MODULE-1

INTRODUCTION

1.1 History of Accounting:

Accounting is as old as civilization itself. From the ancient relics of Babylon, it can be will
proved that accounting did exist as long as 2600 B.C. However, in modern form accounting based on
the principles of Double Entry System came into existence in 17 th Century. Fra Luka Paciolo, a
Fransiscan monk and mathematician published a book De computic et scripturies in 1494 at Venice in
Italyl. This book was translated into English in 1543. In this book he covered a brief section on ‘book-
keeping’.

1.2 Origin of Accounting in India:

Accounting was practiced in India thousand years ago and there is a clear evidence for this.
In his famous book Arthashastra Kautilya dealt with not only politics and economics but also the art
of proper keeping of accounts. However, the accounting on modern lines was introduced in India
after 1850 with the formation joint stock companies in India.

Accounting in India is now a fast developing discipline. The two premier Accounting
Institutes in India viz., chartered Accountants of India and the Institute of Cost and Works
Accountants of India are making continuous and substantial contributions. The international
Accounts Standards Committee (IASC) was established as on 29 th June. In India the ‘Accounting
Standards Board (ASB) is formulating ‘Accounting Standards’ on the lines of standards framed by
International Accounting Standards Committee.

2. BOOK-KEEPING AND ACCOUNTING

According to G.A. Lee the accounting system has two stages.

1. The making of routine records in the prescribed from and according to set rules of all events
with affect the financial state of the organization; and
2. The summarization from time to time of the information contained in the records, its
presentation in a significant form to interested parties and its interpretation as an aid to
decision making by these parties.
First stage is called Book-Keeping and the second one is Accounting.
Book – Keeping: Book – Keeping involves the chronological recording of financial transactions in a
set of books in a systematic manner.

Accounting: Accounting is concerned with the maintenance of accounts giving stress to the design
of the system of records, the preparation of reports based on the recorded date and the
interpretation of the reports.

Distinction between Book – Keeping and Accountancy

Thus, the terms, book-keeping and accounting are very closely related, through there is a
subtle difference as mentioned below.

1. Object : The object of book-keeping is to prepare original books of Accounts. It is restricted to

journal, subsidiary book and ledge accounts only. On the other hand, the main object of accounting
is to record analyse and interpret the business transactions.

2. Level of Work: Book-keeping is restricted to level of work. Clerical work is mainly involved in it.
Accountancy on the other hand, is concerned with all level of management.

3. Principles of Accountancy: In Book-keeping Accounting concepts and conventions will be

followed by all without any difference. On the other hand, various firms follow various methods of
reporting and interpretation in accounting.

3. Final Result: In Book-Keeping it is not possible to know the final result of business every year,

2.1 Meaning of Accounting

Thus, book-keeping is an art of recording the business transactions in the

books of original entry and the ledges. Accountancy begins where Book-keeping
ends. Accountancy means the compiliation of accounts in such a way that one is
in a position to know the state of affairs of the business. The work of an
accountant is to analyse, interpret and review the accounts and draw conclusion
with a view to guide the management in chalking out the future policy of the
business.

2.2 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.

2.3 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 loass 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 assist 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 assest 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.

3. 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.
 4. 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.

4.1 Internal Users:

Managers : These are the persons who manage the business, i.e.
management at he 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.”

4.2 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.

5. ADVANTAGES FROM ACCOUNTING

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

6. 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, which ever is less. In
case of, building, machinery etc., we adopt historical cost as the basis. Infact,
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 collectibility, 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.

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.

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

AMOUNT(RS.) AMOUNT(RS.)
 (PARTICULARS)

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 Loss

34 Provision for discount on creditors Credit Income

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

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

Xxxx

To factory expenses

To other man. Expenses Xxxx

To productive expenses Xxxx

To gross profit c/d

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 investments

TO Insurance Xxxx Dividend on shares

TO General expenses Xxxx Miscellaneous investments Xxxx

TO Advertisements Xxxxx Rent received Xxxx

TO Bad debts Xxxx

TO Carriage outwards Xxxx 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 as certain 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.PREAPID 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] ACCURED 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 added 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.