 Returned goods to Ramesh Rs.1,000.
29 Navin returned goods Rs.500.
30 Paid rent Rs.1,000. Paid salaries Rs.12,000.

Illustration - 6

Journalise the following transactions in the books of Sabitha and post them in the
Ledger: 2000 Apr.
1 Bought goods for cash Rs. 15,000
3 Sold goods for cash Rs. 19,000
5 Bought goods on credit from Perara Rs. 12,000
6 Sold goods on credit to Ravindar Rs. 16,000
8 Received from Ravindar Rs. 12,000
10 Paid to Perara Rs. 7,500
25 Bought furniture for cash Rs. 4,500

Illustration – 7
Enter the following transactions in the journal and ledger of Murali of New Delhi:
2001 Rs. Mar.
1 Murali commenced business with cash 90,000
4 Purchased goods for cash 6,000
5 Deposited into bank 40,000
6 Withdrew from bank for office use 4,500
8 Sold goods to Raja 4,800
12 Purchased goods on credit from Kathar 1,380
15 Received from Raj Rs.4,650 and allowed him discount 150
20 Cash sales 7,200
28 Paid to Kathar in full settlement 1,300
30 Paid rent 300 Paid salary 1,600
Accounts are closed on 31st March 2001.
Illustration – 8

Journalise the following transactions and Post them in relevant ledger accounts:
1991 Rs.
Jan. 1. Bought from Das 1,000
Jan. 2. Sold to Sen 400
Jan. 3. Sold to Ramesh 250
Jan. 4. Purchased from Suresh 200
Jan. 5. Sales returns by Sen 50
 Jan. 10. Bought from Shyam 600
Jan. 12. Returned to Suresh 100
Jan. 15. Sold to Roy 800
Jan. 16. Roy returned goods 200
Jan. 17. Sold goods to Ram 300
Jan. 19. Bough from Naresh 650
Jan. 21. Sold to Bhatanger 750
Jan. 22. Returned to Naresh 50
Jan. 25. Bought from Khatju 850
Jan. 27. Sold to Dheeran 260
Jan. 29. Returns from Bhatanger 100
Jan. 30. Dheeran Returned 60
Jan. 31. Returns to Khatju 150

References

1) Grewal, T.B., Double Entry Book Keeping.

2) Gupta & Radhasway – Advanced Accountancy.

TRIAL BALANCE
INTRODUCTION

According to the dual aspect concept, the total of debit balance must be equal
to the credit balance. It is a must that the correctness of posting to the ledger accounts
and their balances be verified. This is done by preparing a trail balance.

Preparation of Trial Balance

Theoritically spreading, a trial balance can be prepared in the following three

ways :

(i) Totals Method

(ii) Balances Method
(iii) Totals-cum-balances Method

Totals method

Under this method, total of each side in the ledger (debit and credit) is ascertained
separately and shown in the trial balance in the respective columns. The total of debit column
of trial balance should agree with the total of credit column in the trial balance because the
accounts are based on double entry system. However, this method is not widely used in
practice, as it does not help in assuming accuracy of balances of various accounts and and
preparation of the fianancial statements.

Balances Method

This is the most widely used method in practice. Under this method trial balance
is prepared by showing the balances of all ledger accounts and then totalling up the debit and
credit columns of the trial balance to assure their correctness. The account balances are used
because the balance summarises the net effect of all transactions relating to an account and
helps in preparing the financial statements. It may be noted that in trial balance, normally in
place of balances in individual accounts of the debtors, a figure of sundry debtors is shown,
and in place of individual accounts of creditors, a figure of sundry creditors is shown.

Totals-cum-balances Method

This method is a combination of totals method and balances method. Under this
method four columns for amount are prepared. Two columns for writing the debit and credit
totals of various accounts and two columns for writing the debit and credit balances of these
accounts. However, this method is also not used in practice because it is time consuming and
hardly serves any additional or special purpose.

Let us now learn how will the trial balance be prepared using each of these methods with the
help of the following example :
Mr. Rawat’s ledger shows the following accounts for his business. Help him
in preparing the trial balance using : (i) Totals method,
(ii) Balances method, (iii) Totals-cum-Balances method.
Ruling of a trail balance:
The following is the form of a trail balance
Particulars L.F Debit Credit
Method I: Total Method Amount Amount
Rs. Rs.
• Capital Trail Balance as on…….. XXXX
• Land and Buildings XXXX
Debit Credit
• Plant and Machinery
S.no Name of accounts L.F Total XXXX
Amount Total Amount
• Equipment XXXX
Rs. Rs.
• Furniture and Fixtures XXXX

Method II: Balance Method:

MT’s Books
Trail Balance as on……..
S. No Name of accounts L.F Debit balance Credit balance
Rs. Rs.

Note: Accounts of all assets, expenses, losses and drawings are debit balances.
Accounts of incomes, gains, liabilities and capital are credit balances. Trial balance
disclosed some of the errors and does not disclosed some other errors. This is given
below.

A) Trial Balance disclosed by the Errors

i) Wrong totaling of subsidiary books

ii) Posting of an amount on the wrong side
iii) Omission to post an amount into ledger
iv) Double posting or omission of posting
v) Posting wrong amount
vi) Error in balancing

B) Trail Balance not disclosed by the Errors

i) Error of principle
ii) Error of omission
iii) Errors of Commission
iv) Recording wrong amount in the books of original entry
v) Compensating errors
 • Cash in Hand XXXX
• Cash at Bank XXXX
• Debtors XXXX
• Bills Receivable XXXX
• Stock of Raw Materials XXXX
• Stock of Finished Goods XXXX
• Purchases XXXX
• Carriage Inwards XXXX
• Carriage Outwards XXXX
• Sales XXXX
• Sales Return XXXX
• Purchases Return XXXX
• Interest Paid XXXX
• Commission/Discount Received XXXX
• Salaries XXXX
• Long Term Loan XXXX
• Bills Payable XXXX
• Creditors XXXX
• Advances from Customers XXXX
• Drawings XXXX
Total XXXXX XXXXX

ILLUSTRATIVE TRIAL BALANCE

Illustration - 9
The under mentioned balances were extracted from the books of Mahesh as on
31st March 2005. You are asked to prepare a Trail Balance as on that date.
Rs.
Capital 78,000

Leasehold Premises 46,000 Furniture & Fittings 13,500

 Plant & Machinery 35,000
Purchases 78,900
Sales 1,30,620
Discount Received 470
Discount Allowed 540
Carriage Inwards 120
Carriage Outwards 230
Returns Inward 1,500
Returns Outward 380
Wages and Salaries 17,680

Rates and Taxes 1,370

Rent Received 530
Sundry Expenses 1,660
Trade Creditors 22,760
Book Debts 34,000
Drawings 3,00
Bills Payable 1,140
Cash in hand 1,200
Bank Loan 5,800
Closing Stock 3,900

References

1. Grewal T.B. – Double Entry Book Keeping

2. Jain & Navamy – Advanced Accountancy.