Section-I Financial Accounting

1. Recording of Accounting Transaction

1.1 Types of Accounts and Golden Rules of Accounting

All accounts within the organization can be split into three types. An account can
be of one and only one of the following type and not more. Here are the various
types of accounts.

 Personal: Personal accounts make most intuitive sense. We keep a track of

all the transactions that we have undertaken with a particular person in
them. We all maintain personal accounts like the money we owe our friends,
the grocer and so on.
 Real: Real accounts are accounts which have been created to account for
tangible things. Accounts such as land and building, machinery a/c etc are
called real accounts. Although they are not living beings, we still transact
with such entities. Records of such transactions are kept in real accounts.
 Nominal: Nominal accounts are a special category of accounts. While the
other accounts can hold balance and carry it forward, nominal account are
automatically reset to zero as soon as the time period is over. Their balance
is carried forward to other accounts and the books for that period are closed.
Examples of such accounts are Profit a/c, depreciation a/c etc.

Debits and Credits in Accounts

Debits and credits are the building blocks of the double entry accounting system.
Many accounting students find the usage of these words confusing. Many try to
understand them by trying to draw an analogy with something they already know
like plus and minus. However, debits and credits are distinctly different from plus
and minus. Sometimes a debit entry may make an account balance go up whereas
other times it will make an account balance go down. Let’s try and understand how
this debit and credit system works.
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The debit credit system can be understood to be a two layered system. The steps
involved in deciding whether an account needs to be debited or credited are as
follows:

1. Ascertain the type of account

2. Ascertain the type of transaction

1. Ascertaining the Type of Account

Accounts are of two types the debit and the credit types. Here is how they are
distinguished

 The 4 Classifications: There are four major classifications of accounts in

accounting. They are assets, liabilities, income and expenses. Any item can
be classified as exactly one of these classifications. However, the same item
may be split into two and be part asset and part expense and so on.
 Divide into Two Groups: We could consolidate these 4 categories into 2
categories. Expenses and assets denote outflow of resources from the firm.
Income and Liabilities denote inflow of resources to the firm. Thus accounts
can be classified as outflow and inflow
i. The outflow accounts i.e. expenses and assets have a by default debit
balance
ii. The inflow accounts i.e. income and sales have a by default credit
balance

When you debit an account which has a default debit balance, you increase its
value. When you credit an account which has a default debit balance, you decrease
its value. The same is true for credit accounts as well.

2. Ascertain the Type of Transaction

Now you can decide whether to debit or credit an account. Let’s say you have to
increase the cash balance. Cash is an asset and therefore has a default debit
balance. When you debit it further, you increase its balance. Therefore, you will
debit the cash account.

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Similarly you can ascertain whether an item needs to be debited or credited. As a
check, you must ensure that the debits in every transaction are equal to the credits.
This is like the fundamental principle of accounting.

 Debits are recorded on the left side of a T account in a ledger. Debits increase
balances in asset accounts and expense accounts and decrease balances in
liability accounts, revenue accounts, and capital accounts.
 Credits are recorded on the right side of a T account in a ledger. Credits
increase balances in liability accounts, revenue accounts, and capital
accounts, and decrease balances in asset accounts and expense accounts.
 Debit accounts are asset and expense accounts that usually have debit
balances, i.e. the total debits usually exceeds the total credits in each debit
account.
 Credit accounts are revenue (income, gains) accounts and liability accounts
that usually have credit balances.

ACCOUNTS DEBIT CREDIT

ASSET INCREASE DECREASE

LIABILITY DECREASE INCREASE

INCOME DECREASE INCREASE

EXPENSE INCREASE DECREASE

CAPITAL DECREASE INCREASE

The Golden Rules of Accounting

1. Debit The Receiver, Credit The Giver

This principle is used in the case of personal accounts. When a person gives
something to the organization, it becomes an inflow and therefore the
person must be credit in the books of accounts. The converse of this is also
true, which is why the receiver needs to be debited.

2. Debit What Comes In, Credit What Goes Out

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 This principle is applied in case of real accounts. Real accounts involve
machinery, land and building etc. They have a debit balance by default. Thus
when you debit what comes in, you are adding to the existing account
balance. This is exactly what needs to be done. Similarly when you credit
what goes out, you are reducing the account balance when a tangible asset
goes out of the organization.

3. Debit All Expenses And Losses, Credit All Incomes And Gains

This rule is applied when the account in question is a nominal account. The
capital of the company is a liability. Therefore it has a default credit balance.
When you credit all incomes and gains, you increase the capital and by
debiting expenses and losses, you decrease the capital. This is exactly what
needs to be done for the system to stay in balance.

1.2Journal: Problems on Journal Entries.

In accounting careers, journal entries are by far one of the most important skills to
master. Without proper journal entries, companies’ financial statements would be
inaccurate and a complete mess.

An easy way to understand journal entries is to think of Isaac Newton’s third law of
motion, which states that for every action there is an equal and opposite reaction.
So, whenever a transaction occurs within a company, there must be at least 2
accounts being affected.

For example, if a company bought a car, the company’s assets would go up by the
value of the car. However, there needs to be an additional account that changes
(i.e., the equal and opposite reaction). The other account that is affected is the
company’s cash going down because they used the cash to purchase the car.

Finally, just like how the size of the forces on the first object must equal that of the
second object, so must the debits and credits of every journal entry must be equal.

How to Approach Journal Entries

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A journal is the company’s official book in which all transactions are recorded in
chronological order. Although many companies use accounting software nowadays
to book journal entries, journals were the predominant method of booking entries
in the past. In every journal entry that is recorded, the debits and credits must be
equal to ensure that the accounting equation (A = L + SE) remains in balance. When
doing journal entries we must always consider four factors:

1.
1. Which accounts are affected by the transaction
2. For each account, determine if it is increased or decreased
3. For each account, determine by how much it changed
4. Make sure that the accounting equation stays in balance

The best way to master journal entries is through practice. Here are numerous
examples that illustrate some common journal entries. The first example is a
complete walkthrough of the process.

Problems on journal entry:

Q1) Journalise the following transactions in the books of Rama & Sons

3rd May : Cash deposited into bank 60,000

4th May : Loan given to Bhuvan 20,000

4th May : Paid cash to Veeru 20,000

5th May : Paid to Veeru by cheque 15,000

5th May : Cash received from Tarun 12,000

5th May : Took loan from Anush 15,000

6th May : Cheque received from Pranav 15,000

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6th May : Paid to Intel Computers by cheque 17,000

6th May : Withdrew from bank 5,000

7th May : Withdrew from bank for office use 8,000

7th May : Cash received from Bhuvan on loan account 10,000

8th May : Withdrew from bank for personal use 1,000

8th May : Cash taken by proprietor for personal use 3,000

9th May : Bought furniture and paid by cheque 15,000

9th May : Paid to Anush by cheque on loan account 5,000

9th May : Brought additional capital of 25,000

Solution
Journal in the books of M/s Rama & Sons
st th
for the period from 1 May to 10 May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)

May – Bank a/c Dr – 60,000

3rd – 60,000
To Cash a/c

[Being the amount of cash deposited into

bank]

4th – Loan to Bhuvan a/c Dr – 20,000

– 20,000
To Cash a/c

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Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)

[Being the amount of cash given as loan to

Bhuvan]

4th – Veeru a/c Dr – 20,000

– 20,000
To Cash a/c

[Being the amount of cash paid to Veeru]

5th – Veeru a/c Dr – 15,000

– 15,000
To Bank a/c

[Being the amount paid to veeru on account

by cheque]

5th – Cash a/c Dr – 12,000

– 12,000
To Tarun a/c

[Being the amount of cash received from

Tarun]

5th – Cash a/c Dr – 15,000

– 15,000
To Loan from Anush a/c

[Being the amount of loan taken from Anush

]

6th – Bank a/c Dr 15,000

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Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)

To Pranav a/c –
– 15,000
[Being the amount received by cheque from
Pranav]

6th – Intel Computers a/c Dr – 17,000

– 17,000
To Bank a/c

[Being the amount paid by cheque to Intel

Computers]

6th – Cash a/c Dr – 5,000

– 5,000
To Bank a/c

[Being the amount of cash withdrawn from

bank]

7th – Cash a/c Dr – 8,000

– 8,000
To Bank a/c

[Being the amount of cash withdrawn from

bank]

7th – Cash a/c Dr – 10,000

– 10,000
To Loan to Bhuvan a/c

[Being the amount of cash received from

Bhuvan as loan]

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Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)

8th – Drawings a/c Dr – 1,000

– 1,000
To Bank a/c

[Being the amount of withdrawn from bank

for personal use]

8th – Drawings a/c Dr – 3,000

– 3,000
To Cash a/c

[Being the amount of cash taken by the

proprietor for personal purposes]

9th – Furniture a/c Dr – 15,000

– 15,000
To Bank a/c

[Being the amount paid by cheque towards

the purchase of furniture]

9th – Loan from Anush a/c Dr – 5,000

– 5,000
To Bank a/c

[Being the amount paid by cheque towards

repayment of loan from Anush]

9th – Cash a/c Dr – 25,000

– 25,000
To Capital a/c

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Journal in the books of M/s Rama & Sons
for the period from 1st May to 10th May

V/R Amount Amount

Date Particulars L/F
No. (Dr) (Cr)

[Being the amount received from proprietor

as capital vide cash]

Q2) Jeyaseeli is a sole proprietor having a provisions store. Following are the
transactions during the month of January, 2018. Journalise them.

Jan. Rs.

1 Commenced business with cash 80,000

2 Deposited cash with bank 40,000

3 Purchased goods by paying cash 5,000

4 Purchased goods from Lipton & Co. on credit 10,000

5 Sold goods to Joy and received cash 11,000

6 Paid salaries by cash 5,000

7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan.

8 Bought furniture by cash 4,000

9 Paid electricity charges by cash 1,000

10 Bank paid insurance premium on furniture as per standing

instructions 300

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Solution

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Q 3)Ananth is a trader dealing in textiles. For the following transactions, pass
journal entries for the month of January, 2018.

Jan. Rs.

1 Commenced business with cash 70,000

2 Purchased goods from X and Co. on credit 30,000

3 Cash deposited into bank 40,000

4 Bought a building from L and Co. on credit 95,000

5 Cash withdrawn from bank for office use 5,000

6 Cash withdrawn from bank for personal use of Ananthu 4,000

7 Towels given as charities 3,000

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8 Shirts taken over by Ananth for personal use 12,000

9 Sarees distributed as free samples 3,000

10 Goods (table clothes) used for office use 200

Solution

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Q 4)

Arun is a trader dealing in automobiles. For the following transactions, pass journal
entries for the month of January, 2018

Jan. Rs.

1 Commenced business with cash 90,000

2 Purchased goods from X and Co. on credit 40,000

3 Accepted bill drawn by X and Co. 20,000

4 Sold goods to D and Co. on credit 10,000

5 Paid by cash the bill drawn by X and Co.

6 Received cheque from D and Co. in full settlement and deposited the same in
bank 9,000

7 Commission received in cash 5,000

8 Goods costing Rs. 40,000 was sold and cash received 50,000

9 Salaries paid in cash 4,000

10 Building purchased from Kumar and Co. for Rs. 1,00,000 and an advance of Rs.
20,000 is given in cash

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Solution

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Q 5) Bragathish is a trader dealing in electronic goods who commenced his business
in 2015. For the following transactions took place in the month of March 2018, pass
journal entries.

March Rs.

1. Purchased goods from Y and Co. on credit 60,000

2. Sold goods to D and Co. on credit 30,000

3. Paid Y and Co. through bank in full settlement 58,000

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4. D and Co. accepted a bill drawn by Bragathish 30,000

5. Sold goods to L on credit 20,000

6. Sold goods to M on credit 40,000

7 Received a cheque from M in full settlement and deposited the same to the
bank 39,000

8. Goods returned to Y and Co. 4,000

9. L became insolvent and only 90 paise per rupee is received by cash in final
settlement

10. Goods returned by M 3,000

Solution

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1.3 Types of Journals:
 Cash Book
A cash book is a financial journal that contains all cash receipts and disbursements,
including bank deposits and withdrawals. Entries in the cash book are then posted
into the general ledger.

KEY TAKEAWAYS

 A cash book is a subsidiary to the general ledger in which all cash transactions
during a period are recorded.
 The cash book is recorded in chronological order, and the balance is updated
and verified on a continuous basis.
 There are three common types of cash books: single column, double column,
and triple column.

Recording in a Cash Book

All transactions in the cash book have two sides: debit and credit. All cash receipts
are recorded on the left-hand side as a debit, and all cash payments are recorded
by date on the right-hand side as a credit. The difference between the left and right
sides shows the balance of cash on hand, which should be a net debit balance if
cash flow is positive.

The cash book is set up in columns. There are three common versions of the cash
book: single column, double column, and triple column. The single column cash
book shows only receipts and payments of cash. The double column cash book
shows cash receipts and payments as well as details about bank transactions. The
triple column cash book shows all of the above plus information about purchase or
sales discounts.

A typical single column cash book will have the column headers: date, description,
reference (or folio number), and amount. These headers are present for both the
left side (receipts) and right side (payments). The date column is the date of the
transaction.

Because the cash book is updated continuously, it will be in chronological order by

transaction. In the description column, the accountant writes a short description or

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narration of the transaction. In the reference or ledger folio column, the accountant
inputs the account number for the related general ledger account. The amount of
the transaction is recorded in the final column.

 Sales Book
A Sales book is a record of all credit sales made by a business. It is one of the
secondary book of accounts and unlike cash sales which are recorded in cash book,
sales book is only to record credit sales. The amount entered in the sales book is on
behalf of invoices supplied to purchasers. A Sales book is also called Sales Journal
or Sales Day Book.
For example, the following entries of sales appear in the books of ABC Ltd.
Jan 7 – Sold 10 Keyboards to A & Co. for 300 each.
Jan 24 – Sold 5 headphones to X & Co. for 200 each.
Sales book of ABC ltd will appear as follows:
Sales Book
Date Particulars LF Amount
7 Jan A & co. 3000
24 JanX & co. 1000
4000
A credit sales will be recorded by passing the following journal entry:
Debtors A/c – Dr.
To sales A/c

 Purchase Book
It is also known as a Purchase journal, Invoice book or Purchase day book. Purchase
book is a special purpose subsidiary book prepared by a business to record all
credit purchases. Nowadays all these recordings occur in ERPs and only small firms
resort solely to notebooks or MS-Excel.

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Few things to note are,

 Purchases recorded are only for goods or items related to core business
operations of a company i.e. goods procured for resale.
 Example – If a grocery business purchases office furniture it will not be
posted in the purchases book as it is considered as “purchase of an asset”
and not goods.
 Cash purchases are recorded in cash book and credit purchases are
recorded in purchase book.

Sample Format of Purchase Book

Example

Prepare the purchases book of Unreal Pvt Ltd. from the following details.

Jan 7 – Purchased 10 Keyboards from ABC Co. for 300 each (for resale, invoice # 60)

Jan 24 – Purchased 5 headphones from XYZ Co. for 200 each (for resale, invoice #
75)

Purchases Book for Unreal Pvt Ltd.

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The total purchases at the time of preparing the above records are 4,000 made
from 2 companies ABC Co. (3,000) & XYZ Co. (1,000)

 Petty Cash Book

 Besides maintaining a main or general cash book, many companies also
maintain a small cash book known as petty cash book to record small day
to day expenditures of the business.
 Petty cash book is a type of cash book that is used to record minor regular
expenditures such as office teas, bus fares, fuel, newspapers, cleaning,
pins, and causal labor etc. These small expenditures are usually paid using
coins and currency notes rather than checks. The person responsible for
spending petty cash and recording it in a petty cash book is known
as petty cashier.
 The chief cashier (also known as head or main cashier) bears the heavy
responsibility of maintaining company’s general cash book in which
receipts and payments amounting to hundreds or even thousands of
dollars are recorded by him every day. He, therefore, usually delegates
the responsibility for handling small day to day cash transactions to a
bookkeeper, receptionist or some other reliable staff member. Like a
general cash book, a petty cash book has a debit and a credit side. All
receipts are recorded on the debit side and all payments are recorded on
the credit side of petty cash book by the petty cashier.

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Bills Receivable Book

Also known as a B/R book, bills receivable book is a subsidiary or secondary book
of accounting, where all bills of exchange, which are receivable for the
business, are recorded. The total value of all the bills receivable for an accounting
period is transferred to the books of accounts.

In a mid to large sized business where the number of bills exchanging hands is large
in number, it is tough to journalize all receipt of bills. All the bills are entered in an
accounting ERP or a register depending on the business, furthermore, all these
entries are transferred to the respective ledger accounts at a regular interval.

Bills receivable account will usually have a debit balance. As a bill receivable is
supposed to be received at maturity, it acts as a current asset for the business.
Generally, every bill has a 3 day grace period.

Sample Format of the B/R Book

A person who draws the bill of exchange is called a “drawer” and a customer on
whom it is drawn is called a “drawee” or an “acceptor”. A bill receivable for a
“drawer” is a bill payable for a “drawee”.

 Bill Payable Book

 Also known as a B/P book, bills payable book is a subsidiary or secondary

book of accounting where all bills of exchange, which are payable by the

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 business, are recorded. The total value of all the bills payable for an
accounting period is transferred to the books of accounts.

 In a mid to large sized business where the number of bills exchanging

hands is large in number, it is tough to journalize all bills drawn. All such
bills are entered in an accounting ERP or a register depending on the
business, furthermore, all these entries are transferred to the
respective ledger accounts at a regular interval, often monthly.

 A bill receivable for a “drawer” is a bill payable for a “drawee”. Bills

payable account will usually have a credit balance, as it is supposed to be
paid at maturity, it acts as a liability for the business. Generally, every bill
has a 3-day grace period.

 Sample Format of a B/P Book

 The person, who draws the bill of exchange, is called a “drawer” and the
customer, on whom it is drawn, is called a “drawee” or an “acceptor”.

1.4 Ledger: Concept, Pro-forma

 Definition: A ledger is a written or computerized record of all the
transactions a business has completed. These transactions are recorded in
the ledger in different accounts. This list of accounts is most often called the
chart of accounts. Large companies tend to have many accounts in their
chart of accounts while smaller companies might only have a few accounts
listed.

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 What Does Accounting Ledger Mean?
Ledger, in an accounting text, most often refers to the general ledger. Companies
use the general ledger to record all of the accounts in the chart of accounts are
summarized and categories in the general ledger.
The general ledger or ledger is a record of all the accounts that the company uses.
In all modern accounting systems, the general ledger is computerized. A general
ledger divides accounts into three account types: assets, liabilities, and equity
accounts. Most companies have many of the same general accounts like cash,
accounts payable, and retained earnings, but some companies have specialized
accounts specific for their operations.

 Example
For example, a manufacturer would have raw materials inventory, work in process
inventory, and finished inventory accounts in its asset section. A retailer, on the
other hand, might have an account for promotional inventory or merchandise not
for sale. Many retailers also create different accounts for new promotions and
specific inventory classes.
After the accounts are categorized by type, they are arranged in balance sheet
order starting with assets, then liabilities, then equity accounts. Here are some
example accounts in balance sheet order.
 Balancing of Ledger – Balance c /d and Balance b/d (Opening & Closing
Balance)

The journal consists of all entries, but what if we are asked about transactions with a
particular account? We can’t count and find the total amount or number of
transactions as they are probably done on different dates. Hence, different accounts
are made to record transactions related to that particular account. In the end,
balancing of the ledger is done to get the status of the particular ledger at the end of
the financial year.

 Ledger Posting

After the transactions are recorded in the journal, it is then posted in the principal
book called as ‘Ledger’. The process of transferring the entries from journal to
respective ledger accounts is called ledger posting. Balancing of ledgers is carried to
find out differences at the end of the year.
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Ledger posting is entering information in the ledger, in respective accounts from the
journal for individual records. The account debited is posted on the debit side and the
account credited is posted on the credit side of the same account.

This process is carried throughout the year and at the end of the financial year the
ledger accounts are closed and are totaled and balanced. This process is called the
balancing of the ledger accounts.

 Rules for posting of entries in the ledger

1. A separate account is opened for each account and entries from the journal are
posted in respective ledger account accordingly.
2. The words like ‘To’ and ‘By’ are used while posting the entries in the ledger
accounts. ‘To’ is used when accounts are posted in the debit side column of a
particular account. ‘By’ is used when accounts are posted in the credit side
column of a particular account. These words may not have meaning but are
used to represent the debit and credit accounts.
3. The account which is debited in the journal should also be debited in the ledger
book but the reference should be of respective credit account.
 Balancing of Ledger

At the end of every accounting year all the accounts which are operated in the ledger
book are closed, totaled and balanced. Balancing of ledgers means finding the
difference between the debit and credit amounts of a particular account i.e. heavier
total and lighter total difference and recording that difference amount on the lighter
total side.

 Steps for Balancing Ledger Account

1. First of all, calculate the totals of debit and credit columns separately on a rough
sheet to avoid mistakes. Find out the difference between the heavier total and
lighter total by subtracting the lower from higher. The difference is called a
Balance amount.

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 2. If the total of the debit side is heavier than that of the credit side, the balance
is called as “Debit Balance” and is written on the credit side (the side with
lower amount) of that particular account as “By Balance c/d” or “By Balance
c/FD”. Here, c/d means carried down and c/FD means carried forward.
3. Similarly, if the total of the credit side is more than that of debit side total,
the balance is called “Credit Balance”. The difference amount is written on
the debit side of the account as “To balance c/d” or “To balance c/fd”
4. Once we get the heavier total it should be written in both the columns’ total.
Draw double lines across the total below the amounts which indicates the
account is closed and balanced.
5. Last year’s closing balance is the opening balance of the current year. So, if
there is debit it should be shown on the debit side of a particular account as
“To Balance b/d” or “To Balance b/fd”. Here, b/d means brought down and
b/fd means brought forward.
Note: Nominal accounts are not balanced; the balances are transferred to profit and
loss account.

Format of a ledger sheet

The format of a ledger sheet is as follows :

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 1.5 Problems on Ledger Preparation
Journalise the following transactions and post them in the ledger
2006
 January 1 Commenced business with cash 50000
 January 3 Paid into bank 25000
 January 5 Purchased furniture for cash 5000
 January 8 Purchased goods and paid by cheque 15000
 January 8 Paid for carriage 500
 January 14 Purchased Goods from K. Murthy 35000
 January 18 Cash Sales 32000 January 20 Sold Goods to Ashok on credit 28000
 January 25 Paid cash to K. Murthy in full settlement 34200
 January 28 Cash received from Ashok 20000
 January 31 Paid Rent for the month 2000
 January 31 Withdrew from bank for private use 2500
Solution:-

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1.6 Cash Book: Types
The cash book is used to record receipts and payments of cash. It works as a
book of original entry as well as a ledger account. The entries related to receipt
and payment of cash are first recorded in the cash book and then posted to the
relevant ledger accounts. Moreover, a cash book is a substitute for cash account
in the ledger. A company that properly maintains a cash book does not need to
open a cash account in its ledger.
Types of cash book

There are four major types of cash book that companies usually maintain to
account for their cash flows. These are given below:

1. A single column cash book to record only cash transactions.

2. A double/two column cash book to record cash as well as bank transactions.
3. A triple/three column cash book to record cash, bank and purchase discount
and sales discount.

1. Single column cash book

The single column cash book (also known as simple cash book) is a cash book
that is used to record only cash transactions of a business. It is very identical to
a traditional cash account in which all cash receipts are recorded on left hand
(debit) side and all cash payments are recorded on right hand (credit) side in a
chronological order.

The single column cash book has only one money column on both debit and credit
sides titled as “amount” which is periodically totaled and balanced like a T-account.
As stated earlier, a single column cash book records only cash related transactions.
The entries relating to checks issued, checks received, purchases discount, and
sales discount are not recorded in single column cash book.

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Format:

The specimen/format of a single column cash book is given below:

The purpose of five columns used on both sides of a single column cash book is
briefly explained below:

 Date: The date column of the cash book is used to record the year, month
and actual date of each cash transaction. This column ensures the
chronological record of each business transaction involving receipt or
payment of cash.
 Description: The description column is used to record the account titles to
be debited or credited as a result of each cash transaction. A short
explanation (also known as narration) of each cash transaction may also be
written in this column. This column is sometime titled as “particulars”.
 Voucher No: Voucher is a document that supports a business transaction.
This column is used to record the serial number of a receipt voucher or
payment voucher.
 Posting reference: This column is used to write the page number of each
ledger account named in the description column of the cash book.
 Amount: The amount column of single column cash book is used to record
the money value of each cash transaction.

2. Double column cash book

The double column cash book (also known as two column cash book) has two
money columns on both debit and credit sides – one to record cash transactions
and one to record bank transactions. In other words, we can say that if we add a
bank column to both sides of a single column cash book, it would become a double
column cash book. The cash column is used to record all cash transactions and
35
works as a cash account whereas bank column is used to record all receipts and
payments made by checks and works as a bank account. Both the columns are
totaled and balanced like a traditional T-account at the end of an appropriate
period which is usually one month.
Since a double column cash book provides cash as well as bank balance at the end
of a period, some organizations prefer to maintain a double column cash book
rather than maintaining two separate ledger accounts for recording cash and bank
transactions.

 Format

The format/specimen of a double column cash book is given below:

The above format of double column cash book has six columns on both debit and
credit sides. The purpose of cash and bank columns has been explained at the start
of this article and the purpose of date, description, voucher number (VN) and
posting reference (PR) columns has been explained in single column cash
book article.

 Important points to remember while making entries in a double column cash

book

 Recording cash transactions:

1. All cash receipts are recorded in cash column on the debit side and all cash
payments are recorded in cash column on credit side of the double column
cash book.

36
 2. If cash is received from a debtor or customer and is deposited into the bank
account on the same date, the entry will be made in the bank column on the
debit side, not in the cash column.

 Recording bank transactions:

1. When a check is received and the same is deposited into the bank account
on the same date, the amount of the check is entered in the bank column
on the debit side.
2. When a check is received and the same is not deposited into the bank on the
same date, the amount of the check is entered in the cash column, not in
the bank column.
3. When a check received from a receivable on a date subsequent to its receipt
is deposited into the bank account, the entry is made in the bank column on
the debit side and in the cash column on credit side. It is called a contra
entry.
4. When a check is issued, the amount of the check is entered in the bank
column on the credit side.

 Recording contra entries:

The “contra” is a Latin word which means against or opposite. The contra entry is
an entry which involves a cash account and a bank account and which is recorded
on both debit and credit sides of the double column cash book at the same time.
This entry is not posted to any ledger account because both debit and credit aspects
of transaction are handled within the cash book and the double entry work is
completed. In posting reference column, the letter “C” is written to denote that the
entry is a contra entry and will not be posted to any ledger account. A contra entry
is made in the following circumstances:

(1). When cash is deposited into the bank account:

The entry for depositing cash into the bank account is:

Bank[Dr]
Cash [Cr]

The deposited amount is written in the bank column on debit side and cash column
on credit side.
37
(2). When cash is withdrawn from bank account for business use:

The entry for withdrawal of cash from bank account for business purpose is:

Cash [Dr]
Bank [Cr]

The withdrawn amount is written in the cash column on debit side and bank column
on credit side.

Important: The contra entry is made only when the cash is withdrawn for business
use. If cash is withdrawn for personal use, it will be recorded only in the bank
column on credit side of the cash book.

(3). When a check received from a receivable or customer on a date subsequent

to its receipt is deposited into the bank account:

When a check is received and is not deposited into the bank account on the same
date, it is recorded in the cash book just like a normal cash receipt. On a subsequent
date, when the check is deposited into the bank account, the following entry is
made:

Bank[Dr]
Cash [Cr]

The amount of the check is recorded in the bank column on debit side and cash
column on credit side.

 Balancing and posting a double column cash book

Both cash column and bank column of double column cash book are totaled and
balanced at the end of an appropriate period. The process of balancing and posting
a cash book has been explained in detail in single column cash book article. The
same process is also applicable to a double column cash book.

3. Triple/three column cash book

The triple column cash book (also referred to as three column cash book) is the
most exhaustive form of cash book which has three money columns on both receipt

38
(Dr) and payment (Cr) sides to record transactions involving cash, bank and
discounts. A triple column cash book is usually maintained by large firms which
make and receive payments in cash as well as by bank and which frequently receive
and allow cash discounts.

The procedure of recording transactions in a triple/three column cash book is

similar to that of a double column cash book. The only difference between two
types of cash book is that a double column cash book has two money columns (i.e.,
cash and bank) whereas a triple column cash book has three money columns (i.e.,
cash, bank and discount).

The cash and bank columns of triple column cash book are used as accounts and
are periodically totaled and balanced just like in case of a double column cash book.
The discount column is only totaled. It is not balanced because it does not work as
an account.

In general ledger, two separate accounts are maintained for discount allowed and
discount received. The total of discount column on debit side of cash book
represents the total cash discount allowed to customers during the period and is
posted to the discount allowed account maintained in the ledger. The total of
discount column on credit side represents the total cash discount received from
suppliers during the period and is posted to the discount received account
maintained in the ledger.

Discount allowed is an expense and discount received is an income of the business.

 Format

The format of a triple/three column cash book is given below:

39
The triple column cash book has 7 columns on both debit and credit sides. The
purpose of each column is briefly explained below:

1. Date: The date column is used to enter the transaction date.

2. Description: The description column is used to write the name of the
account to be debited or credited in the ledger as a result of cash or bank
transaction.
3. Voucher number (VN): A voucher is a document in support of a transaction.
The serial number of the voucher is entered in this column.
4. Posting reference (PR): Each account in the ledger is assigned a unique
numbered. The number each ledger account that is written in description
column is entered in PR column.
5. Discount: The amount of discount allowed is recorded on debit side and the
amount of discount received is recorded on credit side in discount
column.The totals of debit column and credit column are posted to discount
allowed account and discount received account respectively.
6. Cash: The amount of cash received (net of any discount allowed) is entered
on the debit side and the amount of cash paid (net of any discount received)
is entered on the credit side in cash column. This column is totaled and
balanced like a ledger account.
7. Bank: The amount of all receipts and payments made by the bank account
are entered in bank column of the cash book. This column is also totaled and
balanced like a ledger account.

1.7 Problems on Preparation of Cash Book

Q1)Enter the following transactions in the cash book of M/s. Rohan Traders:
Date Details Amount (Rs.)
December 01 Cash in Hand 27,500
December 05 Cash received from Nitu 12,000
December 08 Insurance Premium paid 2,000
December 10 Furniture purchased 6,000
December 14 Sold Goods for cash 16,500
December 18 Purchased Goods from Naman for cash 26,000
December 22 Cash paid to Rohini 3,200
December 25 Sold Goods to Kanika for cash 18,700

40
 December 28 Cash Deposited into Bank 5,000
December 30 Rent paid 4,000
December 31 Salary paid 7,000
Solution

41
Q2)Enter the following transactions of the Premier Trading Company in Cash Book
with
three columns- Discount, Cash and Bank and balance the accounts as on 31st
December
2004:
2004 Dec. 1 Cash in hand Rs 4,000
2004 Dec. 1 Bank Rs 1,000 (Cr.)
2004 Dec. 3 Received a cheque from A Rs 290 and allowed him discount of Rs 40
2004 Dec. 7 A’s cheque deposited into the bank
2004 Dec. 10 Withdrew from bank for office use Rs 800
2004 Dec. 12 Paid B/P by cheque Rs 600
2004 Dec. 15 B/R from Ram. Rs 2,500: Discounted it, crediting with bank Rs 2,400
2004 Dec. 20 Issued a cheque for Petty Cashier Rs 100
2004 Dec. 25 Paid to Gupta by cheque Rs 920; discount received Rs 30
2004 Dec. 28 Made cash-sales Rs 900.

42
Problem Sums In Class Notes

Chapter Ends!

43
2. Preparation of Final Accounts
2.1 Trial Balance: - Concept, Objectives and Pro forma
When all accounts of the ledger are in balance, a Trial Balance is prepared. A Trial
Balance is a listing of all the accounts and their respective balances. Trial Balance is
a statement of debit balance and credit balance extracted from ledger accounts on
a particular date. A Trial Balance is, thus, a summary of all the Ledger Balances
outstanding as on a particular date.

Proforma of a Trial Balance is as follows:

It must be stated here that total of debit balance column must be equal to total of
credit balance column. This is so because under double entry system, for each item
of debit there is a corresponding credit and secondly all the transactions recorded
in the books of original entry are transferred to ledger.

Objectives of Preparing a Trial Balance:

The following are the objectives of preparing a Trial Balance:
1. To check the arithmetical accuracy of accounting entries posted in the ledger—
When the trial balance tallies, it is an indication of the fact that ledger accounts are
arithmetically accurate. It also indicates that:

(i) For each transaction, the debits and credits were recorded in equal amounts,

(ii) The balance (debit balances and credit balances) for each account was
calculated correctly,

44
(iii) The balances of the various debit and credit accounts have been correctly
added together to arrive at the total equality of the debits and credits. Of course
there may be certain errors in the books of accounts in-spite of the agreement of
Trial Balance.

2. To Provide a Basis for Financial Statements—Trial Balance is a first step towards

preparation of financial statements of an organisation. If trial balance is not
prepared, it will be impossible to prepare the financial statement.

3. Trial Balance serves as a summary of all the ledger accounts and provides a
complete picture of each account in the ledger.

Illustration 1:
The following were the transactions of a firm dealing in furniture:

Journalese the above transactions in the books of the firm and show the ledger
postings. Also prepare a trial balance as on March 31, 2012.

45
46
47
ADVERTISEMENTS:

48
49
50
Illustration 2:

51
Journalise the following transactions, post them into the ledger and prepare a
trial balance:
1. 09.2012 Started business by bringing in cash worth Rs. 2,00,000 out of which
paid into bank— Rs. 80,000

02.09.2012 Bought furniture for Rs. 20,000 and machinery Rs. 40,000.

03.09.2012 Purchased goods for Rs. 56,000.

06.09.2012 Sold goods for Rs. 32,000

08.09.2012 Purchased goods from Jain & Co. on credit for Rs. 44,000

10.09.2012 Paid telephone rent for the year by cheque Rs. 2,000

11. 09.2012 Bought one typewriter for Rs. 8,400 from Standard Typewriter Co. on
credit.

15.09.2012 Sold goods to Shiva worth Rs. 48,000

17.09.2012 Sold goods to Kumar for cash at Rs. 8,000

19.09.2012 Amount withdrawn from bank for personal use Rs. 6,000

20.09.2012 Withdrew from bank for business use Rs. 14,000

21.09.2012 Received cash from Shiva Rs. 47,600 and discount allowed Rs. 400

22.09.2012 Paid into bank Rs. 23,200

23.09.2012 Bought 100 shares in PQ & Co. Ltd. at Rs. 120 per share and brokerage
paid Rs. 80

52
25.09.2012 Goods worth Rs. 4,000 which were defective were returned to Jain &
Co. and the balance amount due to them was settled by issuing a cheque in their
favour.

28.09.2012 Sold 40 shares of PQ & Co. Ltd. at Rs. 130 per share and brokerage paid
Rs. 80

28.09.2012 Bought goods worth Rs. 8,400 from Peter and supplied them to Paul for
Rs. 12,000

30.09.2012 Paul returned goods worth Rs. 400

Goods worth Rs. 280 returned to Peter.

Issued a cheque for Rs. 4,000 in favour of the landlord towards rent.

30.09.2012 Paid salaries to staff Rs. 6,000.

Received from travelling salesman Rs. 8,000 for goods sold by him after deducting
his travelling expenses Rs. 400

30.09.2012 Paid for donations Rs. 402

Stationery Rs. 1,800

Postage Rs. 996

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56
57
58
59
60
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Illustration 3:
The balance sheet of a company as on March 31, 2012 is given below:

Following
is the summary of transactions that occurred during April:
(a) Collections of accounts receivable Rs. 44,000

(b) Payments of accounts payable Rs. 12,000

(c) Acquisition of inventory on credit Rs. 40,000

62
(d) Inventory costing Rs. 35,000 was sold on credit for Rs. 42,500

(e) Recognition of rent expense for April Rs. 500

(f) Wages paid in cash for April Rs. 4,000

(g) Dividends declared and disbursed to shareholders in April Rs. 9,000

Prepare all ledger accounts after including the opening balances as on March 31,
2012.

63
64
Illustration 4:
From the following list of balances, prepare a trial balance as on 30.6.2012:

65
Illustration 5:
The accountant of a business firm wrongly prepared the following trial balance. You
are required to draw up a trial balance correctly stating reasons in brief.

66
Reasons:
1. Discount allowed is an expense and therefore it has a debit balance.
67
2. Fixed assets always reflect debit balance, because assets coming in are debited.

3. Sales has credit balance.

4. Purchases has a debit balance.

5. Carriage inwards is an expense and has a debit balance.

6. Carriage outwards is an expense and has a debit balance.

7. Interest paid is an expense and has a debit balance.

8. Creditor is a liability and has a credit balance.

9. Closing stock is not an account, so it cannot have any balance, and consequently,
it does not find a place in the trial balance. Only when closing stock is adjusted
against purchases, it appears in the trial balance.

68
2.2 Problems on Preparation of Trading, Profit and Loss and Balance-
sheet
(Horizontal Format- i.e. Regular Format)

Example 1:
From the following balances extracted from the books of X & Co., prepare a trading
and profit and loss account and balance sheet on 31st December, 1991.
$ $
Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200
Purchases 39,000 Office fixtures 1,000
Wages 2,800 Cash in hand 500

Insurance 700 Cash at bank 4,750

Sundry debtors 30,000 Tent and taxes 1,100

Carriage inwards 800 Carriage outwards 1,450

Commission (Dr.) 800 Sales 60,000
Interest on capital 700 Bills payable 3,000

Stationary 450 Creditors 19,650

Returns inwards 1,300 Capital 17,900
The stock on 21st December, 1991 was valued at $25,000.
Solution:
X&Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991
To Opening stock 11,000 |By Sales 60,000

69
 Less returns
To Purchases 39,000 | 1,300
i/w
Less returns o/w 500 | 58,700
By Closing
38,500 | 25,000
stock
To Carriage
800 |
inwards
To Wages 2,800 |
To Gross profit
30,600 |
c/d
|
83,700 | 83,700
|
By Gross
To Stationary 450 | 30,600
profit b/d
To Rent and rates 1,100 |
To Carriage
1,450 |
outwards
To Insurance 700 |
To Trade
200 |
expenses
To Commission 800 |
To Interest on
700 |
capital
To Net profit |
transferred to 25,200
capital a/c |

70
 |
30,600 | 30,600
|
X & Co.
Balance Sheet
As at 31st December, 1991
Liabilities $ |Assets $
Creditors 19,650 |Cash in hand 500
Bills payable 3,000 |Cash at bank 4,750
Capital 17,900 |Sundry debtors 30,000
Add Net profit 25,200 |Bill receivable 4,500
43,100 |Stock 25,000
|Office equipment 1,000
|
65,750 | 65,750

71
The following trial balance have been taken out from the books of XYZ as on 31st
December, 2005.

Dr. Cr.
$ $
Plant and Machinery 100,000
Opening stock 60,000
Purchases 160,000
Building 170,000
Carriage inward 3,400
Carriage outward 5,000
Wages 32,000
Sundry debtors 100,000
Salaries 24,000
Furniture 36,000
Trade expense 12,000
Discount on sales 1,900
Advertisement 5,000
Bad debts 1,800
Drawings 10,000
Bills receivable 50,000
Insurance 4,400
Bank balances 20,000
Sales 480,000
Interest received 2,000
Sundry creditors 40,000
Bank loan 100,000
Discount on purchases 2,000
Capital 171,500

795,500 795,500

Closing stock is valued at $90,000

Required: Prepare the trading and profit and loss account of the business for the year ended
31.12.2005 and a balance sheet as at that date.

XYZ
Trading and Profit and Loss Account
For the year ended 31st, December 2005

Opening stock 60,000 Sales 480,000

Less
Purchases 160,000 1,900 478,100
discount
Less discount 2,000 158,000
Closing
90,000
stock
Carriage inward 3,400

72
Wages 32,000
Gross profit (transferred to P&L) 314,700

568,100 568,000

Gross profit
Carriage outward 5,000 (transferred 314,700
to P&L)
Interest
Salaries 24,000 2,000
received
Trade expenses 12,000
Advertisement 5,000
Bad debts 1,800
Insurance 4,400
Net profit (transferred to
264,500
capital)

316,700 316,700

Note: Discount on purchases and discount on sales are deducted from purchases and sales
respectively. They may be shown on the credit and debit side of profit and loss account
respectively and it will not affect the net profit of the business. The gross profit will be
affected if discount is treated so.

XYZ
Balance Sheet
For the year ended 31st, December 2005

Assets $ Liabilities $
Current Assets: Current Liabilities:
Bank balance 20,000 Sundry creditors 40,000
Bills receivable 50,000 Bank loan 100,000
Sundry debtors 100,000 Fixed and Long Term:
Closing stock 90,000 Capital 171,500
Fixed Assets: +Net profit 264,500
Furniture 36,000
Plant and Machinery 100,000 -Drawings 10,000 426,000
Building 170,000

566,000 566,000

Problem Sums In Class Notes

Chapter Ends!

73