Assignment Semester 1 Cycle 6 ( (Fa) )

F-2,Block, Amity Campus
Sec-125, Nodia (UP)

India 201303
ASSIGNMENTS
PROGRAM:
SEMESTER-I
Subject Name
: Financial Accounting
Study COUNTRY
: Sudan LC
Permanent Enrollment Number (PEN) : MFC001652014-2016014
Roll Number
: AMF102 (T)
Student Name
: SOMAIA TAMBAL YOUSIF ELMALIK
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C
DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
45 Objective Questions
MARKS
10
10
10
b)
c)
d)
e)
Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates (specified
from time to time) and need to be submitted for evaluation by Amity
University.
f) The evaluated assignment marks will be made available within six
weeks. Thereafter, these will be destroyed at the end of each semester.
g) The students have to attach a scan signature in the form.
Signature :
Date
__________30 January 2015_____________________
( ) Tick mark in front of the assignments submitted
Assignment A
Assignment B
Assignment C
Financial Accounting
ASSIGNMENT A
Q1. Define Accounting. How does it differ from bookkeeping?
Every business and not-for-profit entity needs a reliable bookkeeping system
based on established accounting principles. Keep in mind that accounting is
a much broader term than bookkeeping. Bookkeeping refers mainly to the
record-keeping aspects of accounting; it's essentially the process of
recording all the information regarding the transactions and financial
activities of a business.
Defining bookkeeping
Bookkeeping is an indispensable subset of accounting. Bookkeeping refers
to the process of accumulating, organizing, storing, and accessing the
financial information base of an entity, which is needed for two basic
purposes:
Facilitating the day-to-day operations of the entity

Preparing financial statements, tax returns, and internal reports to
managers
Bookkeeping (also called recordkeeping) can be thought of as the financial

information infrastructure of an entity. The financial information base should
be complete, accurate, and timely. Every recordkeeping system needs quality
controls built into it, which are called internal controls.
Defining accounting
The term accounting is much broader; going into the realm of designing the
bookkeeping system, establishing controls to make sure the system is
working well, and analyzing and verifying the recorded information.
Accountants give orders; bookkeepers follow them.
Accounting encompasses the problems in measuring the financial effects of

economic activity. Furthermore, accounting includes the function of
financial reporting of values and performance measures to those that need
the information. Business managers, investors, and many others depend on
financial reports for information about the performance and condition of the
entity.
Accountants design the internal controls for the bookkeeping system, which
serve to minimize errors in recording the large number of activities that an
entity engages in over the period. The internal controls that accountants
design are also relied on to detect and deter theft, embezzlement, fraud, and
dishonest behavior of all kinds.
Accountants prepare reports based on the information accumulated by the
bookkeeping process: financial statements, tax returns, and various
confidential reports to managers. Measuring profit is a critical task that
accountants perform a task that depends on the accuracy of the
information recorded by the bookkeeper. The accountant decides how to
measure sales revenue and expenses to determine the profit or loss for the
period.
The American Institute of Certified Public Accountants defines accounting
as the art of recording, classifying and summarizing in a significant manner
and in terms of money transactions and events which are, in part at least, of a
financial character, and interpreting the results thereof.
This definition brings out the following as attributes of accounting:
1.
Events and transactions of a financial nature are recorded while the
events of a non-financial nature cannot be recorded.
2.
The record should reflect the importance of the transactions so
recorded both individually and collectively, which includes summarization,
thereby making it amenable to analysis.
3.
The users of the financial statements should be able to obtain the
message encompassed in such financial statements.
ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: Book-keeping is a part of Accounting. Accounting is a part of Accountancy.
Accountancy: refers to a systematic knowledge of accounting.
Accounting: Refers to the actual process of preparing & presenting the
accounts.
Book-keeping: is the part of accounting & is concerned with record keeping
or maintaining of books of accounting which is often routine & clerical in
nature.
The Accounting Process/Accounting Cycle: It is a complete sequence
beginning with the recording of the transactions & ending with the
preparation of final accounts. The steps involved in accounting cycle are as
follows:
Step 1: - Identification of Transactions & Events: - Accounting identifies
transactions & events of a specific entity. A transaction is an exchange in
which each participant receives or sacrifices value (e.g. purchase of raw
material). An event is a happening of consequences to an entity (e.g. use of
raw material for production). An entity means an economic unit that
performs economic activities.
Step 2: - Preparation of Business Documents: - After identifying, we
measure those transactions & events in monetary terms & to record them we
prepare business documents.
Step 3: - Journalizing: - It is concerned with the recording of identified &
measured financial transactions in an orderly manner, and this process is
called as Journalizing.
Step 4: - Posting: - It is concerned with classification of the recorded
transactions so as to group the transactions of similar type at one place. This
function is performed by maintaining the ledger in which different accounts
are opened to which related transactions are brought to one place by posting
Step 5: - Preparation of Trial Balance: - It is concerned with the balancing &
summarization of the classified transactions in a manner useful to users. It
can further be classified into preparation of unadjusted trial balance &
passing the adjustment entries. After balancing all the accounts, we do some
adjustments to match our expenses & revenues & then prepare adjusted
accounts.
Step 6: - Preparation of Income Statement & Position Statement:- After

preparing Trial Balance we prepare Income Statement i.e. Trading & Profit
& Loss Account & position statement i.e. Balance Sheet. We can present the
same graphically as follows:
We must also understand the difference & relationship between the terms
accounting & book-keeping. Accounting is broader in scope than
bookkeeping, which is merely concerned with orderly record keeping. Going
beyond the narrow confines of bookkeeping, accounting involves analysis
and judgment at different stages such as recording of transactions,
classification, summarization and interpretation.
Distinction B/w Accounting & Book-keeping in Tabular form can be
presented as follows:
Basis of Distinction
Book-keeping
Accounting
Scope
It involves
identification,
measurement,
recording &
classification of
transaction
In addition it involves
summarizing classified
transactions. Analyzing,
interpreting &
communicating the same.
Stage
Its a primary stage
Its a secondary stage, starts

where book-keeping ends
Basic Objective
To maintain
systematic records
To ascertain net results of

operations & financial
position of the co
Who Performs
Performed by junior
staff
By senior staff
Knowledge level
Not required a high

level of knowledge
It needs a high level of

knowledge
Analytical Skill
Not required
Required
Nature of Job
Routine & clerical
Analytical
Supervision &
Checking
Supervised by an
accountant
Whereas its work is not

supervised by a book-keeper
BRANCHES OF ACCOUNTING: Classification of Accounting:

Financial Accounting: - Accounting involves recording, classifying
and summarizing of past events and thus is historical in nature. It is
Historical accounting which is better known as financial accounting whose
primary intention is to prepare the Statements revealing the Income and
financial position of the business on the basis of events which have
happened in the period being reckoned.
Cost Accounting: - It shows classification and analysis of costs on the

basis of functions, processes, products, centers etc. It also deals with cost
computation, cost saving, cost reduction, etc.
Management Accounting: - It deals with the processing of data

generated in financial accounting and cost accounting for managerial
decision-making. It also deals with application of managerial economic
concepts for decision-making.
Accounting records are required to be maintained statutorily by certain
government and regulatory bodies.
Accounting records are also required by the management for taking the
financial decisions.
ADVANTAGES OF ACCOUNTING
Facilitate To Replace Memory
Facilitate to comply with legal requirement
Facilitate to ascertain net result of operations
Facilitate to ascertain financial position
Facilitate the users to take decision
Facilitate a comparative study
Facilitate control over assets
Facilitate the settlement of tax liability
Facilitate the ascertainment of value of business
Facilitate Raising Loan
Acts as legal evidence
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

The double entry system of accounting is based on a set of principles which
are called Generally Accepted Accounting Principles (GAAP). GAAP may
be defined as those rules of action or conduct which are derived from
experience and practice and when they prove useful, they become accepted
as principles of accounting.
These principles enable to certain extent standardization in recording and
reporting of information so that the users, once they are aware of the
principles, can read and understand the financial statements prepared by
diverse organizations.
Acceptance of accounting principles depends on following three criteria:
Relevance: - A principle is relevant to the extent it results in

information that is meaningful & useful to the users of accounting
information.
Objectivity: - it connotes reliability & trustworthiness.
Feasibility: - A principle is feasible to the extent it can be

implemented without much complexity & cost.
Principles can be classified into two categories:
(i)
Accounting concepts
(ii)
Accounting conventions
ACCOUNTING CONCEPTS:
The term concepts include those basic assumptions or conditions upon
which the science of accounting is based. The following are the important
accounting concepts:
(1)
Money Measurement Concept:
In financial accountancy, a record is made only of information that can be

expressed in monetary terms. Recording, classification and summarization
of business transactions requires a common unit of measurement which is
taken as money. If events cannot be quantified in monetary terms then they
do not facilitate accounting. Money is the standard of exchange and the
changes in purchasing power caused by inflation are ignored for the purpose
of accounting because the assumption about the stability of money,
notwithstanding its limitations, is a necessity for ensuring a smooth
accounting process. Hence, all transactions are recorded through a common
denominator, namely the monetary unit.
(2)
Cost Concept:-
Cost concept implies that in accounting, all transactions are generally

recorded at cost, and not at market value. (3) Business Entity/Separate Entity
Concept:
The legal entity of a corporate business, as distinct from the entity of its
owners is well understood today. Less understood, however, is the
accounting entity of a business as distinct from its owners? For example, for
many purposes, the legal entity of a sole proprietary business may not be
very distinct from the entity of the proprietor himself. However, the business
entity concept requires that this should not come in the way of treating the
business as a distinct accounting entity for the purposes of treating
transactions relating to the operations of the business. It is in accordance
with this concept that when an owner brings capital into the business, the
business in turn is deemed to owe the capital to the owner.
(4)
Going Concern Concept:
A business entity is assumed to carry on its operations forever. Seemingly

inconsequential, this is a fundamental concept which has far reaching
consequences. This is because it is difficult to envisage any economic
activity on the part of a business entity if its liquidation were shortly
expected. Going concern concept implies that the resources of the concern
would continue to be used for the purposes for which they are meant to be
used. For instance, in a manufacturing concern, the land, buildings,
machinery etc., are primarily required for carrying out the production and
selling of certain products. Going concern concept implies that these land,
buildings, machinery etc., would continue to be used for this purpose
(5)
Duality or Accounting Equivalence Concept:
It can easily be seen that in business, as elsewhere, funds can be raised in

any of the following ways:
Additional capital (increases owners equity)
Additional loans (increases outside liability)
Earning revenue (increases owners equity)
Making profits (increases owners equity)
Disposing or reducing some of the assets (reduces assets).
Thus, all increases in liabilities (including owners equity) and reduction in

assets represent sources of funds. Thus the duality or accounting equivalence
concept implies that:
Owners Equity + Outside Liability = Assets
This equation is known as the Fundamental Accounting Equation.
(6)
Accounting Period Concept:
To be able to prepare the income statement for a business, the period for
which it is to be prepared must first be specified. Very often the accounting
period chosen is a calendar year (January 1 December 31) or a fiscal year
(April 1 March 31).
(7) Realization Concept: With this concept, accounts recognize
transactions (and any profits arising from them) at the point of sale or
transfer of legal ownership - rather than just when cash actually changes
hands. For example, a company that makes a sale to a customer can
recognize that sale when the transaction is legal - at the point of contract.
The actual payment due from the customer may not arise until several weeks
(or months) later - if the customer has been granted some credit terms.
(8)
Matching Concept:
In order to determine the profits or losses accrued in an accounting period,

the expenses must relate to the goods or services sold during the period. For
instance, assume a situation where nine products are manufactured in an
accounting period, seven products are dispatched and money is received on
only five. Let the selling price and cost per product is Rs.10 and Rs.6
respectively. Then, depending on whether the sale is recognized at
production or dispatch or collection, the revenue would be Rs.90 or Rs.70 or

Rs.50 respectively. And the cost of goods sold under the three situations will
be Rs.54, Rs.42 and Rs.30 respectively. Thus it is clear that the cost derives
its relevance only from the sale and not vice-versa. It is for this reason that
revenue recognition always precedes the matching of cost. If revenue or sale
is not defined, the cost cannot be defined either.
ACCOUNTING CONVENTIONS:
Conventions are based on what is practicable; these are the methods or
procedures employed generally by accounting practitioners. For example,
dividing a centimeter into ten equal parts is a convention rather than a
concept. They are based on custom and are subject to change as new
developments arise.
Some of the accounting conventions are as follows:
(1) Materiality:
An important convention As we can see from the application of accounting
standards and accounting policies, the preparation of accounts involves a
high degree of judgment. According to this, the accountant should attach
importance to material details & ignore insignificant details.
(2) Prudence/Conservatism:
Profits are not recognized until a sale has been completed. In addition, a
cautious view is taken for future problems and costs of the business. For
example, a sales manager might have finalized a deal with his client for, say,
sale of 100 units of their product. But unless these items are produced and
delivered to the client there is no reasonable certainty about receiving the
payment for these 100 units. It is only thereafter that he can record the sales
amount on those 100 units as due from the client. But, on the other hand, if
he comes to know that a customer has lost all his assets and is likely to
default payment, then he should immediately provide for such loss.
(3) Consistency:
There are in practice several ways of treating an event that may be recorded
in the accounts. The consistency concept requires that once an entity has
decided on one method, it will treat all subsequent events of the same
character in the same fashion unless it has a sound reason to change the
method of treatment of that event. For example, if a concern is valuing its
inventory by a particular method in one year it is expected to value its

inventory in the subsequent years also in the same method unless there is a
strong reason to change the same. Similarly, if it is charging depreciation by
one method it is expected to follow the same method in the subsequent years
also.
(4) Full disclosure:
According to this convention accounting report should disclose fully &
fairly the information they purport to represent. They should be honestly
prepared & sufficiently disclose information which is of material interest to
proprietors, to present & potential creditors & to investors.
CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING:
At the end of this chapter you will be conversant with:
4.1 Single Entry System
4.2 Double Entry System
4.3 Systems of Accounting
Accounting Equation:
In Chapter 2, it was stated that, under the duality concept that sources of
funds must always equal to uses of funds and from this equality was derived.
The fundamental accounting equation:
Total Liabilities = Total Assets
(or)
(or)
Assets = Capital + Liabilities
(or)
Resources = Sources of Finance
(or)
Assets = Internal Equity + External Equity

Where assets refer to resources which are owned by business enterprises,
liabilities are debts payable to parties external to business and capital means
the amount payable to owner of the business enterprise.
It was also evident from the earlier discussions that any of the following is a
source of funds, in business:
Incurring Liability (including owners equity)
Earning Revenue
Making Profits.
It stands to reason that a decrease in liability, revenue or profit must be a use

of funds being the opposite of a source.
Similarly, any of the following is a use of funds:
Acquiring Assets
Incurring Expenses
Incurring Losses.
A business is started with a capital of Rs.10,000 brought in cash. The above

event gives rise to a cash balance of Rs.10,000, which, being an increase in
an asset (namely cash), is a use.
At the same time, the business now owes Rs.10,000 to the owner who
invests the capital in it, so that the owners equity in the business is
Rs.10,000. This being a liability of the business towards the owner,
constitutes a source.
Steps Involved In Developing Accounting Equation:

An accounting equation may be developed by taking the steps given below:
Step 1 Ascertain the variables of an equation affected by a transaction
Step 2- Find out the effect of a transaction on the variables of an equation
Step 3 Show the effect on the appropriate side of an equation and ensure
that the total of right hand side is equal to the total of left hand side
Illustration 1:- A started business with Rs 1,00,000. Analyze the transaction

and give Accounting Equation.
Step 1- Variables affected
Asset & Capital
Step 2- Effect of transactions on affected

variables
Increase in asset & Capital
Step 3- Accounting equation
Asset = Liability + Capital

1,00,000 = 0+ 1,00,000
Illustration 2:- Borrowed Rs 50,000 from ICICI Bank.

Asset & Liability

variables
Increase in asset & Liability

1,00,000 = 50,000+ 0
Systems of Accounting:ACCRUAL BASIS OF ACCOUNTING & CASH BASIS OF

ACCOUNTING:
Accrual Basis of accounting is a method of recording transactions by which
revenue, cash, assets & liabilities are reflected in the accounts for the period
in which they accrue. Whereas cash basis accounting in which actual
receipts or actual payments are made. These two methods can be
differentiated in tabular form as follows:
BASIS OF DISTINCTION
ACCRUAL
CASH
BASIS
BASIS
1 Prepaid/outstanding
expenses/accrued/unaccr
ued income
These things are

treated in this
accounting
Whereas no entry is done

in cash basis accounting
2 Income status in case of

prepaid expenses &
accrued income
Income statement
Income statement will
will show a relatively show lower income
high income
3 Income status in case of

o/s exp and unaccrued
income
Income statement
Income statement will
will show a relatively show a high income
lower income
4 Recognition under
companies Act 1956
It is recognized
Not recognized
5 Availability of choosing
accounting option like
LIFO/FIFO/SLM/WDV
Under this an
accountant has an
option
Whereas under this an

accountant has no option
to make a choice as such
CHAPTER 5 RECORDING OF ACCOUNTING TRANSACTIONS:

5.6 OPENING ENTRY:
A journal entry by means of which the balances of various assets, liabilities
& capital appearing in the balance sheet of previous accounting period are
brought forward in the books of current accounting period, is known as
opening entry.
6.3 CASH BOOK
Cashbook is a special journal in which all cash transactions are recorded
directly. Cashbook shows the cash receipts and the cash payments. The
Cashbook resembles a ledger with the debit and credit sides, and the balance
represents cash on hand at the end of the accounting period. As soon as the
cash transaction takes place, it is recorded in the Cashbook. Cash account is
not opened separately, when a Cashbook is maintained because Cashbook
serves the purpose of the ledger also.
Conceptual framework is presented for Financial Accounting in the
following figure:
Figure: Conceptual Framework and Financial Accounting
In other words:
The subject of Financial Accounting is based on the double entry

system of accounting using debits and credits.
Cash transactions are entered in Cashbook.
Credit transactions (non-cash transactions) are entered in the Journal.
The transactions of Cashbook and journal are integrated into the

Ledger, which is a summary of all cash and credit entries.
When all the ledger accounts are tabulated as a summary statement it

is known as Trial Balance.
Trial Balance establishes the arithmetical accuracy of the accounting

records.
From the trial balance two separate accounting documents are

prepared namely Profit and Loss Account and Balance Sheet.
All income and expenditure accounts are taken to Profit and Loss
Account.
All assets and liabilities accounts are taken to Balance Sheet.

The net result of Profit and Loss Account namely Profit or Loss is
taken to Balance Sheet.
book-keeping:
Course Objective:
To develop conceptual understanding of the fundamentals of financial
system which processes transactions and other events through a bookkeeping mechanism to prepare financial statements, and also to impart skills
in accounting for recording various kinds of business transactions.
Course Contents:
Module I:
Basics of book-keeping and accounting definition and its usefulness.
Branches of accounting. Financial accounting principles, concepts and
convention. Accounting standards national and international (basic
knowledge).
Chapter 4 Systems of Book-Keeping & Accounting
22
CHAPTER-1 MEANING & SCOPE OF ACCOUNTING:
1.1 Accountancy, Accounting & Book-keeping
1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: Book-keeping is a part of Accounting. Accounting is a part of Accountancy.
Accountancy: refers to a systematic knowledge of accounting.
Accounting: Refers to the actual process of preparing & presenting the
accounts.
CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING:
4.1 SINGLE ENTRY SYSTEM:An incomplete double entry can be termed as a single entry system.
According to Kohler it is a system of book-keeping in which as a rule only
records of cash & personal accounts are maintained, it is always incomplete
double entry, varying with circumstances. This system has been developed
by some business houses where, for their convenience, only some essential
records are kept. Since all records are not kept, the system is not reliable &
can be used only by small business firms.
Q 2 What is basic accounting equation?

Basic Accounting Equation:
Definition: The basic accounting equation forms the logical basis for double
entry accounting. The formula is:
Assets = Liabilities + Shareholders' Equity
The three components of the basic accounting formula are:
Assets. These are the tangible and intangible assets of a business, such
as cash, accounts receivable, inventory, and fixed assets.
Liabilities. These are the obligations of a business to pay its creditors,

such as for accounts payable, accrued wages, and loans.
Shareholders' equity. This is funds obtained from investors, as well as

accumulated profits that have not been distributed to investors.
In essence, a business uses liabilities and shareholders' equity to obtain

sufficient funding for the assets its needs to operate.
The basic accounting formula must balance at all times. If not, a journal
entry was entered incorrectly, and must be fixed before financial statements
can be issued. This balancing requirement is most easily seen in the balance
sheet (also known as the statement of financial position), where the total of
all assets must equal the combination of all liabilities and all shareholders'
equity.
The basic accounting equation is one of the fundamental underpinnings of
accounting, since it forms the basis for the recordation of all accounting
transactions. In essence, if both sides of the basic accounting equation do not
match at all times, there is an error in the accounting system that must be
corrected.
The following table shows how a number of typical accounting transactions

are recorded within the framework of the accounting equation:
Transaction Type
Assets
Buy fixed assets on credit Fixed assets increase
Buy inventory on credit
Inventory increases
Pay dividends
Cash decreases
Pay rent
Cash decreases
Pay supplier invoices
Cash decreases
Sell goods on credit (part

1)
Inventory decreases
Sell goods on credit (part Accounts receivable

2)
Sell services on credit
Sell stock
increases
Accounts receivable
increases
Cash increases
Liabilities + Equity
Accounts payable (liability)
increases
increases
Retained earnings (equity)
decreases
Income (equity) decreases
decreases
Income (equity) decreases
Income (equity) increases
Income (equity) increases

Equity increases
The basic accounting equation only relates to the double entry bookkeeping
system, where all entries made are intended to balance using this equation. If
you are using a single entry system, the equation does not apply.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

The double entry system of accounting is based on a set of principles which
are called Generally Accepted Accounting Principles (GAAP). GAAP may
be defined as those rules of action or conduct which are derived from
experience and practice and when they prove useful, they become accepted
as principles of accounting.
These principles enable to certain extent standardization in recording and
reporting of information so that the users, once they are aware of the
principles, can read and understand the financial statements prepared by
diverse organizations.
Acceptance of accounting principles depends on following three criteria:
Relevance: - A principle is relevant to the extent it results in
information that is meaningful & useful to the users of accounting
information.
Objectivity: - it connotes reliability & trustworthiness.
Feasibility: - A principle is feasible to the extent it can be
implemented without much complexity & cost.
Principles can be classified into two categories:
(i)
Accounting concepts
(ii) Accounting conventions
ACCOUNTING CONCEPTS:
The term concepts include those basic assumptions or conditions upon
which the science of accounting is based. The following are the important
accounting concepts:
(1) Money Measurement Concept:
In financial accountancy, a record is made only of information that can be
expressed in monetary terms. Recording, classification and summarization
of business transactions requires a common unit of measurement which is
taken as money. If events cannot be quantified in monetary terms then they
do not facilitate accounting. Money is the standard of exchange and the
changes in purchasing power caused by inflation are ignored for the purpose
of accounting because the assumption about the stability of money,
notwithstanding its limitations, is a necessity for ensuring a smooth
accounting process. Hence, all transactions are recorded through a common
denominator, namely the monetary unit.
(2) Cost Concept:Cost concept implies that in accounting, all transactions are generally
recorded at cost, and not at market value. For example, if a piece of land is
acquired for Rs.1 lakh, it would continue to be shown in the balance sheet at
Rs.1 lakh, even when the market value of the land rises to say Rs.2 lakhs.
Why should this be so? This is because; cost concept is in fact closely
related to the going concern concept. If the land is acquired for the
operations of the business and would continue to be used for its operations
and would not be sold shortly, then it is largely immaterial what the lands
market value is, since it is not going to be sold anyway. Thus, it is consistent
with going concern concept to keep recording the land at cost, i.e. Rs.1 lakh
on an ongoing basis.
(3) Business Entity/Separate Entity Concept:
The legal entity of a corporate business, as distinct from the entity of its
owners is well understood today. Less understood, however, is the
accounting entity of a business as distinct from its owners? For example, for
many purposes, the legal entity of a sole proprietary business may not be
very distinct from the entity of the proprietor himself. However, the business
entity concept requires that this should not come in the way of treating the
business as a distinct accounting entity for the purposes of treating
transactions relating to the operations of the business. It is in accordance
with this concept that when an owner brings capital into the business, the
business in turn is deemed to owe the capital to the owner.
(4) Going Concern Concept:
A business entity is assumed to carry on its operations forever. Seemingly
inconsequential, this is a fundamental concept which has far reaching
consequences. This is because it is difficult to envisage any economic
activity on the part of a business entity if its liquidation were shortly
expected. Going concern concept implies that the resources of the concern
would continue to be used for the purposes for which they are meant to be
used. For instance, in a manufacturing concern, the land, buildings,
machinery etc., are primarily required for carrying out the production and
selling of certain products. Going concern concept implies that these land,
buildings, machinery etc., would continue to be used for this purpose
(5) Duality or Accounting Equivalence Concept:
It can easily be seen that in business, as elsewhere, funds can be raised in

any of the following ways:
Additional capital (increases owners equity)
Additional loans (increases outside liability)
Earning revenue (increases owners equity)
Making profits (increases owners equity)
Disposing or reducing some of the assets (reduces assets).
Thus, all increases in liabilities (including owners equity) and reduction in

assets represent sources of funds.
Similarly, the funds thus raised, may be put to any of the following uses:
Purchasing of assets (increases assets)
Incurring operational expenses (decreases owners equity)
Discharging earlier liabilities (decreases liability)
Keeping idle funds so that cash balance increases (increases assets)
Suffering losses (decreases owners equity).
Thus all increases in assets and decreases in liabilities (including owners

equity) are uses of funds.
A little reflection must reveal that in a business, the sum of the Sources of
Funds must equal the sum of Uses of Funds. This is because, whatever funds
are raised by the business, either through capital or operations or from
outsiders, must be tied up in one or the other form of uses.
Thus the duality or accounting equivalence concept implies that:
This equation is known as the Fundamental Accounting Equation.
(6) Accounting Period Concept:
To be able to prepare the income statement for a business, the period for
which it is to be prepared must first be specified. Very often the accounting
period chosen is a calendar year (January 1 December 31) or a fiscal year
(April 1 March 31).
(7) Realization Concept: With this concept, accounts recognize
Transactions (and any profits arising from them) at the point of sale or
transfer of legal ownership - rather than just when cash actually changes
hands. For example, a company that makes a sale to a customer can
recognize that sale when the transaction is legal - at the point of contract.
The actual payment due from the customer may not arise until several weeks
(or months) later - if the customer has been granted some credit terms.
(8) Matching Concept:
In order to determine the profits or losses accrued in an accounting period,

the expenses must relate to the goods or services sold during the period.
For instance, assume a situation where nine products are manufactured in
an accounting period, seven products are dispatched and money is received
on only five. Let the selling price and cost per product be Rs.10 and Rs.6
respectively. Then, depending on whether the sale is recognized at
production or dispatch or collection, the revenue would be Rs.90 or Rs.70
or Rs.50 respectively. And the cost of goods sold under the three situations
will be Rs.54, Rs.42 and Rs.30 respectively. Thus it is clear that the cost
derives its relevance only from the sale and not vice-versa. It is for this
reason that revenue recognition always precedes the matching of cost. If
revenue or sale is not defined, the cost cannot be defined either.
ACCOUNTING CONVENTIONS:
Conventions are based on what is practicable; these are the methods or
procedures employed generally by accounting practitioners. For example,
dividing a centimeter into ten equal parts is a convention rather than a
concept. They are based on custom and are subject to change as new
developments arise.
Some of the accounting conventions are as follows:
(1) Materiality:
An important convention as we can see from the application of accounting
standards and accounting policies, the preparation of accounts involves a
high degree of judgment. According to this, the accountant should attach
importance to material details & ignore insignificant details.
(2) Prudence/Conservatism:
Profits are not recognized until a sale has been completed. In addition, a
cautious view is taken for future problems and costs of the business. For
example, a sales manager might have finalized a deal with his client for,
say, sale of 100 units of their product. But unless these items are produced
and delivered to the client there is no reasonable certainty about receiving
the payment for these 100 units. It is only thereafter that he can record the
sales amount on those 100 units as due from the client. But, on the other
hand, if he comes to know that a customer has lost all his assets and is
likely to default payment, then he should immediately provide for such
loss.
(3) Consistency:
There are in practice several ways of treating an event that may be recorded
in the accounts. The consistency concept requires that once an entity has
decided on one method, it will treat all subsequent events of the same
character in the same fashion unless it has a sound reason to change the
method of treatment of that event. For example, if a concern is valuing its
inventory by a particular method in one year it is expected to value its
inventory in the subsequent years also in the same method unless there is a
strong reason to change the same. Similarly, if it is charging depreciation
by one method it is expected to follow the same method in the subsequent
years also.
(4) Full disclosure:
According to this convention accounting report should disclose fully &
fairly the information they purport to represent. They should be honestly
prepared & sufficiently disclose information which is of material interest to
proprietors, to present & potential creditors & to investors.
DOUBLE ENTRY SYSTEM:All the business transactions have two fold effects. Recording of both
aspects of a transaction is called Double Entry system of bookkeeping.
Accounting Equation:
It was stated that, under the duality concept that sources of funds must
always equal to uses of funds and from this equality was derived. The
fundamental accounting equation:
Total Liabilities = Total Assets
(Or)
(Or)
Assets = Capital + Liabilities
(Or)
Resources = Sources of Finance
(Or)
Assets = Internal Equity + External Equity
Where assets refer to resources which are owned by business enterprises,

liabilities are debts payable to parties external to business and capital means
the amount payable to owner of the business enterprise.
It was also evident from the earlier discussions that any of the following is
a source of funds, in business:
Incurring Liability (including owners equity)
Earning Revenue
Making Profits.
It stands to reason that a decrease in liability, revenue or profit must be a
use of funds being the opposite of a source.
Similarly, any of the following is a use of funds:
Acquiring Assets
Incurring Expenses
Incurring Losses.
A business is started with a capital of Rs.10, 000 brought in cash. The
above event gives rise to a cash balance of Rs.10, 000, which, being an
increase in an asset (namely cash), is a use.
At the same time, the business now owes Rs.10, 000 to the owner who
invests the capital in it, so that the owners equity in the business is Rs.10,
000. This being a liability of the business towards the owner constitutes a
source.
Steps Involved In Developing Accounting Equation:
An accounting equation may be developed by taking the steps given below:
Steps 1 Ascertain the variables of an equation affected by a transaction
Step 2- Find out the effect of a transaction on the variables of an equation
Step 3 Show the effect on the appropriate side of an equation and ensure
that the total of right hand side is equal to the total of left hand side
Illustration 1:A started business with Rs 1, 00,000 analyze. The transaction and give
Accounting Equation.
Asset & Capital

variables
Increase in asset & Capital

1,00,000 = 0+ 1,00,000
Illustration 2:
- Borrowed Rs 50,000 from ICICI Bank.
Asset & Liability

variables

1,00,000 = 50,000+ 0
Illustration 3:
- Purchased furniture worth Rs. 100000.
Assets

variables
Increase & Decrease in

assets

+1,00,000 1,00,000 = 0 + 0
Illustration 4:
- Purchased goods for cash 20,000.
Assets

variables
Increase & Decrease in

assets

+20,000-20,000 = 0 + 0
Illustration 5: - Purchased goods on credit for Rs 50000.

Asset and Liability

variables

50,000 = 50,000 + 0
Illustration 6:- Sold goods costing Rs 10,000 for Rs 12000.

Assets & Capital

variables
Increase in one asset &

Decrease in another asset &
Increase in Capital

+12,000-10,000 = 0 + 2000
Illustration 7: - Sold goods costing Rs 20,000 on credit for Rs 25,000.

Assets & Capital

variables

Decrease in another asset &
Increase in Capital

+25,000-20,000 = 0 + 5000
Illustration 8:- Returned goods costing Rs 5,000 to suppliers of goods.

Asset & Liability

variables
decrease in asset & Liability

-5000 = -5000+ 0
Illustration 9:- Received cash from a customer Rs 20,000.

Assets

variables

Decrease in another asset.

+20,000 20,000 = 0+ 0
Illustration 10: -Withdrew cash Rs 2,000 for personal use.

Asset & Capital

variables
decrease in asset & Capital

-2000 = 0 - 2000
Q 3 What is Journalizing? Give a format of Journal &

briefly explain its content.
MAENING & FORMAT OF JOURNAL:
A journal is a book in which transactions are recorded in chronological
order. It is called a book of prime entry or original entry.
FORMAT OF JOURNAL
Date
Particulars
L.F.
Debit
Rs.
Credit
Rs.
The date on which transactions have taken place is entered in the date
column. Two aspects of the transaction are recorded in the particulars
column. A brief description of the transaction is also given in the
particulars column. The Ledger Folio (L.F.) column is meant for writing
the number of the page in the ledger in which the particular transaction is
entered. The amount to be debited is entered in the debit column and the
amount to be credited is entered in the credit column.
STEPS IN JOURNALIZING:
1.
Ascertain what accounts are involved in a transaction?
2.
Ascertain what is the nature of the accounts involved?
3.
Ascertain what rule of debit & credit is applicable for each of the
accounts involved?
4.
Ascertain what account is to be debited and credited?
5.
Record the date of transaction in the date column.
6.
Write the name of accounts to be debited & credited (with
abbreviation Dr. & Cr) in particular column
7.
Write narration in brief describing the transaction.
8.
Draw a line to separate one journal entry from other.
Note: - L.F. column is filled at the time of posting into the ledger.
Illustration 2:XYZ Ltd. received Rs.1, 000 from Geet & Co. on 5-1-2001
Recording the journal entry in the books of XYZ Ltd
Step 1 the two accounts involved in the above transaction is (i) money being
received, and (ii) the person paying the amount i.e., Geet & Co.
Step 2 the nature of the accounts are (i) Real account, and (ii) Personal
account respectively.
Step 3
(a) The rule applicable to real account is debit what comes in and credit
what goes out. In the given transaction, cash is coming in, therefore debit
cash account.
(b) The rule for personal account is debit the receiver and credit the
giver. In the above transaction, Geet & Co. is the giver, therefore credit
Geet & Co.
Journal:
Date
Particulars
5.1.2001 Cash a/c
L.F. Debit. Credit

Rs.
Rs.
Dr.
1,000
To Geet & Co. a/c

(Being cash received from Geet & Co.)
1,000
Let us apply the rules of debit and credit for a few sample transactions after
ascertaining dual aspects
Transaction Aspects
Account Reason for Account

Debited the Debit Credited
ABC Ltd.
received
Rs.5,000
from Gupta
Cash a/c Cash a/c is a Gupta & Co. Gupta & Co a/c is a
Real a/c.
Personal a/c. The
The rule of
rule of Credit the
Debit what
Aspect 1 cash
of Rs.5,000 is
received.
Aspect 2 The
Reason for the

Credit
Transaction Aspects
Account Reason for Account

Debited the Debit Credited
Reason for the

Credit
& Company amount is given

(In the books by Gupta & Co.
of ABC Ltd.)
comes in
applies.
giver applies.
PQR Ltd.
purchased
Rs.6,000
worth of
goods from
X Co.
(In the books
of PQR Ltd.)
Aspect 1 Goods Inventory

of Rs.6,000 are a/c (or
received.
Purchase
Aspect 2 The s a/c)
goods are
supplied by X
Co.
Inventory X Co. a/c

a/c or
Purchases
a/c in
Nominal
a/c. The
Rule is Debt
all
Expenses.
X Co. a/c is a
personal a/c. The
rule of Credit the
giver applies.
XYZ Ltd.
paid the
salaries of
Rs.15,500 to
its staff for
the month
through bank
transfer.
(In the books
of XYZ Ltd.)
Aspect 1
Salaries
Payment of an a/c
expense of
Rs.15,500.
Aspect 2 Bank
balance is
reduced by
Rs.15,500.
Salaries a/c Bank a/c

is a
Nominal
a/c. The rule
of Debit all
expenses
applies.
Bank a/c is a
personal a/c the rule
of Credit the giver
applies
Illustration 3:
Journalize the following transactions in the books of Dixit Enterprises.
i.
Started business with a capital of Rs.7,50,000.
ii.
Opened a bank account with State Bank of India for Rs.2,00,000.
iii.
Purchased goods from Tandon & Co. for cash Rs.1,00,000.
iv.
Purchased goods from Burman for Rs.2,00,000.
v.
Goods returned to Mr Burman Rs.50,000.
vi.
Paid Rs.1,40,000 to Mr Burman in full settlement of his dues.
vii.
Paid Mr Dharam, the landlord Rs.50, 000 towards rent.
viii. Withdrew cash for household expenses Rs.60,000.

ix.
Sold goods to Mr. Karan for cash Rs.2,50,000.
x.
Sold goods to Mr Dev on credit Rs.1,00,000.
xi.
Goods returned by Mr. Dev for Rs.25, 000.
xii.
Received cash from Mr. Dev Rs.70, 000 in full settlement.
xiii. Paid cartage on goods purchased Rs.35, 000.

xiv.
Paid cartage on goods sold Rs.80,000.
xv.
Purchased furniture for office purpose Rs.1,00,000.
xvi.
Purchased furniture for re-sale Rs.1, 00,000.
xvii. Sold furniture out of those meant for resale Rs.1, 50,000.
xviii. Paid rent out of personal cash Rs.40, 000.
Solution:
Date Particulars
i.
ii.
iii.
iv.
v.
vi.
Cash A/c
Dr
To Capital A/c
(Being cash invested in the business)
Bank A/c
Dr.
To Cash A/c
(Being cash deposited in the Bank)
Purchases A/c Dr.
To Cash A/c
(Being goods purchased from Tandon & Co. for cash)
Purchases A/c Dr.
To Burman A/c
(Being goods purchased from Burman on credit)
Burman A/c Dr.
To Returns outward A/c
(Being goods returned to Burman)
Burman A/c
Dr.
To Returns outward A/c
To Discount Received A/c
L.F
Debit
Rs.
Credit
Rs.
7,50,000
7,50,000
2,00,000
2,00,000
1,00,000
1,00,000
2,00,000
2,00,000
50,000
50,000
1,50,000
1,40,000
10,000
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi
xvii.
xviii.
(Being cash paid to Mr Burman and received discount)

Rent A/c Dr.
To Cash A/c
(Being rent paid in cash)
Drawings A/c
Dr.
To Cash
(Being cash withdrawn for household expenses)
Cash A/c
Dr.
To Sales A/c
(Being goods sold for cash)
Dev A/c
Dr.
To Sales A/c
(Being goods sold to Dev on credit)
Returns Inward A/c Dr.
To Dev A/c
(Being goods returned by Dev)
Cash A/c
Dr.
Discount Allowed A/c Dr.
To Dev A/c
(Being cash received from Dev and allowed him
discount)
Cartage Inward A/c Dr.
To Cash A/c
(Being cartage paid on goods purchased)
Cartage Outwards A/ Dr.
To Cash A/c
(Being cartage paid on goods sold)
Furniture A/c Dr.
To Cash A/c
(Being furniture purchased on cash for office)
Purchases A/c Dr.
To Cash A/c
(Being furniture purchased on cash for re-sale)
Cash A/c Dr.
To Sales A/c
(Being furniture meant for resale sold for cash)
Rent A/c Dr.
To Capital A/c
(Being rent paid out of personal cash)
50,000
50,000
60,000
60,000
2,50,000
2,50,000
1,00,000
1,00,000
25,000
25,000
70,000
5,000
75,000
35,000
35,000
80,000
80,000
1,00,000
1,00,000
1,00,000
1,00,000
1,50,000
1,50,000
40,000
40,000
Illustration 4:
Special transactions:
Journalize the following transactions in the Books of Rakesh for the month
of January, 2001
Date
Transactions
2.1.2001
8.1.2001
9.1.2001
10.1.2001
11.1.2001
12.1.2001
12.1.2001
25.1.2001
Withdrawn cash for personal use Rs.2,500

Withdrawn goods for personal use (Sale price Rs.1,500, CostRs.1,250)
Goods distributed to children in an orphanage (Sale price Rs.2,000 Cost
Rs.17,000)
Goods distributed as free samples (Sale price Rs.1,200; Cost Rs.1,000)
Goods stolen (Sale price Rs.1,000 Cost Rs.800)
Goods destroyed by fire (Sale price Rs.1,500 Cost Rs.1,250)
Goods used in furnishing the office (Sale prices Rs.2,000 Cost price
Rs.1,750)
Recovered from Pramod half the amount which was written off as
bad Rs.300 was written off as bad earlier.
Rs.250 payable by Rakesh was written off as bad.
28.1.200
Solution:
In the Books of Rakesh
Journal Entries
Date
Particulars
2.1.2001
Drawings a/c
Dr.
To Cash a/c
(Being cash withdrawn for personal use)
Drawings a/c.
Dr.
To Purchases a/c
(Being goods withdrawn for personal use)
Donation a/c
Dr.
To Purchases a/c
(Being goods distributed to the children in an
orphanage)
Sales Promotion a/c Dr.
To Purchases a/c
(Being goods distributed as free samples)
Loss by Theft a/c
Dr.
To Purchases a/c
(Being goods stolen)
Loss by fire a/c
Dr.
To Purchases a/c
(Being goods destroyed by fire)
Office furniture a/c
Dr.
To Purchases a/c
(Being goods used in furnishing the office)
Cash a/c
Dr.
8.1.2001
9.1.2001
10.1.2001
11.1.2001
12.1.2001
12.1.2001
L.F.
Debit
Rs.
Credit
Rs.
2,500
2,500
1,250
1,250
1,700
1,700
1,000
1,000
800
800
1,250
1,250
1,750
1,750
150
150
To Bad Debts Recovered a/c

(Being cash recovered out of an amount which was
written off as bad earlier)
Bad Debts a/c
Dr.
To Rakesh a/c
(Being amount due from Rakesh written off as bad)
25.1.2001
28.1.2001
250
250
COMPOUND JOURNAL ENTRY:

Sometimes there are a number of transactions on the same date relating to
one particular account or of one particular nature. Such transactions may be
recorded by means of a single entry instead of passing several journal
entries. Such an entry is termed as compound journal entry. It may be
recorded in any of the following three ways:
(i) One particular account may be debited while several other accounts may
be credited.
(ii) One particular account may be credited while several other accounts may
be debited.
(iii) Several accounts may be debited and several accounts may be credited.
Illustrations 5:
Journalize the following transactions in the Books of Rakesh for the month
of January, 2001.
Date
Transactions
2.1.2001 Purchased goods from Arora at the list price of Rs.8,000. A trade discount of
10% was allowed.
8.1.2001 Sold goods to Flora at a list price of Rs.4,000. A trade discount of 5% was
allowed.
15.1.2001 Received a cheque from Flora for Rs.3,600 in full settlement.
20.1.2001 Paid Arora Rs.7,000 by cheque in full settlement.
25.1.2001 Shyam is declared insolvent and received from his official receiver, a first &
final dividend of 60 paise in a rupee against a debt of Rs.2,500
Solution:
Journal Entries
Date
Particulars
L.F.
Debit
Rs.
2.1.2001 Purchases a/c

Dr.
To Arora a/c
(Being goods purchased from Arora for
8.1.2001 Rs.8,000 at a trade discount of 10%)
Flora a/c
Dr.
To Sales a/c
(Being goods sold to Flora for Rs.4,000 at a
15.1.2001 trade discount of 5%)
Bank a/c
Dr.
Discount Allowed a/c Dr.
To Flora a/c
(Being cheque received from Flora in full
settlement)
7,200
20.1.2001
7,200
Arora a/c
Dr.
To Bank a/c
To Discount received a/c
(Being cheque paid to Arora in full settlement)
Cash a/c
Dr.
25.1.2001 Bad Debts a/c
Dr.
To Shyam a/c
(Being 60 paise in a rupee received from
Shyam in full settlement of dues)
Credit
Rs.
7,200
3,800
3,800
3,600
200
3,800
7,000
200
1,500
1,000
2,500
OPENING ENTRY:
A journal entry by means of which the balances of various assets, liabilities
& capital appearing in the balance sheet of previous accounting period are
brought forward in the books of current accounting period, is known as
opening entry.
Illustration 6:
Pass the opening entry in the journal of Ram (as on 1st April 2008):
Cash in Hand Rs 50,000, stock of Rs 20,000, land & building Rs 1,0,00,00

plant & machinery Rs 50,000, furniture 20,000 owings from X ltd 15000,
loan from Y ltd 10,000.
Solution:
Date
Particulars
L.F.
Dr (Rs)
2008
Cash in hand
Dr
50,000
April1
Stock
Dr.
20,000
Land & Building
Dr.
1,00,000
Plant & Machinery Dr
50,000
Furniture
20,000
Dr
Cr (Rs)
To X Ltd
15000
To Loan from Y Ltd
10,000
To Rams capital A/c
2,15,000
(being the balance brought forward

from the last year)
TRADE DISCOUNT V/S CASH DISCOUNT:

TRADE DISCOUNT:
It is a reduction granted by a supplier from the list price of goods or service
on business considerations (such as quantity bought trade practices etc.)
other than for prompt payment. For example: If a supplier sells goods worth
Rs 10,000 at trade discount of 10%, trade discount will be calculated as
follows:
Price of Goods
Rs 10,000
Less: Trade discount
Rs 1,000
Amount payable as per invoice
Rs 9,000
CASH DISCOUNT:
A reduction granted by a supplier from the invoice price in consideration of
immediate payment or payment within a stipulated period. Example: If in
the above example, terms of payment 2%, 30 days, it means buyer will get
2% cash discount if he makes payment within 30 days. And the cash
discount will be calculated as follows:
Amount payable as per invoice
Rs 9,000
Cash discount
Rs 180
Cash paid within 30 days
Rs 8,820
Difference between these two discounts can be presented in tabular
form as follows:
Trade Discount
It is a reduction granted by supplier from
the list price of goods/ service on business
consideration other than for prompt
payment
It is given to promote sales
It is allowed on purchase
Cash Discount
A reduction granted by supplier from the
invoice price in consideration of immediate
payment or payment in stipulated period.
It is allowed to encourage prompt payment

It is given at the time of payment within
stipulated time period
It is shown in invoice itself.
It is not shown in invoice
Trade discount account is not opened in It is opened in ledger
ledger
It may vary with quantity purchased
It may vary with the payment period
LEDGER:
Ledger contains a classified summary of all transactions recorded in
Cashbook and journal. It is the main book of account. Ledger is also called
Principal book as final information pertaining to the financial position of a
business emerges only from the accounts
Format of ledger:
Date Particulars
J.F. Amou Date Particulars

nt
J.F. Amoun
t
The date column records the year, month and date of the transactions.
Particulars column records the title of the other account affected. Name of
the account in particulars column on the debit and credit side are preceded
by the words To and By respectively. Journal Folio (J.F.) column records
the page number of the journal from which the posting to the ledger has
taken place. Amount column on debit and credit side records the amount
mentioned in journal entry against the title of the account prepared.
Ledger Posting:
The process of transferring of debits and credits entries from the journal to
the ledger is called ledger posting.
STEPS IN LEDGER POSTING:
First of all the opening balance (if any) has to be posted. The opening entry
for various assets should be posted by writing To Balance b/f on the debit
side of the relevant account. Similarly, liabilities accounts should be posted
by writing By Balance b/f on the credit side of the relevant account.
1.
Enter the date of the transaction on the debit side of the relevant
account.
2.
The title of the account to be credited is preceded by the word To be
entered in the particulars column.
3.
In Journal Folio (J.F.) column enter the page number of the journal on
which the journal entry is passed.
4.
Amount column records the amount mentioned in the journal against
title of the account under consideration.
For posting of the account to be credited, above mentioned steps are
followed but with one difference. Now the recording is done on the credit
side of the account and in the particulars column title of the amount to be
debited is preceded by the word By.
Illustration 7:
Cash received from Geet & Co. Rs.1, 000 on 5.1.2001
Cash a/c
Dr. 1,000
To Geet & Co. a/c 1,000
Dr
Date
Particulars
CASH A/C
J.F. Amount Date
Particulars
Cr
J.F. Amount
5.1.2001
To Geet & Co
Dr.
Date
1,000
Geeta & Co A/c
Particulars
J.F. Amount Date
Cr.
Particulars
J.F. Amount
5.1.2001 By Cash a/c
1,000
BALANCING OF LEDGER:
After the posting has been completed accounts are balanced. Balancing of
an account means to make the total of amounts column appearing on the
debit and credit side equal to each other. If the total of debit side is greater
than the credit side, the difference between the two sides is known as debit
balance and likewise, if the total of credit side is greater, the difference is
known as credit balance. The difference is placed on the shorter side,
saying To (or By) balance carried down. The total is written on both sides
opposite each other and the account is ruled off. Personal accounts and real
accounts like capital accounts, machinery account, building account, etc.
are balanced. But nominal accounts representing expenses, revenues and
incomes are not balanced. They are transferred to the trading and profit and
loss account at the end of the year.
Illustration 8:
From the following information prepare the ledger account of Garewal in the
books of Rahman and bring down the balance as on 31st January, 2001.
1.1.2001
Sold goods for Rs.1, 00,000 less 25% trade discount.
4.1.2001
Garewal paid Rs.40, 000 on account, discount allowed Rs.4, 000.
6.1.2001
Sold goods for Rs.50, 000 less 25% trade discount.
9.1.2001
Received back 1/3rd of the goods sold on 6th January.
15.1.2001
Received cheque for Rs.60, 000, discount allowed thereon Rs.6,

000.
18.1.2001
Sold goods Rs.2, 00,000 less 25% trade discount.
20.1.2001
Bills Receivable accepted by Garewal for Rs.1, 00,000.
25.1.2001
Cheque received on 15th January was returned dishonored.
28.1.2001
Received cash Rs.75, 000.
Solution:
In the Books of Rahman
Garewals Account
Dr.
Date
Cr.
Particulars
1.1.2001 To Sales A/c

25.1.2001 To Bank A/c
Cheque dishonored
25.1.2001 To Discount Allowed

Cancellation of discount
J.F. Amount Date

Rs.
Particular
J.F. Amount
Rs.
75,000 4.1.2001
By Cash A/c
37,500 4.1.2001 By Discount Allowed a/c
By Returns Inward
1,50,000 9.1.2001
By Bank A/c
15.1.2001 By Discount Allowed
60,000 15.1.2001
A/c
By Bills Receivable A/c
By Cash a/c
By Balance c/d
28.1.2001
6,000 31.1.2001
40,000
40,000
12,500
60,000
6,000
1,00,000
75,000
31,000
3,28,500
3,28,500
1.2.2001 To Balance b/d
31,000
Q 4 what are the advantages of special Journal & list

them.
MEANING OF SPECIAL JOURNALS OR SUNSIDIARY BOOKS:
When the number of transactions is large, it is practically impossible to
record all the transactions through one journal. Special journal refer to
journals meant for specific transactions of similar nature. Special journals
are also known as subsidiary books or day books. The Performa & number
of special journals vary according to the requirements of each enterprise. In
any large organization following special journals are generally used:
Name of special journal
Specific transactions to be recorded
1 Cash Journals
(a) Simple cash book
Cash transactions
(b) cash book with discount column
Cash & discount transactions
cash book with bank & discount column
Cash, bank & discount transactions
(d) petty cash book
Petty cash transactions
2 Goods Journals
(a) Purchase book
Credit purchases of goods
(b) Sales book
Credit sales of goods
Sales return book (return inward book)
Goods returned by those customers to

whom goods were sold on credit
(d) Purchase return book (return outward

book)
Goods returned to those customers from

whom goods were purchased on credit
3. Bills Journals
(a) Bills receivable book
Bills receivable drawn
(b) Bills payable book
Bills payable accepted
4 Journal Proper
Those transactions which do not fall within

the scope of special journal
ADVANTAGES OF SPECIAL JOURNALS (SUBSIDIARY BOOKS):

1.
Facilitates division of work
2.
Permits the installation of internal check system
3.
Permits the use of specialized skill
4.
Time & labor saving in journalizing & posting
CASH BOOK:
Cashbook is a special journal in which all cash transactions are recorded

directly. Cashbook shows the cash receipts and the cash payments. The
Cashbook resembles a ledger with the debit and credit sides, and the balance
represents cash on hand at the end of the accounting period. As soon as the
cash transaction takes place, it is recorded in the Cashbook. Cash account is
not opened separately, when a Cashbook is maintained because Cashbook
serves the purpose of the ledger also.
Conceptual framework is presented for Financial Accounting in the
following figure:
Figure: Conceptual Framework and Financial Accounting
In other words:
The subject of Financial Accounting is based on the double

entry system of accounting using debits and credits.
Cash transactions are entered in Cashbook.
Credit transactions (non-cash transactions) are entered in the

Journal.
The transactions of Cashbook and journal are integrated into

the Ledger, which is a summary of all cash and credit entries.
When all the ledger accounts are tabulated as a summary

statement it is known as Trial Balance.
Trial Balance establishes the arithmetical accuracy of the

accounting records.
From the trial balance two separate accounting documents are

prepared namely Profit and Loss Account and Balance Sheet.
All income and expenditure accounts are taken to Profit and

Loss Account.
All assets and liabilities accounts are taken to Balance Sheet.
The net result of Profit and Loss Account namely Profit or Loss
is taken to Balance Sheet.
Thus the Balance Sheet tallies

The recording of transactions in the books of accounts may be represented as in Figure
3.5.
Figure 3.5: Recording of Transactions
TYPES OF CASH BOOK:

1.
Simple Cashbook/Single Column Cashbook
2.
Double Column Cashbook
3.
Three Column Cashbook
4.
Petty cash book
1. SIMPLE CASH BOOK:
In simple Cashbook all the cash transactions are recorded in chronological
order. All cash receipts are entered on the debit side and cash payments on
the credit side of the Cashbook. The difference between the two sides is
the cash in hand.
Illustration:
Prepare a single column Cashbook of Raja Ram from the following
particulars:
1.1..2001
He commenced business with Rs 1,00,000of which 20,000 was

borrowed from Mr Basant
2.1.2001
Purchased furniture for office use worth Rs 5,000
3.1.2001
Paid petty cash expenses of Rs.2,000.
4.1.2001
Bought goods from Mohan for cash Rs.20,000.
4.1.2001
Paid Rs.20,000 to Charat for goods purchased on credit.
5.1.2001
Sold goods to Shyam for cash Rs.10,000. Received Rs.38,000 from

Hari for goods sold on credit.
16.1.2001
Drew cash for personal use Rs.1,000.
31.1.2001
Paid salary to Sri Ram, an employee, Rs.1,500.
31.1.2001
Repaid the loan taken from Mr. Basant including interest @18% p.a.
Solution:
Cash book
Dr.
Date
Cr.
Particulars
1.1.2001. To Capital a/c

1.20011 To Loan from
Basant a/c
5.1.2001 To Sales
5.1.2001 To Haris a/c
LF
Date
Particulars
Rs.
80,000 2.1.2001 By Furniture a/cBy
20,000 3.1.2001 Petty Expenses a/c
10,000 4.1.2001 By Purchases a/c
38,000 4.1.2001 By Charat a/c
16.1.2001 By Drawings a/c
31.1.2001 By Salary a/c
31.1.2001 By Interest on Loan a/c
By Loan from Basant
31.1.2001 a/c
By Balance c/d
31.1.2001
1,48,000
To Balance b/d
78,200
LF
Rs.
5,000
2,000
20,000
20,000
1,000
1,500
300
20,000
78, 200
1,48,000
2. Double Column Cashbook (Cashbook with cash and discount

columns)
This Cashbook is an extension of simple Cashbook. An additional column
is maintained to record discount involved in the settlement of debtors and
creditors in the double column Cashbook. Cash discount usually occurs in
the settlement of trade debts. It is an allowance made by the receiver of
cash to the payer for the prompt payment. Cash received from debtors is
recorded in the cash column and discount allowed in the discount column
on the debit side of the Cashbook. Similarly, credit side of the Cashbook
records cash paid to the creditors in cash column and discount received in
the discount column
Double column cashbook also can be with cash and bank columns. In this
type of cashbook, the transactions involving cash and transactions involving
receipts and payments by cheques are recorded. It facilitates and enables the
business to maintain both cash and bank accounts simultaneously.
Illustration:
Compile Cashbook with discount column from the following transactions
for the month of March, 2001
1.3.2001
Mr. Ganesh commenced business with cash Rs.65, 000.
3.3.2001
Bought goods for cash Rs.6, 850.
4.3.2001
Paid Mr. Mohan cash Rs.950; discount was allowed thereon Rs.50.
6.3.2001
Deposited in bank Rs.40,000
6.3.2001
Paid for office furniture by cash Rs.4, 650.
9.3.2001
Sold goods for cash Rs.30, 000.
12.3.2001
Paid wages by cash Rs.1, 200.
13.3.2001
Paid for stationery Rs.400.
15.3.2001
17.3.2001
Paid for Miscellaneous expenses Rs.450.
19.3.2001
Received cash from Mr. Tilak 4,850; Allowed him discount Rs.150.
21.3.2001
Purchased a radio set for Rs.2, 500 for personal use.
22.3.2001
Paid salary Rs.4, 000.
25.3.2001
Paid rent Rs.900.
28.3.2001
Paid electricity bill Rs.350.
29.3.2001
Paid advertising expenses Rs.400.
31.3.2001
Paid into bank Rs.25, 000.
Solution:
CASH BOOK
Date
Particulars
1.3.2001 To Capital A/c

19.3.2001 To Tilak A/c
LF Discount Cash
Rs.
Rs.
150
150
65,000
30,000
25,000
4,850
1,24,850
Date
L.F Discount
Rs.
3.3.200 By Purchases a/cBy

14.3.2001 Mohan a/c
6.3.200 By Bank a/c
16.3.2001 By Office Furniture
a/c
12.3.2001 By Wages a/c
13.3.2001 By Stationary a/c
17.3.2001 By Miscellaneous
Expenses a/c
21.3.2001 By Drawings a/c
22.3.2001 By Salary a/c
25.3.2001 By Rent a/c
28.3.2001 By Electricity a/c
29.3.2001 By Advertising a/c
31.3.2001 By Bank a/c
31.3.2001 By Balance c/d
50
Cash
Rs.
6,850
950
40,000
4,650
1,200
400
450
2,500
4,000
900
350
400
25,000
37,200
50
3. Three Column Cashbook (Cashbook with cash, discount and bank

Columns)
With the development of banking sector, and frequent use of banking
instrument, Cashbook with additional column for bank transactions came
into existence. Thus, the three columns Cashbook is nothing but ledger
accounts for cash and bank with additional information about discount
allowed and discount received.
1,24,850
An illustrative format of this type of Cashbook is given below:

Cashbook of Excellent Enterprises
Dr.
Date Receipts
Discount Cash
allowed
2001
April, To Balance
1
b/f
Bank
Date
Payments
2001
1,500 13,000 April,
2
6
7
800
To Sales
To Arvind
11
Co
20
To Beta
Corpn
To sales
50
2,000
60
2,350
500
110
2,800 17,350
5
8
15
30
By Wage
for Casual
Sweeper
By Electricity
By Plumbing
Repairs
By Y Ltd.
By Balance c/f
Cr.
Discount Cash Bank
received
50
400
400
150
10,800
2,350 6,150
150 2,850 17,350
The Cashbook normally carries columns for Cash Memo No., Ledger Folio
No., Voucher No., etc.
The unique feature of the Cashbook is that it performs the functions of a
Journal and the General Ledger with regard to the cash and bank
transactions. In other words, Cashbook is the book of first entry for all such
transactions and the ledger accounts for cash in hand and cash at bank will
not be maintained in the General Ledger.
4. PETTY CASHBOOK:
When the petty cash fund is operated as an imprest fund, the recording of the
petty expenses paid will be made in the Petty Cashbook. This would also
avoid recording too many small value transactions in the main Cashbook.
The Petty Cashbook would contain a number of analytical columns for
grouping the various expenses under a few classifications which would
facilitate subsequent posting into the General Ledger.
THE IMPREST SYSTEM:
When an analytical Petty Cashbook is maintained for recording the petty

expenses, it will be practically more convenient to consider the petty cash as
a separate account and take cheques issued for the petty cash impress as a
debit to petty cash account and all petty expenses paid as credits in petty
cash account.
CONTRA ENTRIES:
If a transaction affects both cash account and bank account in the opposite
sides, the entry for recording the transaction is called a contra entry. Entries
which are made on both sides of the Cashbook are called contra entries. For
contra entries no posting is required because the double entry is completed
in the Cashbook itself. For example, cash deposited into bank and cash
withdrawn from bank affect cash and bank account only. Both aspects of
these transactions are recorded in cash column and bank column of the
Cashbook respectively. No ledger posting is required, because both aspects
of the transaction are recorded in the Cashbook itself. This fact is indicated
in the Cashbook by writing C in L.F. column
Illustration:
1.3.2001
Cash in hand
2,500
Cash at bank
10,000
2.3.2001
Paid into bank
1,000
5.3.2001
Bought furniture and issued cheque
2,000
8.3.2001
Purchased goods for cash
500
12.3.2001
Received cash from Mohinder
980
Discount allowed to him
20
14.3.2001
Cash Sales
4,000
16.3.2001
Paid to Amaranth by cheque
1,450
Discount received
50
19.3.2001
Paid into Bank
400
23.3.2001
Withdrawn from Bank for private expenses
600
24.3.2001
Received cheque from Patel
1,430
allowed him discount
20
28.3.2001
Withdrawn cash from bank for office use
30.3.2001
Paid rent by cheque
2,000
800
Solution:
CASH BOOK
Dr.
Date
1.3.2001
Cr.
Particulars LF Discount Cash

Allowed
Date
- 2,500 10,000 2.3.2001
12.3.2001 To Cash a/c 14.3.2001 To

Mohinder
19.3.2001 a/c
C
24.3.2001 To Sales a/c
20
2.3.2001
To
Balanceb/f
Bank
28.3.2001 To Cash
1,000
5.3.2001
980
8.3.2001
4,000
16.3.2001
400 19.3.2001
1,430 23.3.2001
20
2,000
28.3.2001
To Patel a/c
30.3.2001
To Bank
30.3.2001
40
31.3.2001
To Balance
b/d
9,480 12,830
7,580 5,980
Particulars LF Discount Cash Bank

By Bank a/c C
By Furniture a/c
By
Purchases
a/c
By Aamranth C
a/c
By Bank a/c
By Drawings C
a/c
By Cash a/c
By Rent a/c
By Balance
c/d
50
-
1,000
2,000
500 1450
400
600
-- 2,000
7580 800
5,980
40 9,480 12,830
-
Q 5 State the reasons for the difference between the

cash book balance & pass book balance.
Cash book is written by depositor and pass book is written by the bank. All
transactions related to bank are recorded in the bank column of the cash
book and these transactions are also recorded in the pass book by the bank.
Following are the main points of difference between cash book and pass
book:
Cash Book
1. It is written by the depositor.
2. Money deposited is recorded on the
debit side and money withdrawn on
credit side.
3. A check deposited for collection is
recorded on the date of deposit.
4. A check when issued to a creditor is
recorded on the date of issue.
5. Its debit balance shows cash at bank
and credit balance shows bank
overdraft.
Pass Book
1. It is written by the bank but remains in the
depositor's possession.
2. Money deposited is entered on the credit
side and withdrawn on the debit side.
3. It is recorded on the date when it is
actually collected from the debtor's bank.
4. It is recorded when it is paid by the bank
to the creditor.
5. Its debit balance shows bank overdraft and
credit balance shows cash at bank.
Examples are always the best way to understand. Consider the following
example:
Example:
Enter the following transactions in the cash book and pass book:
Jan.
2005
1. Mr. X opened a current account with Standard Chartered Bank.
3. Paid Mr. N by check.
5. Received a check from Mr. S and deposited into the bank.
8. Withdrew from bank for office use.
10. Paid rent by check.
14. Bank charges debited by bank
17. Paid Mr. Z by check
Solution:
Cash Book (bank column only)
$
80,000
8,000
16,000
6,000
10,000
400
3,000
Date Particulars V/N L/F

1.1.05 Cash A/C
C
Mr. S A/C
5
Bank
80,000
16,000
Date
3.1.05
8.1.05
10.1.05
Particulars V/N L/F

Mr. N A/C
7
Cash A/C
C
Rent A/C
9
Bank
14.1.05 Charges
11
A/C
17.1.05 Mr. Z A/C
13
Bank
8,000
6,000
10,000
400
3,000
68,600
68,600
68,600
Pass Book (A copy of depositor's account in banks ledger)

Date
1.1.05
3.1.05
5.1.05
8.1.05
10.1.05
14.1.05
17.1.05
Particulars
Cash
(Mr. N) Check No.......
(Mr. S) Check No.......
Cash: Check No.......
Check No.......paid
Bank charges
(Mr. Z) Check No.......
Debit
Credit
(withdrawals) (deposits)
80,000
8,000
16,000
6,000
10,000
400
3,000
Balance
80,000
72,000
88,000
82,000
72,000
71,600
68,600
It may be noted that the cash book is showing a debit balance (cash at bank)
or $68,600 and the pass book (depositor's A/C) is showing a credit balance
of $68,600. Both balances are equal but opposite generally these two
balances do not agree. To understand the reasons of disagreement, read our
causes of disagreement between cash book and pass book article.
BANK RECONCILIATION STATEMENT NOTES:
1. A businessman generally opens a current account with a bank. The
bank column of cash book is used for making entries regarding
deposited and withdrawals in this account.
2. On the other hand, the bank also maintains the customers account in
its books. A copy of this account, it submits to the customer from time
to time. The account so submitted by the bank of the customer is
known as the bank passbook or bank statement.
3. When money or cheque is deposited by the customer into the bank

account, the customer debits the bank account while the bank credits the
customers account. Similarly, when money is withdrawn from the bank, the
customer credits the bank account while bank debits the customers account.
4. DEFINITION OF BANKRECONCILIATION STATEMENT:
According to Patil, Bank reconciliation statement is a statement prepared
mainly to reconcile the difference between the Bank Balance shown by the
cash book and passbook.
5. According to William Pickles, Generally a statement is prepared to
show the effect of unpresented and unaccredited cheques. Such statement
is known as bank reconciliation statement.
6. CAUSES OF DIFFERENCE BETWEEN CASH BOOK AND PASS
BOOK:
The following are the causes of difference between the balance as shown
by the bank pass book and balance as shown by the cash book.
1. Cheque issued but not yet presented for payment: When cheque is
issued to the creditor in payment of his dues, it is immediately
recorded in the cash book in the bank column. If the cheque is not
presented for payment in the bank, the bank will not record in the
firms account. Generally, there is a time lag between the issue of a
cheque and its presentation to the bank. Thus, until the cheques are
presented for payment, the cash book will show lesser balance in
comparison.
2. Cheques paid into bank for collection but not yet credited by the bank:
A trader receives from time to time cheques, drafts, etc. from its
customers and he sends them to its bankers for collection. The trader
debit bank column of cash book as soon as he deposited cheques, drafts
etc. with the bank for collection but the bank credits the traders account
only after these cheques have been collected. The collection generally
takes a few days. It results in bank balance as per cash book higher than
the balance as per pass book.
3. Cheques paid into bank for collection but dishonored by the bank:
Sometimes, a cheque deposited into bank is dishonored. It has the same
effect as a cheque deposited but not yet credited.
4. Interest allowed by the bank: When bank allow interest to a customer

for deposits, it will credit customers account and his bank balance will
increase. But the customer is not making the entry in the cash book
simultaneously till he knows the fact, therefore, the balance differ. Thus,
the balance shown in cash book is less than the balance shown in the cash
book.
5. Interest and dividend collected by the bank: A banker may receive
amounts due to the customer by way of dividends, interest etc. directly
from the persons on account of standing instructions of the customer to
such persons. The bank credits the account of the customer for such
collection as soon as it gets such payments. But same will be entered in
the cash book only when customer receives the statement from the bank.
So long, the balance shown in the cash book is less than the balance
shown by the pass book.
6. Bank charges and commission charged by the bank: The bank charges by
way of incidental charges, commission, and collection charges etc. from its
customers for the services it renders to the customer from time to time. The
bank debits the customers account as soon as it renders such a service and
this reduces the bank balance. But the customer will know such charges only
when he receives a statement of account from the bank, until then, bank
balance as per pass book will be less than bank balance as per cash book.
7. Interest on bank overdraft: When a trader is allowed by the bank to
withdraw more than his deposits in the account, the excess withdrawal is
known as overdraft. The bank charges interest on overdrafts and debits the
customers account with these charges. But the customer will record this in
the cash book either on receiving intimation from the bank in his regard or
when he receives the bank pass book duly completed. Thus, the balances of
both books differ.
8. Direct payment made by the bank on behalf of customer: Usually an
accountholder instructs the bank to make certain payment on his behalf such
as payment for insurance premium, interest on loan, electricity bill etc. The
bank will debit the partys account on making the payment and this reduces
the bank balance. But the party has no information of the same till it is
informed. Thus, the balance shown in the cash book is more than the balance
shown by the pass book.
9. Direct deposit into bank by the debtors: Sometimes, debtors may
directly deposit the amount due in the firms bank account. The bank
credits the firms account immediately on receipt of such payment but the
firm will make entry in the cash book only after receiving intimation in
this regard. Thus, pass book shows more balance than the cash book.
10. Other reasons: Sometimes, the firm commits an error such as-:
(i) Cheque deposited into the bank omitted to be recorded in the cash book.
(ii) Cheque issued to a creditor but omitted to be recorded in the cash book.
(iii) Error in totaling or balancing the bank column of the cash book.
11. NEEDS AND IMPORTANCE of BANK RECONCILIATION
STATEMENT:
The need and importance of bank reconciliation statement can be judged
on the basis of the following facts:
1) It identifies the reasons for difference between the bank balance as

per cash book and the bank balance as per pass book. Necessary
adjustments or corrections can, therefore, be carried out at the earliest.
2) By preparing bank reconciliation statement, the customer becomes
sure of the correctness of the bank balance depicted by the cash book.
It helps him in making the further transactions with bank.
3) Periodic preparation of the bank reconciliation statement reduces
the chances of fraud by the cash staff. It may be possible that the
cashier may not deposit the money in the bank in time though he
might have passed the entry in the bank column of the cash book. The
bank reconciliation statement will point out to such discrepancies.
4) There is a moral check on the staff of the business organization to
keep the cash records always up-to-date.
12. UTILITY OF BANKRECONCILIATION STATEMENT:

1) It gives an authentic proof of the accuracy of the cash book and pass
book balances.
2) Entries in both the books are automatically checked.
3) The cash book may be made up-to-date by recording some either
unknown entries.
4) Error, if any, may be rectified.

13. MAIN POINTS REGARDING BANK RECONCILIATION
STATEMENT
1) Bank reconciliation statement is prepared by the customer.
2) Bank reconciliation statement may be prepared at any time.

3) Bank reconciliation statement is prepared by taking the balance of
cash book or pass book and at the end; the balance of pass book and cash
book are calculated.
14. Difference between Cash book & Pass book Cash book Pass book:
(i)
Given Balance Put, favorable Put, favorable balance in plus

balance in plus column & column & unfavorable bal. in
unfavorable balance minus column in minus column.
(ii) See effects of: ii)Increase in cash transaction on passbook bal. book
bal. means amount of amount of difference finding out balance difference
put in put in plus column i.e. pass book or plus column Cash book.
(ii)
(iii)
Decrease in pass: ii) Decrease in cash book balance means book

balance means amount of difference amount of difference put in
minus put in minus column.
Column. iii) Finding out Pass book: Cash book: balance.
a) Plus bal. a) Plus bal. shows favorable shows favorable bal. i.e. credit
bal. bal. i.e. debit bal.
b) Minus bal. b) minus bal. shows unfavorable bal. unfavorable bal. i.e.
debit bal. or i.e. credit bal. or overdraft.
MEANING OF SPECIAL JOURNALS OR SUNSIDIARY BOOKS:

When the number of transactions is large, it is practically impossible to
record all the transactions through one journal. Special journal refer to
journals meant for specific transactions of similar nature. Special journals
are also known as subsidiary books or day books. The Performa & number
of special journals vary according to the requirements of each enterprise. In

any large organization following special journals are generally used:
Name of special journal
Specific transactions to be recorded
1 Cash Journals
(a) Simple cash book
Cash transactions
(b) cash book with discount column
Cash & discount transactions
cash book with bank & discount column
Cash, bank & discount transactions
(d) petty cash book
Petty cash transactions
2 Goods Journals
(a) Purchase book
Credit purchases of goods
(b) Sales book
Credit sales of goods
Sales return book (return inward book)
Goods returned by those customers to

whom goods were sold on credit
(d) Purchase return book (return outward

book)
Goods returned to those customers from

whom goods were purchased on credit
3. Bills Journals
(a) Bills receivable book
Bills receivable drawn
(b) Bills payable book
Bills payable accepted
4 Journal Proper
Those transactions which do not fall within

the scope of special journal
TYPES OF CASH BOOK:

1.
Simple Cashbook/Single Column Cashbook
2.
Double Column Cashbook
3.
Three Column Cashbook
4.
Petty cash book
1.
SIMPLE CASH BOOK:
In simple Cashbook all the cash transactions are recorded in chronological

order. All cash receipts are entered on the debit side and cash payments on
the credit side of the Cashbook. The difference between the two sides is the
cash in hand.
Illustration:
Prepare a single column Cashbook of Raja Ram from the following
particulars:
1.1..2001
He commenced business with Rs 1,00,000of which 20,000 was

borrowed from Mr Basant
2.1.2001
Purchased furniture for office use worth Rs 5,000
3.1.2001
Paid petty cash expenses of Rs.2,000.
4.1.2001
Bought goods from Mohan for cash Rs.20,000.
4.1.2001
Paid Rs.20,000 to Charat for goods purchased on credit.
5.1.2001
Sold goods to Shyam for cash Rs.10,000. Received Rs.38,000 from

Hari for goods sold on credit.
16.1.2001
Drew cash for personal use Rs.1,000.
31.1.2001
Paid salary to Sri Ram, an employee, Rs.1,500.
31.1.2001
Repaid the loan taken from Mr. Basant including interest @18% p.a.
Solution:
Cash book
Date
Particulars
1.1.2001. To Capital a/c

1.20011 To Loan from
Basant a/c
5.1.2001 To Sales
5.1.2001 To Haris a/c
LF Rs.
Date
Particulars
LF Rs.
80,000 2.1.2001
20,000 3.1.2001
By Furniture a/cBy
Petty Expenses a/c
5,000
2,000
10,000 4.1.2001
38,000 4.1.2001
16.1.2001
31.1.2001
31.1.2001
By Purchases a/c
By Charat a/c
By Drawings a/c
By Salary a/c
By Interest on Loan
a/c
20,000
20,000
1,000
1,500
300
31.1.2001 By Loan from

Basant a/c
31.1.2001 By Balance c/d
20,000
78, 200
1,48,000
1,48,000
To Balance b/d
78,200
2. Double Column Cashbook (Cashbook with cash and discount columns)

This Cashbook is an extension of simple Cashbook. An additional column is
maintained to record discount involved in the settlement of debtors and
creditors in the double column Cashbook. Cash discount usually occurs in
the settlement of trade debts. It is an allowance made by the receiver of cash
to the payer for the prompt payment. Cash received from debtors is recorded
in the cash column and discount allowed in the discount column on the debit
side of the Cashbook. Similarly, credit side of the Cashbook records cash
paid to the creditors in cash column and discount received in the discount
column
Double column cashbook also can be with cash and bank columns. In this
type of cashbook, the transactions involving cash and transactions involving
receipts and payments by cheques are recorded. It facilitates and enables the
business to maintain both cash and bank accounts simultaneously.
Illustration:
Compile Cashbook with discount column from the following transactions
for the month of March, 2001
1.3.2001
Mr. Ganesh commenced business with cash Rs.65, 000.
3.3.2001
Bought goods for cash Rs.6, 850.
4.3.2001
Paid Mr. Mohan cash Rs.950; discount was allowed thereon Rs.50.
6.3.2001
Deposited in bank Rs.40,000
6.3.2001
Paid for office furniture by cash Rs.4, 650.
9.3.2001
12.3.2001
Paid wages by cash Rs.1, 200.
13.3.2001
Paid for stationery Rs.400.
15.3.2001
17.3.2001
Paid for Miscellaneous expenses Rs.450.
19.3.2001
Received cash from Mr. Tilak 4,850; Allowed him discount Rs.150.
21.3.2001
Purchased a radio set for Rs.2, 500 for personal use.
22.3.2001
Paid salary Rs.4, 000.
25.3.2001
Paid rent Rs.900.
28.3.2001
Paid electricity bill Rs.350.
29.3.2001
Paid advertising expenses Rs.400.
31.3.2001
Paid into bank Rs.25, 000.
Solution:
CASH BOOK
Date
Particulars LF Discount Cash

Rs.
Rs.
Date
L.F Discount Cash

Rs.
Rs.
1.3.2001
9.3.2001
15.3.2001
19.3.2001
To Capital
A/c
To Sales A/c
To Sales A/c
To Tilak A/c
150
65,000
30,000
25,000
4,850
3.3.200
14.3.2001
6.3.200
16.3.2001
12.3.2001
13.3.2001
17.3.2001
21.3.2001
22.3.2001
25.3.2001
28.3.2001
29.3.2001
31.3.2001
31.3.2001
150
1,24,850
By Purchases
a/cBy Mohan a/c
By Bank a/c
By Office
Furniture a/c
By Wages a/c
By Stationary
a/c
By
Miscellaneous
Expenses a/c
By Drawings a/c
By Salary a/c
By Rent a/c
By Electricity
a/c
By Advertising
a/c
By Bank a/c
By Balance c/d
50
6,850
950
40,000
4,650
1,200
400
450
2,500
4,000
900
350
400
25,000
37,200
50
1,24,850
3. Three Column Cashbook (Cashbook with cash, discount and bank

Columns)
With the development of banking sector, and frequent use of banking
instrument, Cashbook with additional column for bank transactions came
into existence. Thus, the three columns Cashbook is nothing but ledger
accounts for cash and bank with additional information about discount
allowed and discount received.
An illustrative format of this type of Cashbook is given below:
Cashbook of Excellent Enterprises
Date Receipts
Discount Cash Bank

allowed
Date Payments
Discount Cash Bank

received
2001
April, To Balance
1
b/f
6
7
11
20
To Sales 50
To Arvind
Co
60
2001
1,500 13,000 April, By Wage
2
for Casual Sweeper
By Electricity
800
5
By Plumbing
2,000 8
Repairs
By Y Ltd.
2,350 15
By Balance c/f
150
500
30
50
400
400
10,800
2,350 6,150
To Beta
Corpn
To sales
110
2,800 17,350
150
2,850 17,350
The Cashbook normally carries columns for Cash Memo No., Ledger Folio
No., Voucher No., etc.
The unique feature of the Cashbook is that it performs the functions of a
Journal and the General Ledger with regard to the cash and bank
transactions. In other words, Cashbook is the book of first entry for all such
transactions and the ledger accounts for cash in hand and cash at bank will
not be maintained in the General Ledger.
4. PETTY CASHBOOK:
When the petty cash fund is operated as an imprest fund, the recording of the
petty expenses paid will be made in the Petty Cashbook. This would also
avoid recording too many small value transactions in the main Cashbook.
The Petty Cashbook would contain a number of analytical columns for
grouping the various expenses under a few classifications which would
facilitate subsequent posting into the General Ledger.
THE IMPREST SYSTEM:
When an analytical Petty Cashbook is maintained for recording the petty
expenses, it will be practically more convenient to consider the petty cash as
a separate account and take cheques issued for the petty cash imprest as a
debit to petty cash account and all petty expenses paid as credits in petty
cash account.
CONTRA ENTRIES:
If a transaction affects both cash account and bank account in the opposite
sides, the entry for recording the transaction is called a contra entry. Entries
which are made on both sides of the Cashbook are called contra entries. For
contra entries no posting is required because the double entry is completed
in the Cashbook itself. For example, cash deposited into bank and cash
withdrawn from bank affect cash and bank account only. Both aspects of
these transactions are recorded in cash column and bank column of the
Cashbook respectively. No ledger posting is required, because both aspects
of the transaction are recorded in the Cashbook itself. This fact is indicated
in the Cashbook by writing C in L.F. column
Illustration:
1.3.2001
Cash in hand
2,500
Cash at bank
10,000
2.3.2001
Paid into bank
1,000
5.3.2001
Bought furniture and issued cheque
2,000
8.3.2001
Purchased goods for cash
500
12.3.2001
Received cash from Mohinder
980
Discount allowed to him
20
14.3.2001
Cash Sales
4,000
16.3.2001
Paid to Amaranth by cheque
1,450
Discount received
50
19.3.2001
Paid into Bank
400
23.3.2001
Withdrawn from Bank for private expenses
600
24.3.2001
Received cheque from Patel
1,430
allowed him discount
20
28.3.2001
Withdrawn cash from bank for office use
2,000
30.3.2001
Paid rent by cheque
Solution:
CASH BOOK
800
Date

Allowed
1.3.2001
To
Balanceb/f
2.3.2001
C
To Cash a/c
12.3.2001
To
14.3.2001 Mohinder a/c
19.3.2001
C
To Sales a/c
24.3.2001
To Cash
28.3.2001
C
To Patel a/c
Date
2,500 10,000 2.3.2001
By Bank a/c C
1,000
1,000
5.3.2001
20
980
8.3.2001
By
Furniture
a/c
2,000
4,000 -
500
400
16.3.2001 By
Purchases
19.3.2001 a/c
20
1,430
23.3.2001 By
Aamranth
28.3.2001 a/c
C 50
1450
400
600
--
2,000
2,000
30.3.2001 By Bank a/c
To Bank
30.3.2001 By
Drawings
a/c
-
31.3.2001
7580 -
By Cash a/c
800
By Rent a/c
To Balance
b/d
40
9,480 12,830
7,580 5,980
By Balance
c/d
5,980
40
9,480 12,830
BANK RECONCILIATION STATEMENT:

MEANING:
The Bank Reconciliation Statement is an aid used to ensure the accuracy of
transactions appearing in the bank columns of the Cashbook. Such
transactions can be verified through an external record, namely, the bank
statement received periodically from the banker. While the business keeps a
record of its transactions through the bank columns in the Cashbook, the
banker in turn maintains the banks transactions with the business in his
ledger. An extract from this ledger showing details of the transactions during
a specified period is sent at frequent intervals by the bank to the business
and this extract is referred to as a bank statement.
REASONS FOR DIFFERENCE BETWEEN BANK BALANCES AS

PER CASHBOOK AND PASSBOOK:
The relationship between the customer and the banker is that of a creditor
and a debtor. So, if the bank column of the Cashbook shows a debit balance
as on a specified date the bank statement should show an equal amount of
credit balance as on that date and vice versa. However, the balances shown
by the two independent records may not always agree due to the following:
1.
Cheques issued by the business to its suppliers or other parties may
not have been presented for payment.
2.
Cheques received from customers and deposited may not have been
collected by the banker.
3.
Deposits may have been directly made by the customers into the bank
account of the enterprise.
4.
Collection charges, service charges and interest on overdraft are
charged by the banker. The business can ascertain the exact amount of
charges and record them in the Cashbook only after the receipt of the bank
statement.
5.
Interest credited by bank for the balance maintained with it and any
other income such as interest on securities, dividend, etc. collected by the
bank on behalf of the business can be ascertained only from the bank
statement.
6.
Wrong entries made by the business in the Cashbook or errors
committed by the bank in its ledger.
7.
Omission of entries in the two sets of books.
8.
Dishonor of customers cheques deposited in the bank account
Advantages of Bank Reconciliation Statement:

(1) Error Detection:
It helps in detection of errors of omission of transactions or wrong recording
of transactions either by the bank or the business enterprises. Errors
identified in the books by preparing BRS can be rectified.
(ii) Delay in Collection Revealed:
The delay in the collection of cheques, bills, etc., if any, is revealed, when
BRS is prepared. The matter can be pursued to avoid unnecessary delays in
collection. It also helps the management to keep track of the cheques and
bills sent for collection.
(iii) Completion of Cashbook:
Business enterprises get information about bank charges, cheques
dishonored, direct payments, direct deposits, etc. from the bank statement
only. Entries of the same are made in the Cashbook on the basis of bank
statement. Thus to complete the Cashbook, comparison and reconciliation of
Cashbook and bank book is essential.
(iv) Chances of Embezzlements are Reduced:
Periodical comparison of Cashbook and passbook keeps a check on the
office staff. For example, entry for cash deposit is appearing in the Cashbook
but not in the passbook, indicates fraud being committed by the staff. This
type of frauds comes to light when Bank Reconciliation Statement is
prepared.
Steps in Preparation of BRS:
(1) Take the Cashbook or passbook balance as starting point. The following
points have to be noted while taking the opening balance.
1.
Dr. Balance as per Cashbook indicates favorable balance.
2.
Cr. balance as per Cashbook means overdraft or unfavorable balance.
3.
Dr. Balance as per passbook means overdraft or unfavorable balance.
4.
Cr. Balance as per passbook means favorable balance.
If the starting point denotes a favorable balance as per Cashbook or

passbook, take it as a positive figure. However, if the starting point denotes
negative unfavorable balance, take it as a negative figure.
(2) adjust the starting point amount as per the information given and analyze
its impact on the other balances.
(3) After adjusting all the differences or errors, the balance as per the other
book is obtained. If the final balance is positive, it denotes favorable balance
(Dr. Balance as per Cashbook or credit balance as per the passbook).
However, if the final balance is negative, it denotes the unfavorable balance

or overdraft. (Cr. balance as per Cashbook or debit balance as per passbook).
The following table summarizes the impact of various differences and errors
on the starting balance.
Bank Reconciliation Statement (BRS)
Items
Rs
Rs
Bank Balance as per Cashbook

Or
xxxx
Overdraft balance as per Passbook

Add:
1
Cheques issued but not presented for payment
xxxx
Direct payments made by customers
xxxx
Amount collected by bank (rent, dividends, interest on

investments, etc.)
xxxx
xxxx
Cheques deposited but omitted to be recorded in Cashbook

5
Wrong credit on the credit side of Passbook
xxxx
xxxx
1
Less:
xxxx
Cheques deposited but not collected
xxxx
Cheques paid into the bank but dishonored
xxxx
Bank charges and interest charges
xxxx
Payments made by the banker on behalf of the trader
xxxx
Cheques issued but not recorded in the Cashbook
xxxx
Wrong entry on the debit side of the passbook
Xxxx
Balance as per other book
xxxx
Illustration:
On March 31, 2001, the bank column of Cashbook of Prithvi Limited
showed a bank balance (debit) of Rs.48, 500. However, the bank statement
showed a credit balance of Rs.53, 900 as on the same date. A detailed
comparison of entries revealed the following:
1.
Customers cheques amounting to Rs.8, 450 had not been collected by
the bank as on 31.3.2001.
2.
Certain cheques amounting to Rs.8, 850 had not been presented for
payment as on 31.3.2001.
3.
Bank charges of Rs.1, 000 and interest on investments of Rs.2, 500
collected by the banker appear only in the bank statement.
4.
On 30.3.2001, there was a wrong credit of Rs.2, 500 in the bank
statement.
5.
Swaroop Limited, a customer, had paid into the bank directly a sum of
Rs.3, 000 on March 29, 2001. This has not been recorded in the Cashbook.
6.
A cheque for Rs.2, 000 received from Excel Limited, a customer,
which was deposited had been returned unpaid. The dishonor of this cheque
has not been entered in the Cashbook. Solution:
Prithvi Limited will first pass the necessary rectification entries in the
Cashbook and then prepare a reconciliation statement
Cashbook of Prithvi Limited (Bank Columns only)
Date
Receipts
Bank
Date
Payments
Rs.
2001
March,31 To Balance b/d
Bank
Rs.
2001
48,500 March,31
By Bank Charges
1,000
March,31 To InterestReceived 2,500
March,31
By Excel Limited
2,000
March,31 To SwaroopLimited 3,000
March,31
By Balance c/d
51,000
54,000
54,000
Bank Reconciliation Statement as on March 31, 2001

Particulars
Rs.
Bank balance as per Cashbook
51,000
Add: Cheques issued but not presented for payment

8,850
Wrong credit in the bank statement
Rs.
11,350
2,500
62,350
Less: Cheques deposited and remained uncollected

Bank balance as per bank statement
8,450
53,900
What are some reasons that cause the balance on the bank statement to
differ from the cash balance on the books?
The reasons for the difference between the balance on the bank statement
and the balance on the books include outstanding checks, deposits in transit,
bank service charges, check printing charges, errors on the books, errors by
the bank, electronic charges on the bank statement not yet recorded on the
books, and electronic deposits on the bank statement that are not yet
recorded on the books.
If an item is on the books but has not yet appeared on the bank statement
(outstanding checks, deposits in transit), the items are entered as an
adjustment to the balance per bank statement. Outstanding checks are a
deduction to the balance per bank; deposits in transit are an addition to the
balance per bank.
If an item is on the bank statement but has not yet been entered on the
books, the items are entered as an adjustment to the balance per books. Bank
service charges, check printing charges, and other electronic deductions that
are not yet recorded on the books are deductions from the cash balance on
the books. Electronic deposits not yet on the books are added to the cash
balance per books.
ASSIGNMENT B
Q1 Define depreciation Differentiate, with suitable
example, between Diminishing Balance Method &
Straight Line Method of charging depreciation.
Meaning of Depreciation:
Provision is created in a companys account towards depreciation to account
for the wear and tear of its assets caused by usage, passage of time,
technological obsolescence, etc. while depreciation does not involve
payment of money to any third party; it is nevertheless an accounting entry

in the books. Depreciation is the acquisition cost of an asset (less the
expected salvage value) spread over the economic life of that asset. The
purpose of charging depreciation over the economic life of the asset is to
match the cost of the asset over the period for which revenue is earned by
using the asset.
DEPRECIATION METHODS:
The two methods which are basically used for charging depreciation are
1. Straight Line Method
Under the straight-line method, the net acquisition cost or construction cost
is charged off in equal proportion during the useful economic life and the
quantum of the depreciation is arrived at by dividing the net acquisition or
construction cost by the number of years of useful economic life. The net
acquisition or construction cost is calculated by deducting salvage value
from the acquisition or construction cost.
Depreciation =
For example, if the cost of an asset is Rs.1,00,000, the expected salvage

value is Rs.20,000 and the estimated useful life is 8 years, the annual
depreciation would be = Rs.10,000 or 10% per annum.
This method has the following advantages:
1.
The amount of depreciation and the rate does not change over the
useful economic life of the asset;
2.
The calculation is relatively simple; and
3.
It realistically matches cost and revenue.
2. The Written Down Value Method/Diminishing Balance Method

Under this method the depreciation charged in the various years will not be
equal over the useful life of the asset. This is because the depreciation charge
every year is calculated as a percentage of the outstanding balance of the
asset as at the beginning of that particular year and not on the original cost
of the asset.
While preparing final accounts, if depreciation is shown as an item under

adjustments, calculate the amount of depreciation and charge it off to profit
and loss account by debiting P & L account and crediting depreciation; show
depreciation as a deduction from the asset value on the assets side of
Balance Sheet.
If depreciation is shown in the trial balance, then, the amount of depreciation
should be charged to only P & L account.
The percentage of depreciation to be charged under the declining balance
method can be determined as under
r=1
(or) 1 (s/c) 1/n
Where,
r
= rate of depreciation under the written down value method
n = estimated useful life of the asset in years

s=
residual value or scrap value of the asset
c = original cost of the asset.

Please note that if the residual or scrap value of an asset is zero, the rate of
depreciation cannot be determined using the above formula.
Illustration 1
Original Cost of the Machine- Rs.1, 00,000
Estimated Scrap Value - Rs.30, 000
Useful Life - 6 years
The calculation of depreciation for each of the years would be as follows:
r = 1 (30,000/1, 00,000)1/6 = 18%
At the end of the 1st year, the depreciation is calculated by applying the rate
to the original cost. Then the written down value is arrived at by deducting
the depreciation so arrived at from the original cost. At the end of the 2nd
year, the depreciation rate is applied to the written down value at the end of
the 1st year. This depreciation amount is again deducted to arrive at the
written down value at the end of the 2nd year. In the above
Mentioned asset the depreciation calculations will be as follows:

Year
Calculation of depn. Depreciation
Written down value
1,00,000 x 18%
18,000
82,000
82,000 x 18%
14,760
67,240
67,240 x 18%
12,103
55,137
55,137 x 18%
9,925
45,212
45,212 x 18%
8,138
37,074
37,074 x 18%
6,673
30,401
(The small difference between the estimated scrap value and the written
down value at the end of the sixth year is due to approximation of the
depreciation rate)
The following are the advantages of Diminishing Balance Method:
1.
It matches the service of the asset in the sense that higher depreciation
is charged in the initial years, when the machine is most efficient compared
to later years.
2.
It recognizes the risk of obsolescence by concentrating the major part
of the depreciation in the early years of the life of the asset.
3.
It equalizes the expenses of depreciation and repair charges taken
together. It is assumed that repairs are the lowest in the initial years and
higher in the later years while the depreciation under this method is higher in
the initial years and lower in the later years.
4.
It results in a better cash flow through tax deferral as under this
method the net income to be taxed is lower in the initial years and higher in
the subsequent years.
The disadvantages of declining balance method are:
1.
It requires elaborate bookkeeping.
2.
As the amount of the depreciation varies from year to year, intraenterprise comparability is lost and that income is understated in early years
and overstated in subsequent years.
COMPARISON BETWEEN
DEPRECIATION
SLM
&
WDV
METHODS
OF
Explanation: In the above diagram we see that irrespective of the time period
the amount of depreciation charged is same under the straight line method.
But in case of written down value method, the amount of depreciation
charged falls down as the time period increases. The depreciation charged
under this method is more in the initial years and keeps on falling as the
number of years of usage increase.
We can draw the following differences between the diminishing balance
method and straight line method. They are:
1
2
3
4
5
6
Straight Line
A fixed amount of depreciation is charged
The rate of depreciation is the reciprocal
of the life of the asset
The asset may or may not have scrap
value
The amount of depreciation per year is
same
In the first year, the depreciation is
charged on the cost of the asset, less scrap
value, if any
At the end of its life, the book value of the
asset becomes zero
Diminishing Balance
A fixed rate of depreciation is charged
The rate of depreciation is ascertained
by applying the formula
The asset must have a significant
scrap value
The amount of depreciation goes on
reducing with each passing year.
In the first year, the depreciation is
charged on the asset
The book value of the asset never
reduces to zero.
RECORDING DEPRECIATION
There are two methods of recording depreciation.
When no provision for depreciation account is maintained
When Provision for depreciation account is maintained
When no provision for depreciation account is maintained

Under the first method, the asset account is directly credited for the
depreciation and the written down value is readily ascertained. The journal
entry to record depreciation under the method is
Depreciation a/c
Dr
To Asset a/c
For transferring depreciation to Profit and Loss Account
Profit and Loss Account
To Depreciation account
Dr.
(Being the depreciation provided for the

Accounting period)
After the expiry of useful life of the asset, these two accounts are closed by
debiting accumulated depreciation account and crediting asset account and
any balance in asset account is transferred to the Profit and Loss account.
P&L a/c
Dr
To Depreciation a/c
Illustration 2
An enterprise whose accounting period ends on 31st March, purchased three
cars for Rs.90,000 each on 1st April, 1998. Depreciation is charged @ 10%
on cost of the Machinery. On 1st January, 2000 one car was damaged in an
accident and was sold for Rs.60,000. Another car was sold for Rs.80,000 on
30th September, 2000.
You are required to prepare necessary accounts on the basis of straight line
method while: (a) charging to the Asset Account (b) maintaining Provision
for Depreciation Account.
Solution:
a. Direct Charge to the Asset Account

Cars Account
Rs.
1998
Apr. 1
To Cash/Bank a/c
(purchase of cars)
Rs.
2,70,000
1999
Mar. 31 By Depreciation a/c
Mar. 31 By Balance c/d
2,70,000
1999
Apr. 1
2,43,000
To Balance b/d
2,70,000
2000
Jan. 1 By Car disposal a/c (2)
Mar. 31 By Depreciation (1)
2,43,000
2000
Apr. 1
1,44,000
To Balance b/d
74,250
24,750
1,44,000
2,43,000
By Car disposal a/c (4)
67,500
2001
By Depreciation a/c (3)
13,500
63,000
2000
Sept. 1
1,44,000
1,44,000
2001 To Balance b/d
April 1
27,000
2,43,000
63,000
Car Disposal Account*

Particulars
Rs.
2000 To Cars a/c
74,250
Jan. 1
Particulars
Rs.
2000 By Cash/Bank a/c
60,000
Jan. 1
Mar. 31 By Profit & Loss a/c 14,250
(Loss)
74,250
74,250
Illustration 2.
On 1st January 1999, the Supreme Manufacturers purchased a machine for Rs.2,50,000.
Depreciation is provided annually according to the straight line method. The estimated
useful life of the machine is 10 years and the scrap value is Rs.10,000. You are required
to find out the rate of depreciation and also show the machine account as on 31st
December, 2001.
Determination of amount of depreciation:

Depreciation
=2,40,000/10=Rs.24,000
CHANGE IN THE METHOD OF DEPRECIATION

The depreciation that is charged under the straight line method remains the
same every year. Under the WDV method it reduces gradually. This gives
rise to variations in the depreciation charge calculated as per the two
different methods. For instance, let us assume that the following particulars
relate to an asset X:
Original Cost = Rs.12,000
Salvage Value = Rs.2,000
Useful Life = 5 years
Depreciation as per straight line method

=
= Rs.2,000 per annum

Rate of depreciation = (2000/12000) x 100
= 16.67%
Depreciation percentage as per WDV method

r=
= 1
The depreciation each year will be as follows:

Year
Depn. as per SLM
1
2
3
4
5
2,000
2,000
2,000
2,000
2,000
Depn. as per WDV

method
3,600
2,520
1,764
1,235
864
We see that the depreciation in the initial years is higher under the written
down value method and is higher under the straight line method in the latter
years of the life of the asset. A company may use this to manipulate its
profits by switching over from one method to another.
Procedure for recording a change in the Method of depreciation

Step 1 Calculate the total depreciation already provided on assets existing
as at the end of previous accounting year (i.e. assets other than
sold/discarded/destroyed up to the end of previous year) under the existing
method up to the end of previous accounting year.
Step 2- Calculate the total depreciation on asset existing as at the end of
previous accounting year by adopting the new method.
Step 3- Calculate the difference between the total depreciation under
existing method (as per step 1) & under new method (as per step 2)
Step 4- Adjust the short depreciation (excess of step 2 over step 1) by
debiting Profit & Loss A/c & crediting the Asset Account/Provision for
depreciation a/c
OR
Adjust the excess depreciation (excess of step 1 over step 2) by debiting
Asset A/c/Provision for Depreciation A/c & crediting Profit & Loss A/c.
Step 5- Charge depreciation from current accounting year & onwards by
adopting new method.
The following illustration shows the effect of change in the method of
depreciation on the profits of a company:
Illustration:
On 1st January 2001 Bharat Steel Ltd purchased two machines I & II costing
Rs 50,000 each & provided depreciation @10% p.a. on straight line method
basis. At the end of 2004, the company decided to change the method of
depreciation from straight line to
written down value method, the rate remaining the same. Prepare the
Machinery Account upto 2004.
Solution:
Step 1- Calculation of depreciation as per old method (SLM) for 3 years =
1,00,000 *10% * 3 = Rs 30,000
Step 2- Calculation of depreciation as per new method (WDV) =
A. Cost as on 1.1.2001
Rs
1,00,000
B. Less: Depreciation for 2001

C. Book value as on 1.1.2002
D. Less: Depreciation for 2002
E. Book Value as on 1.1.2003
F . Less: Depreciation for 2003
E. Book Value as on 1.1.2004
Total Depreciation under new method:
= Rs 10,000 + Rs 9000 + Rs 8100= Rs 27,100
10,000
90,000
9000
81000
8100
72900
Step 3- Calculate the difference between the total depreciation as per Step 1
& Step 2:
A Total depreciation under old method
B Total depreciation under new method
C Difference being excess Depreciation
Rs 30,000
Rs 27100
Rs 2900s
Step 4-Journal Entry to adjust excess depreciation

Machinery A/c
Dr. Rs 2,900
To Profit & Loss A/c
Rs 2,900
Step 5- Depreciation for the current accounting year = 10% of Rs 72,900 = Rs 7,290
Step 6Dr.
Date
MACHINERY ACCOUNT
Particulars
Rs
Date
Particulars
Rs
1.01.2001
To Bank A/c
1,00,000
31.12.2001
By Depreciation A/c
By Balance c/d
10,000
90,000
1,00,000
10,000
80,000
90,000
10,000
70,000
80,000
7,290
Cr.
1,00,000
1.01.2002
1.01.2003
1.01.2004
To Balance b/d
90,000
31.12.2002
By Depreciation A/c
By Balance c/d
To Balance b/d
90,000
80,000
31.12.2003
By Depreciation A/c
By Balance c/d
80,000
70,000
31.12.2004
By Depreciation A/c
(10% of Rs 72,900)
By Balance c/d
To Balance b/d
To P&L A/c
(Excess
dep
written back on
account
of
change
from
WDV method to
SLM)
2,900
72,900
65,610
72900
Test Exercise:
Problem1
A firm purchased on 1st Jan,1989, a second hand Machinery for Rs 36000 and spent Rs
4000 on its installation. On 1st July in the same year another Machinery costing Rs 20000
was purchased. On 1st July, 1991, the Machinery bought on 1st Jan., 1989 was sold off for
Rs. 12000 & on the same date a fresh Machine is purchased for Rs 64000. Depreciation is
provided annually on 31st Dec, @ 10% p.a. on the written down value method. Show the
Machine a/c from 1989 to 1992.
Problem 2:
On 1st July, 1987, a company purchased a plant for Rs 20000. Depreciation was provided
at the rate of 10% per annum on straight line method on 31 st December every year. With
effect from 1.1.1989, the company decided to change the method of depreciation to
Dimishing balance method @ 15% p.a. on 1.7.1990, the plant was sold for Rs 12000.
Prepare a plant account from 1987 to 1990 and make adjustments for arrears of
depreciation in the year 1989.
Problem 3:
A manufacturing firm purchased on 1st January, 1989 certain mill machinery for Rs.
19,4000 and spent Rs. 600 on its erection. On 1st July in the same year additional
machinery costing Rs. 10,000 was acquired. On 1st July, 1991, the machinery purchased
on 1st January , 1989 having become obsolete, was auctioned for Rs. 8000 and on the
same date fresh machinery was purchased at a cost of Rs 15,000.
Depreciation was provided annually on 31st Dec @ 10% p.a. on the original cost of asset.
In 1992, however the firm changed this method of providing depreciation and adopted the
method of writing off 15% on the written down value. Give the machinery account as it
would stand at the end of each year from 1989 to 1992. Make your calculations to the
nearest rupee.
Q2 Define Bills of Exchange and explain the parties

involved in it
BILLS OF EXCHANGE DEFINE BILLS OF EXCHANGE:
An instrument in writing containing an unconditional order signed by the

maker directing a certain person to pay a certain sum of money only to or to
the order of a certain person or to the bearer of the instrument.
WHAT ARE THE MAIN FEATURES OF BILLS OF EXCHANGE?
Following are the main Features of Bills of exchange:
It must be writing
It must be signed by the maker
It must be unconditional order to pay
The maker must direct a certain person to pay c certain sum of money
EXPLAIN PARTIES OF BILLS OF EXCHANGE:
1. DRAWER. The person who draws/writes the bill is known as drawer
2. DRAWEE The person who is liable to pay the amount of bill is known as
drawee.
3. PAYEE the person who receive the amount of bill is known as payee
EXPLAIN CLASSIFICATION OF BILLS OF EXCHANGE:
1. INLAND BILLS. Inland bills are drawn, accepted and payable in the
same country
2. FOREGION BILLS. Foreign bills are drawn in one country and accepted
and payable in another country
EXPLAIN TYPES OF BILL OF EXCHANGE:
1. ON THE BASIS OF PERIOD
DEMAND / USANCE BILL OF EXCHANGE there is no fixed date for
the payment of these bills are called usance bill
TERM BILLS OF EXCHANGE. These bills are payable after specified
period of time e.g. 2 Month, 3 Month
2. ON THE BASIS OF OBJECT

TRADE BILLS These bills are drawn and accepted against the sale and
purchase of goods.
DEFINE ACCOMMODATION BILLS. These bills are drawn and
accepted without the sale and purchase of goods. The purpose is to help one
party or both financially.
DEFINE GRACE DAYS. Three additional days which are allowed to
drawee for the payment of bill of exchange are called grace days.
DEFINE TENOR. Tenor is the period of time after which a bill becomes
payable e.g. 2 Month, 3 Month
WHAT IS MEANT BY ACCEPTANCE OF BILL? When the drawee
signs his name on the face of the bill along with the word Accepted the bill
is said to be accepted and this act of the drawee is called acceptance of a
bill.
DEFINE THE HOLDER OF THE BILL. Holder of a bill is a person who
is entitle in his own right to the possession thereof and to claim the amount
due there on.
BILLS OF EXCHANGE DEFINE GENERAL ACCEPTANCE:
When the bill is accepted without any condition to the order of the drawer it
is called general acceptance.
DEFINE QUALIFIED ACCEPTANCE:
When a bill is accepted with some qualified to the order of the drawer it is
called qualified acceptance.
DEFINE THE BILLS RECEIVABLE AND BILLS PAYABLE:
When the bill is drawn by drawer and accepted by drawee it is called bills
receivable from drawer point of view and bills payable from drawee point of
view.
EXPLAIN THE DISCOUNTING OF A BILL:
If the holder of the bill is in need of money before due date of the bill he
may sell it to the bank. The bank will give cash for it in consideration of
small charge. This is called discounting the bill.
DEFINE THE ENDORSEMENT OF BILL:
The procedure by which a bill is transferred from one person to another for
the settlement of debts is called endorsement of bill.
WHEN A BILL BECOMES DISHONORED?
When the drawee fails to make the payment of the bill on the due date
WHEN A BILL BECOMES HONORED?
When the drawee makes payment of the bill on the due date
DEFINE NOTING CHARGES:
In case of bill dishonored the notary public charge a small fee from the
holder of the bill. The fee is known as noting charges.
WHAT DO YOU MEANT BY RETIRING OF A BILL?
When the drawee makes payment before the due date of the bill
DEFINE PROMISSORY NOTE.
An instrument in writing containing an unconditional undertaking signed by
the maker to pay a certain sum of money only to or to the order of a certain
person or to the bearer of the instrument.
EXPLAIN THE PARTIES INVOLVING IN PROMISSORY NOTE:
There are two parties involving in promissory note:
MAKER: The person who draws the promissory note
PAYEE: The person who receives the amount of promissory note
EXPLAIN THE FEATURES OF PROMISSORY NOTE: Following are
the features of promissory note:
It must be in writing
It must be signed by maker

It must be unconditional promise to pay by the maker
DIFFERENTIATE BETWEEN PROMISSORY NOTE AND BILLS OF
EXCHANGE. SR.NO PROMISSORY NOTE BILLS OF EXCHANGE:
1 It is promise to pay It is an order to pay
2 Two parties (Maker and Payee) Three parties (Drawer Drawee and
Payee)
3 There is no need of acceptance It must be accepted
Define Bills of Exchange:
A written, unconditional order by one party (the drawer) to another (the
drawee) to pay a certain sum, either immediately (a sight bill) or on a fixed
date (a term bill), for payment of goods and/or services received. The
drawee accepts the bill by signing it, thus converting it into a post-dated
check and a binding contract.
A bill of exchange is also called a draft but, while all drafts are negotiable
instruments, only "to order" bills of exchange can be negotiated. According
to the 1930 Convention Providing A Uniform Law For Bills of Exchange
and Promissory Notes held in Geneva (also called Geneva Convention) a
bill of exchange contains:
(1) The term bill of exchange inserted in the body of the instrument and
expressed in the language employed in drawing up the instrument.
(2) An unconditional order to pay a determinate sum of money.
(3) The name of the person who is to pay (drawee).
(4) A statement of the time of payment.
(5) A statement of the place where payment is to be made.
(6) The name of the person to whom or to whose order payment is to be
made.
(7) A statement of the date and of the place where the bill is issued.
(8) The signature of the person who issues the bill (drawer).
A bill of exchange is the most often used form of payment in local and
international trade, and has a long history- as long as that of writing.
What is a bill of exchange?
A bill of exchange is a binding agreement by one party to pay a fixed
amount of cash to another party as of a predetermined date or on
demand. Bills of exchange are primarily used in international trade. Their
use has declined as other forms of payment have become more popular.
There are three entities that may be involved with a bill of exchange
transaction. They are:
Drawee. This party pays the amount stated on the bill of exchange to
the payee.
Drawer. This party requires the drawee to pay a third party (or the
drawer can be paid by the drawee).
Payee. This party is paid the amount specified on the bill of exchange
by the drawee.
A bill of exchange normally includes the following information:
Title. The term "bill of exchange" is noted on the face of the

document.
Amount. The amount to be paid, expressed both numerically and

written in text.
As of. The date on which the amount is to be paid. Can be stated as a

certain number of days after an event, such as a shipment or receipt of
a delivery.
Payee. States the name (and possibly the address) of the party to be
paid.
Identification number. The bill should contain a unique identifying

number.
Signature. The bill is signed by a person authorized to commit the

drawee to pay the designated amount of funds.
Issuers of bills of exchange use their own formats, so there is some variation
from the information just noted, as well as in the layout of the document.
A bill of exchange is transferable, so the drawee may find itself paying an
entirely different party than it initially agreed to pay. The payee can transfer
the bill to another party by endorsing the back of the document.
A payee may sell a bill of exchange to another party for a discounted price in
order to obtain funds prior to the payment date specified on the bill. The
discount represents the interest cost associated with being paid early.
A bill of exchange does not usually include a requirement to pay interest. If
interest is to be paid, then the percentage interest rate is stated on the
document. If a bill does not pay interest, then it is effectively a post-dated
check.
If an entity accepts a bill of exchange, its risk is that the drawee may not pay.
This is a particular concern if the drawee is a person or non-bank business.
No matter whom the drawee is, the payee should investigate the
creditworthiness of the issuer before accepting the bill. If the drawee refuses
to pay on the due date of the bill, then the bill is said to be dishonored.
A bill of exchange issued by a person may be called a trade draft. If the
document is issued by a bank, it may be called a bank draft.
BILLS RECEIVABLE BOOK
The Bills Receivable of an enterprise consists of all Promissory Notes given

or Bills of Exchange accepted by customers in respect of amounts due from
them. The bills receivable book is used to record all promissory notes given
or Bills of Exchange accepted by customers
Simple format of Bill Receivable Book is given below:
BILLS PAYABLE BOOK
The Bills Payable consists of all Promissory Notes given or Bills of
Exchange accepted by the business in respect of amounts owing to its
suppliers The Bills Payable Book is used to record all such Promissory
Notes given or Bills of Exchange accepted by the business.
Simple format of Bill Payable Book is given below, Notes:
1.
Receivables indicate the total of all personal accounts which have a
debit balance. They owe money to Kiran Kumar.
2.
Payables indicate the total of all personal accounts, which have a
credit balance. Kiran Kumar owes money to them.
3.
Bills receivable indicate the bills of exchange accepted by Kiran
Kumars debtors. Bills receivable become due for payments by debtors on
specified dates.
4.
Bills payable indicate the bills of exchange accepted by Kiran Kumar
himself in favor of his creditors. Bills payable become due for payments by
Kiran Kumar on specified dates.
5.
Opening inventory indicates the opening inventory of goods at the
beginning of the period.
Solution:
Trial Balance of Kiran Kumar as on 31.03.2001
Particulars
Kiran Kumars Capital
Salaries
Purchases
Sales
Trade expenses
Wages
Freight inwards
Office expenses
Discount received
Commission paid
Postage & Telegrams
Accounts receivable
Accounts payable
Furniture
Machinery
Insurance
Bills receivable
Bills payable
Opening inventory
Cash in hand
Cash at bank
Total
Debit Rs.
Credit Rs.
25,000
6,000
26,000
47,000
1,000
7,800
400
500
200
600
1,200
30,000
21,000
3,000
10,000
400
2,000
6,800
7,000
500
3,600
CONCEPT:
The Negotiable Instruments Act defines a bill of exchange as an instrument
in writing, containing an unconditional order, signed by the maker, directing
a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument.
The features of bills of exchange are:
1.
It is a written document.
2.
It is an unconditional order to pay a certain sum of money.
3.
It is signed by the maker (or drawer) of the bill.
4.
It must be dated and properly stamped.
5.
The amount must be payable to a definite person or to his order or the
bearer of the instrument.
6.
It must be accepted by the drawee.
The person who draws the bill is called the Drawer. The person who accepts
the order is known as drawee and the person to whom the amount has to be
paid is known as the payee. Drawer and the payee can be the same person.
ACCOUNTING FOR BILLS OF EXCHANGE:
A bill of exchange is treated as bills receivable by the party entitled to
receive the payment, and as bills payable by the party liable to make
payment.
Journal entries in the books of Drawer and Drawee in the following cases
a.
In case the bill is retained by the drawer till the due date
A Books of Drawer
B Books of Drawee
A
i.
Entry for sale of goods

Customers a/c Dr.
To Sales a/c s
ii.
Purchases a/c Dr.

To Suppliers a/c
On receipt of acceptance from the drawee

Bills Receivable a/c
Dr.
To Customers a/c
Suppliers a/c
Dr.
To Bills Payable
a/c
iii
On receiving payment on the due date
Cash a/c
Dr.
Bills Payable a/c Dr.

To Cash
a/c
To Bills Receivable a/c
IILUSTRATION 1:
X sold goods on credit to A for Rs.5,000 on 10.4.2001. on the same date. A
accepted a bill drawn by X payable after 3 months. On the due date, the bill
is duly honored by X. Pass journal entries in the books of both the parties.
Journal of X (Drawer)
Date
Particulars
Debit
Rs.
10.4.01
As a/c
Dr.
5,000
Credit
Rs.
5,000
To Sales a/c
(For credit sales to A)
10.4.01

Dr.
5,000
5,000
To As a/c
(Bills received from A)
13.7.01
Cash a/c
Dr. 5,000
5,000
(Being cash received on maturity of

bill)
Journal of A (Drawee)
Date
Particulars
Debit
Rs.
10.4.01
Purchases a/c
5,000
Credit
Rs.
Dr.
To Xs A/c
5000
(For credit purchases from X)

10.4.01
Xs a/c
Dr.
To Bills Payable a/c
5,000
5000
(For the acceptance given)

13.7.01
Bills Payablea/c
Dr.
5,000
To Cash a/c
5000
(For payment made on the due date)

B When the bill is discounted with the bank
If the holder of the bill receivable needs cash before the due date, he can get
the bill discounted from the bank.
Books of drawer
Books of drawee
i. Entry at the time of discounting

the bill:- Cash a/c
Dr.
Discount a/c
Dr.
No entry

ii. On the due date No Entry
Bills Payable a/c
Dr.
To Cash a/c
ILLUSTRATION 2.
A draws a bill on B for Rs.6,000 on 1.6.2001 payable after two months. On
4.7.01 he got the bill discounted from bank at 10% p.a. The bill is duly
honored on the due date. Pass journal entries in the books of A and B.
Journal of A
Date
Particulars
1.6.01

To Bs a/c
(Being bill drawn on B)
Dr
4.7.01
Cash a/c
Dr.
Discount a/c
Dr.
Dr.
Cr.
Amount Amoun
t
6,000
6,000
5,950
50 6,000

(Being bills discounted with bank)
Journal of B
Date
Particulars
1.6.01
Bs a/c
Dr.
Dr.
Amount
6,000
Cr.
Amount
6,000

(Being bill accepted)
4.8.01
Bills Payable a/c
Dr.
6,000
To Cash a/c
6,000
(Being bills honored on the due

date)
c.When the bill is endorsed to a third party

i.
Books of Drawer
At the time of endorsement
Endorsee a/c
ii.
ILLUSTRATION 3.
No Entry
Dr.

At the time of payment
No Entry
Books of Drawee
Bills Payable a/c

To Cash a/c
Dr
On April 09, 2001 Ashwini draws on Rohini a bill of exchange for

Rs.10,000 payable after 2 months. The bill was duly accepted by Rohini on
9th April, 2001. Ashwini endorsed the bill in favor of Bharini on 16th
April, 2001. The bill is honored on the due date. Pass journal entries in the
books of Ashwini, Rohini and Bharini.
9.4.01
10,000
Dr.
To Rohinis a/c
16.4.01
10,000
(For bill drawn on Rohini

for the amount due)
Bharinis a/c
10,000
Dr.
(For bill endorsed in favor of Bharini
10,000
JOURNAL OF BHAIRINI
16.4.01 Bills Receivable a/c
Dr.
To Ashwinis a/c
10,0
00
10,0
00
(Being the bill endorsed)

12.6.01
Cash a/c
(Being amount received on maturity)
Dr.
10,0
00
10,0
00
ILLUSTRATION 4
P draws a bill for Rs.15,000 on Q on 1.4.2001 payable after 3 months.
After receiving Qs acceptance the bill was sent to bank for collection on
8.5.2001. The bill was duly honored on the due date. Collection Charges
paid were Rs.150. Pass journal entries in the books of P and Q.
Journal of P
Date
1.4.01
Particulars
To Qs a/c
Dr.
Dr.
Cr.
Amount
Amount
15,000
15,000
(Being bill drawn)

8.5.01
Bills sent for collection a/c
Dr.
15,000
15,000
(Being bill sent for collection)

4.7.01
Bank a/c
Dr.
15,000
To Bills sent for collection a/c
15,000
(Being the bill collected by the bank on the

due date)
4.7.01
Collection charges a/c Dr.
150
To Bank a/c
150
(Being collection charges paid to bank)
Journal of Q
Date
Particulars
Dr.
Amount
1.4.01 Ps a/c
Dr.
Cr.
Amount
15,000
15,000
(Being acceptance given)

4.7.01 Bills Payable a/c
Dr.
To Bank a/c
15,000
15,000
(For payment of bill on the due date)
DISHONOR OF BILLS
The bill is presented to the drawee for payment on the due date. When the
payment is made on the due date, the bill is said to be honored. However, if
the drawee fails to meet the bill on the due date then the bill is said to be
dishonored. The bill must be noted by the notary public. Recording the fact
of dishonor on the bill by the Notary Public is called noting, and the
amount charged by him for his services is called noting charges.
Journal Entries for Dishonor of Bill
Books of Drawee
a.
When the bill is retained till due date
Books of Drawer
Drawee a/c
Dr.
To Cash a/c
Bills Payable a/c

Noting Charges a/c
To Drawer a/c
(Drawers a/c is credited with the

amount of bill and the noting
paid in cash)
b.
(Drawees a/c is debited with the

amount of bill and the charges
charges reimbursed.)
When the bill is discounted with the bank

Drawee a/c
Dr.
Bills Payable a/c

Dr.
Noting Charges a/c
To Drawer a/c
To Cash a/c
(Amount of bill and noting charges
paid are debited to drawee a/c)
c.
Dr.
Dr.
Dr.
(Drawer a/c is credited by the bill

amount and the noting charges)
When the bill is endorsed

Drawee a/c
Dr.
To Endorsee a/c
Bills Payable a/c

Noting Charges a/c
Dr
Dr.
To Drawer a/c
(With the bill amount and the noting (With the amount of bill and noting
charges paid by the endorsee )
charges paid in cash)
Entry in the books of Endorsee
Drawer (or endorser) a/c
Dr.
To Cash (Noting Charges) a/c
d.
When the bill is sent for collection

Drawee a/c Dr.
To Bills sent for Collection a/c
To Bank a/c (Noting Charges)
(Entry for the dishonor of the

bill sent to bank for collection)
ILLUSTRATION 5:
Bills Payablea/c
Noting Charges a/
To Drawer a/c
Dr.
Dr
(Being the bill dishonored and

noting charges paid in cash)
X sold goods worth Rs.10,000 to Y on 1.4.2001. On the same date Y

accepted a bill of exchange payable after 2 months. On maturity Y failed to
honor the bill. X paid Rs.20 as noting charges. Pass journal entries in the
books of X and Y if
a.
He had retained the bill with him till maturity.
b.
He had endorsed the bill to A.
c.
He had discounted the bill with his bank at 6% on 4.05.2001.
d.
He had sent it to bank for collection
Journal of X (Drawer)
Date
Particulars
1.04.01
Ys a/c
1.04.01
To Sales a/c
(Being goods sold to Y)
Dr.
Amount
10,000
Dr.
Cr.
Amount
10,000
Dr.
10,000
To Ys a/c
(Being the entry for bills received)
a.
If bill is retained till maturity and dishonored
4.06.01 Ys a/c
Dr.
10,020
To Cash a/c
10,000
10,000
20
(Being bill dishonored, noting charges paid)

b. If the bill is endorsed in favor of A
As a/c
Dr.
10,000
10,000
(Being bill endorsed in favor of A)

4.06.01
Ys a/c
To As a/c
Dr.
(Being the bill dishonored and noting

charges paid)
c. If the bill is discounted with bank at 6%
10,020
10,020
4.05.01 Bank a/c

Discount a/c
9,950
50
Dr.
Dr.
10,000

(Being the bill discounted with bank)
4.06.01
Ys a/c
To Bank a/c
Dr.
10,020
10,020
(Being bill dishonored and noting charges

paid)
d. If the bill is sent to bank for collection
Bills for Collection a/c
Dr.
10,000
10,000
(Being bills sent to bank for collection)

4.06.01
10,020
Ys a/c Dr.
10,000

To Bank a/c (Noting Charges)
20
(Being the bill sent to bank for collection

dishonored and noting charges paid)
Journal of Y (Drawee)
Date
Particulars

To Xs a/c
Dr.
Amount
Dr.
Cr.
Amount
10,000
10,000
(Being goods purchased from X)

1.04.01 Xs a/c
Dr.
(Being bill accepted in favor of X)
a.
When the bill is retained till the due date
10,000
10,000
Date
Particulars
Dr.
Amount
Bills Payable a/c

Noting Charges a/c
To Xs a/c
Dr.
Dr.
10,000
20
Cr.
Amount
10,020
(Being the bill dishonored and noting charges

paid)
b.
4.06.01
When the bill is endorsed in favor of A

Bills Payable a/c
Noting Charges a/c
To Xs a/c
Dr.
Dr.
10,000
20
10,020
(Being the endorsed bill dishonored)

c.
4.06.01
When the bill is discounted

Bills Payable a/c
Noting Charges a/c
To Xs a/c
Dr.
Dr.
10,000
20
10,020

paid)
d.

Noting Charges a/c
Dr.
Dr.
To Xs a/c
10,000
20
10,020

paid)
ILLUSTRATION 6:
A sold goods worth Rs.20,000 to B on 1.4.2001. On the same date, B
accepted a bill of exchange payable after 2 months. On maturity B failed to
honor the bill. A paid Rs.20 as noting charges. Pass journal entries in the
books of A and B if
a.
He had retained the bill with him till maturity.
b.
He had endorsed the bill to X.
c.
He had discounted the bill with his bank at 6% on 4.5.2001.
d.
He had sent it to bank for collection.
Journal of A (Drawer)
Date
Particulars
1.4.01 Bs a/c
Dr.
Dr.
Cr.
Amount
Amount
20,000
To Sales a/c
20,000
(Being goods sold to B)

1.4.01 Bills Receivable a/c Dr.
20,000
To Bs a/c
20,000
(Being the entry for bill

received)
a.
If bill is retained till maturity and dishonored
4.6.01 Bs a/c
Dr.
20,020
20,000
To Cash a/c
20
(Being bill dishonored, noting

charges paid)
b.
If the bill is endorsed in favor of X

Xs a/c
Dr.
20,000
To Bills Receivable
a/c
20,000
(Being bill endorsed in

favor of X)
Bs a/c
To Xs a/c
(Being the bill
Dr.
20,020
20,020
Date
Particulars
Dr.
Cr.
Amount
Amount
dishonored and noting

charges paid)
c.
If the bill is discounted with bank at 6%
4.5.01
Bank a/c
Dr.
Discount a/c
19,900
Dr.
100
To Bills Receivable
20,000
a/c
(Being the bill discounted with
bank)
4.6.01
Bs a/c
Dr.
20,020
To Bank a/c
20,020
(Being bill dishonored and noting charges paid)

d.
If the bill is sent to bank for collection

Bills sent for Collection
a/c
Dr.
20,000
To Bills Receivable
a/c
20,000
(Being bill sent to bank for

collection)
4.6.01 Bs a/c
Dr.
20,020
20,000
To Bank a/c (Noting charges)
20
(Being the bill sent to bank for collection

dishonored and noting charges paid)
Journal of B (Drawee)
Date
Particulars
Dr.
Amount
Dr.
20,000
To As a/c
20,000
(Being goods purchased

from A)
1.4.01 As a/c
Cr.
Amount
Dr.
20,000
20,000
(Being bill accepted in

favor of A)
a.
When the bill is retained till the due date

Noting Charges a/c
Dr.
20,000
Dr.
20
To As a/c
20,020
(Being the bill

dishonored and noting
charges paid)
b. When the bill is endorsed in favor of X
Noting Charges a/c
Dr.
20,000
Dr.
20
To As a/c
20,020
(Being the endorsed

bill dishonored)
c.When the bill is discounted
Noting Charges a/c
Dr.
20,000
Dr.
20
To As a/c
20,020
(Being the bill dishonored and noting charges paid)

d.
20,000
Noting Charges a/c

To As a/c
20
20,020

paid)
RENEWAL OF BILLS
Sometimes, when the drawee is unable to meet the bill on the due date he
may request the drawer for extension of time for paying the amount of the
bill. The drawee may make part-payment of the bill in cash and accept a
new bill for the remaining amount payable. The drawer by accepting his
request for cancelation of the old bill, draws a new bill on him for the
balance due. This is known as renewal of bill. For renewal of bill, interest
is charged by the drawer for the period of new bill. Interest may be paid in
cash or it can be added to the amount of old bill and a new bill is accepted
by the drawee.
Journal entries for cancellation and renewal of a bill are as follows:
Books of Drawer
1.
Books of Drawee
For Cancellation of old bill

Drawees a/c
Dr.
Bills Payable a/c

2. For the part-payment
received
Cash a/c
Dr.
To Drawers a/c
Drawers a/c
Dr.
To Cash a/c
Dr.
To Drawees a/c
3. For interest receivable on
renewal of bill
a. When interest is paid in cash
Interest a/c
Cash a/c
Dr.
To Cash a/c
To Interest a/c
b. When interest is included in
the new bill
Drawees a/c
Dr.
To Interest a/c
4. For the new bill received
To Drawees a/c
Dr.
Interest a/c
Dr.
To Drawers a/c
Dr.
Drawers a/c
Dr.
ILLUSTRATION 7
Suraj draws a bill on Chandra for Rs.10,000 on 1.4.2001 payable after 2
months. Chandra was unable to pay the amount. He approached Suraj
before the due date and requested him to draw a new bill payable after
three months for Rs.8,000 plus interest @10% p.a. and the balance amount
is paid in cash. New bill is duly honored on the due date. Pass journal
entries in the books of Suraj and Chandra.
Journal of Suraj
Date
1.4.01
Particulars
Dr.
Dr.
Cr.
Amount
Amount
10,000
To Chandras a/c
10,000
(Being the entry for

acceptance received from
Chandra)
Chandras a/c
Dr.
10,000
10,000
(Being the old bill canceled

for renewal)
Chandrasa/c
Dr.
200
To Interest a/c
200
(Being the entry for the

interest)
(8,000 x 10 x 3)/(12 x 100)
Dr.
8,200
To Chandras a/c
8,200
(Being the entry for the new bill accepted)

Cash a/c
Dr.
2,000
To Chandras a/c
balance paid in cash)
2,000
Cash a/c
Dr.
8,200
8,200
(Being the payment received

on the due date)
Journal of Chandra
Date
Particulars
1.04.01 Surajs a/c

Dr.
Dr.
Cr.
Amount
Amount
10,000
10,000
Date
Particulars
Dr.
Cr.
Amount
Amount
(Being acceptance given)

Bills Payable a/c
Dr.
10,000
To Surajs a/c
10,000
(Being the old bill canceled)

Interest a/c
Dr.
200
To Surajs a/c
200

interest on the new bill)
Surajs a/c
Dr.
8,200
8,200
(Being the entry for the new

bill accepted)
Surajs a/c
Dr.
2,000
To Cash a/c
2,000
(Being cash paid to Suraj)

Bills Payable a/c
To Cash a/c
Dr.
8,200
8,200
(Being the payment made on

the due date)
ACCOMMODATION BILLS
Normally bills are drawn and accepted to facilitate trade. But sometimes
bills are drawn and accepted for the purpose of helping one or both the
parties involved without any genuine business transaction between them.
These bills are known as accommodation bills or fictitious bills. The main
purpose of accommodation bills is to raise funds for a short period by
discounting the bill with the bank. The discounting charges are shared by the
parties in the ratio of funds they receive. Journal entries are passed in the
similar way as for ordinary bills. The only additional entry to be passed is
for sending or receiving the amount
ILLUSTRATION 8
A, for the mutual accommodation of himself and B, draws upon the later, a
bill at 4 months date for Rs.1,800 dated 1st March. The bill is discounted
by A at 5 percent, and half the proceeds are remitted to B.
B, at the same time, draws a bill at 4 months on A for Rs.900. After

securing As acceptance, the bill is discounted at 6% by B, who remits half
the proceeds to A. B becomes insolvent on 31st May, and 25 paise in the
rupee is received on 15th July as first and final dividend from his estate.
Write journal entries in the books of both the parties.
In the Books of A Journal Entries
Date
Debit
Rs.
Particulars
1st
March Bills receivable a/c
Dr.
Credit
Rs.
1,800
To B a/c
1,800
Bank a/c
Discount a/c
To Bills receivable a/c
Dr.
1,770
Dr.
30
1,800
Dr.
B a/c
900
885
To Bank a/c
B a/c
Bank a/c
Discount allowed a/c
To B a/c
4th July B a/c
To Bank a/c
Bills payable a/c
To Bank a/c
15
Dr.
900
Dr.
441
Dr.
9
450
Dr.
1,800
1,800
Dr.
900
900
Dr.
Bank a/c
To B a/c
900
337.5
337.5
Dr.
Bad debts a/c

To B a/c
1012.5
1012.5
In the Books of B
Date
Particulars
Debit
Credit
Rs.
1st
A a/c
March
Bank a/c
Discount allowed a/c
To A a/c
Bills receivable a/c
To A a/c
Bank a/c
Discount a/c
A a/c
To Bank a/c
4th
Bills Payable a/c
July
To A a/c
A a/c
To Bank a/c
To Deficiency a/c
Dr.
1,800
Dr.
Dr.
885
15
Dr.
900
Dr.
Dr.
882
18
Rs.
1,800
900
900
900
Dr.
450
441
9
Dr.
1,800
Dr.
1,350
1,800
337.5
1012.5
ILLUSTRATION 9:
A and B, business partners, on 1st January agree to draw on the other a bill
of exchange for Rs.1000 for 3 months and to discount the others bill each
meeting his own bill when it falls due and paying the expenses of
discounting the others bill. Both bills are accepted and discounted at 6%.
On the due date, B meets his acceptance. A, however, notifies B of his
inability to meet his bill and B has therefore to take it up. A pays Rs.400 on
3rd April and accepts another bill drawn on him by B at 2 months date for
Rs.610 including interest. This bill of exchange is honored by A at
maturity.
Give the journal entries in the books of A.
Journal Entries in the books of A
Date Particulars
Debit
Rs.
Rs.
Credit
________________________________________
1st January Bills receivable a/c
Dr.
To B a/c
B a/c Dr.
1,000
1,000
To Bills payable a/c

Bank a/c
Dr.
Discount a/c
1,000
985
Dr.
15

3rdApril
Bills payable a/c
Dr.
To B a/c
Interest a/c Dr.
1,000
1,000
1,000
10
To B a/c
B a/c Dr.
1,000
10
1,010
To Bank a/c
To Bills payable a/c
400
610
Q3 Distinguish between capital expenditure & revenue

expenditure.
CAPITAL AND REVENUE EXPENDITURE:
Capital Expenditure:
Capital expenditure refers to expenditure that the benefit of which is not
fully derived in one year but spread over several periods. Examples for
capital expenditure are acquisition of assets for the purpose of earning,
additions to fixed assets to improve its capacity, expenditure resulting in
long-term benefit to the business, etc. Expenses like Preliminary expenses,
Research and Development expenditure, Interest paid during Construction
period, etc. are taken to assets side of Balance Sheet and shown under
Miscellaneous Expenditure.
Revenue Expenditure:
It is an expenditure incurred and the benefit of which is derived in the year
in which the expenditure was incurred. Examples are raw materials,
repairs, depreciation, rent, wages, etc. Such expenses are debited to Profit
and Loss account. Any incomes and gains are credited to Profit and Loss
account. Examples are Commission received, Dividend received, Interest
received etc. Net Profit is transferred to capital account in the balance sheet.
Format of Profit and Loss account is given below.
Deferred Revenue Expenditure:
Deferred revenue expenditure is that expenditure is that expenditure which
yields benefits which extend beyond a current accounting period, but to
relatively a short period as compared to the period for which a capital
expenditure is expected to yield benefits. These are also known as future
expenditure. Such expenditure should normally be written off over a period
of 3 to 5 years. The example of such expenditure includes advertisement,
research & development expenditure.
Capital expenditure & Revenue expenditure:
Expenditure: The use of goods and services in order to earn revenue

is the expense.
Hendriksen opines, "Expenses are the using or consuming of goods
and services in the process of obtaining revenues".
"Expense is the expired cost, directly or indirectly related to given

fiscal period, of the flow of goods or services into the market and of
related operations."
Expenditure: Expenditure incurred during the fiscal period and related
to same accounting period becomes an expense i.e. expired cost of
that period.
Expenditure: incurred during the previous accounting period but
related to current accounting period becomes an expense i.e. expired
cost of the current accounting period e.g. prepaid expenses.
Expenditure: related to the current accounting period but not paid
becomes outstanding expenses.
Expenditure: Expenditure is usually of two types:
(a) Capital expenditure; and
(b) Revenue expenditure.
Capital and Revenue Expenditures Increases operating efficiency or
adds to capacity? Capital Expenditure (Debit fixed asset account)
Capital and Revenue Expenditures Increases operating efficiency or
adds to capacity? Increases useful life (extraordinary repairs)? Capital
Expenditure (Debit fixed asset account)
Revenue Expenditure (Debit expense account for ordinary
maintenance and repairs) Increases operating efficiency or adds to
capacity? Increases useful life (extraordinary repairs)? Capital
Expenditure (Debit fixed asset account) Capital and Revenue
Expenditures
ASSETS Capital and Revenue Expenditures CAPITAL
EXPENDITUR ES
1. Initial cost
2. Additions
3. Betterments
4. Extraordinary repairs
ASSETS EXPENSES Capital and Revenue Expenditures CAPITAL
EXPENDITUR ES Normal and ordinary repairs and maintenance
REVENUE EXPENDITUR ES
Key words indicating Capital expenditure Key words indicating
Revenue expenditure Enhance Upgrade Extend Improve Repair
Maintain Replace Like-for-like Remedial Renew
Capital expenditure consists of expenditure, the benefit of which is
not fully enjoyed in one accounting period but spread over several
accounting periods.
It includes assets acquired for the purpose of earning income or

increasing the earning capacity of the business or effecting economy
in the operation of an asset.
The sum of invoice price, freight and insurance charges, installation
and erection cost and custom duty etc. will be capitalized in the books
of a firm.
These capital items appear on the assets side of Balance Sheet.
Capital Expenditure Includes Capital Expenditure may include
the following:
Purchase costs (less any discount received)
Delivery costs
Legal charges
Installation costs
Up gradation costs
Replacement costs
As capital expenditure results in increase in the fixed asset of the
entity, the accounting entry is as follows:
-Debit Fixed Assets Credit Cash/Payable
Capital Expenditure Examples:
Interest on capital paid during the period of construction of
Company (u/s 208 of Indian Companies Act)
Expenditure in connection with or incidental to the purchase or
installation of an asset
Acquisition of new assets
Expenditure incurred for putting the old asset purchased, into
working condition.
Additions and extensions to existing
The cost of assets will be written off by way of depreciation over a

period of its life.
The amount of depreciation is revenue expenditure and is debited
to profit and loss account.
The reason for charging depreciation to revenue i.e. profit and loss
account is that the asset is used for earning revenue.
Cost of goodwill.
Cost of freehold land and building and the legal charges incurred
in this connection.
Cost of lease.
Cost of machineries, plants, tools, fixtures, etc.
Cost of trademarks, patents, copy rights, designs, etc.
Cost of car, lorry etc.
Revenue expenditure consists of expenditure incurred in one
period of the accounting, the full benefit of which is enjoyed in that
period only.
This does not increase the earning capacity of the business but it is
incurred in order to maintain the existing earning capacity of the
business
It includes all expenses which arise in normal course of business.
Revenue Expenditure Include Revenue costs therefore comprise of the

following:
Repair costs
Maintenance charges
Repainting costs
Renewal expenses
The accounting entry to record revenue expenditure is therefore as

follows:
- Debit Revenue Expense (Income Statement) Credit Cash/payable
Revenue Expenditure Examples:
Wages or salaries paid to factory workers.
Machine Oil to lubricate
Electricity or Power required running machinery or motor
Expenditure incurred in the ordinary conduct and administration of
business, i.e. rent, , carriage on saleable goods, salaries, wages
manufacturing expenses, commission, legal expenses, insurance,
Purchase of raw materials for conversion into finished goods.
Selling and distribution expenses incurred for sale of finished goods e.g.
sales office expenses, delivery expenses, advertisement charges, et (%
Establishment expenses like salaries, wages, rent, rates, taxes, insurance,
and depreciation on office equipment.
Depreciation of plant, machinery and
All these items appear on the debit side of trading and profit and
loss account, in case of trading concerns or income and expenditure
account, in case of non- trading concerns.
Revenue v/s Capital expenditure:
Its effect is temporary, i.e. the benefit is received within the accounting
year.
Neither an asset is acquired nor is the value of an asset increased
It has no physical
Its effect is long-term, i.e. it is not exhausted within the current accounting
year-its benefit is received for a number of years in future.
An asset is acquired or the value of an existing asset is Revenue

Expenditure Capital Expenditure
Deferred Revenue expenditure means essentially revenue expenditure
but the benefit of which is received over a period of more than one year.
Examples:
1. Heavy research expenditure
2. Heavy advertisement expenditure
Deferred Revenue Expenditure:
Deferred Revenue Expenditure is a revenue expenditure which has been
incurred during one accounting year which is applicable either wholly or in
part to further accounting years.
According to Prof. A.W. Johnson, "Deferred Revenue Expenditure
includes those non-recurring expenses, which are expected to be of financial
nature, distributed to several accounting periods of indeterminate total
Deferred Revenue Expenses are those expenses, the benefit of which may
be extended to a number of years, say, 3 to 5 years. These are to be charged
to profit and loss account, over a period of 3 to 5 years depending upon the
benefit accrued.
Sometimes losses may be suffered of an exceptional nature e.g. loss of
an asset (uninsured) due to accident or fire; confiscation of property in a
foreign country etc.
The amount which has not been debited to the profit and loss account of
the current year is shown in the balance sheet on the assets side and it is
known as fictitious asset.
Purpose of Distinction:
Profit and Loss Account is debited with revenue expenditure and credited
with revenue income (i.e. sales income and from other sources).
If the revenue income is higher than revenue expenditure, it will be a
profit and if it is less than revenue expenditure, it will be a loss.
Capital expenditure is shown on the assets side of Balance Sheet. Capital

and
Treated as revenue expenditure:
Value of fixed asset is understated
Net profit is understated
Treated as capital expenditure:
Value of Fixed asset is overstated
Net profit is overstated
CAPITAL AND REVENUE EXPENDITURE:
CAPITAL EXPENDITURE:
Expenditure means the amount spent. Any expenditure incurred for

the following purposes is capital expenditure:
a) For acquiring fixed assets such as land, buildings, plant and
machinery, furniture and fittings and motor vehicles. These assets
should not be acquired with a view to resell them at a profit during the
year but to be retained in the business for more than a year. The cost
of fixed asset would include all expenditure up to the time the asset
becomes ready for use.
b) For making improvements and extensions to the fixed asset e.g.,
additions to buildings.
c) For increasing the earning capacity of a business or for reducing the
cost of manufacture, administration or distribution in a business e.g.,
expenditure incurred in removing the business to a central locality or
compensation paid to a retrenched employee.
d) For raising capital money for the business such as brokerage paid
for arranging loans, discount on issue of shares and debentures,
underwriting commission etc.
All capital expenditure represents either an assets or liability and is
shown in the balance sheet.
LIST OF CAPITAL EXPENDITURE The following is a list of the
usual items of capital expenditure.
1. Cost of good will
2. Freehold land and buildings and the legal charges incurred in this
connection.
3. Cost of lease
4. Cost of machineries, plants, tools, fixtures. etc.
5. Cost of trademarks, patents, copy rights, designs etc.
6. Cost of car, lorry etc.
7. Cost of installation of lights and fans
8. Cost of any other assets acquired by way of equipment
9. Erection cost of plant and machinery
10.Cost of addition to existing assets
11.Structural improvements and alterations in the existing assets
12.Expenses for developments in case of mines and plantations
13.Expenses for administration incurred for construction and
equipment of any industrial enterprise
14.Expenses incurred in experimenting which finally result in the
acquisition of a patent or other rights
REVENUE EXPENDITURE:
Expenditure will be treated as revenue if it is incurred for the following
purpose:
a) Expenditure for purchasing floating assets e.g. cost of goods, raw

material and stores.
b) Expenditure incurred by maintaining fixed assets in proper working
order e.g., repairs to plant and machinery, buildings, furniture and
fittings etc.
c) Expenditure incurred for meeting day to day expenses of operating
a business e.g., salaries, wages, rent, rates, taxes, stationery, postage
etc.
All the revenue expenditure has to be deducted from the income earned by
the organization. That is to say, all revenue items will be taken to the profit
& loss account.
LIST OF REVENUE EXPENDITURE:
The following is a list of usual items of revenue expenditure:
a) Expenses incurred for the ordinary administration and carrying on the
operations of a business.
b) Expenses for repairs.

c) Cost of goods for resale.
d) Cost of raw materials and stores acquired for consumption in course of
manufacturing.
e) Wages paid for manufacture of products for sale.
f) Expenses for the manufacture and distribution of the finished product g)
Loss from wear and tear and obsolescence of assets.
h) Depreciation of lease assets.
i) Interest on loans borrowed for business.
j) Loss from sale of fixed assets.
k) Fees for renewal of patent rights etc.
l) Up keep and maintenance of motor car and van.
m) Maintenance of fan and lights.
n) Book value of assets discarded or totally damaged or destroyed by fire or
other reasons
DIFFERENCE BETWEEN CAPITAL EXPENDITURE AND
REVENUE EXPENDITURE:
Capital expenditure Revenue expenditure:
1. Its effect is long term i.e. it is not exhausted within the current accounting
year- its benefit is enjoyed in future years also.
2. An asset is acquired or the value of an asset is increased as a result of this
expenditure.
3. Generally, it has physical existence i.e. it can be seen with eyes.
4. It does not occur again and again it is non-recurring and irregular.
5. This expenditure improves the position of the concern.
6. A portion of this expenditure is shown in trading and profit & loss account
or income & expenditure account as depreciation.
7. It appears in balance sheet until its benefit is fully exhausted.
8. It does not reduce the revenue of the concern.
Purchase of fixed asset does not affect revenue:
1. Its effect is temporary i.e. it is exhausted within the current accounting
year.
2. Neither an asset is acquired nor is the value of an asset increased.
3. It has no physical existence i.e. it cannot be seen with eyes.
4. It occurs repeatedly it is recurring and regular.
5. This expenditure helps to maintain the concern.
6. The whole amount of this expenditure is shown in trading and profit &
loss account or income & expenditure account. But deferred revenue
expenditure and prepaid expenses are not shown.
7. It does not appear in balance sheet. Deferred revenue expenditure,
outstanding expenditure, outstanding expenses and prepaid expenses are,
however, temporarily shown in balance sheet.
8. It reduces revenue e.g. payment of salaries to employees decreases
revenue.
WHEN REVENUE EXPENDITURE BECOMING CAPITAL
EXPENDITURE:
Following are some of the circumstances under which an expenditure which
is usually of revenue nature may be taken as an expenditure of a capital
nature:
1. WAGES AND SALARIES: The amount spent as wages and salaries
generally taken as a revenue expenses. However, amount of wages and
salaries paid for the erection of a new plant or machinery or wages paid to
workman engaged in construction of fixed assets are taken as expenditure of
a capital nature.
2. CARRIGE IN: Carriage charges are usually of a revenue nature but

carriage charges incurred for a new plant and machinery are taken as
expenditure of a capital nature and are added to the cost of asset.
3. REPAIRS: The amount spent on repairs of plant, furniture, building, etc.
is taken as revenue expenditure. However, when some second hand plant,
motor-car etc. is purchased, the expenditure incurred for immediate repairs
of such plant, motorcar etc. to make it fit for use will be taken as a capital
expenditure.
4. LEGAL EXPENSES: Legal expenses are usually taken as expenditure of
a revenue nature but legal expenses incurred in connection with purchase of
fixed assets should be taken as a part of the cost of fixed assets.
5. RAW MATERIALS AND STORES: They are usually taken as of a
revenue nature, but raw materials and stores consumed in construction is the
fixed assets should be treated as capital expenditure and be taken as a part of
the cost of such fixed assets.
6. DEVELOPMENT EXPENDITURE: In case of some business such as tea,
rubber, mines, plantations, horticulture etc. a long period is required for
development. They start earning only after expiry of a long period which can
be termed as development period. The expenditure incurred during such
periods is termed as development expenditure and may be treated as a
capital expenditure. However, once they begin to earn, the expenditure
incurred to maintain them will be revenue expenditure.
7. DEFERRED REVENUE EXPENDITURE:
Deferred Revenue Expenditure is a revenue expenditure which has
been incurred during one accounting year which is applicable either
wholly or in part to further accounting years.
According to Prof. A.W. Johnson, o "Deferred Revenue Expenditure
includes those non-recurring expenses, which are expected to be of
financial nature, distributed to several accounting periods of
indeterminate total length. These are of revenue nature but are deferred or
postponed. It is of quasi- capital nature."
Deferred Revenue Expenses are those expenses, the benefit of which
may be extended to a number of years, say, 3 to 5 years. These are to be
charged to profit and loss account, over a period of 3 to 5 years

depending upon the benefit accrued.
Sometimes losses may be suffered of an exceptional nature of e.g. loss
of an asset (uninsured) due to accident or fire; confiscation of property in
a foreign country etc.
The amount which has not been debited to the profit and loss account
of the current year is shown in the balance sheet on the assets side and it
is known as fictitious asset.
PURPOSE OF DISTINCTION:
Profit and Loss Account is debited with revenue expenditure and
credited with revenue income (i.e. sales income and from other sources).
If the revenue income is higher than revenue expenditure, it will be a
profit and if it is less than revenue expenditure, it will be a loss.
Capital expenditure is shown on the assets side of Balance Sheet.
Capital and liabilities are shown on the liabilities side of Balance Sheet.
The purpose of distinction is to give "True and fair" view of the
accounts and financial position of the firm.
Expenditure Types of Expenditure:
(a) Buying a motor van Capital
(b) Petrol costs for a motor van Revenue
(c) Repairs to a motor van Revenue
(d) Putting extra headlights on a motor van Capital
(e) Buying machinery Capital
(f) Electricity cost of using machinery Revenue
(g) We spent $1,500 on machinery - $1,000 for upgrading the machine
and $500 for repairs Capital $1,000 Revenue $500
(h) Painting outside of a new building Capital

(i) Three years later repainting outside of the building in (h) Revenue
Example: Machinery costing $30,000 was bought. $1,000 was paid for
installation charges. Machinery Bank Balance Sheet $ $ Fixed Assets $
Bank 30,000 Machinery 30,000 Machinery 31,000 Bank 1,000
Machinery 1,000 CONCLUSION: The classification, capital or revenue,
is not uniquely determined by the nature of the item involved, rather it is
determined by the circumstances of the transaction.
Difference between Capital Expenditure and Revenue Expenditure:
1. Its effect is temporary, i.e. the benefit is received within the

accounting year.
2. Neither an asset is acquired nor is the value of an asset increased.
3. It has no physical existence because it is incurred on items which
are used by the business.
4. It is recurring and regular and it occurs repeatedly
5. A portion of this expenditure (depreciation on assets) is shown in
trading & P & L A/c and the balance are shown in the balance sheet on
asset side.
6. This expenditure helps to maintain the business.
7. The whole amount of this expenditure is shown in trading P & L
A/c or income statement
8. It does not appear in the balance sheet.
9. It reduces revenue (profit) of the business.
1. Its effect is long-term, i.e. it is not exhausted within the current
accounting year-its benefit is received for a number of years in future.
2. An asset is acquired or the value of an existing asset is increased.
3. Generally it has physical existence except intangible assets.
4. It does not occur again and again. It is nonrecurring and irregular.
5. This expenditure improves the position of the business
6. It appears in the balance sheet until its benefit is fully exhausted.

7. It does not reduce the revenue of the concern. Purchase of fixed
asset does not affect revenue.
5. Example: State with reasons whether the following items of
expenditure are capital or revenue
(i) Wages paid on the purchase of goods.
(ii) Carriage paid on goods purchased.
(iii) Transportation paid on machinery purchased.
(iv) Duty paid on machinery.
(v) Duty paid on goods.
(vi) A second-hand car was purchased for 7,000 and5,000 was spent
for its repairs and overhauling.
(vii) Office building was whitewashed at a cost of3,000.
(viii) A new machinery was purchased for 80, 000 and a sum of
1,000 was spent on its installation indirection.
(ix) Books were purchased for 50,000 and 1,000 was paid for
carrying books to the library.
(x) Land was purchased for 1, 00,000 and5,000 were paid for
legal expenses.
(xi) 50,000 was paid for customs duty and freight on machinery
purchased from Japan.
(xii) Old furniture was repaired at a cost of500.
(xiii) An additional room was constructed at a cost of 15,000.
(xiv) Damages paid on account of the breach of contract to supply
certain goods.
(xv) Cost of replacement of an old and worn out part of machinery.
(xvi) Repairs to a motor car met with an accident.
(xvii) 10,000 paid for improving a machinery.
(xviii) Cost of removing plant and machinery to a new site.
(xix) Cost of acquiring the goodwill of an old firm.
(xx) Cost of redecorating a cinema hall.
(xxi) Cost of putting up a. gallery in a cinema hall.
(xxii) Compensation paid to a director for loss of his office.
(xxiii) Premium paid on the redemption of debentures.
(xxiv) Costs of attending a mortgage.
(xxv) Commission paid on issue of debentures.
(xxvi) Cost of air-conditioning the office of the director of a
company.
(xxvii) Repairs and renewal of machinery.
(xxviii) Cost of acquiring patent rights and trademarks.
(xxix) Compensation paid to workers for termination of their

services.
(xxx) Compensation paid to a person injured by companys car.
(xxxi) Expenditures incurred on alteration in windows ordered by
local authorities.
(xxxii) Painting expenditures of a newly-constructed factory.
(xxxiii) Expenditures incurred on renewal of patent.
(xxxiv) Expenditures on replacement of a slate roof by a glass roof.
(xxxv) 10,000 spent on dismantling, removing and reinstalling
machinery and fixtures.
(xxxvi) Legal expenses incurred in an income tax appeal.
Preparation of Trading & Profit and Loss account from a given Trial
Balance:
From a given Trial Balance we can prepare a Trading and Profit and Loss
account to determine the profit or loss made by a business organization
during a particular period. At the time of preparation of Profit and Loss
account, the following points may be kept in mind:
1.
All expenses are debited to Profit and Loss account.
2.
All incomes are credited to Profit and Loss account.
3.
In addition to treating the incomes and expenses found in the Trial
Balance, we may have to give special treatment to certain Adjustments also
(They are discussed in detail in the subsequent paragraphs).
4.
The profit is credited to Reserves account. If there is net loss, it is
debited to Reserves account in the Balance Sheet, in the case of companies
and in the case of sole trader and partnership, the net profit is credited to
capital account and net loss is debited to capital account.
5.
Trading account is prepared to ascertain the Gross Profit. Gross profit
is the difference between sales and cost of goods sold.
6.
And by deducting all administrative and selling expenses from gross
profit we determine the net profit. Profit and Loss account is prepared to
ascertain net profit.
7.
It is necessary to emphasize here that Profit and Loss account
(including trading account) is usually prepared on Accrual basis. In other
words all expenses incurred and due are debited to Profit and Loss account
whether they are actually paid for or not. Similarly all incomes earned and
due are credited to Profit and Loss account whether they are actually
received or not.
Format of a Trading account is given below: Trading Account of XYZ
Co. for the year ending 31st March, 2001
Dr.
Date
Cr.
Particulars
J.F
Amount
Date Particulars
Rs.
J.F Amount
Rs.
To Opening stock
By Sales
Add: Purchases
Less: Returns
Less: Returns
To Wages
By Closing
To Carriage inward
stock
To Gas, Water, Fuel,
etc.
To Packaging charges
To Other factory
expenses
Gross Profit
Format of a Profit & Loss account is given below: Profit and Loss
Account for the year ending 31st March, 2001
Date
Particulars
To Office salaries
and wages
J.F Amount Date

Rs.
Particulars
By Gross profit
To Office rent, rates

and taxes
By Cash
discounts
received
To Office lighting
and insurance
By Bad debts
recovered
To Printing and
stationery
By Income from
investments
J.F Amount
Rs.
Date
Particulars
J.F Amount Date

Rs.
Particulars
To Postage and
telegrams
By Commission
received
To Legal expenses
By Interest on
deposits
To Trade expenses
To Audit fees
To Car upkeep
expenses
To Telephone
expenses
To General expenses
To Cash discounts
allowed
To Interest on capital
To Interest on loans
To Discount or
Rebate on bills of
exchange
To Bad debts
To Store charges
To Carriage, Freight,
Cartage outwards
To Cost of samples,
catalogue expenses
To Salesmens
By Gain on sale
of fixed assets
J.F Amount
Rs.
Date
Particulars
J.F Amount Date

Rs.
Particulars
J.F Amount
Rs.
salaries, expenses
and commission
To Advertising
expenses
To Depreciation on
fixed assets
To Net profit
(transferred to capital
account)
Q 4 Case Study: The following is the Trial Balance of Gupta as on

30th June, 2001
Trial Balance of Gupta for the year ending
30th June, 2001
Dr.
Cr.
Particulars
Rs.
Particulars
Rs.
Cash
Cash at Bank
Purchases
Return inwards
540
2,630
40,675
680
Wages
8,480
Fuel and power
4,730
Carriage on sales
3,200
Carriage on Purchases
2,040
Inventory (1st July, 2000)
5,760
Buildings
32,000
Freehold land
10,000
Machinery
20,000
Patents
7,500
Salaries
15,000
General expenses
Returns outwards
Capital
98,780
500
62,000
Accounts payable
6,300
Rent
9,000
3,000
Insurance
600
Drawings
5,245
Accounts receivable
Sales account
14,500
1,76,580
1,76,580
Taking into account the following adjustments prepare the Trading,

Profit and Loss account as on 30th June, 2001.
1. Inventory on hand on 30th June, 2001 is Rs.6, 800.
2. Machinery is to be depreciated at the rate of 10% and Patents at
the rate of 20%.
3. Salaries for the month of June 2001amounting to Rs.1, 500 were

unpaid.
4. Insurance includes an annual premium of Rs.170 on a policy
expiring on 31st December, 2001.
5. Bad debts to be written off are Rs.725.
6. Rent receivable Rs.1, 000.
ASSIGNMENT C OBJECTIVE QUESTIONS

In each of the following cases indicate the alternative which you consider to be correct:
Q1. Which of the following financial statements is prepared as of a particular date?
(a) Profit and loss account
(b) Balance sheet

(c) Cash flow statement
(d) Income and expenditure statement
(e) Profit and loss appropriation account.
Q2. Based on which of the following concepts, share capital account is shown on the
liability side of balance sheet?
(a) Business entity concept

(b) Money measurement concept
(c) Cost concept
(d) Going concern concept
(e) Conservatism concept.
Q3. Which of the following is not an accounting transaction?
(a) Sale of goods for cash

(b) Payment of salary of office staff
(c) Agreement to sell

(d) Purchase of office furniture
(e) Repayment of bank loan.
Q 4. Which of the following is false?
(a) Taking the favourable balance as per pass book as the starting point, the amount in
respect of charges made by the bank will be added to the pass book balance
(b) Taking the favourable balance as per pass book as the starting point, the amount in
respect of dividends received directly will be deducted from the pass book balance
(c) Bank charges recorded twice in cash book will be

added to the overdraft as per cash book in the
preparation of reconciliation statement
(d) Cheque issued but not presented for payment will be added when favourable balance
as per cash book is the starting point
(e) The amount of the undercasting of the credit side of the bank column of the cash book
will be deducted from the overdraft as per pass book.
Q5. From the books of Mr.Neelam, it was observed that cheques amounting to
Rs.2,40,000 were deposited in the bank, out of which cheques worth Rs.20,000 were
dishonored and cheques worth Rs.40,000 are still in the process of collection. The
treatment of this while preparing Bank Reconciliation Statement is
(a) Deduct Rs.60,000 from bank balance as per pass book
(b) Add Rs.20,000 and deduct Rs.40,000 from overdraft balance as per cash book
(c) Deduct Rs.60,000 from overdraft balance as per pass

book
(d) Add Rs.60,000 to overdraft balance as per pass book
(e) Deduct Rs.40,000 and add Rs.20,000 from overdraft balance as per pass book.
Q6 . Which of the following is true?
(a) Bank account is a personal account

(b) Stock of stationery account is a nominal account
(c) Returns inward account is a personal account
(d) Outstanding rent account is a nominal account
(e) Capital account is a real account.
Q7 . A sales day book is to record
(a) all credit sales only
(b) All cash sales only
(c) all credit and cash sales
(d) credit sales of goods and trade discount

(e) all cash and credit sales and trade discount.
Q8. Which of the following is a liability of a firm?

(a) Debit balance of discount column of cash book
(b) Credit balance of bank pass book
(c) Debit balance of bank column of cash book
(d) Debit balance of cash column of cash book
(e) Credit balance of bank column of cash book.

Q9. Which of the following accounts will invariably have a debit balance?
I. Accounts receivable.
II. Accounts payable.
III. Purchases account.
IV. Bank account.
V. Prepaid expenditure.
(a) Only (III) above
(b) Both (II) and (III) above
(c) Both (I) and (III) above
(d) (I), (III) and (V) above

(e) (I), (III), (IV) and (V) above.
Q10. The following is not a book of original entry
(a) Purchase book
(b) Journal proper
(c) Cash book
(d) General ledger

(e) sales book
Q11. The Accountant of a company is recording the transactions of the day in various
Books of Original Entry. Which
of the following transactions is recorded in the wrong book?
(a) Goods purchased on credit - Purchase Book
(b) Goods sold on credit - Sales Book
(c) Wages paid in cash - Cash Book
(d) General Stationery purchased on credit - Purchase

Book
(e) Office Equipment purchased on credit - Journal Proper
Q12. The impact on assets, profit and liabilities of a firm, on account of salary paid will
be
Assets
Profit Total Liabilities
(a) No effect Decreases
Decreases
(b) Decreases No effect
Decreases
(c) Decreases Decreases

(d) Increases No effect
(e) Decreases Increases
Increases
Decreases.
Decreases
Q13. Which of the following is true?
(a) Discount columns in cash book are totaled and not

balanced
(b) A petty cash book in which a separate column is provided to record payment under
each head is
called imprest system
(c) The total of purchases book is posted periodically on the credit side of sundry
creditors account
(d) The total of sales book is posted periodically on the debit side of sundry debtors
account
(e) Petty cash book is used to record all cash transactions.
Q14. Total of sales day book at the end of the month indicates
(a) The total sales for the month
(b) The total credit sales for the month

(c) Total cash sales of the month
(d) Total amount due to suppliers
(e) Total amount receivable from credit sales.
Q15. Which of the following is true?
(a) Cash book may be defined as the record of

transactions concerning cash receipts and payments
(b) Discount account should be balanced in the cash book
(c) The ledger is the book of original entry
(d) Sales journal is used for recording cash sales
(e) Purchase return book is used for recording the return of goods purchased from
suppliers against cash.
Q16. Journal entry for receiving interest in cash from Mr. Prashant against the loan given
to him
(a) Interest on loan account Dr.
To Prashant account
(b) Prashant account
Dr.
To Interest account
(c) Cash account
Dr.
To Prashant account
(d) Cash account

Dr.
To Interest on loan account
(e) Cash account
To Loan account.
Dr.
Q 17. Which of the following entries recorded in the books of the drawee of a bill is
false?
(a) When a bill is accepted, the account to be debited is drawers a/c
(b) When a bill is discharged, the account to be debited is bills payable a/c
(c) When a bill presented for payment by a bank is dishonored, the account to be debited
is bills
payable a/c
(d) When noting charges of a dishonored bill is paid by the endorsee ,the account to be
debited is
noting charges a/c
(e) At the time of retirement of a bill the account to be

debited is the drawers a/c.
Q 18. Which of the following is true?
(a) A bill sent for collection by bank when dishonored, the drawer will credit bank a/c
(b) At the time of renewal of bill interest a/c is credited in the books of the drawee
(c) Accommodation bills are drawn, accepted and endorsed for some consideration
(d) Refusal by the acceptor to make payment of the bill

on due date is called dishonor
(e) When a bill is endorsed, the drawer credits the drawees a/c.
Q19. Bills receivable account is a
(a) Nominal account
(b) Personal account
(c) Intangible asset
(d) Real account

(e) Representative Personal account.
Q20 . Closing stock is generally valued at
(a) Cost price
(b) Replacement cost
(c) Market price
(d) Realisable value
(e) Cost price or market price whichever is lower.

Q21. The provision for discount on debtors is calculated on the amount of debtors
(a) Before deducting the provision for doubtful debts
(b) Left after deducting the provision for doubtful debts
(c) Before deducting the actual bad debts
(d) After deducting the actual bad debts
(e) After deducting the actual bad debts and the

provision for doubtful debts.
Q22. Consider the following information of Thumbs-up Company for the year 20062007:
Opening balance of provision for debtors account
Rs. 20,000
Bad debts during the year

Rs. 18,000
Closing balance of Sundry debtors
Rs.2,65,000
Estimated provision for doubtful debts
4%
The amount to be debited to profit and loss account to make the estimated provision is
(a) Rs. 8,600

(b) Rs.10,400
(c) Rs.10,520
(d) Rs.10,600
(e) Rs.10,680.
Q23. At the time of preparation of final accounts, bad debts recovered account will be
transferred to
(a) Debtors account
(b) Profit & loss account

(c) Profit & loss adjustment account
(d) Profit & loss appropriation account
(e) Provision for discount on debtors account.
Q24. Which of the following is false about diminishing balance method of depreciation?
(a) Higher amount of depreciation is charged when the machine is more efficient
(b) It recognizes the risk of obsolescence by higher amount of depreciation in the early
years
(c) The total amount of depreciation and repairs is almost uniformally distributed over the
useful
life
(d) It results in better cash flow through tax deferral as taxable income is lower in the
initial years
(e) Depreciation amount throughout the useful life will

be uniform.
Q25. The following is not an example of fixed asset
(a) Plant and machinery
(b) Land and building
(c) Royalty
(d) Patent
(e) Office furniture.
Q26. Under depletion method, depletion per unit is calculated as
(a) Acquisition cost divided by average production units per annum
(b) Acquisition cost divided by actual production units in the year
(c) Acquisition cost minus residual value divided by average production units per annum
(d) Acquisition cost minus residual value divided by the actual production units in the
year
(e) Acquisition cost minus residual value divided by the

total production units over the useful life.
Q 27. Which one of the following is a capital expenditure?
(a) Compensation paid to Directors on termination of their services
(b) Expenditure for renewal of trade mark
(c) Gratuity paid to employees
(d) Installments paid for the purchase of patent for

manufacture and sale of medicine
(e) Compensation paid to workers on retirement.
Q28. Entries passed for outstanding expenses, depreciation, interest on capital etc. are
(a) Opening entries
(b) Journal entries
(c) Adjustment entries

(d) Rectification entries
(e) Closing entries.
Q29. Which of following transactions does not change the total amount of liabilities in
the balance sheet?
(a) Purchase of office furniture on credit
(b) Payment of bank loan
(c) Issue of debentures
(d) Acceptance of bills from creditors

(e) Redemption of preference shares.
Q30. Which of the following is false?
(a) Capital plus liabilities will be equal to assets
(b) The difference between assets and liabilities is bank

borrowing
(c) Capital account is a personal account
(d) Investment account is a real account
(e) Outstanding rent account is a representative personal account.
Q31. The expenses and incomes pertaining to full trading period are taken to the Profit
and Loss account of a business, irrespective of their actual payment or receipt. This is in
recognition of
(a) Time period concept
(b) Business entity concept
(c) Going concern concept
(d) Accrual concept

(e) Duality concept.
Q32. Which of the following statements can be used to assess the liquidity of a company?
(a) Balance sheet

(b) Profit and loss account
(c) Profit and loss appropriation account
(d) Bank reconciliation statement
(e) Manufacturing account.
Q33 . Which of the following state that Anticipate no profit and provide for all possible
losses?
(a) Convention of materiality
(b) Convention of consistency
(c) Convention of disclosure
(d) Convention of conservatism

(e) Convention of matching.
Q34. Which of the following statements is/are true?
I. Drawings account is a nominal account.
II. Capital account is a real account.
III. Sales account is a nominal account.
IV. Outstanding salaries account is a nominal account.
V. Patents account is a personal account.
(a) Only (I) above
(b) Only (III) above

(c) Both (II) and (IV) above
(d) (II), (IV) and (V) above
(e) (I), (II), (III) and (IV) above.
Q35. RS Ltd., makes purchases on credit. If the purchases are not as per the
specifications, the company returns them to the suppliers. The book, that is used to record
such returns is
(a) Returns inward book
(b) Returns outward book

(c) Cash book
(d) Journal proper
(e) Purchases day book.
Q36 . Which one of the following is not a reason for discrepancy in the balance as per
cash book and bank pass book of a company?
(a) Cheque issued to suppliers may not have been presented
(b) Cheque deposited in the account may not have been realized
(c) Bill discounted with bank is not due for payment

(d) Customers may have directly deposited money in the companys account
(e) Bank charges not accounted.
Q37. The bank balance in the cash book of Mr.Avinash, a proprietor showed a credit
balance of Rs.10,500 on March 31, 2008. On comparing it with his pass book he
discovered the following discrepancies.
i. Cheque No. 51 for Rs.540 in favour of Mr.Raman has not yet been presented.
ii. A bill of Rs.1,000 was retired by the bank under a rebate for Rs.15, but the full amount
of the bill was credited to bank account in cash book.
The balance as per pass book is
(a) Rs.11,025 (Dr.)
(b) Rs. 9,945 (Dr.)

(c) Rs. 9,945 (Cr.)
(d) Rs. 9,975 (Dr.)
(e) Rs. 9,975 (Cr.).
Q38. The total cost of goods available for sale with a company during the current year is
Rs.12,00,000 and the total sales during the period are Rs.13,00,000. If the gross profit
margin of the company is 25% on sales, the closing inventory during the current year is
(a) Rs.4,00,000
(b) Rs.3,40,000
(c) Rs.2,25,000
(d) Rs.1,60,000
(e) Rs.1,00,000
Q39. Unearned income account is
(a) A current asset
(b) A current liability

(c) An expense
(d) An income
(e) Deferred expense.
Q40. The essentials of double entry book-keeping in sequential order are
(a) Passing journal entries, posting in ledger, appropriate adjusting entries, trial balance,
Profit & Loss a/c and Balance-sheet
(b) Passing journal entries, posting ledger, trial balance, Profit & Loss a/c and Balancesheet, passing adjusting entries.
(c) Passing journal entries, posting ledger, passing adjusting entries, Profit & Loss a/c and
Balance sheet, trial balance
(d) Passing adjusting entries, passing journal entries, trial balance, posting in ledger,
Profit & Loss a/c and Balance-sheet
(e) Passing journal entries, posting in ledger, trial

balance, passing adjusting entries, Profit & Loss a/c and
Balance-sheet.

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F-2,Block, Amity Campus

Sec-125, Nodia (UP)

Total weightage given to these assignments is 30%. OR 30 Marks

__________30 January 2015_____________________

( ) Tick mark in front of the assignments submitted

Facilitating the day-to-day operations of the entity

Bookkeeping (also called recordkeeping) can be thought of as the financial

Accounting encompasses the problems in measuring the financial effects of

Step 6: - Preparation of Income Statement & Position Statement:- After

Its a primary stage

Its a secondary stage, starts

To ascertain net results of

Not required a high

It needs a high level of

Routine & clerical

Whereas its work is not

BRANCHES OF ACCOUNTING: Classification of Accounting:

Cost Accounting: - It shows classification and analysis of costs on the

Management Accounting: - It deals with the processing of data

Facilitate To Replace Memory

Facilitate to comply with legal requirement

Facilitate to ascertain net result of operations

Facilitate to ascertain financial position

Facilitate the users to take decision

Facilitate a comparative study

Facilitate control over assets

Facilitate the settlement of tax liability

Facilitate the ascertainment of value of business

Facilitate Raising Loan

Acts as legal evidence

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

Relevance: - A principle is relevant to the extent it results in

Objectivity: - it connotes reliability & trustworthiness.

Feasibility: - A principle is feasible to the extent it can be

Money Measurement Concept:

In financial accountancy, a record is made only of information that can be

Cost concept implies that in accounting, all transactions are generally

Going Concern Concept:

A business entity is assumed to carry on its operations forever. Seemingly

Duality or Accounting Equivalence Concept:

It can easily be seen that in business, as elsewhere, funds can be raised in

Additional capital (increases owners equity)

Additional loans (increases outside liability)

Earning revenue (increases owners equity)

Making profits (increases owners equity)

Disposing or reducing some of the assets (reduces assets).

Thus, all increases in liabilities (including owners equity) and reduction in

Accounting Period Concept:

In order to determine the profits or losses accrued in an accounting period,

production or dispatch or collection, the revenue would be Rs.90 or Rs.70 or

inventory by a particular method in one year it is expected to value its

Assets = Internal Equity + External Equity

Incurring Liability (including owners equity)

It stands to reason that a decrease in liability, revenue or profit must be a use

A business is started with a capital of Rs.10,000 brought in cash. The above

Steps Involved In Developing Accounting Equation:

Illustration 1:- A started business with Rs 1,00,000. Analyze the transaction

Asset & Capital

Step 2- Effect of transactions on affected

Increase in asset & Capital

Step 3- Accounting equation

Asset = Liability + Capital

30 January 2015___________