Accountancy

Module 1

Samitesh Brahma
Department of Humanities
Jorhat Engineering College
Module 1
✓ Concept and classification of accounts
✓ Double entry system of book keeping
✓ Golden rules of Debit and Credit
✓ Journal- Definition, advantages, Procedure of journalizing
✓ Ledger- Advantages, rules regarding posting, balancing of ledger
accounts
✓ Trial Balance- Definition, objectives, procedure of preparation.
Meaning of Accounting

The American Institute of Certified Public Accountants 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 atleast, of a financial character, and interpreting and
the results thereof. ”
 Characteristics
1. Accounting is an art as well as science.
2. Recording of financial transactions only.
3. Classifying.
4. Summarizing.
5. Interpretation of results.
6. Communicating

NOTE: Recording, classifying and summarizing are termed as “Process of accounting” or

“accounting cycle”
Objectives
1. To keep systematic record of business transaction
2. To calculate profit or loss
3. To know the exact reasons leading to net profit or net loss
4. To ascertain the financial position of business
5. To ascertain the operational performance.
6. To provide information to various parties
Functions
1. Maintaining complete and systematic records.
2. Communicating the financial results to various parties.
3. Protecting the assets of business.
4. Providing assistance to management
5. Compliance of legal needs.
Accounting Cycle
Transaction

The accounting cycle is a Closing the

books
Journal
Entries
collective process of
identifying, analyzing, and
recording the accounting
Financial Posting in
events of a company. It is a statements Ledger

standard 8-step process that

begins when a transaction
occurs and ends with its Adjusting
Trail
journal
Balance
inclusion in the financial entries

statements. worksheet

Figure: Accounting Cycle

Accounting Cycle
1. Identify Transactions: An organization begins its accounting cycle with the identification of those transactions that
comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions using journal entries. The entries are based on the
receipt of an invoice, recognition of a sale, or completion of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general
ledger provides a breakdown of all accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual general ledger accounts, an unadjusted
trial balance is prepared. The trial balance ensures that total debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is
created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be
made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result of corrections made
on the worksheet and the results from the passage of time. For example, an adjusting entry may accrue interest revenue that
has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial balance followed by the
actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the period using closing
entries. These closing entries include transferring net income into retained earnings. Finally, a company prepares the post-
closing trial balance to ensure debits and credits match and the cycle can begin anew.
Branches of accounting

1. Financial accounting
2. Cost accounting
3. Management accounting
Accounting and Accountancy
Basis of Accounting Accountancy
Distinction
1. Meaning It is concerned with recording, It is a body of knowledge prescribing
classification and summarizing of certain rules or principles to be
transactions. observed while recording,
classification and summarizing of
transactions.
2. Scope It is narrow in scope. It is wider in scope.
3. Relation It depends in book- keeping. It depends on both book-keeping and
accounting.
4. Function Its main function is to ascertain the net It includes the decision-making
results and the financial position of the function on the basis of information
business and to communicate them to provided by book-keeping and
interested parties. accounting.
Transaction
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.
Account
➢In actual practice, the individual transactions of like nature
are recorded, added and subtracted at one place. Such place is
customarily termed as an ‘Account’.
➢An account is a Ledger record in a summarized form, of all
the transactions that have taken place with the particular
person or things specified.
➢All accounts are divided into two parts:
1. Left side of an account is called Debit side
2. Right side of an account is called Credit side
Classification of accounts

Classification on accounts

Personal Accounts Impersonal Accounts

Real Accounts Nominal Accounts

Classification of accounts
✓ Personal accounts – the accounts which relate to an individual, firm, company or
an institution.
✓Example: Bank account, Capital Account, Drawings account, etc.
✓ Real accounts- the accounts of all those things whose value are measured in
terms of money and which are properties of the business (assets).
✓Example: Cash account, furniture account, goodwill account, etc.
✓ Nominal accounts- the accounts which includes the accounts of all expenses or
loss and incomes or gains.
✓Example: Salaries paid, rent paid, bad debts, etc.
Note: When any word (as a prefix or as a suffix ) is added to a nominal account, it becomes a personal account
Classification of Personal accounts

Personal Accounts

Artificial personal Representative personal

Natural personal accounts
accounts accounts
Classification of personal accounts
1. Natural personal accounts – accounts of human beings.

Example: drawings account, debtors account, creditors account, Ram’s account.

2. Artificial personal accounts- accounts do not have physical existence as

human beings.

Example: any firm’s account, any institution’s account, etc.

3. Representative personal accounts- accounts represents a group of persons.

Example: salaries outstanding account, prepaid insurance account, etc.

Classification of Real accounts

Real Accounts

Tangible Real Accounts Intangible Real Accounts

Classification of Real accounts

1. Tangible real accounts – accounts of those things which can be

touched, felt, measured, purchased, sold, etc.
Example: Cash account, furniture account, land account, etc.

2. Intangible real accounts – accounts which cannot be touched, but

their value can be measured in terms of money.
Example : goodwill account, copyrights account, patents account, etc.
Golden rules of debit and credit
Types of account Golden rules
1. Personal account Debit - the receiver
Credit - the giver
2. Real account Debit - what comes in
Credit – what goes out
3. Nominal account Debit – the expenses or losses
Credit – the incomes or gains
Rules of Debit and Credit

Assets Liabilities
Increase Decrease Increase Decrease
Debit Credit Credit Debit

Expenses/Loses Capital
Increase Decrease Increase Decrease
Debit Credit Credit Debit

Revenue/Gain
Increase Decrease
Credit Debit
Double Entry system

Every business transaction has a two- fold effect and that it affects two
accounts in opposite directions and if a complete record were to be
made of each transaction, it would be necessary to debit one account
and credit another account. It is this recording of the two-fold effect of
every transaction that has given rise to the term double entry system.
Principles or characteristics of double entry system

1. Every business transaction affects two accounts

2. Recording of both personal and impersonal aspects.

3. Recording is made according to certain specified rules.

4. Preparation of trail balance

Stages of double Entry System

1. Original Record (Journal)

2. Classification (Ledger)

3. Summary ( Trial Balance)

Advantages of Double Entry System
1. Scientific system
2. Complete record of every transaction
3. Preparation of trail balance
4. Preparation of trading and P&L Account
5. Knowledge of financial position of the business
6. Legal approval
7. Helps management in decision making
Journal- Books of original entry
✓It is a book of original entry in which the transactions are recorded
first of all, as and when they take place.
✓Transactions are originally recorded in a chronological (day-to-day)
order.
✓Journal is sub-divided into a number of Sub-Journals known as special
purpose subsidiary books.
✓The subsidiary books may be
1. Cash Book 5. Sales Return Book

2. Purchases Book 6. Bills Receivable Book

3. Sales Book 7. Bills Payable Book

4. Purchases Return Book 8. Journal Paper

Features or characteristics of a journal

i. Journal is a book in which the transactions are recorded for the first
time, as and when they take place.
ii. A journal is only a book of primary entry.
iii. A journal is a daily accounting record.
iv. It maintains the identity of each transactions and provides a
complete picture of the same in one entry.
v. Each entry in the journal is followed by a brief explanation of the
transaction which is called ‘Narration’.
vi. In journal, transactions are recorded in a chronological order.
Functions of a journal
i. To keep a chorological record of all transactions.

ii. To analyze each transactions into debit and credit aspects by using
double entry system of book keeping.

iii. To provide a basis for posting into ledger.

iv. To maintain the identity of each transaction by keeping a complete

record of each transaction qt one place on a permanent basis.
Format of a journal
JOURNAL OF ………..
Date Particulars Ledger Amount Amount
Folio Dr. Cr.
₹ ₹
(1) (2) (3) (4) (5)

1. Date : Date of transaction is entered.

2. Particulars: The name of the account to be debited is written first and the word ‘Dr’ is
also written towards the end of the column. In the second line, the name of the account
to be credited is written. The credit account starts with the word ‘To’.
Narration: a brief explanation of the transaction together with necessary details.
3. Ledger Folio: The page number or folio number of the ledger account where the
posting has been made from the journal is recorded in the L.F. Column.
4. Amount Dr. : Amount of the account being debited is written.
5. Amount Cr. : Amount of the account being credited is written.
 Rules of Journalising
1. Personal accounts
E.g.,
a. paid ₹20,000/- to Mr. ABC
Particulars Amount Credit
Dr. Cr.
Mr. ABC Dr 20,000
To Cash A/c 20,000
Narration (Cash paid to Mr. ABC)

b. Received ₹ 50,000/- from Mr. XYZ

Particulars Amount Credit
Dr. Cr.
Cash A/c Dr 50,000
To Mr. XYZ 50,000
(Cash received from Mr. XYZ)
Rules of Journalising
2. Real Accounts
E.g., a. Machinery bought for ₹ 5,00,000/- cash.
Particulars Amount Credit
Dr. Cr.
Machinery A/c Dr 5,00,000
To Cash A/c 5,00,000
(Machine purchased for cash)

b. Sold Goods to Mr. XYZ for ₹ 4,000/- cash

Particulars Amount Credit
Dr. Cr.
Cash A/c Dr 4,000
To Sales A/c 4,000
(Goods sold for cash)
Rules of Journalising
3. Nominal Accounts
E.g., a. ₹ 20,000/- paid for salary
Particulars Amount Credit
Dr. Cr.
Salary A/c Dr 20,000
To Cash A/c 20,000
(Salary paid)

b. ₹ 3000/- received for commission

Particulars Amount Credit
Dr. Cr.
Cash A/c Dr 3,000
To Commission A/c 3,000
(Commission received)
Important considerations
1. If, in the transaction relating to purchase or sale of goods, the name
of the purchaser or seller is not given, it is considered as a cash
transaction.
Example: ‘Goods sold for ₹ 50,000.’
2. If, in the transaction relating to purchase or sale of goods, the name
of the purchaser or seller is given along with cash, it is considered as
a cash transaction.
Example: ‘Goods sold to XYZ for cash.’
3. If, in the transaction relating to purchase or sale of goods, the name
of the purchaser or seller is given and it is not stated whether it is a
cash or credit transaction, it is considered to be a credit transaction.
Example: ‘Goods sold to ABC’
Illustration 1
Enter the following transactions in the Journal of M/s XYZ Stores.

2021 Amount (₹)

Feb. 1 M/s XYZ Stores started business with cash 50,000
3 Purchased goods for cash 20,000
5 Purchased goods from Mr. A for cash 12,000
8 Purchased goods from Mr. B 8,000
10 Sold goods for cash 5,000
11 Sold goods to Mrs. C for cash 10,000
13 Sold goods to Mr. D 7,000
20 Withdrew cash from office for personal use 2,000
27 Paid wages 1,500
28 Paid rent 6,500
28 Paid salary to Mr. Q 3,000
28 Received commission 4,000
Illustration 1
Solution Journal of M/s XYZ Stores
Date Particulars L.F. Amount Amount
Dr. Cr.
₹ ₹
Feb 1’21 Cash A/c Dr. 50,000
To Capital A/c 50,000
(Being Cash brought into the business by M/s XYZ Stores as capital)

Feb 3’21 Purchase A/c Dr. 20,000

To Cash A/c 20,000
(Being Goods purchased for cash)
Feb 5’21 Purchase A/c Dr. 12,000
To Cash A/c 12,000
(Being Goods purchased for cash)
Total c/f 82,000 82,000
Illustration 1
Solution Journal of M/s XYZ Stores
Date Particulars L. Amount Amount
F. Dr. Cr.
₹ ₹
Total b/f 82,000 82,000
Feb 8’21 Purchase A/c Dr. 8,000
To Mr. B 8,000
( Being Goods purchased from Mr. B on credit )
Feb 10’21 Cash A/c Dr. 5,000
To Sales A/c 5,000
(Being Sold goods for cash)
Feb 11’21 Cash A/c Dr. 10,000
To Sales A/c 10,000
(Being Sold goods for cash)
Total c/f 1,05,000 1,05,000
Illustration 1
Solution Journal of M/s XYZ Stores
Date Particulars L.F Amount Amount
. Dr. Cr.
₹ ₹
Total b/f 1,05,000 1,05,000
Feb 13’21 Mr. D Dr. 7,000
To Sales A/c 7,000
( Being Goods sold to Mr. D on credit )
Feb 20’21 Drawings A/c Dr. 2,000
To Cash A/c 2,000
( Being the Amount withdrawn for personal use)
Feb 27’21 Wages A/c Dr. 1,500
To Cash A/c 1,500
(Being the Wages Paid)
Total c/f 1,15,500 1,15,500
Illustration 1
Solution Journal of M/s XYZ Stores
Date Particulars L.F. Amount Amount
Dr. Cr.
₹ ₹
Total b/f 1,15,500 1,15,500
Feb 28’21 Rent A/c Dr. 6,500
To Cash A/c 6,500
( Being the Paid Rent)
Feb 28’21 Salary A/c Dr. 3,000
To Cash A/c 3,000
(Being The Salary Paid)
Feb 28’21 Cash A/c Dr. 4,000
To Commission Received A/c 4,000
(Being Commission received)
Total ₹ 1,29,000 1,29,000
Ledger

✓According to L.C. Cropper, “The book which contains a classified and

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

✓A ledger in accounting refers to a book that contains different accounts

where records of transactions pertaining to a specific account is stored.

✓It is also known as the book of final entry or principal book.

Distinction between ‘Books of Original Entry’ and ‘Ledger’
Journal or Books of Original Entry Ledger
1 Transactions are entered in a chorological Transactions are recorded in analytical order, i.e.,
order, as and when they take place all the transactions pertaining to a particular
account are contained at one place in the Ledger.

2 Full details of a transaction are narration are Full details of a transactions are not recorded in
recorded in these books. the ledger.
3 Final Accounts cannot be prepared with the Final accounts can be prepared with the help of
help of books of original entry. Ledger balances.
4 The process of recording entries in the books The process of recording entries in the ledger is
of original entry is called ‘journalizing’ called ‘posting’.
5 Page number of the ledger, i.e., Ledger Folio Page number of the Journal or subsidiary books,
(L.F.) is written in these books. i.e., Journal Folio (J.F) is written in Ledger

6 Accuracy of these books cannot be tested. Accuracy of the ledger accounts is tested by
preparing a trail Balance
Format of ledger
Dr. Name of Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
₹ ₹
1 2 3 4 1 2 3 4

As, shown above, there are four columns on each side of an account-
1. Date:- The date of the transaction is recorded in this column.
2. Particulars:- Each transaction affects two accounts. The name of the other account which is
affected by the transactions is written in this column.
3. Journal Folio or J.F. :- in this column, the page number of the Journal or subsidiary book from
which that particular entry is transferred, is entered.
4. Amount :- the amount pertaining to this account is entered in this column.
Rules of posting

1. All transactions relating to an account should be entered at one

place. In other words, two separate accounts should not be opened
for posting transaction relating to the same account.
2. The word ‘To’ is used before the accounts which appear on the debit
side of an account. Similarly, the word ‘By’ is used before the
accounts which appear on the credit side of an account.
3. If an account has been debited in the journal entry, the posting in the
ledger should also be made on the debit side of such account.
4. If an account has been credited in the journal entry, the posting in
the ledger should also be made on the credit side of such account.
Example : On 1st Jan 2021, sold goods for cash ₹ 10,000. Pass journal entry and post it into ledger.
Solution:
Journal entry:
Date Particulars Amount ₹ Credit ₹
Dr. Cr.
1/01/21 Cash A/c Dr 10,000
To Sales A/c 10,000
(Being Goods sold for cash)
Ledger account:
Dr. Cash Account Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
₹ ₹
1/01/21 To Sales A/c 10,000

Dr. Sales Account Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
₹ ₹
1/01/21 By Cash A/c 10,000
Closing and balancing of accounts
1. Closing of Personal Accounts
If a personal account shows a debit balance, it indicates the amount
owing from him. (↓)
If a personal account shows a credit balance, it indicates the amount
owing to him. (↑)
The words ‘By balance c/d’ i.e., balance carried down are written
against the amount of the difference. In the next accounting period, the
balance is brought down on the other side by witting the words ‘To balance
b/d’.
2. Closing of Real Accounts
Same as personal accounts.
3. Closing of Nominal Accounts
These accounts does not require balancing, as the main purpose of
opening nominal account is to ascertain the net profit or loss of the firm.
Trial Balance
➢Trial balance is the list of debit and credit balances, taken out from ledger. It
also includes the balances of cash and bank taken out from the cash book.

➢The statement prepared with the help of ledger balances, at the end of
financial year (or at any other date) to find out whether debit total agrees
with credit total is called Trail balance.

➢Account which shows no balance, i.e., whose debit and credit totals are
equal, is not entered in the trail balance.

➢If the total of debit side of trial balance equals to that of credit side, it is
proved that books are at least arithmetically correct and there are no errors
in the posting and balancing the ledger accounts.
Format
Trail Balance
As at ……..
Name of Accounts L.F. Balance Dr. Balance Cr.
(₹) (₹)
Points for preparing a Trail Balance: -
1. All Assets have debit balances. Their Balances should be shown on the debit
side of trail balance.
2. All liabilities have credit balances. Their balances should be shown on the credit
side of trail balance.
3. Capital account shows a credit balance.
4. Drawings account shows a debit balance.
5. All expenses and losses show debit balances.
6. All incomes and profits show credit balances.
7. Purchases account always shows a debit balance.
8. Purchases return account always shows a credit balance.
9. Sales account always shows a credit balance.
10. Sales return account always shows a debit balance.
Illustration
Prepare a Trail Balance from the following balances of M/s Dutta as at 31st March
2021: -

Name of Accounts ₹ Name of Accounts ₹

Opening Stock 20,000 Discount (Cr) 710
Purchases 85,000 Furniture 6,000
Purchases Returns 5,000 Machinery 62,000
Sales 1,60,000 Debtors 36,000
Sales Return 6,200 Creditors 12,750
Rent 1,200 Bills Receivable 4,600
Salaries 5,700 Bill Payable 2,500
Advertisement 880 Cash In hand 11,220
Commission Received 1,440 Bank Overdraft 10,000
Capital 50,000 Loan 6,000
Drawings 7,800 Interest on Overdraft 1,800
Solution
Trail Balance
As at 31st March 2021
Name of Accounts L.F. Balance Dr. (₹) Balance Cr. (₹)
Opening Stock 20,000
Purchases 85,000
Purchases Returns 5,000
Sales 1,60,000
Sales Return 6,200
Rent 1,200
Salaries 5,700
Advertisement 880
Commission Received 1,440
Capital 50,000
Drawings 7,800
Discount (Cr) 710
Furniture 6,000
Solution
Trail Balance
As at 31st March 2021
Name of Accounts L.F. Balance Dr. (₹) Balance Cr. (₹)
Machinery 62,000
Debtors 36,000
Creditors 12,750
Bills Receivable 4,600
Bill Payable 2,500
Cash In hand 11,220
Bank Overdraft 10,000
Loan 6,000
Interest on Overdraft 1,800
Total 2,48,400 2,48,400
Illustration
Pass journal entries for the following transactions and post them into ledger and prepare trial balance

2021 Amount (₹)

Jan 1 Ram & Shyam Constructions commenced business with cash 2,00,000
Jan 3 Purchased office furniture for cash 20,000
Jan 5 Purchased goods for cash 50,000
Jan 8 Purchased goods - from Vishal Trading Co. 25,000
from Mohan Steels 16,000
Jan 10 Returned goods to Vishal Trading Co. 5,000
Jan 14 Paid cash to Vishal Trading Co. in full settlement of their account, after deducting
5% cash discount
Jan 15 Sold goods for cash 40,000
Jan 18 Sold goods to Hero Limited, less 10% Trade discount 30,000
Jan 20 Ram & Shyam Constructions withdrew from business for personal use - Cash 10,000
Goods 4,000
Jan 21 Paid to Mohan Steels 7,800
Discount received 200
Jan 22 Received from Hero Limited 8,850
Discount allowed 150
Jan 25 Sold Goods to Hanjraj Ltd. For cash 12,000
Jan 28 Purchased goods from Pawan Brothers 24,000
Jan 31 Paid for Rent ₹ 2,000 and Salaries ₹4,000
Solution:
Journal of Ram & Shyam Constructions
Date Particulars L.F. Amount (Dr) Amount (Cr)
₹ ₹
Jan 1 Cash A/c Dr. 2,00,000
2021 To Capital A/c 2,00,000
(Stated business with cash)
Jan 3 Furniture A/c Dr. 20,000
To Cash A/c 20,000
(purchased furniture for cash)
Jan 5 Purchases A/c Dr. 50,000
To Cash A/c 50,000
(Purchased goods for cash)
Jan 8 Purchases A/c Dr. 41,000
To Vishal Trading Co. 25,000
To Mohan Steels 16,000
(Goods purchased on credit)
C/F 3,11,000 3,11,000
 Journal of Ram & Shyam Constructions
Date Particulars L.F. Amount (Dr) Amount (Cr)
₹ ₹
B/F 3,11,000 3,11,000
Jan 10 Vishal Trading Co. Dr. 5,000
To Purchases Return A/c 5,000
(Goods returned )
Jan 14 Vishal Trading Co. Dr. 20,000
To Cash A/c 19,000
To Discount Received A/c 1,000
(Cash paid and 5% discount received)
Jan 15 Cash A/c Dr. 40,000
To Sales A/c 40,000
(Sold goods for cash)
Jan 18 Hero Limited Dr. 27,000
To Sales A/c 27,000
(10% discount on goods bought)
C/F 4,03,000 4,03,000
 Journal of Ram & Shyam Constructions
Date Particulars L.F. Amount (Dr) Amount (Cr)
₹ ₹
B/F 4,03,000 4,03,000
Jan 20 Drawings A/c Dr. 14,000
To Cash A/c 10,000
To Purchases A/c 4,000
(Cash and Goods withdrew by owners )
Jan 21 Mohan Steels Dr. 8,000
To Cash A/c 7,800
To Discount Received A/c 200
(Cash paid and 5% discount received)
Jan 22 Cash A/c Dr. 8,850
Discount allowed A/c Dr. 150
To Hero Limited 9,000
(Cash received and discount allowed)
Jan 25 Cash A/c Dr. 12,000
To Sales A/c 12,000
(Sold goods for Cash)
C/F 4,46,000 4,46,000
 Journal of Ram & Shyam Constructions
Date Particulars L.F. Amount (Dr) Amount (Cr)
₹ ₹
B/F 4,46,000 4,46,000
Jan 28 Purchases A/c Dr. 24,000
To Pawan brothers 24,000
(Bought goods on credit )
Jan 31 Rent A/c Dr. 2,000
Salaries A/c 4,000
To Cash A/c 6,000
(Expenses paid in cash)
Total 4,76,000 4,76,000
 Ledger of Ram & Shyam Constructions
Dr. Cash Account Cr.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 1 2021 To Capital A/c 2,00,000 Jan 3 By furniture A/c 20,000
2021
Jan 15 2021 To Sales A/c 40,000 Jan 5 By Purchases A/c 50,000
2021
Jan 22 2021 To Hero Limited 8,850 Jan 14 By Vishal Trading Co. 19,000
2021
Jan 25 2021 To Sales A/c 12,000 Jan 20 By Drawing A/c 10,000
2021
Jan 21 By Mohan Steels 7,800
2021
Jan 31 By Rent A/c 2,000
2021
Jan 31 By Salaries A/c 4,000
2021
Jan 31 By balance C/d 1,48,050
2021
2,60,850 2,60,850
Feb 1 2021 To Balance b/d 1,48,050
Dr. Capital Account Cr.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 31 2021 To balance c/d 2,00,000 Jan 1 2021 By Cash A/c 2,00,000
Feb 1 2021 By balance b/d 2,00,000

Dr. Furniture Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 3 2021 To Cash A/c 20,000 Jan 31 2021 By balance c/d 20,000
Feb 1 2021 To Balance b/d 20,000

Dr. Purchases Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 5 2021 To Cash A/c 50,000 Jan 20 2021 By Drawings A/c 4,000
Jan 8 2021 To Vishal Trading Co. 25,000
Jan 8 2021 To Mohan Steels 16,000
Jan 28 2021 To Pawan Brothers 24,000
1,15,000
Dr. Vishal Trading Co. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount (₹)
(₹)
Jan 10 2021 To Purchases Return A/c 5,000 Jan 8 2021 By Purchases A/c 25,000
Jan 14 2021 To Cash A/c 19,000
Jan 14 2021 To Discount Received 1,000
A/c
25,000 25,000

Dr. Mohan Steels Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount (₹)
(₹)
Jan 14 2021 To Cash A/c 7,800 Jan 8 2021 By Purchases A/c 16,000
Jan 14 2021 To Discount Received 200
A/c
Jan 31 2021 To balance c/d 8,000
16,000 16,000
Feb 1 2021 By balance b/d 8,000
Dr. Purchase Return Account Cr.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 10 2021 By Vishal Trading Co. 5,000

Dr. Discount Received Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 14 2021 By Vishal Trading Co. 1,000
Jan 21 2021 By Mohan Steel 200

Dr. Sales Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 15 2021 By Cash A/c 40,000
Jan 18 2021 By Hero Limited 27,000
Jan 25 2021 By Cash A/c 12,000
Dr. Hero Limited Cr.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 18 2021 To Sales A/c 27,000 Jan 22 2021 By Cash A/c 8,500
Jan 22 2021 By Discount Allowed A/c 150
Jan 31 2021 By balance c/d 18,000
27,000 27,000
Feb 1 2021 To balance b/d 18,000

Dr. Drawings account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 20 2021 To Cash A/c 10,000 Jan 31 2021 By balance c/d 14,000
Jan 20 2021 To Purchases A/c 4,000
14,000 14,000
Feb 1 2021 To balance b/d 14,000

Dr. Discount Allowed Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 22 2021 To Hero Limited 150
Dr. Pawan Brothers Cr.
Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 31 2021 By balance c/d 24,000 Jan 28 2021 By Purchases A/c 24,000
Feb 1 2021 By balance b/d 24,000

Dr. Rent Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 31 2021 To Cash A/c 2,000

Dr. Salaries Account Cr.

Date Particulars J.F. Amount (₹) Date Particulars J.F. Amount (₹)
Jan 31 2021 To Cash A/c 4,000
 TRIAL BALANCE OF RAM & SHYAM CONSTRUCTIONS

As on 31st Jam 2021

Name of Accounts L.F. Dr. Balances (₹) Cr. Balances (₹)

Capital A/c 2,00,000

Mohan Steels 8,000

Hero Limited 18,000

Drawings A/c 14,000

Pawan Brothers 24,000

Cash A/c 1,48,050

Furniture A/c 20,000

Purchases A/c 1,11,000

Purchases return A/c 5,000

Sales A/c 79,000

Discount received A/c 1,200

Discount allowed A/c 150

Rent A/c 2,000

Salaries A/c 4,000

Total 3,17,200 3,17,200

ACCOUNTANCY
Module 2

Samitesh Brahma
Department of Humanities
Jorhat Engineering College
MODULE 2

✓ Name of subsidiary books

✓ Cash Book – definition, advantages objectives, types and preparation

of different types of cash books.

✓ Bank reconciliation statement,

✓ Reasons of disagreement between cash book with passbook balance

✓ Preparation of bank reconciliation statement

Subsidiary books
1. Cash book
2. Purchase book
3. Sales book
4. Purchase return book
5. Sales return book
6. Journal paper - This book is used for recording the transactions
which cannot be recorded in any of the above mentioned book.
Advantages of subsidiary books
1. Division of work according to ability
2. Increase in efficiency
3. Easiness in posting
4. Easiness in checking
5. Protecting from frauds
6. Full information at one place
Cash Book

➢Cash book is a book in which all transactions relating to cash

receipts and cash payments are recorded.
➢It serves the purpose of both journal as well as the ledger
(cash) account.
➢It is also called the book of original entry.
➢When a cashbook is maintained, transactions of cash are not
recorded in the journal, and no separate account for cash or
bank is required in the ledger.
Cash book- a subsidiary book and a principal book

➢It is both a subsidiary book and a principal book.

➢All the cash transactions are recorded for the first time in the cash
book, it is therefore a book of original entry.
➢But when a cash book is prepared, cash account in the ledger is not
prepared.
➢In this way cash book represents the cash account and hence, becomes
the principal book.
Cash Book is a Journalised Ledger
➢Is it a journal or ledger?
➢It is a journal since the transactions are recorded in it for the first time
from the source documents and from there these are posted to the
respective accounts in the ledger.
➢The cash book is also a ledger in the sense that it serves the purposed
of a cash account also.
➢When a cash book is prepared, no separate cash account is opened in
the ledger.
➢AS such, the Cash Book is a journal as well as a ledger and hence it
may be called as ‘Jornalised Ledger’.
Types of cash book

1. Single Column Cash Book or One Column Cash Book

2. Double Column Cash Book having
i. Cash and discount columns
ii. Bank and discount columns
iii. Cash and bank columns.
3. Triple Column Cash Book.
4. Petty Cash Book.
1. Single Column Cash Book
Format of Single Column Cash Book

In the books of …….

Dr. Cash Book Cr.
Date Particulars V. No. L.F. Amount Date Particulars V. No. L.F. Amount
(Receipts) ₹ (Payments) ₹
(1) (2) (3) (4) (5) (1) (2) (3) (4) (5)
To By

1. Date : Day, month and year of the transaction.

2. Particulars : The name of the account in respect of which cash has been received or payment
has been made is recorded in this column.
3. Voucher No. : The document supporting a transaction is called a voucher.
4. Ledger Folio : This column records the page number of the ledger where the posting of the
amount has been made.
5. Amount : The amounts received are recorded on the debit side and amounts paid are
recorded on the credit side.
Things to remember while preparing a cash book

1. Cash book is a cash account. As such, it is a real account and follows the
rules of debit and credit as that of real account.

2. If positive opening balance is given, it will be written on the debit side of

the cash book as “To Balance b/d”

3. Single column cash book make no record of

a) Cheques received and given and

b) Cash discount allowed and received.

4. When a cash book is maintained, cash account is not opened in the ledger.
Balancing of single column cash book

1. The receipts (Debit) Column will always be bigger than the

payments (Credit Column).

2. The difference will be written on the credit side as “By Balance c/d”.
This will make the total of the two sides equal and the total will be
written in the two columns opposite one another.

3. The closing balance becomes opening balance of cash in hand at the

beginning of the next period and is written on the debit side as “To
balance b/d”.
Illutration1
Enter the following transactions in a single column cash book

2020
March
₹
1 Commenced business with cash 82,000
5 Goods purchased 20,000
10 Goods Purchased from Ganesh 40,000
15 Goods purchased from Mahesh in Cash 50,000
18 Goods Sold 25,000
20 Goods sold to Saraswati 36,000
25 Goods sold to Dev in Cash 15,000
28 Received from Saraswati in Cash 30,000
31 Withdrew for personal expenses 10,000
31 Paid Salary 5,000
Solution

In the books of …….

Dr. Cash Book Cr.
Date Particulars V. L.F Amount Date Particulars V. L.F. Amount
(2020) (Receipts) No. . ₹ (2020) (Payments) No. ₹
1 March To Capital a/c 82,000 5 March By Purchases A/c 20,000
18 March To Sales A/c 25,000 15 March By Purchases 50,000
A./c
25 March To Sales A/c 15,000 31 March By Drawings A/c 10,000
28 March To Saraswati 30,000 31 March By Salary A/c 5,000
31 March By Balance c/d 67,000
1,52,000 1,52,000
1 April To Balance b/d 67,000
2. Double column cash book or two column cash book

In the books of …….

Dr. Cash Book Cr.
Date Particulars V. No. L.F. Cash Bank Date Particulars V. No. L.F. Cash Bank
(Receipts) ₹ ₹ (Payments) ₹ ₹
To By
Rules for preparing a Double Column Cash Book

1. A Bank account is a personal account.

2. Opening Balance: usually, the cash column would always show a debit balance
and will be written as ‘To Balance c/d’ on the debit side. But on the contrary if
credit balance is given, it will be written as ‘By Balance b/d’. If overdraft
balance is given, it will be treated as credit balance of bank.

3. Contra Entries: When cash is deposited into the bank or when is withdrawn
from the bank for use in the office, such transactions affects both ‘Cash
Column’ as well as ‘Bank Column’ and the transaction is therefore, recorded on
both sides of the cash book. Such entries, the double entry of which is complete
in the cash Book itself, are called “Contra Entries”
Rules for preparing a Double Column Cash Book

i. Cash Deposited into Bank

On the Dr. side ‘To Cash A/c’ is written and the amount is recorded in the
bank column. On the Cr. Side ‘By Bank A/c’ is written and the amount is
recorded in the cash column.
Debit Bank A/c (As bank is receiving the cash)
Credit Cash A/c (As cash is going out)

Eg., Deposited ₹2000 into the bank on 1st March, 2021

In the books of …….

Dr. Cash Book Cr.
Date Particulars V. No. L.F. Cash Bank Date Particulars V. No. L.F. Cash Bank
(Receipts) ₹ ₹ (Payments) ₹ ₹
1/3/ To Cash C 2000 1/3/2 By Bank A/c C 2000
21 A/c 1
Rules for preparing a Double Column Cash Book

ii. Cash withdrawn from bank

On the Dr. side ‘To Bank A/c’ is written and the amount is recorded in the
cash column. On the Cr. Side ‘By Cash A/c’ is written and the amount is
recorded in the Bank column.
Debit Cash A/c
Credit Bank A/c

Eg., Withdraw ₹ 2000 from bank on 2nd March 2021

In the books of …….

Dr. Cash Book Cr. Cr.

Date Particulars V. No. L.F. Cash Bank Date Particulars V. No. L.F. Cash Bank
(Receipts) ₹ ₹ (Payments) ₹ ₹
1/3/ To Bank C 2000 1/3/2 By cash A/c C 2000
21 A/c 1
Illustration
Enter the following transactions in two-column cash book and bank column of M/s
Karun stores:
Date ₹
2020
Jan 1 Cash in Hand 70,000
Bank overdraft 50,000
Jan 4 Sold goods for cash 50,000

Jan 5 Cash deposited into Bank 80,000

Jan 6 Purchased goods from Meena 30,000

Jan 7 Cheque issued to Meena in full settlement 28,800

Jan 8 Withdrawn from Bank for personal use 5,000

Jan 12 Sold goods to Ajay and received cheque from him 25,000

Jan 17 Cheque received from Ajay deposited into bank

Jan 20 Bank Charges 500

Jan 22 Interest charged by bank 2,500

Jan 23 Received cash from Ramesh 28,000

Jan 28 Withdrew from bank by cheque for personal use 15,000

Jan 30 Deposited into bank the entire balance after retaining ₹ 5000 cash in business
 Solution
In the books of M/s Karun
Dr. Cash Book Cr.

Date Particulars V. L.F Cash Bank Date Particulars V. No. L. Cash Bank
2020 (Receipts) No. . ₹ ₹ 2020 (Payments) F. ₹ ₹
Jan1 To Balance b/d 70,000 By Balance b/d 50,000

Jan 4 To Sales A/c 50,000 Jan 5 By Bank A/c C 80,000

Jan 5 To Cash A/c C 80,000 Jan 7 By Meena 28,800

Jan 17 To Cheques in Hand 25,000 Jan 8 By Drawings A/c 5,000

A/c
Jan 23 To Ramesh 28,000 Jan 20 By Bank Charges 500

(1) Total 1,48,000 Jan 22 By Interest Charges 2,500

(1)-(2) = Total Balance (₹68,000)
Jan 30 To Cash A/c C 63,000 Jan 28 By Drawings A/c 15,000

(2) Total 80,000

Jan 30 By Bank A/c C 63,000

Jan 31 By Balance c/d 5,000 66,200

1,48,000 1,68,000 1,48,000 16,8,000

Feb 1 To Balance b/d 5,000 66,200

 3. Three column or Tripple Column cash book

In the books of …….

Dr. Cash Book Cr.
Date Particulars V. L.F. Discount Cash Bank Date Particulars V. L.F. Discount Cash Bank
(Receipts) No. ₹ ₹ ₹ (Payments) No. ₹ ₹ ₹
To By
Illustration
Prepare a 3- column cash bank with discount, cash and bank column.
2020 ₹ ₹
Jan 1 Cash in hand 20,000 Jan 17 Paid to Mr. R. Dev by cheque 3,850
Discount allowed to him 150
Bank Balance 50,000 Jan 19 Paid Wages 650
Jan 2 Deposited into Bank 10,000 Jan 21 Withdrew from bank for 3,000
personal use
Jan 4 Received Cash from Mr. A. Sharma 5,000 Jan 23 Paid Salaries by cheque 6,250
Discount Allowed to him 150
Jan 5 Received for cash sales 1,375 Jan 25 Paid rent 2,000
Jan 6 Paid cheque for cash purchase 3,225 Jan 27 Purchased furniture by cheque 1,875
Jan 9 Received cheque for cash sales 1,125 Jan 30 Received cheque from Mr. 2,900
Jan 11 Paid to Mr. H. Jain by cheque in 1,600 Rahul in full settlement of their
full settlement of ₹ 1,750 account of ₹ 3,100

Jan 13 Paid Advertisement expenses 225

Jan 15 Withdrew from bank for official 4,500
expenses
Soln In the books of……
Dr. Cash Book Cr.
Date Particulars L. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
(Receipts) F. ₹ ₹ ₹ (Payments) ₹ ₹ ₹
Jan 1 To Balance b/d 20,000 50,000 Jan 2 By Bank A/c C 10,000

Jan 2 To Cash A/c C 10,000 Jan 6 By Purchase A/c 3,225

Jan 4 To Mr. A. Sharma 150 5,000 Jan 11 By H. Jain 150 1.600

Jan 5 To Sales A/c 1,375 Jan 13 By Advertisement 225

A/c
Jan 9 To Sales A/c 1,125 Jan 15 By Cash A/c C 4,500

Jan 15 To Bank A/c C 4,500 Jan 17 By R. Dev 150 3,850

Jan 30 To Rahul 200 2,900 Jan 19 By Wages A/c 650

Jan 21 By Drawings A/c 3,000

Jan 23 By Salaries A/c 6,250

Jan 25 By Rent A/c 2,000

Jan 27 By Furniture A/c 1,875

Jan 31 By Balance c/d 18,000 39,725

350 30,875 64,025 300 30,875 64,025

Feb 1 To Balance b/d 18,000 39,725

4. Petty Cash Book

Petty cash book is a type of cash book that is used to record minor
regular expenditures such as bus fares, fuel, newspapers, cleaning,
stationary, etc. these payments are repetitive in nature.

Imprest System: Under imprest system, a fixed amount of money

known as “imprest amount ” is given to the petty cashier to meet petty
expenditures for an agreed period which usually consists of a week or
month. At the end of agreed period, the petty cashier submits the details
of all expenditures incurred by him to the chief cashier. The total cash
spent by the petty cashier during the period is reimbursed to him and the
total cash available to spend at the start of the next period becomes
equal to the original sum.
Bank Reconciliation Statement

Bank reconciliation Statement is a statement prepared by the account

holder on a particular date to reconcile the difference between the Bank
Balance as per the Cash Book with the balance as per Bank Pass Book
showing entries because of which differences between the two balance
exist.
To compare
Bank Statement or Bank Pass Book

1. Debit balance means that much amount is payable by the account

holder to the bank.

2. Credit balance means that much amount is lying deposited in the

bank being receivable by the account holder.
Causes of differences in the Cash Book and Pass Book Balance

1. Differences caused by Time Gap in Recording transactions

2. Differences caused by errors committed in recording transactions.
Causes of differences in the Cash Book and Pass Book Balance
1. Differences caused by Time Gap in Recording transactions
i. Cheques issued but not yet presented for payment in the bank.
ii. Cheques paid into the bank for collection but not yet credited by the bank.
iii. Cheques paid into the bank for collection but dishonored by the bank.
iv. Interest allowed by the bank.
v. Interest charged by the bank on overdraft.
vi. Bank charges and commission charged by the bank.
vii. Direct deposit by customers into the bank.
viii. Interest and dividend collected by the bank
ix. Direct payment made by the bank on behalf of customers.
Causes of differences in the Cash Book and Pass Book Balance

2. Differences caused by errors committed in recording transactions.

i. Errors committed in recording transactions by the firm.
ii. Errors committed in recording transactions by the bank.
Need and importance of Bank Reconciliation Statement

1. It locates the errors or omissions that may have been committed either on the
part of the customer or the bank.

2. The customers becomes sure of the correctness of the bank balance show by the
cash book.

3. A reconciliation statement facilitates the preparation of a revised cash book.

4. It helps in revealing the unnecessary delay in the collection of cheques by the

bank.

5. It also helps in keeping a track of cheques which have been sent to the bank for
collection.
Preparation of a bank reconciliation statement
➢We may have four different situations while preparing the bank reconciliation
statement. These are :
1. When debit balance (favourable balance) as per cash book is given and the .
2. When credit balance (favourable balance) as per passbook is given and the
balance as per cash book is to be ascertained.
3. When credit balance as per cash book (unfavourable balance/overdraft balance) is
given and the balance as per passbook is to be ascertained.
4. When debit balance as per passbook (unfavourable balance/overdraft balance) is
given and the cash book balance as per is to be ascertained.
Format of Bank Reconciliation Statement when Dr. balance as per Cash Book is taken as starting point:
BANK RECONCILIATION STATEMENT
As on …………………
Particulars Plus Items (₹) Minus Items (₹)
Balance (favourable balance) as per cash book XX

Add: 1 Cheques issued or drawn but not yet presented for payment upto this date xx

2 Interest allowed by bank not recorded in Cash Book xx

3 Amount directly deposited by the customers in our bank account xx

4 Interest and dividends collected by bank on trader’s investments xx

5 Cheques paid into bank but omitted to be entered in the cash book xx

6 Any wrong credit given by bank in the pass book xx

Less: 1 Cheques deposited into the bank for collection but not yet credited by bank upto this date xx

2 Cheques deposited into bank for collection but dishonoured by the bank xx

3 Direct payments made by the bank according to the standing instruction of customers xx

4 Bank Charges and commission charged by bank xx

5 Cheques issued by omitted to be recorded in the cash book xx

6 Any wrong debit given by bank in the pass book xx

xx xx
Balance ( Favourable balance) as per pass book XX
A. Method of preparing Bank Reconciliation Statement by Debit balance of
Bank column of Cash Book

Items to be added (Plus Items)

1. Cheques issued but not yet presented for payment
2. Credit made by the bank for interest
3. Amount directly deposited by the customers in our bank account.
4. Interest and dividend collected by the bank
5. Cheques paid into the bank but omitted to be recorded in the cash book.
Items to be deducted (Minus Items)
1. Cheques sent to the bank for collection but not yet credited by the bank.
2. Cheques sent to the bank for collection but dishonoured by the bank.
3. Direct Payment made by the bank on behalf of customers.
4. Debits made by the bank for commission , bank charges , etc.
5. Cheques issued but omitted to be recorded in the cash book.
Illustration 1
On 30th June, 2020, the bank Column of Anil’s Cash Book showed a balance of
₹ 8,250. on examination of the Cash Book and bank statement you find that:
1. Out of Total cheques amounting to 8,000 issued, cheques amounting to ₹
5,800 have been presented for payment upto 30th June, 2020.
2. Out of total cheques amounting to 6,000 sent to bank for collection,
cheques of ₹ 4,100 were credited in pass book upto 30th June, 2020.
3. On 28th June a customer deposited ₹ 3,500 direct in the bank account but
it was entered only in the pass book.
4. Debit side of Anil’s cash book has been overcast by ₹100.
5. No entry has been made in the cash book for the rent of ₹800 paid by
banks according to Anil’s standing instructions.
6. The pass book showed a credit of ₹320 for interest and a debit of ₹ 40 for
bank charges, but these have not been entered in the cash book.

Prepare a Bank Reconciliation Statement as on 30th June, 2020

Solution
BANK RECONCILIATION STATEMENT
As on 30th June 2020
Particulars Plus items Minus Items
₹ ₹
Balance as per cash book (DR) 8,250
1 Cheques issued into bank but not presented for payment upto 30th 2,200
June, 2020 (₹8,000 - ₹5,800)
2 Direct deposit by a customer in a bank 3,500
3 Interest credited by bank 320
4 Cheques sent for collection but not yet credited by the bank upto 30th 2,000
June, 2020 (₹6,000 - ₹4,000)
5 Debit side of Cash book Overcast 100
6 Rent paid by bank according to standing instructions 800
7 Bank Charges 40
14,270 2,940
Balance as per pass book (Cr) 11,430
Illustration 2
On 30th June, 2020, the cash book of M/s Ram showed a balance of ₹ 4000 at bank.
He sent cheques amounting ₹20,000 to the bank before 30th June, but it appears from the pass
book that cheques worth only ₹8,000 had been credited before the date. Similarly, out of the
cheques of ₹10,000 issued during the month of June, cheques for ₹ 500 were presented and
paid in July.
Also a bill for ₹ 700 retired by bank on our behalf under a rebate of ₹20, the full
amount of the bill was credited in the Cash Book.
The Pass Book also showed the following payments:-
i. ₹640 as premium on the life policy according to standing instructions; and
ii. ₹4000 as club fess.

The Pass Book showed that the bank had collected ₹ 1,200 as interest. The Bank had
charged bank charges of ₹140. there as no entry in the cash book for payments, interest, etc.
Prepare Bank Reconciliation Statement as on 30th June, 2020
Solution
BANK RECONCILIATION STATEMENT
As on 30th June 2020
Particulars Plus items Minus Items
₹ ₹
Balance as per cash book (Favourable) 4,000
1 Cheques issued into bank but not presented for payment in June, 2020 500
2 Interest collected by bank 1,200
3 Cheques deposited into bank but not yet credited 12,000
(₹20000-₹8000)
4 Rebate on payment of bill by bank not recorded in cash book 20
5 Amount paid by bank on standing instructions
i. Life Insurance Premium 640
ii. Club fees 4,000
6 Interest charged by bank 140
5,720 16,780
Balance as per pass book (Overdraft) 11,060
B. Method of preparing Bank Reconciliation Statement by Credit
balance of Cash Book

If the cash book shows a credit balance(overdraft) at the start,

the overdraft balance will be written in minus column and
there will be no change in the column of all other items.
 Illustration 3
On 31st March, 2020, the bank column of the cash book of Mr. Dinesh disclosed an
overdraft balance of ₹16,600. On examination the cash book and bank statement, you find that:

i. Cheques were deposited into the bank for ₹ 32,000 but of there cheques for ₹9,200
were collected and credited in April.
ii. Cheques were issued for ₹ 15,000, out of which cheques for ₹ 12,000 had been
presented for payment in March.
iii. In March, Mr. Dinesh had discounted a bill of exchange of ₹ 20,000 at a discount of ₹
800 but ₹20,000 were entered in the cash book.
iv. No entry is made in the cash book of an amount of ₹12,200 directly deposited by a
customer in the bank.
v. Payment of insurance premium of ₹4,000 and receipt of insurance claim of ₹ 16,000
appear in the pass book but not entered in the cash book.
vi. A cheque of ₹7,000 issued to Mr. Naresh was omitted to be recorded in the cash book.
vii. Bank column of the payment side of the cash book was undercast by ₹ 2,000.
viii. A cheque of ₹ 5,600 issued of Mr. Rajesh was entered in the cash column of the cash
book.
Prepare a Bank Reconciliation Statement as on 31st March, 2020.
Solution
BANK RECONCILIATION STATEMENT
As on 31st March 2020
Particulars Plus items Minus Items
₹ ₹
Overdraft Balance as per cash book (Cr.) 16,600
1 Cheques deposited into bank but credited in April 9,200
2 Cheques issued but not presented in March 3,000
3 Discount on bill not recorded in cash book 800
4 Directly deposited by customer 12,200
5 Payment of insurance premium 4,000
And Receipt of insurance claim 16,000
6 Cheque issued omitted to be recorded in cash book 7,000
7 Bank column of payment side of cash book undercast 2,000
8 Cheque issued to Rajesh entered in the cash column of cash book 5,600
31,200 45,200
Balance as per pass book (Overdraft) 14,000
Illustration 4 (Previous year Q)

From the following particulars prepare a Bank Reconciliation Statement, showing the
balance as per Pass Book on 31st March, 2020

i. Bank Balances as per cash book ₹ 78,400 on 31st March, 2020.

ii. Cheques of ₹ 8,100 were deposited into the bank in the month of march but the
bank collected and credited in the month of April, 2020.
iii. Cheques of ₹ 6,800 were issued to different parties before 31st march, 2020 but
the cheques were presented for payment into the bank in the month of April,
2020.
iv. Insurance premium of ₹ 1,200 debited by the bank in the month march, 2020
but it was not recorded in the cash book up to 31st march, 2020
v. Bank interest credited by the bank ₹ 1,420 in the month of march, 2020 but
same was not recorded in the cash book up to 31st march, 2020
Solution

BANK RECONCILIATION STATEMENT

As on 31st March 2020
Particulars Plus items Minus Items
₹ ₹
Balance as per cash book (Dr.) 78,400
1 Cheques issued but not presented for payment upto 31st 6,800
March, 2020
2 Bank interest credited but not recorded 1,420
3 Cheques deposited into bank but not collected by bank 8,100
upto 31st March 2020
4 Insurance premium 1,200
86,620 9,300
Balance as per pass book (Cr.) 77,320
DEPARTMENT OF HUMANITIES

Accountancy
Module 3

Samitesh Brahma
Department of Humanities
Jorhat Engineering College
Module 3

➢ Final Accounts
➢Trading and Profit and Loss account
➢Balance Sheet

➢Preparation of final accounts

➢Profit and loss accounts with adjustments

Financial Statements
➢It refers to such statements which report the profitability and the
financial position of the business at the end of accounting period.
➢The term financial statements includes at least two basic
statements which are:
➢Income statement (or Trading and Profit & Loss Account) which shows
the results of business operation during an accounting period.
➢Statement of Financial Position (or Balance Sheet) which shows the
financial position of an enterprise at a specific point of time.
➢These two financial statements are termed as “Final Accounts”.
Objectives or need or Importance of Financial Statements

1. Trading and Profit and Loss Account

a) Determine Gross Profit or Gross Loss
b) Determine Net Profit or Net Loss
c) Comparison with previous year
d) Details of Expenses and Income
e) Ratio Analysis
2. Balance Sheet
a) Ascertaining Financial position
b) Comparison with previous year
c) Determining Solvency Position.
Users of financial statements

1. Owners
2. Management
3. Employees and Trade Unions
4. Investors
5. Creditors
6. Government
7. Taxation authorities
Income statement

Income statement is a summary of accounts that affects the profit or loss

of an enterprise.

• It is divided into two parts

✓First part is called ‘Trading Account’. It shows the gross profit or gross loss,

✓The second part is called ‘Profit and Loss Account’. It shows the net profit or
net loss.
Concept of Gross Profit and Net Profit
➢Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and bringing them to the point of sale. Direct expenses include
carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel,
royalty on production, etc.
➢The excess of sales over purchases and direct expenses is called gross profit.
➢If the amount of purchases including direct expenses is more than the sales
revenue, the resultant figure is gross loss.
➢Gross Profit = Sales – (Purchases + Direct Expenses)
➢If the total of the credit side of the profit and loss account is more than the total of
the debit side, the difference is the net profit for the period of which it is being
prepared. On the other hand, if the total of the debit side is more than the total of
the credit side, the difference is the net loss incurred by the business firm.
➢Net Profit = Gross Profit + Other Incomes – Indirect Expenses
Cost of goods sold and Gross Profit
Cost of goods sold = Opening Stock + purchases + Direct expenses – Closing stock
Cost of goods sold = Sales – Gross Profit

Illustration
From the following information, calculate the cost of goods sold and gross profit on
the basis of cost of goods sold.
₹
Opening Stock 40,000
Purchases 4,20,000
Expenses on purchase 8,000
Expenses on Sales 15,000
Wages 30,000
Sales 6,00,000
Closing Stock 52,000
Solution

Cost of Goods = Opening Stock + Purchases + Direct Expenses – Closing

Sold Stock
= Opening Stock + Purchases + Expense on Purchases + Wages
– Closing Stock
= ₹ (40,000 + 4,20,000 + 8,000 + 30,000 – 52,000)
= ₹ 4,46,000
Gross Profit = Sales – Cost of Goods Sold
= ₹ (6,00,000- 4,46,000)
= ₹ 1,54,000
Trading Account

✓ It is prepared for calculating the gross profit or gross loss arising or

incurred as a result of the trading activities of a business.

✓All expenses which relate to either purchase of raw materials or

manufacturing of goods are recorded in the trading account.

✓All such expenses are called ‘Direct Expenses’.

✓Trading Account is a nominal account.

Transactions recorded in Trading account
1. Opening Stock
2. Purchases
3. Purchases Returns/ Return Outward
4. Sales
5. Sales return / return inward
6. Closing Stock
7. Expenses incurred on manufacturing of goods
8. Expenses incurred on purchasing and bringing the goods to the
trading place
Preparation of Trading Account
A. Items written on the Dr. side of the trading account
1. Opening stock or inventory
2. Purchases and purchases return
3. Direct expenses
i. Wages
ii. Carriage or carriage inwards or freight
iii. Manufacturing expenses
iv. Stores consumed
v. Docks charges
vi. Royalty
B. Items written on the Cr. Side of the trading account
1. Sales and sales return
2. Closing Stock
Closing entries
➢If the credit side of the trading account exceeds the debit, the
difference will be Gross Profit. The Gross Profit will be transferred to
the credit of a newly opened account called Profit and Loss Account.
Trading A/c DR
To Profit and Loss A/c
(The Transfer of Gross Profit to the Credit Side of P&L A/c

➢If the debit side of the Trading account exceeds the credit, the
difference will be gross Loss. It will be transferred to the debit of P&L
A/c by means of the following entry.
Profit and Loss A/c DR
To Trading A/c
(The Transfer of Gross Loss to the Dedit Side of P&L A/c
Format of a Trading Account
TRADING A/C
Dr For the year ending…………… Cr
Particulars Amount (₹) Particulars Amount (₹)
To opening stock By sales
To purchases Less: sales return
Less: Purchase returns Or return inwards
Or return outward By closing stock
To wages By Gross Loss
To wages and salaries (if any) transferred to
P&L A/c
To Direct expenses
To Carriage
To carriage inwards
To carriages on purchases
To Gas, fuel and power
To freight and cartage
Continued….
To manufacturing expenses, or
Productive Expenses
To Factory expenses, such as,
Factory lighting
Factory rent, etc.
To dock charges and clearing charges
To import duty or custom duty
To royalty
To Gross Profit
Transferred to P&L A/c
Illustration 1
Prepare a Trading Account for the year ended on 31st March, 2020 from
the following balances:-
Particulars ₹ Particulars ₹
Opening Stock 2,00,000 Purchases return 60,000
Purchases 10,00,000 Sales Return 1,00,000
Sales 25,00,000 Carriage on purchase 40,000
Freight 32,500 Carriage on sales 50,000
Wages 1,50,000 Factory Rent 2,20,000
Factory Lighting 54,000 Office rent 37,500
Coal, Gas and water 11,000 Salaries 1,00,000

Closing Stock = ₹ 3,00,000

Solution
TRADING A/C
Dr For the year ending on 31st March, 2020 Cr
Particulars Amount (₹) Particulars Amount (₹)
To Opening stock 2,00,000 By sales 25,00,000
To purchases 10,00,000 Less: sales return 1,00,000 24,00,000
Less: Purchase returns 60,000 9,40,000 By closing stock 3,00,000
To Freight 32,500
To Wages 1,50,000
To Factory Lighting 54,000
To Coal, Gas and Water 11,000
To Carriage on Purchase 40,000
To Factory Rent 2,20,000
Total 16,47,500
To Gross Profit transferred to
P&L A/c 10,52,500
27,00,000 27,00,000
Profit and Loss Account
✓A Profit & Loss Account is an account into which all gains
and loses are collected, in order to ascertain the excess of
gains over the losses or vice- versa.
✓A Profit & Loss Account is started with the amount of gross
profit or gross loss brought down from the Trading Account.
✓These expenses include administrative expenses, selling
expenses, distribution expenses, etc.
✓These are called ‘Indirect Expenses’.
✓P&L Account is a nominal account.
Preparation of Profit and Loss Account

➢Items written on the Dr. Side of Profit & Loss Account :-

1. Gross Loss.
2. Office and Administrative Expenses.
3. Selling and Distribution Expenses.
4. Miscellaneous Expenses
➢Items written on the Cr. Side of Profit & Loss Account:-
1. Gross Profit.
2. Other incomes and gains.
Closing Entries relating to P&L A/c
1. For the transfer of credit balance of Profit & Loss A/c known as net
profit:
Profit and Loss A/c Dr.
To Capital A/c
(The transfer of net profit to capital A/c

2. For the transfer of debit balance of Profit & Loss A/c, known as net
loss:
Capital A/c Dr.
To Profit and Loss A/c
(The transfer of net profit to capital A/c
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Gross Loss b/d By Gross Profit B/d
(Transferred from Trading A/c) (Transferred from Trading A/c)
Office Expenses : By Rent from tenant
To Salaries By Discount Received
To Salaries and Wages By Commission Received
To Rent, Rates and taxes By Interest on Investments
To Printing and Stationary By Dividend on shares
To Postage By Bad-Debts Recovered
To Lighting By Profit on sale of assets
To Insurance Premium By Income from other sources
To Telephone charges By Misc. Income
To Legal Charges By Net Loss ( if any)
To Audit fees Transferred to Capital A/c
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Travelling Expenses
To Establishment Expenses
To Trade expenses
To General Expenses
Selling and distribution expenses:
To Carriage outwards, or
Carriage on Sales
To Advertisement
To Commission
To Brokerage
To Bad-Debts
To Export duty
To Packaging charges
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Delivery Van Expenses
To Stable expenses
Miscellaneous Expenses:
To Discount allowed
To Repairs
To Depreciation
To Bank charges
To Conveyance Expenses
To Donation and charity
To Loss on sale of assets
To Net Profit
Transferred to Capital A/c
Illustration
From the following particulars, prepare a profit and loss account for the
years ending 31st March, 2021
Particulars Amount (₹) Particulars Amount (₹)
Gross Profit 10,52,500 Discount Allowed 15,000
Trade Expenses 10,000 Lighting 3,900
Carriage on Sales 50,000 Commission Received 4,200
Office Salaries 79,000 Bad-Debts 6,000
Postage 3,600 Discount Received 3,000
Office Rent 37,500 Interest on loan 11,000
Legal Charges 2,000 Stable Expenses 7,000
Audit fee 8,000 Export duty 11,500
Donation 5,500 Misc. Income 2,500
Sundry Expenses 1,800 Unproductive Expenses 20,500
Selling Expenses 26,600 Travelling Expenses 12,500
Solution
PROFIT AND LOSS A/C
Dr. For the year ending 31st March 2021 Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Trade expenses 10,000 By Gross Profit B/d 10,52,500
To Carriage on sales 50,000 By Commission Received 4,200
To Office Salaries 79,000 By Discount Received 3,000
To Postage 3,600 By Misc. Income 2,500
To Office Rent 37,500
To Legal Charges 2,000
To Audit fee 8,000
To Donation 5,500
To Sundry Expenses 1,800
To Selling Expenses 26,600
To Discount Allowed 15,000
To Lighting 3,900
To Bad-Debts 6,000
Solution

PROFIT AND LOSS A/C

Dr. For the year ending 31st March 2021 Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Interest on Loan 11,000
To Stable Expenses 7,000
To Export duty 11,500
To Unproductive Expenses 20,500
To Travelling Expenses 12,500
To Net Profit transferred to
Capital Account 7,50,800
10,62,200 10,62,200
Operating Profit and Net Profit

Profit may be of two types:

i. Operating profit and

ii. Net profit.

Operating Profit
✓The profit earned through normal operating activities of the business.

✓Expenses which are related to the main or normal activities of the

business are called operating expenses.

✓They include office and administration expenses, selling and

distribution expenses, discount, bad- debts, etc.

✓They are also called ‘Earnings before Interest and Tax’ or EBIT.
Net Profit
✓It is arrived by deducting operating as well as non- operating expenses
from the gross profit.

✓Expenses which are indirect to the main operations of the business are
called non- operating expenses.

✓They include interest on loan, donations, loss on sale of fixed assets,

loss due to theft.
Balance Sheet
✓A balance sheet is a statement prepared with a view to measure the
exact financial position of a business on a certain fixed date.

✓A balance sheet contains all the Assets and Liabilities of the business
enterprise.

✓Balances of all the personal and real accounts are group as assets and
liabilities.

✓Liabilities are shown on the left hand side of the Balance Sheet and
Assets on the right hand side.
Characteristics of Balance Sheet

1. A balance sheet is a part of Final Accounts.

2. A Balance sheet is a summary of the Personal and Real Accounts,
which are still open and have not been closed by transfer of the
Trading and Profit and Loss Account.
3. The totals of the two sides of the balance sheet must be equal.
4. Balance sheet is prepared on a particular date and not for a fixed
period.
5. It shows the financial position
Format of a Balance Sheet
BALANCE SHEET
As at ……………
Liabilities Amount (₹) Assets Amount (₹)
Current Liabilities Current Assets
Bank Overdraft Cash in Hand
Bills payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding expenses Short Term Investments
Unearned Income Sundry Debtors
Non-Current Liabilities Closing Stock
Long term loans Prepaid Insurance
Reserves Accrued Income
Capital Long Term Investments
Add: Net Profit or Non- current Assets
(Less: Net loss)
Less: Drawings Furniture
Less: Income Tax Loose tools
Format of a Balance Sheet

BALANCE SHEET
As at ……………
Liabilities Amount (₹) Assets Amount (₹)
Less: Life Insurance Premium Motor Vehicle
Plant and Machinery
Land and Buildings
Patents and Trade Marks
Goodwill
Total Total
Important points for preparing Final Accounts

1. If a trail balance is not given in the question, it is better to prepare a trail

balance at first.
2. The items which appear on the debit side of the Trail Balance should be
shown either on the debit side of the Trading or P&L account or on the
assets side of balance sheet.
3. The items which appear on the credit side of the Trail Balance should be
shown either on the credit side of the Trading or P&L account or on the
liabilities side of balance sheet.
4. The balances of Personal and Real Accounts are always shown in the
balance sheet.
5. If the expenses in respect of ‘Rent’ and ‘Lighting’ are clearly stated as
having been incurred in respect of factory, these will be shown in the
Trading Account, otherwise these will be shown in Profit and Loss
Account.
6. The total of both sides of the balance sheet will always be equal.
Adjustment entries
DEPARTMENT OF HUMANITIES

Accountancy
M4

Samitesh Brahma
Department of Humanities
Jorhat Engineering College
Module 4
✓Capital expenditure ✓Prepaid expenses

✓Revenue expenditure ✓Accrued Income

✓Bad debts

✓Provision for bad and doubtful debts

✓Provision for discount on debtors

✓Outstanding expenses
Capital Expenditure

➢Any expenditure which is incurred in acquiring or

increasing the value of a fixed asset is termed as
capital expenditure
➢As such, the amount spent on the purchase of Land
and Building, Plant and Machinery, furniture, etc. is
capital expenditure.
➢Such expenditure yields benefit over a long period
and hence is written in Assets.
Examples of Capital expenditure
1. Expenditure which results in the acquisition of a fixed asset
such as land, building , plant, motor vehicles, etc.
2. Expenditure in connection with the purchase of a fixed asset
such as wages paid to workers.
3. Expenditure which results in the extension or improvement
of fixed assets and which increases the earning capacity of
such assets.
4. Expenditure incurred for establishing the business.
5. Expenditure incurred on the purchase of second-hand asset
and on putting such asset into working condition.
Revenue Expenditure
➢Any expenditure, the benefit of which is received
during the current year itself is termed as revenue
expenditure.
➢As such, all the revenue expenditures are debited to
Trading and Profit & Loss account.
➢Such expenditure does not result in an increase in the
earning capacity of the business but only helps in
maintaining the existing earning capacity.
Examples of Revenue Expenditure
1. Expenses incurred for the purpose of day to day running of
business such as manufacturing expenses, office expenses,
selling expenses.
2. Expenses incurred on the ordinary repairs and maintenance
of fixed assets.
3. Payment for goods purchase for resale.
4. Depreciation on fixed assets.
5. Replacement of worn-out part of an existing machine.
6. Loss from sale of fixed assets.
Distinction between capital expenditure and revenue expenditure

Basis of Distinction Capital Expenditure Revenue Expenditure

1. Purpose It is incurred for the acquisition of a It is incurred for the day-to-day
fixed asset for use in business. running of the business
2. Earning capacity It increases the earning capacity of It is incurred for maintaining the
the business earning capacity
3. Period Its benefit extends to more than one Its benefit is exhausted within a
year maximum period of one year
4. Accounting treatment It is debited to related Asset It is debited to related Expenses
account account
5. Nature of account It is a real account It is a nominal account
6. Presentation It is shown in the balance Sheet It is shown in the Trading or Profit
and Loss account
7. Examples Purchase of fixed assets like plant Rent, salaries, repairs, depreciation,
and machinery etc.
Illustration 1
Classify the following into Capital and Revenue Expenditure,
stating reasons in each case.
1. ₹50,000 paid for the installation of a new machine.
2. Payment of annual taxes ₹20,000 and annual insurance of ₹
10,000.
3. Wages paid to workers for converting raw material into
finished goods.
4. A sum of ₹40,000 was spent in overhauling its entire plant
which resulted in adding five years to its useful life.
5. ₹10 Lac spent on the construction of railway sidings
Solution
1. Cost of installing the machine is a capital expenditure.
2. Annual taxes and insurance premium are Revenue Expenditure
because their benefit will be exhausted within the year.
3. It is revenue expenditure since it is incurred in the ordinary course of
business.
4. It is capital expenditure since it has resulted in increase of the
working life of the asset.
5. It is capital expenditure as asset is created which will be used for a
number of years.
Adjustment entries
Adjustment entries

• While preparing Final accounts it must be detected whether there is a

transaction

I. which has been omitted to be recorded in the books, or

II. Which has been wrongly recorded in the books, or

III. Of which only one aspect has been recorded in the books.

Entries passed for such transactions are called ‘Adjustment entries’.

Objectives or Need of adjustments
1. To ascertain the true Net Profit or loss of the business.

2. To ascertain the true financial position of the business.

3. To make a record of the transaction omitted from the books.

4. To rectify the errors committed in the books of accounts.

5. To make a record of such incomes which have accrued but not have been
paid.

6. To provide for depreciation and other provisions

Important adjustments

1. Outstanding expenses

2. Prepaid expenses

3. Accrued Income

4. Bad debts

5. Provision for bad and doubtful debts

6. Provision for discount on debtors

Outstanding expenses or Expenses Due but not paid

✓These are the expenses which have been incurred during the
year but have been left unpaid on the date of preparation of
final accounts.

Treatment in Final Accounts:- Outstanding Expenses on the

one hand, will be added to the concerned expenses on the debit
side of the Trading or Profit and Loss account and on the other
hand, will also be shown on the liabilities side of Balance
Sheet. It is a Personal Account because it represents those
persons to whom the payment is to be made.
Example: Extracts of Trial balance as at 31st March, 2020
Name of account Dr. Balances (₹) Cr. Balances (₹)
Wages 2,20,000
Salaries 55,000

Adjustments :- Wages ₹20,000 and salary ₹ 5,000 are outstanding.

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Wages A/c Dr. 20,000
To Outstanding expenses A/c 20,000
(Wages Due)
Salary A/c Dr. 5,000
To outstanding expense A/c 5,000
(Salary due)
Effects on Final accounts:-
Dr. Trading A/C Cr
Particulars ₹ Particulars ₹
To wages 2,20,000
Add: Outstanding wages 20,000 2,40,000

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Salary 55,000
Add: Outstanding salary 5,000 60,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Outstanding wages 20,000
Outstanding Salary 5,000
If the outstanding expenses are shown in the trail Balance, it means that
the adjusting entry is already passed. In effect, outstanding expenses are
already included in the expense shown in the Trail Balance. In such
case, outstanding expenses are shown in the balance sheet only as
current liability.
Prepaid expenses or Expenses paid in advance
✓These are the expenses which have been paid in advance for
the next year during the current year itself.

Treatment in Final Account:- Prepaid Expenses on the one

hand, will be deducted from the concerned expenses on the
debit side of Trading or Profit and loss Account and on the
other hand, will also be shown on the Assets side of the
Balance Sheet. Prepaid Expenses is a Personal Account
because it represents those persons to whom the payment has
been made in advance.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Insurance A/c 20,000

Adjustments :- Prepaid Insurance amounted to ₹5,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Prepaid Insurance A/c Dr. 5,000
To Insurance A/c 5,000
(Insurance Paid in Advance)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Insurance 20,000
Less: Prepaid Insurance 5,000 15,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Prepaid Insurance 5,000
When prepaid expenses are shown in the Trail balance, it means that the
adjusting entry has already been passed. In such a case, Prepaid
expenses, as shown in Trail Balance, are shown in the balance sheet
only as current asset.
Accrued Income or Income Receivable

✓It is quite common that certain items of income such as

interest on securities, rent, etc., are earned during the current
year but have not been actually receive by the end of the
current year. Such incomes are known as ‘Accrued Income’.

Treatment in Final Account:- Such Incomes on the one hand,

will be shown on the credit side of the P&L Account and on
the other hand, will be shown on the Assets side of the Balance
Sheet because the amount is yet to be received.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Commission Received 15,000

Adjustments :- Commission earned but not received ₹3,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Accrued Commission A/c Dr. 3,000
To Commission Received A/c 3,000
(Commission Receivable)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
By Commission 15,000
Add: Accrued Commission 3,000 18,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Accrued Commission 3,000
When accrued income is given in trail balance, it means its adjustment
entry is already passed. In such a case, the accrued income is shown in
the balance sheet only as current asset.
Bad Debts
✓When it becomes certain that a particular amount will not be
recovered it is known as ‘Bad-Debts’. Bed-debt is
undoubtedly a loss to the firm is therefore written on the debit
side of the P&L Account.

Treatment in Final Accounts:- Bad-Debts of ₹ 10,000 given in

adjustments will be added to the Bad-Debts of ₹ 8,000 on the
debit side of the P&L account and the amount of ₹10,000 will
also be deducted from Debtors on the assets side of the
Balance Sheet.
➢Bad debts account given in the Trail Balance: it means the entry for bad
debts is already passed in the books and already deducted from the sundry
debtors. In such a case, the amount of bad debts will be transferred to the
P&L account.

➢Bad debts is given outside the Trail balance, as an adjustment: it means

entry for such bad debts is yet to be passed in the books of account. Such
bad debts are known as further bad debts. It means the amount of sundry
debtors in the trial balance is before the deduction of bad debts.
1. In the debit side of P&L accounts, these are shown as additions to Bad debts;
2. In the assets side of Balance sheet, these are deducted from sundry Debtors.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Bad-Debts 8,000
Sundry Debtors 2,00,000

Adjustments :- Write off further Bad-Debts ₹10,000

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)
Bad-debts A/c Dr. 10,000
To Sundry Debtors A/c 10,000
(Further Bad-Debts written off)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Bad-debts 8,000
Add: Further Bad-debts 10,000 18,000

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Sundry Debtors 2,00,000
Less: further Bad-Debts 10,000 1,90,000
Provision for Bad and Doubtful Debts
✓Even after deducting the amount of actual bad-debts from the debtors, the
list of debtors at the end of the year may include some debts which are
either bad of doubtful. As the amount of actual loss on amount is realized
from debtors, a provision is created to cover any possible loss on account of
bad-debts likely to occur in future. Such a provision is created at a fixed
percentage on debtors every year and is called ‘Provision for Bad and
Doubtful Debts’

Treatment in Final Accounts:- The amount of Provision and doubtful Debts

on the one hand, is shown on the debit side of the P&L account and on the
other hand, is deducted from Sundry Debtors on the assets side of the Balance
sheet, so that the debtors may appear at their realizable value in the balance
sheet.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Debtors 60,000

Adjustments :- Create a provision for bad and doubtful debts@ 5% on Debtors

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Profit and Loss A/c Dr. 3,000
To Provision for Bad and Doubtful 3,000
Debts A/c
(provision at 5% on debtors)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Provision for Bad and 3,000
Doubtful Debts

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Debtors 60,000
Less: Provision for bad and 57,000
doubtful debts 3,000
Provision for discount on debtors
✓Discount thus allowed will be an expense of the business and
is therefore debited to the P&L account. Since there will be
certain debtors will make early payment in the next
accounting year and will be allowed such discount, a
provision for such discount is created in the current year
itself.

Treatment in Final Accounts:- Such provision is shown on the

debit side of the P&L account and is also deducted from
Sundry Debtors on the assets side of Balance Sheet.
Example: Extracts of Trial balance as at 31st March, 2020

Name of account Dr. Balances (₹) Cr. Balances (₹)

Sundry Debtors 1,00,000

Adjustments :- Create a provision for discount on sundry debtors@ 5%.

Solution:- Adjustment entries

Dr. (₹) Cr. (₹)

Profit and Loss A/c Dr. 5,000
To Provision for discount on 5,000
Debtors A/c
(provision at 5% on debtors)
Effects on Final accounts:-

Dr. Profit and Loss account Cr.

Particulars ₹ Particulars ₹
To Provision for discount 5,000
on debtors

Balance Sheet
Liabilities Amount (₹) Assets Amount(₹)
Sundry Debtors 1,00,000
Less: Provision for discount on 95,000
debtors 5,000
Accountancy
Module 5
Day 23
Samitesh Brahma
Department of Humanities
Jorhat Engineering College
Module 5

➢Introduction to depreciation Accounting

➢Meaning

➢Causes

➢Factors

➢Methods of charging depreciation

Meaning

➢Assets have a definite span of life after the expiry of which the assets
will lose their usefulness for the business operations.

➢Fall in the value and utility of such assets due to their constant use and
expiry of time is term as depreciation.

➢Depreciation is the gradual and permanent decrease in the value of an

asset.
Causes of depreciation
1. By constant use
2. By expiry of legal rights
3. By Obsolescence
4. By expiry of time
5. By accident
6. By depletion
7. By permanent fall in market price.
Need and importance of providing Depreciation

1. For ascertaining the true profit or loss.

2. For showing the ‘true and fair value’ of the financial position.

3. To ascertain the accurate cost of production

4. To provide funds for replacement of assets.

5. To prevent the distribution of profits out of capital.

6. For avoiding over payment of Income Tax.

Factors determining the amount of depreciation

1. Total cost the asset

2. Estimates Net Residual Value (Salvage Value)

3. Depreciable Cost

4. Estimated useful life of asset

Methods for charging depreciation
1. Straight Line Method
2. Written Down Value Method
Straight Line Method
➢Depreciation is charged at a fixed percentage on the original cost of
the asset.
➢The amount of depreciation remains equal from year to year and as
such the method is also known as ‘Equal Instalment Method’ or ‘Fixed
Installment Method’.

Original cost of the asset−Estimated scrap value

➢Yearly Depreciation = estimated life of the asset

Amount of anuual of yearly depreciation

➢Depreciation rate = Total cost of the asset
Example:
On 1st April, 2020,X Ltd. purchased a Machine for ₹ 90,000 and spent ₹ 6,000 on its carriage and ₹ 4,000 on its
installation. On the date of purchase it was estimated that effective life of the machine will be 10 years and after
10 years the scrap value will be ₹20,000. what will be the annual depreciation and rate of depreciation under
straight line method?
Solution:
Cost of asset = ₹1,00,000 (90000+6000+4000)
Scrap value= ₹ 20,000
Estimated life of asset = 10 years
𝐂𝐨𝐬𝐭 𝐨𝐟 𝐚𝐬𝐬𝐞𝐭−𝐬𝐜𝐫𝐚𝐩 𝐯𝐚𝐥𝐮𝐞
Annual Depreciation (Straight Line Method) = 𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐝 𝐮𝐬𝐞𝐟𝐮𝐥𝐥 𝐥𝐢𝐟𝐞

1,00,000−20,000
= 10
= 8,000 every year
𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐚𝐧𝐧𝐮𝐚𝐥 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧
Rate of depreciation = 𝐗 100
𝐓𝐨𝐭𝐚𝐥 𝐜𝐨𝐬𝐭 𝐨𝐟 𝐚𝐬𝐬𝐞𝐭
8,000
= 𝑋100
1,00,000
= 8%
Written Down Value Method
➢The value of asset goes on diminishing year after year, the amount of depreciation
charged every year also goes on declining.

➢Each year’s depreciation is calculated o the book value of the asset at the beginning of
that year, rather than on the original cost.

➢Book Value is the written down value of the asset. In other words, it is that part of the
original cost of the asset which has not been depreciated so far.

➢Also known as ‘Reducing Instalment Method’ or ‘Diminishing Balance Method’.

➢Book Value= Original Cost - Total Depreciation to date

𝑠
➢𝑊𝑟𝑖𝑡𝑡𝑒𝑛 𝐷𝑜𝑤𝑛 𝑉𝑎𝑙𝑢𝑒 𝑅𝑎𝑡𝑒, R ={1-(n )}x 100
𝑐

Where, s= Scrap Value, c= Cost of asset and n= Expected Useful life

Example:
If a machine is purchased for ₹ 1,00,000 and depreciation is to be
charged at 10% p.a., what will be the depreciation according to ‘Written
Down value method’?
Solution:
1st year ₹ 1,00,000 @10% = 10,000

2nd year ₹ 90,000 @10% = 9,000

3rd year ₹ 81,000 @10% = 8,100

4th year ₹ 72,900 @10%` = 7,290

And So on..
Distinction between the two methods
Basis of Difference Straight Line Method Written Down Value Method
1 Basis of charging Original Cost Book Value (i.e. original cost
depreciation less depreciation
charged till date)
2 Annual depreciation charge Fixed (Constant) year Declines year after year
3 Total charge against profit Unequal year after year. It Almost equal every year.
and loss account in respect increases in later years.
of depreciation
and repairs
4 Recognition by income Not recognized Recognized by tax law
5 Suitability It is suitable for assets in which It is suitable for assets, which
repair charges are less, the are affected by technological
possibility of and obsolescence changes and require more repair
is low scrap value depends expenses with passage of time.
upon the time period involved.