Befa Unit IV

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UNIT - IV
FINANCIAL ACCOUNTING
CONCEPTS
Synopsis:
1. Introduction
2. Book-keeping and Accounting
3. Function of an Accountant
4. Users of Accounting
5. Advantages of Accounting
6. Limitations of Accounting
7. Basic Accounting concepts
1. INTRODUCITON
As you are aware, every trader generally starts business for purpose of earning
profit. While establishing business, he brings own capital, borrows money from
relatives, friends, outsiders or financial institutions. Then he purchases machinery,
plant , furniture, raw materials and other assets. He starts buying and selling of
goods, paying for salaries, rent and other expenses, depositing and withdrawing
cash from bank. Like this he undertakes innumerable transactions in business.
Observe the following transactions of small trader for one week during the month
of July, 1998.
1998 Rs.
July 24 Purchase of goods from Sree Ram 12,000
July 25 Goods sold for cash 5,000
July 25 Sold gods to Syam on credit 8,000
July 26 Advertising expenses 5,200
July 27 Stationary expenses 600
July 27 Withdrawal for personal use 2,500
July 28 Rent paid through cheque 1,000
July 31 Salaries paid 9,000
July 31 Received cash from Syam 5,000
BUSINESS ECONOMICS AND FINANCIAL

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The number of transactions in an organization depends upon the size of the

organization. In small organizations, the transactions generally will be in thousand
and in big organizations they may be in lakhs. As such it is humanly impossible to
remember all these transactions. Further, it may not by possible to find out the
final result of the business without recording and analyzing these transactions.
Accounting came into practice as an aid to human memory by maintaining

a systematic record of business transactions.
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 17th 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 29th 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

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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

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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

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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

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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.

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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 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.

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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

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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.
7. 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)
FINAL ACCOUNTS
INTRODUCTION: The main object of any Business is to make profit. Every trader
generally starts business for the purpose of earning profit. While establishing
Business, he brings his own capital, borrows money from relatives, friends, outsiders
or financial institutions, then purchases machinery, plant, furniture, raw materials and
other assets. He starts buying and selling of goods, paying for salaries, rent and other

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ANAYLSIS

expenses, depositing and withdrawing cash from Bank. Like this he undertakes
innumerable transactions in Business.
The number of Business transactions in an organization depends
up on the size of the organization. In small organizations the transactions generally
will be in thousands and in big organizations they may be in lacks. As such it is
humanly impossible to remember all these transactions. Further it may not be possible
to find out the final result of the Business with out recording and analyzing these
transactions.
Accounting came in practice as an aid to human memory by
maintaining a systematic record of Business transactions.
BOOK KEEPING AND ACCOUNTING:

According to G.A.Lee the Accounting system has two stages. First
stage is Book keeping and the second stage is accounting.
[A]. BOOK KEEPING:

Book keeping involves the chronological recording of financial
transactions in a set of books in a systematic manner
“Book keeping is the system of recording Business transactions for the

purpose of providing reliable information to the owners and managers
about the state and prospect of the Business concepts”.
Thus Book keeping is an art of recording business transactions in the

books of original entry and the ledges.
[B]. ACCOUNTING: Accounting begins where the Bookkeeping ends

1. SMITH AND ASHBUNNE: Accounting means “measuring and reporting the results
of economic activities”.
2. R.N ANTHONY: Accounting is a system of “collecting, summarizing, Analyzing and
reporting in monster terms, the information about the Business”.
3. ICPA: Recording, classifying and summarizing is 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 there.
Thus accounting is an art of recording, classifying, summarizing and interpreting

business transactions of financial nature. Hence accounting is the “Language of
Business”.
ADVANTAGE OF ACCOUNTING
The following are the advantages of Accounting…………

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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 PRPARATION OF FINANCIAL STATEMENTS: Profit and Loss

account 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 hand, cash at hand, stack of goods, accounts receivable 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. PROVIES THE REQUIRED INFORMATION: Interested parties such as owners,

lenders, creditors etc, get necessary information at frequent intervals.
5. COMPARITIVE STUDY: One can compare present performance of the

organization with that of its past. This enables the managers to draw useful
conclusions 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 MALTERS: 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 of substantial the claim of the Business. Thus records are based on
documentary proof. Authentic vouchers support every entry. 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.

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The weaknesses of the business can be identified and corrective measures can be
applied to remove them with the help of 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 advantages, business contacts
etc.
2.DOES NOT REFLECT CURRENT VLAUES: The data available under book keeping
is historical in nature. So they do not reflect current values. For instance we record
the values of stock at cost price or market price, which ever is less. In case of
building, machinery etc., we adapt historical case 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 JUDGEMENT: The estimates used for

determining the values of various items may not be correct. For example, debtors
are estimated in terms of collectibles, 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 over all profitability of the business. No information
is given about the cost and profitability of different activities of products or
divisions.
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 ONCEPTS”. 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.

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1. BUSINESS ENTITY CONEPT: 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 can not 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 ASCEPT 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. REALISATION 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

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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, which
ever 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.
KEY WORDS IN BOOK-KEEPING
1. TRANSACTIONS: Any sale or purchase of goods of services is called the

transaction.
Transactions are two types.
[a]. cash transaction: cash transaction is one where cash
receipt or payment is involved in the exchange.
[b]. Credit transaction: Credit transaction will not have
cash, either received or paid, for something given or
received respectively.
2.GOODS: Fill those things which a firm purchases for resale are called goods.

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3.PURCHASES: Purchases means purchase of goods, unless it is stated

otherwise it also represents the
Goods purchased.
4.SALES: Sales means sale of goods, unless it is stated otherwise it also

represents these goods sold.
5.EXPENSES: Payments for the purchase of goods as services are known as

expenses.
6.REVENUE: Revenue is the amount realized or receivable from the sale of

goods or services.
7.ASSETS: The valuable things owned by the business are known as assets.
These are the properties
Owned by the business.
8.LIABILITIES: Liabilities are the obligations or debts payable by the enterprise

in future in the term
Of money or goods.
9. DEBTORS: Debtors means a person who owes money to the trader.
10.CREDITORS: A creditor is a person to whom something is owned by the

business.
11.DRAWINGS: cash or goods withdrawn by the proprietor from the Business for
his personal or Household is termed to as “drawing”.
12.RESERVE: An amount set aside out of profits or other surplus and designed to
meet contingencies.
13.ACCOUNT: A summarized statements of transactions relating to a particular

person, thing,
Expense or income.
14.DISCOUNT: There are two types of discounts..

a. cash discount: An allowable made to encourage frame
payment or before the expiration of the period allowed for
credit.
b. Trade discount: A deduction from the gross or catalogue price
allowed to traders who buys them for resale.

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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

Credit---The Giver”

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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

Credit---What goes out”
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

Credit---All incomes and gains”
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 Date Particulars L.F. no Debit Credit

RS. RS.

17
ANAYLSIS

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

18
ANAYLSIS

sales account
cash account
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.

19
ANAYLSIS

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

20
ANAYLSIS

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

21
ANAYLSIS

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

22
ANAYLSIS

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

23
ANAYLSIS

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 Xxxx
xxxxxxx ,copyrights Xxxx
-------- Goodwill
Prepaid expenses Xxxx
Less: Outstanding incomes 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.

24
ANAYLSIS

5. It is possible to find out the balances of various accounts at one place.

25
ANAYLSIS

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 :-

26
ANAYLSIS

(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 :-

27
ANAYLSIS

(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.
Note: Problems to be solved on final accounts

28
ANAYLSIS

SUBSIDIARY BOOKS
In a small business concern, the numbers of transactions are limited. These

transactions are first recorded in the journal as and when they take place.
Subsequently, these transactions are posted in the appropriate accounts of the ledger.
Therefore, the journal is known as “Book Of Original Entry” or “Book of Prime Entry”
while the ledger is known as main book of accounts.
On the other hand, the transactions in big concern are numerous and sometimes even
run into thousands and lakhs. It is inconvenient and time wasting process if all the
transactions are going to be managed with a journal.
Therefore, a convenient device is made. Smaller account books known as subsidiary

books or subsidiary journals are disturbed to various sections of the business house.
As and when transactions take place, they are recorded in these subsidiary books
simultaneously without delay. The original journal (which is known as Journal Proper)
is used only occasionally to record those transactions which cannot be recorded in any
of the subsidiary books.
TYPES OF SUBSIDIARY BOOKS:-- Subsidiary books are divided into eight types. They
are,
1.Purchases Book
2.Sales Book
3.Purchase Returns Book
4.Sales Returns Book
5.Cash Book
6.Bills Receivable Book
7.Bills Payable Book
8.Journal Proper
1. PURCHASES BOOK :- This book records all credit purchases only. Purchase of goods
for cash and purchase of assets for cash. Credit will not be recorded in this book.
Purchases book is otherwise called Purchases Day Book, Purchases Journal or
Purchases Register.
2. SALES BOOK :-This book is used to record credit sales only. Goods are sold for
cash and sale of assets for cash or credit will not be recorded in this book. This book
is otherwise called Sales Day Book, Sales Journal or Sales Register.
3.PURCHASE RETURNS BOOK :- This book is used to record the particulars of goods
returned to the suppliers .This book is otherwise called Returns Outward Book.

29
ANAYLSIS

4.SALES RETURNS BOOK :- This book is used to record the particulars of goods
returned by the customers. This book is otherwise called Returns Inward Book.
5.CASH BOOK :- All cash transactions , receipts and payments are recorded in this
book. Cash includes cheques, money orders etc.
6.BILLS REECEIVABLE BOOK :- This book is used to record all the bills and promissory
notes are received from the customers.
7.BILLS PAYABLE BOOK :- This book is used to record all the bills or promissory notes
accepted to the suppliers.
8.JOURNAL PROPER :- This is used to record all the transactions that cannot be
recorded in any of the above mentioned subsidiary books.
FORMAT FOR PURCHASE BOOK
Date Name of supplier Invoice Lf no Details Amount(Rs.)

No
FORMAT FOR SALES BOOK
Date Name of customer Invoice Lf no Details Amount(Rs.)

No
FORMAT FOR PURCHASE RETURNS BOOK
Date Name of supplier Debit Lf no Details Amount(Rs.)

note
No

30
ANAYLSIS

FORMAT FOR SALES RETURNS BOOK

Date Name of supplier Credit Lf no Details Amount(Rs.)
note
No
CASH BOOK
Cash book plays an important role in accounting. Whether transactions made are in
the form of cash or credit, final statement will be in the form of receipt or payment of
cash. So, every transaction finds place in the cash book finally.
Cash book is a principal book as well as the subsidiary book. It is a book of original
entry since the transactions are recorded for the first time from the source of
documents. It is a ledger in a sense it is designed in the form of cash account and
records cash receipts on the debit side and the cash payments on the credit side.
Thus, a cash book fulfils the functions of both a ledger account and a journal.
Cash book is divided into two sides. Receipt side (debit side) and payment side (credit
side). The method of recording cash sample is very simple. All cash receipts will be
posted on the debit side and all the payments will be recorded on the credit side.
Types of cash book: cash book may be of the following types according to the needs
of the business.
 Simple cash book

 Double column or two column cash book
 Three column cash book
 Petty cash book
SINGLE COLUMN CASH BOOK: The simple cash book is a record of only cash
transactions. The model of the cash book is given below.
CASH BOOK
Date Partic Lf no Amount Date Particulars Lf no Amo

ulars unt
TWO COLUMN CASH BOOK: This book has two columns on each side one for discount
and the other for cash. Discount column on debit side represents loss being discount

31
ANAYLSIS

allowed to customers. Similarly, discount column on credit side represents gain being
discount received.
Discount may be two types.
(i)Trade discount
(ii)cash discount
TRADE DISCOUNT: when a retailer purchases goods from the wholesaler, he allows
some discount on the catalogue price. This discount is called as Trade discount. Trade
discount is adjusted in the invoice and the net amount is recorded in the purchase
book. As such it will not appear in the book of accounts.
CASH DISCOUNT: When the goods are purchased on credit, payment will be made in
the future as agreed by the parties. If the amount is paid early as promptly a discount
by a way of incentive will be allowed by the seller to the buyer. This discount is called
as cash discount. So cash discount is the discount allowed by the seller to encourage
prompt payment from the buyer. Cash discount is entered in the discount column of
the cash book. The discount recorded in the debit side of the cash book is discount
allowed. The discount recorded in the credit side of the cash book is discount received.
CASH DISCOUNT COLUMN CASH BOOK
Date particulars Lf no Disc. cash Date Particulars Lf Disc cash

Allo No Recei
wed Ved.

32
ANAYLSIS

PETTY CASH BOOK: We have seen that all the cash receipts and payments will be
recorded in the cash book. But in the case of big concerns if all transactions like
postage, cleaning charges, etc., are recorded in the cash book, the cash book becomes
bulky and un wieldy. So, all petty disbursement of cash is recorded in a separate cash
book called petty cash book.
Note: Problems to be solved on subsidiary books

33
ANAYLSIS


34
ANAYLSIS

9
Accounting
PROBLEMS FOR TRIAL BALANCE (1-5)
Problem # 9.1: Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at March 31st, 2017?
Description Amount Description Amount Description Amount

Bank Loan Rs. 14,000 Insurance Expense Rs. 7,300 Equipments Rs. 40,000
Marketable Security 6,500 Owner's Investments 95,000 Maintenance Exp. 5,000
Bill Payable 1,000 Rent & Rates Expense 400 Miscellaneous Expenses 4,800
Unearned Revenue 3,500 Acc. Dep. _ Equipments 14,000 Accrued Expenses 1,500
Sundry Debtors 12,000 Accrued Revenue 15,000 Dep. Exp. _ Equipments 2,000
Outstanding Salaries 2,500 Machinery 25,000 Unexpired Insurance 8,500
Prepaid Rent 2,000 Drawings 3,500 Vendor's Payables 500
Shining Brothers Pvt. Ltd.

Trial Balance
As on March 31st, 2017
Amount (Rs.)
S. No Description Ref Dr. Cr.
1 Bank Loan
2 Marketable Security
3 Bill Payable
4 Unearned Revenue
5 Sundry Debtors
6 Outstanding Salaries
7 Prepaid Rent
8 Insurance Expense
9 Owner's Investments
10 Rent & Rates Expense
11 Accumulated Dep. _ Equipments
12 Accrued Revenue
13 Machinery
14 Drawings
15 Equipments
16 Maintenance Exp.
17 Miscellaneous Expenses
18 Accrued Expenses
19 Depreciation Exp. _ Equipments
20 Unexpired Insurance
21 Vendor's Payables
Total Rs. 132,000 Rs. 132,000
www.accountancyKnowledge.com 1 Trial Balance

9
Accounting
Problem # 9.2: There are several Mistakes in the Umer & Brothers (Pvt.) Ltd. Trial Balance. You are requested to
identify Errors and make corrected Trial Balance?
S. No Heads of Accounts Ref Debit Credit

1 Umer Owner Equity 1,551
2 Umer Drawings 560
3 Equipments 2,850
4 Sales 2,850
5 Due from Customers 530
6 Purchases 1,260
7 Purchase Return 364
8 Bank Loan 996
9 Creditors 528
10 Taxes 720
11 Cash in Hand 226
12 Note Payable 680
13 Inventory 264
14 Repair 461
15 Return Inward 98
Total Rs. 7,649 Rs. 6,289
S. No Heads of Accounts Ref Debit Credit
1 Umer Owner Equity

2 Umer Drawings
3 Equipments
4 Sales
5 Due from Customers
6 Purchases
7 Purchase Return
8 Bank Loan
9 Creditors
10 Taxes
11 Cash in Hand
12 Note Payable
13 Inventory
14 Repair
15 Return Inward
Total

9
Accounting
Problem # 9.3: Prepare Trial Balance as on 31.03.2012 from the following balances of Ms. Maliha Afzal
Drawings Rs. 74,800 Purchases Rs. 295,700 Stock (1.04.2011) Rs. 30,000 Bills receivable Rs. 52,500
Capital Rs. 250,000 Furniture Rs. 33,000 Discount allowed Rs. 950 Sales Rs. 335,350
Rent Rs. 72,500 Freight Rs. 3,500 Printing charges Rs. 1,500 Sundry creditors 75,000
Insurance Rs. 2,700 Sundry expenses Rs. 21,000 Discount received Rs. 1,000 Bank loan Rs. 120,000
Stock (31.03.2012) Rs. 17,000 Income tax Rs. 9,500 Machinery Rs. 215,400 Bills payable Rs. 31,700
Ms. Maliha Afzal
Trial Balance
As on 31st March, 2012
Amount (Rs.)
S. No Heads of Accounts Ref Dr Cr
10
11
12
13
14
15
16
17
18
19
Total Rs. 813,050 Rs. 813,050

9
Accounting
Problem # 9.4: Prepare Trial Balance from the following balances of Mr. Akhtar as on 31.12.2016
Capital Rs. 420,000 Cash in hand Rs. 25,000 Building Rs. 115,000 Cash at bank Rs. 84,700
Machinery Rs. 60,000 Sundry Creditors Rs. 68,000 Furniture Rs. 11,000 Rent Rs. 48,000
Car Rs. 68,000 Opening stock Rs. 86,000 Commission Rs. 1,400 Rates and Taxes Rs. 2,600
Purchases Rs. 94,000 Bad debts Rs. 3,200 Sales Rs. 196,000 Insurance Rs. 2,400
General Expenses Rs. 800 Sundry debtors Rs. 16,200 Reserve for doubtful debts Rs. 7,300 Salaries Rs. 94,000
Closing Stock Rs. 12,000 Unearned Revenue Rs. 16,000 Interest received Rs. 5,000
Mr. Akhtar
Trial Balance
As on 31st December, 2016
Amount (Rs.)

9
Accounting
Problem # 9.5: The following balances are extracted from the books of Ms. Maria Waseem, Prepare Trial Balance as on
30.6.2015
Owner’s Equity Rs. 470,200 Machinery Rs. 158,800 Cash in hand Rs. 6,000 Account receivable Rs. 48,000
Building Rs. 320,000 Repairs Rs. 5,400 Stock Rs. 33,000 Insurance premium Rs. 3,300
Account payable Rs. 26,000 Sales Rs. 290,000 Commission Rs. 750 Telephone charges Rs. 6,450
Rent & Taxes Rs. 6,300 Furniture Rs. 11,000 Purchases Rs. 165,000 Discount earned Rs. 1,100
Loan from Sidra Rs. 51,000 Salaries Rs. 70,600 Reserve fund Rs. 5,900 Discount allowed Rs. 650
Note receivable Rs. 8,600 Drawings Rs. 5,000 Bad debts Rs. 1,350 Bills payable Rs. 6,000
Ms. Maria Waseem

Trial Balance
As on 30th June, 2015
Amount (Rs.)

FINAL ACCOUNTS SOLUTION
Format of Trading Account

(Trading Account) for the Year Ended...
Particulars Amount Particulars Amount
Rs. Rs.
Opening Stock ------ Sales ---------
Purchases ------ Less: Returns Inwards -------
Less: Returns Outwards ------ ------ Or, Sales Returns ------- -------
Wages ------ Closing Stock -------
Wages and Salaries ------ Gross Loss -------
Carriage Inwards ------ (transferred to Profit & Loss Account)
Freight Inwards ------
Gas & Fuel ------
Power & Water ------
Factory Rent & Rates ------
Manufacturing Expenses ------
Dock and Clearing Expenses ------
Import and Customs Duty ------
Royalties ------
Packaging Expenses ------
Gross Profit (Transferred to Profit &
Loss Account) ------
‐‐‐‐‐‐ ‐‐‐‐‐‐
(Pro-forma) Profit and Loss Account

For the Year Ended on (Closing Date Of The Accounting Period)
Dr. Cr.
Rs. Rs.
Trading Account (For gross Loss) Trading Account Either of
(Gross Profit)
Rent and Rates
Lighting and Heating Incidental Income or Gains
Office Salaries Rebate
Office Salaries and Wages Cash Discount Received
Office Insurance Commission Received
Sundry Expenses or Bank Interest Received
General Expenses Interest or Income on
Printing and Stationery Investments
Repairs and Renewals Rent Received

Telephone Gain on the Sale of
Accountancy Fees Fixed Assets
Legal Charges Investments etc.
Audit Fees Bad Debts Recovered
Staff Bonuses Special Bonuses Received
Bank Charges and Commission from Suppliers
Interest Paid (on mortgage loan, Provision or Reserve for
or bank loan or on capital) Discount on Creditors
Premium on Lease Commission Capital Account
Motor Expenses Either of the two
Advertising (Transfer of net loss if any)
Traveller's Salaries and
Commission
Sales Room Expenses
Cash Discount Allowed
Bad Debts
Free Samples
Loss on Sale of Fixed Assets
Brokerage
Carriage Outward
Warehouse Expenses
Warehouse Rent
Warehouse Insurance
Delivery Van Expenses
Packing Expenses
Depreciation on Different Assets
Provision or Reserve for Bad and
Doubtful Debts; Provision or Reserve
for Discount on Debtors; Any other
provisions for Expenses e.g.,
Loss by fire
Interest on loan; Cos of discounting
the bill
Capital Account for gross loss
(Transfer of net profit if, any)

SUMMARY TABLE OF ADJUSTMENTS
S. Name of the Adjustment Entry Treatment in Trading and Treatment in Balance No.
item Profit & Loss Account Sheet
1. Closing Stock Closing Stock Dr. Show on Credit side of Trading Show as current asset.
To Trading A/c Account.
2. Depreciation on Depreciation A/c Dr. Show on Debit Side of Profit Deduct from Fixed
Fixed Assets To Fixed Assets & Loss Account. Assets individually.
3. Outstanding Expenses Account Dr. In Trading/Profit & Loss A/c Show as a current
Expenses To Outstanding add to the particular expense liability.
Expenses A/c on the debit side.
4. Accrued Income Accrued Income Dr. Add to specific income on the Show as a current
To Income A/c credit side of Profit & Loss A/c asset.
5. Prepaid Expenses Prepaid Expenses Dr. Deduct from the particular Show as a current
To Expenses A/c expense on debit side either in assets.
Trading Account or Profit
& Loss Account as the
may be.
6. Unearned Income Income A/c Dr. In Profit & Loss Account Show as current
or (Income To Unearned Income from the relevant income on liability.
received in the credit side.
advance)
7. Bad Debts Bad Debts A/c Dr. Show in Profit & Loss A/c Deduct from the
(Additional) To Debtors on the debit side. Debtors on the
Assets side.
8. Provision for Profit & Loss A/c Dr. Show on the debit side of Deduct from Debtors
Doubtful Debts To Provision for Profit & Loss Account on the assets side,
Doubtful Debts after deducting
additional Bad Debts.
9. Provision for Profit & Loss A/c Dr. Show on the Debit side of Deduct from Debtors
Discount on To Provision for Profit & Loss Account. after deducting addi-
Doubtful Debts tional Bad Debts and
Provision for
Doubtful Debts.
10. Interest on Int. on Capital A/c Dr. Show on the debit side of Add to Capital A/c
Capital To Capital A/c Profit & Loss Account. on the Liabilities side.
11. Interest on Capital A/c Dr. Show on the credit side of Deduct from the
Drawings To Interest on Profit & Loss Account. Capital on the
Drawings A/c Liabilities.
12. Manager’s Profit & Loss A/c Dr. Show on the debit side of
Show as a Current
Commission on To Manager’s Profit & Loss Account. Liability.
Profit Commission A/c

10. From the following particulars prepare a trading and profit and loss account :
Opening Stock Rs. 1,50,000; Purchases Rs. 4,50,000; Salaries Rs. 50,000; Other expenses
Rs. 20,000; Sales Rs. 6,00,000.
Closing stock could not be ascertained but it is known that goods are sold at cost plus 50 per
cent. The manager of the business is entitled to a commission of 5 per cent on net profits
after charging such commission.
SOLUTION :
Trading Account
Rs. Rs.
Opening Stock 1,50,000 Sales 6,00,000
Purchases Stock at the end 2,00,000
Profit and Loss Account 4,50,000 (Balancing Figure)
(Gross Profit)
2,00,000
8,00,000 8,00,000
Profit and Loss Account
Rs. Rs.
Salaries 50,000
Other expenses 20,000 Trading Account 2,00,000
Manager’s commission 6,190 (Gross Profit)
Net Profit 1,23,810
2,00,000 2,00,000
32. A trader maintained Provision for Doubtful debts @ 5%, a Provision for Discount
@ 2% on debtors and Reserve for discount @ 2% on creditors which on 1 January
1993 stood at Rs. 1,500, Rs. 500 and Rs. 400 respectively.
His balances on 31-12-1993 and on 31-12-1994 were :
31-12-1993 31-12-1994
Rs. Rs.
Bad debts written off 1,800 300
Discount allowed 600 200

Sundry Debtors 20,000 6,000
Discount received 300 50
Sundry Creditors 15,000 10,000
Show necessary accounts in the Ledger.
SOLUTION :
Bad Debts Account
Rs. Rs.
31.12.1993 Sundry Debtors1,80031.12.1993 Pro. for Doubtful Debts 1,800
31-12-1994 Sundry Debtors 30031-12-1994 Pro. for Doubtful Debts 300
Provision for Doubtful Debts
31.12.1993 Rs. 1-1-1993 Rs.

Bad Debts Account 1,800 Balance b/d 1,500
Balance c/d (5% on Rs. 20,000) 1,000 31-12-1993
Profit and Loss Account 1,300
(Balancing Figure)
2,800 2,800
31-12-1994 1-1-1994
Bad Debts Account 300 Balance b/d 1,000
Profit and Loss Account 400
Balance c/d (5% on Rs. 6,000) 300
1,000 1,000
Discount Allowed Account
Rs. Rs.
31-12-1993 31-12-1993
Sundry Debtors 600 Provision for Discount on Debtors600
31-12-1994 31-12-1994
Sundry Debtors 200 Provision for Discount on Debtors200
Provision for Discount on Debtors
Rs. Rs.
31-12-1993 31-12-1993

Discount Allowed Account 600 Balance b/d 500
Balance c/d 380 Profit and Loss Account 480
[2% on Rs. 19,900 (20,000-100)]
980 980
31-12-1994 31-12-1994
Discount Allowed 200 Balanced b/d 380
Balance c/d 114
[2% on 5,700 (6,000–300)]380 380
1-1-1995 Balance b/d 114
Discount Received Account
Rs. Rs.
31-12-1993 31-12-1993
Reserve for Discount on
Creditors 300 Sundry Creditors 300
31-12-1994
Reserve for Discount on 31-12-1994
Creditors 50 Sundry Creditors 50
Reserve for Discount on Creditors
Rs. Rs.
1-1-1993 31-12-1993
Balance b/d 400 Discount Received 300
31-12-1993 Balance c/d (2% on Rs. 15,000)300
600 600
1-1-1994 31-12-1994
Balance b/d 300 Discount Received 50
Balance c/d (2% on Rs. 10,000) 200
300 300
1-1-1995
Balance b/d 200
Profit and Loss Account for The Year Ending On 31-12-1993

Rs. Rs.
Provision for Doubtful Discount Received 300
Debts Account 1,300 Add : Reserve for
Discount Allowed 600 discount on Creditors 300
Add : Provision for 600
Discount on Debtors 380 Less : Old Reserve 400 200
980
Less : Old Provision 500 480
Profit And Loss Account For the Year Ending On 31-12-1994
Rs. Rs.
Provision for Discount Provision for Doubtful Debts 400
on Creditors 50 Provision for Discount on Debtors66

34. Final Accounts of Business Entities Shri Patil Bansali
Debit Credit
No. Particulars Rs. Rs.
(1) Capital – 16,000
(2) Opening stock 17,500 –
(3) Drawings 3,305 –
(4) Returns inward 550 –
(5) Deposit with X 1,400 –
(6) Return outward – 840
(7) Carriage inward 1240 –
(8) Carriage outward 725 –
(9) Rent 800 –
(10) Rent outstanding – 150
(11) Purchases 13,000 –
(12) Sundry debtors 5,000 –
(13) Sundry creditors – 4,000
(14) Furniture 1,500 –
(15) Sales – 29,000
(16) Wages 850 –
(17) Cash 1,370 –
(18) Goodwill 1,800 –
(19) Advertisement 950 –
49,990 49,990
Trading and Profit and Loss Account
for the year ending 31 December 2007
Rs. Rs.
Opening Stock 17,500 Sales 29,000
Purchases 13,000 Less : Returns Inward 550
Less : Returns 28,450
outward 840 12,160 Profit and Loss A/c (loss by fire) 2,000
Wages 850 Stock at the end 18,790
Carriage Inward 1,240
Gross Profit c/d 17,490
49,240 49,240
Carriage outward 725 Gross Profit b/d 17,490
Rent 800 Insurance Company 1,500
Advertisement 950
Bed Debts 600
Reserve for bad Debts 220
Trading Account (loss
by fire) 2,000
Depreciation on Furniture 150
Net Profit transferred to Capital Account
13,545
18,990 18,990
Balance sheet As on 31 December 2007
Liabilities Assets
Rent outstanding 150 Goodwill 1,800
Capital 16,000 Deposit with X 1,400
Add : Net Profit 13,545 Cash in hand 1,370
29,545 Furniture 1,500
Less : Drawings 3,305 26,240 Less : Depreciation 150 1,350

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Debtors 5,000
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Less : Bad Debts 600
4,400
Less : Provision 220 4,180
Insurance company 1,500
Stock at the end 18,790
30,390 30,390
35. Shri Goyal

Trading And Profit and Loss Account
For the Year Ended On 31 December 2008
Rs. Rs. Rs. Rs.
Purchases 3,49,600 Sales 3,70,000 Less : Drawings 2,000
3,47,600
Wages 10,450
Add : Contribution to
National Insurance :
by Employer 75
by Employees 75
10,600
Add : Rental value of the
housing facilities 250 10,850
Carriage Inwards 200
Profit and Loss Account 11,350
(Gross Profit)
3,70,000 3,70,000
Carriage Outwards 250 Trading Account 11,350
Lighting 300 (Gross Profit)
Rates and Insurance 200 Discount Earned 150
Less: Prepaid 75 125 Dividends Received 300
Discount Allowed 50 Rent Earned (Rental value of
Depreciation on : housing facilities) 250
Plant and Machinery 2,250
Furniture 400 2,650
Manager’s Commission 1,446
Net Profit 7,229

12,050 12,050
Balance Sheet As On 31 December 2008
Liabilities Rs. Assets Rs.
Capital 34,250 Plant and Machinery 15,000
Add : Net Profit 7,229 Less : Depreciation 2,500 12,750
41,479 Furniture 4,000
Less : Drawings 2,000 39,479 Less : Depreciation 400 3,600
(Goods to son) Stock in Trade 30,625
Sundry Creditors 10,000 Sundry Debtors 3,000
Outstanding Commission Prepaid Insurance 75
to Manager 1,446 Cash in hand and at Bank 875

36. M/s. ABC Company
For the Year Ended On 31 March 2002
Rs. Rs.
Opening stock 23,2,00 Sales 2,32,000
Purchases 58,000 Less : Returns 4,350 Less : Returns 1,160
2,27,650
56,840 Profit and Loss Account 8,700
Add : Unrecorded (Loss by fire)
Purchases 2,900 59,740 Stock at the end 20,300
Wages 20,010
Gross Profit c/d 1,53,700
2,56,650 2,56,650
Interest on capital 7,250 Gross Profit b/d 1,53,700
(5% on Rs. 1,45,000) Insurance Company 5,800
trading Account 8,700 Interest on Drawings 232
(Loss by fire) Interest on Loan 870
Office Expenses 23,345 Add : Accrued 570 1,450
(1,450 – 870)
Advertisement 15,950 Apprenticeship
Less : Carried forward 14,500 1,450 Premium 3,480
Manager’s Commission 11,054 Less : Received
(10/110 × 1,21,597) in advance 2,320 1,160
Net Profit transfered (2/3 of 3,840)
to Capital Account 1,10,543
1,62,342 1,62,342
Balance Sheet As On 31 March 2002
Capital 1,45,000 Land and Building 1,59,500
Add : Interest on Capital 7,250 Plant and Machinery 13,050
Net Profit 1,10,543 Furniture and Fixtures 7,250
Less :Drawings 8,700 2,62,793 Investment 8,700
Interest on Bills Receivable 10,150
Drawings 232 8,932 Sundry Debtors 58,000
2,53,861 Insurance Company 5,800
Sundry Creditors 45,820 Loan 14,500
Add : Unrecorded Add : Accrued
Purchases 2,900 48,720 Interest 580 15,080
Bills Payable 7,250 Advertisement Suspense
Manager’s Commission Account 14,500
Outstanding 11,054 Stock at the end 20,300
Apprenticeship premium Cash at Bank 10,150
received in advance 2,320 Cash in hand 725
3,23,205 3,23,205


37. Mr. Rishab
For the Year Ended On 31 March 2006
Rs. Rs.
Opening stock 21,300 Sales 1,40,000
Purchases 84,000 Less : Returns 5,000 1,35,000
Less : Returns 4,000 80,000 Profit and Loss Account 10,000
Carriage 10,000 (Loss by fire)
Gross Profit c/d 61,000 Closing Stock 27,300
1,72,300 1,72,300
Sundry Expenses 600 Gross Profit b/d 61,000
Printing and Stationery 500 Provision for discount on
Insurance 1,000 Debtors (380 – 342) 38
Less : Prepaid 200 800 Provision for discount on
Salaries and Wages 18,500 Creditors 360
Trade Expenses 800 Profit of Textile Department 10,000
Trading Account (Loss by fire) 10,000 Insurance Comapany 6,000
Interest on loan 1,350 Provision for Doubtful
Bad Debts 400 Debts (1,000 – 900) 100
Additional 400 800
Depreciation on :
Land and Buildings 1,800
Furniture 250 6,050
Net Profit transferred
to Capital Account 38,098
77,498 77,498
Balance Sheet As on 31 March 2006
Capital 1,00,000 Land and Building 90,000
Add : Net Profit 38,098 Less : Depreciation 1,800 88,200
Less: Drawings : 1,38,098 Plant and Machinery 20,000
As per T. B. 12,000 Less : Depreciation 4,000 16,000
Goods 2,000 14,000 Furniture 5,000
1,24,098 250
Loan from Gayanand 30,000 Less : Depreciation 4,750
Stock:
Add : Accrued Interest 1,350 31,350 General goods 27,300
Textile goods 8,000 35,300
Creditors 12,000 Debtors 18,400
Add : Omitted 6,000 Less : Additional
18,000 Bad Debts 400
Less : Provision 18,000
for Discount 360 17,640 Less : P. D. D. 900
17,100
Less : Provision for
Discount 342 16,758
Insurance Company 6,000
Prepaid Insurance 200
Cash at Bank 4,600
Cash in hand 1,280
1,73,088 1,73,088
WORKING NOTE

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Purchases 80,000
Add : Omitted Invoices 6,000
86,000
Less : Drawings 2,000
84,000
39. The following is the trial Balance of Hari as at 31 December,

1999 :
Dr. (Rs.) Cr. (Rs.)

Hari's Capital Account — 76,690
Stock 1 January, 1999 46,800 —
Sales — 3,89,600
Returns Inwards 8,600 —
Purchases 3,21,700 —
Returns Outwards — 5,800
Carriage Inwards 19,600 —
Rent & Taxes 4,700 —
Salaries & Wages 9,300 —
Sundry Debtors 24,000 —
Sundry Creditors — 14,800
Bank Loan @ 14% p.a. — 20,000
Bank Interest 1,100 —
Printing and Stationery Expenses 14,400 —
Bank Balance 8,000 —
Discount Earned — 4,440
Furniture & Fittings 5,000 —
Discount Allowed 1,800 —
General Expenses 11,450 —
Insurance 1,300 —
Postage & Telegram Expenses 2,330 —
Cash Balance 380 —
Travelling Expenses 870 —
Drawings 30,000 —
5,11,330 5,11,330
The following adjustments are to be made :

(i) Included among the Debtors is Rs. 3,000 due from Ram and included
among the Creditors Rs. 1,000 due to him.
(ii) Provision for Bad and Doubtful Debts be created at 5% and for Discount
@ 2% on Sundry Debtors.
(iii) Depreciation on Furniture & Fittings @ 10% shall be written off.
(iv) Personal Purchases of Hari amounting to Rs. 600 had been recorded
in the Purchases Day Book.
(v) Interest on Bank Loan shall be provided for the whole year.
(vi) A quarter of the amount of stationery expense is to be carried forward
to the next accounting period.
(vii) Credit purchase invoice amounting to Rs. 400 had been omitted from
the books.
(viii) Stock on 31-12-1999 was Rs. 78,600.
SOLUTION :
Hari
For the Year Ending on 31 March 1999
Rs. Rs.
Opening Stock 46,800 Sales 3,89,600
Purchases 3,21,700 Less : Returns 8,600 3,81,000
Add : Omitted Invoice400 Stock at the end 78,600 Less : Returns
3,22,100
5,800
3,16,300
Less : Drawings 6003,15,700
Freight and Carriage 19,600
4,59,600 4,59,600
Rent and Taxes 4,700 Gross Profit b/d 77,500

Salaries and Wages 9,300 Discount 4,440
Bank Interest 1,100
Add : Accrued 1,700 2,800
Printing and Stationery14,400
Less : Prepaid (1/4)3,60010,800
Discount Allowed 1,800
General Expenses 11,450
Insurance 1,300

Postage and Telegrams 2,330
Travelling Expenses 870
Provision for Bad Debts 1,150
Provision for Discount
on Debtors 437
Depreciation On :
Furniture and Fittings 500
Net Profit transferred to
Capital Account 34,503
81,940 81,940
Balance Sheet as on 31 December 1999
Liabilities Rs. Rs. Assets Rs. Rs.

Capital 76,690 Furniture and Fittings5,000
Add : Net Profit 34,503 Less : Depreciation 500 4,500
1,11,193 Debtors 24,000
Less : Drawings : Less : Common Debt1,000
Cash (30,000) 23,000
Goods (600) 80,953 Less : Provision for
Bank Loan 20,000 Doubtful Debts1,150
Bank Interest Accrued 1,700 21,850
Sundry Creditors14,800 Discount 437 21,413
Less : Common Debts1,000 (2% of Rs. 21,850)
13,800 Stock at the end 78,600
Add : Invoice Omitted40014,200 Prepaid Expenses :
Printing and stationery 3,600
Cash in hand 380
Cash at Bank 8,000
1,16,493 1,16,493

SELF PRACTICE
2. From the following Trial Balance of 'Mr. Yamin' for the year ending 31-3-2000, and
additional information given, prepare Trading and Profit & Loss Account and a Balance
Sheet as at that date :
Trial Balance
Dr. (Rs.) Cr. (Rs.)

Opening Stock 1,00,000 —
Capital — 9,00,000
Debtors and Creditors 1,20,000 70,000
Purchases and Sales 8,00,000 14,00,000
Returns 30,000 20,000
Carriage 16,000 —
Wages and Salaries 50,000 —
Commission — 26,000
Machinery 1,60,000 —
Furniture 40,000 —
Bad debts 16,000 —
Provision for doubtful debts — 20,000
B/R and B/P 60,000 14,000
Taxes and Insurance 34,000 —
Land and Buildings 8,00,000 —
Discount allowed 24,000 —
Bank 1,00,000 —
Drawings 1,00,000 —
24,50,000 24,50,000
Additional Information :
(i) Value of closing stock, as on 31-3-2000 is Rs. 80,000.
(ii) Insurance prepaid is Rs. 4,000. Wages and salaries outstanding is
Rs. 2,000.
(iii) Provide for doubtful debts on the debtors @ 10%.
(iv)Depreciate Machinery and Furniture @ 10% and @ 15% respectively.
(v) Goods of the value of Rs. 10,000 were taken by the proprietor for his
own use but no entry was made in the books of accounts.
[B. Com. (P) Delhi 2001 (E)]
SOLUTION :
Mr. Y

For the Year Ending on 31 March 2000
Rs. Rs.
Opening Stock 1,00,000 Sales 14,00,000
Purchases 8,00,000 Less : Returns 30,00013,70,000
Less : Returns 20,000 Stock at the end 80,000
7,80,000
Less : Drawings 10,0007,70,000
Carriage 16,000
Wages and Salaries50,000
Add : Outstanding2,000 52,000
14,50,000 14,50,000
Bad Debts 16,000 Gross Profit b/d 5,12,000

Taxes and Insurance34,000 Commission 26,000
Less : Prepaid 4,000 30,000 Provision for Doubtful
Discount Allowed 24,000 Debts (20,000–12,000) 8,000
Depreciation on :
Machinery 16,000
Furniture 6,000
Net Profit transferred to
Capital Account 4,54,000
5,46,000 5,46,000
Balance Sheet of Mr. Y As On 31 March 2000
Liabilities Rs. Rs. Assets Rs. Rs.

Capital 9,00,000 Cash at Bank 1,00,000
Add : Net Profit4,54,000 Debtors 1,20,000
13,54,000 Less : Provision12,0001,08,000
Less : Drawings Bills Receivable 60,000
(1,00,000+10,000)1,10,00012,44,000Prepaid Insurance 4,000
Creditors Stock in hand 80,000
For Goods 70,000 Land and Building 8,00,000
For Wages and Salaries 2,000 Machinery 1,60,000
Bills Payable 14,000 Less : Depreciation16,0001,44,000

Furniture 40,000
Less : Depreciation6,00034,000
13,30,000 13,30,000
5. From the following Trial Balance of Vee Kay Traders, prepare Trading and Profit and
Loss Account for the year ended 31st March, 2002 and a Balance sheet as on that date
:
Debit Balances Rs. Credit Balances Rs.
Plant and Machinery 19,720 Capital 80,000

Manufacturing wages 34,965 Sundry Creditors 54,160
Salaries 15,965 Bank Loan 10,000
Fixtures and Fittings 9,480 Purchases Returns 1,140
Carriage inwards 1,980 Reserve for Bad and
Carriage outward 2,150 Doubtful debt 2,000
Freehold works 25,000 Sales 2,46,850
Manufacturing expenses 9,455
Insurance and Taxes 4,175
Goodwill 30,000
General expenses 8,142
Factory Fuel and Power 1,276
Sundry Debtors 78,140
Factory lighting 986
Stable expenses for distribution 2,473
Stock on 1 April, 2001 34,170
Horses and Carts 5,165
Purchases 97,165
Sales Returns 3,170
Discount allowed 928
Bad debts 1,485
Interest and Bank Charges 475
Cash at Bank 7,540
Cash in hand 145
3,94,150 3,94,150
Adjustments :
(a) Stock on 31 March, 2002 Rs. 29,630.
(b) Depreciation — Plant and Machinery 10%, Furniture and Fittings – 5%,
Horses and Carts Rs. 1,000.

(c) Bring reserve for bad and doubtful debts to 5%.
(d) Unexpired insurance Rs. 300 and Taxes Rs. 190.
(e) A commission of one per cent on the gross profit to be provided to works manager.
(f) A commission of 5% on net profit after charging the works manager’s commission to be
credited to the general manager. [B.Com. Punjab]
SOLUTION :
Veek Kay Traders

For The Year Ending 31 March 2002
Rs. Rs.
Opening stock 34,170 Sales 2,46,850
Purchases 97,165 Less : Returns3,1702,43,680
Less : Returns 1,140 96,025 Closing stock 29,630
Carriage inwards 1,980
Manufacturing expenses 9,455
Factory fuel and power 1,276
Factory lighting 986
Manufacturing wages 34,965
2,73,310 2,73,310
Salaries 15,965 Gross Profit b/d 94,453

Carriage outwards 2,150
Insurance and taxes 4,175
Less : prepaid 490 3,685
General expenses 8,142
Stable expenses 2,473
Discount allowed 928
Bad debts 1,485
Provision for
Doubtful Debts (3,907–2,000) 1,907
Interest and bank charges 475
Depreciation on :
Plant and machinery1,972
Furniture & fittings 474
horses and carts 1,000 3,446
Commission to works manager 945
Commission to general manager2,517

94,453 94,453
Balance Sheet As on 31 March 2002

Capital 80,000 Goodwill 3,000
Add : Net Profit 50,335 1,30,335 Plant & Machinery19,720
Bank loan 10,000 Less : Depreciation1,97217,748
Sundry Creditors 54,160 Furniture & fitting9,480
Outstanding Commission to : Less : Depreciation 474 9,006
Works manager 945 Freehold works 25,000
General Manager 2,517 3,462 Horses and carts5,165
Less : Depreciation1,0004,165
Closing Stock 29,630
Sundry Debtors78,140
Less : Provision
for doubtful debts3,90774,233
Cash at bank 7,540
Cash in hand 145
Prepaid insurance 300
Prepaid taxes 190
1,97,957 1,97,957
12. From the following figures extracted from the books of Shri Govind, prepare a trading
and profit and loss account for the year ended 31 March, 1999 and balance sheet as
on that date after making necessary adjustments :
Rs. Rs.
Shri Govind's capital 2,28,800 Stock 1-4-1998 38,500
Shri Govind's drawings 13,200 Wages 35,200
Plant and machinery 99,000 Sundry creditors 44,000
Freehold property 66,000 Postage and telegrams 1,540
Purchases 1,10,000 Insurance 1,760
Returns outward 1,100 Gas and fuel 2,970
Salaries 13,200 Bad debts 660
Office expenses 2,750 Office rent 2,860
Office furniture 5,500 Freight 9,900

Discount account (Dr.) 1,320 Loose tools 2,200
Sundry debtors 29,260 Factory lighting 1,100
Loan to Shri Krishna @ of 10% Provision for doubtful debts 880
–balance on 1-4-1998 44,000 Interest on loan to
Cash at bank 29,260 Shri Krishna 1,000
Bills payable 5,500 Cash on hand 2,640
Sales 231,440
Adjustments :
(i) Stock on 31 March 1999 was valued at Rs. 72,600.
(ii) A new machine was installed during the year costing Rs. 15,400 but it
was not recorded in the books as no payment was made for it. Wages
paid for its erection have been debited to wages account.
(iii) Depreciate plant and machinery by 33-1/3%; furniture by 10% and
freehold property by 5%.
(iv) Loose tools were valued at Rs. 1,760 on 31-3-1999.
(v) Of the sundry debtors Rs. 660 are bad and should be written off.
(vi) Maintain a provision of 5% on sundry debtors for doubtful debts.
(vii) The manager is entitled to a commission of 10% of the net profits after
charging such commission.
SOLUTION :
Shri Govind
For The Year Ending On 31 March 1999
Rs. Rs.
Purchases 1,10,000 Stock at the end 72,600
Less : Returns 1,100 1,08,900
Wages 35,200
Less : For erection of
Machine 1,100 34,100
Gas and Fuel 2,970
Freight 9,900
Factory Lighting 1,100
3,04,040 3,04,040
Postage and Telegrams 1,540 Gross Profit b/d 1,08,570

Salaries 13,200 Interest on Loan1,100
Office expenses 2,750 Add : Outstanding3,300 4,400

Insurance 1,760
Office Rent 2,860
Discount 1,320
Bad Debts (660 + 660) 1,320
Provision for Bad Debts 550
(1,430–880)
Depreciation on :
Machinery 38,500
Furniture 550
Freehold Property3,30042,350
Loss on Revaluation
of Loose Tools 440
Net Profit 40,800
1,12,970 1,12,970
Balance Sheet As On 31 March 1999

Capital 2,28,800 Plant and Machinery99,000
Add : Net Profit40,800 Add : New Machine 16,500
2,69,600 (15,400 + 1,100)1,15,500
Less : Drawings13,2002,56,400 Less : Depreciation 38,500 77,000
Bills Payable 5,500 Freehold Property 66,000
Sundry Creditors 59,400 Less : Depreciation 3,300 62,700
Manager’s Commission Office Furniture 5,500
Outstanding 4,080 Less : Depreciation 550 4,950
Loose Tools 2,200
Less : Loss on Revaluation4401,760
Sock at the end 72,600
Debtors 28,600
Less : Provision 1,430 27,170
Loan to Shri Krishna44,000
Add : Interest thereon3,300 47,300
Cash at Bank 29,260
Cash in hand 2,640
3,25,380 3,25,380

17. From the following Trial Balance of Fatima on

December 31, 2001, prepare the Final Accounts.
Trial Balance of F as on December 31, 2001
Debit Balances Amount Credit Balances Amount

Rs. Rs.
Drawings 6,000 Bank Overdraft 25,000
Wages 15,500 Interest on Investment 5,800
Stock 12,800 Bills Payable 4,600
Loan to Gaurav 4,000 Interest on Loan to Gaurav 320
Rent 5,000 Capital 1,00,000
General Expenses 1,480 Reserve for Bad and
Investments 60,000 Doubtful Debts 250
Purchases 1,60,000 Sales 2,30,000
Freight and Carriage 2,100 Sundry Creditors 12,590
Goodwill 40,000
Bills Receivable 6,200
Rates and Taxes 1,800
Sales Return 2,100
Insurance 900
Cash in hand 2,500
Savings Bank 1,200
Postage and Telegram 3,800
Land and Building 25,000
Packing Charges 400
Bad Debts 1,280
3,78,560 3,78,560
Adjustments :
(i) Closing stock as on 31 December 2001— Rs. 16,000.
(ii) Goods worth Rs. 700 were sent on 25-12-2001 as "Sale on Approval Basis"
for Rs. 800 and the approval was not received before the end of the month.
(iii) 20% of the goodwill is to be written off.
(iv) Further bad debts was estimated at Rs. 350.
(v) Increase Reserve for Bad Debts to the extent of Rs. 1,500.
(vi) Depreciate Land and Building by 3% and Plant and Machinery by 10%.

(vii) Goods worth Rs. 800 were distributed as free samples.
SOLUTION :
Fatima
For The Year Ending 31 December 2001
Rs. Rs.
Purchases 1,60,000 Less : Returns 2,1002,27,900
Less : Free Samples8001,59,200 Stock at the end 16,000
Wages 15,500 Add : Sale on Approval70016,700
Freight and Carriage 2,100
Packing Charges 400
2,44,600 2,44,600
Goodwill (Amortization of) 8,000 Gross Profit b/d 54,600

Bad Debts 1,280 Interest on Investments 5,800
(+) Additional 350 1,630 Interest on Loan to Gaurav 320
Provision for Doubtful Debts 1,250
Depreciation on :
Land and Building 750
Plant and Machinery1,000 1,750
Advertisement (free samples) 800
Rent 5,000
General Expenses 1,480
Rates and Taxes 1,800
Insurance 900
Postage and Telegrams 3,800
60,720 60,720
Balance Sheet As on 31 December 2001

Capital 1,00,000 Cash in hand 2,500
Add : Net Profit 34,310 Saving Bank 1,200
1,34,310 Bills Receivable 6,200

Less : Drawings 6,0001,28,310 Loan to Gaurav 4,000
Bills Payable 4,600 Sundry Debtors 16,500
Bank Overdraft 25,000 Less : Bad Debts (350)
Sundry Creditors 12,590 Less : Reserve for
Bad Debts (1,500) 14,650
Investments 60,000
Plant and 10,000
Machinery 10,000
Less : Depreciation1,000 9,000
Land and Building25,000
Less : Depreciation 750 24,250
Goodwill 40,000
Less : Amortised 8,000 32,000
1,70,500 1,70,500
Attention Please
Goods sent on approval are not treated as sales and also not available at the time
of stock taking. Hence cash price of the goods should be included in the sales.
18. Mrs. Ghosal submits to you the following Trial Balance

which she has not been able to agree. Prepare the Trial Balance after correcting the
errors committed by her and prepare a Trading Account and Profit & Loss Account for
the year ended 31 December, 2001 and a Balance Sheet as at that date after giving
effect to the undermentioned adjustments :
Dr. Cr.
Rs. Rs.
Capital — 15,000
Drawings 3,250 —
Stock (1.1.2001) 17,445 —
Returns Inward — 554
Carriage Inward 1,240 —
Deposit with Bank — 1,375
Returns Outward 840 —
Carriage Outward — 725
Loan to Chatterjee @ 5% p.a. (on 1.1.2001) — 1,000
Interest on the above — 25
Rent 820 —

Rent Outstanding 130 —
Stock (31.12.2001) 18,792
Purchases 12,970 —
Debtors 4,000 —
Creditors — 3,000
Provision for Doubtful Debts — 1,200
Advertisement Expenses 954 —
Bad Debts 400 —
Patents 500 —
Sales — 27,914
Discount allowed — 330
Wages 754 —
Cash 62 —
Goodwill 1,730 —
45,095 69,915
Adjustments :
(i) The manager of Mrs. Ghosal is entitled to a commission of 10% of the
net profit calculated after charging such commission.
(ii) Increase bad debts by Rs. 600. Provision for doubtful debts is to be 10%
and provision for discount on debtors is to be 5% on sundry debtors.
(iii) Stock valued at Rs. 1,500 was destroyed by fire on 25 December 2001
but the insurance company admitted a claim of Rs. 950 only and paid it in 2002.
(iv)Rs. 200 out of advertisement expenses are to be carried forward to next year.
SOLUTION :
Mrs. Ghosal
Trial Balance As on 31 December 2001
Debit Balances Rs. Credit Balances Rs.

Drawings 3,250 Capital 15,000
Stock (1-1-2001) 17,445 Returns Outward 840
Returns Inward 554 Interest on Loan 25
Carriage Inward 1,240 Outstanding Rent 130
Deposit with Bank 1,375 Creditors 3,000
Carriage Outward 725 Provision for Doubtful Debts1,200
Loan to Chatterjee Sales 27,914
@ 5% on 1-1-2001 1,000
Rent 820
Purchases 12,970

Debtors 4,000
Advertisement Expenses 954
Bad Debts 400
Patents 500
Discount Allowed 330
Wages 754
Cash 62
Goodwill 1,730
48,109 48,109
Stock at the end, Rs. 18,792 would not be shown in the trial balance since the purchases are
not adjusted.

For The Year Ending on 31 December 2001
Rs. Rs.
Opening Stock 17,445 Sales 27,914
Purchase 12,970 Less : Returns 554 27,360
Less : Returns 840 12,130 Profit and
Carriage Inward 1,240 Loss Account (Stock Destroyed) 1,500
Wages 754 Stock at the end 18,792
47,652 47,652
Rent 820 Gross Profit b/d 16,083

Advertisement Expenses954 Insurance Company 950
Less : Prepaid 200 754 Provision for Doubtful
Bad Debts 400 Debts (1,200-340) 860
Additional Bad Debts 600 1,000 Interest on Loan 25
Discount Allowed 330 Add : Accrued 25 50
Trading Account 1,500
Provision for Discount on
Debtors 153
Carriage Outward 725
17,943 17,943


Capital 15,000 Goodwill 1,730
Add : Net Profit 11,510 Patents 500
26,510 Deposit with Bank 1,375
Less : Drawings 3,250 23,260 Loan to Chatterjee 1,000
Creditors 3,000 Interest Accrued thereon 25
Manager’s Commission unpaid1,151 Stock in hand 18,792
Outstanding Rent 130 Debtors 4,000
Less : Additional Bad Debts600
3,400
Doubtful Debts340
3,060
Discount 153 2,907
Insurance Company 950
Prepaid Advertisement 200
Cash in hand 62
27,541 27,541
Attention Please
Manager’s Commission is calculated as under :
10 × 12,661 (17,943–5,282) = Rs. 1,151
110
19. The following Trial Balance as on December 31, 2002 has been
extracted from the books of Garima. You are required to prepare the Final Accounts.
Trial Balance of Garima as on December 31, 2002
Debit Balances Amount Credit Balances Amount

Rs. Rs.
Cash in hand 600 Capital 50,000
Cash at Bank 4,100 Sundry Creditors 30,000
Purchases 2,12,300 Bills Payable 4,200
Sales Return 4,500 Sales 3,57,300
Transportation 18,700 Purchases Returns 1,080
Wages 60,200
Salaries 17,800

Printing and Stationery 4,500
Rent, Rates and Taxes 12,880
Factory Rent 8,500
Fuel and Gas 6,100
Carriage Outwards 800
Commission 1,500
Stable Expenses 6,200
Bills Receivable 2,150
Furniture 4,300
Loose Tools 1,400
Horse and Cart 2,500
Postage and Telephone 3,800
Factory Manager's Salary 18,750
Opening Stock 46,000
4,42,580 4,42,580
Adjustments :
(i) Stock as on 31 December 2002 was valued at Rs. 50,600.
(ii) At the end of the year, it was ascertained that there was shortage of
goods worth Rs. 4,500. It was decided to write off 10% of it as natural
shortage and to recover the remainder from Godown keeper.
(iii) Provide 10% p.a. depreciation on Furniture. Furniture worth Rs. 300 was
purchased on 1 September 2002.
(iv) Depreciate horse and carts by 10%.
(v) A bill for 3 months valued at Rs. 1,000, discounted at 10% with the
Banker was dishonoured on 29-12-2002. The intimation from the Banker
was received on 2-1-2003.
(vi) Outstanding salaries— Rs. 250.
(vii) Loose tools were revalued at Rs. 1,200.
SOLUTION :
Garima
For the Year Ending on 31 December 2002
Rs. Rs.
Purchases 2,12,300 Add : Shortages 4,500
Less : Returns 1,080 2,11,220 3,61,800

Transportation 18,700 Less : Sales Returns4,5003,57,300
Wages 60,200 Stock at the end 50,600
Factory Rent 8,500
Fuel and Gas 6,100
Factory Manager’s Salary 18,750
4,07,900 4,07,900
Shortages 4,500 Gross Profit b/d 38,430

Salaries 17,800 Godown Keeper 4,050 Add : Outstanding
250 18,050 Net Loss transferred to
Printing and Stationery 4,500 Capital Account 1,0610
Rent, Rates and Taxes 12,880
Carriage Outwards 800
Commission 1,500
Stable Expenses 6,200
Postage and Telephone 3,800
Depreciation on :
Furniture 410
Horse and cart 250
Loose Tools 200 860
53,090 53,090

Bills Payable 4,200 Cash in hand 600
Sundry Creditors 30,000 Cash at Bank 4,100
Outstanding Salaries 250 Less : Bills Receivable
Capital 50,000 Discounted Dishonoured1,0003,100
Less : Net Loss 10,610 39,390 Bills Receivable 2,150
Add : Bills Receivable
Discounted Dishonoured1,0006,000
Goldown Keeper 4,050
Horse and Cart 2,500
Loose Tools 1,400

Less : Loss on
Revaluation 200 1,200
Furniture 4,300
(400+10)
73,840 73,840
Attention Please
When the discounted bills receivable is dishonoured, the bank balance is reduced
and debtors are increased. The entry is.
Debtors’ Account Dr.
To Bank Account

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BUSINESS ECONOMICS AND FINANCIAL

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The number of transactions in an organization depends upon the size of the

Accounting came into practice as an aid to human memory by maintaining

1.1 History of Accounting:

1.2 Origin of Accounting in India:

2. BOOK-KEEPING AND ACCOUNTING

BUSINESS ECONOMICS AND FINANCIAL

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

Book – Keeping: Book – Keeping involves the chronological recording of

Distinction between Book – Keeping and Accountancy

2.1 Meaning of Accounting

BUSINESS ECONOMICS AND FINANCIAL

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2.2 Definition of Accounting:

Smith and Ashburne: “Accounting is a means of measuring and reporting the

2.3 Branches of Accounting:

BUSINESS ECONOMICS AND FINANCIAL

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BUSINESS ECONOMICS AND FINANCIAL

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accou8nting departments has to prepare and send regular reports so as to

This is what the accountant or the accounting department does. A person

4. USERS OF ACCOUNTING INFORMATION

Different categories of users need different kinds of information for making

4.1 Internal Users:

4.2 External Users :

BUSINESS ECONOMICS AND FINANCIAL

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3. Workers : In our country, workers are entitled to payment of bonus which

6. Public : The public at large interested in the functioning of the enterprises

7. Researchers: The financial statements, being a mirror of business conditions,

5. ADVANTAGES FROM ACCOUNTING

BUSINESS ECONOMICS AND FINANCIAL

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3. Provides control over assets: Book-keeping provides information regarding

The following are the limitations of accounting.

BUSINESS ECONOMICS AND FINANCIAL

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7. BASIC ACCOUNTING CONCEPTS

BUSINESS ECONOMICS AND FINANCIAL

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BOOK KEEPING AND ACCOUNTING:

[A]. BOOK KEEPING:

“Book keeping is the system of recording Business transactions for the

Thus Book keeping is an art of recording business transactions in the

[B]. ACCOUNTING: Accounting begins where the Bookkeeping ends

Thus accounting is an art of recording, classifying, summarizing and interpreting

The following are the advantages of Accounting…………

BUSINESS ECONOMICS AND FINANCIAL

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2. FACILITATES THE PRPARATION OF FINANCIAL STATEMENTS: Profit and Loss

3. PROVIDES CONTROL OVER ASSETS: Book keeping provides information

4. PROVIES THE REQUIRED INFORMATION: Interested parties such as owners,

5. COMPARITIVE STUDY: One can compare present performance of the

8. ASCERTAINING VALUE OF BUSINESS: The accounting records will help in

9. DOCUMENTARY EVIDENCE: Accounting records can also be used as evidence

10.HELPFUL TO MANAGEMENT: Accounting is useful to the management in various