UNIT – V

Objective:
The student will be able to understand
 concept and significance of accounting
 branches of accounting
 the concept and preparation of trail balance
 accounting concepts
 types of accounts and rules
 preparation of journal and ledger accounts
 preparation of final accounts with simple adjustments
Syllabus: Introduction to Accountancy, Types of Accounts, Ledgers, Maintenance of
Ledgers & Trial Balance, Introduction to Final Accounts, Problems on Trading , Profit
& Loss Account and Balance sheet, Problems with simple adjustments.
Learning Outcomes:
At the end of the Unit, Student will be able to
 learn about the fundamentals of accounting
 learn how to prepare profit and loss account
 identify the differences between assets and liabilities
 gain understanding about various adjustments in accounting

Learning Material
Definition of Accounting:

Smith and Ashburne: “Accounting is a means of measuring and reporting the results of
economic activities.”

R.N. Anthony: “Accounting system is a means of collecting summarizing, analyzing

and reporting in monetary terms, the information about the business.

American Institute of Certified Public Accountants (AICPA): “The art of recording,

classifying and summarizing in a significant manner and in terms of money transactions
and events, which are in part at least, of a financial character and interpreting the results
thereof.”
 Thus, accounting is an art of identifying, recording, summarizing and
interpreting business transactions of financial nature. Hence accounting is the Language
of Business.

Branches of Accounting:

The important branches of accounting are:

1. Financial Accounting: The purpose of Accounting is to ascertain the financial
results i.e. profit or loss in the operations during a specific period. It is also
aimed at knowing the financial position, i.e. assets, liabilities and equity
position at the end of the period. It also provides other relevant information to
the management as a basic for decision-making for planning and controlling
the operations of the business.
2. Cost Accounting: The purpose of this branch of accounting is to ascertain the
cost of a product / operation / project and the costs incurred for carrying out
various activities. It also assists the management in controlling the costs. The
necessary data and information are gatherr4ed form financial and other sources.
3. Management Accounting: Its aim to assist the management in taking correct
policy decision and to evaluate the impact of its decisions and actions. The data
required for this purpose are drawn accounting and cost-accounting.
4. Inflation Accounting: It is concerned with the adjustment in the values of
assets and of profit in light of changes in the price level. In a way it is
concerned with the overcoming of limitations that arise in financial statements
on account of the cost assumption (i.e. recording of the assets at their historical
or original cost) and the assumption of stable monetary unit.
5. Human Resource Accounting: It is a branch of accounting which seeks to
report and emphasize the importance of human resources in a company’s
earning process and total assets. It is concerned with the process of identifying
and measuring data about human resources and communicating this
information to interested parties. In simple words, it is accounting for people as
organizational resources.

Functions of an Accountant

The job of an accountant involves the following types of accounting works:

 1. Designing Work: It includes the designing of the accounting system, basis for
identification and classification of financial transactions and events, forms,
methods, procedures, etc.
2. Recording Work: The financial transactions are identified, classified and
recorded in appropriate books of accounts according to principles. This is “Book
Keeping”. The recording of transactions tends to be mechanical and repetitive.
3. Summarizing Work: The recorded transactions are summarized into
significant form according to generally accepted accounting principles. The
work includes the preparation of profit and loss account, balance sheet. This
phase is called ‘preparation of final accounts’
4. Analysis and Interpretation Work: The financial statements are analysed by
using ratio analysis, break-even analysis, funds flow and cash flow analysis.
5. Reporting Work: The summarized statements along with analysis and
interpretation are communicated to the interested parties or whoever has the
right to receive them. For Ex. Share holders. In addition, the accou8nting
departments has to prepare and send regular reports so as to assist the
management in decision making. This is ‘Reporting’.
6. Preparation of Budget: The management must be able to reasonably estimate
the future requirements and opportunities. As an aid to this process, the
accountant has to prepare budgets, like cash budget, capital budget, purchase
budget, sales budget etc. this is ‘Budgeting’.
7. Taxation Work: The accountant has to prepare various statements and returns
pertaining to income-tax, sales-tax, excise or customs duties etc., and file the
returns with the authorities concerned.
8. Auditing: It involves a critical review and verification of the books of accounts
statements and reports with a view to verifying their accuracy. This is ‘Auditing’

This is what the accountant or the accounting department does. A person may be
placed in any part of Accounting Department or MIS (Management Information System)
Department or in small organization; the same person may have to attend to all this
work.

Users of Accounting Information

Different categories of users need different kinds of information for making decisions.
The users of accounting can be divided in two board groups (1). Internal users and (2).
External users.

Internal Users:
 Managers: These are the persons who manage the business, i.e. management at
the top, middle and lower levels. Their requirements of information are different because
they make different types of decisions.
Accounting reports are important to managers for evaluating the results of their
decisions. In additions to external financial statements, managers need detailed internal
reports either branch division or department or product-wise. Accounting reports for
managers are prepared much more frequently than external reports.
Accounting information also helps the managers in appraising the performance
of subordinates. As such Accounting is termed as “the eyes and ears of management.”

External Users:
1. Investors: Those who are interested in buying the shares of company are naturally
interested in the financial statements to know how safe the investment already made is
and how safe the proposed investments will be.
2. Creditors: Lenders are interested to know whether their load, principal and
interest, will be paid when due. Suppliers and other creditors are also interested to know
the ability of the firm to pay their dues in time.
3. Workers: In our country, workers are entitled to payment of bonus which depends
on the size of profit earned. Hence, they would like to be satisfied that he bonus being
paid to them is correct. This knowledge also helps them in conducting negotiations for
wages.
4. Customers: They are also concerned with the stability and profitability of the
enterprise. They may be interested in knowing the financial strength of the company to
rent it for further decisions relating to purchase of goods.
5. Government: Governments all over the world are using financial statements for
compiling statistics concerning business which, in turn, helps in compiling national
accounts. The financial statements are useful for tax authorities for calculating taxes.
6. Public : The public at large interested in the functioning of the enterprises because
it may make a substantial contribution to the local economy in many ways including the
number of people employed and their patronage to local suppliers.
7. Researchers: The financial statements, being a mirror of business conditions, is
of great interest to scholars undertaking research in accounting theory as well as
business affairs and practices.

Advantages from Accounting

The role of accounting has changed from that of a mere record keeping during
the 1 decade of 20th century of the present stage, which it is accepted as information
st

system and decision making activity. The following are the advantages of accounting.
 1. Provides for systematic records: Since all the financial transactions are recorded
in the books, one need not rely on memory. Any information required is readily
available from these records.
2. Facilitates the preparation of financial statements: Profit and loss accountant
and balance sheet can be easily prepared with the help of the information in the
records. This enables the trader to know the net result of business operations (i.e.
profit / loss) during the accounting period and the financial position of the business
at the end of the accounting period.
3. Provides control over assets: Book-keeping provides information regarding
cash in had, cash at bank, stock of goods, accounts receivables from various
parties and the amounts invested in various other assets. As the trader knows the
values of the assets he will have control over them.
4. Provides the required information: Interested parties such as owners, lenders,
creditors etc., get necessary information at frequent intervals.
5. Comparative study: One can compare the present performance of the
organization with that of its past. This enables the managers to draw useful
conclusion and make proper decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc.,
because of the balancing of the books of accounts periodically. As the work is
divided among many persons, there will be check and counter check.
7. Tax matters: Properly maintained book-keeping records will help in the
settlement of all tax matters with the tax authorities.
8. Ascertaining Value of Business: The accounting records will help in ascertaining
the correct value of the business. This helps in the event of sale or purchase of a
business.
9. Documentary evidence: Accounting records can also be used as evidence in the
court to substantiate the claim of the business. These records are based on
documentary proof. Every entry is supported by authentic vouchers. As such,
Courts accept these records as evidence.
10. Helpful to management: Accounting is useful to the management in various
ways. It enables the management to assess the achievement of its performance.
The weakness of the business can be identified and corrective measures can be
applied to remove them with the helps accounting.

Limitations of Accounting

The following are the limitations of accounting.

 1. Does not record all events: Only the transactions of a financial character will
be recorded under book-keeping. So it does not reveal a complete picture about
the quality of human resources, locational advantage, business contacts etc.
2. Does not reflect current values: The data available under book-keeping is
historical in nature. So they do not reflect current values. For instance, we record
the value of stock at cost price or market price, whichever is less. In case of,
building, machinery etc., we adopt historical cost as the basis. In fact, the current
values of buildings, plant and machinery may be much more than what is
recorded in the balance sheet.
3. Estimates based on Personal Judgment: The estimate used for determining the
values of various items may not be correct. For example, debtor are estimated in
terms of collectability, inventories are based on marketability, and fixed assets
are based on useful working life. These estimates are based on personal
judgment and hence sometimes may not be correct.
4. Inadequate information on costs and Profits: Book-keeping only provides
information about the overall profitability of the business. No information is
given about the cost and profitability of different activities of products or
divisions.

Basic Accounting Concepts

Accounting has been evolved over a period of several centuries. During this
period, certain rules and conventions have been adopted. They serve as guidelines in
identifying the events and transactions to be accounted for measuring, recording,
summarizing and reporting them to the interested parties. These rules and conventions
are termed as Generally Accepted Accounting Principles. These principles are also
referred as standards, assumptions, concepts, conventions doctrines, etc. Thus, the
accounting concepts are the fundamental ideas or basic assumptions underlying the
theory and practice of financial accounting. They are the broad working rules for all
accounting activities developed and accepted by the accounting profession.
Basic accounting concepts may be classified into two broad categories.
1. Concept to be observed at the time of recording transactions.(Recording Stage).
2. Concept to be observed at the time of preparing the financial accounts
(Reporting Stage)
Basic Accounting Concepts
Accounting is a system evolved to achieve a set of objectives. In order to achieve the
goals, we need a set of rules or guidelines. These guidelines are termed here as “basic
accounting concepts”. The term concept means an idea or thought. Basic accounting
concepts are the fundamental ideas or basic assumptions underlying the theory and profit
of financial accounting. These concepts help in bringing about uniformity in the practice
of accounting. In accountancy following concepts are quite popular.

1. Business Entity Concept: in this concept “business is treated as separate from the
proprietor”. All the transactions recorded in the book of business and not in the books
of proprietor. the proprietor is also treated as a creditor for the business.

2. Going Concern Concept: this concept relates with the long life of business. The
assumption is that business will continue to exist for unlimited period unless it is
dissolved due to some reasons or the other.

3. Money Measurement Concept: in this concept “only those transactions are recorded in
accounting which can be expressed in terms of money, those transactions which cannot
be expressed in terms of money are not recorded in the books of accounting”.

4. Cost Concept: accounting to this concept, can asset is recorded at its cost in the books
of account. i.e., the price, which is paid at the time of acquiring it. In balance sheet, these
assets appear not at cost price every year, but depreciation is deducted and they appear at
the amount, which is cost, less classification.

5. Accounting Period Concept: every businessman wants to know the result of his
investment and efforts after a certain period. usually one-year period is regarded as an
ideal for this purpose. This period is called accounting period. it depends on the nature
of the business and object of the proprietor of business.

6. Dual Aspect Concept: according to this concept “every business transactions has two
aspects”, one is the receiving benefit aspect another one is giving benefit aspect. the
receiving benefit aspect is termed as “debit”, where as the giving benefit aspect is
termed as “credit”. Therefore, for every debit, there will be corresponding credit.

7. Matching Cost Concept: according to this concept “the expenses incurred during an
accounting period, e.g., if revenue is recognized on all goods sold during a period, cost
of those good sole should also be charged to that period.

8. Realization Concept: according to this concept revenue is recognized when a sale is

made. Sale is considered to be made at the point when the property in goods posses to
the buyer and he becomes legally liable to pay.

Accounting Conventions
Accounting is based on some customs or usages. Naturally accountants here to adopt
that usage or custom. They are termed as convert conventions in accounting. the
following are some of the important accounting conventions.

1. Full Disclosure: according to this convention accounting reports should disclose fully
and fairly the information. They purport to represent. They should be prepared honestly
and sufficiently disclose information which is if material interest to proprietors, present
and potential creditors and investors. The companies act, 1956 makes it compulsory to
provide all the information in the prescribed form.

2. Materiality: under this convention the trader records important factor about the
commercial activities. In the form of financial statements if any unimportant information
is to be given for the sake of clarity it will be given as footnotes.

3. Consistency: it means that accounting method adopted should not be changed from
year to year. It means that there should be consistent in the methods or principles
followed or else the results of a year cannot be conveniently compared with that of
another.

4. Conservatism: this convention warns the trader not to take unrealized income in to
account. That is why the practice of valuing stock at cost or market price, whichever is
lower is in vague. This is the policy of “playing safe”; it takes in to consideration all
prospective losses but leaves all prospective profits.

Classification of Business Transactions

All business transactions are classified into three categories:
1. Those relating to persons
2. Those relating to property (Assets)
3. Those relating to income & expenses
Thus, three classes of accounts are maintained for recording all business transactions.
They are:
1. Personal accounts
2. Real accounts
3. Nominal accounts

1. Personal Accounts: Accounts which are transactions with persons are called “Personal
Accounts”.
A separate account is kept on the name of each person for recording the benefits
received from, or given to the person in the course of dealings with him.
E.g.: Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd. A/C, ObulReddy
& Sons A/C, HMT Ltd. A/C, Capital A/C, Drawings A/C etc.

2. Real Accounts: The accounts relating to properties or assets are known as “Real
Accounts” .Every business needs assets such as machinery, furniture etc, for running its
activities .A separate account is maintained for each asset owned by the business.
E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3. NominalAccounts: Accounts relating to expenses, losses, incomes and gains are

known as “Nominal Accounts”. A separate account is maintained for each item of
expenses, losses, income or gain.
E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest
A/C, purchases A/C, rent A/C, discount A/C, commission received A/C, interest
received A/C, rent received A/C, discount received A/C.

Before recording a transaction, it is necessary to find out which of the accounts is to be

debited and which is to be credited. The following three different rules have been laid
down for the three classes of accounts….

1. Personal Accounts: The account of the person receiving benefit (receiver) is to be

debited and the account of the person giving the benefit (given) is to be credited.

Rule: “Debit----The
Receiver

2. Real Accounts: When an asset is coming into the business, account of that asset is to
be debited .When an asset is going out of the business, the account of that asset is to be
credited.

Rule: “Debit----What
comes in
3. Nominal Accounts: When an expense is incurred or loss encountered, the account
representing the expense or loss is to be debited. When any income is earned or gain
made, the account representing the income of gain is to be credited.

Rule: “Debit----All expenses and

losses

Journal
The first step in accounting therefore is the record of all the transactions in the books of
original entry viz., Journal and then posting into ledges.

Journal: The word Journal is derived from the Latin word ‘journ’ which means a day.
Therefore, journal means a ‘day Book’ in day-to-day business transactions are recorded
in chronological order.

Journal is treated as the book of original entry or first entry or prime entry. All the
business transactions are recorded in this book before they are posted in the ledges. The
journal is a complete and chronological (in order of dates) record of business
transactions. It is recorded in a systematic manner. The process of recording a
transaction in the journal is called “JOURNALISING”. The entries made in the book are
called “Journal Entries”.

The proforma of Journal is given below.

Date Particulars L.F. no Debit Credit

RS. RS.
1998 Jan 1 Purchases account to cash 10,000/- 10,000/-
account(being goods purchased
for cash)

Ledger
All the transactions in a journal are recorded in a chronological order. After a certain
period, if we want to know whether a particular account is showing a debit or credit
balance it becomes very difficult. So, the ledger is designed to accommodate the various
accounts maintained the trader. It contains the final or permanent record of all the
transactions in duly classified form. “A ledger is a book which contains various
accounts.” The process of transferring entries from journal to ledger is called
“POSTING”.

Posting is the process of entering in the ledger the entries given in the journal. Posting
into ledger is done periodically, may be weekly or fortnightly as per the convenience of
the business. The following are the guidelines for posting transactions in the ledger.
1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for
each new item a new account is to be opened.
3. Depending upon the number of transactions space for each account is to be
determined in the ledger.
4. For each account there must be a name. This should be written in the top of the
table. At the end of the name, the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the
account, by starting with “TO”.
6. The credit side of the Journal entry is to be posted on the debit side of the
account, by starting with “BY”.

Proforma for ledger: Ledger Book

Particulars account

Date Particulars Lfno Amount Date Particulars Lfno amount

Sales account
Date Particulars Lfno Amount Date Particulars Lfno amount

Cash account
Date Particulars Lfno Amount Date Particulars Lfno amount
Trail Balance

The first step in the preparation of final accounts is the preparation of trail balance. In
the double entry system of book keeping, there will be credit for every debit and there
will not be any debit without credit. When this principle is followed in writing journal
entries, the total amount of all debits is equal to the total amount all credits.

A trail balance is a statement of debit and credit balances. It is prepared on a particular

date with the object of checking the accuracy of the books of accounts. It indicates that
all the transactions for a particular period have been duly entered in the book, properly
posted and balanced. The trail balance doesn’t include stock in hand at the end of the
period. All adjustments required to be done at the end of the period including closing
stock are generally given under the trail balance.

Definitions: SPICER AND POGLAR: A trail balance is a list of all the balances
standing on the ledger accounts and cash book of a concern at any given date.
J.R.BATLIBOI:

A trail balance is a statement of debit and credit balances extracted from the ledger with
a view to test the arithmetical accuracy of the books.

Thus a trail balance is a list of balances of the ledger accounts’ and cash book of a
business concern at any given date.

Proforma for Trail Balance:

Trail balance for MR…………………………………… as on …………
No Name of account Debit Credit
(particulars) amount(rs.) amount(rs.)
Trail Balance
Specimen of trial balance

1 Capital Credit Loan

2 Opening stock Debit Asset
3 Purchases Debit Expense
4 Sales Credit Gain
5 Returns inwards Debit Loss
6 Returns outwards Debit Gain
7 Wages Debit Expense
8 Freight Debit Expense
9 Transport expenses Debit Expense
10 Royalities on production Debit Expense
11 Gas, fuel Debit Expense
12 Discount received Credit Revenue
13 Discount allowed Debit Loss
14 Bas debts Debit Loss
15 Dab debts reserve Credit Gain
16 Commission received Credit Revenue
17 Repairs Debit Expense
18 Rent Debit Expense
19 Salaries Debit Expense
20 Loan Taken Credit Loan
21 Interest received Credit Revenue
22 Interest paid Debit Expense
23 Insurance Debit Expense
24 Carriage outwards Debit Expense
25 Advertisements Debit Expense
26 Petty expenses Debit Expense
27 Trade expenses Debit Expense
28 Petty receipts Credit Revenue
29 Income tax Debit Drawings
30 Office expenses Debit Expense
31 Customs duty Debit Expense
32 Sales tax Debit Expense
33 Provision for discount on debtors Debit Liability
34 Provision for discount on creditors Debit Asset
 35 Debtors Debit Asset
36 Creditors Credit Liability
37 Goodwill Debit Asset
38 Plant, machinery Debit Asset
39 Land, buildings Debit Asset
40 Furniture, fittings Debit Asset
41 Investments Debit Asset
42 Cash in hand Debit Asset
43 Cash at bank Debit Asset
44 Reserve fund Credit Liability
45 Loan advances Debit Asset
46 Horse, carts Debit Asset
47 Excise duty Debit Expense
48 General reserve Credit Liability
49 Provision for depreciation Credit Liability
50 Bills receivable Debit Asset
51 Bills payable Credit Liability
52 Depreciation Debit Loss
53 Bank overdraft Credit Liability
54 Outstanding salaries Credit Liability
55 Prepaid insurance Debit Asset
56 Bad debt reserve Credit Revenue
57 Patents & Trademarks Debit Asset
58 Motor vehicle Debit Asset
59 Outstanding rent Credit Revenue

Final Accounts

In every business, the business man is interested in knowing whether the

business has resulted in profit or loss and what the financial position of the business is at
a given time. In brief, he wants to know (i) The profitability of the business and (ii) The
soundness of the business.
The trader can ascertain this by preparing the final accounts. The final accounts
are prepared from the trial balance. Hence the trial balance is said to be the link between
the ledger accounts and the final accounts. The final accounts of a firm can be divided
into two stages. The first stage is preparing the trading and profit and loss account and
the second stage is preparing the balance sheet.
Trading Account
The first step in the preparation of final account is the preparation of trading
account. The main purpose of preparing the trading account is to ascertain gross profit or
gross loss as a result of buying and selling the goods.
Trading account of MR……………………. for the year ended ……………………

Particulars Amount Particulars Amount

To opening stock Xxxx By sales xxxx

To purchases xxxx Less: returns xxx Xxxx
Less: returns xx Xxxx By closing stock Xxxx

To carriage inwards Xxxx

To wages Xxxx
To freight Xxxx
To customs duty, octroi Xxxx

To gas, fuel, coal,

Water Xxxx

To factory expenses
To other man. Expenses Xxxx
To productive expenses Xxxx
To gross profit c/d
Xxxx
Xxxx

Xxxx

Xxxx

Finally, a ledger may be defined as a summary statement of all the transactions relating
to a person , asset, expense or income which have taken place during a given period of
time. The up-to-date state of any account can be easily known by referring to the ledger.

Profit And Loss Account

The business man is always interested in knowing his net income or net profit.Net profit
represents the excess of gross profit plus the other revenue incomes over administrative,
sales, Financial and other expenses. The debit side of profit and loss account shows the
expenses and the credit side the incomes. If the total of the credit side is more, it will be
the net profit. And if the debit side is more, it will be net loss.
 PROFIT AND LOSS A/C OF MR…………………….FOR THE YEAR
ENDED…………
PARTICULARS AMOUNT PARTICULARS AMOUNT
TO office salaries Xxxxxx By gross profit b/d Xxxxx
TO rent,rates,taxes Xxxxx Interest received Xxxxx
TO Printing and stationery Xxxxx Discount received Xxxx
TO Legal charges Commission received Xxxxx
Audit fee Xxxx Income from
TO Insurance Xxxx investments
TO General expenses Xxxx Dividend on shares Xxxx
TO Advertisements Xxxxx Miscellaneous Xxxx
TO Bad debts Xxxx investments
TO Carriage outwards Xxxx Rent received xxxx
TO Repairs Xxxx
TO Depreciation Xxxxx
TO interest paid Xxxxx
TO Interest on capital Xxxxx
TO Interest on loans Xxxx
TO Discount allowed Xxxxx
TO Commission Xxxxx
TO Net profit------- Xxxxx
(transferred to capital a/c)
xxxxxx Xxxxxx

Balance Sheet

The second point of final accounts is the preparation of balance sheet. It is prepared
often in the trading and profit, loss accounts have been compiled and closed. A balance
sheet may be considered as a statement of the financial position of the concern at a given
date.

DEFINITION: A balance sheet is an item wise list of assets, liabilities and

proprietorship of a business at a certain state.

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial

position of a business at a particular date.
Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a
business firm and which serves to ascertain the financial position of the same on any
particular date. On the left-hand side of this statement, the liabilities and the capital are
shown. On the right-hand side all the assets are shown. Therefore, the two sides of the
balance sheet should be equal. Otherwise, there is an error somewhere.

BALANCE SHEET OF ………………………… AS ON

…………………………………….
Liabilities and capital Amount Assets Amount

Creditors Xxxx Cash in hand Xxxx

Bills payable Xxxx Cash at bank Xxxx
Bank overdraft Xxxx Bills receivable Xxxx
Loans Xxxx Debtors Xxxx
Mortgage Xxxx Closing stock Xxxx
Reserve fund Xxxx Investments Xxxx
Capital xxxxxx Furniture and fittings Xxxx
Add: Plats&machinery
Net Profit xxxx Land & buildings Xxxx
------- Patents, tm ,copyrights Xxxx
xxxxxxx Goodwill Xxxx
-------- Prepaid expenses
Outstanding incomes Xxxx
Less: Xxxx
Drawings xxxx Xxxx Xxxx
--------- XXXX XXXX

Advantages: The following are the advantages of final balance.

1. It helps in checking the arithmetical accuracy of books of accounts.
2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.

Final Accounts -- Adjustments

We know that business is a going concern. It has to be carried on indefinitely. At the end
of every accounting year. The trader prepares the trading and profit and loss account and
balance sheet. While preparing these financial statements, sometimes the trader may
come across certain problems .The expenses of the current year may be still payable or
the expenses of the next year have been prepaid during the current year. In the same
way, the income of the current year still receivable and the income of the next year have
been received during the current year. Without these adjustments, the profit figures
arrived at or the financial position of the concern may not be correct. As such these
adjustments are to be made while preparing the final accounts.

The adjustments to be made to final accounts will be given under the Trial Balance.
While making the adjustment in the final accounts, the student should remember that
“every adjustment is to be made in the final accounts twice i.e. once in trading, profit
and loss account and later in balance sheet generally”. The following are some of the
important adjustments to be made at the time of preparing of final accounts:-

1. Closing Stock:-

(i)If closing stock is given in Trail Balance: It should be shown only in the balance sheet
“Assets Side”.

(ii)If closing stock is given as adjustment:

1. First, it should be posted at the credit side of “Trading Account”.

2. Next, shown at the asset side of the “Balance Sheet”.

2. Outstanding Expenses:-

(i)If outstanding expenses given in Trail Balance: It should be only on the liability side
of Balance Sheet.

(ii)If outstanding expenses given as adjustment:

1. First, it should be added to the concerned expense at the
debit side of profit and loss account or Trading Account.
2. Next, it should be added at the liabilities side of the Balance Sheet.

3. Prepaid Expenses:-
(i)If prepaid expenses given in Trial Balance: It should be shown only in assets side of
the Balance Sheet.
(ii)If prepaid expense given as adjustment :

1. First, it should be deducted from the concerned expenses at the debit side of
profit and loss account or Trading Account.
2. Next, it should be shown at the assets side of the Balance Sheet.

4. Income Earned But Not Received [Or] Outstanding Income [Or] Accrued Income:-

(i)If incomes given in Trial Balance: It should be shown only on the assets side of the
Balance Sheet.
(ii)If incomes outstanding given as adjustment:
1. First, it should be added to the concerned income at the credit side of profit and
loss account.
2. Next, it should be shown at the assets side of the Balance sheet.

5. Income Received In Advance: Unearned Income:-

(i)If unearned incomes given in Trail Balance: It should be shown only on the liabilities
side of the Balance Sheet.
(ii)If unearned income given as adjustment :
1. First, it should be deducted from the concerned income in the credit side of the
profit and loss account.
2. Secondly, it should be shown in the liabilities side of the Balance Sheet.

6. Depreciation:-

(i)If Depreciation given in Trail Balance: It should be shown only on the debit side of
the profit and loss account.
(ii)If Depreciation given as adjustment
1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deduced from the concerned asset in the Balance sheet
assets side.

7. Interest on Loan [Or] Capital:-

(i)If interest on loan (or) capital given in Trail balance : It should be shown only on
debit side of the profit and loss account.
(ii)If interest on loan (or) capital given as adjustment:

1. First, it should be shown on debit side of the profit and loss account.
2. Secondly, it should add to the loan or capital in the liabilities side of the Balance
Sheet.

8. Bad Debts:-
(i)If bad debts given in Trail balance: It should be shown on the debit side of the profit
and loss account.
(ii)If bad debts given as adjustment:
1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deducted from debtors in the assets side of the Balance
Sheet.

9. Interest on Drawings:-
(i)If interest on drawings given in Trail balance: It should be shown on the credit side of
the profit and loss account.
(ii)If interest on drawings given as adjustments:
1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be deducted from capital on liabilities side of the Balance
Sheet.

10. Interest on Investments:-

(i)If interest on the investments given in Trail balance: It should be shown on the credit
side of the profit and loss account.
(ii)If interest on investments given as adjustments :
1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be added to the investments on assets side of the Balance
Sheet.

Assignment-Cum-Tutorial Questions
A. Questions testing the remembering / understanding level of students
I) Objective Questions
1. How many types of accounts are maintained to record all types of business
transactions?
( )
(a) Five (b) four
(c) Three (d) Two
2. Which connects the link between Journal and Trial Balance?
( )
(a) Trading Account (b) Profit & Loss account
(c) Ledger (d) Balance sheet
3. “Bank over draft” is a ________.
( )
(a) Asset (b) Expense
(c) Liability (d) Income
4. _____ is a person who owes money to the firm.
( )
(a) Creditor (b) Owner
(c) Debtor (d) Share holder
5. ______ is called as ‘Book of Original Entry’.
( )
(a) Ledger (b) Trial Balance
(c) Journal (d) Trading account
6. Debit what comes in; Credit what goes out is ____ account principle?
( )
(a) Nominal (b) Personal
(c) Real (d) None
7. The process of entering transactions in to Ledge accounts known as __.
( )
(a) Journal entry (b) First entry
(c) Posting (d) None
8. Debit Expenses and Losses; Credit Incomes and Gains is ___ account Principle
( )
(a) Personal (b) Real
(c) Nominal (d) None
9. “Gross Profit” can be found out by preparing _______.
( )
(a) Profit and Loss account (b) Balance sheet
(c) Trading account (d) Trial balance
10. “Net Profit” can be found out by preparing _______.
( )
(a) Trading account (b) Trial balance
(c) Profit and Loss account (d) Balance sheet
II) Descriptive Questions
1. What do you mean by accounting? Write about the branches of accounting?
 2. What do you understand by Journal?
3. Explain the following adjustments & illustrate suitably with assumed data.
a) Closing stock
b) Outstanding expenses
c) Prepaid income
d) Bad debts
4. Explain about Trading and Profit & Loss A/Cs and Balance Sheet.
5. State how accounting is useful to different types of users.
6. Explain about the Double Entry system of Book Keeping.
7. Explain the Accounting Cycle.
8. How do you classify the accounts? Explain the rule of debit and credit with respect
to different types of accounts.
B. Question testing the ability of students in applying the concepts.
1. “Outstanding wages” is treated as _________.
( )
(a) Asset (b) Expense
(c) Liability (d) Income
2. Which assets can be converted into cash in short period?
( )
(a) Fixed Assets (b) Intangible Assets
(c) Current Assets (d) Fictitious Assets
3. Profit and Loss account is prepared to find out the business ____.
( )
(a) Gross result (b) Financial position
(c) Net result (d) Liquidity position
4. The statement reveals the financial positions of a business at any given date is called
( )
(a) Trading account (b) Profit and loss account
(c) Balance sheet (d) Trial balance
5. “Prepaid Insurance Premium” is treated as _________.
( )
(a) Gain (b) Income
(c) Asset (d) Liability
6. In which Concept “Business is treated separate from the Proprietor? (
)
(a) Cost concept (b) Dual aspect concept
(c) Business entity concept (d) Matching concept
7. In which Book-keeping system, business transactions are recorded as two separate
accounts at the same time?
( )
(a) Single entry (b) Triple entry
(c) Double entry (d) None
8. kamal bought goods for Rs. 30 lakhs and sold of the goods for Rs.36 lakhs and
incurred expenses amounting to Rs.5 lakhs during a given year. he counted a net profit
of Rs.16 lakhs. which accounting concept did he follow?
( )
(a) business entity concept (b) accounting period concept
(c) matching concept (d) going concern concept
9. Management accounting starts where _______________ ends (
)
(a) cost accounting (b) standard costing
(c) financial accounting (d) accounting concepts and conventions
10. Final account comprises_________________
(a) Ledger, Trial Balance (b) Trading, Profit Accounts
(c) Profit & Loss Accounts (d) Trading, Profit & Loss Accounts

II) Descriptive Questions

1. Journalize the following transactions in the books of Rama Krishna
1. Commence business with cash rs.10,000
2. paid into bank rs.8,000
3.Bought goods for cash rs.500
4. Bought furniture by cheque rs.500.
5. withdrawn from bank rs.900
6. He sold goods to Gopal Rs.500
7.Bought goods from Ram for rs.510
8. Paid trade expenses rs.200
9.Received cash from Gopal and allowed discount rs.10- 490
10.paid wages rs.70
11.paid Ram in full settelment rs.500
12.paid rent rs.150
13.Interest on capital rs.500

2. Journalize the following transactions & post them to ledger.

 1. Ram invites Rs.10, 000 in cash
2. He bought goods worth rs.2, 000 from shyam
3. He bought a machine for rs.5, 000 from lakshmanon account.
4. He paid to Lakshman Rs. 2,000.
5. He sold goods for cash Rs. 3,000.
6. He sold goods to A on account Rs.4, 000.
7. He paid to shyam Rs.1, 000.
8. He received amount from A Rs.2, 000.

3. Following are the transactions in the month of January, 2009 of Mr. Prasad &
Co:

Jan 1 Purchase goods worth Rs. 5,000 for cash

less 20% trade discount and 5% cash discount.
Jan 4 Purchase of goods from Bharat Rs. 5,000
Jan 12 Sold goods to Rohan on credit Rs. 600
Jan 18 Sold goods to Ram for cash Rs. 1000.
Jan 20 Paid salary to Ratan Rs. 2000
Jan 26 Interest received from Madhu Rs. 200
Jan 31 Sold goods for cash Rs. 500.
Jan 31 Withdrew goods from business for personal use Rs. 200
4. Journalize the following transactions in the books of Ravi and post them into
ledgers:

Particulars Amount
2008 March 1 Started business with cash 4,50,000
March 1 Purchase of goods from ram 3, 20,000
March10 Paid rent for the month 2,000
March11 Purchase of Machine 1, 00,000
March12 Paid salaries 12,000
March15 Paid to ram 1, 00,000
March20 Sold goods to shyam 20,000
March25 Received from shyam 30,000
March31 Received cash from cash sales 2, 50,000
March31 Wages paid 5,000

5. Prepare Trading, Profit and loss account and Balance sheet for the year ending
31/3/2003 after taking into consideration the following information.
 Rs. Rs.
Furniture 15000 Insurance 6000
Capital A/C 54000 Rent 22000
Cash in hand 3000 Sundry debtors 60000
Opening stock 50000 Sales 600000
Fixed deposits 134600 Advertisement 10000
Drawings 5000 Postages and telephone 3400
Provision for bad 3000 Bad debts 2000
debts
Cash at Bank 10000 Printing and stationary 9000
Purchases 300000 General charges 13000
Salaries 19000 Sundry creditors 40000
Carriage inwards 41000 Deposit from customers 6000
Adjustments:
a) Closing stock as on 31st March was Rs. 10000.
b) Salary of Rs. 2000 is yet to be paid to an employee

6. Trail Balance of Bharat is given below. Prepare the Trading Account and Profit
and Loss Account for the year ending 31st December, 2005 and Balance Sheet as
on that date

Particulars Debit Rs. Credit Rs.

Drawings and Capital 10,550 1,19,400
Plant & Machinery 38,300
Sundry Debtors and Creditors 62,000 59,360
Wages 43,750
Purchases and Sales 2,56,590
Opening Stock 95,300
Salaries 12,880
Insurance 930
Cash at Bank 18,970
Interest on Loan 14,370
Discount allowed 4,870
Furniture 12,590
Loan Payable 79,630
Land & Buildings 43,990
6,15,090 6,15,090
Closing Stock was Values at Rs. 90,000
7. Prepare trail balance from the following information
Particulars Amount
Capital 1,00,000
Plant & Machinery 1,60,000
Sales 3,54,000
Purchases 1,20,000
Returns outwards 1,500
Returns inwards 2,000
Opening stock 60,000
Discount allowed 700
Discount Received 1,600
Bank Charges 150
Sundry Debtors 90,000
Sundry Creditors 50,000
Salaries 13,600
Manufacturing Wages 20,000
Carriage inwards 1,500
Carriage outwards 2,400
Provision for bad debts 1,050
Rent, rates and taxes 20,000
Advertisements 4,000
Cash 1,800
Bank 12,000
Closing stock 70,000
 8. The following are the particulars of Ledger Account balances taken from the books of
Bhaskar for the year ending 31st March 2005. You are required to prepare Trading
Account and Profit and Loss Account and Balance Sheet as on that date
Particulars Debit Rs. Credit Rs.
Capital 1,00,000
Bills receivables and Bills Payable 4,00,000 7,00,000
Sundry Debtors and Creditors 75,000 50,000
Cash 15,000
Bank 25,000
Business Premises 2,50,000
Loan Payable 25,000
Opening stock 40,000
Purchase & Returns 60,000 8,000
Sales & Returns 37,000 2,75,000
Wages 35,000
Salaries 65,000
Rent, Taxes and rates 15,000
Depreciation 5,000
Furniture 78,000
Advertisement 58,000

11,58,000 11,58,000
Adjustments:
1. Closing Stock was Values at Rs. 80,000
2. Write off Bad Debts of Rs. 5,000 out of sundry debtors.
3. Prepaid Insurance amounted Rs. 1,000